**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**
| **x**                                              | **Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**  |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                         |
| **For the  quarterly period ended March 31, 2007** |
|                                               |
| **or**                                             |
|                                               |
| o                                                  | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from                                            to                                           **

**Commission File Number:  1-12213**

**COVANCE INC**.

(Exact name ofRegistrant as specified in its Charter)

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

 

Registrant’s telephone number, including areacode:  **(609)452-4440**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act (the “Exchange Act”) of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES x      NOo

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act).

Large AcceleratedFiler x                 Accelerated Filer o                             Non-Accelerated Filero

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

YES o        NOx

APPLICABLE ONLY TO CORPORATE ISSUERS:

As ofApril 20, 2007, the Registrant had 63,553,996 shares of common stock outstanding.

 

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**Covance Inc.**

**Form 10-QFor the Quarterly Period Ended March 31, 2007**

**INDEX**
|                                                                                        | ** ** | **Page**                                                                                    |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|
| **Part I. Financial Information**                                                      |       |                                                                                        |
| ** **                                                                             |       |                                                                                        |
| Item 1.                                                                                |       | Financial Statements (Unaudited)                                                            |   |   |
|                                                                                   |       |                                                                                        |   |   |
| Consolidated Balance  Sheets—March 31, 2007 and December 31, 2006                 |       | 2                                                                                           |
|                                                                                   |       |                                                                                        |
| Consolidated  Statements of Income—Three Months ended March 31, 2007 and 2006     |       | 3                                                                                           |
|                                                                                   |       |                                                                                        |
| Consolidated  Statements of Cash Flows—Three Months ended March 31, 2007 and 2006 |       | 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                                  |   | 22 |
|                                                                                   |       |                                                                                        |   |   |
| Item 4.                                                                                |       | Controls and  Procedures                                                                    |   | 22 |
|                                                                                   |       |                                                                                        |   |   |
| **Part II. Other  Information**                                                        |       |                                                                                        |
| ** **                                                                             |       |                                                                                        |
| Item  1a.                                                                              |       | Risk  Factors                                                                               |   | 23 |
|                                                                                   |       |                                                                                        |   |   |
| 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, 2007 AND DECEMBER 31, 2006**
| ** **                                                                                                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                                                                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                   | ** ** | **(UNAUDITED)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                   |       |               |       |                  |       |
| Current Assets:                                                                                                                                                                                                              |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                   |       | $                  | 181,548    |                  | $          | 219,810 |   |
| Accounts  receivable                                                                                                                                                                                                         |       | 205,625            |       | 205,473               |       |
| Unbilled  services                                                                                                                                                                                                           |       | 102,247            |       | 89,139                |       |
| Inventory                                                                                                                                                                                                                    |       | 48,286             |       | 49,628                |       |
| Deferred income  taxes                                                                                                                                                                                                       |       | 3,795              |       | 4,320                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                   |       | 85,109             |       | 71,196                |       |
| Total Current  Assets                                                                                                                                                                                                        |       | 626,610            |       | 639,566               |       |
| Property and equipment,  net                                                                                                                                                                                                 |       | 516,638            |       | 500,057               |       |
| Goodwill, net                                                                                                                                                                                                                |       | 119,725            |       | 119,725               |       |
| Other assets                                                                                                                                                                                                                 |       | 40,956             |       | 38,330                |       |
| Total Assets                                                                                                                                                                                                                 |       | $                  | 1,303,929  |                  | $          | 1,297,678 |   |
|                                                                                                                                                                                                                         |       |               |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                               |       |               |       |                  |       |
| Current Liabilities:                                                                                                                                                                                                         |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                             |       | $                  | 29,437     |                  | $          | 35,479 |   |
| Accrued payroll  and benefits                                                                                                                                                                                                |       | 62,951             |       | 76,657                |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                              |       | 44,532             |       | 50,855                |       |
| Unearned revenue                                                                                                                                                                                                             |       | 125,650            |       | 109,559               |       |
| Income taxes  payable                                                                                                                                                                                                        |       | 22,791             |       | 17,154                |       |
| Total Current  Liabilities                                                                                                                                                                                                   |       | 285,361            |       | 289,704               |       |
| Deferred income taxes                                                                                                                                                                                                        |       | 30,738             |       | 31,052                |       |
| Other liabilities                                                                                                                                                                                                            |       | 57,764             |       | 53,627                |       |
| Total  Liabilities                                                                                                                                                                                                           |       | 373,863            |       | 374,383               |       |
|                                                                                                                                                                                                                         |       |               |       |                  |       |
| 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, 2007 and December 31, 2006                                                                        |       | 3⁄4             |       | 3⁄4                |       |
| Common Stock -  Par value $0.01 per share; 140,000,000 shares authorized; 73,792,570 and  73,427,001 shares issued and outstanding, including those held in treasury, at  March 31, 2007 and December 31, 2006, respectively |       | 738                |       | 734                   |       |
| Paid-in capital                                                                                                                                                                                                              |       | 442,306            |       | 426,806               |       |
| Retained  earnings                                                                                                                                                                                                           |       | 796,071            |       | 757,809               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                      |       | 12,928             |       | 11,781                |       |
| Treasury stock  at cost (10,293,510 and 9,485,549 shares at March 31, 2007 and December 31,  2006, respectively)                                                                                                             |       | (321,977           | )          | (273,835              | )          |
| Total  Stockholders’ Equity                                                                                                                                                                                             |       | 930,066            |       | 923,295               |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                             |       | $                  | 1,303,929  |                  | $          | 1,297,678 |   |

 

**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, 2007 AND 2006**

**(UNAUDITED)**
| ** **                                                                      | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                                            |       |                                                |       |   |   |
| Net revenues                                                                    |       | $                                                   | 358,319    |   | $ | 320,509 |   |
| Reimbursable  out-of-pockets                                                    |       | 18,620                                              |       | 13,129 |   |
| Total revenues                                                                  |       | 376,939                                             |       | 333,638 |   |
|                                                                            |       |                                                |       |   |   |
| Costs and  expenses:                                                            |       |                                                |       |   |   |
| Cost of revenue (excluding depreciation and amortization)                       |       | 234,379                                             |       | 213,660 |   |
| Reimbursed out-of-pocket expenses                                               |       | 18,620                                              |       | 13,129 |   |
| Selling, general and administrative (excluding depreciation  and amortization)  |       | 55,791                                              |       | 48,286 |   |
| Depreciation and amortization                                                   |       | 16,111                                              |       | 12,719 |   |
| Total costs and expenses                                                        |       | 324,901                                             |       | 287,794 |   |
| Income from  operations                                                         |       | 52,038                                              |       | 45,844 |   |
| Other (income)  expense, net:                                                   |       |                                                |       |   |   |
| Interest income                                                                 |       | (2,597                                              | )          | (1,905 | ) |
| Interest expense                                                                |       | 117                                                 |       | 92 |   |
| Foreign exchange transaction loss, net                                          |       | 149                                                 |       | 262 |   |
| Other income, net                                                               |       | (2,331                                              | )          | (1,551 | ) |
| Income before  taxes and equity investee earnings                               |       | 54,369                                              |       | 47,395 |   |
| Taxes on income                                                                 |       | 16,041                                              |       | 14,256 |   |
| Equity investee  earnings                                                       |       | 566                                                 |       | 250 |   |
| Net income                                                                      |       | $                                                   | 38,894     |   | $ | 33,389 |   |
|                                                                            |       |                                                |       |   |   |
| Basic earnings  per share                                                       |       | $                                                   | 0.61       |   | $ | 0.53 |   |
| Weighted average  shares outstanding - basic                                    |       | 63,845,710                                          |       | 63,172,374 |   |
|                                                                            |       |                                                |       |   |   |
| Diluted earnings  per share                                                     |       | $                                                   | 0.60       |   | $ | 0.52 |   |
| Weighted average shares  outstanding - diluted                                  |       | 64,895,239                                          |       | 64,446,222 |   |

 

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**

**FORTHE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**(UNAUDITED)**
| ** **                                                                                   | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands)**                                                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                                                         |       |                                                |       |   |   |
| Cash flows from  operating activities:                                                       |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 38,894     |   | $ | 33,389 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:           |       |                                                |       |   |   |
| Depreciation and amortization                                                                |       | 16,111                                              |       | 12,719 |   |
| Non-cash compensation expense associated with employee  benefit and stock compensation plans |       | 8,256                                               |       | 6,697 |   |
| Deferred income tax provision (benefit)                                                      |       | (1,037                                              | )          | (1,203 | ) |
| Other                                                                                        |       | (326                                                | )          | (195 | ) |
| Changes in operating assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                          |       | (152                                                | )          | 12,362 |   |
| Unbilled services                                                                            |       | (13,108                                             | )          | (7,910 | ) |
| Inventory                                                                                    |       | 1,342                                               |       | (227 | ) |
| Accounts payable                                                                             |       | (6,042                                              | )          | (2,296 | ) |
| Accrued liabilities                                                                          |       | (15,875                                             | )          | (12,241 | ) |
| Unearned revenue                                                                             |       | 16,091                                              |       | (6,332 | ) |
| Income taxes payable                                                                         |       | 8,618                                               |       | 5,260 |   |
| Other assets and liabilities, net                                                            |       | (17,866                                             | )          | (7,462 | ) |
| Net cash  provided by operating activities                                                   |       | 34,906                                              |       | 32,561 |   |
|                                                                                         |       |                                                |       |   |   |
| Cash flows from  investing activities:                                                       |       |                                                |       |   |   |
| Capital expenditures                                                                         |       | (31,800                                             | )          | (19,158 | ) |
| Other, net                                                                                   |       | —                                              |       | 22 |   |
| Net cash used in  investing activities                                                       |       | (31,800                                             | )          | (19,136 | ) |
|                                                                                         |       |                                                |       |   |   |
| Cash flows from  financing activities:                                                       |       |                                                |       |   |   |
| Stock issued under employee stock purchase and option  plans                                 |       | 6,438                                               |       | 17,560 |   |
| Purchase of treasury stock                                                                   |       | (48,142                                             | )          | (563 | ) |
| Net cash (used  in) provided by financing activities                                         |       | (41,704                                             | )          | 16,997 |   |
|                                                                                         |       |                                                |       |   |   |
| Effect of  exchange rate changes on cash                                                     |       | 336                                                 |       | (42 | ) |
| Net change in  cash and cash equivalents                                                     |       | (38,262                                             | )          | 30,380 |   |
| Cash and cash  equivalents, beginning of period                                              |       | 219,810                                             |       | 160,717 |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                                   | 181,548    |   | $ | 191,097 |   |

 

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)**

**March31, 2007 and 2006**

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

**1.  Basis ofPresentation**

The accompanying unaudited consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by GAAP for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the three months endedMarch 31, 2007 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007. The balance sheet at December31, 2006 has been derived from the audited financial statements at that datebut does not include all of the information and footnotes required by GAAP forcomplete financial statements.  Youshould read these unaudited consolidated financial statements together with thehistorical consolidated financial statements of Covance Inc. and subsidiaries (“Covance”or the “Company”) for the years ended December 31, 2006, 2005 and 2004 includedin our Annual Report on Form 10-K for the year ended December 31, 2006.

**2.  Summary of Significant Accounting Policies**

**Principles ofConsolidation**

These unauditedconsolidated financial statements include the accounts of all entitiescontrolled 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 unauditedconsolidated financial statements have been prepared in conformity with GAAP,which requires management to make estimates and assumptions about future eventsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

**Inventory**

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

**Prepaid Expensesand Other Current Assets**

In connection with themanagement of multi-site clinical trials, Covance pays on behalf of itscustomers fees to investigators, volunteers and other out-of-pocket costs (suchas travel, printing, meetings, couriers, etc.), for which we are reimbursed atcost, without mark-up or profit. Amounts receivable from customers inconnection with billed and unbilled investigator fees, volunteer payments andother out-of-pocket pass-through costs are included in prepaid expenses andother current assets in the accompanying Consolidated Balance Sheets andtotaled $36.8 million and $37.7 million at March 31, 2007 and December 31,2006, respectively.  See Note 2 “ReimbursableOut-of-Pocket Expenses”.

**Goodwill and OtherIntangible Assets and Impairment**

Goodwill represents costsin excess of the fair value of net tangible and identifiable net intangibleassets acquired in business combinations. In accordance with Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*, Covance performs anannual test for impairment of goodwill and other indefinite lived intangibleassets during the fourth quarter. This test is performed by comparing, at thereporting unit level, the carrying value of the reporting unit to its fairvalue. Covance assesses fair value based upon its best estimate of the presentvalue of the future cash flows that it expects to be generated by the reportingunit.  The most recent annual test forimpairment performed for 2006 did not identify any instances of impairment andthere were no events through March 31, 2007 that warranted a reconsideration ofour impairment test results.

5

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

**(dollarsin thousands, unless otherwise indicated)**

**Revenue Recognition**

Covance recognizesrevenue either as services are performed or products are delivered, dependingupon the nature of the work contracted. Historically, a majority of Covance’snet revenues have been earned under contracts which range in duration from afew months to two years, but can extend in duration up to five years or longer.Service contracts generally take the form of fee-for-service or fixed-pricearrangements. In the case of fee-for-service contracts, revenue is recognizedas services are performed, based upon, for example, hours worked or samplestested. For long-term fixed-price service contracts, revenue isrecognized as services are performed, with performance generally assessed usingoutput measures, such as units-of-work performed to date as compared to thetotal units-of-work contracted. Changes in the scope of work generally resultin a renegotiation of contract pricing terms. Renegotiated amounts are notincluded in net revenues until earned and realization is assured. Estimates ofcosts to complete are made to provide, where appropriate, for losses expectedon contracts. Costs are not deferred in anticipation of contracts beingawarded, but instead are expensed as incurred. In some cases, a portion of thecontract fee is paid at the time the trial is initiated. These advances aredeferred and recognized as revenue as services are performed or products aredelivered, as discussed above. Additional payments may be made based upon theachievement of performance-based milestones over the contract duration.Most contracts are terminable by the client either immediately or upon notice.These contracts typically require payment to Covance of expenses to wind downthe study, fees earned to date and, in some cases, a termination fee or apayment to Covance of some portion of the fees or profits that could have beenearned by Covance under the contract if it had not been terminated early.Termination fees are included in net revenues when realization is assured. 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. Investigatorfees are not reflected in total revenues or expenses where Covance acts in thecapacity of an agent on behalf of the pharmaceutical company sponsor, passingthrough these costs without risk or reward to Covance. All other out-of-pocketcosts are included in total revenues and expenses.

Unbilled services are recorded for revenue recognized to date andrelate to amounts that are currently unbillable to the customer pursuant tocontractual terms. In general, amounts become billable upon the achievement ofmilestones or in accordance with predetermined payment schedules. Unbilledservices are billable to customers within one year from the respective balancesheet date. Unearned revenue is recorded for cash received from customers forwhich revenue has not been recognized at the balance sheet date.

**Taxes on Income**

Covance uses the asset and liability method of accounting for incometaxes.  Under this method, deferred taxassets and liabilities are recognized for the expected future tax consequencesof differences 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.

Covance maintains a reserve for uncertain tax positions. EffectiveJanuary 1, 2007, the Company adopted the provisions of Financial AccountingStandards Board Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109*(“FIN 48”).  This authoritativeinterpretation clarified and standardized the manner by which companies arerequired to account for uncertain income tax positions. Under the guidance ofFIN 48, the Company may recognize the tax benefit from an uncertain taxposition only if it is more likely than not to be sustained upon examinationbased on the technical merits of the position. The amount of the accrual forwhich an exposure exists is measured as the largest amount of benefitdetermined on a cumulative probability basis that the Company believes is morelikely than not to be realized upon ultimate settlement of the position.

On January 1, 2007, theCompany recognized a $0.6 million increase in its liability for uncertainincome tax positions, which was accounted for as a reduction to retainedearnings, for the cumulative effect change of adopting FIN 48. The reserve foruncertain income tax positions at January 1, 2007, as calculated under themeasurement provisions of FIN 48, was $9.1 million. Components of the reserveare classified as either a current or long-term liability in the consolidatedbalance sheet based on when the Company expects each of the items to besettled. Accordingly, the Company recorded a current liability of

6

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

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

$3.5 million inaccrued expenses and other current liabilities and a long-term liability of$5.6 million in other liabilities on its balance sheet at January 1, 2007,including accrued interest of approximately $1.3 million. Consistent withhistorical practice, Covance records interest and penalties accrued in relationto uncertain income tax positions as a component of income tax expense.

Any changes in the $9.1million liability for uncertain tax positions would impact the effective taxrate of Covance. Over the next twelve months, it is reasonably possible thatthe uncertainty surrounding a portion of the reserve for uncertain income taxpositions, related to certain foreign tax withholding and income taxes,dividend income, transfer pricing and state tax issues, will be resolved as aresult of the expiration of the statute of limitations or the conclusion ofvarious state and foreign tax audits. If such resolutions are favorable,Covance would reduce the carrying value of its reserve for these items by up to$2.0 million.  The following tax yearsremain open to investigation as of January 1, 2007 for the Company’s major taxjurisdictions:
| Tax Jurisdiction      | ** ** | **Years** |
|-----------------------|------------|-----------|
| US Federal and  State |       | 2002-2006 |
| United Kingdom        |       | 2004-2006 |
| Switzerland           |       | 2002-2006 |
| Germany               |       | 2006      |

 

As of March 31,2007, the balance of the reserve for uncertain income tax positions is $8.9million, of which $3.2 million is recorded as a current liability in accruedexpenses and other current liabilities, and $5.7 million is recorded as along-term liability in other liabilities on the consolidated balance sheet,including accrued interest of approximately $1.5 million.  The $0.2 million net decrease in the reservefrom January 1, 2007 to March 31, 2007 is due to a $0.4 million reductionresulting from the settlement of foreign and state audits, offset by a $0.2million increase in accrued interest.

The Company alsomaintains a tax reserve related to exposures for non-income tax matters such asvalue-added tax and state sales and use taxes, which are accounted for inaccordance with Statement of Financial Accounting Standards No. 5, *Accounting for Contingencies*. The balanceof this reserve at March 31, 2007 is approximately $1.1 million and is recordedas a current liability in accrued expenses and other current liabilities on theconsolidated balance sheet.

While Covance believes that it has identified all reasonablyidentifiable exposures and that the reserve it has established for identifiableexposures is appropriate under the circumstances, it is possible thatadditional exposures exist and that exposures may be settled at amountsdifferent than the amounts reserved. It is also possible that changes in factsand circumstances could cause Covance to either materially increase or reducethe carrying amount of its tax reserve.

Covance’s historical policy has been to leave its unremitted foreignearnings invested indefinitely outside the United States. Except for theone-time opportunity provided under the American Jobs Creation Act, pursuant towhich Covance repatriated $103 million in accumulated foreign earnings in thefourth quarter of 2005, Covance intends to continue to leave its unremittedforeign earnings invested indefinitely outside the United States.  As a result, taxes have not been provided onany accumulated foreign unremitted earnings as of March 31, 2007.

**Comprehensive Income**

Covance’s totalcomprehensive income, which represents net income plus the change in thecumulative translation adjustment equity account for the periods presented, was$40.0 million and $33.3 million for the three months ended March 31, 2007 and2006, respectively.

**ReimbursableOut-of-Pocket Expenses**

As discussed in Note 2 “PrepaidExpenses and Other Current Assets”, Covance pays on behalf of its customersfees to investigators, volunteers and other out-of-pocket costs for which weare reimbursed at cost, without mark-up or profit.  In

7

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

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

connection withthe requirements of Financial Accounting Standards Board Emerging Issues TaskForce Rule No. 01-14 (“EITF 01-14”), *Income StatementCharacterization 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-BasedCompensation**

TheCompany sponsors several stock-based compensation plans pursuant to whichnon-qualified stock options and restricted stock awards are granted to eligibleemployees.  These plans are describedmore fully in Note 7 herein and Note 10 to our audited consolidated financialstatements included in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

EffectiveJanuary 1, 2006, the Company adopted the fair value recognition provisions ofStatement of Financial Accounting Standards No. 123R, *Share-BasedPayments*, (“SFAS 123R”) using the modified prospective transitionmethod.  SFAS 123R revised Statement ofFinancial Accounting Standard No. 123, *Accounting for Stock-BasedCompensation*, (“SFAS 123”) superseded Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*,(“APB 25”) and amended Statement of Financial Accounting Standards No. 95, *Statement of Cash Flows*. Under the modified prospective transition method, compensation expenseis recognized in the financial statements on a prospective basis for (a) allshare-based payments granted prior to, but not vested as of January 1, 2006,based upon the grant-date fair value estimated in accordance with the originalprovisions of SFAS 123, and (b) share-based payments granted on or subsequentto January 1, 2006, based upon the grant-date fair value estimated inaccordance with the provisions of SFAS 123R. The grant-date fair value of awards expected to vest is expensed on astraight-line basis over the vesting period of the related awards.  See Note 7.

**Earnings Per Share(“EPS”)**

Basic EPS iscomputed by dividing net income available to common stockholders by theweighted average number of shares outstanding during the period.  The computation of diluted EPS is similar tothe computation of basic EPS, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif the dilutive potential common shares had been issued; computed under thetreasury stock method in accordance with the requirements of Statement of Financial Accounting StandardsNo. 128, *Earnings Per Share*.

In computingdiluted EPS for the three months ended March 31, 2007 and 2006, the denominatorwas increased by 1,049,529 shares and 1,273,848 shares, respectively,representing the dilutive effect of stock options outstanding at March 31, 2007and 2006, 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 endedMarch 31, 2007 were options to purchase 133,647 shares of common stock atprices ranging from $61.26 to $66.86 per share because the exercise prices ofsuch options were greater than the average market price of Covance’s commonstock during this period.  Excluded fromthe computation of diluted EPS for the three months ended March 31, 2006 wereoptions to purchase 130,864 shares of common stock at prices ranging from$56.18 to $59.52 per share because the exercise prices of such options weregreater than the average market price of Covance’s common stock during thisperiod.

**SupplementalCash Flow Information**

Cash paid for interest ineach of the three month periods ended March 31, 2007 and 2006 was $0.1 million.  Cash paid for income taxes for the threemonths ended March 31, 2007 and 2006 totaled $8.2 million and $5.5 million,respectively. The change in income taxes payable in the consolidated statementof cash flows for the three months ended March 31, 2007 and 2006 reflects as anoperating cash outflow the excess tax benefit received from the exercise ofnon-qualified stock options as measured under SFAS 123R of $0.9 million and$4.2 million, respectively (a corresponding cash inflow of $0.9 million and $4.2million, respectively, has been reflected in financing cash flows).

8

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

**(dollarsin thousands, unless otherwise indicated)**

**RecentlyIssued Accounting Standards**

In September 2006, theFinancial Accounting Standards Board (the “FASB”) issued Statement of FinancialAccounting Standards No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132(R)*, (“SFAS 158”). As of December31, 2006, Covance has adopted the recognition and disclosure provisions of SFAS158, which require an employer to recognize the over funded or under fundedstatus of its defined benefit postretirement plans – measured as the differencebetween the fair value of plan assets and the projected benefit obligation - asan asset or liability, respectively, in its balance sheet and to recognizechanges in the funded status of the plan in the year in which such changesoccur through other comprehensive income. SFAS 158 also requires, effective forfiscal years ending after December 15, 2008, that the measurement of the overfunded or under funded status of a plan be made as of the employer’s fiscalyear end and not as of an earlier measurement date.  Covance will be required to conform themeasurement dates of its plans to December 31st for its fiscal year ending December 31, 2008.Covance does not expect this change in measurement dates to have a materialimpact on its consolidated results of operations or financial position.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements,* (“SFAS 157”).SFAS 157, which applies whenever other standards require (or permit) fair valuemeasurement, defines fair value and provides guidance for using fair value tomeasure assets and liabilities.  SFAS 157also requires expanded disclosures about the extent to which companies measureassets and liabilities at fair value, the information used in thosemeasurements and the effect of fair value measurements on earnings. Covancewill be required to adopt SFAS 157, which is effective for fiscal yearsbeginning after November 15, 2007, no later than the quarter beginning January1, 2008. Covance is currently in the process of evaluating SFAS 157, and hasnot yet determined the impact, if any, SFAS 157 will have on its consolidatedresults of operations or financial position.

**3.  TreasuryStock**

In February 2007, theCovance Board of Directors authorized the repurchase of an additional 3.0million shares under Covance’s stock repurchase program. At March 31, 2007,there are approximately 2.5 million shares remaining for purchase under the2007 authorization.  Covance alsoreacquires shares of its common stock in connection with certain employeebenefit plans when employees tender shares either in connection with reloadstock options or to satisfy income tax withholdings associated with the vestingof stock awards.  The following tablesets forth the treasury stock activity during the three month periods endedMarch 31, 2007 and 2006:
| ** **                              | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **(amounts in thousands)**    | ** ** | **$**                                               | ** ** | **# shares** | ** ** | **$** | ** ** | **# shares** | ** ** |
| Shares  repurchased in connection with: |       |                                                |       |   |   |   |   |   |   |
| Board approved buyback programs         |       | $                                                   | 46,436     |   | 780.8 |   | $ | — |   | — |   |
| Employee benefit plans                  |       | 1,706                                               |       | 27.2 |   | 563 |   | 9.8 |   |
| Total                                   |       | $                                                   | 48,142     |   | 808.0 |   | $ | 563 |   | 9.8 |   |

 

**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 $20.7million.  The excess of the purchaseprice over the underlying equity in Noveprim’s net assets at the date ofacquisition 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, 2007 and 2006, Covancerecognized $0.4 million and $0.3 million, respectively, representing its shareof Noveprim’s earnings, less the elimination of profit on inventory purchasedfrom Noveprim and still on hand at Covance at March 31, 2007 and 2006. Thecarrying value of Covance’s investment in Noveprim at both March 31, 2007 andDecember 31, 2006 was $23.0 million.

9

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

**(dollarsin thousands, unless otherwise indicated)**

Covance has aminority equity position (approximately 21*%* at March 31, 2007) in Bio-ImagingTechnologies, Inc. (“BITI”).  BITI usesproprietary medical imaging technologies to process and analyze medical images,and also provides other services, including the data-basing and regulatorysubmission of medical images, quantitative data and text.  During the three month periods ended March31, 2007 and 2006, Covance recognized income of $0.1 million and a loss of $0.1million, respectively, representing its pro rata share of BITI’s earnings/(losses).  The carrying value of Covance’s investment inBITI as of March 31, 2007 and December 31, 2006 was $0.6 million and $0.5million, respectively, while the fair market value was $14.7 million and $19.0million, respectively.

**5.  Acquisitions**

InMay 2006, Covance acquired the stock of Radiant Research Inc. (“Radiant”) in amerger transaction for cash payments aggregating approximately $66.6 million(including direct acquisition costs of $0.5 million). The Radiant acquisitionincluded eight early development clinical sites performing Phase I/IIa clinicaltrial services.  Results of operationsfor Radiant, which are part of Covance’s Early Development segment serviceoffering, and the fair value of Radiant’s assets and liabilities acquired, areincluded in Covance’s consolidated financial statements beginning in June 2006.

InMay 2006, Covance also acquired certain assets and liabilities of SignetLaboratories, Inc. (“Signet”) for cash payments totaling $9.1 million(including direct acquisition costs of $0.2 million).  Signet specializes in the development ofmonoclonal antibodies and diagnostic assays for cancer, infectious diseases andneurodegenerative diseases.  Results ofoperations for Signet, which are part of Covance’s Early Development segmentservice offering, and the fair value of Signet’s assets and liabilitiesacquired, are included in Covance’s consolidated financial statements beginningin June 2006.

Thetable below summarizes the preliminary purchase price allocations for theRadiant and Signet acquisitions:
|                                                                                 | ** ** | **Radiant** | ** ** | **Signet** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Estimated fair  value of net tangible assets acquired                           |       | $           | 9,183      |       | $          | 352 |   |
| Fair value of  intangible assets acquired (8 year weighted average useful life) |       | 6,820       |       | 850        |       |
| Goodwill                                                                        |       | 50,567      |       | 7,896      |       |
| Net assets  acquired                                                            |       | $           | 66,570     |       | $          | 9,098 |   |

 

The purchase price allocations are based uponpreliminary estimates for tax matters, using available information and makingassumptions management believes are reasonable. Accordingly, these purchaseprice allocations are subject to finalization within one year of eachacquisition. The goodwill resulting from the Signet acquisition is deductiblefor tax purposes, while the goodwill resulting from the merger with Radiant isnot deductible for tax purposes.

**6.  DefinedBenefit Plans**

Covance sponsors various pension and otherpost-retirement benefit plans. As required by SFAS 158, Covance recognizes theover funded or under funded status of its defined benefit postretirement plans –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 recognizes changes in the funded status of the plan throughother comprehensive income (in the year such changes occur).

**DefinedBenefit Pension Plans**

Covance sponsors twodefined benefit pension plans for the benefit of its employees at two UnitedKingdom subsidiaries and one defined benefit pension plan for the benefit ofits employees at a German subsidiary, all of which are legacy plans ofpreviously acquired companies.  Benefitamounts for all three plans are based upon years of service andcompensation.  The German plan isunfunded, while the United Kingdom plans are funded.  Covance’s funding policy has been to contributeannually a fixed percentage of the eligible employee’s salary at least equal tothe local statutory funding requirements. Pension plan assets are

10

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

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

administered bythe plans’ trustees and are principally invested in equity and debtsecurities.  The components of netperiodic pension expense for these plans for the three month periods endedMarch 31, 2007 and 2006 are as follows:
| ** **                                                | ** ** | **United Kingdom Plans**                  | ** ** | **German Plan**                                | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** | **Three Months Ended March 31** | ** ** |
| ** **                                                | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Components of  Net Periodic Pension Cost:                 |       |                                                |       |                                                |       |   |   |   |   |
| Service cost                                              |       | $                                                   | 1,464      |                                                | $          | 1,389 |   | $ | 123 |   | $ | 96 |   |
| Interest cost                                             |       | 1,841                                               |       | 1,484                                               |       | 90 |   | 71 |   |
| Expected return on plan assets                            |       | (2,116                                              | )          | (1,687                                              | )          | — |   | — |   |
| Amortization of net actuarial loss                        |       | 350                                                 |       | 439                                                 |       | 17 |   | 12 |   |
| Participant contributions                                 |       | (550                                                | )          | (535                                                | )          | — |   | — |   |
| Net periodic pension cost                                 |       | $                                                   | 989        |                                                | $          | 1,090 |   | $ | 230 |   | $ | 179 |   |
|                                                      |       |                                                |       |                                                |       |   |   |   |   |
| Assumptions Used  to Determine Net Periodic Pension Cost: |       |                                                |       |                                                |       |   |   |   |   |
| Discount rate                                             |       | 5.25                                                | %          | 5.00                                                | %          | 4.65 | % | 4.65 | % |
| Expected rate of return on assets                         |       | 6.75                                                | %          | 6.75                                                | %          | n/a |   | n/a |   |
| Salary increases                                          |       | 4.00                                                | %          | 4.00                                                | %          | 2.50 | % | 2.50 | % |

 

**SupplementalExecutive Retirement Plan**

In addition to these foreign defined benefit pensionplans, Covance also has a non-qualified Supplemental Executive Retirement Plan(“SERP”).  The SERP, which is not funded,is intended to provide retirement benefits for certain executive officers ofCovance.  Benefit amounts are based uponyears of service and compensation of the participating employees.  The components of net periodic pension cost forthe three month periods ended March 31, 2007 and 2006 are as follows:
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Components of  Net Periodic Pension Cost:                 |       |                                                |       |   |   |
| Service cost                                              |       | $                                                   | 271        |   | $ | 231 |   |
| Interest cost                                             |       | 193                                                 |       | 164 |   |
| Amortization of prior service cost                        |       | 19                                                  |       | 19 |   |
| Amortization of net actuarial loss                        |       | 11                                                  |       | 8 |   |
| Net periodic pension cost                                 |       | $                                                   | 494        |   | $ | 422 |   |
|                                                      |       |                                                |       |   |   |
| Assumptions Used  to Determine Net Periodic Pension Cost: |       |                                                |       |   |   |
| Discount rate                                             |       | 5.50                                                | %          | 5.50 | % |
| Salary increases                                          |       | 4.00                                                | %          | 4.00 | % |

 

**Post-EmploymentRetiree Health and Welfare 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, 2007 and 2006 are as follows:

11

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

**(dollarsin thousands, unless otherwise indicated)**
| ** **                                                                | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Components of  Net Periodic Post-retirement Benefit Cost:                 |       |                                                |       |   |   |
| Service cost                                                              |       | $                                                   | 41         |   | $ | 44 |   |
| Interest cost                                                             |       | 70                                                  |       | 78 |   |
| Amortization of net actuarial loss                                        |       | —                                              |       | 13 |   |
| Net periodic post-retirement benefit cost                                 |       | $                                                   | 111        |   | $ | 135 |   |
|                                                                      |       |                                                |       |   |   |
| 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)decreasing to ultimate trend of 5.00% in 2011

**7.  Stock-Based Compensation Plans**

Covance sponsors severalemployee stock-based compensation plans which are described more fully in Note10 to our audited consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2006.  These plans include the 2002 Employee StockOption Plan (the “2002 ESOP”) pursuant to which eligible employees can receiveoptions to purchase common stock or stock appreciation rights, and the 2002Employee Equity Participation Plan (the “2002 EEPP”) pursuant to which eligibleemployees can receive options to purchase common stock, stock appreciationrights, or restricted stock awards either singly or in combination.  No stock appreciation rights have been grantedunder either the 2002 ESOP or the 2002 EEPP.

The grant-date fair valueof stock option awards is estimated using an option pricing model as more fullydescribed in Note 10 to our audited consolidated financial statements includedin our Annual Report on Form 10-K for the year ended December 31, 2006.  The grant-date fair value of options expectedto vest is expensed on a straight-line basis over the vesting period of therelated awards.

Thefollowing table sets forth the weighted-average assumptions used to calculatethe fair value of options granted for the three month periods ended March31, 2007 and 2006:
|                                   | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Expected stock  price volatility  |       | 42%                                                 |       | 44% |   |
| Risk free  interest rate(s)       |       | 4.7%  - 5.1%                                        |       | 4.6% |   |
| Expected life of  options (years) |       | 4.3                                                 |       | 4.3 |   |

 

Restricted stock awards aregranted subject to certain restrictions, including in some cases serviceconditions and in other cases service and performance conditions.  The grant-date fair value of restricted stockawards expected to vest, which has been determined based upon the market valueof Covance’s shares on the grant date, is expensed on a straight-line basisover the vesting period of the related awards.

Covance also has an employeestock purchase plan (“ESPP”) pursuant to which Covance may make available forsale to its employees shares of its common stock at a price equal to 85% of thelower of the market value on the first or last day of each calendarquarter.  The ESPP is intended to give Covanceemployees the opportunity to purchase shares of Covance common stock throughpayroll deductions.

12

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**COVANCE INC. AND SUBSIDIARIES**

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

**(UNAUDITED)**

**March31, 2007 and 2006**

**(dollarsin thousands, unless otherwise indicated)**

Results of operations forthe three month period ended March 31, 2007 include total stock-basedcompensation expense of $5.5 million ($3.7 million net of tax benefit of $1.8million), $2.0 million of which has been included in cost of revenue and $3.5million of which has been included in selling, general and administrativeexpenses.  Results of operations for thethree month period ended March 31, 2006 include total stock-based compensationexpense of $4.3 million ($2.9 million net of tax benefit of $1.4 million), $1.8million of which has been included in cost of revenue and $2.5 million of whichhas been included in selling, general and administrative expenses.

**8.   SegmentInformation**

Covance has tworeportable segments: early development and late-stage development.  Early development services, which includesCovance’s preclinical and clinical pharmacology service capabilities, involveevaluating a new compound for safety and early effectiveness as well asevaluating the absorption, distribution, metabolism and excretion of thecompound in the human body.  It is atthis stage that a pharmaceutical company, based on available data, willgenerally decide whether to continue further development of a drug.  Late-stage development services, whichincludes Covance’s central laboratory, clinical development, cardiac safetyservices, periapproval and market access services, are geared towarddemonstrating the clinical effectiveness of a compound in treating certaindiseases or conditions, obtaining regulatory approval and maximizing the drug’scommercial potential. The accounting policies of the reportable segments arethe same as those described in Note 2.

Segment netrevenues, operating income and total assets for the three months ended March31, 2007 and 2006 are as follows:
| ** **                               | ** ** | **Early  Development** | ** ** | **Late-Stage  Development** | ** ** | **Other  Reconciling Items** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------|------------|
| ***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 |   |
|                                     |       |                   |       |                        |       |                              |       |      |       |
| ***Three  months ended March 31, 2006*** |       |                   |       |                        |       |                              |       |      |       |
| Total revenues from external customers   |       | $                      | 142,439    |                        | $          | 178,070                           |       | $    | 13,129     | (a) | $ | 333,638 |   |
| Operating income                         |       | $                      | 35,499     |                        | $          | 31,983                            |       | $         | (21,638    | )(b) | $ | 45,844 |   |
| Total assets                             |       | $                      | 558,945    |                        | $          | 381,766                           |       | $    | 157,879    | (c) | $ | 1,098,590 |   |

 

----

(a)                                   Represents revenues associated withreimbursable out-of-pocket expenses.

(b)                                   Represents corporate expenses (primarilyinformation technology, marketing, communications, human resources, finance,legal, and stock-based compensation expense).

(c)                                   Represents corporate assets.

13

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof 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, 2007.

**Overview**

Covance is aleading drug development services company providing a wide range of early-stageand late-stage product development services on a worldwide basis primarily tothe pharmaceutical, biotechnology and medical device industries. Covance alsoprovides services such as laboratory testing to the chemical, agrochemical andfood industries. The foregoing services comprise two reportable segments forfinancial reporting purposes: early development services, which includespreclinical and clinical pharmacology service offerings; and late-stagedevelopment services, which includes central laboratory, clinical development,cardiac safety services, periapproval and market access services. Although eachsegment has separate services within it, they can be combined in joint serviceofferings and we believe clients increasingly are interested in opportunitiesfor such combined services.  Covancebelieves it is one of the largest drug development services companies, based onannual net revenues, and one of a few that is capable of providingcomprehensive global product development services. Covance offers its clientshigh quality services designed to provide data to clients as rapidly as possibleand reduce product development time.  Webelieve this enables Covance’s customers to introduce their products into themarketplace faster and as a result, maximize the period of market exclusivityand 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.

**Critical Accounting Policies**

Covance’sconsolidated financial statements are prepared in accordance with U.S.generally accepted accounting principles (“GAAP”), which require management tomake estimates and assumptions about future events that affect the amountsreported in the financial 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 revenueeither as services are performed or products are delivered, depending upon thenature of the work contracted. 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 take the form of fee-for-service orfixed-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-term fixed-price service contracts,revenue is recognized as services are performed, with performance generallyassessed using output measures, such as units-of-work performed to date ascompared to the total units-of-work contracted. Changes in the scope of work generally result in a renegotiation ofcontract pricing terms.  Renegotiatedamounts are not included in net revenues until earned and realization isassured.  Estimates of costs to completeare made to provide, 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 contract duration.  Most contracts are terminable by the clienteither immediately or upon notice.  Thesecontracts typically require payment to Covance of expenses to wind down thestudy, fees earned to date and, in some cases, a termination fee or a paymentto Covance of some portion of the fees or profits that could have been earnedby Covance under the contract if it had not been terminated early.  Termination fees are included in net revenueswhen 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 on Income.***SinceCovance conducts operations on a global basis, its effective tax rate has andwill continue to depend upon the geographic distribution of its pre-taxearnings among locations with varying tax rates. Covance’s profits are furtherimpacted by changes in the tax rates of the various jurisdictions in whichCovance operates. In addition, Covance maintains a reserve for uncertain incometax positions, changes in which also impact Covance’s effective tax rate in theperiod in which such changes are made.

Effective January 1,2007, the Company adopted the provisions of Financial Accounting StandardsBoard Interpretation No. 48, *Accounting forUncertainty in Income Taxes – an Interpretation of FASB Statement No. 109*(“FIN 48”).  This authoritativeinterpretation clarified and standardized the manner by which companies arerequired to account for uncertain income tax positions. Under the guidance ofFIN 48, the Company may recognize the tax benefit from an uncertain taxposition only if it is more likely than not to be sustained upon examinationbased on the technical merits of the position. The amount of the accrual forwhich an exposure exists is measured as the largest amount of benefitdetermined on a cumulative probability basis that the Company believes is morelikely than not to be realized upon ultimate settlement of the position. OnJanuary 1, 2007, the Company recognized a $0.6 million increase its liabilityfor uncertain income tax positions, which was accounted for as a reduction toretained earnings, for the cumulative effect change of adopting FIN 48. Thereserve for uncertain income tax positions at January 1, 2007, as calculatedunder the measurement provisions of FIN 48, was $9.1 million. Components of thereserve are classified as either a current or long-term liability in theconsolidated balance sheet based on when the Company expects each of the itemsto be settled. Accordingly, the Company recorded a current liability of $3.5million in accrued expenses and other current liabilities and a long-termliability of $5.6 million in other liabilities on its balance sheet at January1, 2007, including accrued interest of approximately $1.3 million. Consistentwith historical practice, Covance records interest and penalties accrued inrelation to uncertain income tax positions as a component of income taxexpense.

Any changes in the $9.1million liability for uncertain tax positions would impact the effective taxrate of Covance. Over the next twelve months, it is reasonably possible thatthe uncertainty surrounding a portion of the reserve for uncertain income taxpositions, related to certain foreign tax withholding and income taxes,dividend income, transfer pricing and state tax issues, will be resolved as aresult of the expiration of the statute of limitations or the conclusion ofvarious state and foreign tax audits. If such resolutions are favorable,Covance would reduce the carrying value of its reserve for these items by up to$2.0 million.  The following tax yearsremain open to investigation as of January 1, 2007 for the Company’s major taxjurisdictions:
| Tax Jurisdiction      | ** ** | **Years** |
|-----------------------|------------|-----------|
| US Federal and  State |       | 2002-2006 |
| United Kingdom        |       | 2004-2006 |
| Switzerland           |       | 2002-2006 |
| Germany               |       | 2006      |

 

As of March 31,2007, the balance of the reserve for uncertain income tax positions is $8.9million, of which $3.2 million is recorded as a current liability in accruedexpenses and other current liabilities, and $5.7 million is recorded as along-term liability in other liabilities on the consolidated balance sheet,including accrued interest of approximately $1.5 million.  The $0.2 million net decrease in the reservefrom January 1, 2007 to March 31, 2007 is due to a $0.4 million reductionresulting from the settlement of foreign and state audits, offset by a $0.2million increase in accrued interest.

The Company alsomaintains a tax reserve related to exposures for non-income tax matters such asvalue-added tax and state sales and use taxes, which are accounted for inaccordance with Statement of Financial Accounting Standards No. 5, *Accounting for Contingencies*. The balanceof this reserve at March 31, 2007 is approximately $1.1 million and is recordedas a current liability in accrued expenses and other current liabilities on theconsolidated balance sheet.

While Covance believes that it has identified allreasonably identifiable exposures and that the reserve it has established foridentifiable exposures is appropriate under the circumstances, it is possiblethat additional exposures exist and that exposures will be settled at amountsdifferent than the amounts reserved. It is also possible that changes in factsand circumstances could cause Covance to either materially increase or reducethe carrying amount of its tax reserve.

Covance’s policy is to provide income taxes onearnings of foreign subsidiaries only to the extent those earnings are taxableor are expected to be remitted. Covance’s historical policy has been to leaveits unremitted foreign earnings invested indefinitely outside the UnitedStates. Except for the amounts repatriated in the fourth quarter of 2005 underthe American Jobs Creation Act of 2004, Covance intends to continue to leaveits unremitted foreign earnings invested indefinitely outside the UnitedStates.  As a result, taxes have not beenprovided on any accumulated foreign unremitted earnings as of March 31, 2007.

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***Stock-BasedCompensation.*** TheCompany sponsors several stock-based compensation plans pursuant to whichnon-qualified stock options and restricted stock awards are granted to eligibleemployees.  These plans are describedmore fully in Note 10 to our audited financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2006.

The grant-date fair valueof stock awards is based upon the underlying price of the stock on the date ofgrant.  The grant-date fair value ofstock option awards must be determined using an option pricing model.  Option pricing models require the use ofestimates and assumptions as to (a) the expected term of the option, (b) theexpected volatility of the price of the underlying stock, (c) the risk-freeinterest rate for the expected term of the option and (d) pre-vestingforfeiture rates.  For stock optionsgranted prior to January 1, 2006, the Company used the Black-Scholes-Mertonoption pricing formula for determining the grant-date fair value of suchawards.  For stock options granted on orsubsequent to January 1, 2006, the Company is using the Lattice-Binomial optionpricing formula for determining the grant-date fair value of stock optionawards.  The Company changed to the Lattice-Binomialoption pricing formula as it believes such formula may result in a betterestimate of fair value than the Black-Scholes-Merton formula.

The expected term of theoption is based upon the contractual term and expected employee exercise andexpected post-vesting employment termination behavior.  The expected volatility of the price of theunderlying stock is based upon the historical volatility of the Company’s stockcomputed over a period of time equal to the expected term of the option.  The risk free interest rate is based upon theimplied yields currently available from the U.S. Treasury zero-coupon yieldcurve for issues with a remaining duration equal to the expected term of theoption.  Pre-vesting forfeiture rates areestimated based upon past voluntary termination behavior and past optionforfeitures.

Thefollowing table sets forth the weighted-average assumptions used to calculatethe fair value of options granted for the three month periods ended March31, 2007 and 2006:
|                                   | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Expected stock  price volatility  |       | 42%                                                 |       | 44% |   |
| Risk free  interest rate(s)       |       | 4.7%  - 5.1%                                        |       | 4.6% |   |
| Expected life of  options (years) |       | 4.3                                                 |       | 4.3 |   |

 

Changes in any of theseassumptions could impact, potentially materially, the amount of expenserecorded in future periods related to stock-based awards.

***Impairment of Assets.***Covance reviews its long-lived assets other than goodwill and otherindefinite lived intangible assets for impairment, when events or changes incircumstances occur that indicate that the carrying value of the asset may notbe recoverable.  The assessment ofpossible impairment is based upon Covance’s judgment of its ability to recoverthe asset from the expected future undiscounted cash flows of the relatedoperations.  Actual future cash flows maybe greater or less than estimated.

Covance performs an annual test for impairment ofgoodwill and other indefinite lived intangible assets during the fourthquarter. This test is performed by comparing, at the reporting unit level, thecarrying value of the reporting unit to its fair value.  Covance assesses fair value based upon itsbest estimate of the present value of the future cash flows that it expects tobe generated by the reporting unit.  The mostrecent test for impairment performed for 2006 did not identify any instances ofimpairment and there were no events through March 31, 2007 that warranted areconsideration of our impairment test 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.***Covancesponsors defined benefit pension plans for the benefit of its employees atthree foreign subsidiaries, as well as a non-qualified supplemental executiveretirement plan and a post-employment retiree health and welfare plan for thebenefit of eligible employees at certain U.S. subsidiaries. The measurement ofthe related benefit obligation and net periodic benefit cost recorded each yearis based upon actuarial computations, which require the use of judgment as tocertain assumptions. The more significant of these assumptions are: (a) theappropriate discount rate to use in computing the present value of the benefitobligation; (b) the expected return on plan assets (for funded plans); and (c)the expected future rate of salary increases (for pay-related plans). Actualresults (such as the return on plan assets, future rate of salary increases andplan participation rates) will likely differ from the assumptions used. Thosedifferences, along with changes that may be made in the assumptions used fromperiod to period, will impact the amounts reported in the financial statementsand footnote disclosures.

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Set forth below is a discussionof the impact that (a) differences between assumed results and actualresults and (b) assumption changes have had on our results of operations forthe years ended December 31, 2006, 2005 and 2004 and on the financial positionof the plans as of December 31, 2006 and 2005 for our United Kingdom definedbenefit pension plans (the largest of our defined benefit-type pension plans).
| ** **                                                                 | ** ** | **United Kingdom Plans** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                        | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net periodic  pension cost                                                 |       | $                                  | 4.6        |   | $ | 4.1 |   | $ | 4.3 |   | $ | 4.1 |   |
| Weighted average  assumptions used to determine net periodic pension cost: |       |                               |       |   |   |   |   |   |   |
| Discount rate                                                              |       | 5.00                               | %          | 5.75 | % | 6.00 | % | 6.00 | % |
| Expected rate of return on assets                                          |       | 6.75                               | %          | 6.75 | % | 6.00 | % | 6.00 | % |
| Salary increases                                                           |       | 4.00                               | %          | 4.00 | % | 3.50 | % | 3.50 | % |
|                                                                            |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

The increase (decrease)in the net periodic benefit cost from period to period is attributable to thefollowing:
| ** **                                                                   | ** ** | **United Kingdom Plans** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                          | ** ** | **2005 to 2006**         | ** ** | **2004 to 2005** | ** ** | **2003 to 2004** | ** ** |
| Change in  discount rate                                                     |       | $                                  | 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 |       | (1.9                               | )          | (0.4 | ) | $ | (0.3 | ) |
| Foreign currency  exchange rate changes                                      |       | —                             |       | — |   | 0.5 |   |
| Net change in periodic  benefit cost                                         |       | $                                  | 0.5        |   | $ | (0.2 | ) | $ | 0.2 |   |

 
| ** **                                                          | ** ** | **United Kingdom Plans** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  assumptions used to determine benefit obligation: | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                       |       | 5.25                               | %          | 5.00 | % | 5.75 | % |
| Salary increases                                                    |       | 4.00                               | %          | 4.00 | % | 4.00 | % |

 

The change in theprojected benefit obligation from period to period is attributable to thefollowing:
| ** **                                                                   | ** ** | **United Kingdom Plans** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                          | ** ** | **2005 to 2006**         | ** ** | **2004 to 2005** | ** ** |
| Projected  benefit obligation, beginning of year                             |       | $                                  | 119.8      |   | $ | 103.3 |   |
| Service/interest  cost components of net periodic benefit cost in year       |       | 12.2                               |       | 10.5 |   |
| Benefits paid                                                                |       | (1.3                               | )          | (1.2 | ) |
| (Increase)/reduction  in discount rate                                       |       | (8.6                               | )          | 18.6 |   |
| Other, including  differences between actual experience and assumptions used |       | 3.9                                |       | (0.5 | ) |
| Foreign currency  exchange rate changes                                      |       | 15.3                               |       | (10.9 | ) |
| Projected benefit  obligation, end of year                                   |       | $                                  | 141.3      |   | $ | 119.8 |   |

 

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**Foreign Currency Risks**

Since Covance operates on a global basis, it isexposed to various foreign currency risks. Two specific risks arise from thenature of the contracts Covance executes with its customers since from time totime contracts are denominated in a currency different than the particularCovance subsidiary’s local currency. These risks are generally applicable onlyto a portion of the contracts executed by Covance’s subsidiaries providingclinical services. The first risk occurs when revenue recognized for servicesrendered is denominated in a currency different from the currency in which thesubsidiary’s expenses are incurred. As a result, the subsidiary’s net revenuesand resultant earnings can be affected by fluctuations in exchange rates.  Historically, fluctuations in exchange ratesfrom those in effect at the time contracts were executed have not had amaterial effect upon Covance’s consolidated financial results.  See “Risk Factors”.

The second risk results from the passage of timebetween the invoicing of customers under these contracts and the ultimatecollection of customer payments against such invoices. Because the contract isdenominated in a currency other than the subsidiary’s local currency, Covancerecognizes a receivable at the time of invoicing for the local currencyequivalent of the foreign currency invoice amount. Changes in exchange ratesfrom the time the invoice is prepared and payment from the customer is receivedwill result in Covance receiving either more or less in local currency than thelocal currency equivalent of the invoice amount at the time the invoice wasprepared and the receivable established. This difference is recognized byCovance as a foreign currency transaction gain or loss, as applicable, and isreported in other expense (income) in Covance’s consolidated statements of income.

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, 2007, accumulatedother comprehensive income on the Consolidated Balance Sheet includes thecumulative translation account balance of $36.3 million.

### **Operating Expenses and ReimbursableOut-of-Pockets**

Covance segregates its recurringoperating expenses among four categories: cost of revenue; reimbursedout-of-pocket expenses; selling, general and administrative expenses; anddepreciation and amortization. Cost of revenue includes direct labor and relatedbenefits, other direct costs, shipping and handling fees, and an allocation offacility charges and information technology costs, and excludes depreciationand amortization. Cost of revenue, as a percentage of net revenues, tends andis expected to fluctuate from one period to another, as a result of changes inlabor utilization and the mix of service offerings involving hundreds ofstudies conducted during any period of time. Selling, general andadministrative expenses consist primarily of administrative payroll and relatedbenefit charges, advertising and promotional expenses, administrative traveland an allocation of facility charges and information technology costs, andexcludes depreciation and amortization.

In connection with themanagement of multi-site clinical trials, Covance pays on behalf of itscustomers fees to investigators, volunteers and other out-of-pocket costs (suchas for travel, printing, meetings, couriers, etc.), for which it is reimbursedat cost, without mark-up or profit. Investigator fees are not reflected in total revenues or expenses whereCovance acts in the capacity of an agent on behalf of the pharmaceuticalcompany sponsor, passing through these costs without risk or reward toCovance.  All other out-of-pocket costsare included in total revenues and expenses.

**Quarterly Results**

Covance’s quarterlyoperating results are subject to variation, and are expected to continue to besubject to variation, as a result of factors such as (1) delays in initiatingor completing significant drug development trials, (2) termination or reductionin size of drug development trials, (3) acquisitions and divestitures, (4)changes in the mix of our services, and (5) exchange rate fluctuations. Delaysand terminations of trials are often the result of actions taken by Covance’scustomers or regulatory authorities and are not typically controllable byCovance. Since a large amount of Covance’s operating costs are relatively fixedwhile revenue is subject to fluctuation, moderate variations in the commencement,progress or completion of drug development trials may cause significantvariations in quarterly results.

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**Results of Operations**

***Three Months Ended March 31, 2007 Compared with Three Months EndedMarch 31, 2006. ***Netrevenues increased 11.8% to $358.3 million for the three months ended March 31,2007 from $320.5 million for the corresponding 2006 period.  Excluding the impact of foreign exchange ratevariances between both periods net revenues increased 9.0% as compared to the corresponding 2006period.  Net revenues from Covance’searly development segment grew 25.8%,or 22.3% excluding the impact of foreign exchange rate variances betweenboth periods, driven by broad-based strength across toxicology, chemistry andclinical pharmacology services.  Netrevenues from Covance’s late-stage development segment increased 0.6%, but decreased 1.7% excluding theimpact of foreign exchange rate variances between both periods.   Softness in: (1) central laboratoryservices, due to delays in enrollment and longer trial durations; (2) cardiacsafety services, due to low orders; and (3) commercialization services, due tofewer new biological market launches; more than offset strong performance inclinical development.

Costof revenue increased 9.7% to $234.4 million or 65.4% of net revenues for thethree months ended March 31, 2007 as compared to $213.7 million or 66.7% of netrevenues for the corresponding 2006 period. Gross margins increased by 130basis points to 34.6% for the three months ended March 31, 2007 from 33.3% forthe corresponding 2006 period.

Overall,selling, general and administrative expenses increased 15.5% to $55.8 millionfor the three months ended March 31, 2007 from $48.3 million for thecorresponding 2006 period. As a percentage of net revenues, selling, generaland administrative expenses increased 50 basis points to 15.6% for the threemonths ended March 31, 2007 from 15.1% for the corresponding 2006 period.

Depreciationand amortization increased 26.7% to $16.1 million or 4.5% of net revenues forthe three months ended March 31, 2007 from $12.7 million or 4.0% of netrevenues for the corresponding 2006 period as a result of higher levels ofcapital spending over the last eighteen months.

Incomefrom operations increased 13.5% to $52.0 million or 14.5% of net revenues forthe three months ended March 31, 2007 from $45.8 million or 14.3% of netrevenues for the corresponding 2006 period. Income from operations from Covance’searly development segment increased $8.2 million or 23.0% to $43.7 million or24.4% of net revenues for the three months ended March 31, 2007 from $35.5million or 24.9% of net revenues for the corresponding 2006 period. The $8.2million increase over the prior year was driven primarily by growth in globaltoxicology and chemistry.  The 50 basispoint reduction in operating margin is primarily attributable to the results ofthe acquired eight clinical pharmacology sites from Radiant Research Inc. inthe second quarter of 2006. Excluding the impact of this acquisition, operatingmargins expanded over the corresponding 2006 period. Income from operationsfrom Covance’s late-stage development segment decreased $2.8 million or 8.7% to$29.2 million or 16.3% of net revenues for the three months ended March 31,2007 from $32.0 million or 18.0% of net revenues for the corresponding 2006period, as the impact of revenue softness experienced in central laboratory,cardiac safety and commercialization services more than offset margin expansionin clinical development services.  Corporateexpenses decreased $0.7 million to $20.9 million or 5.8% of net revenues forthe three months ended March 31, 2007 from $21.6 million or 6.8% of netrevenues for the three months ended March 31, 2006, driven primarily by adecrease in information technology expenses, which more than offset increasesin stock-based compensation and other general and administrative expenses.Included in Corporate expense is stock-based compensation expense of $5.5million or 1.5% of net revenues for the three months ended March 31, 2007, ascompared to $4.3 million or 1.3% of net revenues for the corresponding 2006period.

Otherincome, net increased $0.8 million to $2.3 million for the three months endedMarch 31, 2007 from $1.5 million for the corresponding 2006 period primarily asa result of a $0.7 million increase innet interest income due to higher average invested cash balances in the firstquarter of 2007 and higher average interest rates earned on those balances.

Covance’seffective tax rate for the three months ended March 31, 2007 was 29.5% comparedto 30.1% for the corresponding 2006 period. The year-over-year 60 basis pointreduction in Covance’s effective tax rate is attributable to a number offactors, including the mix of our pre-tax earnings across various taxjurisdictions and other planning initiatives.

Covance has aminority equity position (approximately 21% at March 31, 2007) in Bio-ImagingTechnologies, Inc. (“BITI”).  BITI usesproprietary medical imaging technologies to process and analyze medical images,and also provides other services, including the data-basing and regulatorysubmission of medical images, quantitative data and text.  For the three month periods ended March 31,2007 and 2006, Covance recognized income of $0.1 million and losses of $0.1million, representing its pro rata share of BITI’s earnings (losses).

Covancehas a 47% minority equity position in Noveprim Limited (“Noveprim”), a supplierof research products.  For the threemonth periods ended March 31, 2007 and 2006, Covance recognized $0.4 millionand $0.3 million, respectively, representing its share

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of Noveprim’s earnings, less the elimination of profiton inventory purchased from Noveprim and still on hand at Covance at March 31,2007 and 2006.

Netincome of $38.9 million for the three months ended March 31, 2007 increased$5.5 million or 16.5% as compared to $33.4 million for the corresponding 2006period.

**Liquidity and Capital Resources**

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 from operations will provide sufficient liquidity for theforeseeable future. At March 31, 2007, there were no outstanding borrowings and$1.1 million of outstanding 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.  The CreditFacility contains various financial and other covenants.  At March 31, 2007, Covance was in compliancewith the terms of the Credit Facility. The Credit Facility is collateralized byguarantees of certain of Covance’s domestic subsidiaries and a pledge of 65percent of the capital stock of certain of Covance’s foreign subsidiaries.

Duringthe three months ended March 31, 2007, Covance’s operations provided net cashof $34.9 million, an increase of $2.3 million from the corresponding 2006period.  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 assets andunbilled services and a reduction in accrued payroll and benefits (primarilyattributable to incentive compensation payments made during the first quarterof 2007 relating to 2006 incentive compensation accruals), partially offset byan increase in unearned revenue. The change in net operating assets used $18.8million in cash during the three months ended March 31, 2006, primarily due toa reduction in accrued payroll and benefits (primarily attributable toincentive compensation payments made during the first quarter of 2006 relatingto 2005 incentive compensation accruals) and an increase in prepaid expensesand other current assets and unbilled services, partially offset by a decreasein accounts receivable. Covance’s ratio of current assets to currentliabilities was 2.20 at March 31, 2007 and 2.21 at December 31, 2006.

Investingactivities for the three months ended March 31, 2007 used $31.8 million,compared to using $19.1 million for the corresponding 2006 period.  Capital spending for the first three monthsof 2007 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.  Capital spending for the corresponding 2006period totaled $19.2 million, and was primarily for the expansion of ourMadison, WI facility, outfitting of new facilities, upgrade of existingequipment, and the purchase of new equipment and software for newly hiredemployees.

Financing activities forthe three months ended March 31, 2007 used $41.7 million, which was comprisedprimarily of funds used to purchase into treasury 780,800 shares of commonstock under the share buyback program authorized by Covance’s Board ofDirectors, and the purchase into treasury of 27,161 shares of common stock inconnection with employee benefit plans, for an aggregate cost of $48.1 million,partially offset by proceeds from the exercise of stock options of $4.4million, excess tax benefits realized on the exercise of stock options of $0.9million and employee contributions to Covance’s employee stock purchase plan of$1.1 million.  Financing activities forthe three months ended March 31, 2006 provided $17.0 million, which wascomprised of proceeds from the exercise of stock options of $12.4 million,excess tax benefits realized on the exercise of stock options of $4.2 millionand employee contributions to Covance’s employee stock purchase plan of $0.9million, partially offset by the purchase into treasury of 9,828 shares ofcommon stock for an aggregate cost of $0.6 million, in connection with employeebenefit plans.

**Inflation**

While most of Covance’snet revenues are earned under contracts, the long-term contracts (those inexcess of one year) generally include an inflation or cost of living adjustmentfor the portion of the services to be performed beyond one year from thecontract date. As a result, Covance believes that the effects of inflationgenerally do not have a material adverse effect on its operations or financialcondition.

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**RecentlyIssued 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 adopted the recognition and disclosureprovisions of SFAS 158, which require an employer to recognize the over fundedor under funded status of its defined benefit postretirement plans – measuredas the difference between the fair value of plan assets and the projectedbenefit obligation - as an asset or liability, respectively, in its balancesheet and to recognize changes in the funded status of the plan in the year inwhich such changes occur through other comprehensive income. SFAS 158 alsorequires, 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 themeasurement dates of its plans to December 31st for its fiscal year ending December 31, 2008.Covance does not expect this change in measurement dates to have a material impacton its consolidated results of operations or financial position.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements,* (“SFAS 157”).SFAS 157, which applies whenever other standards require (or permit) fair valuemeasurement, defines fair value and provides guidance for using fair value tomeasure assets and liabilities.  SFAS 157also requires expanded disclosures about the extent to which companies measureassets and liabilities at fair value, the information used in thosemeasurements and the effect of fair value measurements on earnings. Covancewill be required to adopt SFAS 157, which is effective for fiscal yearsbeginning after November 15, 2007, no later than the quarter beginning January1, 2008. Covance is currently in the process of evaluating SFAS 157, and hasnot yet determined the impact, if any, SFAS 157 will have on its consolidatedresults of operations or financial position.

***ForwardLooking Statements.****Statements in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations, aswell as in certain other parts of this Quarterly Report on Form 10-Q that lookforward in time, are forward looking statements made pursuant to the safeharbor 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, difficulties or delays in integrating the business ofRadiant and achieving anticipated efficiencies and synergies, and other factorsdescribed in Covance’s filings with the Securities and Exchange Commission,including its Annual Report on Form 10-K.*

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

For the three months ended March 31, 2007,approximately 37% of our net revenues were derived from our operations outsidethe United States. We do not engage in derivative or hedging activities relatedto our potential foreign exchange exposures. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Foreign Currency Risks” for a more detailed discussionof 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**

**Item 1a.  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 ingovernment regulation or in practices relating to the pharmaceutical industrycould decrease the need for the services we provide.**

Governmental agencies throughoutthe world, but particularly 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 tocomply with existing regulations could result in a loss of revenue or earningsor 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 bearfinancial losses because most of our contracts are of a fixed price nature andmay be delayed or terminated or reduced in scope for reasons beyond ourcontrol.**

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 the products;

·                  insufficient patient enrollment;

·                  insufficient investigator recruitment;

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

·                  our failure to perform properly our duties underthe 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 bearfinancial risk if we under price our contracts or overrun 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 beable to successfully develop and market or acquire 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 quarterlyoperating 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 or cancellation oflarge 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 thepharmaceutical 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 ahighly 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 the larger contract research organizationsfor both clients and potential acquisition candidates. Additionally, small,limited service entities considering entering the contract researchorganization industry will find few barriers to entry, thus further increasingpossible competition. These competitive pressures may affect the attractivenessof our services and could adversely affect our financial results.

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**We may expandour 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 inconnection with integrating the acquired companies and achieving the expectedbenefits;

·      diversion of management’sattention from current operations;

·      the possibility that we maybe adversely affected 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 beaffected 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 thirdparties for important services.**

We depend on third parties toprovide us with services critical to our business. For example, we have anagreement with IBM to manage certain aspects of our information technologyinfrastructure. The failure of any of these third parties to adequately providethe needed services could have a material adverse effect on our business.

**Our revenues andearnings are exposed to exchange rate fluctuations**.

We derive a large portion of ournet revenues from international operations. For the three months ended March31, 2007, we derived approximately 37% of our net revenues from outside theUnited States. Our financial statements are denominated in U.S. dollars. Inaddition, in certain circumstances, we may incur costs in one currency relatedto our services 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 ourkey personnel could adversely affect our business.**

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

**Contractresearch services create a risk of liability**.

In contracting to work on drugdevelopment trials, we face a range of potential liabilities, for example:

·                  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

25

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drugs to clinical trialparticipants or the professional malpractice of clinical pharmacology medicalcare 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.

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.

**Reliance on airtransportation.**

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 serviceofferings and research products are dependent on limited sources of supply ofservices or products which if interrupted could affect 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 ourbusiness.

**Actions ofanimal 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 arerequired for the development of new medicines and medical devices underregulatory regimes in the United States, Europe, Japan and other countries.Acts of vandalism and other acts by animal rights extremists who object to theuse of animals in drug development could have a material adverse effect on ourbusiness.

**Our animalpopulations may suffer diseases that can damage our inventory, harm ourreputation, result in decreased sales of research products or result in otherliability 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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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

Repurchases of equitysecurities as reported on a settlement date basis during the quarter endedMarch 31, 2007 were as follows:

**IssuerPurchases of Equity Securities (a)**
| **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, 2007 –  January 31, 2007   |       | 3⁄4                                      |       | 3⁄4                                       |       | 2,740,700                                                                                          |       | 259,300                                                                                                                       |       |
| February 1, 2007  – February 28, 2007 |       | 3⁄4                                      |       | 3⁄4                                       |       | 2,740,700                                                                                          |       | 3,259,300                                                                                                                     |       |
| March 1, 2007 – March  31, 2007       |       | 780,800                                     |       | $                                            | 59.472     |                                                                                               | 3,521,500  |                                                                                                                          | 2,478,500  |   |
|                                            |            |                                             |            |                                              |            |                                                                                                    |            |                                                                                                                               |            |  |

 

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(a)           In February 2007, Covance’s Board of Directorsauthorized the repurchase of an additional 3.0 million shares under Covance’sstock repurchase program.

**Item6.  Exhibits**
| 10.1   |   | 2007 Employee Equity Participation Plan. ***Filed herewith.***                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| 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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**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 8,  2007 | 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    |       | Chairman of the Board and               |       |        |
| Joseph L. Herring         |       | Chief Executive Officer                 |       | May 8, 2007 |
|                      |       | (Principal Executive Officer)           |       |        |
|                      |       |                                    |       |        |
| /s/ William E.  Klitgaard |       |                                    |       |        |
| William E. Klitgaard      |       | Corporate Senior Vice President         |       | May 8, 2007 |
|                      |       | and Chief Financial Officer             |       |        |
|                      |       | (Principal Financial Officer)           |       |        |
|                      |       |                                    |       |        |
| /s/ Michele A.  Kennedy   |       |                                    |       |        |
| Michele A. Kennedy        |       | Corporate Vice President and Controller |       | May 8, 2007 |
|                      |       | (Principal Accounting Officer)          |       |        |

 

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**EXHIBITINDEX**
| Exhibit    | ** ** | ** **                                                                                                                                                                  |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                             |
|       |       |                                                                                                                                                                        |
| 10.1       |       | 2007 Employee Equity Participation Plan. ***Filed herewith.***                                                                                                              |
|       |       |                                                                                                                                                                        |
| 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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