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

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FORM 10-Q

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended June 30, 2005oro

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


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

Delaware(State of Incorporation)

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

08540(Zip Code)


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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 15, 2005, the Registrant had 62,317,214 shares of Common Stock outstanding.



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Covance Inc.  Form 10-Q For the Quarterly Period Ended June 30, 2005    INDEX

PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Balance SheetsJune 30, 2005 and December 31, 2004

2Consolidated Statements of IncomeThree and Six Months ended June 30, 2005 and 2004

3Consolidated Statements of Cash FlowsSix Months ended June 30, 2005 and 2004

4Notes to Consolidated Financial Statements

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

13Item 3. Quantitative and Qualitative Disclosure About Market Risk

24Item 4. Controls and Procedures

24Part II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds

25Item 4. Submission of Matters to a Vote of Security Holders

25Item 6. Exhibits

25Signatures

26


1

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COVANCE INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  JUNE 30, 2005 AND DECEMBER 31, 2004

(Dollars in thousands)

June 30,
2005

December 31,
2004(UNAUDITED)AssetsCurrent Assets:Cash and cash equivalents

$
132,514

$
177,712Accounts receivable


193,460


178,518Unbilled services


74,079


63,220Inventory


36,572


40,999Deferred income taxes


8,649


8,042Prepaid expenses and other current assets


51,635


40,463Total Current Assets


496,909


508,954Property and equipment, net


341,257


319,747Goodwill, net


57,249


56,876Other assets


38,066


39,108Total Assets

$
933,481

$
924,685Liabilities and Stockholders' EquityCurrent Liabilities:Accounts payable

$
27,884

$
24,346Accrued payroll and benefits


52,985


63,143Accrued expenses and other current liabilities


35,907


39,722Unearned revenue


73,847


87,325Income taxes payable


14,867


4,590Total Current Liabilities


205,490


219,126Deferred income taxes


44,693


46,104Other liabilities


23,194


21,769Total Liabilities


273,377


286,999Commitments and Contingent LiabilitiesStockholders' Equity:Preferred StockPar value $1.00 per share; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2005 and December 31, 2004,
respectively





Common StockPar value $0.01 per share; 140,000,000 shares authorized; 71,210,535 and 69,962,527 shares issued, including those held in treasury, at June 30, 2005 and
December 31, 2004, respectively


712


700Paid-in capital


328,803


289,952Retained earnings


551,606


493,192Accumulated other comprehensive income
Cumulative translation adjustment


21,555


41,451Treasury stock at cost (8,936,057 and 7,700,620 shares at June 30, 2005 and December 31, 2004, respectively)


(242,572
)

(187,609
)Total Stockholders' Equity


660,104


637,686Total Liabilities and Stockholders' Equity

$
933,481

$
924,685


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

2

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COVANCE INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004  (UNAUDITED)

Three Months Ended
June 30

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

2005

2004

2005

2004Net revenues

$
293,963

$
250,995

$
575,228

$
495,238Reimbursable out-of-pockets


13,449


7,622


24,967


14,879Total revenues


307,412


258,617


600,195


510,117Cost and expenses:Cost of revenue


195,714


167,120


382,486


328,696Reimbursed out-of-pocket expenses


13,449


7,622


24,967


14,879Selling, general and administrative


44,490


38,393


86,626


77,247Depreciation and amortization


11,833


11,453


23,334


23,191Total costs and expenses


265,486


224,588


517,413


444,013Income from operations


41,926


34,029


82,782


66,104Other (income) expense, net:Interest expense


60


344


179


742Interest income


(1,035
)

(544
)

(2,166
)

(1,486
)Foreign exchange transaction loss, net


369


218


951


418Other (income) expense, net


(606
)

18


(1,036
)

(326
)Income before taxes and equity investee earnings


42,532


34,011


83,818


66,430Taxes on Income


13,041


10,885


25,759


21,401Equity investee earnings


59


169


355


435Net income

$
29,550

$
23,295

$
58,414

$
45,464Basic earnings per share

$
0.47

$
0.37

$
0.93

$
0.73Weighted average shares outstandingbasic


62,506,556


62,512,302


62,630,820


62,553,616Diluted earnings per share

$
0.46

$
0.36

$
0.92

$
0.70Weighted average shares outstandingdiluted


63,651,043


64,795,264


63,820,766


64,726,789


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

3

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COVANCE INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004  (UNAUDITED)

Six Months Ended
June 30(Dollars in thousands)

2005

2004Cash flows from operating activities:Net income

$
58,414

$
45,464Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


23,334


23,191Stock issued under employee benefit and stock compensation plans


6,913


6,428Deferred income tax provision


(2,018
)

(1,977
)Other


185


(237
)Changes in operating assets and liabilities, net of business acquired:Accounts receivable


(14,942
)

(3,411
)Unbilled services


(10,859
)

(10,056
)Inventory


4,484


609Accounts payable


3,538


2,658Accrued liabilities


(13,973
)

(451
)Unearned revenue


(13,478
)

(10,945
)Income taxes payable


18,247


9,593Other assets and liabilities, net


(8,129
)

(7,488
)Net cash provided by operating activities


51,716


53,378Cash flows from investing activities:Capital expenditures


(54,892
)

(23,280
)Acquisition of business


(873
)

Equity investment





(20,741
)Other, net


44


71Net cash used in investing activities


(55,721
)

(43,950
)Cash flows from financing activities:Stock issued under employee stock purchase and option plans


23,980


40,623Purchase of treasury stock


(54,963
)

(70,105
)Net cash used in financing activities


(30,983
)

(29,482
)Effect of exchange rate changes on cash


(10,210
)

1,064Net change in cash and cash equivalents


(45,198
)

(18,990
)Cash and cash equivalents, beginning of period


177,712


171,600Cash and cash equivalents, end of period

$
132,514

$
152,610


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

4

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COVANCE INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)  June 30, 2005 and 2004  (dollars in thousands, unless otherwise indicated)

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes
required by GAAP for complete financial statements. You should read these consolidated financial statements together with the historical consolidated financial statements of Covance Inc. and
subsidiaries ("Covance") for the years ended December 31, 2004, 2003, and 2002 included in our Annual Report on Form 10-K for the year ended December 31, 2004.

2.    Summary of Significant Accounting Policies



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



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



In connection with the management of multi-site clinical trials, Covance pays on behalf of its customers fees to investigators, volunteers and other
out-of-pocket costs (such as travel, printing, meetings, couriers, etc.), for which we are reimbursed at cost, without mark-up or profit. Amounts receivable from
customers in connection with billed and unbilled investigator fees, volunteer payments and other out-of-pocket pass-through costs are included in prepaid expenses
and other current assets in the accompanying Consolidated Balance Sheets and totaled $25.8 million and $22.3 million at June 30, 2005 and December 31, 2004, respectively.
See Note 2 "Reimbursable Out-of-Pocket Expenses".



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



Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. In accordance with
Financial Accounting Standards Board ("FASB") Statement No. 142,Goodwill and Other Intangible Assets, Covance performs an annual test for
impairment of goodwill. The most recent annual test performed for 2004 did not identify any instances of impairment and there were no events through June 30, 2005 that warranted a
reconsideration of our impairment test results.

5

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



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

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



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

Covance
has established, and periodically reviews and reevaluates, an estimated income tax reserve which is included in accrued expenses and other current liabilities on its consolidated
balance sheet. This income tax reserve is for exposures related to matters such as transfer pricing, nexus, deemed dividends and the allocation of overhead costs across various Federal, state and
foreign income tax jurisdictions. An accrual is established at the time an exposure is identified when it is both probable that a liability has been incurred and the amount of the liability can be
reasonably estimated. The amount of the accrual for each item for which an exposure exists is adjusted when either (a) matters are settled at amounts which are different than the amount
included in the reserve or (b) when facts indicate a significant change in either the probability or estimated amount of the potential exposure.

6

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)

On
October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. Among other things, the Act provides an incentive for multi-national companies to
repatriate previously unremitted foreign earnings by allowing companies a special one-time tax deduction equal to 85% of qualified foreign earnings that are repatriated. Amounts repatriated may be
used only for certain qualifying expenditures made in the United States. Covance is analyzing the provision of the Act, but has not yet determined whether it will take advantage of the one-time
opportunity to repatriate funds under the Act. Covance expects to complete its analysis during 2005. Covance's historical policy has been to leave such unremitted foreign earnings invested
indefinitely outside the United States. As a result, taxes have not been provided on any accumulated foreign unremitted earnings as of June 30, 2005. If Covance were to repatriate these
earnings, or a portion of these earnings, Covance would incur an income tax liability, which could be significant.



Covance's total comprehensive income, which represents net income plus the change in the cumulative translation adjustment equity account for the periods
presented, was $18.6 million and $26.2 million for the three months ended June 30, 2005 and 2004, respectively, and $38.5 million and $48.0 million for the six
months ended June 30, 2005 and 2004, respectively.



Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period. The
computation of diluted EPS is similar to the computation of basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued; computed under the treasury stock method in accordance with the requirements of SFAS No. 128,Earnings Per
Share. In computing diluted earnings per share for the three months ended June 30, 2005 and 2004, the denominator was increased by 1,144,487 shares and 2,282,962 shares,
respectively, and for the six months ended June 30, 2005 and 2004, the denominator was increased by 1,189,946 shares and 2,173,173 shares, respectively, representing the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued for stock options outstanding at June 30, 2005 and 2004 with exercise prices less than the
average market price of Covance's Common Stock during each respective period.



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



Covance has several stock-based compensation plans, which are described more fully in Note 10 to our audited consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2004. Through June 30, 2005, Covance continued to follow the disclosure-only provisions of
FASB Statement No. 123 and, accordingly, continued to account for these plans under the recognition and measurement principles of APB Opinion No. 25,Accounting
for Stock Issued to Employees, and related interpretations. Under APB 25, when stock options are issued with an exercise price equal to the market price of the underlying stock
price on the date of grant, no compensation expense is recognized. See Note 2 "Recently Issued Accounting Standards".

7

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)

While Covance does record compensation expense related to awards of stock, no compensation cost is recorded for option grants under Covance's stock option plans
as all options granted under these plans are issued with an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share for the three and six months ended June 30, 2005 and 2004 had Covance applied the fair value recognition provisions of FASB Statement
No. 123,Accounting for Stock-Based Compensation, to all of its stock-based employee compensation plans.

Three Months Ended
June 30

Six Months Ended
June 302005

2004

2005

2004Net income, as reported

$
29,550

$
23,295

$
58,414

$
45,464Add:    Stock award-based employee compensation included in reported net income, net of related tax effects

$
833

$
764

$
1,941

$
1,389Deduct:    Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

$
(3,902
)
$
(3,563
)
$
(8,364
)
$
(6,446
)Pro forma net income

$
26,481

$
20,496

$
51,991

$
40,407Earnings per share:Basicas reported

$
0.47

$
0.37

$
0.93

$
0.73Basicpro forma

$
0.42

$
0.33

$
0.83

$
0.65Dilutedas reported

$
0.46

$
0.36

$
0.92

$
0.70Dilutedpro forma

$
0.42

$
0.32

$
0.81

$
0.63




Cash paid for interest for the six month periods ended June 30, 2005 and 2004 totaled $0.2 million and $0.8 million, respectively. Cash paid
for income taxes for each of the six month periods ended June 30, 2005 and 2004 totaled
$6.6 million. The change in income taxes payable at June 30, 2005 includes a tax benefit from employee exercises of non-qualified stock options totaling $8.0 million.



In December 2004, the Financial Accounting Standards Board (the "FASB") issued Statement No. 123 (revised 2004),Share-Based
Payment,which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation.Statement 123(R)
supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement
123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values. Historically, in accordance with SFAS 123 and SFAS 148,Accounting for Stock-Based
CompensationTransition and Disclosure, Covance had elected to follow the disclosure only provisions of Statement No. 123 and, accordingly, continues to
account for share-based compensation under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. Under APB 25, when stock options are issued with an
exercise price equal to the market price of the underlying stock price on the date of grant, no compensation expense is recognized in the financial statements, and compensation expense is only
disclosed in the footnotes to the financial statements. Covance will be required to adopt Statement No. 123(R) no later than the quarter beginning January 1, 2006, reflecting the delay
in the effective date of this statement pursuant to the Securities and Exchange Commission ruling. Covance is currently in the process of evaluating the option valuation methods and adoption
transition alternatives available under Statement 123(R) and has not yet determined the impact Statement 123(R) will have on its consolidated results of operations, financial position and cash flows.
See Note 2 "Stock-Based Compensation".

8

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

3.    Treasury Stock

In June 2004, the Covance Board of Directors authorized the repurchase of an additional 3.0 million shares under Covance's stock repurchase program.
For the six months ended June 30, 2005 and 2004, Covance repurchased 1.2 million shares and 2.1 million shares, respectively, under Covance's stock repurchase program. At
June 30, 2005, there are approximately 0.7 million shares remaining for purchase under the 2004 authorization. Covance also reacquires shares of its common stock in connection with
certain employee benefit plans when employees tender shares either in connection with reload stock options or to satisfy income tax withholdings associated with the vesting of stock awards. The
following table sets forth the treasury stock activity during the six month periods ended June 30, 2005 and 2004.

Six Months Ended June 302005

2004$

# shares

$

# sharesShares repurchased in connection with:Board approved buyback programs

$
53,210


1,195.5

$
66,883


2,095.0Employee benefit plans


1,754


39.9


3,222


96.3Total

$
54,964


1,235.4

$
70,105


2,191.3


4.    Equity Method Investees

In March 2004, Covance acquired a 47% minority equity position in Noveprim Limited, an existing supplier of research products, for a total
cost of $20.7 million. The excess of the purchase price over the underlying equity in Noveprim's net assets is approximately $13.8 million. This investment is reflected in Other Assets
on the Consolidated Balance Sheet. During the three and six month periods ended June 30, 2005, Covance recognized $0.3 million and $0.6 million, respectively, representing its
share of Noveprim's earnings, less an elimination of profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2005. During both of the three and six month
periods ended June 30, 2004, Covance recognized $0.1 million, representing its share of Noveprim's earnings, less an elimination of profit on inventory purchased from Noveprim Limited
and still on hand at Covance at June 30, 2004. The carrying value of Covance's investment in Noveprim as of June 30, 2005 and December 31, 2004 was $21.5 million and
$21.1 million, respectively.

Covance
has a minority equity position (approximately 21% at June 30, 2005) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During the three and six month periods ended June 30, 2005, Covance recognized losses of $0.2 million and $0.3 million, respectively, representing its share of BITI's losses.
During the three and six month periods ended June 30, 2004, Covance recognized income of $0.1 million and $0.4 million, respectively, representing its share of BITI's earnings.
The carrying value of Covance's investment in BITI as of June 30, 2005 and December 31, 2004 was $0.7 million and $1.0 million, respectively, while the fair market value
was $7.3 million and $12.9 million, respectively.

5.    Acquisition

In June 2005, Covance acquired the business of an antibody products provider for a cash payment of $0.9 million. The goodwill resulting from this
transaction aggregated $0.4 million.

9

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

6.    Defined Benefit Plans

Covance sponsors various pension and other post-retirement benefit plans. In accordance with the interim disclosure provisions of SFAS No. 132
(revised 2003),Employers' Disclosure About Pensions and Other Post-Retirement Benefits,the interim disclosures required are shown below.

Covance
sponsors two defined benefit pension plans for the benefit of its employees at two United Kingdom subsidiaries and one defined benefit pension plan for the benefit of its
employees at a German subsidiary, all of which are legacy plans of previously acquired companies. Benefit amounts for all three plans are based upon years of service and compensation. The German plan
is unfunded while the UK plans are funded. Covance's funding policy has been to contribute annually a fixed percentage of the eligible employee's salary at least equal to the local statutory funding
requirements. Pension plan assets are administered by the plans' trustees and are principally invested in equity and debt securities. The components of net periodic pension expense for these plans for
the three and six month periods ended June 30, 2005 and 2004 are as follows:

United Kingdom
Plans

German PlanThree Months Ended
June 30

Three Months Ended
June 302005

2004

2005

2004Components of Net Periodic Pension Cost:Service cost

$
1,222

$
1,167

$
79

$
72Interest cost


1,393


1,217


64


60Expected return on plan assets


(1,416
)

(1,089
)




Amortization of net actuarial loss


380


281


1


1Participant contributions


(554
)

(507
)




Net periodic pension cost

$
1,025

$
1,069

$
144

$
133Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


5.75
%

6.00
%

5.25
%

5.75
%Expected rate of return on assets


6.75
%

6.00
%

n/a


n/aSalary increases


4.00
%

3.50
%

2.50
%

3.00
%United Kingdom
Plans

German PlanSix Months Ended
June 30

Six Months Ended
June 302005

2004

2005

2004Components of Net Periodic Pension Cost:Service cost

$
2,480

$
2,339

$
164

$
145Interest cost


2,827


2,439


132


121Expected return on plan assets


(2,875
)

(2,183
)




Amortization of net actuarial loss


771


563


3


3Participant contributions


(1,124
)

(1,017
)




Net periodic pension cost

$
2,079

$
2,141

$
299

$
269Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


5.75
%

6.00
%

5.25
%

5.75
%Expected rate of return on assets


6.75
%

6.00
%

n/a


n/aSalary increases


4.00
%

3.50
%

2.50
%

3.00
%


10

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

6.    Defined Benefit Plans (Continued)



In addition to these foreign defined benefit pension plans, Covance also has a non-qualified Supplemental Executive Retirement Plan ("SERP"). The
SERP, which is not funded, is intended to provide retirement benefits for certain executive officers of Covance. Benefit amounts are based upon years of service and compensation of the participating
employees. The components of net periodic pension cost for the three and six month periods ended June 30, 2005 and 2004 are as follows:

Three Months Ended
June 30

Six Months Ended
June 302005

2004

2005

2004Components of Net Periodic Pension Cost:Service cost

$
277

$
237

$
554

$
474Interest cost


147


131


293


262Amortization of prior service cost


19


19


38


38Amortization of net actuarial loss





5





10Net periodic pension cost

$
443

$
392

$
885

$
784Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


6.00
%

6.25
%

6.00
%

6.25
%Salary increases


4.00
%

4.00
%

4.00
%

4.00
%




Covance also sponsors a post-employment retiree health and welfare plan for the benefit of eligible employees at certain U.S. subsidiaries who retire
after satisfying service and age requirements. This plan is funded on a pay-as-you-go basis and the cost of providing these benefits is shared with the retirees.
The components of net periodic post-retirement benefits cost for the three and six month periods ended June 30, 2005 and 2004 are as follows:

Three Months Ended
June 30

Six Months Ended
June 302005

2004

2005

2004Components of Net Periodic Post-retirement Benefits Cost:Service cost

$
49

$
60

$
98

$
120Interest cost


90


98


180


196Amortization of prior service cost (benefit)





(98
)




(196
)Amortization of net actuarial loss


36


50


72


100Net periodic post-retirement benefits cost

$
175

$
110

$
350

$
220Assumptions Used to Determine Net Periodic Post-retirement Benefit Cost:Discount rate


6.00
%

6.25
%

6.00
%

6.25
%Health care cost trend rate


9.00
%(a)

9.00
%(a)

9.00
%(a)

9.00
%(a)


---

11

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2005 and 2004
(dollars in thousands, unless otherwise indicated)

6.    Defined Benefit Plans (Continued)

In
December 2003, the President of the United States signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the "Prescription Drug Act"). The
Prescription Drug Act introduces a prescription drug benefit beginning in 2006 under Medicare (Medicare Part D) as well as a Federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare Part D. Final regulations on determining actuarial equivalency were issued on January 21, 2005. Covance
completed its review of the final regulations during the first quarter of 2005 and has determined that the benefits provided under its postretirement benefit plan are actuarially equivalent to
Medicare Part D. Since the impact of the Prescription Drug Act is not significant, the effects of the Prescription Drug Act will not be incorporated until the next measurement of plan
obligations at November 30, 2005.

7.    Segment Information

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

The
accounting policies of the reportable segments are the same as those described in Note 2. Segment net revenues, operating income and total assets for the three and six months
ended June 30, 2005 and 2004 are as follows:

Early
Development

Late-Stage
Development

Other
Reconciling Items

TotalThree months ended June 30, 2005Total revenues from external customers

$
139,766

$
154,197

$
13,449
(a)
$
307,412Operating income

$
33,718

$
26,895

$
(18,687)
(b)
$
41,926Total assets

$
500,050

$
401,794

$
31,637
(c)
$
933,481Three months ended June 30, 2004Total revenues from external customers

$
120,688

$
130,307

$
7,622
(a)
$
258,617Operating income

$
27,915

$
19,508

$
(13,394)
(b)
$
34,029Total assets

$
426,125

$
341,815

$
76,081
(c)
$
844,021Six months ended June 30, 2005Total revenues from external customers

$
270,717

$
304,511

$
24,967
(a)
$
600,195Operating income

$
65,694

$
52,539

$
(35,451)
(b)
$
82,782Total assets

$
500,050

$
401,794

$
31,637
(c)
$
933,481Six months ended June 30, 2004Total revenues from external customers

$
236,002

$
259,236

$
14,879
(a)
$
510,117Operating income

$
54,831

$
37,960

$
(26,687)
(b)
$
66,104Total assets

$
426,125

$
341,815

$
76,081
(c)
$
844,021


---

12

---



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

You should read the following discussion together with the unaudited Covance consolidated financial statements and the accompanying notes included in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.

Overview

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

Critical Accounting Policies

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

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

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

13

---



Taxes on Income.Since Covance conducts operations on a global basis, its effective tax rate has and
will continue to depend upon the geographic distribution of its pre-tax earnings among locations with varying tax rates. Covance's profits are further impacted by changes in the tax rates
of the various jurisdictions. In particular, as the geographic mix of Covance's pre-tax earnings among various tax jurisdictions changes, Covance's effective tax rate may vary from period
to period. Covance has established, and periodically reviews and reevaluates, an estimated income tax reserve which is included in accrued expenses and other current liabilities on its consolidated
balance sheet. This income tax reserve is for exposures related to matters such as transfer pricing, nexus, deemed dividends and the allocation of overhead costs across various Federal, state and
foreign income tax jurisdictions. An accrual is established at the time an exposure is identified when it is both probable that a liability has been incurred and the amount of the liability can be
reasonably estimated. The amount of the accrual for each item for which an exposure exists is adjusted when either (a) matters are settled at amounts which are different than the amount
included in the reserve or (b) when facts indicate a significant change in either the probability or estimated amount of the potential exposure. While Covance believes that it has identified
all reasonably identifiable exposures and that the reserve it has established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that
exposures will be settled at amounts different than the amounts reserved. It is possible that changes in estimates in the future could cause Covance to either materially increase or reduce the
carrying amount of its income tax reserve. In addition, Covance's policy is to provide income taxes on earnings of foreign subsidiaries to the extent those earnings are taxable or are expected to be
remitted.

On
October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. Among other things, the Act provides an incentive for multi-national companies to
repatriate previously unremitted foreign earnings by allowing companies a special one-time tax deduction equal to 85% of qualified foreign earnings that are repatriated. Amounts
repatriated may be used only for certain qualifying expenditures made in the United States. Covance is analyzing the provision of the Act, but has not yet determined whether it will take advantage of
the one-time opportunity to repatriate funds under the Act. Covance expects to complete its analysis during 2005. Covance's historical policy has been to leave such unremitted foreign
earnings invested indefinitely outside the United States. As a result, taxes have not been provided on any accumulated foreign unremitted earnings as of June 30, 2005. If Covance were to
repatriate these earnings, or a portion of these earnings, Covance would incur an income tax liability, which could be significant.

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

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

Covance
performs an annual test for impairment of goodwill. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. Covance
assesses fair value based upon its best estimate of the present value of the future cash flows that it expects to be generated by the reporting unit. The test performed for 2004 did not identify any
instances of impairment. However, changes in expectations as to the present value of the reporting unit's future cash flows might impact subsequent years' assessments of impairment.

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

14

---



Foreign Currency Risks

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

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

Finally,
Covance's consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar
will affect the translation of each foreign subsidiary's financial results into U.S. dollars for purposes of reporting Covance's consolidated financial results. The process by which each foreign
subsidiary's financial results are translated into U.S. dollars is as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability
accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the stockholders'
equity account, referred to as the cumulative translation adjustment account. This account exists only in the foreign subsidiary's U.S. dollar balance sheet and is necessary to keep the foreign
balance sheet stated in U.S. dollars in balance. At June 30, 2005, the accumulated other comprehensive incomecumulative translation account balance was $21.6 million.

Operating Expenses and Reimbursable Out-of-Pockets

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

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

Quarterly Results

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

15

---





Results of Operations

Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004.Net revenues
increased 17.1% to $294.0 million for the three months ended June 30, 2005 from $251.0 million for the corresponding 2004 period. Excluding the impact of foreign exchange rate
variances between both periods net revenues increased 15.7% as compared to the corresponding 2004 period. Net revenues from Covance's early development segment grew 15.8%, or 14.7% excluding the
impact of foreign exchange rate variances between both periods, primarily on continuing strong performance in our global toxicology and North American Phase I services. Net revenues from Covance's
late-stage development segment grew 18.3%, or 16.6% excluding the impact of foreign exchange rate variances between both periods, primarily on strong performances by our central
laboratory, which continues to see an increase in kit volume, and cardiac safety services.

Cost
of revenue increased 17.1% to $195.7 million or 66.6% of net revenues for the three months ended June 30, 2005 as compared to $167.1 million or 66.6% of net
revenues for the corresponding 2004 period. Gross margins were 33.4% for both the three month periods ended June 30, 2005 and 2004.

Overall,
selling, general and administrative expenses increased 15.9% to $44.5 million for the three months ended June 30, 2005 from $38.4 million for the
corresponding 2004 period. As a percentage of net revenues, selling, general and administrative expenses decreased 20 basis points to 15.1% for the three month period ended June 30, 2005 from
15.3% for the corresponding 2004 period.

Depreciation
and amortization was $11.8 million and $11.5 million, or 4.0% and 4.6% of net revenues for the three months ended June 30, 2005 and 2004, respectively.

Income
from operations increased 23.2% to $41.9 million or 14.3% of net revenues for the three months ended June 30, 2005 from $34.0 million or 13.6% of net revenues
for the corresponding 2004 period. Income from operations from Covance's early development segment increased $5.8 million or 20.8% to $33.7 million or 24.1% of net revenues for the three
months ended June 30, 2005 from $27.9 million or 23.1% of net revenues for the corresponding 2004 period, primarily driven by strong performance in our global toxicology, chemistry and
Phase I services. Income from operations from Covance's late-stage development segment increased $7.4 million or 37.9% to $26.9 million or 17.4% of net revenues for the three
months ended June 30, 2005 from $19.5 million or 15.0% of net revenues for the corresponding 2004 period,
driven by our central laboratory, which continues to see an increase in kit volume, cardiac safety and market access services. Corporate expenses increased $5.3 million to $18.7 million
or 6.4% of net revenues for the three months ended June 30, 2005 from $13.4 million or 5.3% of net revenues for the three months ended June 30, 2004. The increase is primarily
attributable to increased centralized information technology costs, professional fees for strategic initiatives, and employee training programs.

Other
income, net increased $0.6 million to $0.6 million for the three months ended June 30, 2005 from $0.02 million for the corresponding 2004 period as a
result of a $0.8 million increase in net interest income partially offset by a $0.2 million increase in foreign exchange losses.

Covance's
effective tax rate for the three months ended June 30, 2005 was 30.7% compared to 32.0% for the corresponding 2004 period. The year over year 130 basis point reduction
in Covance's effective tax rate is attributable to a number of factors, including the mix of our pre-tax earnings across various tax jurisdictions, research and development tax credits in
the United Kingdom, and other planning initiatives.

Covance
has a minority equity position (approximately 21% at June 30, 2005) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During the three month periods ended June 30, 2005 and 2004, Covance recognized a loss of $0.2 million and income of $0.1 million, respectively, representing its share of BITI's
earnings.

Covance
has a 47% minority equity position in Noveprim Limited, an existing supplier of research products. Covance began recognizing earnings from this investment in the second quarter
of 2004. During the three month periods ended June 30, 2005 and 2004, Covance recognized $0.3 million and $0.1 million, respectively, representing its share of Noveprim's
earnings, less an elimination of profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2005 and 2004.

16

---



Net
income of $29.6 million for the three months ended June 30, 2005 increased $6.3 million or 26.9% as compared to $23.3 million for the corresponding 2004
period.

Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004.Net
revenues increased 16.2% to $575.2 million for the six months ended June 30, 2005 from $495.2 million for the corresponding 2004 period. Excluding the impact of foreign exchange
rate variances between both periods, net revenues increased 14.6% as compared to the corresponding 2004 period. Net revenues from Covance's early development segment grew 14.7%, or 13.6% excluding the
impact of foreign exchange rate variances between both periods, primarily on strong performance in our global toxicology, chemistry and North American Phase I services. Net revenues from Covance's
late-stage development segment increased 17.5%, or 15.5% excluding the impact of foreign exchange rate variances between both periods, driven by our central laboratory, which continued to
see an increase in kit volume, cardiac safety and market access services.

Cost
of revenue increased 16.4% to $382.5 million or 66.5% of net revenues for the six months ended June 30, 2005 as compared to $328.7 million or 66.4% of net
revenues for the corresponding 2004 period. Gross margins decreased slightly by 10 basis points to 33.5% for the six months ended June 30, 2005 from 33.6% for the corresponding 2004 period.

Overall,
selling, general and administrative expenses increased 12.1% to $86.6 million for the six months ended June 30, 2005 from $77.2 million for the
corresponding 2004 period. As a percentage of net revenues, selling, general and administrative expenses decreased 50 basis points to 15.1% for the six months ended June 30, 2005 from 15.6% for
the corresponding 2004 period.

Depreciation
and amortization increased 0.6% to $23.3 million or 4.1% of net revenues for the six months ended June 30, 2005 from $23.2 million or 4.7% of net
revenues for the corresponding 2004 period.

Income
from operations increased 25.2% to $82.8 million or 14.4% of net revenues for the six months ended June 30, 2005 from $66.1 million or 13.3% of net revenues
for the corresponding 2004 period. Income from operations from Covance's early development segment increased $10.9 million or 19.8% to $65.7 million or 24.3% of net revenues for the six
months ended June 30, 2005 from $54.8 million or 23.2% of net revenues for the corresponding 2004 period, primarily driven by strong performance in our global toxicology, chemistry and
Phase I services. Income from operations from Covance's late-stage development segment increased $14.6 million or 38.4% to $52.5 million or 17.3% of net revenues for the six
months ended June 30, 2005 from $38.0 million or 14.6% of net revenues for the corresponding 2004 period, driven by our central laboratory, which continued to see an increase in kit
volume, cardiac safety and market access services. Corporate expenses increased $8.8 million to $35.5 million or 6.2% of net revenues for the six months ended June 30, 2005 from
$26.7 million or 5.4% of net revenues for the six months ended June 30, 2004. The increase is primarily attributable to increased centralized information technology costs, professional
fees for strategic initiatives, and employee training programs.

Other
income, net increased $0.7 million to $1.0 million for the six months ended June 30, 2005 from $0.3 million for the corresponding 2004 period. This
increase is the result of a $1.3 million increase in net interest income due primarily to higher invested cash balances, partially offset by a $0.5 million increase in foreign exchange
losses.

Covance's
effective tax rate for the six months ended June 30, 2005 was 30.7% compared to 32.2% for the corresponding 2004 period. The 150 basis point reduction in Covance's
effective tax rate year over year is attributable to a number of factors, including the mix of our pre-tax earnings across various tax jurisdictions, research and development tax credits
in the United Kingdom, and other initiatives.

Covance
has a minority equity position (approximately 21% at June 30, 2005) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During the six month period ended June 30, 2005, Covance recognized a loss of $0.3 million, representing its share of BITI's losses. During the six month period ended June 30,
2004, Covance recognized income of $0.4 million, representing its share of BITI's earnings.

Covance
has a 47% minority equity position in Noveprim Limited, an existing supplier of research products. Covance began recognizing earnings from this investment in the second quarter
of 2004. For the six month periods ended June 30, 2005 and 2004, Covance recognized $0.6 million and $0.1 million, respectively, representing its share of Noveprim's earnings,
less

17

---



an
elimination of profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2005 and 2004.

Net
income of $58.4 million for the six months ended June 30, 2005 increased $12.9 million or 28.5% as compared to $45.5 million for the corresponding 2004
period.

Liquidity and Capital Resources

Covance's expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible future
acquisitions, geographic expansion, working capital and other general corporate purposes, including possible share repurchases. Covance's $75.0 million revolving credit facility (the "Credit
Facility") expires in June 2009 and may be expanded to $125.0 million at Covance's election. Covance believes cash from operations will provide sufficient liquidity for the foreseeable
future. At June 30, 2005, there were no outstanding borrowings and $1.5 million of outstanding letters of credit under the Credit Facility. Interest on all outstanding borrowings under
the Credit Facility is based upon the London Interbank Offered Rate ("LIBOR") plus a 75 basis point margin. The Credit Facility contains various financial and other covenants. At June 30, 2005,
Covance was in compliance with the terms of the Credit Facility. The Credit Facility is collateralized by guarantees of certain of Covance's domestic subsidiaries and a pledge of 65 percent of
the capital stock of certain of Covance's foreign subsidiaries.

During
the six months ended June 30, 2005, Covance's operations provided net cash of $51.7 million, a decrease of $1.7 million from the corresponding 2004 period.
The change in net operating assets used $35.1 million in cash during the six months ended June 30, 2005, primarily due to an increase in accounts receivable and unbilled services and a
reduction in unearned revenue and accrued liabilities, offset by an increase in income taxes payable. The change in net operating assets used $19.5 million in cash during the six months ended
June 30, 2004, primarily due to a reduction in unearned revenue and an increase in unbilled services. Covance's ratio of current assets to current liabilities was 2.42 at June 30, 2005
and 2.32 at December 31, 2004.

Investing
activities for the six months ended June 30, 2005 used $55.7 million, compared to using $44.0 million for the corresponding 2004 period. Capital spending
for the first six months of 2005 totaled $54.9 million, and was primarily for the expansion of our Madison, WI and Harrogate, UK facilities, outfitting of new facilities, purchase of new
equipment, upgrade of existing equipment and software for newly hired employees. In June 2005, Covance acquired the business of an antibody products provider for a cash payment of
$0.9 million. Capital spending for the corresponding 2004 period totaled $23.3 million, and was primarily for the outfitting of new facilities, purchase of new equipment, upgrade of
existing equipment and software for newly hired
employees. Investment activities for the six months ended June 30, 2004 also included the purchase of a 47% equity investment in Noveprim Limited, an existing supplier of research products,
totaling $20.7 million. This investment was made in March 2004 and Covance began to record equity earnings on this investment in the second quarter of 2004.

Financing
activities for the six months ended June 30, 2005 used $31.0 million and consisted primarily of the purchase of 1,195,500 shares of Covance common stock for an
aggregate cost of $53.2 million, primarily in connection with a 3.0 million share buyback program authorized by Covance's Board of Directors in June 2004, partially offset by
$24.0 million received from stock option exercises and employee contributions to Covance's noncompensatory employee stock purchase plan. Financing activities for the six months ended
June 30, 2004 used $29.5 million and consisted primarily of the purchase of 2,095,000 shares of Covance common stock for an aggregate cost of $70.1 million, primarily in
connection with a 3.0 million share buyback program authorized by Covance's Board of Directors in February 2003, partially offset by $40.6 million received from stock option
exercises and employee contributions to Covance's noncompensatory employee stock purchase plan.

Inflation

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

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Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (the "FASB") issued Statement No. 123 (revised 2004),Share-Based
Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123(R)
supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement
123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values. Historically, in accordance with SFAS 123 and SFAS 148,Accounting for Stock-Based Compensation-Transition
and Disclosure, Covance had elected to follow the disclosure only provisions of Statement No. 123 and, accordingly, continues to account for share-based compensation
under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. Under APB 25, when stock options are issued with an exercise price equal to the market price
of the underlying stock price on the date of grant, no compensation expense is recognized in the financial statements, and compensation expense is only disclosed in the footnotes to the financial
statements. Covance will be required to adopt Statement No. 123(R) no later than the quarter beginning January 1, 2006, reflecting the delay in the effective date of this statement
pursuant to the Securities and Exchange Commission ruling. Covance is currently in the process of evaluating the option valuation methods and adoption transition alternatives available under Statement
123(R) and has not yet determined the impact
Statement 123(R) will have on its consolidated results of operations, financial position and cash flows. See "Stock-Based Compensation".

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

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Risk Factors

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

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

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

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

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

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

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



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

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

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

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

We may seek to develop and market new services that complement or expand our existing business or expand our service offerings through acquisition. If we are
unable to develop new services and/or create demand for those newly developed

20

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services,
or expand our service offerings through acquisition, our future business, results of operations, financial condition, and cash flows could be adversely affected.

Our quarterly operating results may vary.

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



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

We depend on the pharmaceutical and biotechnology industries.

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

We operate in a highly competitive industry.

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



For
instance, our clinical development services have from time to time experienced periods of increased price competition which had a material adverse effect on Covance's
late-stage development profitability and consolidated net revenues and net income.

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

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We may expand our business through acquisitions.

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



We may be affected by potential health care reform.

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

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

We rely on third parties for important services.

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

Our revenues and earnings are exposed to exchange rate fluctuations.

We derive a large portion of our net revenues from international operations. In the six month period ended June 30, 2005, we derived approximately 36% of
our net revenues from outside the United States. Our financial statements are denominated in U.S. dollars. As a result, factors associated with international operations, including changes in foreign
currency exchange rates, could significantly affect our results of operations, financial condition, and cash flows.

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

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

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Contract research services create a risk of liability.

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



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



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

Reliance on air transportation.

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

Actions of animal rights extremists may affect our business.

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

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

It is important that our research products be free of diseases, including infectious diseases. The presence of diseases can distort or compromise the quality of
research results, can cause loss of animals in our inventory, can result in harm to humans or outside animal populations if the disease is not contained to animals in inventory, or can result in other
losses. Such results could harm our reputation or have a material adverse effect on our financial condition, results of operations, and cash flows.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

For the six months ended June 30, 2005, approximately 36% of our net revenues were derived from our operations outside the United States. We do not engage
in derivative or hedging activities related to our potential foreign exchange exposures. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical
Accounting EstimatesForeign Currency Risks" for a more detailed discussion of our foreign currency risks and exposures.

Item 4. Controls and Procedures

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

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Part II. Other Information

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

Repurchases of equity securities as reported on a settlement date basis during the quarter ended June 30, 2005 were as follows:

Issuer Purchases 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
ProgramsApril 1, 2005April 30, 2005


80,800

$
44.86


4,444,200

1,555,800May 1, 2005May 31, 2005


882,400

$
44.50


5,326,600

673,400June 1, 2005June 30, 2005








5,326,600

673,400


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

The Annual Meeting of Stockholders of Covance was held on April 28, 2005, pursuant to notice.

Three
directors were reelected to the Board of Directors with the following votes cast: Kathleen G. Murray received 30,284,531 votes for and 24,601,361 votes were withheld; J. Randall
MacDonald received 30,295,853 votes for and 24,590,039 votes were withheld; William C. Ughetta received 30,261,995 votes for and 24,623,897 votes were withheld. The following directors' terms of
office as a director continued after the meeting: Robert Barchi, Robert M. Baylis, Sandra L. Helton, Joseph L. Herring, Christopher A. Kuebler and Irwin Lerner.

Item 6. Exhibits

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 the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

COVANCE INC.Dated: July 25, 2005

By:

/s/JOSEPH L. HERRINGJoseph L. Herring
President and
Chief Executive Officer


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

Signature

Title

Date/s/ JOSEPH L. HERRINGJoseph L. Herring

President and
Chief Executive Officer
(Principal Executive Officer)

July 25, 2005/s/ WILLIAM E. KLITGAARDWilliam E. Klitgaard

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

July 25, 2005/s/ MICHAEL GIANNETTOMichael Giannetto

Corporate Vice President and Controller
(Principal Accounting Officer)

July 25, 2005


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EXHIBIT INDEX

Exhibit
Number

Description31.1

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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