** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 June 30, 2008**

 

**or**

 
| **o**      | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **For the transition period from                                                    to                                                ** |

 

**Commission File Number:  1-12213**

 

**COVANCE INC**.

(Exact name of Registrant as specified in its Charter)

 

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

 

Registrant’s telephonenumber, including area code:  **(609) 452-4440**

 

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

YES x      NO o

 

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

Large AcceleratedFiler x  AcceleratedFiler o

Non-AcceleratedFiler o  SmallerReporting Company o

 

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

YES o     NO x

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

As of July 25,2008, the Registrant had 63,026,816 shares of common stock outstanding.

 

 

 

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** **

**Covance Inc.**

**Form 10-Q For the QuarterlyPeriod Ended June 30, 2008**

 

**INDEX**

** **
| ** **                                | ** ** | ** **                                                                                     | **Page** |
|-------------------------------------------|------------|------------------------------------------------------------------------------------------------|----------|
| ** **                                | ** ** |
| **Part I. Financial****Information** | ** ** |
| ** **                                |       |                                                                                           |     |
| Item 1.  Financial Statements (Unaudited) |       |
|                                      |       |                                                                                           |     |
|                                      |       | Consolidated  Balance Sheets—June 30, 2008 and December 31, 2007                | 2        |
|                                      |       |                                                                                           |     |
|                                      |       | Consolidated Statements of Income—Three and Six Months  ended June 30, 2008 and 2007 | 3        |
|                                      |       |                                                                                           |     |
|                                      |       | Consolidated Statements of Cash Flows—Six Months ended  June 30, 2008 and 2007       | 4        |
|                                      |       |                                                                                           |     |
|                                      |       | Notes to Consolidated Financial Statements                                                     | 5        |
|                                      |       |                                                                                           |     |
|                                      |       |                                                                                           |     |
| Item  2.                                  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    | 16       |
|                                      |       |                                                                                           |     |
| Item  3.                                  |       | Quantitative  and Qualitative Disclosure About Market Risk                                     | 26       |
|                                      |       |                                                                                           |     |
| Item 4.                                   |       | Controls  and Procedures                                                                       | 26       |
|                                      |       |                                                                                           |     |
|                                      |       |                                                                                           |     |
| **Part II.  Other Information**      |       |
|                                      |       |                                                                                           |     |
| Item 1a.                                  |       | Risk Factors                                                                                   | 27       |
|                                      |       |                                                                                           |     |
| Item  4.                                  |       | Submission  of Matters to a Vote of Security Holders                                           | 32       |
|                                      |       |                                                                                           |     |
| Item 6.                                   |       | Exhibits                                                                                       | 32       |
|                                      |       |                                                                                           |     |
|                                      |       |                                                                                           |     |
| **Signatures**                            | 33         |
|                                           |            |                                                                                                |          |  |  |  |  |  |  |

 

1

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** **

**COVANCE INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2008 AND DECEMBER 31, 2007**

 
| ** **                                                                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                                                                                                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                                            |       | **(UNAUDITED)**   |       |                  |       |
| **Assets**                                                                                                                                                                                                                            |       |              |       |                  |       |
| Current Assets:                                                                                                                                                                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                            |       | $                 | 195,655    |                  | $          | 319,485 |   |
| Accounts receivable                                                                                                                                                                                                                   |       | 224,432           |       | 217,657               |       |
| Unbilled services                                                                                                                                                                                                                     |       | 106,749           |       | 88,835                |       |
| Inventory                                                                                                                                                                                                                             |       | 61,332            |       | 54,788                |       |
| Deferred income taxes                                                                                                                                                                                                                 |       | 8,796             |       | 7,825                 |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                            |       | 88,509            |       | 81,467                |       |
| Total Current Assets                                                                                                                                                                                                                  |       | 685,473           |       | 770,057               |       |
| Property and equipment,  net                                                                                                                                                                                                          |       | 760,634           |       | 646,040               |       |
| Goodwill, net                                                                                                                                                                                                                         |       | 105,486           |       | 105,486               |       |
| Other assets                                                                                                                                                                                                                          |       | 38,946            |       | 38,602                |       |
| Total Assets                                                                                                                                                                                                                          |       | $                 | 1,590,539  |                  | $          | 1,560,185 |   |
| ** **                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                        |       |              |       |                  |       |
| Current Liabilities:                                                                                                                                                                                                                  |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                      |       | $                 | 26,740     |                  | $          | 32,252 |   |
| Accrued payroll and  benefits                                                                                                                                                                                                         |       | 75,105            |       | 95,313                |       |
| Accrued expenses and  other current liabilities                                                                                                                                                                                       |       | 74,332            |       | 66,838                |       |
| Unearned revenue                                                                                                                                                                                                                      |       | 143,928           |       | 144,870               |       |
| Short-term debt                                                                                                                                                                                                                       |       | 35,000            |       | 3⁄4                |       |
| Income taxes payable                                                                                                                                                                                                                  |       | 20,267            |       | 18,887                |       |
| Total Current Liabilities                                                                                                                                                                                                             |       | 375,372           |       | 358,160               |       |
| Deferred income taxes                                                                                                                                                                                                                 |       | 31,256            |       | 32,562                |       |
| Other liabilities                                                                                                                                                                                                                     |       | 59,353            |       | 59,275                |       |
| Total Liabilities                                                                                                                                                                                                                     |       | 465,981           |       | 449,997               |       |
|                                                                                                                                                                                                                                  |       |              |       |                  |       |
| Commitments and Contingent  Liabilities                                                                                                                                                                                               |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                                            |       |              |       |                  |       |
| Preferred Stock – Par  value $1.00 per share; 10,000,000 shares authorized; no shares issued and  outstanding at June 30, 2008 and December 31, 2007                                                                   |       | 3⁄4            |       | 3⁄4                |       |
| Common Stock - Par  value $0.01 per share; 140,000,000 shares authorized; 75,050,217 and  74,590,229 shares issued and outstanding, including those held in treasury, at  June 30, 2008 and December 31, 2007, respectively |       | 751               |       | 746                   |       |
| Paid-in capital                                                                                                                                                                                                                       |       | 521,167           |       | 492,373               |       |
| Retained earnings                                                                                                                                                                                                                     |       | 1,033,081         |       | 933,106               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                               |       | 40,177            |       | 24,154                |       |
| Treasury stock at cost  (12,093,044 and 10,548,248 shares at June 30, 2008 and December 31,  2007, respectively)                                                                                                            |       | (470,618          | )          | (340,191              | )          |
| Total Stockholders’  Equity                                                                                                                                                                                                      |       | 1,124,558         |       | 1,110,188             |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                                      |       | $                 | 1,590,539  |                  | $          | 1,560,185 |   |

 

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

 

2

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** **

**COVANCE INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND2007**

**(UNAUDITED)**

** **
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands, except per share data)**                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Net revenues                                                                   |       | $                                | 436,912    |                           | $          | 381,145 |   | $ | 849,344 |   | $ | 739,464 |   |
| Reimbursable  out-of-pockets                                                   |       | 24,911                           |       | 23,029                         |       | 46,516 |   | 41,649 |   |
| Total revenues                                                                 |       | 461,823                          |       | 404,174                        |       | 895,860 |   | 781,113 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Cost and expenses:                                                             |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue  (excluding depreciation and amortization)                     |       | 286,884                          |       | 251,078                        |       | 560,214 |   | 485,457 |   |
| Reimbursed  out-of-pocket expenses                                             |       | 24,911                           |       | 23,029                         |       | 46,516 |   | 41,649 |   |
| Selling, general and administrative (excluding depreciation  and amortization) |       | 65,242                           |       | 58,092                         |       | 124,259 |   | 113,883 |   |
| Depreciation and  amortization                                                 |       | 17,331                           |       | 16,457                         |       | 34,679 |   | 32,568 |   |
| Total costs and  expenses                                                      |       | 394,368                          |       | 348,656                        |       | 765,668 |   | 673,557 |   |
| Income from operations                                                         |       | 67,455                           |       | 55,518                         |       | 130,192 |   | 107,556 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Other (income) expense,  net:                                                  |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                |       | (1,915                           | )          | (2,138                         | )          | (4,773 | ) | (4,735 | ) |
| Interest expense                                                               |       | 414                              |       | 145                            |       | 676 |   | 262 |   |
| Foreign exchange  transaction (gain) loss, net                                 |       | (481                             | )          | (103                           | )          | (1,546 | ) | 46 |   |
| Gain on sale of  business                                                      |       | (949                             | )          | 3⁄4                         |       | (3,927 | ) | 3⁄4 |   |
| Other income, net                                                              |       | (2,931                           | )          | (2,096                         | )          | (9,570 | ) | (4,427 | ) |
| Income before taxes and  equity investee earnings                              |       | 70,386                           |       | 57,614                         |       | 139,762 |   | 111,983 |   |
| Taxes on income                                                                |       | 20,330                           |       | 16,816                         |       | 41,053 |   | 32,857 |   |
| Equity investee  earnings                                                      |       | 817                              |       | 714                            |       | 1,266 |   | 1,280 |   |
| Net income                                                                     |       | $                                | 50,873     |                           | $          | 41,512 |   | $ | 99,975 |   | $ | 80,406 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per  share                                                      |       | $                                | 0.81       |                           | $          | 0.65 |   | $ | 1.59 |   | $ | 1.26 |   |
| Weighted average shares  outstanding - basic                                   |       | 62,825,444                       |       | 63,598,821                     |       | 63,069,018 |   | 63,722,266 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per  share                                                    |       | $                                | 0.80       |                           | $          | 0.64 |   | $ | 1.56 |   | $ | 1.24 |   |
| Weighted average shares  outstanding – diluted                            |       | 63,756,789                       |       | 64,628,294                     |       | 64,058,649 |   | 64,745,006 |   |

 

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

 

3

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** **

**COVANCE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**

**(UNAUDITED)**

** **
| ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Dollars in thousands)**                                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                                         |       |                                             |       |   |   |
| Cash flows from  operating activities:                                                       |       |                                             |       |   |   |
| Net income                                                                                   |       | $                                                | 99,975     |   | $ | 80,406 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:           |       |                                             |       |   |   |
| Depreciation and  amortization                                                               |       | 34,679                                           |       | 32,568 |   |
| Non-cash compensation  expense associated with employee benefit and stock compensation plans |       | 12,540                                           |       | 15,817 |   |
| Deferred income tax  (benefit) provision                                                     |       | (2,277                                           | )          | (1,802 | ) |
| Gain on sale of  business                                                                    |       | (3,927                                           | )          | 3⁄4 |   |
| Loss (gain) on sale of  property and equipment                                               |       | 253                                              |       | (1,714 | ) |
| Equity investee  earnings                                                                    |       | (1,266                                           | )          | (1,280 | ) |
| Changes in operating  assets and liabilities:                                                |       |                                             |       |   |   |
| Accounts receivable                                                                          |       | (6,775                                           | )          | (14,854 | ) |
| Unbilled services                                                                            |       | (17,914                                          | )          | (14,557 | ) |
| Inventory                                                                                    |       | (6,544                                           | )          | (1,955 | ) |
| Accounts payable                                                                             |       | (5,512                                           | )          | (3,402 | ) |
| Accrued liabilities                                                                          |       | (12,331                                          | )          | (2,982 | ) |
| Unearned revenue                                                                             |       | (942                                             | )          | 24,671 |   |
| Income taxes payable                                                                         |       | 2,565                                            |       | (6,143 | ) |
| Other assets and  liabilities, net                                                           |       | (6,676                                           | )          | (12,909 | ) |
| Net cash provided by  operating activities                                                   |       | 85,848                                           |       | 91,864 |   |
|                                                                                         |       |                                             |       |   |   |
| Cash flows from  investing activities:                                                       |       |                                             |       |   |   |
| Capital expenditures                                                                         |       | (143,163                                         | )          | (61,840 | ) |
| Proceeds from sale of  business                                                              |       | 3,927                                            |       | 3⁄4 |   |
| Other, net                                                                                   |       | 96                                               |       | 85 |   |
| Net cash used in  investing activities                                                       |       | (139,140                                         | )          | (61,755 | ) |
|                                                                                         |       |                                             |       |   |   |
| Cash flows from  financing activities:                                                       |       |                                             |       |   |   |
| Net borrowings under  revolving credit facility                                              |       | 35,000                                           |       | 3⁄4 |   |
| Stock issued under  employee stock purchase and option plans                                 |       | 14,691                                           |       | 19,553 |   |
| Purchase of treasury  stock                                                                  |       | (130,427                                         | )          | (61,425 | ) |
| Net cash used in  financing activities                                                       |       | (80,736                                          | )          | (41,872 | ) |
|                                                                                         |       |                                             |       |   |   |
| Effect of exchange rate  changes on cash                                                     |       | 10,198                                           |       | (39 | ) |
| Net change in cash and  cash equivalents                                                     |       | (123,830                                         | )          | (11,802 | ) |
|                                                                                         |       |                                             |       |   |   |
| Cash and cash  equivalents, beginning of period                                              |       | 319,485                                          |       | 219,810 |   |
|                                                                                         |       |                                             |       |   |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                                | 195,655    |   | $ | 208,008 |   |

 

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

 

4

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** **

**COVANCE INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

** **

**1.  Basis of Presentation**

** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles (“GAAP”) for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by GAAP for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the three and six monthsended June 30, 2008 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2008.  The balance sheet at December 31, 2007has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by GAAP for completefinancial statements.  You should readthese unaudited consolidated financial statements together with the historicalconsolidated financial statements of Covance Inc. and subsidiaries (“Covance”or the “Company”) for the years ended December 31, 2007, 2006, and 2005included in our Annual Report on Form 10-K for the year ended December 31,2007.

 

**2.  Summaryof Significant Accounting Policies**

 

**Principles of Consolidation**

** **

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 orhas the ability to exercise influence over operating or financial decisions,but, in each case, does 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 Expenses and Other Current Assets**

** **

In connection withthe management 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 $47.7 million and $47.4 million at June 30, 2008 and December 31,2007, respectively.  See Note 2 “ReimbursableOut-of-Pocket Expenses”.

 

**Goodwill and Other Intangible Assets and Impairment**

** **

Goodwillrepresents costs in excess of the fair value of net tangible and identifiablenet intangible assets acquired in business combinations. In accordance withStatement of Financial Accounting Standards No. 142, *Goodwill andOther Intangible Assets*, Covance performs an annual test forimpairment of goodwill and other indefinite lived intangible assets during thefourth quarter. This test is performed by comparing, at the reporting unitlevel, the carrying value of the reporting unit to its fair value. Covanceassesses fair value based upon its best estimate of the present value of thefuture cash flows that it expects to be generated by the reporting unit. Themost recent annual test for impairment performed for 2007 did not identify anyinstances of impairment and there were no events through June 30, 2008that warranted a reconsideration of our impairment test results.

 

5

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

** **

**Revenue Recognition**

** **

Covance recognizesrevenue either as services are performed or products are delivered, dependingon the nature of the work contracted. Historically, a majority of Covance’s netrevenues have been earned under contracts which range in duration from a fewmonths 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 cases where performance spans multiple accounting periods,revenue is recognized as services are performed, measured on a proportionalperformance basis, generally using output measures that are specific to theservice provided.  Examples of outputmeasures in our early development segment include the number of slides read,dosings performed, or specimens prepared for preclinical laboratory services,or number of dosings or number of volunteers enrolled for clinicalpharmacology. Examples of output measures in our late-stage development segment’sclinical development service offering include among others, number ofinvestigators enrolled, number of sites initiated, number of patients enrolledand number of monitoring visits completed. Revenue is determined by dividingthe actual units of work completed by the total units of work required underthe contract and multiplying that percentage by the total contract value. Thetotal contract value, or total expected contractual payments, represents theaggregate contracted price for each of the agreed upon services to beprovided.  Changes in the scope of workare common, especially under long-term contracts, and generally result in achange in contract value. Once the client has agreed to the changes in scopeand renegotiated pricing terms, the contract value is amended and revenue isrecognized as described above. Estimates of costs to complete are made toprovide, where appropriate, for losses expected on contracts. Costs are notdeferred in anticipation of contracts being awarded, but instead are expensedas incurred.

 

Billing and payment termsare generally negotiated on a contract-by-contract basis. In some cases, we canonly bill the client for a portion of the total contract value upon reachingspecific milestones over the contract duration, such as, but not limited to,contract signing, initial dosing, investigator site initiation, patientenrollment, database lock, or delivery of a final report.  In other cases, billing and payment terms aretied to the passage of time (e.g., monthly billings).  In either case, while we attempt to negotiateterms that provide for billing and payment of services prior to or within closeproximity to the provision of services, this is not always the case, asevidenced by fluctuations in the levels of unbilled receivables and unearnedrevenue from period to period.  While aproject is ongoing, cash payments are not necessarily representative ofaggregate revenue earned at any particular point in time, as revenues arerecognized when services are provided, while amounts billed and paid are inaccordance with the negotiated billing and payment terms.

 

In some cases, paymentsreceived are in excess of revenue recognized to date.  For example, a contract may provide for anupfront payment of 10% of the full contract value upon contract signing, but atthe time of signing, performance of services has not yet begun, and therefore,no revenue has yet been recognized. Payments received in advance of services being provided, such as in thisexample, are deferred as unearned revenue on the balance sheet. As thecontracted services are subsequently performed and the associated revenue isrecognized, the unearned revenue balance is reduced by the amount of revenuerecognized during the period.

 

In othercases, services may be provided and revenue is recognized before a billingmilestone has been met.  In these cases,revenue recognized will exceed amounts billed, and the difference, representingan unbilled receivable, is recorded for this amount that is currentlyunbillable to the customer pursuant to contractual terms.  Once a billing milestone is met, the clientis billed, the unbilled receivable is reduced for the amount billed, and acorresponding account receivable is recorded. All unbilled receivables arebillable to customers within one year from the respective balance sheet date.

 

Most contracts areterminable by the client either immediately or upon notice. These contractstypically require payment to Covance of expenses to wind down the study, feesearned to date and, in some cases, a termination fee or a payment to Covance ofsome portion of the fees or profits that could have been earned by Covanceunder the contract if it had not been terminated early. Termination fees areincluded in net revenues when realization is assured. 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 intotal revenues or expenses where Covance acts in the capacity of an agent onbehalf of the pharmaceutical company sponsor, passing through these costswithout risk or reward to Covance. All other out-of-pocket costs are includedin total revenues and expenses.

 

6

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

**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 amount of assets and liabilities and theirrespective tax bases using enacted tax rates in effect for the year in whichthe temporary differences are expected to reverse.  The effect on deferred taxes of a change inenacted tax rates is recognized in income in the period when the change iseffective.

 

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

 

As of June 30,2008, the balance of the reserve for unrecognized tax benefits is$9.3 million, of which $2.6 million is recorded as a currentliability in accrued expenses and other current liabilities, and$6.7 million is recorded as a long-term liability in other liabilities onthe consolidated balance sheet, including accrued interest of$1.7 million.  As of December 31,2007, the balance of the reserve for unrecognized tax benefits was$8.9 million, of which $2.6 million was recorded as a currentliability in accrued expenses and other current liabilities, and$6.3 million was recorded as a long-term liability in other liabilities onthe consolidated balance sheet, including accrued interest of$1.3 million.  This reserve relatesto exposures for income tax matters such as transfer pricing, nexus, deemeddividends and research and development credits.

 

The Company alsomaintains a tax reserve related to exposures for non-income tax mattersincluding value-added tax and state sales and use and other taxes, which areaccounted for in accordance with Statement of Financial Accounting Standards No. 5,*Accounting for Contingencies*. Thebalance of this reserve at June 30, 2008 and December 31, 2007 is$0.9 million and $0.8 million, respectively, and is recorded as acurrent 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 inthe fourth 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 of the remaining accumulated foreign unremitted earnings as of June 30,2008.

 

**Comprehensive Income**

 

Covance’stotal comprehensive income, which represents net income plus the change in thecumulative translation adjustment equity account for the periods presented, was$42.2 million and $41.8 million for the three months ended June 30,2008 and 2007, respectively, and $116.0 million and $81.8 million forthe six months ended June 30, 2008 and 2007, respectively.

 

7

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

**Reimbursable Out-of-Pocket Expenses**

** **

As discussed inNote 2 “Prepaid Expenses and Other Current Assets”, Covance pays on behalf ofits customers fees to investigators, volunteers and other out-of-pocket costsfor which we are reimbursed at cost, without mark-up or profit.  In connection with the requirements ofFinancial Accounting Standards Board Emerging Issues Task Force Rule No. 01-14(“EITF 01-14”), *Income Statement Characterization ofReimbursements Received for “Out-of-Pocket” Expenses Incurred*,amounts paid to volunteers and other out-of-pocket costs are reflected inoperating expenses, while the reimbursements received are reflected in revenuesin the consolidated statements of income. Covance will continue to exclude from revenue and expense in theconsolidated statements of income fees paid to investigators and the associatedreimbursement since Covance acts as an agent on behalf of the pharmaceuticalcompany sponsors with regard to investigator payments, in accordance with theFinancial Accounting Standards Board Emerging Issues Task Force Rule No. 99-19(“EITF 99-19”), *Reporting Revenue Gross as aPrincipal versus Net as an Agent*.

 

**Stock-BasedCompensation**

 

The Company sponsors several stock-based compensation plans pursuant towhich non-qualified stock options and restricted stock awards are granted toeligible employees.  These plans aredescribed more fully in Note 8 herein and Note 10 to our audited consolidatedfinancial statements included in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

The Company recognizes stock-based compensation under the provisions ofStatement of Financial Accounting Standards No. 123R, *Share-BasedPayments*, (“SFAS 123R”) using the modified prospectivetransition method.  Under the modifiedprospective transition method, compensation expense is recognized in thefinancial statements on a prospective basis for (a) all share-basedpayments granted prior to, but not vested as of January 1, 2006, basedupon the grant-date fair value estimated in accordance with the originalprovisions of SFAS 123, and (b) share-based payments granted on orsubsequent to January 1, 2006, based upon the grant-date fair valueestimated in accordance with the provisions of SFAS 123R.  The grant-date fair value of awards expectedto vest is expensed on a straight-line basis over the vesting period of therelated awards.  See Note 8.

 

**Earnings Per Share (“EPS”)**

** **

BasicEPS is computed 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 ofFinancial Accounting Standards No. 128, *Earnings PerShare*.

 

Incomputing diluted earnings per share for the three months ended June 30,2008 and 2007, the denominator was increased by 931,345 shares and 1,029,473shares, respectively, and for the six months ended June 30, 2008 and 2007,the denominator was increased by 989,631 shares and 1,022,740 shares,respectively, representing the dilutive effect of stock options outstanding at June 30,2008 and 2007 with exercise prices less than the average market price ofCovance’s common stock during each respective period.  Excluded from the computation of diluted EPSfor the three months ended June 30, 2008 were options to purchase 17,177shares of common stock at prices ranging from $83.23 to $87.33 per sharebecause the exercise prices of such options were greater than the averagemarket price of Covance’s common stock during this period.  Excluded from the computation of diluted EPSfor the six months ended June 30, 2008 were options to purchase 15,400shares of common stock at prices ranging from $86.02 to $87.33 per sharebecause the exercise prices of such options were greater than the averagemarket price of Covance’s common stock during this period.  Excluded from the computation of diluted EPSfor the three months ended June 30, 2007 were options to purchase 6,775shares of common stock at prices ranging from $66.55 to $68.56 per sharebecause the exercise prices of such options were greater than the averagemarket price of Covance’s common stock during this period.  Excluded from the computation of diluted EPSfor the six months ended June 30, 2007 were options to purchase 11,189shares of common stock at prices ranging from $63.18 to $68.56 per sharebecause the exercise prices of such options were greater than the averagemarket price of Covance’s common stock during this period.

 

8

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

**SupplementalCash Flow Information**

 

Cash paid forinterest for the six month periods ended June 30, 2008 and 2007 totaled$0.6 million and $0.2 million, respectively. Cash paid for incometaxes for the six month periods ended June 30, 2008 and 2007 totaled$37.6 million and $37.9 million, respectively.  The change in income taxes payable in theconsolidated statement of cash flows for the six months ended June 30,2008 and 2007 includes as an operating cash outflow the excess tax benefitreceived from the exercise of non-qualified stock options as measured underSFAS 123R of $2.9 million and $3.3 million, respectively (a correspondingcash inflow of $2.9 million and $3.3 million, respectively, has beenincluded in financing cash flows).

 

**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)*, (“SFAS158”). As of December 31, 2006, Covance has adopted the recognition anddisclosure provisions of SFAS 158, which require an employer to recognize 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 to recognize changes in the funded status of the plan in theyear in which such changes occur through other comprehensive income. Theadoption of SFAS 158 did not have an impact on our consolidated results ofoperations. SFAS 158 also requires, effective for fiscal years ending after December 15,2008, that the measurement of the over funded or under funded status of a planbe made as of the employer’s fiscal year end and not as of an earliermeasurement date.  Covance will berequired to conform the measurement dates of its plans to December 31stfor its fiscal year ending December 31, 2008. Covance does not expect thischange in measurement dates to have a material impact on its consolidatedresults of operations or financial position.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations*(“SFAS 141R”) which replaces SFAS No. 141, *Business Combinations*. The scope of SFAS 141R is broader than that of SFAS No. 141,which applied only to business combinations in which control was obtained bytransferring consideration. SFAS 141R revises accounting and reporting standards for businesscombinations and applies to all transactions or other events in which an entityobtains control of one or more businesses by transferring consideration as wellas combinations achieved without the transfer of consideration. By applying thesame method of accounting – the acquisition method – to all transactions andother events in which one entity obtains control over one or more otherbusinesses, this statement is intended to improve the comparability of theinformation about business combinations provided in financial reports.  SFAS 141R applies prospectively tobusiness combinations with an acquisition date on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Covance is currently in theprocess of evaluating SFAS 141R, and has not yet determined the impact, ifany, that accounting for future business combinations under SFAS 141R,effective January 1, 2009, will have on its consolidated results ofoperations or financial position.

 

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

 

9

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

**3.  Treasury Stock**

** **

In February 2007,the Covance Board of Directors authorized the repurchase of an additional3.0 million shares under Covance’s stock repurchase program.  At June 30, 2008, there areapproximately 0.8 million shares remaining for purchase under the 2007authorization.  Covance also reacquiresshares of its common stock in connection with certain employee benefit plansprimarily when employees tender shares to satisfy income tax withholdingsassociated with the vesting of stock awards. The following table sets forth the treasury stock activity during thesix month periods ended June 30, 2008 and 2007.

 
| ** **                              | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **(amounts in thousands)**    | ** ** | **$**                                            | ** ** | **# shares** | ** ** | **$** | ** ** | **# shares** | ** ** |
| Shares repurchased in  connection with: |       |                                             |       |   |   |   |   |   |   |
| Board approved buyback  programs        |       | $                                                | 126,709    |   | 1,500.0 |   | $ | 59,628 |   | 977.0 |   |
| Employee benefit plans                  |       | 3,718                                            |       | 44.8 |   | 1,797 |   | 28.6 |   |
| Total                                   |       | $                                                | 130,427    |   | 1,544.8 |   | $ | 61,425 |   | 1,005.6 |   |

** **

**4.  Equity Method Investees**

** **

Covancehas a minority equity position in Noveprim Limited (“Noveprim”), an existingsupplier of research products, which was acquired in March 2004 at a totalcost of $20.7 million.  The excess of thepurchase price over the underlying equity in Noveprim’s net assets at the dateof acquisition of $13.8 million represents goodwill and is included in thecarrying value of Covance’s investment. This investment is reflected in other assets on the consolidated balancesheet.  During the three and six monthperiods ended June 30, 2008, Covance recognized $0.7 million and$1.0 million, respectively, representing its share of Noveprim’s earnings,less the elimination of profit on inventory purchased from Noveprim and stillon hand at Covance at June 30, 2008. During the three and six month periods ended June 30, 2007, Covancerecognized $0.6 million and $1.1 million, respectively, representingits share of Noveprim’s earnings, less the elimination of profit on inventorypurchased from Noveprim and still on hand at Covance at June 30,2007.  The carrying value of Covance’sinvestment in Noveprim at June 30, 2008 and December 31, 2007 was$23.6 million and $23.2 million, respectively.

 

Covancehas a minority equity position in Bio-Imaging Technologies, Inc. (“BITI”).  BITI uses proprietary medical imagingtechnologies to process and analyze medical images, and also provides otherservices, including the data-basing and regulatory submission of medicalimages, quantitative data and text. During the three and six month periods ended June 30, 2008, Covancerecognized $0.1 million and $0.3 million, respectively, representingits pro rata share of BITI’s earnings. During the three and six month periods ended June 30, 2007, Covancerecognized $0.1 million and $0.2 million, respectively, representingits pro rata share of BITI’s earnings. The carrying value of Covance’s investment in BITI as of June 30,2008 and December 31, 2007 was $1.2 million and $0.9 million,respectively, while the fair market value was $17.4 million and$19.0 million, respectively.

 

**5.  Divestiture**

** **

On November 28,2007, Covance sold its centralized ECG business (“Cardiac Safety Services”),part of Covance’s late stage development segment, to eResearchTechnology Inc. (“eRT”)and simultaneously therewith entered into a ten year marketing agreement witheRT under which Covance will continue to offer its clients cardiac safetyservices.  Covance received initial cashproceeds of $35.2 million in connection with the sale and recorded apre-tax gain of $6.6 million ($4.1 million after tax) during thequarter ended December 31, 2007. During the three and six months ended June 30, 2008, Covancereceived additional proceeds from this sale reflecting contingent considerationrelated to transferred backlog totaling $0.9 million and$3.9 million, respectively, and recognized an additional pre-tax gain of$0.9 million and $3.9 million, ($0.6 million and$2.6 million after tax), respectively. Covance may receive up to approximately $8.6 million in additionalfuture contingent consideration relating to transferred backlog and revenuesgenerated by eRT from new contracts secured under the first three years of themarketing agreement.  In addition,Covance expects to receive referral fees during the term of the long-termmarketing agreement.

 

10

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

**6.  Short-Term Debt**

 

Covance has a$75.0 million revolving credit facility (the “Credit Facility”), which maybe expanded to $125.0 million at Covance’s election.  At June 30, 2008, there were $35.0*** ***million ofoutstanding borrowings and $1.1 million of outstanding letters of creditunder the Credit Facility.  At December 31,2007, there were no outstanding borrowings and $1.1 million of outstandingletters of credit under the Credit Facility. Interest on all outstanding borrowings under the Credit Facility isbased upon the London Interbank Offered Rate (“LIBOR”) plus a 75 basispoint margin and approximated 3.42% per annum during the six months ended June 30,2008.  The Credit Facility, which expiresin June 2009, contains various financial and other covenants and iscollateralized by guarantees of certain of Covance’s domestic subsidiaries anda pledge of 65 percent of the capital stock of certain of Covance’s foreignsubsidiaries.  At June 30, 2008,Covance was in compliance with the terms of the Credit Facility.

 

**7.  Defined Benefit Plans**

** **

Covance sponsors various pension and other post-retirement benefitplans.

 

**DefinedBenefit Pension Plans**

 

Covance sponsorstwo defined benefit pension plans for the benefit of its employees at twoUnited Kingdom subsidiaries and one defined benefit pension plan for the benefitof its 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 and compensation.  The German plan is unfunded while the UnitedKingdom plans are funded.  Covance’sfunding policy has been to contribute annually a fixed percentage of theeligible employee’s salary at least equal to the local statutory fundingrequirements.  Pension plan assets areadministered by the plans’ trustees and are principally invested in equity anddebt securities.  The components of netperiodic pension expense for these plans for the three and six month periodsended June 30, 2008 and 2007 are as follows:

 
| ** **                                                | ** ** | **United Kingdom Plans**                 | ** ** | **German Plan**                               | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended June 30** | ** ** | **Three Months Ended June 30** | ** ** |
| ** **                                                | ** ** | **2008**                                           | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of Net  Periodic Pension Cost:                 |       |                                               |       |                                               |       |   |   |   |   |
| Service cost                                              |       | $                                                  | 1,379      |                                               | $          | 1,482 |   | $ | 146 |   | $ | 122 |   |
| Interest cost                                             |       | 2,063                                              |       | 1,869                                              |       | 138 |   | 91 |   |
| Expected return on plan  assets                           |       | (2,341                                             | )          | (2,146                                             | )          | — |   | — |   |
| Amortization of net  actuarial loss                       |       | 318                                                |       | 355                                                |       | 14 |   | 18 |   |
| Participant  contributions                                |       | (527                                               | )          | (560                                               | )          | — |   | — |   |
| Net periodic pension  cost                                |       | $                                                  | 892        |                                               | $          | 1,000 |   | $ | 298 |   | $ | 231 |   |
|                                                      |       |                                               |       |                                               |       |   |   |   |   |
| Assumptions Used to  Determine Net Periodic Pension Cost: |       |                                               |       |                                               |       |   |   |   |   |
| Discount rate                                             |       | 5.50                                               | %          | 5.25                                               | %          | 5.60 | % | 4.65 | % |
| Expected rate of return  on assets                        |       | 6.75                                               | %          | 6.75                                               | %          | n/a |   | n/a |   |
| Salary increases                                          |       | 4.25                                               | %          | 4.00                                               | %          | 3.00 | % | 2.50 | % |

 

11

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 
| ** **                                                | ** ** | **United Kingdom Plans**               | ** ** | **German Plan**                             | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **Six Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of Net  Periodic Pension Cost:                 |       |                                             |       |                                             |       |   |   |   |   |
| Service cost                                              |       | $                                                | 2,762      |                                             | $          | 2,946 |   | $ | 292 |   | $ | 245 |   |
| Interest cost                                             |       | 4,138                                            |       | 3,710                                            |       | 277 |   | 181 |   |
| Expected return on plan  assets                           |       | (4,694                                           | )          | (4,262                                           | )          | — |   | — |   |
| Amortization of net  actuarial loss                       |       | 637                                              |       | 705                                              |       | 25 |   | 35 |   |
| Participant  contributions                                |       | (1,058                                           | )          | (1,110                                           | )          | — |   | — |   |
| Net periodic pension  cost                                |       | $                                                | 1,785      |                                             | $          | 1,989 |   | $ | 594 |   | $ | 461 |   |
|                                                      |       |                                             |       |                                             |       |   |   |   |   |
| Assumptions Used to  Determine Net Periodic Pension Cost: |       |                                             |       |                                             |       |   |   |   |   |
| Discount rate                                             |       | 5.50                                             | %          | 5.25                                             | %          | 5.60 | % | 4.65 | % |
| Expected rate of return  on assets                        |       | 6.75                                             | %          | 6.75                                             | %          | n/a |   | n/a |   |
| Salary increases                                          |       | 4.25                                             | %          | 4.00                                             | %          | 3.00 | % | 2.50 | % |

## ** **

## **Supplemental Executive 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 costfor the three and six month periods ended June 30, 2008 and 2007 are asfollows:

 
| ** **                                                | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of Net Periodic  Pension Cost:                 |       |                                               |       |                                             |       |   |   |   |   |
| Service cost                                              |       | $                                                  | 308        |                                             | $          | 272 |   | $ | 617 |   | $ | 543 |   |
| Interest cost                                             |       | 217                                                |       | 193                                              |       | 434 |   | 386 |   |
| Amortization of prior  service cost                       |       | (30                                                | )          | 19                                               |       | (59 | ) | 38 |   |
| Amortization of net  actuarial loss                       |       | 27                                                 |       | 10                                               |       | 53 |   | 21 |   |
| Net periodic pension  cost                                |       | $                                                  | 522        |                                             | $          | 494 |   | $ | 1,045 |   | $ | 988 |   |
|                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Assumptions Used to  Determine Net Periodic Pension Cost: |       |                                               |       |                                             |       |   |   |   |   |
| Discount rate                                             |       | 5.50                                               | %          | 5.50                                             | %          | 5.50 | % | 5.50 | % |
| Salary increases                                          |       | 4.00                                               | %          | 4.00                                             | %          | 4.00 | % | 4.00 | % |

 

## **Post-Employment Retiree Health and Welfare Plan**

## ** **

Covance also sponsors a post-employment retiree healthand 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 basisand the cost of providing these benefits is shared with the retirees.  The components of net periodicpost-retirement benefits cost for the three and six month periods ended June 30,2008 and 2007 are as follows:

 

12

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 
| ** **                                                                | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of Net Periodic  Post-retirement Benefits Cost:                |       |                                               |       |                                             |       |   |   |   |   |
| Service cost                                                              |       | $                                                  | 39         |                                             | $          | 42 |   | $ | 77 |   | $ | 83 |   |
| Interest cost                                                             |       | 81                                                 |       | 69                                               |       | 162 |   | 139 |   |
| Net periodic  post-retirement benefits cost                               |       | $                                                  | 120        |                                             | $          | 111 |   | $ | 239 |   | $ | 222 |   |
|                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Assumptions Used to  Determine Net Periodic Post-retirement Benefit Cost: |       |                                               |       |                                             |       |   |   |   |   |
| Discount rate                                                             |       | 5.50                                               | %          | 5.50                                             | %          | 5.50 | % | 5.50 | % |
| Health care cost trend  rate                                              |       | 9.00                                               | %(a)       | 9.00                                             | %(a)       | 9.00 | %(a) | 9.00 | %(a) |

 

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(a) decreasing to ultimate trend of 5.00% in 2011

** **

**8.  Stock-BasedCompensation Plans**

** **

Covance sponsorsseveral employee stock-based compensation plans which are described more fullyin Note 10 to our audited consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

In May 2007, Covance’sshareholders approved the 2007 Employee Equity Participation Plan (the “2007EEPP”) in replacement of the 2002 Employee Equity Participation Plan (the “2002EEPP”). Effective upon approval of the 2007 EEPP, no further grants or awardswere permitted under the 2002 EEPP. Shares remaining for grant under the 2002EEPP will be available for grant under the 2007 EEPP. In addition, the CovanceBoard of Directors directed that, effective May 3, 2007, no further grantswould be permitted under the 2002 Employee Stock Option Plan (the “2002 ESOP”)and, unlike the 2002 EEPP, shares remaining for grant under the 2002 ESOP wouldnot be available for grant under the 2007 EEPP. The 2007 EEPP became effectiveon May 3, 2007 and will expire on May 2, 2017.  The 2007 EEPP authorizes the Compensation andOrganization Committee of the Board of Directors (the “Compensation Committee”),or such committee as is appointed by the Covance Board of Directors, toadminister the 2007 EEPP, to grant awards to employees and consultants ofCovance or entities in which Covance has a controlling or significant equityinterest.  The 2007 EEPP authorizes theCompensation Committee to grant the following awards to eligible employees:options to purchase common stock; stock appreciation rights; and other stockawards either singly or in combination. The exercise period for stock options granted under the 2007 EEPP isdetermined by the Compensation Committee at the time of grant, and is generallyten years from the date of grant. The vesting period for stock options andstock awards granted under the 2007 EEPP is determined by the CompensationCommittee at the time of grant. Generally, options vest over a three yearperiod for senior executives and over a two year period for all other optionees.  Stock awards generally vest over a three yearperiod for all employees. The number of shares of Covance common stockinitially available for grant under the 2007 EEPP totaled approximately 1.6million plus approximately 3.3 million shares remaining available under the2002 EEPP at the time the 2007 EEPP was approved. All stock option grants underthe 2002 EEPP remaining outstanding are now administered in accordance with theprovisions of the 2002 EEPP out of shares issuable under the 2007 EEPP. TheCompany issues authorized but previously unissued shares when options areexercised or for stock awards.  At June 30,2008 there were approximately 4.4 million shares remaining available for grantsor awards under the 2007 EEPP, up to 1.6 million of which are available forissuance as stock awards.  There havebeen no grants of stock appreciation rights or grants to consultants of Covanceor entities in which Covance has a controlling or significant equity interestunder the 2002 ESOP, the 2002 EEPP or the 2007 EEPP.

 

The grant-datefair value of stock option awards is estimated using an option pricing model asmore fully described in Note 10 to our audited consolidated financialstatements included in our Annual Report on Form 10-K for the year ended December 31,2007.  The grant-date fair value ofoptions expected to vest is expensed on a straight-line basis over the vestingperiod of the related awards.

 

13

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

The following table sets forth the weighted-average assumptions used tocalculate the fair value of options granted for the three and six month periodsended June 30, 2008 and 2007:

 

| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected stock price  volatility  |       | 39%                                                |       | 42%                                              |       | 39% |   | 42% |   |
| Risk free interest  rate(s)       |       | 1.9% - 3.7%                                        |       | 4.7% - 5.1%                                      |       | 1.9% - 3.7% |   | 4.7% - 5.1% |   |
| Expected life of  options (years) |       | 4.4                                           |       | 4.3                                         |       | 4.4  |   | 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 giveCovance employees the opportunity to purchase shares of Covance common stockthrough payroll deductions.

 

Results of operations for the three month period ended June 30,2008 include total stock-based compensation expense of $6.5 million ($4.4 millionnet of tax benefit of $2.1 million), $2.5 million of which has beenincluded in cost of revenue and $4.0 million of which has been included inselling, general and administrative expenses. Results of operations for the six month period ended June 30, 2008include total stock-based compensation expense of $12.6 million($8.5 million net of tax benefit of $4.1 million), $4.8 millionof which has been included in cost of revenue and $7.8 million of whichhas been included in selling, general and administrative expenses.  Results of operations for the three monthperiod ended June 30, 2007 include total stock-based compensation expenseof $5.6 million ($3.8 million net of tax benefit of$1.8 million), $1.9 million of which has been included in cost ofrevenue and $3.7 million of which has been included in selling, generaland administrative expenses. Results of operations for the six month periodended June 30, 2007 include total stock-based compensation expense of$11.1 million ($7.5 million net of tax benefit of $3.6 million),$3.9 million of which has been included in cost of revenue and$7.2 million of which has been included in selling, general andadministrative expenses.

 

**9.  Segment Information**

** **

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

 

14

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**COVANCEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(UNAUDITED)June 30, 2008 and 2007(dollars in thousands, unless otherwise indicated)**

 

Segmentnet revenues, operating income and total assets for the three and six monthsended June 30, 2008 and 2007 are as follows:

 
| ** **                                   | ** ** | **Early  Development** | ** ** | **Late-Stage  Development** | ** ** | **Other  Reconciling Items** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------|------------|
| ***Three  months ended June 30, 2008*** |       |                   |       |                        |       |                              |       |      |       |
| Total revenues from  external customers      |       | $                      | 213,119    |                        | $          | 223,793                           |       | $         | 24,911     | (a) | $ | 461,823 |   |
| Operating income                             |       | $                      | 54,220     |                        | $          | 43,004                            |       | $         | (29,769    | )(b) | $ | 67,455 |   |
| Total assets                                 |       | $                      | 1,044,026  |                        | $          | 469,261                           |       | $         | 77,252     | (c) | $ | 1,590,539 |   |
|                                         |       |                   |       |                        |       |                              |       |      |       |
| ***Three  months ended June 30, 2007*** |       |                   |       |                        |       |                              |       |      |       |
| Total revenues from  external customers      |       | $                      | 191,102    |                        | $          | 190,043                           |       | $         | 23,029     | (a) | $ | 404,174 |   |
| Operating income                             |       | $                      | 48,996     |                        | $          | 31,898                            |       | $         | (25,376    | )(b) | $ | 55,518 |   |
| Total assets                                 |       | $                      | 829,561    |                        | $          | 451,427                           |       | $         | 82,174     | (c) | $ | 1,363,162 |   |
|                                         |       |                   |       |                        |       |                              |       |      |       |
| ***Six  months ended June 30, 2008***   |       |                   |       |                        |       |                              |       |      |       |
| Total revenues from  external customers      |       | $                      | 415,164    |                        | $          | 434,180                           |       | $         | 46,516     | (a) | $ | 895,860 |   |
| Operating income                             |       | $                      | 104,794    |                        | $          | 81,874                            |       | $         | (56,476    | )(b) | $ | 130,192 |   |
| Total assets                                 |       | $                      | 1,044,026  |                        | $          | 469,261                           |       | $         | 77,252     | (c) | $ | 1,590,539 |   |
|                                         |       |                   |       |                        |       |                              |       |      |       |
| ***Six  months ended June 30, 2007***   |       |                   |       |                        |       |                              |       |      |       |
| Total revenues from  external customers      |       | $                      | 370,318    |                        | $          | 369,146                           |       | $         | 41,649     | (a) | $ | 781,113 |   |
| Operating income                             |       | $                      | 92,673     |                        | $          | 61,110                            |       | $         | (46,227    | )(b) | $ | 107,556 |   |
| Total assets                                 |       | $                      | 829,561    |                        | $          | 451,427                           |       | $         | 82,174     | (c) | $ | 1,363,162 |   |

 

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| (a) | Represents revenues associated with reimbursable  out-of-pocket expenses.                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Represents corporate expenses (primarily information  technology, marketing, communications, human resources, finance, legal and  stock-based compensation expense). |
| (c) | Represents corporate assets.                                                                                                                                         |

 

15

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** **

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

 

You should read the following discussion together withthe unaudited Covance consolidated financial statements and the accompanyingnotes included in this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2008.

 

**Overview**

 

Covanceis a leading drug development services company providing a wide range ofearly-stage and late-stage product development services on a worldwide basisprimarily to the pharmaceutical, biotechnology and medical deviceindustries.  Covance also providesservices such as laboratory testing to the chemical, agrochemical and foodindustries. 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,periapproval and market access services. Although each segment has separate services within it, they can becombined in joint service offerings and we believe clients increasingly areinterested in opportunities for such combined services.  Covance believes it is one of the largestdrug development services companies, based on annual net revenues, and one of afew that is capable of providing comprehensive global product developmentservices. Covance offers its clients high quality services designed to providedata to clients as rapidly as possible and reduce product developmenttime.  We believe this enables Covance’scustomers to introduce their products into the marketplace faster and as aresult, maximize the period of market exclusivity and monetary return on theirresearch and development investments. Additionally, Covance’s comprehensiveservices and broad experience provide its customers with a variable costalternative to fixed cost internal development capabilities.

 

**CriticalAccounting Policies**

 

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

 

***Revenue Recognition.***Covancerecognizes revenue either as services are performed or products are delivered,depending on the nature of the work contracted. Historically, a majority ofCovance’s net revenues have been earned under contracts which range in durationfrom a few months to two years, but can extend in duration up to five years orlonger. Service contracts generally take the form of fee-for-service orfixed-price arrangements. In cases where performance spans multiple accountingperiods, revenue is recognized as services are performed, measured on aproportional performance basis, generally using output measures that arespecific to the service provided. Examples of output measures in our early development segment include thenumber of slides read, dosings performed, or specimens prepared for preclinicallaboratory services, or number of dosings or number of volunteers enrolled forclinical pharmacology. Examples of output measures in our late-stagedevelopment segment’s clinical development service offering include amongothers, number of investigators enrolled, number of sites initiated, number ofpatients enrolled and number of monitoring visits completed. Revenue isdetermined by dividing the actual units of work completed by the total units ofwork required under the contract and multiplying that percentage by the totalcontract value. The total contract value, or total expected contractualpayments, represents the aggregate contracted price for each of the agreed uponservices to be provided.  Changes in thescope of work are common, especially under long-term contracts, and generallyresult in a change in contract value. Once the client has agreed to the changesin scope and renegotiated pricing terms, the contract value is amended andrevenue is recognized as described above. Estimates of costs to complete aremade to provide, where appropriate, for losses expected on contracts. Costs arenot deferred in anticipation of contracts being awarded, but instead areexpensed as incurred.

 

Billing and payment terms are generally negotiated on a contract-by-contractbasis. In some cases, we can only bill the client for a portion of the totalcontract value upon reaching specific milestones over the contract duration,such as, but not limited to, contract signing, initial dosing, investigatorsite initiation, patient enrollment, database lock, or delivery of a finalreport.  In other cases, billing andpayment terms are tied to the passage of time (e.g., monthly billings).  In either case, while we attempt to negotiateterms that provide for billing and payment of services prior to or within closeproximity to the provision of services, this is not always the case, asevidenced by fluctuations in the levels of unbilled receivables and unearnedrevenue from period to period.  While aproject is ongoing, cash payments are not necessarily representative ofaggregate revenue earned at any particular point in time, as revenues arerecognized when services are provided, while amounts billed and paid are inaccordance with the negotiated billing and payment terms.

 

16

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In some cases, payments received are in excess of revenue recognized todate.  For example, a contract mayprovide for an upfront payment of 10% of the full contract value upon contractsigning, but at the time of signing, performance of services has not yet begun,and therefore, no revenue has yet been recognized.  Payments received in advance of servicesbeing provided, such as in this example, are deferred as unearned revenue onthe balance sheet. As the contracted services are subsequently performed andthe associated revenue is recognized, the unearned revenue balance is reducedby the amount of revenue recognized during the period.

 

In other cases, services may be provided and revenueis recognized before a billing milestone has been met.  In these cases, revenue recognized willexceed amounts billed, and the difference, representing an unbilled receivable,is recorded for this amount that is currently unbillable to the customerpursuant to contractual terms.  Once abilling milestone is met, the client is billed, the unbilled receivable isreduced for the amount billed, and a corresponding account receivable isrecorded. All unbilled receivables are billable to customers within one yearfrom the respective balance sheet date.

 

Most contracts are terminable by the client eitherimmediately 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. ***Covance endeavors to assess and monitorthe creditworthiness of its customers to which it grants credit terms in theordinary course of business.  Covancemaintains a provision for doubtful accounts relating to amounts due that maynot be collected.  This bad debtprovision is monitored on a monthly basis and adjusted as circumstanceswarrant.  Since the recorded bad debtprovision is based upon management’s judgment, actual bad debt write-offs maybe greater or less than the amount recorded. Historically bad debt write-offs have not been material.

 

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

 

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

 

As of June 30,2008, the balance of the reserve for unrecognized tax benefits is$9.3 million, of which $2.6 million is recorded as a currentliability in accrued expenses and other current liabilities, and $6.7 millionis recorded as a long-term liability in other liabilities on the consolidatedbalance sheet, including accrued interest of $1.7 million.  This reserve relates to exposures for incometax matters such as transfer pricing, nexus, deemed dividends and research anddevelopment credits.

 

TheCompany also maintains a tax reserve related to exposures for non-income taxmatters including value-added tax and state sales and use and other taxes,which are accounted for in accordance with Statement of Financial AccountingStandards No. 5, *Accounting forContingencies*. The balance of this reserve at June 30, 2008 isapproximately $0.9 million and is recorded as a current liability inaccrued expenses and other current liabilities on the consolidated balance sheet.

 

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

 

17

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Covance’s policy is toprovide income taxes on earnings of foreign subsidiaries only to the extentthose earnings are taxable or are expected to be remitted. Covance’s historicalpolicy has been to leave its unremitted foreign earnings invested indefinitelyoutside the United States. Except for the amounts repatriated in the fourthquarter of 2005 under the American Jobs Creation Act of 2004, Covance intendsto continue to leave its unremitted foreign earnings invested indefinitelyoutside the United States.  As a result,taxes have not been provided on any of the remaining accumulated foreignunremitted earnings as of June 30, 2008.

 

***Stock-Based Compensation.***The Company sponsorsseveral stock-based compensation plans pursuant to which non-qualified stockoptions and restricted stock awards are granted to eligible employees.  These plans are described more fully in Note10 to our audited financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007 and Note 8 to our consolidatedfinancial statements in our Quarterly Report on Form 10-Q for the quarterended June 30, 2008 included elsewhere herein.

 

Thegrant-date fair value of stock awards is based upon the underlying price of thestock on the date of grant.  Thegrant-date fair value of stock option awards must be determined using an optionpricing model.  Option pricing modelsrequire the use of estimates and assumptions as to (a) the expected termof the option, (b) the expected volatility of the price of the underlyingstock, (c) the risk-free interest rate for the expected term of the optionand (d) pre-vesting forfeiture rates.

 

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

 

The following table sets forth the weighted-averageassumptions used to calculate the fair value of options granted for the threeand six month periods ended June 30, 2008 and 2007:

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected stock price  volatility  |       | 39%                                                |       | 42%                                              |       | 39% |   | 42% |   |
| Risk free interest  rate(s)       |       | 1.9% - 3.7%                                        |       | 4.7% - 5.1%                                      |       | 1.9% - 3.7% |   | 4.7% - 5.1% |   |
| Expected life of  options (years) |       | 4.4                                                |       | 4.3                                              |       | 4.4 |   | 4.3 |   |

 

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

 

***Impairment of Assets.***Covance reviews its long-lived assets other thangoodwill and other indefinite lived intangible assets for impairment, whenevents or changes in circumstances occur that indicate that the carrying valueof the asset may not be recoverable.  Theassessment of possible impairment is based upon Covance’s judgment of itsability to recover the asset from the expected future undiscounted cash flowsof the related operations.  Actual futurecash flows may be greater or less than estimated.

 

Covance performs anannual test for impairment of goodwill and other indefinite lived intangibleassets during the fourth quarter.  Thistest is performed by comparing, at the reporting unit level, the carrying valueof the reporting unit to its fair value. Covance assesses fair value based upon its estimate of the present valueof the future cash flows that it expects to be generated by the reportingunit.  The most recent test forimpairment performed for 2007 did not identify any instances of impairment andthere were no events through June 30, 2008 that warranted areconsideration of our impairment test results. However, changes in expectations as to the present value of thereporting unit’s future cash flows might impact subsequent years’ assessmentsof impairment.

 

18

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***Defined Benefit Pension Plans******.***Covance sponsors defined benefit pensionplans for the benefit of its employees at three foreign subsidiaries, as wellas a non-qualified supplemental executive retirement plan and a post-employmentretiree health and welfare plan for the benefit of eligible employees atcertain U.S. subsidiaries. The measurement of the related benefit obligationand net periodic benefit cost recorded each year is based upon actuarialcomputations, which require the use of judgment as to certain assumptions. Themore significant of these assumptions are: (a) the appropriate discountrate to use in computing the present value of the benefit obligation; (b) theexpected return on plan assets (for funded plans); and (c) the expectedfuture rate of salary increases (for pay-related plans). Actual results (suchas the return on plan assets, future rate of salary increases and planparticipation 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.

 

Set forth below is a discussion of the impact that (a) differencesbetween assumed results and actual results and (b) assumption changes havehad on our results of operations for the years ended December 31, 2007,2006 and 2005 and on the financial position of the plans as of December 31,2007 and 2006 for our United Kingdom defined benefit pension plans (the largestof our defined benefit-type pension plans).

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

 
| ** **                                                                   | ** ** | **United Kingdom Plans** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                          | ** ** | **2006 to 2007**         | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| Change in discount rate                                                      |       | $                                  | (1.3       | ) | $ | 2.4 |   | $ | 0.4 |   |
| Change in expected rate  of return on assets                                 |       | —                             |       | — |   | (0.6 | ) |
| Change in rate of  salary increases                                          |       | —                             |       | — |   | 0.4 |   |
| Other, including  differences between actual experience and assumptions used |       | 0.3                                |       | (1.9 | ) | (0.4 | ) |
| Foreign currency  exchange rate changes                                      |       | 0.4                                |       | — |   | — |   |
| Net change in periodic  benefit cost                                         |       | $                                  | (0.6       | ) | $ | 0.5 |   | $ | (0.2 | ) |
|                                                                         |       |                               |       |   |   |   |   |
|                                                                         |       | **United Kingdom Plans** |       |
|                                                                         |       | **2007**                           | ** ** | **2006** | ** ** | **2005** |   |
| Weighted average  assumptions used to determine benefit obligation:          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                |       | 5.50%                              |       | 5.25 | % | 5.00 | % |
| Salary increases                                                             |       | 4.25%                              |       | 4.00 | % | 4.00 | % |

 

19

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The change in the projected benefit obligation from period to period isattributable to the following:

 
| ** **                                                                   | ** ** | **United Kingdom Plans** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                          | ** ** | **2006 to 2007**         | ** ** | **2005 to 2006** | ** ** |
| Projected benefit  obligation, beginning of year                             |       | $                                  | 141.3      |   | $ | 119.8 |   |
| Service/interest cost  components of net periodic benefit cost in year       |       | 13.5                               |       | 12.2 |   |
| Benefits paid                                                                |       | (2.1                               | )          | (1.3 | ) |
| Increase in discount  rate                                                   |       | (8.5                               | )          | (8.6 | ) |
| Other, including  differences between actual experience and assumptions used |       | 6.3                                |       | 3.9 |   |
| Foreign currency  exchange rate changes                                      |       | 1.6                                |       | 15.3 |   |
| Projected benefit  obligation, end of year                                   |       | $                                  | 152.1      |   | $ | 141.3 |   |

 

**Foreign Currency Risks**

 

Since Covanceoperates on a global basis, it is exposed to various foreign currency risks.Two specific risks arise from the nature of certain contracts. The first riskcan occur when Covance executes contracts with its customers where thecontracts are denominated in a currency different than the local currencies ofthe Covance subsidiaries performing work under the contracts. As a result, revenuerecognized for services rendered may be denominated in a currency differentfrom the currencies in which the subsidiaries’ expenses are incurred.Fluctuations in exchange rates (from those in effect at the time the contractis executed and pricing is established to the time services are rendered andrevenue is recognized) can affect the subsidiary’s net revenues and resultantearnings. This risk is generally applicable only to a portion of the contractsexecuted by Covance’s subsidiaries providing clinical services. Historically,fluctuations in exchange rates from those in effect at the time contracts wereexecuted have not had a material effect upon Covance’s consolidated financialresults. See “Risk Factors”.

 

We also have othercross-currency contracts executed by other Covance subsidiaries where theforeign currency amounts billed are determined by converting local currencyrevenue amounts to the contract billing currency using the exchange rates ineffect at the time services are rendered. These contracts do not give rise to foreign currency denominated revenueand local currency denominated expenses, but they do give rise to a second typeof risk.  This second type of riskresults from the passage of time between the invoicing of customers under bothof these types of contracts and the ultimate collection of customer paymentsagainst such invoices. Because such invoices are denominated in a currencyother than the subsidiary’s local currency, Covance recognizes a receivable atthe time of invoicing for the local currency equivalent of the foreign currencyinvoice amount as of the invoice date. Subsequent changes in exchange ratesfrom the time the invoice is prepared to the time payment from the customer isreceived will result in Covance receiving either more or less in local currencythan the local currency equivalent of the invoice amount at the time theinvoice was prepared and the receivable was recorded. This difference isrecognized by Covance as a foreign currency transaction gain or loss, asapplicable, in the 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 currencyand the U.S. dollar will affect the translation of each foreign subsidiary’sfinancial results into U.S. dollars for purposes of reporting Covance’sconsolidated financial results. The process by which each foreign subsidiary’sfinancial results are translated into U.S. dollars is as follows: incomestatement accounts are translated at average exchange rates for the period;balance sheet asset and liability accounts are translated at end of periodexchange rates; and equity accounts are translated at historical exchangerates. 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 sheetand is necessary to keep the foreign balance sheet stated in U.S. dollars inbalance.  At June 30, 2008,accumulated other comprehensive income on the consolidated balance sheetincludes the cumulative translation account balance of $61.4 million.

 

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**Operating Expenses and Reimbursable Out-of-Pockets**

 

Covance segregates itsrecurring operating 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 andrelated benefits, other direct costs, shipping and handling fees, and anallocation of facility charges and information technology costs, and excludesdepreciation and amortization. Cost of revenue, as a percentage of netrevenues, tends and is expected to fluctuate from one period to another, as aresult of changes in labor utilization and the mix of service offeringsinvolving hundreds of studies conducted during any period of time. Selling,general and administrative expenses consist primarily of administrative payrolland related benefit charges, advertising and promotional expenses,administrative travel and an allocation of facility charges and informationtechnology costs, and excludes depreciation and amortization.

 

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

 

**Quarterly Results**

** **

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

 

**Results of Operations**

** **

***Three Months Ended June 30,2008 Compared with Three Months Ended June 30, 2007. ***Net revenues increased14.6%, or 10.8% excluding the impact of foreign exchange rate variances betweenboth periods, to $436.9 million for the three months ended June 30,2008 from $381.1 million for the corresponding 2007 period.  Net revenues from Covance’s early developmentsegment grew 11.5%, or 10.6% excluding the impact of foreign exchange ratevariances between both periods.  Growth was drivenby a 13.3% increase in our preclinical laboratory services net revenues, resultingfrom an increase in available capacity due to our facility expansions,sustained high levels of client satisfaction resulting in more repeat business,and favorable market conditions. Net revenues from Covance’s late-stage development segment grew 17.8%,or 11.1% excluding the impact of foreign exchange rate variances between bothperiods.  Growth in the segment was led by a strongperformance in our central laboratory services, where net revenues grew 29.3%on increased investigator and patient enrollment, overall higher level of studyactivity and the favorable impact of foreign exchange rate variances betweenboth periods.  Also contributing togrowth was a strong performance in our clinical development services, where netrevenues grew 20.1% on increased study activity and the favorable impact offoreign exchange rate variances between both periods.  Negatively impacting growth over the prioryear was the divestiture of our cardiac safety service offering in November 2007,which contributed $6.1 million of net revenue in the three months ended June 30,2007, and weakness in our commercialization services, where net revenuesdeclined 5.8% over the prior year due to a low number of new biological servicelaunches in the marketplace.

 

Cost of revenue increased14.3% to $286.9 million or 65.7% of net revenues for the three monthsended June 30, 2008 as compared to $251.1 million or 65.9% of netrevenues for the corresponding 2007 period. Gross margins increased by 20 basis points to 34.3% for the three monthsended June 30, 2008 from 34.1% for the corresponding 2007 period.

 

Overall, selling, general and administrative expensesincreased 12.3% to $65.2 million for the three months ended June 30,2008 from $58.1 million for the corresponding 2007 period.  As a percentage of net revenues, selling,general and administrative expenses decreased 30 basis points to 14.9% for thethree month period ended June 30, 2008 from 15.2% for the corresponding2007 period. This percentage can vary from quarter to quarter depending on thetiming and nature of various professional fees and other discretionaryspending.  The 30 basis point decreaseover the corresponding 2007 period also reflects increased efficiencies gainedfrom the leveraging of our existing support functions across a larger base ofrevenues.

 

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Depreciation and amortization increased 5.3% to$17.3 million or 4.0% of net revenues for the three months ended June 30,2008 from $16.5 million or 4.3% of net revenues for the corresponding 2007period primarily as a result of higher levels of capital spending over the lasttwelve months.

 

Income from operations increased 21.5% to$67.5 million or 15.4% of net revenues for the three months ended June 30,2008 from $55.5 million or 14.6% of net revenues for the corresponding2007 period.  Income from operations fromCovance’s early development segment increased $5.2 million or 10.7% to$54.2 million or 25.4% of net revenues for the three months ended June 30,2008 from $49.0 million or 25.6% of net revenues for the corresponding2007 period.  The $5.2 millionincrease over the prior year was driven by additional income from operationsresulting fromthe 13.3% growth in preclinical laboratory services net revenues explainedabove.  Income from operationsfrom Covance’s late-stage development segment increased $11.1 million or34.8% to $43.0 million or 19.2% of net revenues for the three months endedJune 30, 2008 from $31.9 million or 16.8% of net revenues for thecorresponding 2007 period.  Growth wasdriven by centrallaboratory and clinical development services, where income from operations grew48.0% and 46.6%, respectively, over the prior year on the increase in netrevenues explained above.  Partiallyoffsetting this growth was the weakness in our commercialization services,where operating margin declined 28.5% over the prior year on the decline in netrevenues explained above. Corporate expense increased $4.4 millionto $29.8 million or 6.8% of net revenues for the three months ended June 30,2008 from $25.4 million or 6.7% of net revenues for the three months endedJune 30, 2007.  Included inCorporate expense is stock-based compensation expense of $6.5 million or1.5% of net revenues for the three months ended June 30, 2008, as comparedto $5.6 million or 1.5% of net revenues for the corresponding 2007period.  The higher level of Corporateexpenses for the three months ended June 30, 2008 as compared to thecorresponding 2007 period also reflects an increase in compensation-relatedexpenses and investments in infrastructure to support higher levels of currentand expected future growth.

 

Other income, net increased $0.8 million to$2.9 million for the three months ended June 30, 2008 from$2.1 million for the corresponding 2007 period primarily as a result of anadditional $0.9 million gain from the receipt of contingent considerationon transferred backlog on the November 2007 sale of Covance’s cardiacsafety service offering and a $0.4 million increase in net foreignexchange transaction gains, partially offset by a $0.3 million increase ininterest expense.

 

Covance’s effective tax rate for the three monthsended June 30, 2008 was 28.9% compared to 29.2% for the corresponding 2007period.  The year over year decrease inCovance’s effective tax rate is attributable to a number of factors, includingthe mix of our pre-tax earnings across various tax jurisdictions and otherplanning initiatives, slightly offset by the higher effective tax rate on thegain on sale of business.

 

Covance has a minority equity position in Bio-ImagingTechnologies, Inc. (“BITI”).  BITIuses proprietary medical imaging technologies to process and analyze medicalimages, and also provides other services, including the data-basing andregulatory submission of medical images, quantitative data and text.  For each of the three month periods ended June 30,2008 and 2007, Covance recognized income of $0.1 million representing itspro rata share of BITI’s earnings.

 

Covance has a minority equity position in NoveprimLimited (“Noveprim”), a supplier of research products.  For the three month periods ended June 30,2008 and 2007, Covance recognized $0.7 million and $0.6 million,respectively, representing its share of Noveprim’s earnings, less the eliminationof profit on inventory purchased from Noveprim and still on hand at Covance at June 30,2008 and 2007.

 

Net income of $50.9 million for the three monthsended June 30, 2008 increased $9.4 million or 22.6% as compared to$41.5 million for the corresponding 2007 period.

 

***Six Months Ended June 30,2008 Compared with Six Months Ended June 30, 2007. ***Net revenues increased14.9%, or 11.3% excluding the impact of foreign exchange rate variances betweenboth periods, to $849.3 million for the six months ended June 30,2008 from $739.5 million for the corresponding 2007 period.  Net revenues from Covance’s early developmentsegment grew 12.1%, or 11.1% excluding the impact of foreign exchange ratevariances between both periods.  Growth was drivenby a 13.9% increase in our preclinical laboratory services net revenues,resulting from an increase in available capacity due to our facilityexpansions, sustained high levels of client satisfaction resulting in morerepeat business, and favorable market conditions.  Net revenues from Covance’s late-stagedevelopment segment increased 17.6%, or 11.4% excluding the impact of foreignexchange rate variances between both periods. Growthin the segment was led by a strong performance in our central laboratoryservices, where net revenues grew 30.1% on increased investigator and patientenrollment, overall higher level of study activity and the favorable impact offoreign exchange rate variances between both periods.  Also contributing to 

 

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growthwas a strong performance in our clinical development services, where netrevenues grew 18.0% on increased study activity and the favorable impact offoreign exchange rate variances between both periods.  Negatively impacting growth over the prioryear was the divestiture of our cardiac safety service offering in November 2007,which contributed $11.7 million of net revenue in the six months ended June 30,2007, and weakness in our commercialization services, where net revenues declined4.6% over the prior year due to a low number of new biological service launchesin the marketplace.

 

Cost of revenue increased15.4% to $560.2 million or 66.0% of net revenues for the six months ended June 30,2008 as compared to $485.5 million or 65.6% of net revenues for thecorresponding 2007 period.  Gross marginsdecreased by 40 basis points to 34.0% for the six months ended June 30,2008 from 34.4% for the corresponding 2007 period.

 

Overall, selling, general and administrative expensesincreased 9.1% to $124.3 million for the six months ended June 30,2008 from $113.9 million for the corresponding 2007 period.  As a percentage of net revenues, selling,general and administrative expenses decreased 80 basis points to 14.6% for thesix months ended June 30, 2008 from 15.4% for the corresponding 2007period. This percentage can vary from quarter to quarter depending on thetiming and nature of various******professional fees and other discretionaryspending.  The 80 basis point decreaseover the corresponding 2007 period also reflects increased efficiencies gainedfrom the leveraging of our existing support functions across a larger base ofrevenues.

 

Depreciation and amortization increased 6.5% to$34.7 million or 4.1% of net revenues for the six months ended June 30,2008 from $32.6 million or 4.4% of net revenues for the corresponding 2007period primarily as a result of higher levels of capital spending over the lasttwelve months.

 

Income from operations increased 21.0% to$130.2 million or 15.3% of net revenues for the six months ended June 30,2008 from $107.6 million or 14.5% of net revenues for the corresponding2007 period.  Income from operations fromCovance’s early development segment increased $12.1 million or 13.1% to$104.8 million or 25.2% of net revenues for the six months ended June 30,2008 from $92.7 million or 25.0% of net revenues for the corresponding2007 period.  The $12.1 millionincrease over the prior year was driven by additional income from operationsresulting fromthe 13.9% growth in preclinical laboratory services net revenues explainedabove.  Income from operationsfrom Covance’s late-stage development segment increased $20.8 million or34.0% to $81.9 million or 18.9% of net revenues for the six months ended June 30,2008 from $61.1 million or 16.6% of net revenues for the corresponding2007 period.  Growth was driven by central laboratoryand clinical development services, where income from operations grew 54.4% and8.6%, respectively, over the prior year on the increase in net revenuesexplained above.  Partially offsettingthis growth was the weakness in our commercialization services, where operatingmargin declined 21.6% over the prior year on the decline in net revenuesexplained above.  Corporateexpense increased $10.3 million to $56.5 million or 6.6% of netrevenue for the six months ended June 30, 2008 from $46.2 million or6.3% of net revenue for the six months ended June 30, 2007.  Included in Corporate expense is stock-basedcompensation expense of $12.6 million or 1.5% of net revenues for the sixmonths ended June 30, 2008, as compared to $11.1 million or 1.5% ofnet revenues for the corresponding 2007 period. The higher level of Corporate expenses for the six months ended June 30,2008 as compared to the corresponding 2007 period also reflects an increase incompensation-related expenses and investments in infrastructure to supporthigher levels of current and expected future growth.

 

Other income, net increased $5.1 million to$9.6 million for the six months ended June 30, 2008 from$4.4 million for the corresponding 2007 period, primarily as a result ofan additional $3.9 million gain from the receipt of contingentconsideration on transferred backlog on the November 2007 sale of Covance’scardiac safety service offering and a $1.6 million increase in net foreignexchange transaction gains, partially offset by a $0.4 million increase ininterest expense.

 

Covance’s effective tax rate for the six months ended June 30,2008 was 29.4% compared to 29.3% for the corresponding 2007 period.  The year over year increase in Covance’seffective tax rate is attributable to a number of factors, including the highereffective tax rate on the gain on sale of business and the mix of our pre-taxearnings across various tax jurisdictions.

 

Covance has a minority equity position in Bio-ImagingTechnologies, Inc. (“BITI”).  BITIuses proprietary medical imaging technologies to process and analyze medicalimages, and also provides other services, including the data-basing andregulatory submission of medical images, quantitative data and text.  During the six month periods ended June 30,2008 and 2007, Covance recognized income of $0.3 million and$0.2 million, respectively, representing its pro rata share of BITI’searnings.

 

Covance has a minority equity position in NoveprimLimited (“Noveprim”), a supplier of research products.  For the six month periods ended June 30,2008 and 2007, Covance recognized $1.0 million and $1.1 million,respectively, representing 

 

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its share of Noveprim’s earnings, less the eliminationof profit on inventory purchased from Noveprim and still on hand at Covance at June 30,2008 and 2007.

 

Net income of $100.0 million for the six monthsended June 30, 2008 increased $19.6 million or 24.3% as compared to$80.4 million for the corresponding 2007 period.

 

**Liquidity andCapital Resources**

** **

Cash and cash equivalents at June 30, 2008 and December 31,2007 were $195.7 million and $319.5 million, respectively.  Amounts are principally invested inshort-term money market funds.  Covance’sexpected primary cash needs on both a short and long-term basis are for capitalexpenditures, expansion of services, possible future acquisitions, geographicexpansion, working capital and other general corporate purposes, includingpossible share repurchases.  Covance’s$75.0 million revolving credit facility (the “Credit Facility”) expires in June 2009and may be expanded to $125.0 million at Covance’s election. Covance believescash on hand plus cash from operations and available borrowings under theCredit Facility will provide sufficient liquidity for the foreseeablefuture.  At June 30, 2008, therewere $35.0 million of outstanding borrowings and $1.1 million ofoutstanding letters of credit under the Credit Facility.  At December 31, 2007, there were nooutstanding borrowings and $1.1 million of outstanding letters of creditunder the Credit Facility.  Interest onall outstanding borrowings under the Credit Facility is based upon the LondonInterbank Offered Rate (“LIBOR”) plus a 75 basis point margin and approximated3.42% per annum during the six months ended June 30, 2008.  The Credit Facility contains variousfinancial and other covenants.  At June 30,2008, Covance was in compliance with 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.

 

During the six months ended June 30, 2008,Covance’s operations provided net cash of $85.8 million, an decrease of$6.0 million from the corresponding 2007 period. The change in netoperating assets used $54.1 million in cash during the six months ended June 30,2008, primarily due to an increase in unbilled services, accounts receivableand inventory and a decrease in accrued incentive compensation and accountspayable, partially offset by an increase in other accrued expenses.  The change in net operating assets used $32.1 millionin cash during the six months ended June 30, 2007, primarily due to anincrease in accounts receivable, unbilled services and other current assets,partially offset by an increase in unearned revenue.  Covance’s ratio of current assets to currentliabilities was 1.83 at June 30, 2008 and 2.15 at December 31, 2007.

 

Investing activities for the six months ended June 30,2008 used $139.1 million, compared to using $61.8 million for thecorresponding 2007 period.  Capitalspending for the first six months of 2008 totaled $143.2 million, and wasprimarily for the expansion of our preclinical facilities in North America andEurope, outfitting of new facilities, upgrade of existing equipment, and thepurchase of new equipment, hardware and software.  Approximately $123.0 million of capitalspending in the first six months of 2008 represents expenditures primarilyrelated to ongoing significant facility expansions and transformationalinformation technology projects that have not yet been placed in service.  Capital spending for the corresponding 2007period totaled $61.8 million, and was primarily for the expansion of ourpreclinical facilities in North America and Europe, outfitting of newfacilities, upgrade of existing equipment, and the purchase of new equipment,hardware and software for newly hired employees.  Investing activities for the six months endedJune 30, 2008 also included $3.9 million of additional proceedsreceived during the period reflecting contingent consideration related totransferred backlog from the sale of Covance’s cardiac safety service offeringon November 28, 2007.

 

Financingactivities for the six months ended June 30, 2008 and 2007 used$80.7 million and $41.9 million, respectively.  During the six months ended June 30, 2008,$126.7 million was used to purchase into treasury 1,500,000 shares ofcommon stock under the share buyback program authorized by Covance’s Board ofDirectors and $3.7 million was used to purchase into treasury44,796 shares of common stock in connection with employee benefit plans;partially offset by $8.4 million in proceeds from the exercise of stockoptions, $3.4 million from employee contributions to the Company’semployee stock purchase plan and $2.9 million in excess tax benefitsrealized on the exercise of stock options. Additionally, Covance borrowed $43.0 million under the CreditFacility during the first quarter of 2008 to partially fund the purchase intotreasury of common stock and repaid $8.0 million of these borrowingsduring the second quarter of 2008, for net borrowings of $35.0 millionduring the first half of 2008.  Duringthe six months ended June 30, 2007, $61.4 million was used topurchase into treasury 977,000 shares of common stock under the sharebuyback program authorized by Covance’s Board of Directors and the purchaseinto treasury of 28,590 shares of common stock in connection with employeebenefit plans; partially offset by $13.4 million in proceeds from theexercise of stock options, $3.3 million in excess tax benefits realized onthe exercise of stock options and $2.8 million from employee contributionsto the Company’s employee stock purchase plan.

 

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**Inflation**

** **

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

 

**Recently Issued Accounting Standards**

 

In September 2006,the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132(R),* (“SFAS158”). As of December 31, 2006, Covance has adopted the recognition anddisclosure provisions of SFAS 158, which require an employer to recognize 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 to recognize changes in the funded status of the plan in theyear in which such changes occur through other comprehensive income. Theadoption of SFAS 158 did not have an impact on our consolidated results ofoperations.  SFAS 158 also requires,effective for fiscal years ending after December 15, 2008, that themeasurement of the over funded or under funded status of a plan be made as ofthe employer’s fiscal year end and not as of an earlier measurement date.  Covance will be required to conform themeasurement dates of its plans to December 31st for its fiscalyear ending December 31, 2008. Covance does not expect this change inmeasurement dates to have a material impact on its consolidated results of operationsor financial position.

 

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

 

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

 

***Forward Looking Statements.****Statements in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations, as well as in certain other parts of thisQuarterly Report on Form 10-Q that look forward in time, are forwardlooking statements made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward looking statements includestatements concerning plans, objectives, goals, strategies, future events orperformance, expectations, predictions, and assumptions and other statementswhich are other than statements of historical facts. All such forward lookingstatements are based on the current expectations of management and are subjectto, and are qualified by, risks and uncertainties that could cause actualresults to differ materially from those expressed or implied by thosestatements. These risks and uncertainties include, without limitation,competitive factors, outsourcing trends in the pharmaceutical industry, levelsof industry research and development spending, the Company’s ability tocontinue to attract and retain qualified personnel, the fixed price nature ofcontracts or the loss of large contracts, risks associated with acquisitionsand investments, the consummation of the joint venture with Wuxi PharmaTech,the Company’s ability to increase order volume, the pace of translation oforders into revenue in late-stage development services, and other factorsdescribed in Covance’s filings with the Securities and Exchange Commission, includingits Annual Report on Form 10-K.*

 

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**Item 3.  Quantitative and Qualitative Disclosure AboutMarket Risk**

 

For the six months ended June 30, 2008,approximately 42% of our net revenues were derived from our operations outsidethe United States.  We do not engage inmaterial or long-term derivative or hedging activities related to our potentialforeign exchange exposures.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Foreign Currency Risks” for a more detailed discussion of our foreign currencyrisks and exposures.

 

**Item 4.  Controls and Procedures**

 

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

 

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** **

**Part II.Other Information**

 

**Item1a.  Risk Factors**

 

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

** **

**Changes in governmentregulation or in practices relating to the pharmaceutical industry coulddecrease the need for the services we provide.**

** **

Governmental agencies throughout the world, includingin the United States, strictly regulate the drug development process.  Our business involves helping pharmaceuticaland biotechnology companies navigate the regulatory drug approval process.  Changes in regulation, such as a relaxationin regulatory requirements or the introduction of simplified drug approvalprocedures, or an increase in regulatory requirements that we have difficultysatisfying or that make our services less competitive, could eliminate or substantiallyreduce the demand for our services. Also, if government efforts to contain drugcosts and pharmaceutical and biotechnology company profits from new drugs, ourcustomers may spend less, or reduce their growth in spending on research anddevelopment. 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.

 

**Failureto comply with existing regulations could result in a loss of revenue orearnings or in increased costs.**

 

Any failure on our part to comply with applicableregulations could result in the termination of on-going research or thedisqualification of data for submission to regulatory authorities.  For example, if we were to fail to properlymonitor compliance by clinical trial investigators with study protocols, thedata collected from that trial could be disqualified.  If this were to happen, we could becontractually required to repeat the trial at no further cost to our customer,but at substantial cost to us.

 

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

 

Many of our contractsprovide for services on a fixed price or fee-for-service with a cap basis andthey may be terminated or reduced in scope either immediately or uponnotice.  Cancellations may occur for avariety of reasons, including:

 
| · |   | the failure of products  to satisfy safety requirements;                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------|
| · |   | unexpected or undesired  results of the products;                                                       |
| · |   | insufficient patient enrollment;                                                                        |
| · |   | insufficient  investigator recruitment;                                                                 |
| · |   | the client’s decision  to terminate the development of a product or to end a particular study; and |
| · |   | our failure to perform  properly our duties under the contract.                                         |

 

The loss, reduction inscope or delay of a large contract or the loss or delay of multiple contractscould materially adversely affect our business, although our contractsfrequently entitle us to receive the costs of winding down the terminatedprojects, as well as all fees earned by us up to the time of termination.  Some contracts also entitle us to a terminationfee.

 

**We may bear financial risk if we under price ourcontracts or overrun cost estimates.**

 

Since our contracts areoften structured as fixed price or fee-for-service with a cap, we bear thefinancial risk if we initially under price our contracts or otherwise overrunour cost estimates.  Such under pricingor significant cost overruns could have a material adverse effect on ourbusiness, results of operations, financial condition, and cash flows.

 

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**We may not be able to successfully develop andmarket or acquire new services.**

 

We may seek to developand market new services that complement or expand our existing business orexpand our service offerings through acquisition. If we are unable to developnew services and/or create demand for those newly developed services, or toexpand our service offerings through acquisition, our future business, resultsof operations, financial condition, and cash flows could be adversely affected.

 

**Ourquarterly operating results may vary.**

 

Our operating resultsmay vary significantly from quarter to quarter and are influenced by factorsover which we have little control such as:

 

·      exchangerate fluctuations;

·      thecommencement, completion or cancellation of large contracts;

·      theprogress of ongoing contracts;

·      thetiming of and charges associated with completed acquisitions or other events;and

·      changesin the mix of our services.

 

We believe thatoperating results for any particular quarter are not necessarily a meaningfulindication of future results.  Whilefluctuations in our quarterly operating results could negatively or positivelyaffect the market price of our common stock, these fluctuations may not berelated to our future overall operating performance.

 

**We dependon the pharmaceutical and biotechnology industries**.

 

Our revenuesdepend greatly on the expenditures made by the pharmaceutical and biotechnologyindustries in research and development. Accordingly, economic factors and industry trends that affect ourclients in these industries also affect our business.  If companies in these industries were toreduce the number of research and development projects they outsource, ourbusiness could be materially adversely affected.

 

**Weoperate in a highly competitive industry.**

 

Competitors in the contract research organization industry range fromsmall, limited-service providers to full service global contract researchorganizations.  Our main competitionconsists of in-house departments of pharmaceutical companies, full-service andfunctional contract research organizations**,** anduniversities and teaching hospitals, although to a lesser degree.  We compete on a variety of factors,including:

 

·                  reputation for on-time quality performance and regulatory compliance;

·                  expertise and experience in specific areas;

·                  scope of service offerings;

·                  strengths in various geographic markets;

·                  price;

·                  technological expertise and efficient drug development processes;

·                  quality of facilities;

·                  ability to acquire, process, analyze and report data in an accuratemanner;

·                  ability to manage large-scale clinical trials both domestically andinternationally;

·                  expertise and experience in market access services; and

·                  size.

 

For instance, ourclinical development services have from time to time experienced periods ofincreased price competition which had a material adverse effect on Covance’slate-stage development profitability and consolidated net revenues and netincome.

 

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

 

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**We mayexpand our business through acquisitions.**

 

We review manyacquisition candidates and, in addition to acquisitions which we have alreadymade, we are continually evaluating new acquisition opportunities.  Factors which may affect our ability to growsuccessfully through acquisitions include:

 

·                  difficulties and expenses in connection with integrating the acquiredcompanies and achieving the expected benefits;

·                  diversion of management’s attention fromcurrent operations;

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

·                  acquisitions could be dilutive toearnings, or in the event of acquisitions made through the issuance of ourcommon stock to the shareholders of the acquired company, dilutive to thepercentage of ownership of our existing stockholders;

·                  potential losses resulting fromundiscovered liabilities of acquired companies not covered by theindemnification we may obtain from the seller;

·                  risks of not being able to overcomedifferences in foreign business practices, language and other cultural barriersin connection with the acquisition of foreign companies; and

·                  loss of key employees of the acquiredcompanies.

 

**We may beaffected by potential health care reform.**

 

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

 

Implementation of healthcare reform legislation that contain costs could limit the profits that can bemade from the development of new drugs. This could adversely affect research and development expenditures bypharmaceutical and biotechnology companies which could in turn decrease thebusiness opportunities available to us both in the United States and abroad. Inaddition, new laws or regulations may create a risk of liability, increase ourcosts or limit our service offerings.

 

**We relyon third parties for important services.**

 

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

 

**Ourrevenues and earnings are exposed to exchange rate fluctuations**.

 

We derive a largeportion of our net revenues from international operations.  For the six month period ended June 30,2008, we derived approximately 42% of our net revenues from outside the UnitedStates.  Our financial statements aredenominated 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 lossof our key personnel could adversely affect our business.**

 

Our successdepends to a significant extent upon the efforts of our senior management teamand other key personnel. The loss of the services of such personnel couldadversely affect our business.  Also,because of the nature of our business, our success is dependent upon our abilityto attract and retain technologically qualified personnel.  There is substantial competition forqualified personnel, and an inability to recruit or retain qualified personnelmay impact our ability to grow our business and compete effectively in ourindustry.

 

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**Contract research services create a risk ofliability**.

 

In contracting towork on drug development trials and studies, we face a range of potentialliabilities, for example:

 

·                  errors or omissions that create harmduring a trial to study volunteers or after a trial to consumers of the drugafter regulatory approval of the drug;

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

·                  errors or omissions from tests conductedfor the agrochemical and food industries;

·                  risks that animals in our breedingfacilities may be infected with diseases that may be harmful and even lethal tothemselves and humans despite preventive measures contained in our companypolicies for the quarantine and handling of imported animals; and

·                  errors and omissions during a trial thatmay undermine the usefulness of a trial or data from the trial or study.

 

Wealso contract with physicians, also referred to as investigators, to conductthe clinical trials to test new drugs on human volunteers.  These tests can create a risk of liabilityfor personal injury or death to volunteers, resulting from negative reactionsto the drugs administered or from professional malpractice by third partyinvestigators.  We believe that our risksin this area are generally reduced by the following:

 

·                  contract provisions entitling us to beindemnified or entitling us to a limitation of liability;

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

·                  our efforts to comply with variousregulatory requirements we must follow in connection with our business.

 

Contractualindemnifications generally do not protect us against liability arising fromcertain of our own actions, such as negligence or misconduct.  We could be materially and adversely affectedif we were required to pay damages or bear the costs of defending any claimwhich is not covered by a contractual indemnification provision or in the eventthat a party who must indemnify us does not fulfill its indemnificationobligations or which is beyond the level of our insurance coverage.  There can be no assurance that we will beable to maintain such insurance coverage on terms acceptable to us.

 

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

 

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

 

**Relianceon facilities.**

 

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

 

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**Relianceon air transportation**.

 

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

 

**Certainservice offerings and research products are dependent on limited sources ofsupply of services or products which if interrupted could affect our business.**

 

We depend on a limited number of suppliers for certainservices and for certain animal populations. Disruptions to the continuedsupply of these services or products may arise from export import restrictionsor embargoes, foreign political or economic instability, or otherwise.Disruption of supply could have a material adverse effect on our business.

 

**Actions of animal rights extremists may affect ourbusiness.**

 

Our early developmentservices utilize animals in preclinical testing of the safety and efficacy ofdrugs and also breed and sell animals for biomedical research.  Such activities are required for thedevelopment of new medicines and medical devices under regulatory regimes inthe United States, Europe, Japan and other countries.  Acts of vandalism and other acts by animalrights extremists who object to the use of animals in drug development couldhave a material adverse effect on our business.

 

**Our animal populations may suffer diseases thatcan damage our inventory, harm our reputation, result in decreased sales ofresearch products or result in other liability to us.**

 

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

 

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**Item 4.    Submission of Matters to a Vote of SecurityHolders**

** **

TheAnnual Meeting of Stockholders of Covance was held on May 8, 2008,pursuant to notice.

 

Twodirectors were reelected to the Board of Directors with the following votescast: Kathleen Bang received 57,247,697 votes for and 629,898 votes werewithheld; Gary Costley received 56,663,774 votes for and 1,213,821 votes werewithheld.  The following directors’ termsof office as a director continued after the meeting: Robert Barchi, Sandra L.Helton, Joe Herring, Irwin Lerner and Joseph Scodari.

 

Theshareholders approved the 2008 Non-Employee Directors Stock Option Plan (the “2008Director Option Plan”).  The 2008Director Option Plan received 45,679,210 votes for, 6,184,353 votes against,495,066 votes abstained and there were 5,518,966 broker non-votes.

 

Theshareholders ratified the appointment of Ernst & Young LLP as theCompany’s independent auditors with the following votes cast: 57,583,095 votesfor, 181,606 votes against and 112,894 votes abstained.

 

In addition,a shareholder proposal proposed by the People for the Ethical Treatment ofAnimals relating to import of nonhuman primates and exports of canines wasrejected, with no votes for, 57,877,595 votes against and no votes abstained.

 

**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 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:  August 1, 2008 | By:                       | /s/  Joseph L. Herring |   |
|                        | Joseph L. Herring         |
|                        | Chairman of the Board and |
|                        | Chief Executive Officer   |

 

 

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

 

 
| **Signature** | ** **            | **Title**                       | ** **                                | **Date** |
|---------------|-----------------------|---------------------------------|-------------------------------------------|----------|
|          |                  |                            |                                      |     |
| /s/           | Joseph  L. Herring    |                            |                                      |     |   |   |
|          | Joseph  L. Herring    |                            | Chairman  of the Board and                |     | August 1, 2008 |
|          |                  | Chief  Executive Officer        |                                      |     |
|          |                  | (Principal Executive  Officer)  |                                      |     |
|          |                  |                            |                                      |     |
| /s/           | William  E. Klitgaard |                            |                                      |     |   |   |
|          | William  E. Klitgaard |                            | Corporate  Senior Vice President and      |     | August 1, 2008 |
|          |                  | Chief  Financial Officer        |                                      |     |
|          |                  | (Principal  Financial Officer)  |                                      |     |
|          |                  |                            |                                      |     |
| /s/           | Michele  A. Kennedy   |                            |                                      |     |   |   |
|          | Michele A. Kennedy    |                            | Corporate Vice  President, Controller and |     | August 1, 2008 |
|          |                  | Chief  Accounting Officer       |                                      |     |
|          |                  | (Principal  Accounting Officer) |                                      |     |

 

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**EXHIBIT INDEX**

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

 

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