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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended June 30, 2002

INVERESK RESEARCH GROUP, INC.
(Exact name of registrant as specified in its charter)

919 460-9005
(Registrant’s telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    No

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Inveresk Research Group, Inc.

Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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Inveresk Research Group, Inc.

Consolidated Balance Sheets
(In thousands)

See accompanying notes to consolidated financial statements.

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Inveresk Research Group, Inc.

Consolidated Statements of Cash Flows (unaudited)
(In thousands)

See accompanying notes to consolidated financial statements.

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Inveresk Research Group, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)
(In thousands)

See accompanying notes to consolidated financial statements.

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

In this discussion, the terms “the Group”, “the Company”, “we”, “us” and “our” refer to Inveresk Research Group, Inc. and its subsidiaries, except where it is made clear that we mean only a particular company.

1.

Basis of Presentation

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In accordance with those rules and regulations, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The financial statements should be read in conjunction with our audited consolidated financial statements at and for the year ended December 30, 2001. The results of operations for the 13-week and 26-week periods ended June 30, 2002 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2002.

In 2001 the Group’s fiscal quarters ended on the last Sunday of each quarter. In 2002 our fiscal quarters end on the last calendar day of each quarter. In 2002 the second quarter contained 13 weeks and ended on June 30, 2002. The first quarter contained 13 weeks and ended on March 31, 2002. In 2001 the second quarter contained 13 weeks and ended on June 24, 2001. The first quarter contained 12 weeks and ended on March 25, 2001.

On June 25, 2002 the Group changed its ultimate parent company from a company organized in Scotland to a corporation organized in Delaware. This was accomplished through a share exchange transaction in which all the shareholders of Inveresk Research Group Limited (our former ultimate parent company) exchanged their shares for shares of common stock of Inveresk Research Group, Inc. (our new ultimate parent company). With the exception of the incurrence of stamp duty charges of $1.545 million, this transaction had no impact on the consolidated assets or liabilities of the Group. The accompanying financial statements have been prepared as if the change of ultimate parent company had taken place prior to the periods presented. Accordingly, the shareholders’ equity and earnings per share at the dates and for periods before June 25, 2002 are presented on the basis of the capital structure of Inveresk Research Group, Inc., calculated by multiplying the numbers of shares of Inveresk Research Group Limited outstanding at the dates and for the periods presented by the weighted average exchange ratio used in the share exchange transaction.

2.

Initial Public Offering

The Company completed its initial public offering of 12,000,000 shares of common stock, at a price of $13 per share, after June 30, 2002. We used the net proceeds of the offering, together with drawings under our new bank credit facility, to repay all of the outstanding principal and interest under our previously outstanding bank debt and under our 10% unsecured subordinated loan stock due 2008. Because the closing of the offering did not occur until the third quarter of 2002, the receipt of the net proceeds of the offering, and the use of those proceeds, is not reflected in the accompanying interim financial statements.

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

The following unaudited pro forma presentation is intended to reflect what our assets and liabilities would have been if on June 30, 2002 we had completed the initial public offering, the initial drawdown under our new bank credit facility and the related application of those funds to the repayment of debt.

On completion of the initial public offering, the Company recorded an extraordinary charge, net of tax, of approximately $1.467 million, attributable primarily to the elimination of deferred financing costs associated with the debt that was repaid and cancelled at the completion of the offering. That charge is not reflected in the accompanying financial statements, but it is reflected in the foregoing pro forma presentation.

3.

Summary of Significant Accounting Policies

Earnings (Loss) Per Share

Earnings (loss) per share is computed in accordance with FAS 128, “Earnings per Share”. FAS 128 requires presentation of both Basic Earnings per Share (Basic EPS) and Diluted Earnings per Share (Diluted EPS). Basic EPS is based on the weighted average number of shares of common stock outstanding during the year while Diluted EPS also includes the dilutive effect of common stock equivalents. The number of common stock equivalents not reflected in Diluted EPS because they were anti-dilutive were 1,570,099 in 2002 and 203,660 in 2001. Historical earnings (loss) per share have been computed assuming the historical outstanding shares in Inveresk Research Group Limited were converted to ordinary shares in Inveresk Research Group, Inc. using the conversion ratios applied when the change of ultimate parent company became effective.

Intangible assets

In July 2001, the FASB issued FAS 141, “Business Combinations”, and FAS 142, “Goodwill and Other Intangible Assets”. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. FAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of FAS 142. FAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

FAS 142 is effective from January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but instead tested for impairment at least annually in accordance with the provisions of FAS 142. We did not identify any intangible asset with indefinite lives. We continued to amortize goodwill and intangible assets acquired in business combinations completed before July 1, 2001 prior to the time FAS 142 took effect.

FAS 142 requires that we complete a first phase of the impairment review for goodwill by June 30, 2002. That required review was completed at the date of adoption of FAS 142 and annual impairment tests have also been completed during the second quarter of 2002 using balances recorded as at March 31, 2002. These did not result in any impairment of goodwill.

FAS 142 required that the net book value of intangible assets relating to the assembled workforce acquired in prior business contributions be transferred to goodwill when FAS 142 took effect on January 1, 2002. If FAS 142 had been applied from January 1, 2001 our amortization expense in the calendar year 2001 would have been reduced by approximately $7.91 million from the level we recorded under prior accounting rules. The following table contains a pro forma presentation of our income before extraordinary item, net income and related per share amounts, calculated as if FAS 142 had been in effect throughout the periods presented.

In accordance with FAS 128 there is no dilution shown in relation to the share options outstanding in the year ended December 30, 2001. This was because exercise of all the options concerned was conditional upon completion of a listing of the Company’s shares on a recognized stock exchange and this condition had not been satisfied by the end of 2001.

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

Other Recent Account Pronouncements

In June 2001, the Financial Accounting Standards Board issued FAS 143, “Accounting for Asset Retirement Obligations.” FAS 143 requires the fair value of a liability for asset retirement obligations to be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset.

FAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not have any significant asset retirement obligations and, accordingly, the adoption of FAS 143 is not expected to have any material impact on its results of operations or its financial position.

In April 2002, the FASB issued FAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” The principal change reflected in these pronouncements is that gains or losses from extinguishment of debt which are classified as extraordinary items by FAS 4 will no longer be classified as such. The provisions of FAS 145 are effective for fiscal years beginning after May 15, 2002 although early application of the Statement related to the rescission of FAS 4 is encouraged. The Company plans to adopt FAS 145 for its fiscal year ending December 31, 2003. When adopted, prior extraordinary items related to the extinguishment of debt will need to be reclassified.

4.

Shareholders’ Equity

As described in Note 1, during the quarter ended June 30, 2002, we completed a transaction that created a new ultimate parent company for our Group. All the outstanding shares of Inveresk Research Group Limited (our former ultimate holding company, organized in Scotland) were exchanged for shares of common stock of Inveresk Research Group, Inc. (our new ultimate parent company, organized in Delaware).

The capital structure is presented on the basis described in Note 1 and is as follows:

The increase of 301,507 shares during 2002 represents the exercise of options to acquire 301,507 shares at an exercise price of $0.21 per share.

On July 3, 2003, we completed our initial public offering of 12,000,000 shares of common stock. Immediately following this offering, we had 35,770,595 shares of common stock outstanding.

5.

Intangible Assets

The following table sets forth changes in intangible assets, including changes required when FAS 142 took effect (see Note 3 above).

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

6.

Credit Facilities and Debt

At June 30, 2002, we had in place the same bank credit facility as at December 30, 2001. Shortly after June 30, 2002, we received the net proceeds from our initial public offering. We then used those proceeds, a drawdown of $70 million under a new bank credit facility and cash on hand to repay and cancel all our outstanding debt under our old bank credit facility and the whole of the 10% unsecured subordinated loan stock due 2008.

As a result of these transactions, at July 5, 2002 our total bank debt was $70 million and we had no debt remaining in respect of the 10% unsecured subordinated loan stock due 2008.

The $70 million of bank debt drawn under our new bank credit facility is repayable in U.S. dollars and bears interest at LIBOR plus 1.25%. The total amount available to us under this facility is $75 million. The first scheduled principal repayment under the facility is due on June 30, 2004.

7.

Stock Option Plans

The Company issues options to employees pursuant to various stock option plans and arrangements. The objectives of these arrangements include attracting and retaining personnel and promoting the success of the Company by providing employees with the opportunity to acquire shares.

All options issued and outstanding at December 30, 2001 were issued by Inveresk Research Group Limited. Those options subsequently were exchanged for stock options issued by Inveresk Research Group, Inc. These replacement options had exercise prices, exercise periods and other terms substantially equal to those that were replaced. The data with respect to stock options set forth below gives effect to the issuance of the replacement options as if they had been issued at the same time as the options they replaced.

1,520,099 of the options became fully vested (immediately exercisable in full) upon completion of the Company’s initial public offering and will expire 10 years after the original date of grant. 50,000 will vest in equal annual installments over the three years from the original date of grant.

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Inveresk Research Group, Inc.

Notes to Consolidated Financial Statements
(dollars in thousands)

The following table summarizes the exercise prices of the options outstanding at June 30, 2002:

The weighted average exercise price of our outstanding stock options was $0.66 per share at June 30, 2002 and $0.22 at December 30, 2001.

In the quarter ended March 31, 2002, the terms of the options held by one individual were amended to enable him to exercise his options prior to the completion of our initial public offering. Compensation expense was recorded in respect of those options in the quarter ended March 31, 2002, reducing income from operations by $4.545 million and net income by $4.490 million.

In the quarter ended June 30, 2002, compensation expense of $19.383 million has been recorded in respect of the outstanding share options that vested in accordance with their terms. We recorded an additional compensation expense of $29.092 million in connection with our initial public offering, when the percentage equity interest held by certain members of our management team increased in accordance with the terms governing the original issuance of shares to those individuals.

8.

Analysis of tax charge

The Company’s consolidated effective tax rate differed from the federal statutory rate as set forth below: