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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 March 31, 2003

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 [x] No [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

     Yes [ ] No [x]

     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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Statements contained in this Form 10-Q that are forward-looking are based on current expectations that are subject to a number of uncertainties and risks and actual results may differ materially. Factors that might cause such a difference include but are not limited to risks associated with: the reduction in research and development activities by pharmaceutical and biotechnology clients, changes in government regulations, the effect of interest rate and foreign exchange rate fluctuations, our ability to attract and retain employees, the loss or delay of contracts due to economic uncertainty or other factors, our ability to efficiently manage backlog, our ability to expand our business through strategic acquisitions, competition within the industry and the potential adverse impact of healthcare reform.

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Inveresk Research Group, Inc.

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

     See accompanying notes to condensed consolidated financial statements.

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Inveresk Research Group, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except share data)

     See accompanying notes to condensed consolidated financial statements.

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Inveresk Research Group, Inc.

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

     See accompanying notes to condensed consolidated financial statements.

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Inveresk Research Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) and
Shareholders’ Equity (unaudited)
(In thousands, except share data)

     See accompanying notes to condensed consolidated financial statements.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

1. Description of Business

Inveresk Research Group, Inc. and its subsidiaries (collectively the “Company”) provide drug development services to companies in the pharmaceutical and biotechnology industries. Through the Company’s pre-clinical and clinical business segments, it offers a broad range of drug development services, including pre-clinical safety and pharmacology evaluation, laboratory sciences services and clinical development services. The Company is one of a small number of drug development service companies currently providing a comprehensive range of pre-clinical and clinical development services on a worldwide basis. The Company’s client base includes major pharmaceutical companies in North America, Europe, and Japan, as well as many biotechnology and specialty pharmaceutical companies.

2. Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed 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 December 31, 2002 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the audited consolidated financial statements at and for the year ended December 31, 2002 filed with the SEC on Form 10-K. The results of operations for the quarter ended March 31, 2003 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2003.

On June 25, 2002 there was a change in 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. (the current ultimate parent company). With the exception of the incurrence of U.K. stamp duty charges of $1.545 million, this transaction had no impact on the consolidated assets or liabilities of the Company. 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.

3. Summary of Significant Accounting Policies

Earnings (Loss) Per Share

Earnings (loss) per share is computed in accordance with Statements of Financial Accounting Standards (“FAS”) 128, “Earnings per Share”. FAS 128 requires presentation of both basic earnings

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

(loss) per share (“Basic EPS”) and diluted earnings (loss) per share (“Diluted EPS”). Basic EPS is based on the weighted average number of common shares outstanding during the year while Diluted EPS also includes the dilutive effect of share options. The number of share options not reflected in Diluted EPS because they were anti-dilutive was 11,000 in respect of the quarter ended March 31, 2003 and the number of share options not reflected in Diluted EPS because their exercise was conditional was 1,520,893 in respect of the quarter ended March 31, 2002. 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.

Goodwill

The Company follows the requirements set out in FAS 141, “Business Combinations”, and FAS 142, “Goodwill and Other Intangible Assets”. FAS 142 requires that we perform annual impairment tests on goodwill and intangible assets with indefinite lives. The most recent such review was completed during the second quarter of 2002 using balances recorded as at March 31, 2002. These reviews did not result in any changes to the carrying value of goodwill. A further review will be completed during the second quarter of 2003 using balances recorded as at March 31, 2003.

Other Recent Accounting Pronouncements

Accounting policy changes adopted on January 1, 2003

In June 2001, the Financial Accounting Standards Board (“FASB”) 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 was adopted by the Company on January 1, 2003. The Company does not have any significant asset retirement obligations and, accordingly, the adoption of FAS 143 did not have any material impact on its results of operations or its financial position.

In June 2002, the FASB issued FAS 146, “Accounting for Costs Associated with Disposal or Exit Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. FAS 146 provides that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, FAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3 until a liability has been incurred and establishes that fair value is the objective for initial measurement of the liability. However, this standard does not apply to costs associated with exit activities involving entities acquired under business combinations or disposal activities covered under FAS 144. The provisions of FAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted FAS 146 effective January 1, 2003. No such exit or disposal activities have been initiated since this date.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for the Company on January 1, 2003 and the recognition/measurements requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have a material impact on our financial position or results of operations.

In December 2002, the FASB issued FAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” which is an amendment of FAS 123, “Accounting for Stock-Based Compensation.” FAS 148 provides alternative methods of transition from the intrinsic value method of accounting for stock options prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees” to the fair value-based method of accounting required by FAS 123. The Company has decided not to move away from the intrinsic value method at present.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

4. Shareholders’ Equity

As described in Note 2, during the quarter ended June 30, 2002, we completed a transaction that created a new ultimate parent company for Inveresk Research Group Limited and its subsidiaries (the “Group”). All the outstanding shares of Inveresk Research Group Limited (the former ultimate holding company, organized in Scotland) were exchanged for shares of common stock of Inveresk Research Group, Inc. (the current 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 260,483 shares during 2003 resulted from the exercise of employee stock options to acquire 260,483 shares at an average exercise price of $0.25 per share.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

5. Credit Facilities and Debt

At March 31, 2003 the $62.5 million of bank debt drawn under our bank credit facility is repayable in U.S. dollars and bears interest at the London Inter-Bank Offered Rate (“LIBOR”) plus 1.25%. The total amount available to us under this facility is $75 million. The borrowings of a subsidiary company which had utilized this facility at March 31, 2003 were guaranteed by the Company, the principal trading subsidiaries in the group and certain intermediate holding companies. The first scheduled principal repayment under the facility is due on June 30, 2004.

6. Stock Options and Other Equity-Based Compensation Plans

The Company has issued options to employees pursuant to the Inveresk Research Group, Inc. 2002 Stock Option Plan and to non-executive directors pursuant to the Inveresk Research Group, Inc. 2002 Non-employee Directors Stock Option Plan. The objectives of these plans include attracting and retaining personnel and promoting the success of the Company by providing employees and non-executive directors with the opportunity to acquire shares.

All options issued prior to June 27, 2002 were issued by Inveresk Research Group Limited. Those options subsequently were exchanged for stock options issued by Inveresk Research Group, Inc. (the “replacement options”) under its 2002 Stock Option Plan on June 28, 2002. The replacement options had exercise prices, exercise periods and other terms substantially the same as 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.

The replacement options became fully vested (immediately exercisable in full) upon completion of the Company’s initial public offering and such options will expire 10 years after the original date of grant. At March 31, 2003 the number of replacement options remaining outstanding was 1,025,434. The Company has also issued options that vest in equal annual installments over the three years following the date of grant. At March 31, 2003 the amounts of these options outstanding are 35,000 shares at an option price of $13.00 per share, 1,007,730 at an option price of $10.60 per share, 3,500 at an option price of $16.35 per share and 7,500 at an option price of $20.14.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

The following table summarizes the exercise prices of the options outstanding at March 31, 2003:

The weighted average exercise price of our outstanding stock options was $5.58 per share at March 31, 2003 and $5.05 at December 31, 2002.

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.

7. Income Taxes

Significant components of the Company’s deferred tax assets and liabilities are as follows:

In the first quarter of 2003, the Company recorded a deferred tax asset of $2.834 million less a valuation allowance of $2.834 million in respect of U.K. share option deductions.

The balance sheet classification of net deferred tax liabilities is as follows:

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

Our provision for income taxes is affected by various factors. We receive research and development tax credits in Canada and the United Kingdom. The level of such credits is dependent upon the amount of qualifying costs in these jurisdictions and therefore the tax credits are not a constant percentage of income before income taxes. In addition, we expect to receive tax deductions equal to the gains made by United Kingdom employees on exercising their stock options in 2003. These deductions will arise at the time of exercise of the options and will depend on the market price of our stock at the time of exercise. Such amounts may therefore fluctuate from period to period.

As a consequence of these factors, our provision for income taxes expressed as a percentage of income before income taxes may fluctuate from period to period.

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

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

8. Segment Reporting

The Company is a full-service drug development services group serving the pharmaceutical, biotechnology and medical device industries. Our drug development services comprise two operating segments — pre-clinical and clinical. Pre-clinical services include pre-clinical safety and pharmacology evaluation as well as laboratory sciences services. Pre-clinical services are performed in Edinburgh, Scotland and Montreal, Canada. Clinical services consist of designing, monitoring, and managing trials of new pharmaceutical and biotechnology products on humans, and providing clinical data management, biostatistical, product registration, and pharmacovigilance services. Clinical service activities and revenues are performed and earned primarily in the United States and Europe. The Company’s European clinical operations are performed in Maidenhead, England and Edinburgh, Scotland with its primary satellite offices in Brussels, Belgium and Glasgow, Scotland. The operating results of the Company in the individual European countries apart from the United Kingdom are not material.

Financial data by segment are as follows:

The following table summarizes net service revenues and long-lived assets by geographic area.

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Inveresk Research Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company’s operations in Europe comprise operations in a number of countries that are co-ordinated from the United Kingdom. No European country is significant in terms of revenues generated or assets held apart from the United Kingdom.

The following table reconciles the above totals for net service revenues, segment income (loss), segment assets and long-lived assets to the appropriate figures in the financial statements.

No clients accounted for more than 10% of the Company’s consolidated net revenue for any of the periods covered by these financial statements.

9. Contingencies

From time to time we are subject to claims, suits and administrative proceedings arising in the ordinary course of business. We do not expect that any of the claims, suits or proceedings of which we have been notified will have a material adverse effect upon our operations or financial condition.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the corresponding section of our Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on February 18, 2003.

The information set forth and discussed below for the quarters ended March 31, 2003 and March 31, 2002 is derived from the Condensed Consolidated Financial Statements included under Item 1 above. The financial information set forth and discussed below is unaudited but includes all adjustments (consisting of normal recurring adjustments) which the Company’s management considers necessary for a fair presentation of the financial position and the operating results and cash flows for those periods. The Company’s results of operations for a particular quarter may not be indicative of the results that may be expected for other quarters or the entire year.

Overview

Effective June 25, 2002, we changed our ultimate parent company from a company organized in Scotland to a corporation organized in Delaware.

We completed our initial public offering of 12,000,000 shares of common stock, at a price of $13 per share, in the third quarter of 2002. The net proceeds from the offering, together with drawings under our new bank credit facility and existing cash resources, were used to repay all of the outstanding principal and interest at June 30, 2002 under our former bank facility and our 10% unsecured subordinated loan stock due 2008.

We were highly leveraged from the time of our management buyout in 1999 through to the time of the completion of our initial public offering on July 3, 2002. We also incurred significant additional debt in connection with our acquisition of ClinTrials in 2001. Our interest expense has therefore been high in relation to our income before taxes. We believe that, because of the size of our interest expense during the period preceding the completion of our initial public offering, our income from operations (i.e. before interest income and interest expenses) is a better measure of the past performance of our businesses than income (or loss) before income taxes or net income.

We operate in two segments for financial reporting purposes: pre-clinical and clinical. The following table shows a summary of our financial performance for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002.

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