INVERESK RESEARCH GROUP INC - 10-K Annual Report

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

As of June 30, 2003, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $320.8 million. As of February 17, 2004, there were outstanding 37,889,700 shares of the registrant’s common stock, $0.01 par value per share.

Portions of the company’s definitive proxy statement relating to its 2004 Annual Stockholders’ Meeting are incorporated herein by reference in Items 9 through 14.

Unless otherwise indicated, all references below to “we”, “us” and “our” refer to Inveresk Research Group, Inc, and its consolidated subsidiaries.

We are a leading provider of drug development services to companies in the pharmaceutical and biotechnology industries. Through our pre-clinical and clinical business segments, we offer a broad range of drug development services, including pre-clinical safety and pharmacology evaluation services, laboratory sciences services and clinical development services. We are one of a small number of drug development services companies currently providing a comprehensive range of pre-clinical and clinical development services on a worldwide basis. Our client base includes major pharmaceutical companies in North America, Europe and Japan, as well as many biotechnology and specialty pharmaceutical companies. We completed our initial public offering of common stock in July 2002.

Our pre-clinical development business was established over 36 years ago, employs approximately 1,800 people and operates from two principal facilities, one located in Tranent, Scotland and the other in Montreal, Canada. This business segment provides pre-clinical safety and pharmacology evaluation services and laboratory sciences services (including clinical support services). Based upon net service revenue, we estimate that we are the second largest provider of pre-clinical safety evaluation services in the world. Our pre-clinical business has a diverse client base, with no single client representing more than 10% of our net service revenue in 2003 or in 2002. More than 85% of the net service revenue from our pre-clinical business in 2002 and 2003 was generated from repeat clients.

Our clinical development business was established in 1988 and operates from 15 facilities located across the United States and Europe, employing approximately 1,000 people. This business segment conducts Phase I clinical trials and provides Phase II-IV clinical trials management services (including medical data sciences services and regulatory support). Our 62-bed clinic in Edinburgh, Scotland conducts a wide range of Phase I clinical trials and has completed an average of 11 first-in-man studies annually over the past five years. The global infrastructure of our clinical development business permits us to offer our clients multi-country Phase II-IV clinical trials, as well as smaller single-country projects.

Our business is not subject to significant seasonal fluctuations although historically, our earnings in the first quarter have tended to be lower than other quarters.

Prior to 1999 we operated as a division of SGS Société Générale de Surveillance SA. In September 1999 we were acquired in a management buyout supported by Candover Investments PLC. In April 2001, we acquired ClinTrials Research Inc., a Nasdaq traded company, for $115.1 million, net of cash acquired of $5.7 million. ClinTrials provided drug development services, with significant pre-clinical operations in Canada and clinical operations primarily in the United States and Europe. We subsequently implemented a major restructuring of ClinTrials’ clinical business and, since the time we acquired it, its profitability has improved significantly.

In July 2002, we completed our initial public offering of 12.0 million shares of common stock, at a price of $13 per share. Shortly before our initial public offering, we changed our ultimate parent company from a company organized in Scotland to a corporation organized in Delaware.

On July 29, 2003 we completed our acquisition of PharmaResearch Corporation, for $37.1 million in cash, net of cash acquired of $6.0 million. PharmaResearch was a U.S.-based drug development services company focused on providing Phase II-IV clinical trials and support services, principally in the areas of respiratory and infectious diseases.

On November 25, 2003 we completed a public offering of 11.5 million shares of common stock at $20 per share. Of the 11.5 million shares offered, 10.5 million were sold by existing shareholders, principally Candover Investments PLC and related Candover entities. One million new shares were issued by Inveresk Research Group, Inc.

Healthcare Industry Trends we Consider in Formulating our Corporate Strategy

The drug development services industry has evolved from providing limited pre-clinical and clinical trial services in the 1970s to a full-service industry today that encompasses broader relationships with clients, covering the entire drug development process, including pre-clinical safety evaluation, pharmacology, study design, clinical trial management, data collection, statistical analysis, product support and regulatory services. Pharmaceutical companies are now using drug development services companies not only to cover gaps in capacity, but also to increase their skills base, help to control costs and reduce drug development timelines.

There is a strong demand in the marketplace to treat diseases such as cancer and HIV as well as illnesses associated with aging such as osteoporosis, arthritis and Alzheimer’s disease. The development and testing of some of the compounds that treat such illnesses require complex clinical trials. In addition, the cost of developing therapies for chronic disorders, such as arthritis, Alzheimer’s disease and osteoporosis, is higher because the treatments must be studied for a longer period to demonstrate their effectiveness and to determine any possible long-term side effects. The complexity and expense of these trials prompts pharmaceutical and biotechnology companies to outsource all or a portion of these trials to drug development services organizations to take advantage of the experience and expertise of such organizations in conducting complicated trials.

Increases in global research and development expenditures by the major pharmaceutical companies have broadly tracked the increase in pharmaceutical revenues over the past ten years. The outsourcing of pre-clinical and clinical trials for pharmaceutical, biotechnology and medical device products is estimated to be growing at least as much as the rate of growth in global research and development expenditures by major pharmaceutical companies.

The United States, European and Japanese biotechnology industries and the number of drugs produced by them have grown substantially over the past decade. According to the Biotechnology Industry Organization, 35 new biotechnology drugs and vaccines received approval in 2002, compared with seven in 1993. The biotechnology industry is expected to increase its expenditure on drug development in the coming years. Biotechnology companies typically do not have the staff, operating procedures, experience or expertise in-house to conduct their own pre-clinical testing or clinical trials. In addition, while biotechnology companies have historically sought to defray the costs of pre-clinical and clinical development by licensing their products to pharmaceutical companies, they are now increasingly seeking to license out their technology at a later stage of clinical development.

Over the past 20 years, technological advances have dramatically changed the drug discovery process. New and improved technologies have evolved such as combinatorial chemistry, ultra high-throughput screening, new in vitro and in vivo pre-clinical profiling techniques, and the evolution in genetic-based drug research commonly referred to as genomics and proteomics. The objective of these innovations is to find more drug targets and to screen against targets much more quickly with literally millions of chemical compounds. This process should produce many more molecules having the ability to affect biological activity. The

increased numbers of drug candidates will make it imperative that the development and regulatory processes be rapid and cost-effective. Pharmaceutical and biotechnology companies may also find that they do not have sufficient internal development resources or know-how to cope with the increased number of new drug candidates emerging as a consequence of the emergence of new technologies. These resource shortages are expected to increase demand for the services of drug development services companies.

Pharmaceutical companies face increased pressure and competition to bring new drugs to market in the shortest possible time. The development time of a potential new drug is crucial to the competitive advantage and profitability of that drug because it determines the market exclusivity available to a pharmaceutical company to recoup its research and development expenditure. We believe that drug development services organizations are able to perform the needed services with a higher level of expertise or specialization, and more quickly, than a pharmaceutical company could perform such services internally.

Increasingly complex and stringent regulatory requirements throughout the world have increased the volume of high quality data required for regulatory filings and escalated the demand for data collection and analysis during the drug development process. As regulatory requirements become more complex, we believe the pharmaceutical and biotechnology industries will increasingly outsource to drug development services organizations to take advantage of their data management and regulatory expertise, technological capabilities and global presence.

With the increasing cost of new drug development, pharmaceutical companies are increasingly attempting to maximize returns from a given drug by pursuing regulatory approvals in multiple countries simultaneously rather than sequentially. A pharmaceutical company seeking approval in a country in which it lacks experience or internal resources will frequently turn to a drug development services organization for assistance in interacting with regulators or in organizing and conducting clinical trials.

Our corporate strategy has been developed to take account of the trends described above, and to exploit opportunities we believe are presented by those trends. We believe the increasing demand for outsourced drug development services will provide us with opportunities to continue to grow our pre-clinical and clinical businesses profitably. Our strategy is to build upon our core pre-clinical and clinical development expertise and to further our reputation as a provider of a comprehensive range of high quality, value-added drug development services. Our aim is to become the leading research and development partner to the pharmaceutical and biotechnology industries. We anticipate achieving this strategy primarily through:


	•	continuing to invest in our pre-clinical facilities in Tranent and Montreal to provide us with greater capacity to meet anticipated increases in demand for our pre-clinical development services;

	•	maintaining and enhancing the ability of our Phase I clinical operations in Edinburgh to provide high quality, value-added services while leveraging our experience and expertise in seeking to expand these services geographically;

	•	continuing to position our Phase II-IV clinical development business as a provider of high value-added services; and

	•	further leveraging the cross-selling opportunities between our two business segments.

We intend to implement our growth strategy in part by making acquisitions of other companies or businesses, to the extent we are able to do so on terms we find appropriate.

We provide a full range of product development services on a worldwide basis. We derive approximately 88% of our net service revenue from services that we provide to the pharmaceutical and biotechnology industries. We also service the product development needs of the veterinary products, agrochemical and chemical industries. One of our primary objectives is to assist our clients to optimize the time for new product development and provide regulatory advice and direction.

Our pre-clinical development services business offers pre-clinical safety evaluation and pharmacology services as well as selected laboratory sciences services. Our clinical development services business offers a wide range of drug development services including Phase I clinical safety evaluation, Phase II-IV clinical trials and regulatory services. Our approach is to work in partnership with our clients, providing regulatory advice and direction and tailoring our services to their requirements at every stage of a project.

Our pre-clinical development services business offers a broad range of services including pre-clinical safety evaluation, pharmacology and laboratory sciences. In 2003, this business segment generated net service revenue of $163.1 million and income from operations of $43.6 million.

We conduct pre-clinical safety evaluation studies and pharmacological services in our facilities located in Tranent and Montreal. We conduct product development and safety evaluation programs, involving both mammalian and in vitro toxicology and we have the necessary resources in specialist ancillary groups to support fully toxicology studies and provide a complete safety evaluation service. We perform standard or tailored safety evaluation studies designed to satisfy the needs of our clients and the different requirements of regulatory agencies across the world. Both of our facilities are compliant with the regulations imposed by the regulatory authorities in North America, Europe and Japan including Good Laboratory Practice (“GLP”). We are one of the few Western drug development services organizations with an established market presence for pre-clinical development services in Japan.

Pre-clinical safety evaluation and pharmacological services that we undertake on behalf of our clients are wide-ranging and include:


	•	pre-clinical toxicology studies designed to detect physiological, biochemical and hematological, neurological and pathological effects of a pharmaceutical candidate;

	•	genetic toxicology studies conducted on materials to assess the potential for induction of genetic mutations or chromosomal damage. Materials that we test include pharmaceuticals, industrial chemicals, food additives and agrochemicals;

	•	immunotoxicology studies designed to detect, in vitro, the effects of a pharmaceutical candidate on the human immune system;

	•	bioanalytical chemistry studies undertaken to provide a quantitative analysis of parent compounds (pharmaceutical candidates) and metabolites in a variety of biological matrices. These studies play a pivotal role in providing support for toxicology studies; and

	•	toxicokinetic evaluations designed to assess how a pharmaceutical candidate is absorbed by and eventually eliminated from the body. These studies are important for interpreting toxicology findings and providing information to support clinical studies.

In addition, we have an established reputation in the field of specialist toxicology safety evaluation services relating to specific routes of administration, including infusion and inhalation studies, highly specialized areas in which we have experienced increasing demands for our services.

We utilize modern, industry-standard validated software systems wherever possible to assist in the collection, analysis and reporting of toxicology data.

We provide a wide range of laboratory-based analytical services, primarily to the pharmaceutical and biotechnology industries. These services are provided from our pre-clinical facilities located in Tranent and Montreal. We believe that all of the activities of our laboratory sciences business are conducted in compliance with GLP.


	•	bioanalytical services — our bioanalytical group specializes in the quantitative analysis of drug candidates and metabolites in biological fluids and tissues to support toxicokinetic and clinical investigations. Over the past five years we have made considerable investment, including in LC/MS/MS technology, and in facilities and instrumentation;

	•	drug metabolism services — our drug metabolism group has more than 25 years experience in a range of in vivo and in vitro ADME (absorption, distribution, metabolism and elimination) disciplines. Our in vitro group supports discovery and development programs and performs studies to investigate metabolic stability, P450 induction and inhibition, reaction phenotyping, extrahepatic and non-P450 metabolism and drug absorption. Our in vivo metabolism group conducts studies to investigate the disposition of radio labeled and non-radio labeled test items, both in pre-clinical and in clinical studies;

	•	clinical support services — our clinical pathology laboratory offers a full range of services from clinical chemistry and hematology to more specialized molecular and microbiology techniques (e.g. clinical immunology, genotyping and PCR and flow cytometry) and biochemical pharmacology (particularly for drugs targeting cardiovascular disease). We expanded this pre-clinical research group first to support our own Phase I clinical safety evaluation segment and then further to become a central laboratory for international multi-center clinical trials;

	•	product characterization and stability testing — we offer a range of chemistry quality-testing services and can test a wide range of drug candidates and products including demonstration that the source material is free from detectable contaminants, demonstration that the manufacturing process is capable of removing and/or inactivating contaminants, characterization of the product and demonstration of the storage stability of the product.

We also offer a wide range of studies to register new compounds and support existing materials worldwide for the agrochemical, animal health, biocide and chemical industries. In addition to the services described above, we carry out environmental toxicity and related investigations, environmental fate studies, veterinary clinical trials, livestock studies, plant metabolism studies and field trials for agricultural products on behalf of these clients.

Our clinical development services business offers a broad range of services including Phase I clinical safety evaluation and Phase II-IV clinical trials management services (including medical data sciences and regulatory support). In 2003 this business segment generated net service revenue of $109.3 million and income from operations of $12.5 million.

Our Phase I clinical safety evaluation service is designed to move lead pharmaceutical candidates rapidly from pre-clinical development through Phase I tolerability assessments to explore the human pharmacology. Blending the experience of our physicians, scientists, project managers and specialist nursing staff, we can design for our clients an optimal program for the early and later stage development of their drug candidates. We are one of the few drug development services organizations worldwide able to offer this breadth of service.

We conduct Phase I safety evaluations at our facility in Edinburgh that is capable of housing up to 62 volunteers at any one time. This facility is in close proximity to our laboratory sciences segment in Tranent, which is responsible for performing the analysis of biological samples generated by our Phase I clinic, guaranteeing fast response times. All of our volunteers go through an intensive screening process to ensure suitability for our studies.

We believe one of our core competencies is our ability to provide in-depth analysis of the results of Phase I clinical safety evaluation and meaningful information for our clients with respect to the product being tested.

Our Phase I clinic can conduct all types of studies and has experience across a wide range of therapeutic areas. On average, we have completed 11 first-in-man studies annually over the past five years.

We can undertake special population studies in groups such as the elderly, post-menopausal women or patients with specific diagnoses, such as renal failure or asymptomatic HIV disease. Additionally, we conduct Phase I trials in patients for specific indications at investigational sites throughout the United States.

From our 15 offices worldwide and business operations in more than 20 countries, we manage every aspect of clinical trials from clinical development plans and protocol design to New Drug Applications and post-marketing surveillance. We provide a comprehensive range of services as either a full-service package or as individual stand-alone services. In addition to conducting single site studies in many parts of the world, we have a proven track record of managing large international multi-center trials culminating in regulatory filings. We have supported studies in over 50 countries, working in 19 different languages.

We offer customized program management to coordinate and manage a clinical trial development program. The design of each study is agreed with the client at the beginning of the study and set out in a protocol.

As part of conducting clinical trials, we provide the following core services, either on an individual or integrated basis, depending on our clients’ needs:


	•	strategy development — in the initial planning stages, we provide advice on clinical development strategy, program content and its critical decision points;

	•	study design — in the critical area of study design, we assist clients in protocol design and prepare study protocols and case report forms taking into account current products and competing clinical trials with a view to building an effective database for regulatory authorities and post-marketing studies;

	•	investigator recruitment — during a clinical trial, physicians, also referred to as investigators, supervise the administration of the drugs to patients. We solicit the participation of investigators, who contract directly either with our clients or us. We maintain, and continually expand and refine, our investigator databases containing information regarding our experience with these investigators, including factors relevant to rapid study initiation, patient enrollment and quality of participation;

	•	project management — our skilled project management professionals oversee all aspects of our work on Phase II, III and IV clinical studies. They are responsible for overall service delivery to a client, working to ensure that studies proceed to agreed milestones on agreed terms, and for communicating with the client promptly and accurately on all relevant matters. Good project management plays a vital role in successful completion of a study;

	•	quality assurance — all of our activities are audited by staff independent of the study to ensure quality and compliance. We also offer this service to our clients;

	•	patient recruitment services — we assist our clients in recruiting patients to participate in clinical trials through investigator relationships, media advertising and other methods;


	•	study monitoring — we provide study-monitoring services by visiting investigator sites. These visits ensure that data is gathered according to Good Clinical Practice, the requirements of the sponsor, and other applicable regulations. Monitoring staff and project managers provide training to investigators and hospital staff, both on study and protocol specific matters, and, as necessary, on the regulatory requirements associated with the particular study. As patients are examined and tests are conducted in accordance with the study protocol, data are recorded on case report forms and laboratory reports. Specially trained Clinical Research Associates (“CRAs”) collect the data from study sites. CRAs visit sites regularly to ensure that the case report forms are completed correctly and that all data specified in the protocol are collected. We review case report forms for consistency and accuracy before we enter their data into an electronic database for purposes of medical and statistical analysis;

	•	clinical data management — our data management professionals assist in the design of protocols and case report forms, as well as training manuals and training sessions for investigational staff, to ensure that data are collected and coded in an organized and consistent format. Databases are designed according to the analytical specifications of the project and the particular needs of the sponsor. We provide clients with data abstraction, data review and coding, data entry, database verification and editing and problem data resolution. We have expertise in electronically capturing and using diverse study data from different locations and we have invested in our data management capability to ensure the provision of current technology, experienced resources and innovative ideas;

	•	biostatistical analysis — our biostatistics professionals provide biostatistical consulting, database design, data analysis and statistical reporting. They often participate in assessing the number of patients required in particular programs and trials. Our biostatisticians provide sponsors with assistance in all phases of drug development. Biostatisticians develop and review protocols, design appropriate analysis plans and design report formats to address the objectives of the study protocol as well as the sponsor’s individual objectives and report results according to the analysis plan. Additionally, biostatisticians assist our clients before panel hearings at the FDA;

	•	medical writing services — we write integrated clinical/statistical reports, manuscripts, risk/benefit assessment reports and regulatory submissions. These services are fully integrated with our other clinical services and are designed to reduce overall drug development time;

	•	medical overview — throughout the course of a development program, our physicians provide a wide range of medical research and consulting services to improve the speed and quality of clinical development, including medical supervision of clinical trials and compliance with medical standards and safety regulation;

	•	product safety — we provide pharmacovigilance support for both full service and self-standing projects. We are experienced in writing safety narratives and reconciliation of Serious Adverse Events with the clinical database. In addition, in conjunction with our regulatory affairs group, we can provide regulatory reporting of all Serious Adverse Events to worldwide regulatory authorities;

	•	Phase IV studies — post-marketing studies are conducted after a drug has successfully undergone clinical efficacy and safety testing and the NDA has been submitted to the FDA. We offer a range of post-marketing studies, including: post-marketing surveillance (Phase IV trials); periodic safety update reports; support in regulatory agency liaison; advice on product claims and labeling; consumer acceptability studies; and pharmacovigilance; and

	•	Rx to OTC switches — we provide consultancy for and conduct specifically designed studies to support clients in switching product classifications from prescription only to over-the-counter (OTC) approvals, including labeling requirements and new indications.

We have significant expertise in conducting patient and other outcomes registries, such as pregnancy registries on behalf of the pharmaceutical industry. Our experience includes design, implementation, and analysis of prospective, observational and exposure-registration studies, for both single and multiple sponsors.

Our research methodology experience includes, but is not limited to, survey research, focus groups, knowledge, attitude and practice methods and quality of life questionnaires. We also have extensive experience in performing linkage analysis of secondary data sources. We can support clinical studies via our call center facilities, ongoing working relationships with professional bodies, the establishment of advisory and steering committees and development of educational material.

Before a product can be launched in any country, it must be approved by the regulatory agency in that particular country. We offer comprehensive global regulatory product registration services at all stages of development for pharmaceutical and biotechnology products and have particular expertise with the regulations in Europe, North America and Japan. Our regulatory affairs experts review existing published literature, assess the scientific background of a product, assess the competitive and regulatory environment, identify deficiencies and define the steps necessary to obtain registration in the most expeditious manner. Through this service, we help our clients determine the feasibility of developing a particular product or product line.

We provide product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. In 2003 and 2002, no single client accounted for more than 10% of our net service revenue. In 2003 our top 20 clients together accounted for less than 40% of our net service revenue.

Our pre-clinical business has historically been successful in maintaining clients, as is evidenced by the fact that more than 85% of our pre-clinical revenues in 2003 came from repeat clients. Our clinical operations are marketed primarily to our existing pre-clinical clients. In addition, we have a business development manager who, together with a team of business development personnel, markets our clinical operations on a global basis. We also engage in promotional activities including organizing scientific symposia, publishing scientific papers, making presentations and exhibiting at scientific conferences and trade shows in North America, Europe and Japan.

Most of the contracts with our clients are fixed price contracts. Contracts may range from a few weeks to several years depending upon the nature of the work performed. In many of our multi-year contracts, a portion of the contract fee is paid at the time the study or trial is started with the balance of the contract fee payable in instalments over the study or trial duration. Sometimes the instalments are tied to meeting performance milestones; for example, in clinical trials, instalment payments may be related to investigator recruitment, patient enrollment or delivery of a report.

We generally bill our clients upon the completion of negotiated performance requirements and, to a lesser extent, on a date certain basis. In cases where our contracts are fixed price, we generally bear the cost of overruns, but we benefit if the costs are lower than we anticipated. Over the past five years the cost of overruns on our fixed price contracts have not had a material adverse impact on our results of operations. Where there are material changes in the scope of review or any study-specific assumptions, we typically negotiate appropriate amendments of the contract price.

Most of our contracts may be terminated by the client with or without cause upon little or no notice. These contracts typically require payment to us of expenses to wind down and close out a study, payment to us of fees earned to date and payment to us for committed resources that cannot be reallocated to existing studies. Contracts may be terminated for various reasons, including our failure to discharge our obligations properly, the failure of a product to satisfy safety requirements, unexpected or undesired results of the product, inadequate patient enrollment or investigator recruitment, production problems resulting in shortages of the drug being tested, or adverse patient reactions to the drug being tested or our clients’ decisions to forego or terminate a particular study.

Our studies and projects are performed over varying times, from a short period of time to extended periods of time, which may be as long as several years. We maintain an order backlog to track anticipated revenue from studies and projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a study or project in backlog when it is evidenced by written evidence of a client’s intention to proceed. Cancelled studies or projects are removed from backlog. Based upon the foregoing, our aggregate backlog at December 31, 2003 was approximately $285 million, compared to approximately $210 million at December 31, 2002.

We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, studies vary in duration. For instance, some studies that are included in 2003 backlog may be completed in 2004, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities. Terminations or delays can result from a number of reasons. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made.

As discussed further in the overview to Management’s Discussion and Analysis of Financial Condition and Results of Operation, we believe that the cumulative last twelve months new business signings is a better lead indicator of our business than backlog. New business signings are the amounts of contracts signed each period, net of cancellations.

The competitive landscape for our two core businesses varies. Nevertheless, both businesses primarily compete with in-house departments of pharmaceutical companies, other drug development services organizations, universities and teaching hospitals.

We believe we are the second largest provider of pre-clinical safety evaluation services in the world, based on net service revenue. Our primary pre-clinical competitor on a global basis is Covance, although we also face competition from publicly traded companies such as Charles River Laboratories, Life Sciences Research and MDS Pharma, as well as from a number of privately-held companies. Certain of these competitors are also expanding their pre-clinical operations.

The clinical development services market is highly fragmented, with participants ranging from hundreds of small, limited-service providers to a few full service drug development services organizations with global operations. Based on this, we believe that we compete with a number of publicly traded companies, primarily Pharmaceutical Product Development, Covance, MDS Pharma, Parexel, ICON, SFBC and Kendle, as well as Quintiles and a number of other privately-held companies.

In contrast to the pre-clinical drug development industry, the clinical drug development industry has few barriers to entry. Newer, smaller companies with specialty focuses, such as those aligned to a specific disease or therapeutic area, may compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that may adversely affect our operating results. Providers of outsourced drug development services compete on the basis of many factors, including the following:


	•	reputation for on-time quality performance;

	•	expertise, experience and stability;

	•	scope of service offerings;

	•	how well services are integrated;

	•	strength in various geographic markets;

	•	technological expertise and efficient drug development processes;


	•	ability to acquire, process, analyze and report data in a time-saving, accurate manner; and

	•	ability to manage large-scale clinical trials both domestically and internationally.

We have traditionally competed effectively on the basis of the factors noted above, but we may not be able to continue to do so. If we fail to compete successfully, our business could be seriously harmed.

Our laboratory services are subject to various regulatory requirements designed to ensure the quality and integrity of the development processes. The industry standards for conducting pre-clinical laboratory testing are embodied in the GLP and Good Manufacturing Practice (“GMP”) regulations. The standards of GLP and GMP are required by the FDA, the U.S. Environmental Protection Agency, the Department of Health in the United Kingdom, the Health Protection Branch of Health Canada, the Japanese Ministry of Health and Welfare, the European Agency for the Evaluation of Medicinal Products and similar regulatory authorities in other parts of the world. Such standards are also the subject of guidance endorsed by the Organisation for Economic Co-operation and Development. GLP and GMP stipulate requirements for facilities, equipment and professional staff. The regulations require standardized procedures for conducting studies, including procedures for recording and reporting data and for managing study materials and records. To help satisfy our compliance obligations, we have established quality assurance and quality control systems at our laboratories that monitor ongoing compliance with GLP and GMP regulations and the Clinical Laboratory Improvement Amendments, as applicable, by auditing development data and conducting inspections of development procedures. In addition, we have obtained FDA approval to conduct Stability and Lot Release Testing in compliance with GMP.

The industry standards for the conduct of clinical research and development studies are embodied in the regulations for Good Clinical Practice (“GCP”). The FDA and other regulatory authorities require that results of clinical trials that are submitted to such authorities be based on studies conducted in accordance with GCP. These regulations require that we, among other things:


	•	comply with specific requirements governing the selection of qualified investigators;

	•	obtain specific written commitments from the investigators;

	•	verify that appropriate patient informed consent is obtained;

	•	ensure adverse drug reactions are medically evaluated and reported in a timely manner;

	•	monitor the validity and accuracy of data;

	•	verify drug or device accountability;

	•	instruct investigators and studies staff to maintain records and reports; and

	•	permit appropriate governmental authorities access to data for their review.

We must also maintain reports for each study for specified periods for auditing by the study sponsor and by the FDA or similar regulatory authorities in other parts of the world. As with GLP, noncompliance with GCP can result in the disqualification of data collected and reports issued during the clinical trial. In addition, under certain clinical contracts, we have directly assumed certain obligations of the study sponsor under FDA regulations.

Our standard operating procedures are written in accordance with regulations and guidelines appropriate to the region and the nation where they will be used. All clinical research is carried out in accordance with the International Conference on Harmonization — Good Clinical Practice Guidelines and the requirements of the applicable country. Although the United States is a signatory to these guidelines, the FDA has not adopted all of the guidelines as statutory regulations, but has currently adopted them only as guidelines. From an international perspective, when applicable, we have implemented common standard operating procedures across regions to assure consistency whenever it is feasible and appropriate to do so.

Our animal import facilities are subject to a variety of national, regional, and local laws and regulations, including the U.K. Home Office Code of Practice for the Housing and Care of Animals, the U.K. Animals (Scientific Procedures) Act of 1986, the Canadian Health of Animals Act and regulations promulgated under such act by the Canada Food Inspection Agency, the Japanese Basic Law on Food, Agriculture and Rural Areas and regulations promulgated under such law by the Japanese Ministry of Agriculture, Forestry and Fisheries. We also incorporate the U.S. Department of Agriculture Animal Welfare Regulation into our standard operating procedures. These regulations establish the standards for the humane treatment, care and handling of animals by dealers and research facilities. Our animal import facilities maintain the certificates, licenses, detailed standard operating procedures and other documentation necessary to comply with applicable regulations for the humane treatment of the animals in our custody. In addition, our animal research facilities in Canada are accredited by the American Association for Accreditation of Laboratory Animal Care and maintain a Certification of Good Animal Practice with the Canadian Council on Animal Care.

Our pre-clinical laboratories are subject to licensing and regulation under national, regional and local laws relating to the surface and air transportation of laboratory specimens, the handling, storage and disposal of laboratory specimens, hazardous waste and radioactive materials, and the safety and health of laboratory employees, including, but not limited to, the regulations of the U.K. Home Office, the Scottish Environmental Protection Agency, the International Air Transport Association, Environment Canada, the Canadian Nuclear Safety Commission, the Quebec Ministry of the Environment and Health and Social Services Quebec. Although we believe we are currently in compliance in all material respects with such national, regional and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

To ensure that we comply with all scientific and medical regulatory matters we are subject to, each division of our business has established an independent quality assurance group that is responsible for monitoring compliance. The quality assurance group in each business reports directly to the relevant division president. In compliance with GCP, we conduct our Phase I clinical trials under the supervision of an Ethics Committee and have undertaken measures to ensure the protection of personal data.

We are liable to our clients for any failure to conduct their studies properly according to the agreed upon protocol and contract. If we fail to conduct a study properly in accordance with the agreed upon procedures, we may have to repeat the study at our expense, reimburse the client for the cost of the study and pay additional damages.

At our Phase I clinic in Edinburgh, we study the effects of drugs on healthy volunteers. In addition, in our clinical business we contract, on behalf of our clients, with physicians who render professional services, including the administration of the substance being tested, to participants in clinical trials, many of whom are seriously ill and are at great risk of further illness or death as a result of factors other than their participation in a trial. As a result, we could be held liable for bodily injury, death, pain and suffering, loss of consortium, or other personal injury claims and medical expenses arising from a clinical trial.

To reduce our potential liability, informed consent is sought from each volunteer and we obtain indemnity provisions in our contracts with clients. These indemnities generally do not, however, protect us against certain of our own actions such as those involving negligence or misconduct. Our business, financial condition and operating results could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim that is not indemnified, that is outside the scope of an indemnity or where the indemnity, although applicable, is not honored in accordance with its terms.

We maintain errors and omissions professional liability insurance in amounts we believe to be appropriate. This insurance provides coverage for vicarious liability due to negligence of the investigators who contract with us, as well as claims by our clients that a clinical trial was compromised due to an error or omission by us. If our insurance coverage is not adequate, or if insurance coverage does not continue to be available on terms acceptable to us, our business, financial condition and operating results could be materially and adversely affected.

We have developed, and continually develop and update, certain computer software related methodologies intended to maximize the quality and effectiveness of our services. We believe such factors as the technical expertise, knowledge, ability and experience of our professionals are significantly more important to our performance than are any intellectual property rights developed by us.

At December 31, 2003, we had 2,827 employees, of whom 176 held a Ph.D. or M.D. degree, 20 held D.V.M. degrees and 248 held master’s degrees. Approximately 19% of our employees are located in the United States, 39% are located in Canada, 42% are located in Europe and less than 1% are located in other international locations. We believe our relations with our employees are good.

Our performance depends on our ability to attract and retain a qualified management, professional, scientific and technical staff. Competition from both our clients and competitors for skilled personnel is high. While we have not experienced any significant problems in attracting or retaining qualified staff to date, there can be no assurance we will be able to continue to attract and retain personnel in the future.

We purchase the animals used in our in vivo studies from a number of different suppliers. We do not have long-term contracts with any of these suppliers. However, we believe that we will continue to be able to meet our current supply needs and any increase in these needs resulting from the planned expansion of our pre-clinical operations.

We own some of our facilities and lease others. We lease our corporate headquarters office space in Cary, North Carolina. Our pre-clinical operations are conducted from our 300,000 square foot facility located in Tranent, Scotland and our 323,000 square foot facility located in Montreal, Canada, both of which we own. Our clinical operations are conducted from our 180,000 square foot leased facility in Cary, North Carolina, our 20,700 square foot owned Phase I facility in Edinburgh, our smaller owned facility in Edinburgh, our pre-clinical facility in Tranent and our leased facilities in Wilmington (North Carolina), Maidenhead (England), Glasgow, Brussels, Milan, Paris, Tel Aviv, Warsaw, Madrid, Prague and Munich.

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, liquidity or financial condition.

Our common stock is listed on the Nasdaq Stock Market’s National Market under the symbol “IRGI”. The following table sets forth the high and low sales prices of our common stock as reported by the Nasdaq National Market for the periods indicated.

On February 17, 2004, the last reported sale price of our common stock on the Nasdaq National Market was $28.90 per share.

As of February 17, 2004, there were approximately 17 holders of record of our common stock. This does not include persons who hold our common stock in accounts with brokers or banks.

We have not paid any dividends in the past and currently we do not expect to pay cash dividends or make any other distributions in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements and such other factors as our board deems relevant. In addition, our ability to declare and pay dividends on our shares is restricted by (i) covenants in our credit facilities and (ii) our corporate organizational structure (which imposes a significant tax burden on intercompany dividends and distributions of earnings to us by our operating subsidiaries).

The amounts shown in the table above for securities to be issued under equity compensation plans approved by security holders relate entirely to options issued under our 2002 stock option plan which provided for a total of 5,365,589 shares to be issued. At December 31, 2003, a total of 2,912,851 options had been issued or exercised under this plan. There are no equity compensation plans that have not been approved by security holders.

You should read the selected consolidated financial information presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the related notes. The financial information for the period from December 28, 1998 to September 19, 1999 reflects the results of operations of our business while it operated as a division of SGS Société Générale de Surveillance SA (the “Predecessor”). The financial information for the 52 weeks ended December 30, 2001 includes the results of operations of ClinTrials Research Inc. from April 5, 2001, the date of acquisition. The financial information for the year ended December 31, 2003 includes the results of operations of PharmaResearch Corporation from July 29, 2003, the date of acquisition.

The selected consolidated financial data presented below as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 were derived from our audited consolidated financial statements, which are included in this Form 10-K. The selected consolidated financial data presented below as of December 30, 2001, December 31, 2000 and December 26, 1999 and for the 53 weeks ended December 31, 2000 and the period from September 20, 1999 to December 26, 1999 were derived from our audited consolidated financial statements, which are not included herein. The selected consolidated financial data presented below for the period from December 28, 1998 to September 19, 1999 were derived from the audited consolidated financial statements of the Predecessor, which are not included herein. All consolidated financial


(1)	Effective as of the beginning of 2002, our fiscal years end consistently on December 31 and our fiscal quarters end consistently on the last calendar day in the quarter. Before 2002, our fiscal years ended on the last Sunday on or prior to December 31 and our fiscal quarters ended on the last Sunday on or prior to the relevant quarter end.

(2)	Prior to September 20, 1999, our businesses were operated as a division of SGS Société Générale de Surveillance Holdings SA. Share and per share data for these periods is not meaningful and has not been presented.

(3)	As more fully described in Note 4 to the consolidated financial statements, historical share and earnings per share data for periods prior to the date of our initial public offering in June 2002 have been calculated as if the historical outstanding shares in Inveresk Research Group Limited had been converted to common stock in Inveresk Research Group, Inc. using the conversion ratios applicable to the change in ultimate parent company which took place on June 25, 2002.

(4)	We have completed three significant acquisitions during the period covered by the selected consolidated financial information presented above. These were the management buyout completed on September 20, 1999, the acquisition of ClinTrials completed on April 5, 2001 and the acquisition of PharmaResearch completed on July 29, 2003.

(5)	Upon the adoption of SFAS 142 on January 1, 2002 we ceased amortization of goodwill and as a result the amortization expense shown for 2002 and 2003 is not on a consistent basis of accounting with earlier periods. The effect of adoption of SFAS 142 is described in Note 4 of our consolidated financial statements included herein.

(6)	Upon the adoption of SFAS 145 on January 1, 2003, prior extraordinary items related to the extinguishment of debt were reclassified. This resulted in extraordinary items of $1.6 million ($2.0 million before taxes and $0.4 million of income taxes) in 2002 and $0.4 million ($0.6 million before taxes and $0.2 million of income taxes) in 2001 being reclassified to the interest expense and the provision for income taxes.

The following discussion should be read in conjunction with our consolidated financial statements.

The discussion and analysis of our financial position which follows is intended to give investors an understanding of our financial condition, liquidity and capital resources and changes in financial conditions as well as our results of operations. We are required to include much of the detail in the discussion which follows by various regulatory requirements that we are subject to. This introductory overview is intended to assist investors to identify the areas that are the main focus of management.

We undertake pre-clinical and clinical development services on behalf of our clients. The scope of our services for each project is agreed with the client and documented in a contract prior to commencement of the work. Most of the contracts with our clients are fixed price contracts, ranging in length from up to a few weeks to several years. As we perform the agreed services under each of the contracts with our clients, we record revenues based on a percentage of completion for each contract. Because we have large numbers of contracts underway at any particular time, all of which are individually priced, we do not analyze the results of operations based on study type or based on the profitability of individual studies.

In evaluating the underlying health of our business and its prospects, it is important to ensure that we replace the revenues we have generated with new signed business (i.e. future revenues), so as to maintain the growth of our underlying businesses. Therefore, in addition to the results of our operations which are discussed separately below, we monitor closely new business signings for each of our operating units on a cumulative latest twelve months basis (to address seasonal factors). We compare this with revenues recorded over the same period and, based upon past experience, this data provide an indication of the future revenues of the Company.

Our new business signings for the last three financial years compared to reported net revenues are as follows:

Each of our businesses operates principally under a fee for service model. We have historically generated cash flows from operations in excess of our requirements to fund internal growth. Because we have large numbers of individually small contracts, no single contract has a significant effect on our cash flow, although historically our cash flow from operations has been stronger in the second half of the year than in the first. In addition, at December 31, 2003 we had bank credit facilities totaling $75 million more than our borrowings under the facilities.

We place significant emphasis on the process of contract management and how we recognize revenue. This is a significant area of focus for our management. Our operational and our financial management are closely involved in the review of progress and the analysis of expected outcomes of our studies on a regular basis. We have no history of significant issues arising in this area. Our net investment in accounts receivable, unbilled receivables less advance payments, has historically approximated 30 days of net revenue and at December 31, 2003 stood at 28 days.

The main area of market risk that affects our business is foreign exchange rate fluctuations. In 2003, approximately 80% of our revenues were generated outside of the U.S., principally in the United Kingdom and Canada. We experienced considerable volatility in U.S. dollar exchange rates in 2003, particularly against pounds sterling and against the Canadian dollar. Whilst the depreciation of the U.S. dollar against pounds sterling positively impacted our financial results in 2003, its depreciation against the Canadian dollar has had an adverse impact on our profitability. This is because the costs of our Canadian operations arise predominantly in Canadian dollars but a significant proportion of the income of this business arises in U.S. dollars. The impact of exchange rates on our financial results is discussed in more detail in Item 7A below.

On April 5, 2001, we completed the acquisition of ClinTrials, a Nasdaq traded company. The total acquisition cost was $115.1 million, net of cash acquired of $5.7 million.

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

On July 3, 2002, we completed our initial public offering of 12 million shares of common stock at a price of $13 per share. 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 under our former bank facility and our 10% unsecured subordinated loan stock due 2008.

We were highly leveraged prior to the completion of our initial public offering partly due to the structure of a previous management buyout and in part to the incurrence of additional significant indebtedness in connection with our acquisition of ClinTrials in 2001. Our interest expense had 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 (or loss).

On July 29, 2003, we completed our acquisition of PharmaResearch Corporation, a provider of Phase II-IV clinical trials management services based in the U.S. and with offices in the United Kingdom, France, Spain and China. In 2002, PharmaResearch Corporation generated net service revenue of $40.6 million and

On November 25, 2003, we completed a public offering of 11.5 million shares of common stock at $20 per share. Of the 11.5 million shares sold in the offering, 10.5 million were sold by existing shareholders, principally Candover Investments PLC and associated Candover entities. One million new shares were sold by Inveresk Research Group, Inc. The net proceeds received from the sale of shares by the Company were $18.2 million after deducting underwriting discounts, commissions and other offering expenses.

We operate in two segments for financial reporting purposes: pre-clinical and clinical. The following table shows, for the periods indicated, a summary of our financial performance by business segment.


(1)	SFAS 142 was adopted with effect from January 1, 2002. As a consequence, there is no amortization of goodwill after January 1, 2002. The effect of adoption of SFAS 142 is shown in Note 4 to our audited financial statements included herein.

(2)	As a consequence of the adoption of SFAS 145 on January 1, 2003, prior extraordinary items related to the extinguishment of debt were reclassified. This resulted in extraordinary items of $1.6 million (being $2.0 million before taxes and $0.4 million of income taxes) in 2002 and $0.4 million (being $0.6 million before taxes and $0.2 million of income taxes) in 2001 being reclassified to the interest and income taxes caption.

The following table summarizes the above results of operations as a percentage of net service revenue:

Net Service Revenue. We recognize revenue as costs are incurred and include estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs (cost-to-cost type of percentage-of-completion method of accounting). We recognize revenue related to contract modifications when realization is assured and the amounts can be reasonably determined. When estimated contract costs indicate that a loss will be incurred on a contract, the entire loss is provided for in such period.

Costs associated with contracting with third party investigators are excluded from net service revenue where they are the direct responsibility of the clients and are passed through to our clients without any mark-up.

Once a contract for a pre-clinical or clinical trial has been signed, the commencement date may vary depending upon the preparedness of the client’s drug candidate and our capacity availability.

Direct Costs Excluding Depreciation. These comprise the costs of the direct work force, laboratory consumables and other direct costs associated with the studies we perform for clients.

Selling, General and Administrative Expenses. These comprise administration costs, marketing expenditure and overhead costs such as the costs of running our facilities that are not allocated to direct costs. These

expenses also include corporate overhead costs that are not directly attributable to our operating businesses and include certain costs related to group management, insurance, marketing, professional fees and property.

Depreciation and Amortization. Depreciation represents the depreciation charged on our tangible fixed assets. Amortization represents the amortization of goodwill and other intangible assets over their estimated useful lives.

Interest Expense (Net). Interest expense, net includes interest expense on our bank borrowings, amortization of deferred debt issue costs and the impact of the marking to market of our interest rate swaps, net of interest income.

Significant Matters Affecting Our Financial Condition and Results of Operation

On July 29, 2003 we completed our acquisition of PharmaResearch Corporation which was formed and began operations in 1995. PharmaResearch was a U.S.-based drug development services company focused on providing Phase II-IV clinical trials and support services, principally in the areas of respiratory and infectious diseases. At the time of the acquisition, PharmaResearch was primarily based in Morrisville and Wilmington, North Carolina, with small operations in England, France, Spain and China. We acquired PharmaResearch for $37.1 million in cash, net of cash acquired of $6.0 million. Its net service revenue and income from operations for the year ended December 31, 2002 were $40.6 million and $4.8 million, respectively. The acquisition of PharmaResearch allowed us to increase significantly the scale and service of our North American clinical development operations. Its strong presence in the field of respiratory and infectious diseases enables us to build value-added clinical laboratory support services for the benefit of the enlarged client base.

We established a plan at the acquisition date to integrate the operations of PharmaResearch with our existing operations. The actions covered by the integration included a reduction of 58 employees (37 employees of PharmaResearch and 21 employees of our company), the relocation of the Morrisville, North Carolina operations of PharmaResearch to our premises in Cary, North Carolina, integration of certain administrative functions and operating entities between the two businesses, combination of the PharmaResearch operations in London, Paris and Madrid with those of our company and the closure of certain office premises. The former PharmaResearch business operations have been functionally integrated into our North American clinical business and accordingly, for financial reporting purposes, we do not separately present the results of those operations.

In connection with the integration plan we have recorded a provision of $2.6 million that was reflected in the purchase price allocation and a provision of $1.1 million that is reflected on our consolidated statement of operations in restructuring and integration costs arising from business acquisitions. We implemented the headcount reductions in early September, with 37 former PharmaResearch employees and 21 former Inveresk employees leaving the Company during September 2003. By January 2004, the employees based at the PharmaResearch facility in Morrisville, North Carolina were relocated to our nearby facility in Cary, North Carolina and the office in China was closed. The following amounts have been recorded in respect of the restructuring plan:

We expect the remaining provisions for severance costs to be utilized in 2004. The lease termination and abandonment costs will be utilized over the periods of the leases of the properties concerned.

The transactions through which we changed our ultimate parent company had several effects that required us to take charges against earnings in 2002. These charges comprised:


	(i) Stamp Duty Taxes. As a result of the change in our ultimate parent company, we were required to pay stamp duty taxes to the U.K. Inland Revenue. The aggregate amount of the stamp duty taxes paid by us in connection with this transaction was $1.5 million.

	(ii) A Compensation Charge in Respect of a Change in the Relative Equity Ownership of Certain Members of Management. Under the terms of a management incentive scheme originally put in place at the time of our leveraged buy-out in 1999, management’s percentage ownership of our common stock increased as a consequence of the change in our ultimate parent company. We were required under applicable accounting rules to record a compensation expense, or charge, equal to the increase in value of the equity ownership position of management resulting from the increase in their percentage ownership of us. This compensation expense amounted to $29.1 million.

	(iii) A Compensation Charge in Respect of Certain Outstanding Employee Stock Options. Due to certain features of the stock options granted by us prior to the initial public offering, we were required to record a compensation expense in connection with the offering of $19.4 million. In addition, we recorded a further charge of $4.5 million for compensation expense on the amendment and exercise of share options in the first quarter of 2002.

In addition to the above, we also expect to incur compensation-related charges when certain of our U.K.-based employees exercise stock options issued before the date of our initial public offering. This is because we will be required to pay U.K. National Insurance contributions at the time of exercise based on the profit realized when the option is exercised.

If all the relevant options were exercised when our shares were trading at our initial public offering price of $13 per share, the compensation charge would be $1.3 million. If all the relevant options were exercised when our shares were trading at $25 per share, the charge would increase to $1.5 million. In the period from our initial public offering to December 31, 2002, we incurred compensation charges related to U.K. National Insurance Contributions on the exercise of these stock options amounting to $0.1 million. In 2003, we incurred compensation charges related to U.K. National Insurance Contributions on the exercise of these stock options amounting to $0.5 million.

On February 18, 2003 we announced a proposed public offering of up to 10,350,000 shares of common stock. 3,000,000 shares were to be offered by the Company and 7,350,000 shares were to be offered by certain selling stockholders. On March 7, 2003, we announced the withdrawal of the registration statement relating to this offering because market conditions at the time made it inadvisable to proceed with the offering. The costs relating to this offering were expensed in the first quarter of 2003 and reduced the first quarter net income by approximately $0.7 million. We do not expect such costs to recur in the foreseeable future.

The statement of operations for the year ended December 31, 2002 does not include any expenses in respect of the amortization of goodwill and intangibles. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which became effective on January 1, 2002, altered the treatment of goodwill. Goodwill is no longer subject to amortization through the statement of operations. Instead, goodwill is subject to impairment testing on at least an annual basis. The following table contains a presentation of net income

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

Our consolidated financial statements are prepared in U.S. dollars. Our principal businesses are based in the United States, the United Kingdom and Canada. Our United Kingdom and Canadian operations record their transactions in local currencies. Accordingly, fluctuations in the pound sterling and Canadian dollar exchange rates will impact the results of operations reported in U.S. dollars.

The results of our non-U.S. operations have been translated from pounds sterling and Canadian dollars using the following average exchange rates:


(1)	Average for the period from April 5, 2001, the date we acquired ClinTrials, to December 30, 2001.

The following table sets forth the percentage of our net service revenue arising in the United Kingdom and Canada:

Our Canadian business invoices a significant proportion of its revenues in U.S. dollars, although its costs are largely in Canadian dollars. Our other businesses also have revenues that arise in foreign currencies, but the impact is not so significant as the effect on our Canadian operations. This can result in transaction exchange gains or losses that are reflected in its statement of operations. The foreign currency gains or losses

recognized in the statement of operations and included in “Other selling, general and administrative expenses” were a loss of $3.2 million for the fiscal year ended December 31, 2003, a loss of $0.4 million for the fiscal year ended December 31, 2002 and a gain of $1.2 million for the fiscal year ended December 30, 2001.

For ease of comparison and because we are a global business, we provide revenue growth information based on constant dollar exchange rates as well as based on actual exchange rates.

Net Service Revenue. Our aggregate net service revenue in 2003 was $272.5 million, an increase of $50.0 million, or 22%, over 2002 net service revenue of $222.5 million.

Pre-Clinical. Net service revenue in 2003 was $163.1 million, an increase of $21.0 million, or 15%, over revenues of $142.2 million in 2002. At constant dollar exchange rates, net service revenue would have increased by 4%.

Our North American pre-clinical operations experienced some volatility in business flow in the first quarter of 2003, resulting in an unusually high level of project delays. The impact of this was largely reversed in the second quarter of 2003, when these operations recorded net service revenue 24% higher than recorded in the first quarter of 2003. Slow or delayed decisions by its clients and an unfavorable change in business mix adversely affected the revenues of our North American operations in the third and fourth quarter. Consequently the net service revenue for our North American operations decreased year on year by 1% assuming a constant dollar exchange rate with 2002. As reported, based on actual exchange rates, net service revenue for our North American pre-clinical operations increased by 11% as compared with 2002. In Europe, our pre-clinical operations continued to experience strong demand for their services in 2003, both for safety evaluation services and laboratory sciences services. Room occupancy rates have remained high during 2003 and we have continued to benefit from a favorable business mix in these operations. Phase 1 of the expansion of our European operations was completed in the fourth quarter although the impact on revenues in 2003 was not significant. As a consequence, our European operations experienced growth in 2003 that at constant dollar exchange rates amounted to 11% compared with 2002. As reported, based on actual exchange rates, net service revenue at our European pre-clinical operations increased by 21% in 2003 compared to 2002.

Clinical. Net service revenue from our clinical operations in 2003 was $109.3 million, an increase of $29.1 million, or 36%, over revenues of $80.3 million in 2002. Assuming constant dollar exchange rates, net service revenue in the clinical segment increased by 31% compared with 2002.

The Phase II-IV business experienced a 39% increase in net service revenue, attributable largely to the acquisition of PharmaResearch on July 29, 2003 and to higher activity levels in our other Phase II-IV clinical businesses. Key steps in the integration of the PharmaResearch acquisition are now complete. Consequently it is not meaningful to report the revenues of this business separately. Additionally, our Phase I clinical operations recorded growth of 16% in 2003 compared with 2002, assuming constant dollar exchange rates.

Direct Costs Excluding Depreciation. In 2003 direct costs excluding depreciation totaled $141.6 million, an increase of $31.5 million, or 29%, from $110.1 million in 2002. Direct costs were 52% of net service revenue in 2003 compared to 49% in 2002.

Pre-Clinical. Direct costs excluding depreciation of our pre-clinical business in 2003 were $76.5 million, an increase of $13.5 million, or 22%, over costs of $63.0 million in 2002. In 2003, these costs were 47% of net service revenue, compared to 44% in 2002. This increase is attributable mainly to adverse movements in exchange rates, particularly having an impact on our North American pre-clinical operations. A majority of the revenues in our North American operations are invoiced in U.S. dollars whereas the costs incurred by these operations are almost entirely denominated in Canadian dollars. Compared with 2002, the Canadian dollar appreciated by approximately 12% against the U.S. dollar in 2003.

Clinical. Direct costs excluding depreciation of our clinical business in 2003 were $65.1 million, an increase of $18.0 million, or 38% over costs of $47.1 million in 2002. In 2003, these costs were 60% of net

service revenues, compared to 59% in 2002. The increase is mainly due to the results of the acquired PharmaResearch business where historically direct costs excluding depreciation as a percentage of net service revenue have been significantly higher than in the equivalent Inveresk businesses.

Selling, General and Administrative Expenses. In 2003, selling, general and administrative expenses totaled $71.9 million, as compared to $111.0 million in 2002. In 2003, an aggregate of $1.7 million of these expenses consisted of charges associated with the restructuring and integration of PharmaResearch and with a withdrawn share offering in the first quarter of 2003. In 2002, an aggregate of $54.6 million of these expenses consisted of charges associated with our initial public offering and related change in ultimate parent company. Excluding these charges, selling, general and administrative expenses represented 26% of net service revenues in 2003, compared with 25% in 2002.

Pre-Clinical. Selling, general and administrative costs in 2003 were $33.3 million, an increase of $5.5 million, or 20%, from $27.8 million in 2002. Selling, general and administrative costs were 20% of net service revenue in 2003, compared to 19% in 2002. This increase in selling, general and administrative costs as a percentage of net service revenue is attributable primarily to exchange losses during the year totaling $2.5 million compared to a loss of $0.3 million in 2002.

Clinical. Selling, general and administrative costs in 2003 were $28.6 million, an increase of $6.9 million, or 32%, from $21.7 million in 2002. When expressed as a percentage of net service revenue, selling, general and administrative costs were 26% in 2003, compared to 27% in 2002.

Corporate Overhead. Corporate overhead amounted to $10.0 million in 2003, compared to $61.5 million in 2002. Corporate overhead in 2003 included an aggregate expense of $1.7 million related to the withdrawn share offering in the first quarter of 2003 and to restructuring and integration incurred following our acquisition of PharmaResearch. Corporate overhead in 2002 included a compensation charge of $23.9 million in respect of stock options, a charge of $29.1 million in respect of management equity incentives and a charge of $1.5 million relating to stamp duty taxes payable on the change of ultimate parent company effected by us immediately prior to our initial public offering. Excluding these costs, other corporate overhead amounted to $8.2 million in 2003, compared with $7.0 million in 2002. This increase in other corporate overhead of $1.3 million, or 18%, over 2002 is due primarily to additional costs associated with the corporate governance and other regulatory costs of a publicly listed company.

Amortization of Intangible Assets. Amortization of intangibles amounted to $0.6 million in 2003. It arises in the clinical business segment where, following the acquisition of PharmaResearch, we have valued the customer contracts at acquisition at $2.8 million. This amount is being amortized over a two-year period from July 30, 2003.

Income from Operations. In 2003 the income from operations amounted to $46.1 million or 17% of net service revenue. Excluding share offering expenses, restructuring and integration costs related to our acquisition of PharmaResearch and the foreign exchange losses referred to above, income from operations amounted to $51.0 million or 19% of net service revenue. Loss from operations in 2002 amounted to $9.0 million or 4% of net service revenue after deducting the compensation expenses and stamp duty costs of $54.6 million referred to above. Excluding these compensation charges and stamp duty costs, income from operations amounted to $45.6 million or 20% of net service revenue.

Pre-Clinical. Income from operations in our pre-clinical business was $43.6 million in 2003 compared to $43.5 million in 2002 for the reasons set forth above.

Clinical. Income from operations in our clinical business was $12.5 million in 2003 compared to $9.0 million in 2002 for the reasons set forth above.

Interest Expense. Interest expense in 2003 was $3.5 million, a reduction of $9.9 million, or 74%, from $13.3 million in 2002. In 2003, our interest expense included $2.9 million of net interest and amortization of deferred debt costs on our bank facilities and cash resources and an expense of $0.7 million relating to the write-off of deferred debt issue and other costs on the bank facilities replaced when we acquired PharmaResearch, offset by a reduction of $0.1 million in the mark-to-market liability recorded on the interest

rate swaps we entered into in 2002. The interest expense of $13.3 million in 2002 included an expense of $9.0 million for the first half of 2002 that reflected our capital structure prior to our initial public offering. It also included an expense of $2.0 million relating to the write-off of deferred debt costs on the bank credit facilities we replaced at the time of our initial public offering in July 2002, a charge of $1.1 million, reflecting a mark-to-market revaluation of the interest rate swaps we entered into during the third quarter of 2002 and a net interest expense for the second half of 2002 of $1.2 million that included $0.9 million of net interest and amortization of deferred debt costs on our bank credit facilities and $0.3 million of interest expense relating to our pre-IPO debt and termination of the hedges associated with our pre-IPO bank debt.

Provision for Income Taxes. Our provision for income taxes in 2003 was $4.6 million or 11% of income before taxes. The tax charge in 2002 was $5.7 million on a loss before income taxes of $22.3 million and represented 18% of income before taxes after adding back the non-deductible compensation expense and stamp duty. We recorded a reduction in tax expense amounting to $1.6 million, net or 4% of income before taxes in 2003 in respect of the gains made by our U.K. employees on exercise of stock options in 2003. In addition the Canadian Federal tax rate was 2% lower in 2003 than in 2002. U.K. and Canadian research and development tax credits reduced the provision for income taxes by $7.7 million in 2003 and $7.5 million in 2002.

Net Service Revenue. Our aggregate net service revenue in 2002 was $222.5 million, an increase of $66.2 million, or 42%, over 2001 net service revenue of $156.3 million.

Pre-Clinical. Net service revenue in 2002 was $142.2 million, an increase of $47.0 million, or 49%, over revenues of $95.2 million in 2001. The Canadian pre-clinical operations of ClinTrials, which we acquired in April 2001, contributed $84.6 million to net revenue in 2002 compared to $48.2 million for the nine month post acquisition period in 2001. Net service revenue for the (non-ClinTrials) balance of our pre-clinical business increased by $10.6 million, or 23% (17% when expressed in local currency). Net service revenue from the pre-clinical operations of ClinTrials increased by $21.2 million, or 33%, in 2002 compared to 2001 (including the period prior to April 6, 2001 when we acquired ClinTrials). Movements in exchange rates did not have a material impact on the net service revenue of these operations in 2002.

Our pre-clinical business experienced exceptional demand for its services in 2002, both for toxicology and laboratory sciences services. As a consequence of this, and particularly the high levels of utilization in our toxicology facilities, in 2002 we focused on shifting this business segment’s revenue mix further towards higher value-added, higher margin specialty services, such as inhalation and infusion toxicology studies. In parallel with this shift, our laboratory sciences business benefited in 2002 from increased demand in connection with the provision of specialty toxicology services by us, as well as through increased demand for its services independent of our toxicology services business. This increased demand reflects our continuing strategy to increase the proportion of our revenues generated by our laboratory sciences services business within our pre-clinical business segment.

Clinical. Net service revenue from our clinical operations in 2002 was $80.3 million, an increase of $19.2 million, or 31%, over revenues of $61.1 million in 2001. The clinical operations of ClinTrials contributed $55.7 million to net revenue in 2002 compared to $40.4 million for the nine month post acquisition period in 2001. Net service revenue for the (non-ClinTrials) balance of our clinical business increased by $3.9 million or 19% (14% when expressed in local currency). Net service revenue from the ClinTrials clinical operations increased by $6.3 million, or 13%, in 2002 compared to 2001 (including the period prior to April 6, 2001 when we acquired ClinTrials), or 11% when expressed in local currency.

The Phase II-IV business experienced a 16% increase in net service revenues in 2002 compared to 2001 (including the period prior to April 5, 2001 for the acquired ClinTrials businesses) reflecting higher activity levels in those operations and improved hourly revenue recovery rates as we replaced old, less profitable ClinTrials contracts with more appropriately priced new business. Our Phase I clinic experienced growth in net service revenues of 9% in 2002 compared to 2001.

Direct Costs Excluding Depreciation. In 2002 direct costs excluding depreciation totaled $110.1 million, an increase of $26.1 million, or 31%, from $84.0 million in 2001. Direct costs were 49% of net service revenue in 2002, compared to 54% in 2001.

Pre-Clinical. Direct costs excluding depreciation of our pre-clinical business in 2002 were $63.0 million, an increase of $18.0 million, or 40%, over costs of $45.0 million in 2001. In 2002, these costs were 44% of net service revenue, compared to 47% in 2001. This improvement in gross margins reflects a continued emphasis by management of our pre-clinical business on cost control and improved business processes at a time when demand for our higher value-added, higher margin toxicology and laboratory sciences services have increased significantly.

Clinical. Direct costs excluding depreciation of our clinical business in 2002 were $47.1 million, an increase of $8.1 million, or 21% over costs of $39.0 million in 2001. In 2002 these costs were 59% of net service revenues compared to 64% in 2001 reflecting the continued focus of the management of our clinical business on improved contract pricing and cost control, particularly in the former ClinTrials businesses.

Selling, General and Administrative Expenses. In 2002, selling, general and administrative expenses totaled $111.0 million as compared to $41.9 million in 2001. In 2002, an aggregate of $54.6 million of these expenses consisted of charges associated with our initial public offering and related change in ultimate parent company. Excluding these charges, selling, general and administrative expenses represented 25% of net service revenues in 2002, compared with 27% in 2001.

Pre-Clinical. Selling, general and administrative costs in 2002 were $27.8 million, an increase of $5.9 million, or 27%, from $21.9 million in 2001. Approximately $1.5 million of this increase was attributable to transaction exchange losses, which realized a loss of $0.3 million in 2002 as compared to a gain of $1.2 million in 2001. When expressed as a percentage of net service revenue, selling, general and administrative costs declined to 20% in 2002, from 23% in 2001, reflecting a continued emphasis by the management of our pre-clinical business on cost control and improved business processes at a time when revenues increased significantly.

Clinical. Selling, general and administrative costs in 2002 were $21.7 million, an increase of $6.1 million, or 39%, from $15.6 million in 2001. When expressed as a percentage of net service revenue, selling, general and administrative costs were 27% in 2002, compared to 26% in 2001. The principal reason for this increase is the inclusion of the higher costs (relative to net service revenue) of the acquired ClinTrials businesses for the whole of 2002 compared to only nine months in 2001.

Corporate Overhead. Corporate overhead in 2002 includes a compensation charge of $23.9 million in respect of stock options, a charge of $29.1 million in respect of other equity-based compensation and a charge of $1.5 million relating to stamp duty taxes payable on the change of ultimate parent company effected by us immediately before our initial public offering. Other corporate overhead amounted to $7.0 million. The increase in other corporate overhead of $2.5 million, or 58%, over 2001 is due primarily to the additional costs associated with becoming a publicly listed company.

Amortization of Intangible Assets. Pursuant to the requirements of SFAS 142 which took effect from January 1, 2002, our 2002 results reflect no amortization of goodwill or intangible assets. Amortization of intangible assets in 2001 amounted to $7.9 million.

Income from Operations. In 2002 the loss from operations amounted to $9.0 million after giving effect to compensation expenses and stamp duty costs of $54.6 million. Income from operations in 2001 amounted to $22.4 million, or 14% of net service revenue, after excluding from the calculation an amortization expense incurred in that year of $7.9 million.

Pre-Clinical. Income from operations in our pre-clinical business increased to $43.5 million in 2002, compared to $18.0 million in 2001.

Clinical. Income from operations in our clinical business was $9.0 million in 2002, compared to $0.9 million in 2001.

Interest Expense. Interest expense in 2002 was $13.3 million, a reduction of $4.4 million, or 25%, from $17.7 million in 2001. Interest expense in 2002 includes $2.0 million arising from the write off of deferred debt issue costs relating to the bank credit facilities replaced at the time of our initial public offering. Interest expense in 2001 includes $0.6 million arising from the write off of deferred debt issue costs relating to the bank credit facilities replaced at the time of the acquisition of ClinTrials in 2001. In the first half of 2002, interest expense increased by $3.3 million, compared to the equivalent period in 2001. This increase was due principally to increases in borrowings used to finance the acquisition of ClinTrials in April 2001. Immediately following our initial public offering, at the start of the third quarter of 2002, we refinanced our outstanding bank borrowings and our 10% unsecured subordinated loan stock due 2008 using proceeds from the offering, borrowings under a new bank credit facility and our existing cash resources. As a result, our total debt declined from $223.1 million to $74.3 million at July 31, 2002. Principally as a result of this reduction in total debt our interest expense for the six months ended December 31, 2002 was $9.1 million lower than our interest expense for the corresponding period in 2001. In the fourth quarter of 2002, our interest expense includes a charge of $1.1 million, reflecting a mark-to-market revaluation of the interest rate swaps we entered into during the third quarter of 2002. The interest expense of $17.1 million that we incurred in 2001 included a charge of $2.1 million, reflecting a mark-to-market revaluation of our previous interest rate hedges.

Provision for Income Taxes. Our provision for income taxes in 2002 was $5.7 million, or 18% of adjusted income before taxes of $32.3 million (calculated without giving effect to the compensation expense and stamp duty taxes of $54.6 million). U.K. and Canadian Federal research and development tax credits amounted to $7.5 million, or 23% of adjusted income before taxes. In 2001 our provision for taxes was $1.9 million on losses before income taxes of $2.7 million. This provision in 2001 was required because, even though we reported a loss on a consolidated basis for that year, a number of our subsidiaries were profitable.

Certain of our operations have experienced, and may continue to experience, period-to-period fluctuations in net service revenue and results from operations. Because we generate a large proportion of our revenue from services billed at hourly rates, our net service revenue in any period is directly related to the number of employees and the number of hours worked by those employees during that period. Our results of operations in any one quarter can fluctuate depending upon, among other things, the number of weeks in the quarter, the number and scope of ongoing client engagements, the commencement, postponement and termination of engagements in the quarter, the mix of revenue, the extent of cost overruns, employee hiring, vacation patterns, severe weather conditions, exchange rate fluctuations and other factors. We may also, in any given quarter, be required to make U.K. National Insurance contributions in connection with the exercise of options issued prior to our initial public offering by certain of our U.K. resident employees. We have only limited ability to compensate for periods of underutilization during one part of a fiscal period by augmenting revenues during another part of that period. We believe that operating results for any particular quarter are not necessarily a meaningful indication of the health of our business or of future results.

The following table sets out the unaudited quarterly consolidated financial data for the four quarters in the period January 1, 2003 to December 31, 2003 and the four quarters from January 1, 2002 to December 31, 2002. The unaudited quarterly consolidated financial data has been prepared on a basis consistent with the audited consolidated financial data, which are included in this Form 10-K. In the opinion of management they

Cash and cash equivalents totaled $24.6 million at December 31, 2003 compared with $19.9 million at December 31, 2002. Our principal sources of liquidity are cash flow from operations, borrowings under our credit facility and proceeds raised from the sale of our capital stock.

On November 25, 2003, we completed a public offering of 11.5 million shares of common stock at a price of $20 per share. The Company sold one million shares of common stock in this offering, raising net proceeds of $18.2 million.

At December 31, 2003, our bank credit facilities provided us with an aggregate of up to $133.2 million comprising $58.2 million of term loans in U.S. dollars and up to $75 million of multi-currency revolving loans. At December 31, 2003, we had drawn $58.2 million in term loans under the facility, which are repayable in quarterly instalments over the period to December 31, 2007. This facility bears interest at floating, LIBOR-based rates. We have limited our exposure to interest rate fluctuations on the loans drawn under this facility through a series of interest rate swaps. Our credit facility subjects us to significant affirmative, negative and financial covenants, is guaranteed by us and our significant subsidiaries and is secured by liens on substantially all of our assets.

Working capital balances which arise from our contracts with customers comprise accounts receivable, unbilled receivables and advance billings. A summary of these balances at December 31, 2003, September 30, 2003, June 30, 2003, March 31, 2003 and December 31, 2002 together with the number of days billings that they represent is set forth below.

The impact of the above balances on our cash flow from operations by quarter in 2003 and for the whole of 2002 was as follows:

The cash generated by our operating activities was $56.3 million in 2003. Cash generated by operating activities was $29.8 million in 2002. Compared with cash generated by operating activities, the cash flows relating to working capital movements have not been a major factor affecting liquidity.

The following table summarizes the Company’s commitments relating to its long-term debt, capital lease and operating lease obligations and its other contractual obligations.

(1)

Our long-term debt, excluding capital lease obligations was $58.8 million at December 31, 2003. The main component was $58.3 million of term loan borrowings under our bank credit facility. These borrowings are repayable quarterly based on our credit agreement. The facilities contain various restrictive covenants and breach of these covenants may result in accelerated repayment. In addition, we may choose to repay this debt early without any penalty.


(2)	Our purchase obligations represent our commitments for capital expenditure at December 31, 2003. The majority of our operating expenses excluding depreciation and amortization are payroll and property related. Accordingly, although we have not conducted a detailed investigation to identify all other purchase commitments as may exist, we believe any additional commitments are insignificant.

(3)	The payments reflected in the table above are based on the expected contribution rate applied to the pensionable payroll at December 31, 2003. The payments arise in pounds sterling and thus may fluctuate as a consequence of changes in exchange rates. The U.K. defined benefit pension plan is closed to new entrants. We have assumed that the pensionable payroll will rise in line with the assumptions made by our actuary in valuing the plan’s obligations and that the contributions rates will not change from the current levels.

(4)	This table does not reflect any amounts in respect of the long-term deferred taxation liabilities at December 31, 2003 as we are not able to predict when such amounts will fall due for payment.

We anticipate that our operating cash flow, together with available borrowings under our bank credit facility and the net proceeds we receive from any offerings, will be sufficient to meet our anticipated future operating expenses, capital expenditures (including our planned expansions at our pre-clinical facilities) and debt service and lease obligations as they become due over the next twelve months. Our corporate strategy of seeking continued growth contemplates the possibility of growth through acquisitions of other businesses, should appropriate opportunities become available. If we decide to seek to acquire other businesses, we expect to fund these acquisitions from existing cash resources, through additional borrowings and, possibly, with the proceeds of sales of our capital stock. We also may pursue acquisitions in which the consideration we pay takes the form of our capital stock.

Cash flow from operations in 2003 was $56.3 million compared to $29.8 million in 2002 (after paying in 2002 $21.5 million of accumulated interest on the 10% unsecured subordinated loan stock due 2008 following the completion of our initial public offering). The cash outflow on capital expenditures was $25.1 million compared to $25.5 million in 2002. There was a decrease in purchases of property, plant and equipment at our pre-clinical operations in Canada where payments amounted to $10.8 million in 2003 compared to $18.5 million in 2002. The decrease arose because the first stage of the expansion in our Canadian pre-clinical operations was completed in December 2002 and the next phase of expansion at these facilities has only recently commenced. We are also expanding our United Kingdom pre-clinical operations where purchases of property, plant and equipment were $9.9 million in 2003, an increase of $3.8 million over 2002. In addition we are investing in our systems in the clinical business and capital expenditure in clinical amounted to $4.3 million in 2003 compared to $1.0 million in 2002.

In 2003 the net cash outflow in respect of the acquisition of PharmaResearch was $38.9 million. This comprised the acquisition price of $43.2 million less cash acquired of $6.0 million plus acquisition costs and restructuring costs of approximately $1.6 million paid in 2003. We also repaid $67.5 million of borrowings under our former bank credit facilities and drew down net new borrowings under the new $150 million facility amounting to $58.2 million. We received $18.2 million net of expenses from the share issue we completed in November 2003 and we also received $2.2 million as a result of the exercise of share options in 2003. In 2002 we repaid $94.8 million of bank debt as well as $109.8 million of 10% unsecured subordinated loan stock due 2008 excluding accrued interest. This comprised all of the debt under the bank facilities in place prior to our initial public offering and all of the 10% unsecured subordinated loan stock due 2008. We also received IPO proceeds of $137.6 million net of expenses and drew down bank borrowings of $66.9 million, net of expenses under the bank credit facility arranged at the time of our initial public offering. We received $0.1 million in respect of the exercise of share options. As a consequence, the net cash outflow from financing activities was $0.1 million in 2002.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are affected by the way we apply our accounting policies. An accounting estimate is considered critical if: the estimate requires us to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate that would have a material impact our financial condition or results of operations are reasonably likely to occur from period to period. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The accounting policies which we consider to be critical accounting policies include revenue recognition and cost estimation on certain contracts for which we the proportional performance method of accounting, accounting for income taxes and accounting for pension obligations.

The majority of our revenues are recorded from fixed-price contracts on a proportional performance method based on assumptions regarding the estimated cost of completion of the work. Each month costs are accumulated on each project and compared to the budget for that particular project. This determines the portion of completion of the project. This percentage is multiplied by the contract value to determine the amount of revenue that can be recognized. Each month or each quarter, management reviews the budget on each project to determine if the assumptions within the budget are still correct and budgets are adjusted accordingly. As the work progresses, original estimates might be deemed incorrect due to revisions in the scope of work or other factors and a contract modification might be negotiated with the customer to cover additional costs. We bear the risk of cost overruns. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future. Should our estimated costs on fixed price contracts prove to be low in comparison to actual costs, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate. Clients generally may terminate a study at any time, which might cause unplanned periods of excess capacity and reduced revenues and earnings. To offset the effects of early terminations of significant contracts, we attempt to negotiate the payment of an early termination fee as part of the original contract.

We have a reserve for losses on contracts which is split between “Unbilled Receivables, net” and “Accrued Expenses” on our Consolidated Balance Sheets. This reflects the fact that our revenue recognition process involves a significant element of judgement in order to estimate the outcome of each contract and that there may be instances where the estimated costs are not covered by the estimated contract revenues. In such instances, we accrue for the whole of the estimated loss on the contract as soon as the estimated loss is identified. We believe our reserve for losses on contracts was adequate as of December 31, 2003 and 2002 based on our experience of performing contractual work for clients. However, no assurances can be given that actual losses will not exceed the recorded reserve. The impact on our income from operations resulting from the net movement in the reserve for contract losses was an expense of $0.6 million in the year ended December 31, 2003 and a reduction in expenses of $0.1 million in each of the years ended December 31, 2002 and December 30, 2001.

We operate in numerous countries but the tax regulations in the U.S., Canada and the United Kingdom have the most significant effect on our income tax and deferred tax assets and liabilities and our income tax expense. The tax regulations are highly complex and whilst we aim to ensure the estimates of tax assets and liabilities that we record are accurate, there may be instances where the process of agreeing our tax liabilities

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. We estimate the amounts of these credits each period based on our experience and knowledge of the relevant tax regulations. Because the level of the credits are based on the levels of qualifying costs, the tax credits are not directly related to income before income taxes and therefore the level of tax credits may fluctuate from period to period when compared to income before income taxes. Research and development tax credits reduced our income tax expense by $7.7 million, $7.5 million and $1.8 million in the three years ended December 31, 2003, December 31, 2002 and December 30, 2001.

We have deferred tax assets of $25.8 million and $21.4 million at December 31, 2003 and 2002 with corresponding valuation allowances of $15.8 million and $15.8 million at the same dates. These assets, and associated valuation allowances, relate mainly to pre-acquisition tax losses in certain operating subsidiaries. We assess the likelihood of the utilization of such assets and based on the historical performance of the relevant operations, limitations on the utilization of the assets and anticipated operating results, we have established valuation allowances. We continue to assess the allowances on the information available each period and our assessment may change in future periods. Any recognition of assets in respect of the pre-acquisition losses will result in a reduction in goodwill and will not generate an income tax benefit that is recognized in the statement of operations.

Certain of our U.K. based subsidiaries maintain a defined benefit pension plan. On December 31, 2002 this plan was closed to new entrants but it will continue to provide benefits to existing beneficiaries (including existing employees who have not yet retired). The pension liabilities that we record are based on a number of actuarial assumptions. These assumptions include discount rate, expected long term rate of return on plan assets and inflation rates. Our assumptions are based on current market conditions, historical information and consultation with and input from our actuaries. We review these assumptions annually at December 31. If the assumptions change, or if actual experience is different from the assumptions made previously, the funding status of the plan will change and we may need to record adjustments to our previously recorded pension liabilities.

At December 31, 2003 and 2002, the total pension liabilities recorded at the current exchange rate on those dates amounted to $24.6 million and $13.3 million. The funded status of the plan on those dates reflected deficits of $35.8 million and $24.3 million. If the actuarial assumptions underlying these liabilities were to be borne out exactly, we would be required to fund these deficits over a period of years which would approximate 17 years, the average remaining service lives of the existing scheme members. However, the assumptions are likely to change and the actual amounts that we are required to fund may increase or decrease as a consequence. The plan’s actuary, having considered the funding of the plan, has recommended that the current funding rate for the Company should be set at 14% of pensionable payroll which we estimate will approximate $3.6 million in 2004.

In April 2002, the FASB issued SFAS 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 were classified as extraordinary items by SFAS 4 are no longer classified as such. We adopted SFAS 145 for our fiscal year ending December 31, 2003. When adopted, prior extraordinary items related to the extinguishment of debt were reclassified. This resulted in the extraordinary items of $1.6 million (being $2.0 million before taxes and $0.4 million of income taxes) in 2002 and $0.4 million (being $0.6 million before taxes and $0.2 million of income taxes) in 2001 being reclassified to the interest expense and income taxes captions.

SFAS No. 132 (Revised 2003) (“SFAS 132R”) requires an entity to make additional disclosures about pensions and other post-retirement benefits. These disclosures include information describing the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows and components of net periodic pension cost. SFAS 132R is effective for domestic plans beginning with fiscal years ending after December 15, 2003 and for non-U.S. plans beginning with fiscal years ending after June 15, 2004. SFAS132R is effective for interim reporting period disclosures beginning after December 15, 2003 and after the provisions of this statement are adopted. The Company has adopted this statement for its U.K. plan in this form 10-K for the year ending December 31, 2003 and will adopt the quarterly reporting requirements in its Form 10-Q for the quarter ending March 31, 2004.

In December 2003, the FASB issued a revision to Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN46R” or the “Interpretation”). FIN46R clarifies the application of ARB No. 51 “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected residual returns, or both.

Among other changes, FIN46R (a) clarified some requirements of the original FIN46 which had been issued in January 2003, (b) eased some implementation problems and (c) added new exceptions. FIN46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period after March 15, 2004 except that all public companies must, at a minimum, apply the provisions of the Interpretation to all entities that were previously considered “special purpose entities” under the FASB literature prior to the issuance of FIN46R by the end of the first reporting period ending after December 15, 2003. The Company does not anticipate that the adoption of FIN46 will have a material impact on its financial position, cash flows or results of operations.

We are subject to market risks arising from changes in interest rates and foreign currency exchange rates.

Our primary interest rate exposure is in respect of future changes in the LIBOR or base rates that are used to determine the amounts of interest we are required to pay on borrowings under our bank credit facility. The outstanding indebtedness at December 31, 2003 under our bank credit facility , bore interest at a rate equal to LIBOR plus a margin of between 1.5% . That margin is set each quarter based on specified financial ratio tests and may vary between LIBOR plus 1.25% and LIBOR plus 2.0%.

In the third quarter of 2002 we cancelled the interest rate hedges we had used to hedge the interest exposure on our bank borrowings before our initial public offering. We subsequently entered into two new interest rate swap arrangements to hedge the interest rate exposure on our bank borrowings. The first arrangement is an interest rate swap with a notional amount of $50 million, which expires on September 30, 2005. Under this arrangement the LIBOR rate applicable to $50 million of bank debt is fixed at 2.9975%. The second arrangement is an interest rate swap with a notional amount of $10 million, which expires on September 30, 2004. Under this arrangement the LIBOR rate applicable to $10 million of bank debt is fixed at 2.5225%.

The interest rate swaps exceed our bank borrowings at December 31, 2003 by $1.8 million and this amount is exposed to unhedged fluctuations in interest rates. Our potential loss over one year that would result from a hypothetical, instantaneous change of 100 basis points in the interest rate is not significant.

We have not designated the interest rate swaps as hedges for financial reporting purposes pursuant to SFAS 133. As a consequence, we record, through the interest expense category in our statement of operations, any changes in the fair value of the swaps. The fair value of the swaps will fluctuate, mainly as a consequence of changes in market rates of interest. Accordingly, changes in market rates of interest can cause fluctuations in the level of our recorded interest expense from period to period. However, over the term of the swaps, the

Our Canadian business has a significant proportion of its working capital represented by assets and liabilities that are denominated in U.S. dollars. Accordingly, fluctuations in the U.S. dollar/ Canadian dollar exchange rate give rise to exchange gains and losses. These gains and losses arise from the conversion of U.S. dollars to Canadian dollars and the retranslation of cash, accounts receivable and unbilled receivable balances and to a lesser extent accounts payable balances. We have entered into a forward contract to sell U.S.$14 million and buy Can$18.6 million on March 31, 2004. This contract reduces our exposure to exchange gains and losses arising from the retranslation of the above balances during the life of the contract. The amounts of the U.S. dollar denominated balances held by our Canadian subsidiary fluctuate from time to time and based on the average balances in the five month period from June 30, 2003 to November 30, 2003 offset by the effects of the forward contract, we estimate that a hypothetical instantaneous 5% devaluation of the U.S. dollar against the Canadian dollar would give rise to recognition of an exchange loss (which would be included for financial reporting purposes in selling, general and administrative expenses) of less than $0.1 million, before income tax effects. On the same basis, we estimate that a hypothetical instantaneous 5% devaluation of the Canadian dollar against the U.S. dollar would give rise to recognition of an exchange gain (which for financial reporting purposes would be netted against and therefore reduce selling, general and administrative expenses) of less than $0.1 million before income tax effects.

A significant proportion of the revenues in our Canadian operations arise in U.S. dollars but the costs in these operations arise mainly in Canadian dollars. To monitor this we look at the results of operations of our Canadian business that arise in Canadian dollars. This is a net loss because it excludes the U.S. dollar denominated revenue stream but includes most of our Canadian costs. In 2003, we estimate that the net loss arising in Canadian dollars in our Canadian operations amounted to approximately $29 million. Based on this, a 5% strengthening of the Canadian dollar against the US dollar would reduce our group net income by $1.5 million over a period of a year and a 5% weakening of the Canadian $ against the US $ would increase group net income by $1.5 million over a period of a year.

Our European operations are less exposed to fluctuations in exchange rates than our Canadian operations. However, the net income of our European operations is recorded in the local currencies of the operations, principally pounds sterling, and then translated into U.S. dollars. In 2003, the net income arising in pounds sterling amounted to approximately $18 million. Based on this, a 5% strengthening of the pound sterling against the US dollar would increase our group net income by $0.9 million over a period of a year and a 5% weakening of the pound sterling against the US $ would decrease group net income by $0.9 million over a period of a year.

We also would potentially have exposure to foreign currency exchange rate fluctuations in respect of the cash flows received from our foreign affiliates. This risk is mitigated by the fact that their operations are conducted in their respective local currencies, and it is not our intention to repatriate earnings prospectively.

Our management does not believe that inflation in past years has had a significant impact on our results from operations. Our management believes that, in the event inflation affects our costs in the future, we will offset the effect of inflation and maintain appropriate margins through increased fees.

We have audited the accompanying consolidated balance sheets of Inveresk Research Group, Inc. and subsidiaries as of December 31, 2003 and December 31, 2002, and the related consolidated statements of operations, comprehensive income (loss) and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 2003, and December 31, 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As explained in Note 4 to the consolidated financial statements, effective January 1, 2002 the Company adopted Statements of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.”

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.

Effective January 1, 2002, the Company has changed its fiscal year end to the last calendar day in the year. In 2001 and prior years the fiscal year ended on the last Sunday of each calendar year. In 2001 the fiscal year contained 52 weeks and ended on December 30, 2001. The change was made so that the Company’s reporting periods will end on the same date each year and will be of equal length. The impact on the results of the periods presented in these financial statements is not significant.

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 (the 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 $1.5 million, this transaction had no impact on the consolidated assets or liabilities of the Company. The consolidated 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.

The Company completed its initial public offering of 12 million shares of common stock, at a price of $13 per share on July 3, 2002. It used the net proceeds of the offering, together with drawings under a new bank credit facility, to repay all of the outstanding principal and interest under the previously outstanding bank debt and under the 10% unsecured subordinated loan stock due 2008. As discussed below in Note 13, the Company recorded additional compensation-related charges of $48.5 million in connection with the initial public offering and related change of ultimate parent during 2002.

In February 2003, the Company announced a proposed public offering of up to 10.5 million shares of common stock. On March 7, 2003, the Company announced the withdrawal of the registration statement relating to this offering because market conditions at the time made it inadvisable to proceed with the offering. The costs relating to this proposed offering amounted to $0.7 million and were expensed in 2003.

On November 25, 2003 the Company completed an offering of 11.5 million shares of common stock at $20 per share. Of the 11.5 million share offering, 10.5 million were sold by existing shareholders, principally Candover Investments PLC and associated Candover entities and one million new shares were sold by the Company. The net proceeds received on the sale of shares by the Company amounted to $18.2 million.

The accompanying financial statements include the accounts of Inveresk Research Group, Inc. and its subsidiaries. All intercompany transactions, balances and profits are eliminated. All business combinations have been accounted for using the purchase method.

Under the purchase method, goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net assets of the acquired subsidiary at the date of acquisition. Goodwill is reported in the balance sheet as an intangible asset and, prior to January 1, 2002, was amortized using the straight-line method over its estimated useful life. The accounting policy for goodwill that took effect from January 1, 2002 is described in the Intangible Assets section of this Note. The gain or loss on disposal of an entity includes the unamortized balance of goodwill relating to the entity disposed of.

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates underlying the accompanying consolidated financial statements include the estimates made in the Company’s revenue recognition process, the reserve for losses on contracts and the assumptions underlying the accounting for our U.K. defined benefit pension plan. Actual results could differ from those estimates.

The consolidated financial statements are prepared in U.S. Dollars. The functional currency of each of the Company’s subsidiaries is the local currency in which each subsidiary is located. Transactions in foreign currencies are measured at the exchange rate in effect at the date of each transaction. Differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is either settled or remeasured are recognized in the statement of operations.

The financial statements of foreign subsidiaries are translated into U.S. Dollars using the current-rate method. Accordingly, assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange in effect during the year. Differences arising from the translation are recorded to accumulated other comprehensive loss.

The foreign currency exchange gain or loss recognized in the statements of operation and included in “Other selling, general and administrative expenses” was a loss of $3.2 million for the year ended December 31, 2003, a loss of $0.4 million for the year ended December 31, 2002 and a gain of $1.2 million for the 52 weeks ended December 30, 2001.

Many of the Company’s contracts are fixed-price contracts over one year in duration. Revenue for such contracts is recognized based on the proportional performance method of accounting. Revenue is recognized as costs are incurred and includes estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs (cost-to-cost type of percentage-of-completion method of accounting). The Company also has contracts with a duration of less than one year. Revenue is recognized on these contracts in the same manner as for contracts of more than one year duration except for contracts that

are at an agreed fee per hour. Revenue on agreed fee per hour contracts is recognized as services under the contract are provided.

Where the scope of a contract is extended, the costs incurred prior to the contract extension being agreed in writing by the client are included in the calculation of the percentage-of-completion of the existing contract, prior to the extension. The estimated revenues are not updated until the contract extension has been agreed in writing with the client. However, when this occurs, the estimated total contract revenues are recalculated and a cumulative adjustment to revenues earned to that point under the contract is recorded.

The Company follows the guidance in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). SAB 101 states that revenue should be recognized when all four of the following conditions exist: persuasive evidence of an arrangement exists; services have been rendered or delivery has occurred; the price is fixed or determinable; and collectibility is reasonably assured. When estimated contract costs indicate that a loss will be incurred on a contract, the entire loss is provided for in such period.

The Company routinely subcontracts with third party investigators in connection with multi-site clinical trials and with other third party service providers for laboratory analysis and other specialized services. Costs associated with contracting with third party investigators are excluded from net service revenue and expenses where they are the responsibility of the client and they are passed through to clients without any mark up.

Earnings (loss) per share is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” (“SFAS 128”). SFAS 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 stock options. The number of stock options not reflected in Diluted EPS because they were anti-dilutive or their exercise was conditional were nil in 2003, 2,366,217 in 2002 and 1,148,532 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.

Cash and cash equivalents include demand deposits and money market accounts held with financial institutions. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Billings are generally determined by contractual provisions that include predetermined date-certain payment schedules (which may include payment at or near the time the trial is initiated), the achievement of negotiated performance requirements or milestones, or the submission of required billing detail. Unbilled receivables arise from those contracts under which billings are rendered upon the achievement of certain negotiated performance requirements or on a date-certain basis and services rendered exceed billings. The Company expects to bill and collect these unbilled receivables within one year of revenue recognition. Advance billings represent contractual billings for services not yet rendered.

Financial instruments which potentially expose the Company to credit risk include unsecured accounts receivable. Concentrations of credit risk on accounts receivable is limited due to the large number of clients.

Additionally, the Company maintains allowances for potential credit losses and credit losses incurred have not exceeded management’s expectations. The Company’s exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding accounts receivable and unbilled services balance.

Inventories, which comprise consumables and supplies, are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method.

Maintenance repairs and minor renewals are charged to expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives. When assets are retired or otherwise disposed of, the cost is removed from the asset account and the corresponding accumulated depreciation is removed from the related reserve account. Any gain or loss resulting from such retirement or disposal is included in current income.

Depreciation is provided on a straight-line basis over the estimated useful economic lives of the assets as set out below:

Goodwill represents the excess of the fair value of the consideration over the fair value of the identifiable assets and liabilities acquired. For the periods ending before January 1, 2002, goodwill was amortized on a straight-line basis over twenty years.

Effective January 1, 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS 142) which applies to all goodwill and other intangible assets recognized in the balance sheet at that date, regardless of when the assets were initially recognized. Under SFAS 142, the Company no longer amortizes goodwill or other intangible assets with indefinite lives, but instead reviews them at least annually for impairment. The Company completes its impairment assessment in the second quarter of each year based on balances recorded at March 31. This has not resulted in any impairment for the periods presented.

The following table reflects the consolidated results of operations and the related per share amounts, as if SFAS 142 had been in effect for all periods presented.

In accordance with SFAS 128, there is no dilution shown in the above table in respect of stock options outstanding in the 52 weeks 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.

The Company evaluates long-lived assets and intangibles other than goodwill for impairment whenever events or changes in circumstances indicate that the value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposal are less than its carrying amount including any attributable goodwill. In such instances, the carrying value of long-lived assets is reduced to the estimated fair value, as determined using an appraisal or discounted cash flow analysis, as appropriate.

Income taxes are accounted for under the liability method in accordance with SFAS 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that a portion of the asset will not be realized.

The Company accounts for stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees‘(“APB 25”). Compensation cost for stock options granted to employees is based on the excess of the quoted market price of the Company’s stock on the measurement date over the amount an employee must pay to acquire the stock (the “intrinsic value”) and is recognized over the vesting period. No compensation cost was recognized in respect of options where the vesting of the options was conditional upon the listing of the Company’s shares on

a recognized stock exchange, prior to the condition being met. Once the condition was met, the compensation expense was recorded in full on the date when the condition was satisfied.

Had compensation expense been determined for the Company’s option grants consistent with the provisions of SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS 123”), the Company’s net income (loss) for the periods shown below would have reflected the pro forma amounts set forth in the table below. For periods prior to our initial public offering in June 2002, there would have been no change in the reported net income or loss.

The assumptions underlying the calculation of this pro forma information are described in Note 14.

Many of the Company’s activities are directed towards the performance of research on behalf of its clients and the Company is continually improving its scientific methods and techniques. All costs relating to the performance of client projects are expensed as incurred and there are no significant levels of expenditure on research and development on the Company’s own behalf.

The Company follows the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and used for hedging activities. All derivatives, whether designated for hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, all changes in the fair value of the derivative and changes in the fair value of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged item affects earnings. The ineffective portions of both fair value and cash flow hedges are immediately recognized in earnings.

The Company has not designated any of its derivative financial instruments as hedges for accounting purposes, and therefore the changes in fair value are reflected in income each period. This may cause volatility in quarterly earnings in the future.

Debt issuance costs relating to the Company’s bank loans and unsecured fixed rate debt are deferred and amortized to interest expense using the effective interest method over the respective terms of the debt concerned. Any unamortized debt issuance costs are written off in the period in which the associated indebtedness is repaid.

In April 2002, the FASB issued SFAS 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 were classified as extraordinary items by SFAS 4 are no longer classified as such. The Company adopted SFAS 145 for our fiscal year ending December 31, 2003. When adopted, prior extraordinary items related to the extinguishment of debt were reclassified. This resulted in the extraordinary items of $1.6 million (being $2.0 million before taxes and $0.4 million of income taxes) in 2002 and $0.4 million (being $0.6 million before taxes and $0.2 million of income taxes) in 2001 being reclassified to the interest expense and income taxes captions.

SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (Revised 2003), (“SFAS 132R”) requires an entity to make additional disclosures about pensions and other post-retirement benefits. These disclosures include information describing the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows and components of net periodic pension cost. SFAS 132R is effective for the Company beginning with fiscal years ending after December 15, 2003 and for non-U.S. plans beginning with fiscal years ending after June 15, 2004. SFAS132R is effective for interim reporting period disclosures beginning after December 15, 2003 and after the provisions of this statement are adopted. The Company has adopted this statement for its U.K. plan in this form 10-K for the year ending December 31, 2003 and will adopt the quarterly reporting requirements in its Form 10-Q for the quarter ending March 31, 2004.

The Company made two significant acquisitions during the three year period ended December 31, 2003. The acquisitions were accounted for under the purchase method of accounting and accordingly, the assets acquired and liabilities assumed were recorded at fair value as of the acquisition dates. The excess of the purchase price over the fair value of the assets acquired less the liabilities assumed has been recorded as goodwill. The results of operations of the acquired business have been included from the date of the acquisitions.

On July 29, 2003 the Company acquired all of the outstanding capital stock of PharmaResearch Corporation (“PharmaResearch”) for $43.2 million, financed through bank borrowings. PharmaResearch is a US-based drug development services group focused on the provision of Phase II-IV clinical trials support services, principally in the areas of respiratory and infectious diseases. At the time of the acquisition PharmaResearch was primarily based in Morrisville and Wilmington, North Carolina, with foreign operations based in the United Kingdom, France, Spain and China.

The acquisition of PharmaResearch allowed the Company to increase significantly the scale and service of its North American clinical development operations. Its strong presence in the field of respiratory and infectious diseases enabled Inveresk Research to build value-added clinical support services for the benefit of the enlarged client base. The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date.

The purchase price payable for PharmaResearch is subject to partial holdback. The customer contracts acquired have an estimated useful life of two years. The goodwill arising from the transaction was all assigned for financial reporting purposes to the clinical segment of the business. The customer contracts and goodwill are not deductible for tax purposes.

The Company established a plan at the acquisition date to integrate the operations of PharmaResearch with certain of its existing operations. The actions necessary to complete the integration included a reduction of 58 employees across the enlarged Company (37 employees of PharmaResearch and 21 employees of the Company), the relocation of the Morrisville operations of PharmaResearch to the Company’s premises in Cary, North Carolina, integration of certain administrative functions and operating entities between the two

businesses, combination of the PharmaResearch operations in London, Paris and Madrid with those of the Company and the closure of certain office premises.

In connection with this plan the Company has recorded provisions that have been reflected in the purchase price allocation of $2.6 million and provisions of $1.1 million that are included in restructuring and integration costs arising from business acquisitions in the consolidated statement of operations. The Company implemented the restructuring plan in early September, with 37 former PharmaResearch employees and 21 former Inveresk employees leaving the Company during September. By January 2004, the employees based at the PharmaResearch facility in Morrisville, North Carolina were relocated to the Company’s nearby facility in Cary, North Carolina and the office in China was closed. The following amounts have been recorded in respect of the restructuring plan:

The Company expects the remaining provisions for severance costs to be utilized in 2004. The lease termination and abandonment costs will be utilized over the terms of the property leases concerned.

On April 5, 2001, the Company acquired the whole of the outstanding stock of ClinTrials Research Inc. for cash of $120.8 million. The estimated fair value of assets acquired and liabilities assumed are summarized below:

Tax losses at the acquisition date amounted to approximately $40 million and these remain unutilized at December 31, 2003. A valuation allowance has been established against the whole of these losses, and to the extent that this valuation allowance is reduced in future, the reduction will be allocated to reduce goodwill.

Provision was made at acquisition for restructuring of the European Clinical operation of ClinTrials Research Inc. This was based upon a plan formulated at acquisition, approved by the directors of the Company in August 2001 and wholly implemented in 2001. The plan involved reducing the headcount in the acquired business, relocating certain functions from Maidenhead in England to various locations in Scotland and vacating office space in Maidenhead.

The provision established at acquisition comprised $1.7 million in respect of severance payments to 74 people in the statistical and data management and various administrative functions, $1.3 million relating to rental and services costs on the surplus space vacated at Maidenhead, $0.3 million relating to dilapidations on the Maidenhead property and $0.1 million of other expenditures.

The following unaudited consolidated pro forma results of operations for the years ended December 31, 2003 and 2002 give effect to the acquisition of PharmaResearch as if it was completed at the beginning of each period. These pro forma results reflect incremental financing costs resulting from the acquisition and the amortization of acquired intangible assets.

This unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to represent the results of operations which would actually have occurred had the companies operated as one during the period, nor to predict the Company’s results of future operations. No effect has been included for synergies, if any, that might have been realized through the acquisition.

Included in plant and equipment are assets with a cost of $0.7 million and $2.9 million at December 31, 2003 and December 31, 2002 which are the subject of capital leases.

The customer contracts were acquired in connection with the acquisition of PharmaResearch. Future amortization expense is expected to be $1.4 million in 2004 and $0.8 million in 2005.

In July 2003, the Company entered into a new $150 million syndicated bank credit facility part of which was used to finance the acquisition of PharmaResearch and also to repay the borrowings outstanding under our former bank credit facility. Scheduled principal repayments of $1.9 million were made on each of September 30, 2003 and December 31, 2003. In addition on December 31, 2003, we repaid $13 million of the term loan facility ahead of schedule. At December 31, 2003 the facility totaled $133.2 million comprised of $58.2 million of term loans in U.S. dollars and up to $75 million of loans available in multiple currencies under a revolving credit arrangement.

At December 31, 2003, the borrowings under the facility comprised $58.2 million drawn down as a five year term loan with repayments due quarterly until December 31, 2007. Such borrowings bear interest at rates between LIBOR plus 1.25% and LIBOR plus 2.00% depending on the ratio of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) to borrowings. Based on the financial position of the company at September 30, 2003 the borrowings currently bear interest at LIBOR plus 1.5%. The exposure to interest rate fluctuations on the loans drawn under this facility has been limited by retaining, with minor amendments, the interest rate swaps entered into previously in connection with the previous bank credit facility. The bank credit facility subjects the Company to significant affirmative, negative and financial covenants, is guaranteed by the Company and its significant subsidiaries and is secured by liens on substantially all of the assets and pledges of the shares of the subsidiaries. The covenants include, but are not limited to, a maximum leverage ratio, a minimum net worth amount and a minimum amount for the ratio of consolidated EBITDA to consolidated financial charges. The Company was in compliance with these covenants at December 31, 2003.

At December 31, 2002, $67.5 million of bank debt had been drawn under a bank credit facility (“the facility”). Such debt was repayable in U.S. dollars and bore interest at the London Inter-Bank Offered Rate (“LIBOR”) plus 1.25%. The facility was secured by the Company’s principal assets. The borrowings were

repaid in part on various dates during 2003 and we made a final repayment of the borrowings under the facility immediately prior to completing the acquisition of PharmaResearch on July 29, 2003.

The carrying amounts of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities approximate fair value because of the short term maturity of these instruments. The carrying amount of the Company’s long term debt approximates fair value because of the variability of the interest cost associated with these borrowings.

The Company uses foreign exchange contracts to manage the risk of foreign exchange rate fluctuations. At December 31, 2003 the Company had one forward currency contract outstanding. This was to sell $14 million and buy Can$18.552 million on March 31, 2004. This contract was recorded at fair value of $0.3 million at December 31, 2003 and an unrealized gain of $0.3 million was recorded in selling general and administrative expenses.

The Company also enters into interest swap arrangements related to its bank borrowings to manage its exposure to variability in cash flows associated with floating interest rates. At December 31, 2003 the Company had two outstanding interest rate swap arrangements. The first arrangement is an interest rate swap, which has a notional amount of $50 million and expires on September 30, 2005. Under this agreement the LIBOR rate applicable to $50 million of debt is fixed at 2.9975%. The second arrangement is an interest rate swap, which has a notional amount of $10 million and expires on September 30, 2004. Under this arrangement the LIBOR rate applicable to $10 million of debt is fixed at 2.5225%. The estimated fair value of these two swaps is based on the quoted market prices. At December 31, 2003 and December 31, 2002, the fair value was estimated to be a liability of $1.0 million and $1.1 million, respectively. The unrealized gains or losses recorded as additional interest income or cost in the years ended December 31, 2003 and December 31, 2002 were a gain of $0.1 million and a loss of $1.1 million. In the year ended December 30, 2001, an additional interest cost of $2.0 million was recorded on the mark to market of interest rate swaps in place during that year.

The Company leases office space and office equipment under various operating leases. Minimum rental commitments payable in future years under operating leases having initial or remaining non-cancellable terms of one year or more at December 31 are as follows:

The Company has capital lease obligations relating to scientific machinery, vehicles and office equipment. The Company’s commitments under capital leases are:

The Company has commitments in relation to capital expenditure amounting to $3.1 million at December 31, 2003 and had commitments of $12.1 million at December 31, 2002. Payments of the capital commitments at December 31, 2003 are all expected to be made in 2004.

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

The Company’s Canadian subsidiary qualifies for Canadian Federal and Quebec Scientific Research and Development deductions and tax credits. Expenditures on certain capital assets are fully deductible or may be carried forward indefinitely until utilized. The tax credits are equal to 30% of certain capital and current expenditures. The Canadian federal tax credits are accounted for using the flow through method, in which the

Canadian federal credits are recognized as a reduction of income taxes in the year the credit arises. Quebec provincial tax credits are reported as a component of income from operations in the statement of operations, rather than as a reduction of income tax expense. In the three years ended December 31, 2003, December 31, 2002 and December 30, 2001, $3.5 million, $3.4 million and $1.8 million of Quebec provincial tax credits were offset against direct costs in the statement of operations.

Provision has not been made for United States or additional foreign taxes on undistributed earnings of foreign subsidiaries as those earnings have been permanently reinvested and the Company has no plans in the foreseeable future to remit these earnings to the United States. It is not practicable to determine the amounts involved.

Significant components of the provision (benefit) for income taxes are as follows:

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

A valuation allowance has been established for the amount of United States deferred tax assets primarily related to the Company’s potential tax benefit associated with loss carryforwards. At December 31, 2003, the Company had approximately $39 million of federal net operating loss carryforwards, $31 million of which begin to expire in 2018. Foreign tax losses available for offset against future profits of the business in which they arose, amount to approximately $19 million and have no expiry date.

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 before 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”) on June 28, 2002 under its 2002 Stock Option Plan. The replacement options were issued with exercise prices, exercise periods and other terms substantially the same as those of 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 date of grant of the options they replaced. At December 31, 2003 the number of replacement options remaining outstanding was 615,479. The Company has also issued options that vest in equal annual instalments over the three years following the date of grant. At December 31, 2003 the number of shares issuable on exercise of these options outstanding was 1,204,469.

The following table summarizes the options outstanding and exercisable under these plans:

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

The Company accounts for stock-based compensation plans under the provisions of APB 25. For options granted on or after June 27, 2002, the exercise price was equal to the market price of the underlying stock and accordingly no compensation expense is recorded. The exercise of all options granted prior to June 27, 2002 was conditional upon the listing of the Company’s shares on a recognized stock exchange. No compensation cost was recognized in respect of these options prior to this condition being met. Once the condition was met, the compensation expense was recorded in full on the date when the condition was satisfied.

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 was recorded in respect of the outstanding share options that vested in accordance with their terms. The Company recorded an additional compensation expense of $29.092 million in connection with its initial public offering, when the percentage equity interest held by certain members of its management team increased in accordance with the terms governing the original issuance of shares of those individuals.

Pro forma information regarding net income is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options under the fair value method of that statement. The information required is shown in Note 4.

For purposes of this disclosure, the fair values of the fixed option grants were estimated using the Black-Scholes option-pricing model. The assumptions used have not changed between periods and are as follows:

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective valuation assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in subjective assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

The Company operates both defined contribution plans and a funded defined benefit pension plan, covering certain qualifying employees. Contributions under defined contribution plans are determined as a percentage of gross salary. The expense related to these plans for the year ended December 31, 2003 was $1.9 million, for the year ended December 31, 2002 was $0.9 million and for the 52 weeks ended December 30, 2001 was $1.4 million.

The Company operates a funded defined benefit pension plan. The benefits under the defined benefit plan are based on years of service and salary levels. Plan assets are primarily comprised of marketable securities. The following provides a reconciliation of benefit obligations, plan assets and the funded status of the defined benefit plan.

The following table sets forth the funded status of the defined benefit pension plan:

As of December 31, 2003 and 2002 and December 30, 2001, the accumulated benefit obligations of $79.6 million, $52.3 million and $45.1 million exceeded the plan assets by $24.6 million, $13.3 million and $4.7 million respectively. The weighted average assumptions used to determine the projected benefit obligation are:

The weighted average assumptions used to determine the net periodic pension cost are:

Net periodic pension costs for the defined benefit pension plan include the following components:

The trustees of the defined benefit plan follow a defined investment policy that is set out in the plan’s statement of investment principles prepared in accordance with the requirements of the United Kingdom Pensions Act 1995. The investment policy is guided by an overall objective of achieving over the long term, a return on investments which is consistent with the long term assumptions made by the plan’s actuary in determining the funding of the plan. Over the shorter term the objective is to achieve favorable returns against

the investment manager’s respective benchmarks. The target asset allocation is 80% equities and 20% fixed interest securities.

The expected rate of return on assets is based on a weighted average expected rate of return on equities of 8.0% and of 5.25% on fixed interest securities. These rates are established with reference to market rates of return and are reviewed annually.

As of December 31, 2003, the expected future benefits to be paid for each of the next five years and in the aggregate for the succeeding five years thereafter translated from pounds sterling at the December 31, 2003 exchange rate are as follows:

As of December 31, 2003, the best estimate of contributions expected to be paid to fund the plan for the next year is £2.0 million (equivalent to $3.6 million). This is based on the funding rate of 14% of pensionable payroll recommended by the plan’s actuary.

The measurement date used to determine the majority of the plan assets and benefit obligations was December 31, 2003.

The Company is a full-service drug development services group serving the pharmaceutical, biotechnology and medical device industries. Its 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 based on the location of the business providing the service.

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 client accounted for more than 10% of the Company’s consolidated net revenue for any of the periods covered by these financial statements.

From time to time the Company is subject to claims, suits and administrative proceedings arising in the ordinary course of business. The company does not expect that any of the claims, suits or proceedings of which we have been notified will have a material adverse effect upon its liquidity, results of operations or financial condition.

Prior to its initial public offering in 2002, the Company entered into various transactions with its principal shareholder, Candover Investments PLC. The Company’s unsecured subordinated loan stock that was repaid at the time of its initial public offering, was held by Candover Investments PLC and certain other Candover Investors. The Company paid costs associated with the issue of the loan stock to Candover Investments PLC amounting to $0.7 million in 2001. The Company paid charges to Candover Investments PLC for the services of Mr. I. Gray as a director of Inveresk Research Group Limited amounting to less than $0.1 million in each of 2002 and 2001.

Certain of the directors of Inveresk Research Group, Inc. own common stock of the Company and also hold stock options.

At December 31, 2003 and December 31, 2002, $0.9 million and $1.1 million respectively of the reserve for losses on contracts was offset against unbilled receivables and $4.0 million and $2.5 million respectively was included within accrued expenses in the consolidated balance sheets.

The information required by this item is incorporated herein by reference to our definitive proxy statement, which will be filed no later than March 31, 2004.

The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining a system of disclosure controls and procedures to ensure the accuracy and completeness of the Company’s quarterly and annual reports. They are also responsible for conducting a review of the effectiveness of the disclosure controls and procedures, and disclosing their conclusions about the effectiveness of the disclosure controls and procedures based on the review.

The system of disclosure controls and procedures cannot provide absolute assurance on the accuracy and completeness of the Company’s annual and quarterly reports, but it has been designed to meet the Company’s needs and the risks to which it is exposed.

There is a continuous process of identifying, evaluating and managing the risks to which the Company is exposed that has been in place throughout 2003. The key elements of the process are:


	•	Formal reporting on a monthly basis to the Chief Executive Officer and Chief Financial Officer on the results of operations and on any emerging risks and issues. The monthly results are analyzed by business segment and all significant variations from budget and the prior year are investigated. The day-to-day responsibility for each business unit rests with experienced management and the Company has a clear organization structure that includes appropriate delegation of authority. There is regular contact between the Chief Executive Officer and Chief Financial Officer and the President of each business unit.

	•	Formal Board approval of the annual budget for each financial year. Annual budgets are prepared in detail for each business unit.

	•	Review of each quarterly or annual report by the Audit Committee. The Audit Committee also meets with the Company’s external auditors on a quarterly basis to discuss the results of the external auditors’ review of the quarterly financial statements or audit of the annual financial statements and any internal control matters arising from such review or audit.

	•	Confirmation each quarter from the President of each business unit covering the accuracy of the reported financial results of the business, and that all significant issues affecting the business have been reported to the Chief Executive Officer and Chief Financial Officer.

	•	Confirmation from the Vice-President of Finance for each business unit that certain financial control procedures have been completed.

	•	Consultation on significant matters with the Company’s professional advisers.

In addition to the above procedures, the Company has an internal audit function and a formal plan is now in place. The internal audit function has been outsourced to one of the big four international accounting firms other than our external independent auditors. The internal audit team reports regularly to the Audit Committee and senior management.

Based on their review of the disclosure controls and procedures as of December 31, 2003, the Chief Executive Officer and Chief Financial Officer have concluded that the Company has effective disclosure controls and procedures.

There have been no significant changes in the internal controls nor in other factors that could significantly affect these controls subsequent to December 31, 2003.

We maintain a code of ethics governing the conduct of our business and behavior by our personnel. A copy of this code may be obtained by sending a written request to 11000 Weston Parkway, Cary, North Carolina, 27513, Attention: Martha Boyd.

Our audit committee is chaired by S. Louise McCrary who is independent of management and fulfills the criteria for qualification as a financial expert.

Copies of our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K may be obtained free of charge through our website at www.inveresk.com.

Except for information relating to our code of ethics, as mentioned in Item 9A above, the information required by this item is incorporated herein by reference to our definitive proxy statement, which will be filed no later than March 31, 2004.

The information required by this item is incorporated herein by reference to our definitive proxy statement, which will be filed no later than March 31, 2004.

Except for information relating to equity compensation plans, as disclosed in Item 5 above, the information required by this item is incorporated herein by reference to our definitive proxy statement, which will be filed no later than March 31, 2004.

The information required by this item is incorporated herein by reference to our definitive proxy statement, which will be filed no later than March 31, 2004.


	1. Financial Statements

	The financial statements listed in the Index to Consolidated Financial Statements are filed as part of this report.

	2. Schedules

	None.

	3. Exhibits

	The Exhibits listed in the Exhibit Index are incorporated by reference in or filed as part of this report.

We filed a Current Report on Form 8-K, dated October 29, 2003, including our press release announcing our earnings information for the quarter ended September 30, 2003, a transcript of a conference call held on

October, 29, 2003, discussing the results for the quarter ended September 30, 2003 and a slide presentation given on October 29, 2003 with respect to the results for the quarter ended September 30, 2003.

We filed an amended Current Report on Form 8-K/ A, dated October 30, 2003 containing an amended consent of independent auditors’ relating to the consolidated financial statements of PharmaResearch Corporation.

We filed a Current Report on Form 8-K, dated November 7, 2003 including our press release announcing a proposed public offering of 10,000,000 shares of common stock (with an additional 1,500,000 shares issuable upon exercise of the underwriters’ over allotment option).

We filed a Current Report on Form 8-K, dated November 20, 2003 including our press release announcing the pricing of a public offering of stock.

We filed a Current Report on Form 8-K, dated November 20, 2003 containing a copy of the form of underwriting agreement expected to be used in connection with the public offering.

We filed a Current Report on Form 8-K, dated November 26, 2003 including our press release announcing the closing of a public offering of 11,500,000 shares of common stock.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ D.J. PAUL E. COWAN



	D.J. Paul E. Cowan
	Chief Financial Officer and Treasurer

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


*	Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-83536).


†	Incorporated by reference to our Form 10-K filing for the year ended December 31, 2002.


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Fiscal Year ended December 31, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware (State or other jurisdiction of incorporation or organization)		43-1955097 (I.R.S. Employer Identification No.)

11000 Weston Parkway, Suite 100, Cary, NC (Address of principal executive offices)		27513 (Zip Code)


			Page

PART I				2
	ITEM 1.	Business		2
	ITEM 2.	Properties		13
	ITEM 3.	Legal Proceedings		13
	ITEM 4.	Submission of Matters to a Vote of Security Holders		14
PART II				14
	ITEM 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		14
	ITEM 6.	Selected Consolidated Financial Data		15
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		17
	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		35
	ITEM 8.	Financial Statements and Supplementary Data		37
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		69
	ITEM 9A.	Controls and Procedures		69
PART III				71
	ITEM 10.	Directors and Executive Officers		71
	ITEM 11.	Executive Compensation		71
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		71
	ITEM 13.	Certain Relationships and Transactions		71
	ITEM 14.	Principal Accounting Fees and Services		71
	ITEM 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		71
LIST OF SUBSIDIARIES
302 CERTIFICATION: CEO
302 CERTIFICATION: CFO
906 CERTIFICATION: CEO AND CFO


		High		Low

Fiscal Year Ending December 31, 2004
	First quarter (through February 17, 2004)	$	28.90	$	23.25


		High		Low

Fiscal Year Ended December 31, 2003
	First quarter	$	21.65	$	11.50
	Second quarter	$	19.53	$	12.85
	Third quarter	$	21.73	$	15.00
	Fourth quarter	$	25.85	$	19.75


	*Demand for New Drugs Based on Changing Population Demographics*


	*Escalating Research and Development Expenditures by Pharmaceutical Companies*


	*The Emergence of New Research and Development Technologies*


	*The Need for Improved Productivity and Cost Effectiveness*


	*The Increasingly Complex and Demanding Regulatory Environment*


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


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*


		High		Low

Fiscal Year Ended December 31, 2002
	Second quarter (from June 28, 2002)	$	13.15	$	12.96
	Third quarter	$	19.05	$	8.67
	Fourth quarter	$	22.12	$	16.55



		Inveresk Research Group(1)(4)															Predecessor

								52 Weeks			53 Weeks			September 20,			December 28,
		Year Ended			Year Ended			Ended			Ended			1999 to			1998 to
		December 31,			December 31,			December 30,			December 31,			December 26,			September 19,
		2003			2002			2001			2000			1999			1999


		(Dollars in thousands, except share and per share data)
Statement of Operations Data:
Net service revenues		$	272,482		$	222,462		$	156,296		$	65,540		$	16,832		$	47,088
Direct costs excluding depreciation			(141,603	)		(110,099	)		(83,975	)		(36,133	)		(9,645	)		(27,177	)

			130,879			112,363			72,321			29,407			7,187			19,911
Selling, general and administrative expenses:
	Compensation expense in respect of share options and management equity incentives		—			(53,020	)		—			—			—			—
	U.K. stamp duty taxes on change of ultimate parent company		—			(1,545	)		—			—			—			—
	Share offering expenses		(658	)		—			—			—			—			—
	Restructuring and integration costs arising from business acquisitions		(1,088	)		—			—			—			—			—
	Other selling, general and administrative expenses		(70,106	)		(56,455	)		(41,934	)		(13,825	)		(3,275	)		(9,013	)

Total selling, general and administrative expenses			(71,852	)		(111,020	)		(41,934	)		(13,825	)		(3,275	)		(9,013	)
Depreciation			(12,301	)		(10,315	)		(8,028	)		(4,513	)		(809	)		(3,731	)
Amortization of goodwill and intangibles(5)			(580	)		—			(7,910	)		(3,281	)		(973	)		(242	)

Income (loss) from operations			46,146			(8,972	)		14,449			7,788			2,130			6,925
Interest (expense), net(6)			(3,464	)		(13,343	)		(17,694	)		(7,522	)		(2,004	)		(560	)

Income (loss) before income taxes			42,682			(22,315	)		(3,245	)		266			126			6,365
Provision for income taxes			(4,560	)		(5,694	)		(1,875	)		(682	)		(325	)		(2,308	)

Net income (loss)		$	38,122		$	(28,009	)	$	(5,120	)	$	(416	)	$	(199	)	$	(4,057	)

Earnings (loss) per share:(2)(3)
	Basic	$	1.04		$	(0.94	)	$	(0.24	)	$	(0.03	)	$	(0.01	)		N/A
	Diluted	$	1.01		$	(0.94	)	$	(0.24	)	$	(0.03	)	$	(0.01	)		N/A
Weighted average number of common shares outstanding:(2)(3)
	Basic		36,527,491			29,735,957			21,489,571			15,803,724			15,803,724			N/A
	Diluted		37,705,378			29,735,957			21,489,571			15,803,724			15,803,724			N/A
Dividends per share(2)(3)			—			—			—			—			—			N/A
Other data:
	Depreciation and amortization	$	12,881		$	10,315		$	15,938		$	7,794		$	1,782		$	3,973
	Capital expenditures	$	30,414		$	25,497		$	11,145		$	6,792		$	1,307		$	5,305


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operation*


Item 1.	*Business*


	*General*


	*Globalization of Clinical Development*


	*General*



	Severance and
	Related Costs						Other Costs						Lease
													Termination and
	Pharma						Pharma						Abandonment
	Research			Inveresk			Research			Inveresk			Costs


	(Dollars in thousands)
Amount established at acquisition	$	1,190		$	676		$	348		$	412		$	1,137
Utilized from July 29, 2003 to December 31, 2003		(877	)		(676	)		(242	)		(344	)		—

Balance at December 31, 2003	$	313		$	—		$	106		$	68		$	1,137


	*Earnings Charges in Respect of the Change in Ultimate Parent Company and in Respect of Equity-Based Compensation*


	U.S. Dollars		U.S. Dollars
	Per Pound		Per Canadian
	Sterling		Dollar

Fiscal Year
2001	$	1.4405	$	0.6428	(1)
2002		1.5032		0.6368
2003		1.6341		0.7159


	United
	Kingdom			Canada

Fiscal Year
2001		54	%		31	%
2002		46	%		38	%
2003		46	%		34	%


		Quarter			Quarter			Quarter			Quarter
		Ended			Ended			Ended			Ended
		December 31,			September 30,			June 30,			March 31,
		2003			2003			2003			2003


		(Dollars in thousands except share and per share data)
Net service revenue
Pre-clinical		$	42,988		$	41,590		$	42,231		$	36,329
Clinical			34,204			28,981			24,804			21,355

		$	77,192		$	70,571		$	67,035		$	57,684

Income from operations
Pre-clinical		$	10,978		$	11,668		$	12,206		$	8,782
Clinical			4,441			2,980			2,797			2,263
Corporate overhead including share offering expenses, restructuring and other selling, general and administrative expenses			(2,649	)		(2,784	)		(2,062	)		(2,474	)

		$	12,770		$	11,864		$	12,941		$	8,571

Net income		$	11,022		$	9,564		$	10,159		$	7,377

Earnings per share:
	Basic	$	0.30		$	0.26		$	0.28		$	0.20
	Diluted	$	0.29		$	0.25		$	0.27		$	0.20
Weighted average number of common shares outstanding:
	Basic		37,159,079			36,505,169			36,352,511			36,081,610
	Diluted		38,336,966			37,720,565			37,624,192			37,366,463



	December 31, 2003						September 30, 2003						June 30, 2003						March 31, 2003						December 31, 2002

				No. of						No. of						No. of						No. of						No. of
				Days Net						Days Net						Days Net						Days Net						Days Net
	Balance			Revenue			Balance			Revenue			Balance			Revenue			Balance			Revenue			Balance			Revenue

	($’000s)						($’000s)						($’000s)						($’000s)						($’000s)
Accounts receivable	$	53,391			71		$	45,012			62		$	36,428			53		$	36,289			57		$	39,266			64
Unbilled receivables		24,331			33			26,144			36			25,643			37			24,371			38			20,706			34

Sub total		77,722			104			71,156			98			62,071			90			60,660			95			59,972			98
Advance billings		(56,745	)		(76	)		(48,266	)		(67	)		(40,840	)		(59	)		(40,625	)		(64	)		(41,415	)		(68	)

	$	20,977			28		$	22,890			31		$	21,231			31		$	20,035			31		$	18,557			30



			Payments Due by Period

			Less Than						More Than
	Total		1 Year		1 to 3 Years		3 to 5 Years		5 Years


	(Dollars in thousands)
Long-term debt obligations(1)	$	58,798	$	7,857	$	32,066	$	18,875	$	—
Capital lease obligations		353		161		192		—		—
Operating lease obligations		52,829		7,049		12,516		11,887		21,377
Purchase obligations(2)		3,104		3,104		—		—		—
Pension obligation(3)		24,576		3,568		7,570		8,187		5,251

	$	139,660	$	21,739	$	52,344	$	38,949	$	26,628


Item 8.	*Financial Statements and Supplementary Data*


		Page

Consolidated financial statements
	Independent Auditors’ Report		38
	Consolidated Statements of Operations for the years ended December 31, 2003, December 31, 2002 and December 30, 2001		39
	Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002		40
	Consolidated Statements of Cash Flows for the years ended December 31, 2003, December 31, 2002 and December 30, 2001		41
	Consolidated Statements of Comprehensive Income (Loss) and Shareholders’ Equity for the years ended December 31, 2003, December 31, 2002 and December 30, 2001		42
	Notes to Consolidated Financial Statements		43


		December 31		December 31,
		2003		2002


		(In thousands,
		except share data)
ASSETS
Current assets:
	Cash and cash equivalents	$	24,579	$	19,909
	Accounts receivable, net of allowance for doubtful accounts of $1,525 in 2003 and $1,021 in 2002		53,391		39,266
	Unbilled receivables, net of reserve for losses on contracts of $897 in 2003 and $1,110 in 2002		24,331		20,706
	Income taxes receivable		4,045		2,979
	Inventories		1,619		1,167
	Deferred income taxes (Note 12)		144		—
	Other current assets		6,902		4,300

Total current assets			115,011		88,327
Property, plant and equipment (Note 6)			145,364		108,570
Goodwill (Note 7)			184,239		135,043
Intangible assets (Note 8)			2,203		—
Deferred income taxes (Note 12)			669		—
Deferred debt issue costs			1,593		527

		$	449,079	$	332,467


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	20,389	$	10,792
	Advance billings		56,745		41,415
	Accrued expenses (Note 9)		29,050		21,399
	Income taxes payable		2,018		2,871
	Deferred income taxes (Note 12)		334		204
	Current portion of long term debt (Note 10)		7,857		217

Total current liabilities			116,393		76,898
Deferred income taxes (Note 12)			22,994		22,139
Long term debt (Note 10)			50,941		67,768
Defined benefit pension plan obligation (Note 14)			24,576		13,259
Commitments and contingencies (Note 11)
Shareholders’ equity:
	Preferred stock, $0.01 par value 10,000,000 authorized, none issued		—		—
	Common stock, $0.01 par value 150,000,000 authorized; 37,863,498 and 36,004,777 issued and outstanding at December 31, 2003 and December 31, 2002		379		360
	Additional paid-in capital		211,963		191,618
	Retained earnings (accumulated deficit)		4,329		(33,793	)
	Accumulated other comprehensive income (loss)		17,504		(5,782	)

Total shareholders’ equity			234,175		152,403

		$	449,079	$	332,467


														Accumulated
		Shares of									Retained			Other
		Common Stock		Total			Par Value		Additional		Earnings			Comprehensive
		$0.01 Par		Shareholders’			Paid-In		Paid-In		(Accumulated			Income
		Value		Equity			Capital		Capital		Deficit)			(Loss)


		(In thousands, except share data)
Balance at December 31, 2000			15,803,724	$	247		$	158	$	807	$	(664	)	$	(54	)
Issue of common stock			7,665,364		388			77		311		—			—
Comprehensive loss:
	Foreign currency translation adjustments				(1,675	)		—		—		—			(1,675	)
	Cumulative-effect adjustment for SFAS 133 (net of income taxes of $58)				(135	)		—		—		—			(135	)
	Provision for accumulated benefit obligation under SFAS 87 (net of income taxes of $484)				(1,090	)		—		—		—			(1,090	)
	Net loss for period to December 30, 2001				(5,120	)		—		—		(5,120	)		—

Comprehensive loss					(8,020	)

Balance at December 30, 2001			23,469,088	$	(7,385	)	$	235	$	1,118	$	(5,784	)	$	(2,954	)
Issue of common stock, net of offering costs of $18,425			12,535,689		137,691			125		137,566		—			—
Compensation expense in respect of share options and management equity incentives					52,934			—		52,934		—			—
Comprehensive income (loss):
	Foreign currency translation adjustments				2,655			—		—		—			2,655
	Provision for accumulated benefit obligation under SFAS 87 (net of income taxes of $2,350)				(5,483	)		—		—		—			(5,483	)
	Net loss for year to December 31, 2002				(28,009	)		—		—		(28,009	)		—

	Comprehensive loss				(30,837	)

Balance at December 31, 2002			36,004,777	$	152,403		$	360	$	191,618	$	(33,793	)	$	(5,782	)
Issue of common stock, net of offering costs of $1,000			1,858,721		20,364			19		20,345		—			—
Comprehensive income (loss):
	Foreign currency translation adjustments				29,089			—		—		—			29,089
	Tax benefit arising on options granted on or after June 27, 2002				219			—		—		—			219
	Provision for accumulated benefit obligation under SFAS 87 (net of income taxes of $2,581)				(6,022	)		—		—		—			(6,022	)
	Net income for year to December 31, 2003				38,122			—		—		38,122			—

	Comprehensive income				61,408

Balance at December 31, 2003			37,863,498	$	234,175		$	379	$	211,963	$	4,329		$	17,504


Land		not depreciated
Buildings		40 years
Leasehold improvements		lesser of the term of the lease or the useful life
Machinery and equipment		5 to 10 years
Office furniture and machines		3 to 10 years
Vehicles		3 to 5 years


	(Dollars in
	thousands)

Cash	$	5,976
Other current assets		15,571

Total current assets		21,547
Property, plant and equipment		2,249
Customer contracts		2,783
Goodwill		34,907
Current liabilities		(18,236	)
Deferred taxation liabilities		(53	)
Long term portion of capital leases		(9	)

Purchase price (including acquisition costs)	$	43,188


	(Dollars in
	thousands)

Allocation of purchase price:
Net current assets (including cash of $5,700)	$	1,201
Property, plant and equipment		37,353
Goodwill		95,699
Deferred taxation liabilities		(13,183	)
Long term liabilities		(223	)

Purchase price (including acquisition costs)	$	120,847


	*Fair Value of Financial Instruments and Derivative Instruments*


	(Dollars in
	thousands)

2004	$	7,049
2005		5,849
2006		6,667
2007		6,272
2008		5,615
Thereafter		21,377

Total minimum rentals		52,829
Less minimum rentals due under non-cancellable subleases		(674	)

	$	52,155


13.	Stock Option and Other Equity-Based Compensation Plans


	Shares of Common					Weighted
	Stock Issuable					Average
	upon Exercise			Exercise Price		Exercise Price

Outstanding at December 31, 2000		213,286		$	0.19	$	0.19
Granted during 2001		948,159		$	0.03-$ 0.40	$	0.22
Forfeited during 2001		(12,913	)	$	0.19	$	0.19
Exercised during 2001		—			—		—

Outstanding at December 30, 2001		1,148,532		$	0.03-$ 0.40	$	0.22
Granted during 2002		1,809,941		$	0.03-$20.14	$	6.84
Forfeited during 2002		(56,567	)	$	0.19-$13.00	$	9.88
Exercised during 2002		(535,689	)	$	0.05-$ 0.40	$	0.22

Outstanding at December 31, 2002		2,366,217		$	0.03-$20.14	$	5.05
Granted during 2003		421,950		$	14.68-$17.75	$	17.40
Forfeited during 2003		(109,498	)	$	10.60-$17.75	$	11.46
Exercised during 2003		(858,721	)	$	0.03-$10.60	$	2.52

Outstanding at December 31, 2003		1,819,948		$	0.03-$20.14	$	8.72


Shares of Common Stock
Issuable Upon Exercise		Exercise Price

	207,891	$	0.03 per share
	11,736	$	0.05 per share
	27,634	$	0.19 per share
	368,218	$	0.40 per share
	749,619	$	10.60 per share
	35,000	$	13.00 per share
	40,000	$	14.68 per share
	3,500	$	16.35 per share
	40,000	$	17.17 per share
	328,850	$	17.75 per share
	7,500	$	20.14 per share

	1,819,948


Risk-free interest rate	3.0	%
Volatility factor	60	%
Weighted average expected life of options in months	21.8