GENERAL

The following should be read in conjunction with the consolidated financial statements of LSR as presented in "Item 8 Financial Statements and Supplementary Data".

The Company provides pre-clinical and non-clinical biological safety evaluation research services to most of the world's leading pharmaceutical and biotechnology companies, as well as many agrochemical and industrial chemical companies. The purpose of this safety evaluation is to identify risks to humans, animals or the environment resulting from the use or manufacture of a wide range of chemicals, which are essential components of the Company's customers' products. The Company's services are designed to meet the regulatory requirements of governments around the world.

The Company's aim is to develop its business within these markets, principally in the pharmaceutical sector, and through organic growth. In doing so, the Company expects to benefit from strong drug pipelines in the pharmaceutical industry and a growing trend towards greater outsourcing as customers focus more internal resources on research and increasingly look to variabilize their development costs.

The Company's business is characterized by high fixed costs, in particular staff and facility related costs. Such a high proportion creates favorable conditions for the Company as excess capacity is utilized, such as has been the case during the last three years. However, during periods of declining revenue, careful planning is required to reduce costs without impairing revenue-generating activities.

While the Company believes that the market it operates in will continue to grow for the foreseeable future, both in absolute dollar amount and in the percentage of pre-clinical work that is outsourced, it is currently experiencing what it expects is near term softness in demand driven by a number of factors, including reorganizations and reprioritization within pharmaceutical industry customers, and contraction in spending by biotechnology customers who are facing a challenging financing environment. Although the Company cannot predict how long these factors will continue to depress growth in the market for outsourced services, it believes that historical growth levels should resume

The recent volatility in the currency markets has had an adverse effect on the Company's results during the latter part of 2008 due to the weakening of the British Pound against the US Dollar, as more than 75% of the Company trade is denominated in Pounds. The continued uncertainty in the currency markets means that there remains a risk of further volatility in the results in the future.

CRITICAL ACCOUNTING ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with US GAAP. The Company considers the following accounting policies to be critical accounting estimates.

In preparing its consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, the Company makes assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. The Company bases its assumptions, judgments and estimates on historical experience and various other factors that it believes to be reasonable under the circumstances. These assumptions, judgments and estimates are evaluated on a regular basis. Critical accounting policies and estimates are also discussed with the Audit Committee of the Board of Directors.

Actual outcomes may differ from these assumptions, judgments and estimates and these differences may have a material impact on the consolidated financial statements.

The Company believes that the assumptions, judgments and estimates involved in the accounting for revenue recognition, pensions and income taxes have the greatest potential impact on its consolidated financial statements. These areas are key components of the Company's results of operations and are based on complex rules which require the Company to make judgments and estimates, so it considers these to be its critical accounting policies. Historically, the Company's assumptions, judgments and estimates relative to its critical accounting policies have not differed materially from actual results.

A summary of the significant accounting policies is set out below:

Revenue Recognition

The majority of the Company's net revenues have been earned under contracts, which generally range in duration from a few months to three years. Net revenue from these contracts is generally recognized over the term of the contracts as services are rendered. Contracts may contain provisions for re-negotiation in the event of cost overruns due to changes in the level of work scope. Renegotiated amounts are included in net revenue when earned and realization is assured. Provisions for losses to be incurred on contracts are recognized in full in the period in which it is determined that a loss will result from performance of the contractual arrangement. Most service contracts may be terminated for a variety of reasons by the Company's customers either immediately or upon notice at a future date. The contracts generally require payments to the Company to recover costs incurred, including costs to wind down the study, and payment of fees earned to date, and in some cases to provide the Company with a portion of the fees or income that would have been earned under the contract had the contract not been terminated early.

Unbilled receivables are recorded for net revenue recognized to date that is currently not billable to the customer pursuant to contractual terms. In general, amounts become billable upon the achievement of certain aspects of the contract or in accordance with predetermined payment schedules. Unbilled receivables are billable to customers within one year from the respective balance sheet date. Fees in advance are recorded for amounts billed to customers for which net revenue has not been recognized at the balance sheet date (such as upfront payments upon contract authorization, but prior to the actual commencement of the study).

If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. While such issues have not historically been significant, any such resulting reductions in margins or contract losses could be material to the Company's results of operations.

Prior to December 31, 2002, a defined benefit pension plan provided benefits to employees in the UK based on their final pensionable salary. As of December 31, 2002, the defined benefit pension plan was curtailed. The pension cost of the plan is accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions". Pension information is presented in accordance with the currently required provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" and FAS158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans". The measurement of the related benefit obligation and net periodic benefit cost recorded each year is based upon actuarial computations which require the use of judgment as to certain assumptions. The more significant of these assumptions are: (a) the appropriate discount rate to use in computing the present value of the benefit obligation; and (b) the expected return on plan assets (for funded plans). Actual results (such as the return on plan assets and plan participation rates) will likely differ from the assumptions used. Those differences, along with changes that may be made in the assumptions used from period to period, will impact the amounts reported in the financial statements and note disclosures. The net (loss)/gain subject to amortization, outside the corridor, is being amortized on a straight-line basis over a period of 15 years. The Company recognized all actuarial gains and losses immediately for the purposes of its minimum pension liability.

Taxation

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period in which the enactment rate changes. Deferred tax assets and liabilities are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

On January 1, 2007, the Company adopted FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109. FIN 48 provides guidance on recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return.

Year ended December 31, 2008 compared with year ended December 31, 2007

The Company is currently experiencing what it expects is a near term softness in demand driven by a number of factors, including reorganizations and reprioritizations within pharmaceutical industry customers, and contraction in spending by biotechnology customers who are facing a challenging financing environment. This impacted orders in the latter part of the year with the result that orders for the year ended December 31, 2008 were $233.9 million, an 8% decrease on orders for the year ended December 31, 2007 at constant exchange rates. This reduction in orders, together with a significant weakening of the British Pound against the US dollar in the fourth quarter of 2008 reduced backlog and restricted the growth in revenues in 2008. At December 31, 2008 backlog (booked-on work) amounted to approximately $142 million, a decrease of 25% from the level at December 31, 2007 (5% net of foreign currency effect). Net revenues for the year ended December 31, 2008 were $242.4 million, an increase of 2.4% on net revenues of $236.8 million for the year ended December 31, 2007. The underlying increase after adjusting for the impact of the movement in exchange rates was 8.4%.

Cost of sales in the year ended December 31, 2008 were $169.3 million (69.8% of net revenue), an increase of 2.1% on cost of sales of $165.8 million (70.0% of net revenue) for the year ended December 31, 2007. The underlying increase after adjusting for the impact of the movement in exchange rates was 8.5%. The decrease in cost of sales as a % of net revenue was due to a reduction of 70 basis points in overhead costs as a % of net revenue with improved capacity utilization, and a reduction of 30 basis points in direct study costs as a % of net revenue was due to a change in the mix of business. These were offset by an increase of 80 basis points in labor costs as a % of revenue. In addition to general headcount increases during the first half of the year, which were mostly reversed during the second half of the year through attrition, there were a limited number of hires to strengthen the scientific and operational infrastructure of the Company. Compensation packages had also been increased, particularly for certain key positions within the Company, but beginning in 2009, steps have been taken to reduce staffing costs throughout the Company.

Selling, general and administrative expenses declined by 4.9% to $37.2 million (15.3% of net revenue) for the year ended December 31, 2008 from $39.1 million (16.5% of net revenue) in the year ended December 31, 2007. The underlying decrease after adjusting for the impact of the movement in exchange rates was 1.1%. The decrease in costs was due to a decrease in incentive accruals and a decline in accrued UK employer taxes associated with the decrease in value of outstanding management share options.

Net interest expense decreased by 16.6% to $11.3 million for the year ended December 31, 2008 from $13.6 million in the year ended December 31, 2007. This decrease of $2.3 million was due to a $3.2 million net interest saving associated with the reduction in the LIBOR based borrowing rate associated with the March 2006 Financing, a $0.1 million decrease in capital lease interest expense, and a $0.1 million decrease in interest expense related to the amortization of debt issue and financing costs, offset by a reduction in interest receivable of $1.1 million. The Company reclassified from other expense to interest expense $2.4 million and $2.8 million relating to amortization of finance arrangement fees for 2008 and 2007, respectively. The Company believes this reclassification is appropriate and in accordance with Regulation S-X, rule 5-03 - Income Statements. There was no effect on the consolidated financial statements for the years ended December 31, 2008 and 2007 as a result of this reclassification.

Other expense of $12.8 million for the year ended December 31, 2008 comprised $14.1 million from the non-cash foreign exchange remeasurement expense on the March 2006 Financing denominated in US dollars (the functional currency of the financing Subsidiary that holds the loan is UK sterling), offset by other exchange gains of $1.3 million. In the year ended December 31, 2007 other income of $0.9 million comprised $0.8 million from the non-cash foreign exchange remeasurement gain on the March 2006 Financing denominated in US dollars (the functional currency of the financing Subsidiary that holds the loan is UK sterling) and other exchange gains of $0.1 million.

A reconciliation between the US statutory tax rate and the effective rate of tax expense/benefit on income/losses before taxes for the year ended December 31, 2008 and December 31, 2007 is shown below:

                                                % of income before income taxes
                                                    2008                2007
                                                     %                    %
   US statutory rate                                 35                  35
   Foreign rate differential                        (4)                  (5)
   UK R & D credit and non-deductible items        (105)                (53)
   Valuation allowance                               55                  195
   State taxes                                       -                    -
   Change in estimate                                31                   1
   Effective tax rate                                12                  173

The Company derives significant benefit from the UK Research and Development Tax Credit for large companies. In 2009, this will be amended and the relief will be extended further. As a result the Company does not anticipate reporting any UK tax liability for the foreseeable future.

Net income for the year ended December 31, 2008 was $10.4 million compared with a $14.0 million net loss for the year ended December 31, 2007. Net earnings per common and fully diluted share were $0.81 and $0.70 for the year ended December 31, 2008 respectively, compared with a $1.10 loss per share, basic and fully diluted, for the year ended December 31, 2007.

Year ended December 31, 2007 compared with year ended December 31, 2006

Net revenues in the year ended December 31, 2007 were $236.8 million, an increase of 23.2% on net revenues of $192.2 million for the year ended December 31, 2006. The underlying increase, after adjusting for the impact of the movement in exchange rates was 15.6%; with the UK showing a 14.0% increase and the US a 21.2% increase. The growth in net revenues reflects the increase in orders and, consequently, backlog over the last two years, principally from the pharmaceutical industry. Orders for the year ended December 31, 2007, of $266.7 million were 7% above the previous year at constant exchange rates. At December 31, 2007 backlog (booked-on work) amounted to approximately $190 million, an increase of 9% above the level at December 31, 2006 (7% net of foreign currency effect).

Cost of sales in the year ended December 31, 2007 were $165.8 million (70.0% of net revenue), an increase of 16.2% on cost of sales of $142.7 million (74.2% of net revenue) or the year ended December 31, 2006. The underlying increase after adjusting for the impact of the movement in exchange rates was 9.0%. The decrease in cost of sales as a % of net revenue was due to improved efficiencies associated with net revenue increases and improved capacity utilization, including a reduction of 140 basis points in overhead costs as a % of net revenue and an 80 basis point reduction in labor costs as a % of net revenues. In addition a reduction of 200 basis points in direct study costs as a % of net revenue was due to a change in the mix of business.

Other operating expenses were $0 for the year end December 31, 2007, compared with $10.5 million for the year end December 31, 2006. The 2006 expenses comprised $7.7 million for warrant costs and $1.0 million flotation expenses associated with the listing of the Company's shares on the NYSE Arca in 2006 and $1.8 million litigation and other expenses associated with the Animal Rights campaign against the Company.

Net interest expense decreased by 22.5% to $13.6 million for the year ended December 31, 2007 from $17.5 million in the year ended December 31, 2006. This decrease of $3.9 million was due to a $2.3 million decrease in capital lease interest expense, $1.1 million net interest saving associated with the March 2006 Financing, a $0.8 million saving caused by the deconsolidation of the variable interest entity in 2006, and additional interest receivable of $0.7 million, offset by an additional $1.0 million interest expense related to the amortization of debt issue and financing costs. The Company reclassified from other expense to interest expense $2.8 million and $5.0 million relating to amortization of finance arrangement fees for 2007 and 2006, respectively. The Company believes this reclassification is appropriate and in accordance with Regulation S-X, rule 5-03 - Income Statements. There was no effect on the consolidated financial statements for the years ended December 31, 2007 and 2006 as a result of this reclassification.

Other income of $0.9 million for the year ended December 31, 2007 comprised $0.8 million from the non-cash foreign exchange remeasurement gain on the March 2006 Financing denominated in US dollars (the functional currency of the financing Subsidiary that holds the loan is UK sterling) and other exchange gains of $0.1 million. In the year ended December 31, 2006 there was other income of $6.9 million which comprised $6.2 million from the non-cash foreign exchange remeasurement gain on the March 2006 Financing and Convertible Capital Bonds denominated in US dollars (the functional currency of the financing Subsidiary that held the loan and bond was UK sterling) and other exchange gains of $0.7 million.

Income tax expense on profits for the year ended December 31, 2007 was $33.2 million representing an expense at 173% of pre-tax profit compared to an income tax benefit of $6.9 million representing a benefit at 640% of pre-tax losses for the year ended December 31, 2006. A reconciliation between the US statutory tax rate and the effective rate of tax expense/benefit on income/losses before taxes for the year ended December 31, 2007 and December 31, 2006 is shown below:

                                                      % of income before
                                                         income taxes
                                                       2007        2006
                                                        %            %
          US statutory rate                             35         (35)
          Foreign rate differential                    (5)         (23)
          UK R & D credit and non-deductible items     (53)        (468)
          Valuation allowance                          195           -
          State taxes                                   -          (74)
          Change in estimate                            1          (40)
          Effective tax rate                           173         (640)

The Company derives significant benefit from the UK Research and Development Tax Credit for large companies. In 2009, this will be amended and the relief will be extended further. As a result the Company does not anticipate reporting any UK tax liability for the foreseeable future. The Company has therefore recorded a valuation allowance of $37.4 million to reflect a reversal of the previously recorded tax provision that recognized the net tax asset associated with the Company's UK Net Operating Losses ("NOLs") and UK defined benefit pension plan liability. This changed treatment of the NOL tax asset does not impact their availability to the Company in the future, should circumstances change.

In 2006, the main reason for the change in estimate relates to the US leaseback gain that arose from the sale of the US property as part of the Sale/Leaseback Transaction. Under FIN46R the gain was originally recognized in 2005 and charged to income taxes. This charge reversed in 2006 as the deferred gain was recognized due to the deconsolidation of the variable interest entity. The gain on the sale of the UK assets was offset against brought forward capital losses in 2005. A revision to the treatment of the losses on the UK buildings sold as part of the Sale/Leaseback Transaction in 2005 also caused a change in estimate in 2006.

Net Loss for the year ended December 31, 2007 was $14.0 million compared with $14.9 million for the year ended December 31, 2006. Net loss per common and fully diluted share was $1.10 for the year ended December 31, 2007 compared with $1.18 for the year ended December 31, 2006.

GEOGRAPHICAL ANALYSIS

The analysis of the Company's net revenues, operating income/(loss) and total
assets between the two geographical areas and Corporate for the three years
ended December 31, 2008 is as follows:

The performance of each the two geographical areas and Corporate is measured by
net revenues and operating income/(loss) before other operating expenses.

              Company                       2008         2007       2006
                                            $000         $000       $000
                                                   (Restated)
              Net revenues
                 UK                      187,638      186,935    151,079
                 US                       54,784       49,865     41,138
                 Corporate                     -            -          -
                                        $242,422     $236,800   $192,217
              Operating income/(loss)
                 UK                       36,450       34,951     21,676
                 US                        9,819        8,309      5,268
                 Corporate (a)          (10,354)     (11,385)   (17,372)
                                         $35,915      $31,875     $9,572
              Total Assets
                 UK                      121,505      154,640    183,312
                 US                       46,923       43,921     39,781
                 Corporate                 2,770        3,022      7,486
                                        $171,198     $201,583   $230,579

(a) Operating loss for Corporate in 2006 included other operating expense of $10,497. See Note 9 Other Operating Expense within Item 8 for further explanation.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at December 31, 2008 were $36.5 million and were held in accounts denominated in the following currencies:

                       Currency                       2008
                       (Amounts in USD Equivalents)   $000
                       Dollar                       23,165
                       Sterling                     12,093
                       Euro                            884
                       Yen                             351
                                                    36,493

The Company retains sufficient working capital in the appropriate currencies to meet its local short term requirements. These local currency balances are normally funded by the collection of similar currency accounts receivables. Excess cash is converted into US Dollars and held on deposit to act as an economic hedge against the Company's US Dollar denominated debt.

The company has approximately $78 million of outstanding debt. $57 million of this debt relates to the March 2006 Financing, and is repayable on March 1, 2011. In addition, the company has a long term lease of $21 million arising on the sale and leaseback deal (Alconbury) which is classed as long-term debt.

The company's expected primary cash needs on both a short-term and a long-term basis are for capital expenditures, expansion of services, possible future . . .