The following discussion of the financial condition and results of operations of Life Sciences Research, Inc ("LSR") and Subsidiaries (collectively, "the Company") should be read together with the financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in more detail in its 2008 Annual Report on Form 10-K. The Company undertakes no obligation to update any information in its forward-looking statements.

OVERVIEW OF THE COMPANY'S BUSINESS

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 clients' 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. A number of the larger pharmaceutical companies are going through mergers and acquisitions, or reprioritizing their research and development functions, and as a result there has been a short term decrease in outsourced projects. It is expected that this pharmaceutical development market will return in the medium term and that the Company will benefit from improving drug pipelines across the industry. In addition there is a growing trend towards greater outsourcing as clients focus more internal resources on research and increasingly look to variabilize their development costs.

On July 8, 2009, the Company entered into the Merger Agreement with Parent and Lion, a wholly owned subsidiary of Parent. Each of Parent and Lion was formed for the purpose of consummating the transactions contemplated by the Merger Agreement, and each of such entities is controlled by Andrew Baker, Chairman and CEO of the Company. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Lion will merge with and into the Company (the "Merger"), with the Company continuing as the surviving company and a wholly owned subsidiary of Parent following the Merger.

A Special Committee consisting of the Company's independent directors was charged with evaluating strategic alternatives for the Company and unanimously recommended the approval of the Merger. Based upon this recommendation, the Board of Directors of the Company (with Andrew Baker and Brian Cass abstaining), approved the Merger and resolved to recommend that LSR stockholders approve the Merger. The Special Committee was advised by independent counsel and an independent financial advisor who provided a fairness opinion to the Special Committee.

The Merger Agreement provides that, upon consummation of the Merger, each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the effective time of the Merger, other than Shares owned by Parent, Lion or their affiliates, will be converted into the right to receive $8.50 in cash. Based upon the latest information available to the Company, Mr. Baker beneficially owns approximately 17.5% of the Shares. No stockholder has any statutory right to demand and receive payment of the fair value of his, her or its Shares in connection with the Merger.

Consummation of the Merger is subject to a number of conditions, including without limitation: (i) the approval of the Merger by (A) the holders of at least a majority of the outstanding Shares entitled to vote on the Merger at a stockholders' meeting duly called and held for such purpose and (B) a majority of the votes cast by holders of outstanding Shares entitled to vote on the Merger at a stockholders' meeting duly called and held for such purpose, excluding any votes cast by Parent, Lion, Andrew Baker or any other "interested party" (as such term is defined in the Merger Agreement); (ii) the absence of any "company material adverse effect" (as defined in the Merger Agreement); and
(iii) other closing conditions set forth in the Merger Agreement.

Each of the Company and Parent have the right to terminate the Merger Agreement under certain circumstances, which may require the payment of a termination fee.

The foregoing description is qualified in its entirety by reference to the full text of the Merger Agreement filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 9, 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of the Company's financial condition and operating results is based on the Company's financial statements. The preparation of this Quarterly Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company's financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. See "Notes to Unaudited Condensed Financial Statements" in Part I of this Quarterly Report for a presentation of the Company's significant accounting policies. No changes have been made to the Company's critical accounting policies and estimates disclosed in its 2008 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Three months ended June 30, 2009 compared with three months ended June 30, 2008.

The Company is continuing to experience 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 second quarter of 2009 with the result that orders for the quarter ended June 30, 2009 were $44.7 million, a 25% decrease on orders for the quarter ended June 30, 2008 at constant exchange rates. This reduction in orders, following on from a reduction in orders in the first quarter of 2009, together with a significant weakening of the British Pound against the US dollar since the first half of 2008, reduced revenues in the second quarter of 2009 compared to the second quarter of 2008.

Net revenues for the three months ended June 30, 2009 were $45.3 million, a decrease of 29.7% on net revenues of $64.3 million for the three months ended June 30, 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 15.5%; with the UK showing a 16.5% decrease and the US a 12.0% decrease.

Cost of sales for the three months ended June 30, 2009 were $33.3 million (73.6% of revenue), a decrease of 23.4% on cost of sales of $43.5 million (67.6% of revenue) for the three months ended June 30, 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 8.1% with the UK showing an 8.7% decrease and the US a 5.7% decrease. The increase in cost of sales as a % of revenue was due to an increase of 70 basis points in salary costs as a % of revenue, an increase of 180 basis points in direct study costs as a % of revenue, and a 330 basis points increase in overhead costs as a % of revenues. The increases in labor and overhead costs as a % of revenues were due to a reduction in capacity utilization consequent upon the decline in revenue. In the case of labor this was offset by a reduction in salaries and related costs effective April 1, 2009, while the increase in overhead costs as a % of revenues also reflected higher utility costs. The increase in direct study costs as a % of revenues was due to a change in the mix of business.

Selling, general and administrative expenses ("SG&A") decreased by 40.5% to $6.4 million for the three months ended June 30, 2009 from $10.8 million in the corresponding period in 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 30.1%. The decrease was due to lower incentive expenses and professional fees.

Acquisition-related expenses in the three months ended June 30, 2009 were $1.5 million. These represented costs associated with the Merger, and were comprised predominantly of professional fees.

Net interest expense decreased by 10.7% to $2.6 million for the three months ended June 30, 2009 from $2.9 million for the three months ended June 30, 2008.

Other income of $4.4 million for the three months ended June 30, 2009 comprised $5.3 million from the non-cash foreign exchange re-measurement gain on the March 2006 Financing denominated in US dollars (the functional currency of the subsidiary that holds the loan is UK sterling), offset by other exchange losses of $0.9 million. In the three months ended June 30, 2008 other income of $23 thousand comprised a non-cash foreign exchange re-measurement gain on the March 2006 Financing denominated in US dollars (the functional currency of the subsidiary that holds the loan is UK sterling) of $29 thousand offset by other exchange losses of $6 thousand.

Income tax benefit for the three months ended June 30, 2009 was $0.5 million. This reflects a tax benefit arising in the US, which the Company expects to utilize during the course of 2009. The income tax benefit for the three months ended June 30, 2008 was $0.1 million. Net operating losses are $99.5 million at June 30, 2009, with net operating losses in the US of $17.3 million and net operating losses in the UK of $82.2 million.

Net income for the three months ended June 30, 2009 was $6.3 million compared with net income of $7.3 million for the three months ended June 30, 2008. The decrease in net income of $1.0 million is due to a $6.0 million decrease in operating income, offset by an increase in other income of $4.4 million, a decrease in the net interest expense of $0.3 million and an increase in the income tax benefit of $0.3 million.

Net income per outstanding common share for the three months ended June 30, 2009 was 47 cents, compared to 58 cents income in the three months ended June 30, 2008, on the weighted average common shares outstanding of 13,349,055 and 12,655,038 respectively. Net income per fully diluted share for the three months ended June 30, 2009 was 44 cents, compared to 47 cents in the three months ended June 30 2008, on the weighted average fully diluted common shares outstanding of 14,443,061 and 15,559,193 respectively.

Six months ended June 30, 2009 compared with six months ended June 30, 2008.

The Company is continuing to experience 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 first six months of 2009 with the result that orders for the six months ended June 30, 2009 were $85.4 million, a 26% decrease on orders for the six months ended June 30, 2008 at constant exchange rates. This reduction in orders, following on from a reduction in orders in the second half of 2008 and a significant weakening of the British Pound against the US dollar since the first half of 2008, reduced revenues in the first six months of 2009 compared to the first six months of 2008.

Net revenues for the six months ended June 30, 2009 were $93.3 million, a decrease of 26.9% on net revenues of $127.6 million for the six months ended June 30, 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 9.1%; with the UK showing an 8.6% decrease and the US an 11.2% decrease.

Cost of sales for the six months ended June 30, 2009 were $67.6 million (72.5% of revenue), a decrease of 22.2% on cost of sales of $86.9 million (68.1% of revenue) for the six months ended June 30, 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 3.7% with the UK showing a 3.7% decrease and the US a 3.3% decrease. The increase in cost of sales as a % of revenue was due to an increase of 120 basis points in salary costs as a % of revenue, an increase of 90 basis points in direct study costs as a % of revenue, and a 200 basis points increase in overhead costs as a % of revenues The increases in labor and overhead costs as a % of revenues were due to a reduction in capacity utilization consequent upon the decline in revenue. In the case of labor this was offset by a reduction in salaries and related costs effective April 1, 2009, while the increase in overhead costs as a % of revenues also reflected higher utility costs. The increase in direct study costs as a % of revenues was due to a change in the mix of business.

Selling, general and administrative expenses (SG&A) decreased by 31.9% to $14.3 million for the six months ended June 30, 2009 from $21.0 million in the corresponding period in 2008. The underlying decrease, after adjusting for the impact of the movement in exchange rates was 18.3%. The decrease was due to lower incentive expenses and professional fees.

Acquisition-related expenses in the six months ended June 30, 2009 were $1.5 million. These represented costs associated with the Merger, and were comprised predominantly of professional fees.

Net interest expense decreased by 8.9% to $5.2 million for the six months ended June 30, 2009 from $5.7 million for the six months ended June 30, 2008.

Other income of $4.3 million for the six months ended June 30, 2009 comprised $5.2 million from the non-cash foreign exchange re-measurement expense on the March 2006 Financing denominated in US dollars (the functional currency of the subsidiary that holds the loan is UK sterling), offset by other exchange losses of $0.9 million. In the six months ended June 30, 2008 other expense of $37 thousand comprised a non-cash foreign exchange re-measurement loss on the March 2006 Financing denominated in US dollars (the functional currency of the subsidiary that holds the loan is UK sterling) of $21 thousand and other exchange losses of $16 thousand.

Income tax benefit for the six months ended June 30, 2009 was $1.0 million. This reflects a tax benefit arising in the US, which the Company expects to utilize during the course of 2009. The income tax benefit for the six months ended June 30, 2008 was $0.1 million.

Net income for the six months ended June 30, 2009 was $10.0 million compared with net income of $14.0 million for the six months ended June 30, 2008. The decrease in net income of $4.0 million is due to a $9.8 million decrease in operating income, offset by an increase in other income of $4.3 million, a decrease in the net interest expense of $0.5 million and an increase in the income tax benefit of $1.0 million.

Net income per outstanding common share for the six months ended June 30, 2009 was 75 cents, compared to $1.11 income in the six months ended June 30, 2008, on the weighted average common shares outstanding of 13,347,991 and 12,644,034 respectively. Net income per fully diluted share for the six months ended June 30, 2009 was 69 cents, compared to 91 cents in the six months ended June 30, 2008, on the weighted average fully diluted common shares outstanding of 14,451,822 and 15,480,308 respectively.

LIQUIDITY & CAPITAL RESOURCES

Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2009 were $39.5 million and were held in
accounts denominated in the following currencies:

                  Currency                       June 30, 2009
                  (Amounts in USD Equivalents)   $           000

                  Dollar                                  23,910
                  Sterling                                10,967
                  Euro                                       949
                  Yen                                      3,660
                                                          39,486

The Company has approximately $78 million of outstanding debt. $56 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 $22 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 acquisitions, geographic expansion, working capital and other general corporate purposes, including possible share repurchases.

As of June 30, 2009, the Company had a working capital surplus of $19.4 million, and the Company believes that projected cash flow from operations will satisfy its contemplated cash requirements for at least the next 12 months.

Net days sales outstanding ("DSO") at June 30, 2009 were 26 days, a decrease from 30 days at December 31, 2008 (21 days at June 30, 2008). DSO is calculated as a sum of accounts receivable, unbilled receivables and fees in advance over total net revenue. The impact on liquidity from a one-day change in DSO is approximately $542,000.

During the six months ended June 30, 2009, the Company's operating activities generated net cash of $5.8 million. The change in net operating assets and liabilities used $5.3 million, mainly caused by the decrease in accounts payable, accrued expenses and other liabilities, which used $6.3 million, offset by the decrease in DSO which generated $1.6 million.

Investing activities for the six months ended June 30, 2009 used $4.3 million, as a result of capital expenditures.

Financing activities for the six months ended June 30, 2009 used $1.2 million, due to capital repayments of the March 2006 Financing.

The effect of exchange rate movements on cash for the six months ended June 30, 2009 was an increase of $2.7 million.

The Company's cash balances increased by $3.0 million during the six months ended June 30, 2009.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2009, the Company did not engage in any off-balance sheet arrangements as defined in Item 303 (a) (4) of Regulation S-K under the Securities Act of 1933, as amended, that have, or are likely to have, a material current or future effect on its consolidated financial position or results of operations.

Recently Issued Accounting Standards
In April 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS No. 165 for the quarter ending June 30, 2009. Adoption did not have a material impact on our consolidated financial statements as of and for the three and six months ended June 30, 2009.

In April 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS No. 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity ("VIE"), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("SFAS 168"). SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect adoption to have a material impact on our consolidated financial statements.

Effective January 1, 2009, the Company adopted SFAS No. 141(R), "Business Combinations - a replacement of FASB Statement No. 141" ("SFAS 141R"). Under SFAS 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. For the Company, SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired contingencies under SFAS 109. With the adoption of SFAS 141R, any tax related adjustments associated with acquisitions that closed prior to January 1, 2009 will be recorded through income tax expense, whereas the previous accounting treatment would require any adjustment to be recognized through the purchase price. The adoption of SFAS 141R did not have any impact on the Company's consolidated financial statements as of and for the three and six months ended June 30, 2009.

Effective January 1, 2009, the Company adopted FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-2 delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the 2009 fiscal year. These include goodwill and other non-amortizable intangible assets. The adoption of SFAS 157 did not have a significant impact on the Company's consolidated financial statements as of and for the three and six months ended June 30, 2009.

Effective January 1, 2009, the Company adopted FASB Staff Position No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other U.S. GAAP. The adoption did not have a material impact on the Company's consolidated results of operations or financial condition as of and for the three and six months ended June 30, 2009.

In December 2008, the FASB issued FASB Staff Position 132(R)-1 ("FSP 132R-1"), which provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132R-1 requires disclosure of investment allocation methodologies and information that enables users of financial statements to assess the inputs and valuation techniques used to develop fair value measurements of plan assets in order to provide users with an understanding of significant concentrations of risk in plan assets. FSP 132R-1 is effective for years ending after December 15, 2009. FSP 132R-1 requires additional disclosure only and, therefore, will not impact the Company's consolidated results of operations or financial position.

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.