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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.
|- | --------------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008.

OR



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

For the transition period from  to
.

Commission File Number 0-27570





PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant
as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|North Carolina                                                 |  | 56-1640186                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

929 North Front Street

Wilmington, North Carolina

(Address of principal executive
offices)

28401

(Zip Code)

Registrants telephone number, including area code: (910) 251-0081





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  | x                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 117,900,576 shares of common stock, par value $0.05 per share, as of October 31,
2008.









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INDEX



|                                                                                              |  |                                                                                                                             |  |     
|--------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  |                                                                                                                             |  | Page
|Part I. FINANCIAL INFORMATION                                                                 |  |                                                                                                                            
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  |                                                                                                                            
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2008 (unaudited) |  | 3   
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Condensed Balance Sheets as of December 31, 2007 and September 30, 2008 (unaudited)                            |  | 4   
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2008 (unaudited)           |  | 5   
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Notes to Consolidated Condensed Financial Statements (unaudited)                                                            |  | 6   
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 26                                                                                                                         
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 41                                                                                                                         
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 42                                                                                                                         
|                                                                                              | 
|Part II. OTHER INFORMATION                                                                    |  |                                                                                                                            
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 43                                                                                                                         
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 43                                                                                                                         
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 44                                                                                                                         
|                                                                                              | 
|Signatures                                                                                    |  | 45                                                                                                                         



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS

(unaudited)

(in thousands, except per share data)



|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                      |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2007                            |         |   | 2008                           |   |         | 2007 |  |   | 2008      |  
|Net Revenue:                                          |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Development                                           |  | $                               | 323,769 |   |                                | $ | 358,674 |      |  | $ | 940,452   |   |  | $ | 1,077,120 |  
|Discovery Sciences                                    |  |                                 | 4,694   |   |                                |   | 7,773   |      |  |   | 13,577    |   |  |   | 31,798    |  
|Reimbursed out-of-pockets                             |  |                                 | 28,732  |   |                                |   | 32,020  |      |  |   | 85,388    |   |  |   | 92,811    |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total net revenue                                     |  |                                 | 357,195 |   |                                |   | 398,467 |      |  |   | 1,039,417 |   |  |   | 1,201,729 |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Direct Costs:                                         |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Development                                           |  |                                 | 163,221 |   |                                |   | 173,748 |      |  |   | 472,651   |   |  |   | 534,484   |  
|Discovery Sciences                                    |  |                                 | 2,775   |   |                                |   | 2,741   |      |  |   | 7,595     |   |  |   | 8,065     |  
|Reimbursable out-of-pocket expenses                   |  |                                 | 28,732  |   |                                |   | 32,020  |      |  |   | 85,388    |   |  |   | 92,811    |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total direct costs                                    |  |                                 | 194,728 |   |                                |   | 208,509 |      |  |   | 565,634   |   |  |   | 635,360   |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Research and development expenses                     |  |                                 | 8,353   |   |                                |   | 1,657   |      |  |   | 14,221    |   |  |   | 7,911     |  
|Selling, general and administrative expenses          |  |                                 | 87,129  |   |                                |   | 101,684 |      |  |   | 245,016   |   |  |   | 301,711   |  
|Depreciation and amortization                         |  |                                 | 14,135  |   |                                |   | 15,332  |      |  |   | 40,564    |   |  |   | 45,182    |  
|Impairment of intangible asset                        |  |                                 |        |   |                                |   |        |      |  |   |          |   |  |   | 1,607     |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Total operating expenses                              |  |                                 | 304,345 |   |                                |   | 327,182 |      |  |   | 865,435   |   |  |   | 991,771   |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Income from operations                                |  |                                 | 52,850  |   |                                |   | 71,285  |      |  |   | 173,982   |   |  |   | 209,958   |  
|                                                      |  |                                 |         |  
|Interest income, net                                  |  |                                 | 4,229   |   |                                |   | 4,249   |      |  |   | 13,017    |   |  |   | 13,835    |  
|Other income (expense), net                           |  |                                 | (5      | ) |                                |   | 2,386   |      |  |   | (219      | ) |  |   | 1,072     |  
|Impairment of investments, net                        |  |                                 |        |   |                                |   | (2,092  | )    |  |   |          |   |  |   | (15,435   | )
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Income before provision for income taxes              |  |                                 | 57,074  |   |                                |   | 75,828  |      |  |   | 186,780   |   |  |   | 209,430   |  
|Provision for income taxes                            |  |                                 | 18,834  |   |                                |   | 24,644  |      |  |   | 63,906    |   |  |   | 69,110    |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Net income                                            |  | $                               | 38,240  |   |                                | $ | 51,184  |      |  | $ | 122,874   |   |  | $ | 140,320   |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Net income per common share:                          |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Basic                                                 |  | $                               | 0.32    |   |                                | $ | 0.43    |      |  | $ | 1.04      |   |  | $ | 1.18      |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Diluted                                               |  | $                               | 0.32    |   |                                | $ | 0.43    |      |  | $ | 1.03      |   |  | $ | 1.16      |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Dividends declared per common share                   |  | $                               | 0.03    |   |                                | $ | 0.10    |      |  | $ | 0.09      |   |  | $ | 0.30      |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Weighted average number of common shares outstanding: |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Basic                                                 |  |                                 | 118,739 |   |                                |   | 118,704 |      |  |   | 118,297   |   |  |   | 119,093   |  
|Dilutive effect of stock options and restricted stock |  |                                 | 1,326   |   |                                |   | 1,448   |      |  |   | 1,462     |   |  |   | 1,527     |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  
|Diluted                                               |  |                                 | 120,065 |   |                                |   | 120,152 |      |  |   | 119,759   |   |  |   | 120,620   |  
|                                                      |  |                                 |         |   |                                |   |         |      |  |   |           |   |  |   |           |  

The accompanying notes are an integral part of these consolidated condensed financial statements.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited)

(in thousands)



|                                               |  |                  |           |                   |   |           |  
|---------------------------------------------- |  | ---------------- | --------- | ----------------- | - | --------- | -
|                                               |  | December 31,2007 |           | September 30,2008 |  
|Assets                                         |  |                  |           |                   |   |           |  
|Current assets:                                |  |                  |           |                   |   |           |  
|Cash and cash equivalents                      |  | $                | 171,427   |                   | $ | 462,489   |  
|Short-term investments                         |  |                  | 330,957   |                   |   | 47,761    |  
|Accounts receivable and unbilled services, net |  |                  | 481,477   |                   |   | 458,405   |  
|Income tax receivable                          |  |                  | 517       |                   |   | 4,225     |  
|Investigator advances                          |  |                  | 15,318    |                   |   | 17,921    |  
|Prepaid expenses and other current assets      |  |                  | 49,835    |                   |   | 60,494    |  
|Deferred tax assets                            |  |                  | 23,682    |                   |   | 24,164    |  
|                                               |  |                  |           |                   |   |           |  
|Total current assets                           |  |                  | 1,073,213 |                   |   | 1,075,459 |  
|Property and equipment, net                    |  |                  | 356,189   |                   |   | 376,540   |  
|Goodwill                                       |  |                  | 215,620   |                   |   | 214,208   |  
|Long-term investments                          |  |                  |          |                   |   | 101,873   |  
|Equity investments                             |  |                  | 23,387    |                   |   | 12,433    |  
|Intangible assets                              |  |                  | 1,702     |                   |   | 2,000     |  
|Deferred tax assets                            |  |                  | 11,717    |                   |   | 11,720    |  
|Other assets                                   |  |                  | 2,547     |                   |   | 2,688     |  
|                                               |  |                  |           |                   |   |           |  
|Total assets                                   |  | $                | 1,684,375 |                   | $ | 1,796,921 |  
|                                               |  |                  |           |                   |   |           |  
|                                               |  |                 
|Liabilities and Shareholders Equity           |  |                  |           |                   |   |           |  
|Current liabilities:                           |  |                  |           |                   |   |           |  
|Accounts payable                               |  | $                | 24,984    |                   | $ | 26,129    |  
|Payables to investigators                      |  |                  | 58,952    |                   |   | 53,321    |  
|Accrued income taxes                           |  |                  | 16,182    |                   |   | 13,304    |  
|Other accrued expenses                         |  |                  | 167,235   |                   |   | 183,698   |  
|Deferred tax liabilities                       |  |                  | 101       |                   |   | 204       |  
|Unearned income                                |  |                  | 205,779   |                   |   | 232,499   |  
|                                               |  |                  |           |                   |   |           |  
|Total current liabilities                      |  |                  | 473,233   |                   |   | 509,155   |  
|Accrued income taxes                           |  |                  | 29,223    |                   |   | 32,193    |  
|Accrued additional pension liability           |  |                  | 9,763     |                   |   | 7,986     |  
|Deferred tax liabilities                       |  |                  | 3,814     |                   |   | 3,084     |  
|Deferred rent and other                        |  |                  | 18,246    |                   |   | 28,490    |  
|                                               |  |                  |           |                   |   |           |  
|Total liabilities                              |  |                  | 534,279   |                   |   | 580,908   |  
|                                               |  |                 
|Shareholders equity:                          |  |                  |           |                   |   |           |  
|Common stock                                   |  |                  | 5,955     |                   |   | 5,921     |  
|Paid-in capital                                |  |                  | 502,898   |                   |   | 542,779   |  
|Retained earnings                              |  |                  | 626,025   |                   |   | 671,357   |  
|Accumulated other comprehensive income         |  |                  | 15,218    |                   |   | (4,044    | )
|                                               |  |                  |           |                   |   |           |  
|Total shareholders equity                     |  |                  | 1,150,096 |                   |   | 1,216,013 |  
|                                               |  |                  |           |                   |   |           |  
|Total liabilities and shareholders equity     |  | $                | 1,684,375 |                   | $ | 1,796,921 |  
|                                               |  |                  |           |                   |   |           |  

The accompanying notes are an integral part of these consolidated condensed financial statements.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                          |  |                                |          |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |         
|                                                                                          |  | 2007                           |          |   | 2008 |  
|Cash flows from operating activities:                                                     |  |                                |          |   |      |   |          |  
|Net income                                                                                |  | $                              | 122,874  |   |      | $ | 140,320  |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                                             |  |                                | 40,564   |   |      |   | 45,182   |  
|Impairment of investments                                                                 |  |                                |         |   |      |   | 15,435   |  
|Impairment of intangible asset                                                            |  |                                |         |   |      |   | 1,607    |  
|Stock compensation expense                                                                |  |                                | 15,879   |   |      |   | 19,182   |  
|(Benefit) provision for doubtful accounts                                                 |  |                                | (208     | ) |      |   | 4,302    |  
|Gain on sale of investments                                                               |  |                                | (54      | ) |      |   | (521     | )
|Provision for deferred income taxes                                                       |  |                                | 6,048    |   |      |   | (2,403   | )
|(Gain) loss on disposal of assets, net                                                    |  |                                | (187     | ) |      |   | 60       |  
|Change in operating assets and liabilities                                                |  |                                | (38,660  | ) |      |   | 35,601   |  
|                                                                                          |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                                 |  |                                | 146,256  |   |      |   | 258,765  |  
|                                                                                          |  |                                |          |   |      |   |          |  
|Cash flows from investing activities:                                                     |  |                                |          |   |      |   |          |  
|Purchases of property and equipment                                                       |  |                                | (80,089  | ) |      |   | (53,210  | )
|Proceeds from sale of property and equipment                                              |  |                                | 1,599    |   |      |   | 102      |  
|Purchase of intangibles                                                                   |  |                                |         |   |      |   | (1,500   | )
|Purchases of investments                                                                  |  |                                | (338,903 | ) |      |   | (198,348 | )
|Maturities and sales of investments                                                       |  |                                | 285,137  |   |      |   | 370,805  |  
|Purchases of equity investments                                                           |  |                                | (2,335   | ) |      |   | (2,341   | )
|Proceeds from sale of equity investments                                                  |  |                                | 979      |   |      |   | 1,920    |  
|                                                                                          |  |                                |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                                       |  |                                | (133,612 | ) |      |   | 117,428  |  
|                                                                                          |  |                                |          |   |      |   |          |  
|Cash flows from financing activities:                                                     |  |                                |          |   |      |   |          |  
|Proceeds from revolving credit facility                                                   |  |                                | 24,986   |   |      |   |         |  
|Repayment of revolving credit facility                                                    |  |                                | (24,986  | ) |      |   |         |  
|Repayment of construction loan                                                            |  |                                | (74,833  | ) |      |   |         |  
|Repayment of capital leases obligations                                                   |  |                                | (319     | ) |      |   |         |  
|Repurchases of common stock                                                               |  |                                |         |   |      |   | (66,612  | )
|Proceeds from exercise of stock options and employee stock purchase plan                  |  |                                | 22,766   |   |      |   | 25,116   |  
|Income tax benefit from exercise of stock options and disqualifying dispositions of stock |  |                                | 3,774    |   |      |   | 3,190    |  
|Cash dividends paid                                                                       |  |                                | (10,673  | ) |      |   | (35,727  | )
|                                                                                          |  |                                |          |   |      |   |          |  
|Net cash used in financing activities                                                     |  |                                | (59,285  | ) |      |   | (74,033  | )
|                                                                                          |  |                                |          |   |      |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                                | 2,504    |   |      |   | (11,098  | )
|                                                                                          |  |                                |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                      |  |                                | (44,137  | ) |      |   | 291,062  |  
|Cash and cash equivalents, beginning of the period                                        |  |                                | 179,795  |   |      |   | 171,427  |  
|                                                                                          |  |                                |          |   |      |   |          |  
|Cash and cash equivalents, end of the period                                              |  | $                              | 135,658  |   |      | $ | 462,489  |  
|                                                                                          |  |                                |          |   |      |   |          |  

The accompanying notes are an integral part of these consolidated condensed financial statements.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies
|-- | -------------------------------

The significant
accounting policies followed by Pharmaceutical Product Development, Inc. and its subsidiaries (collectively the Company) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.
The Company prepared these unaudited consolidated condensed financial statements in accordance with Rule 10-01 of Regulation S-X and, in managements opinion, has included all adjustments of a normal recurring nature necessary for a fair
presentation. The accompanying consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Companys Annual Report on Form 10-K for the year ended
December 31, 2007. The results of operations for the three-month and nine-month periods ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year or any other period. The amounts in the
December 31, 2007 consolidated condensed balance sheet are derived from the audited financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.

Principles of consolidation

The accompanying
unaudited consolidated condensed financial statements include the accounts and results of operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.

Recent accounting pronouncements

In September 2006,
the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157, which defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, the statement establishes a framework for measuring fair value and expands disclosure about fair value measurements.
SFAS No. 157 is effective for fiscal years and interim periods beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position, or FSP FAS, 157-1 and FSP FAS 157-2, which delay the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financials statements on a recurring basis (at least annually) and removes certain leasing transactions from
the scope of SFAS No. 157. FSP FAS 157-2 partially defers the effective date of SFAS No. 157 to fiscal years and interim periods beginning after November 15, 2008 for items within the scope of the FSP. The Company does not expect the
adoption of FSP FAS 157-1 and FSP FAS 157-2 to have a material impact on the Companys financial statements. See Fair Value below, and Note 11 for a discussion of the Companys fair value accounting.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans 
an amendment of FASB Statements No. 87, 88, 106, and 132(R), or SFAS No. 158. SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The Company
currently uses a measurement date of November 30 and will be required to change the measurement date to December 31 for the year ended December 31, 2008. The adoption of this requirement is not expected to have a material impact on
the Companys financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115, or SFAS No. 159. This standard permits, but does not require, all entities to choose to measure eligible items at fair value at specified
election dates. For items for which the fair value option has been elected, an entity would report unrealized gains and losses in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entitys
first fiscal year beginning after November 15, 2007. The Company has adopted the standard as of January 1, 2008 but has not elected to account for any of its eligible financial assets and liabilities using the guidance of this standard.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Recent accounting pronouncements (continued)



In June 2007, the FASB reached a consensus on Emerging Issues Task Force, or EITF, Issue
No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 requires companies to recognize as an increase to additional paid-in capital the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. The adoption of
this statement did not have an impact on the Companys financial statements.

In June 2007, the FASB reached a consensus on EITF
Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-03 requires companies to defer and capitalize, until the goods have been
delivered or the related services have been rendered, non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities. EITF 07-03 is effective for fiscal years beginning
after December 15, 2007. The adoption of this statement did not have an impact on the Companys financial statements.

In
December 2007, the FASB reached a consensus on EITF Issue No. 07-01, Accounting for Collaborative Arrangements. EITF 07-01 defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 also establishes the appropriate income statement presentation and classification for joint operating activities and payments
between participants, as well as the required disclosures related to these arrangements. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. The Company does not expect EITF 07-01 will have a material impact on its
financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS
141(R). SFAS 141(R) expands the definitions of a business and a business combination and requires that: the purchase price of an acquisition, including the issuance of equity securities to be determined on the acquisition date, be recorded at fair
value at the acquisition date; all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; acquisition costs generally be
expensed as incurred; restructuring costs generally be expensed in periods subsequent to the acquisition date; and changes be made in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement
period to impact income tax expense. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The
Company does not expect the adoption of this statement to have a significant impact on its current financial statements due to prospective application. However, the adoption of SFAS 141(R) is expected to have a significant effect on reporting of
acquisitions in the financial statements after January 1, 2009.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Recent accounting pronouncements (continued)



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51, or SFAS No. 160. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. An ownership interest in subsidiaries held by parties other than the parent should be presented in the consolidated statement of financial position within equity, but separate from the parents equity. SFAS
No. 160 requires that changes in a parents ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for similarly to equity transactions. When a subsidiary is deconsolidated, any
retained noncontrolling equity investment should be initially measured at fair value, with any gain or loss recognized in earnings. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interests. SFAS
No. 160 is effective for fiscal years beginning on or after December 15, 2008, including interim periods within those fiscal years. The Company does not expect SFAS No. 160 will have a material impact on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, or SFAS
No. 161. SFAS No. 161 requires enhanced disclosures about derivative and hedging activities, including (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted
for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS No. 133, and its related interpretations, and (3) how derivative instruments and related hedged items affect financial position,
financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning on or after November 15, 2008. The Company does not expect SFAS No. 161 will have a material impact on its financial
statements.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP FAS
142-3. FSP FAS 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under FASB SFAS No. 142, Goodwill and
Other Intangible Assets, or SFAS No. 142. More specifically, FSP FAS 142-3 removes the requirement under paragraph 11 of SFAS No. 142 to consider whether an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and instead requires an entity to consider its own historical experience in renewing similar arrangements. FSP FAS 142-3 is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008, including interim periods within those fiscal years. The Company does not expect FSP FAS 142-3 will have a material impact on its financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, or FSP EITF 03-6-1. FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform with the provisions in FSP EITF 03-6-1. The Companys unvested restricted stock is considered a participating security. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15,
2008, including interim periods within those fiscal years. The Company does not expect FSP EITF 03-6-1 will have a material impact on its financial statements.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Recent accounting pronouncements (continued)



In June 2008, the FASB issued EITF No. 08-3, Accounting by Lessees for Nonrefundable
Maintenance Deposits, or EITF 08-3. EITF 08-3 requires that nonrefundable maintenance deposits paid by a lessee under an arrangement accounted for as a lease be accounted for as a deposit asset until the underlying maintenance is performed.
When the underlying maintenance is performed, the deposit may be expensed or capitalized in accordance with the lessees maintenance accounting policy. Upon adoption, entities must recognize the effect of the change as a change in accounting
principle. EITF 08-3 is effective for fiscal years beginning after December 15, 2008, including interim periods within those fiscal years. The Company does not expect EITF 08-3 will have a material impact on its financial statements.

In August 2008, the U.S. Securities and Exchange Commission, or SEC, announced that it will issue for comment a proposed roadmap regarding
the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards, or IFRS. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards
Board, or IASB. Under the proposed roadmap, the Company could be required in fiscal year 2014 to prepare financial statements in accordance with IFRS and the SEC will make a determination in 2011 regarding mandatory adoption of IFRS. The Company is
currently assessing the impact that this potential change would have on our consolidated financial statements and will continue to monitor the development of the potential implementation of IFRS.

Earnings per share

The Company computes basic income
per share information based on the weighted average number of common shares outstanding during the period. The Company computes diluted income per share information based on the weighted average number of common shares outstanding during the period
plus the effects of any dilutive common stock equivalents. The Company excluded 326,566 shares and 1,302,485 shares from the calculation of diluted earnings per share during the three months ended September 30, 2007 and 2008, respectively, and
508,550 shares and 1,238,035 shares from the calculation of diluted earnings per share during the nine months ended September 30, 2007 and 2008, respectively, because they were antidilutive. Included in the calculation of antidilutive shares
are the Companys stock options, employee stock purchase plan subscriptions and restricted stock that are antidilutive for the period.

Fair value

The Company adopted the provisions of SFAS No. 157 as modified by FSP FAS 157-1 and FSP FAS 157-2, effective January 1, 2008.
SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands the disclosure requirements about fair value measurements.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Fair value (continued)



SFAS No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the assumptions market participants would use in pricing the asset or liability based
on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:



| |  |  | Level 1  Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------------

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit
price) in an orderly transaction between market participants at the measurement date. Therefore, even when market assumptions are not readily available the Companys own assumptions are set to reflect those that market participants would
use in pricing the asset or liability at the measurement date. Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an
asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, the Companys policy is to set fair value at the average of the bid
and ask prices.

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors,
including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is
based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between valuation levels are reported at their fair value as of the end of the month in which such changes in the fair value inputs occurs.

Derivatives - The Companys derivative portfolio consists solely of foreign currency forwards and certain foreign currency
structured derivatives. The Companys derivative positions are valued using generally accepted developed models that use as their basis readily observable market parameters that can be validated to external sources, including industry pricing
services. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, forward rates, currency exchange rates, and the credit quality of the counterparty and do
not require significant judgment. These instruments are classified within Level 2 of the valuation hierarchy.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Fair value (continued)



Investments, equity investments and cash equivalents - Where quoted prices are available in an
active market, securities are classified in Level 1 of the valuation hierarchy. Level 1 securities included highly liquid debt obligations for which there are quoted prices in active markets, money market funds which trade daily based on net asset
values or quoted prices in active markets, and exchange-traded equities. If quoted market prices are not available for the specific security, then the Company estimates fair values by using pricing models or quoted prices of securities with similar
characteristics. Examples of such instruments are commercial paper, municipal debt obligations (including auction rate securities, variable rate demand notes and fixed maturity obligations), which would generally be classified within Level 2 of the
valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies securities within Level 3 of the valuation hierarchy.

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|2. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Equity Investments
|-- | -----------------------------------------------------------------------------------------------

Cash and cash equivalents, short-term investments, long-term investments and equity investments were composed of the following as of the dates set forth
below:



|                                         |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|---------------------------------------- |  | ----------------------- | ------- | --------------------- | - | -------------------- |  | ----------------- | ------- |  | - | ------
|                                         |  | Cash andcashequivalents |         | Short-terminvestments |   | Long-terminvestments |  | Equityinvestments
|As of December 31, 2007                  |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Cash                                     |  | $                       | 121,326 |                       |   |                      |  |                   |         |  |   |       
|Money market funds                       |  |                         | 12,474  |                       |   |                      |  |                   |         |  |   |       
|Auction rate securities                  |  |                         |         |                       | $ | 209,475              |  |                   |         |  |   |       
|Municipal debt securities                |  |                         | 23,665  |                       |   | 111,230              |  |                   |         |  |   |       
|Time deposits                            |  |                         | 10,177  |                       |   |                      |  |                   |         |  |   |       
|Commercial paper                         |  |                         | 3,785   |                       |   |                      |  |                   |         |  |   |       
|Other investments                        |  |                         |         |                       |   | 10,252               |  |                   |         |  |   |       
|                                         |  |                         |         |                      
|Marketable equity securities:            |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|BioDelivery Sciences International, Inc. |  |                         |         |                       |   |                      |  |                   |         |  | $ | 1,653 
|Accentia Biopharmaceuticals, Inc.        |  |                         |         |                       |   |                      |  |                   |         |  |   | 14,006
|Cost basis investments:                  |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Bay City Capital Funds                   |  |                         |         |                       |   |                      |  |                   |         |  |   | 5,449 
|A.M. Pappas Funds                        |  |                         |         |                       |   |                      |  |                   |         |  |   | 1,529 
|Other equity investments                 |  |                         |         |                       |   |                      |  |                   |         |  |   | 750   
|                                         |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Total                                    |  | $                       | 171,427 |                       | $ | 330,957              |  | $                 |        |  | $ | 23,387
|                                         |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|As of September 30, 2008                 |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Cash                                     |  | $                       | 225,485 |                       |   |                      |  |                   |         |  |   |       
|Money market funds                       |  |                         | 237,004 |                       |   |                      |  |                   |         |  |   |       
|Auction rate securities                  |  |                         |         |                       | $ | 15,239               |  | $                 | 101,873 |  |   |       
|Municipal debt securities                |  |                         |         |                       |   | 22,522               |  |                   |         |  |   |       
|Time deposits                            |  |                         |         |                       |   | 10,000               |  |                   |         |  |   |       
|                                         |  |                         |         |                      
|Marketable equity securities:            |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Accentia Biopharmaceuticals, Inc.        |  |                         |         |                       |   |                      |  |                   |         |  | $ | 2,306 
|Cost basis investments:                  |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Bay City Capital Funds                   |  |                         |         |                       |   |                      |  |                   |         |  |   | 6,995 
|A.M. Pappas Funds                        |  |                         |         |                       |   |                      |  |                   |         |  |   | 2,382 
|Other equity investments                 |  |                         |         |                       |   |                      |  |                   |         |  |   | 750   
|                                         |  |                         |         |                       |   |                      |  |                   |         |  |   |       
|Total                                    |  | $                       | 462,489 |                       | $ | 47,761               |  | $                 | 101,873 |  | $ | 12,433
|                                         |  |                         |         |                       |   |                      |  |                   |         |  |   |       



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|2. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Equity Investments (continued)
|-- | -----------------------------------------------------------------------------------------------------------



Short-term and long-term investments

The Company accounts for its investment in marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Companys short-term and long-term investments are classified as available-for-sale securities because the Company does not intend to hold these securities to maturity and is not holding them for trading
purposes. The Company determines realized and unrealized gains and losses on short-term and long-term investments on a specific identification basis.

As of December 31, 2007 and September 30, 2008, the Company had the following unrealized gains and losses on investments:



|                                               |  |                  |       |                   |   |      
|---------------------------------------------- |  | ---------------- | ----- | ----------------- | - | -----
|                                               |  | December 31,2007 |       | September 30,2008
|Unrealized gains on municipal debt securities  |  | $                | 437   |                   | $ | 12   
|Unrealized losses on municipal debt securities |  |                  | 2,145 |                   |   | 309  
|Unrealized losses on auction rate securities   |  |                  |      |                   |   | 2,963

For the three months and nine months ended September 30, 2007 and 2008, the Company had the
following gross realized gains and losses on investments:



|                                                   |  |                                 |   |                                |   |      |  |      |   |  |   |      
|-------------------------------------------------- |  | ------------------------------- | - | ------------------------------ | - | ---- |  | ---- | - |  | - | -----
|                                                   |  | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,
|                                                   |  | 2007                            |   | 2008                           |   | 2007 |  | 2008
|Gross realized gains on municipal debt securities  |  | $                               |  |                                | $ |     |  | $    |  |  | $ | 694  
|Gross realized losses on other investments         |  |                                 |  |                                |   |     |  |      |  |  |   | 3,734
|Gross realized losses on municipal debt securities |  |                                 |  |                                |   |     |  |      |  |  |   | 8    

One of the investments in the Companys short-term investment portfolio incurred a loss of
$7.0 million in the first quarter of 2008. The Company elected to liquidate a majority of this investment during the first quarter, leaving a remaining balance of $8.7 million at March 31, 2008. In the second quarter of 2008, the Company
incurred an additional loss of $0.3 million, liquidated the balance of this investment and was reimbursed by an investment firm for $3.6 million of its loss that was incurred in the first quarter of 2008.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|2. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Equity Investments (continued)
|-- | -----------------------------------------------------------------------------------------------------------



Short-term and long-term investments (continued)



The Company held approximately $209.5 million and $117.1 million in tax-exempt auction rate
securities at December 31, 2007 and September 30, 2008, respectively. The Companys portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt
obligations and municipal preferred auction rate securities. During the nine months ended September 30, 2008, a significant number of auction rate securities auctions failed. If future auctions fail, the Company may not be able to liquidate
these securities until a future auction is successful, the issuer redeems the outstanding securities or the securities mature. Due to the uncertainties about the liquidity in the auction rate securities market, the Company classified $101.9 million
of its auction rate securities to long-term assets at September 30, 2008. The Company also recorded an unrealized loss on these investments of $3.0 million as of September 30, 2008. The Company concluded that this was a temporary
impairment based on the market conditions, the Companys ability and intent to hold the auction rate securities for a long-term basis and an assessment of credit quality of the underlying collateral. The Company plans to continue to review the
classification and valuation of these securities quarterly.

Equity investments

The Company has equity investments in publicly traded entities. The Company classifies investments in marketable equity securities as available-for-sale
securities and measures them at market value. The Company determines realized and unrealized gains and losses on equity investments in publicly traded entities on a specific identification basis. The Company records net unrealized gains or losses
associated with investments in publicly traded entities as a component of shareholders equity until they are realized or until an other-than-temporary decline in market value has occurred. Upon realization or recognition of an
other-than-temporary decline in the fair market value of an investment, the Company records an impairment of that investment. The market value of the Companys equity investments in publicly traded entities is based on the closing price as
quoted by the applicable stock exchange or market on the last trading day of the reporting period. The Company classifies its equity investments as long-term assets due to the Companys ability to hold its investments long-term, the strategic
nature of these investments and the lack of liquidity in the public markets for these securities. As of December 31, 2007 and September 30, 2008, the Company had gross unrealized gains of $0.3 million and $0, respectively, and no gross
unrealized losses associated with its investments in marketable securities.

The Company held 564,076 common shares of stock in BioDelivery
Sciences International, Inc. at December 31, 2007. In September 2008, the Company sold all of these shares at various prices for total proceeds of $1.9 million, resulting in a gain of $0.5 million.

During the nine months ended September 30, 2008, the Company recorded a charge to earnings of $11.7 million for an other-than-temporary decline in
the fair market value of its equity investment in Accentia. The write-down was based on a decrease in the publicly quoted market price that Company management believes was other-than-temporary due to the length of time the stock had been trading
below the Companys cost basis and Accentias projected near-term performance based on the results of its Phase III clinical trial for SinuNase, as discussed in Note 5. In future quarters, the Company may need to record additional
impairments, which are not expected to be material to the consolidated condensed financial statements.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|2. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Equity Investments (continued)
|-- | -----------------------------------------------------------------------------------------------------------



Equity investments (continued)



The Company also has equity investments in privately held entities that are not publicly traded and
for which fair values are not readily determinable. The Company records all of its investments in privately held entities at cost. The Company determines realized and unrealized gains and losses on a specific identification basis. The Company
assesses the net realizable value of these entities on a quarterly basis to determine if there has been a decline in the fair value of these entities, and if so, if the decline is other-than-temporary. This quarterly review includes an evaluation of
the entity, including, among other things, the market condition of its overall industry, historical and projected financial performance, expected cash needs and recent funding events, as well as the Companys expected holding period and the
length of time and the extent to which the fair value of the investment has been less than cost. Upon realization or recognition of an other-than-temporary decline in the fair market value of an investment, the Company records an impairment of that
investment.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, L.P., a venture capital fund
established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. In October 2007, the Company became a limited partner in A. M. Pappas Life Science
Ventures IV, L.P. The Company has committed to invest up to a maximum of $4.8 million and $6.0 million, respectively, in these funds. Aggregate capital calls through September 30, 2008 were $2.4 million and $0, respectively. Because no capital
call can exceed 10% of the Companys aggregate capital commitment in each fund and the Companys capital commitment will expire in May 2009 for Pappas Fund III and the fifth anniversary of the funds first investment for Pappas Fund
IV, the Company anticipates that its remaining capital commitment of $2.4 million for Pappas Fund III and $6.0 million for Pappas Fund IV will be made through a series of future capital calls over the term of each commitment. The Company owned
approximately 4.7% of Pappas Fund III as of September 30, 2008. Pappas Fund IV had not made any capital calls as of September 30, 2008.

In September 2005, the Company became a limited partner in Bay City Capital Fund IV, L.P., a venture capital fund established for the purpose of investing in life sciences companies. In May 2007, the Company became a limited partner in Bay
City Capital Fund V, L.P. The Company has committed to invest up to a maximum of $10.0 million in each of these funds. Aggregate capital calls through September 30, 2008 totaled $6.1 million for Bay City Fund IV and $0.9 million for Bay City
Fund V. Because no capital call can exceed 20% of the Companys aggregate capital commitment in each fund and the Companys capital commitment will expire in September 2009 for Bay City Fund IV and October 2012 for Bay City Fund V, the
Company anticipates its remaining capital commitment of $3.9 million for Bay City Fund IV and $9.1 million for Bay City Fund V will be made through a series of future capital calls over the term of each commitment. The Company owned approximately
2.9% and 2.0% of Bay City Fund IV and Bay City Fund V, respectively, as of September 30, 2008.



|3. | Accounts Receivable and Unbilled Services
|-- | -----------------------------------------

Accounts
receivable and unbilled services consisted of the following amounts on the dates set forth below:



|                                                     |  |                  |         |   |                   |   |         |  
|---------------------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                                     |  | December 31,2007 |         |   | September 30,2008 |  
|Billed                                               |  | $                | 302,429 |   |                   | $ | 279,762 |  
|Unbilled                                             |  |                  | 186,112 |   |                   |   | 189,188 |  
|Provision for doubtful accounts                      |  |                  | (7,064  | ) |                   |   | (10,545 | )
|                                                     |  |                  |         |   |                   |   |         |  
|Total accounts receivable and unbilled services, net |  | $                | 481,477 |   |                   | $ | 458,405 |  
|                                                     |  |                  |         |   |                   |   |         |  



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)





|4. | Property and Equipment
|-- | ----------------------

Property and equipment,
stated at cost, consisted of the following amounts on the dates set forth below:



|                                     |  |                  |          |   |                   |   |          |  
|------------------------------------ |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                     |  | December 31,2007 |          |   | September 30,2008 |  
|Land                                 |  | $                | 6,761    |   |                   | $ | 6,620    |  
|Buildings and leasehold improvements |  |                  | 214,842  |   |                   |   | 221,418  |  
|Construction in progress             |  |                  | 18,758   |   |                   |   | 49,029   |  
|Furniture and equipment              |  |                  | 194,187  |   |                   |   | 202,923  |  
|Computer equipment and software      |  |                  | 171,790  |   |                   |   | 183,478  |  
|                                     |  |                  |          |   |                   |   |          |  
|Total property and equipment         |  |                  | 606,338  |   |                   |   | 663,468  |  
|Less accumulated depreciation        |  |                  | (250,149 | ) |                   |   | (286,928 | )
|                                     |  |                  |          |   |                   |   |          |  
|Total property and equipment, net    |  | $                | 356,189  |   |                   | $ | 376,540  |  
|                                     |  |                  |          |   |                   |   |          |  

Construction in progress as of September 30, 2008, included software licenses purchased from
a third-party vendor with annual payment terms as follows:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|June 1, 2009                        |  | $ | 4,212  |  
|June 1, 2010                        |  |   | 4,212  |  
|June 1, 2011                        |  |   | 4,212  |  
|June 1, 2012                        |  |   | 4,212  |  
|                                    |  |   |        |  
|Total future remaining payments     |  | $ | 16,848 |  
|Present value discount              |  |   | (1,184 | )
|                                    |  |   |        |  
|Present value of remaining payments |  | $ | 15,664 |  
|                                    |  |   |        |  

The Company classified its liability related to these licenses as $4.0 million in other accrued expense and $11.6
million in deferred rent and other on its consolidated condensed balance sheet as of September 30, 2008.

The Company owns a building
and land in Leicester, England, which had a net book value of $2.4 million as of September 30, 2008. The Company used this building to house a Phase I business unit of the Development segment of the Company prior to the closure of that business
unit. The Company classified this building as available-for-sale and included it in prepaid expenses and other current assets on its consolidated condensed balance sheet as of September 30, 2008. The net book value at September 30, 2008
was based on indicative offers from external parties. The Company continues to actively market the property.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|5. | Goodwill and Intangible Assets
|-- | ------------------------------

Changes in the
carrying amount of goodwill for the 12 months ended December 31, 2007 and the nine months ended September 30, 2008, by operating segment, were as follows:



|                                 |  |             |         |   |                   |   |        |  |   |         |  
|-------------------------------- |  | ----------- | ------- | - | ----------------- | - | ------ |  | - | ------- | -
|                                 |  | Development |         |   | DiscoverySciences |   | Total  | 
|Balance as of January 1, 2007    |  | $           | 158,766 |   |                   | $ | 53,616 |  | $ | 212,382 |  
|Translation adjustments          |  |             | 3,238   |   |                   |   |       |  |   | 3,238   |  
|                                 |  |             |         |   |                   |   |        |  |   |         |  
|Balance as of December 31, 2007  |  |             | 162,004 |   |                   |   | 53,616 |  |   | 215,620 |  
|Translation adjustments          |  |             | (1,412  | ) |                   |   |       |  |   | (1,412  | )
|                                 |  |             |         |   |                   |   |        |  |   |         |  
|Balance as of September 30, 2008 |  | $           | 160,592 |   |                   | $ | 53,616 |  | $ | 214,208 |  
|                                 |  |             |         |   |                   |   |        |  |   |         |  

Information regarding the Companys other intangible assets follows:



|                                   |  |                   |       |                         |   |       |  |                |       |                         |   |       |  |   |   |  |   |      
|---------------------------------- |  | ----------------- | ----- | ----------------------- | - | ----- |  | -------------- | ----- | ----------------------- | - | ----- |  | - | - |  | - | -----
|                                   |  | December 31, 2007 |       | September 30, 2008     
|                                   |  | CarryingAmount    |       | AccumulatedAmortization |   | Net   |  | CarryingAmount |       | AccumulatedAmortization |   | Net  
|Backlog and customer relationships |  | $                 | 308   |                         | $ | 275   |  | $              | 33    |                         | $ |      |  | $ |  |  | $ |     
|License and royalty agreements     |  |                   | 2,500 |                         |   | 831   |  |                | 1,669 |                         |   |      |  |   |  |  |   |     
|Other intangible asset             |  |                   |      |                         |   |      |  |                |      |                         |   | 2,000 |  |   |  |  |   | 2,000
|                                   |  |                   |       |                         |   |       |  |                |       |                         |   |       |  |   |   |  |   |      
|Total                              |  | $                 | 2,808 |                         | $ | 1,106 |  | $              | 1,702 |                         | $ | 2,000 |  | $ |  |  | $ | 2,000
|                                   |  |                   |       |                         |   |       |  |                |       |                         |   |       |  |   |   |  |   |      

Intangible assets consist of backlog and customer relationships and an other intangible asset. The
other intangible asset has an indefinite life and therefore is not amortized. Backlog and customer relationships are subject to amortization, which the Company amortizes on a straight-line basis, based on estimated useful lives of three to five
years. The weighted average amortization period is 5.0 years for backlog and customer relationships.

In September 2004, the Company
entered into a royalty stream purchase agreement with Accentia Biopharmaceuticals, Inc. under which it paid $2.5 million to Accentia in exchange for the right to receive royalties on sales of specified antifungal products, including SinuNase,
Accentias primary compound that it is developing for the treatment of chronic sinusitis. The Company carried this agreement as an intangible asset in the Discovery Sciences segment. During the first quarter of 2008, Accentia announced results
of the SinuNase Phase III clinical trial and reported that SinuNase did not meet its goal in treating chronic sinusitis patients, resulting in a significant amount of uncertainty regarding the future clinical development of SinuNase. As a result,
the Company determined that the right under its agreement with Accentia to receive royalties on future sales of SinuNase was impaired, and a non-cash charge of $1.6 million was recorded during the first quarter of 2008 for the remaining unamortized
value of its royalty interest in SinuNase.

Amortization expense for the three months ended September 30, 2007 and 2008 was $0.1
million and $2,567, respectively. Amortization expense for the nine months ended September 30, 2007 and 2008 was $0.2 million and $0.1 million, respectively. As of September 30, 2008, all backlog and customer relationships have been fully
amortized.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|6. | Shareholders Equity
|-- | --------------------

Share-based compensation

The Company accounts for its share-based compensation plans using the provisions of SFAS No. 123 (revised), Share-Based
Payment. Accordingly, the Company measures share-based compensation cost at grant date, based on the fair value of the award, and recognizes it as expense over the employees requisite service period.

During the nine months ended September 30, 2008, the Company granted options to purchase approximately 1,448,000 shares with a weighted-average
exercise price of $44.05. This amount includes options to purchase approximately 1,177,000 shares granted in the Companys annual grant during the first quarter of 2008. All options were granted with an exercise price equal to the fair value of
the Companys common stock on the grant date. The fair value of the Companys common stock on the grant date is equal to the Nasdaq closing price of the Companys stock on the date of grant. Prior to third quarter of 2008, shares
granted under the United Kingdom, or U.K., Subplan had a fair value equal to the average of the high and low price of the Companys common stock on the date of grant as reported by Nasdaq. The weighted-average grant date fair value per share
determined using the Black-Scholes option-pricing method and the aggregate fair value of options granted during the nine months ended September 30, 2008 was $11.12 and $16.1 million, respectively. As of September 30, 2008, the Company had
6.6 million options outstanding. In October 2008, the Company granted options to purchase approximately 620,000 shares with an exercise price of $39.01.

Stock repurchase program

In February 2008, the Companys Board of Directors approved a stock repurchase program
authorizing the Company to repurchase up to $350.0 million of its common stock from time to time in the open market. The timing and amount of any share repurchases will be determined by the Companys management based on its evaluation of the
market conditions and other factors. The stock repurchase program was and will continue to be funded from existing cash and future cash flows from operations and may be discontinued at any time.

During the three and nine months ended September 30, 2008, the Company repurchased approximately 769,000 shares and 1,635,000 shares of its common
stock, respectively, for an aggregate purchase price, including broker commissions, of $30.1 million and $66.6 million at an average price per share of $39.18 and $40.75, respectively.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|7. | Comprehensive Income
|-- | --------------------

Comprehensive income
consisted of the following amounts on the dates set forth below:



|                                                                                                                                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                   |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                   |  | 2007                            |        |   | 2008                           |   |         | 2007 |  |   | 2008    |  
|Net income, as reported                                                                                                            |  | $                               | 38,240 |   |                                | $ | 51,184  |      |  | $ | 122,874 |   |  | $ | 140,320 |  
|Other comprehensive income:                                                                                                        |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Cumulative translation adjustment                                                                                                  |  |                                 | 5,864  |   |                                |   | (26,287 | )    |  |   | 9,669   |   |  |   | (15,680 | )
|Change in fair value of hedging transaction, net of taxes of $344, ($2,154), $344 and ($1,143) respectively                        |  |                                 | 678    |   |                                |   | (4,857  | )    |  |   | 678     |   |  |   | (3,258  | )
|Reclassification adjustment for hedging results included in direct costs, net of taxes of ($77), $197, ($77) and $176
respectively |  |                                 | (150   | ) |                                |   | 677     |      |  |   | (150    | ) |  |   | 847     |  
|Net unrealized gain (loss) on investments, net of taxes of ($68), $756, ($1,433) and ($634), respectively                          |  |                                 | (125   | ) |                                |   | 1,326   |      |  |   | (2,533  | ) |  |   | (1,228  | )
|Reclassification to net income of realized gain on investment, net of tax of $33                                                   |  |                                 |       |   |                                |   | 57      |      |  |   |        |   |  |   | 57      |  
|                                                                                                                                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total other comprehensive income                                                                                                   |  |                                 | 6,267  |   |                                |   | (29,084 | )    |  |   | 7,664   |   |  |   | (19,262 | )
|                                                                                                                                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income                                                                                                               |  | $                               | 44,507 |   |                                | $ | 22,100  |      |  | $ | 130,538 |   |  | $ | 121,058 |  
|                                                                                                                                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  

Accumulated other comprehensive income consisted of the following amounts on the dates set forth
below:



|                                                                                        |  |                  |        |   |                   |   |        |  
|--------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                        |  | December 31,2007 |        |   | September 30,2008 |  
|Translation adjustment                                                                  |  | $                | 24,487 |   |                   | $ | 8,806  |  
|Pension liability, net of tax benefit of $2,814                                         |  |                  | (7,235 | ) |                   |   | (7,235 | )
|Fair value on hedging transaction, net of tax benefit of $439 and $1,406, respectively  |  |                  | (1,095 | ) |                   |   | (3,505 | )
|Net unrealized loss on investments, net of tax benefit of $513 and $1,150, respectively |  |                  | (939   | ) |                   |   | (2,110 | )
|                                                                                        |  |                  |        |   |                   |   |        |  
|Total                                                                                   |  | $                | 15,218 |   |                   | $ | (4,044 | )
|                                                                                        |  |                  |        |   |                   |   |        |  



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|8. | Accounting for Derivative Instruments and Hedging Activities
|-- | ------------------------------------------------------------

The Company enters into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS No. 133. The Company recognizes changes in the fair value of the effective
portion of these outstanding forward and option contracts in accumulated other comprehensive income, or OCI. The Company reclassifies these amounts from OCI and recognizes them in earnings when either the forecasted transaction occurs or it becomes
probable that the forecasted transaction will not occur.

The Company recognizes changes in the ineffective portion of a derivative
instrument in earnings in the current period. The Company measures effectiveness for forward cash flow hedge contracts by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. When
critical terms match, the Company presumes fair market value of the hedged exposure to be the market value of the hedge instrument. The Companys hedging portfolio ineffectiveness for the three months ended September 30, 2007 and 2008 was
$0 and $0.3 million, respectively. The Company had no hedging portfolio ineffectiveness for the nine months ended September 30, 2007 and 2008. The Company records any ineffectiveness as a component of direct costs.

The Company has significant international revenues and expenses, and related receivables and payables, denominated in non-functional currencies in the
Companys foreign subsidiaries. As a result, the Companys operating results can be affected by movements in foreign currency exchange rates. In an effort to minimize this risk, the Company from time to time purchases currency option and
forward contracts as cash flow hedges against anticipated and recorded transactions, and the related receivables and payables denominated in non-functional currencies. The Company only uses currency option and forward contracts as hedges to minimize
the variability in the Companys operating results arising from foreign currency exchange rate movements. The Company does not enter into derivative financial instruments for speculative or trading purposes. Hedging contracts are measured at
fair value using dealer quotes and mature within 18 months from their inception. As of September 30, 2008, the Companys existing hedging contracts will expire over the next 15 months. The Company expects to reclassify the current loss
positions of $4.6 million within the next 12 months from OCI into the income statement.

The Companys hedging contracts are intended
to protect against the impact of changes in the value of the U.S. dollar against other currencies and their impact on operating results. Accordingly, for forecasted transactions, subsidiaries incurring expenses in foreign currencies seek to hedge
U.S. dollar revenue contracts. The Company reclassifies OCI associated with hedges of foreign currency revenue into direct costs upon recognition of the forecasted transaction in the statement of operations. At September 30, 2008, the face
value of these foreign exchange hedging contracts was $114.0 million.

At September 30, 2008, the Companys foreign currency
derivative portfolio resulted in the Company recognizing an asset of $0.1 million as a component of prepaid expenses and other current assets and a liability of $5.3 million as a component of other accrued expenses.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|9. | Pension Plan
|-- | ------------

The Company has a separate
contributory defined benefit plan for its qualifying U.K. employees employed by the Companys U.K. subsidiaries. This pension plan was closed to new participants as of December 31, 2002. The benefits for the U.K. pension plan are based
primarily on years of service and average pay at retirement. Plan assets consist principally of investments managed in a mixed fund.

Pension costs for the U.K. pension plan included the following components on the dates set forth below:



|                                 |  |                                 |      |   |                                |   |      |      |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                 |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                 |  | 2007                            |      |   | 2008                           |   |      | 2007 |  |   | 2008   |  
|Service cost                     |  | $                               | 431  |   |                                | $ | 369  |      |  | $ | 1,271  |   |  | $ | 1,139  |  
|Interest cost                    |  |                                 | 665  |   |                                |   | 778  |      |  |   | 1,961  |   |  |   | 2,401  |  
|Expected return on plan assets   |  |                                 | (692 | ) |                                |   | (762 | )    |  |   | (2,040 | ) |  |   | (2,354 | )
|Amortization of gains and losses |  |                                 | 140  |   |                                |   | 112  |      |  |   | 412    |   |  |   | 345    |  
|                                 |  |                                 |      |   |                                |   |      |      |  |   |        |   |  |   |        |  
|Net periodic pension cost        |  | $                               | 544  |   |                                | $ | 497  |      |  | $ | 1,604  |   |  | $ | 1,531  |  
|                                 |  |                                 |      |   |                                |   |      |      |  |   |        |   |  |   |        |  

For the nine months ended September 30, 2008, the Company made contributions totaling $2.3
million and anticipates contributing an additional $0.2 million to fund this plan during the remainder of 2008.



|10. | Commitments and Contingencies
|--- | -----------------------------

The Company
currently maintains insurance for risks associated with the operation of its business, provision of professional services and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to
property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice. The Companys retentions and deductibles associated with these insurance policies range from $0.25 million to $10.0 million.

The Company is self-insured for health insurance for the majority of its employees located within the United States, but maintains
stop-loss insurance on a claims made basis for expenses in excess of $0.28 million per member per year. As of December 31, 2007 and September 30, 2008, the Company maintained a reserve of approximately $4.0 million and $3.2
million, respectively, included in other accrued expenses on the consolidated condensed balance sheets, to cover open claims and estimated claims incurred but not reported.

As of September 30, 2008, the Company had commitments to invest up to an aggregate additional $21.4 million in four venture capital funds. For
further details, see Note 2.

As of September 30, 2008, the total gross unrecognized tax benefits were $25.0 million, of which $10.7
million, if recognized, would reduce the Companys effective tax rate. The Company does not anticipate a significant change in total unrecognized tax benefits or its effective tax rate due to the settlement of audits and the expiration of
statute of limitations within the next 12 months.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|10. | Commitments and Contingencies (continued)
|--- | -----------------------------------------



The Company has been involved in compound development and commercialization collaborations since
1997. The Company developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, the Company assists its clients by sharing the
risks and potential rewards associated with the development and commercialization of drugs at various stages of development. As of September 30, 2008, the Company had four such arrangements that involve the potential future receipt of one or
more of the following forms of revenue: payments upon the achievement of specified development and regulatory milestones; royalty payments if the compound is approved for sale; sales-based milestone payments; and a share of net sales up to a
specified dollar limit. The compounds that are the subject of these collaborations are either still in development or are awaiting regulatory approvals in certain countries. None of the compounds have been approved for sale in any country in the
world. As a result of the risks associated with drug development, including poor or unexpected clinical trial results and obtaining regulatory approval to sell in any country, the Company might not receive any further milestone payments, royalties
or other payments with respect to any of the drug development collaborations.

As of September 30, 2008, the Company had two
collaborations that involved potential future expenditures. The first is the Companys collaboration with ALZA Corporation, subsequently acquired by Johnson & Johnson, for dapoxetine. In connection with this collaboration, the Company
has an obligation to pay a royalty to Eli Lilly and Company of 5% on annual net sales of the compound in excess of $800 million. Johnson & Johnson received a not approvable letter from the United States Food and Drug
Administration, or FDA, in October 2005, but continued its global development program. In December 2007, Johnson & Johnson submitted a marketing authorization application for dapoxetine to regulatory authorities in seven countries in the
European Union. Although this regulatory application has been submitted, the Company does not know if or when Johnson & Johnson will obtain regulatory approval for dapoxetine in these or any other countries.

The second collaboration involving future expenditures is with Ranbaxy Laboratories Ltd. In February 2007, the Company exercised an option to license
from Ranbaxy a statin compound that the Company is developing as a potential treatment for dyslipidemia, a metabolic disorder characterized by high cholesterol levels. Under the agreement, the Company has an exclusive license to make, use, sell,
import and sublicense the compound and any licensed product anywhere in the world for any human use. The Company is solely responsible, and will bear all costs and expenses, for the development, manufacture, marketing and commercialization of the
compound and licensed products. In addition to the one-time license fee, the Company is obligated to pay Ranbaxy milestone payments upon the occurrence of specified clinical development events. If a licensed product is approved for sale, the Company
must also pay Ranbaxy royalties based on sales of the product, as well as commercial milestone payments based on the achievement of specified worldwide sales targets. If all criteria are met, the total amount of potential clinical and sales-based
milestones that the Company is obligated to pay Ranbaxy would be $44.0 million. As previously announced, the Company completed a high dose comparator study in healthy volunteers. The drug was well-tolerated and a preliminary review of results
suggests the statin compound compares favorably to currently marketed statins. The Company continues to review the data from this trial, identify potential development and commercialization partners and evaluate the future clinical development of
this compound.

In September 2007, the Company entered into a contract with a client to construct a laboratory within a leased building, to
supply laboratory equipment and to provide specified laboratory services. The client has agreed to reimburse the Company for the costs of the construction of the laboratory and related equipment over a two-year period. The Company completed the
construction and up-fit for this laboratory in the second quarter of 2008 and incurred construction and equipment costs of $5.0 million.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|10. | Commitments and Contingencies (continued)
|--- | -----------------------------------------



Under most of the agreements for Development services, the Company typically agrees to indemnify and
defend the sponsor against third-party claims based on the Companys negligence or willful misconduct. Any successful claims could have a material adverse effect on the Companys financial condition, results of operations and future
prospects.

In the normal course of business, the Company is a party to various claims and legal proceedings. For example, beginning in
early 2007 the Company was named as a co-defendant in various lawsuits involving claims relating to sanofi-aventis FDA-approved antibiotic Ketek, for which the Company provided certain clinical trial services to sanofi-aventis
predecessor prior to FDA approval. The Company records a reserve for pending and threatened litigation matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of
pending and threatened litigation matters is currently not determinable and litigation costs can be material, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Companys financial condition, results of operations or cash flows.



|11. | Fair Value
|--- | ----------

The Companys assets and
liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with SFAS No. 157. See Fair Value under Note 1 for a discussion of the Companys policies regarding this hierarchy.

The following table presents information about the Companys assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008:



|                                            |  |         |         |         |   |         |  |       |         |  |   |        
|------------------------------------------- |  | ------- | ------- | ------- | - | ------- |  | ----- | ------- |  | - | -------
|                                            |  | Level 1 |         | Level 2 |   | Level 3 |  | Total
|Assets                                      |  |         |         |         |   |         |  |       |         |  |   |        
|Cash and cash equivalents                   |  | $       | 237,004 |         | $ |        |  | $     |        |  | $ | 237,004
|Short-term investments                      |  |         |        |         |   | 47,761  |  |       |        |  |   | 47,761 
|Long-term investments                       |  |         |        |         |   |        |  |       | 101,873 |  |   | 101,873
|Derivative contracts                        |  |         |        |         |   | 140     |  |       |        |  |   | 140    
|Equity investments in marketable securities |  |         | 2,306   |         |   |        |  |       |        |  |   | 2,306  
|                                            |  |         |         |         |   |         |  |       |         |  |   |        
|Total assets                                |  | $       | 239,310 |         | $ | 47,901  |  | $     | 101,873 |  | $ | 389,084
|                                            |  |         |         |         |   |         |  |       |         |  |   |        
|Liabilities                                 |  |         |         |         |   |         |  |       |         |  |   |        
|Derivative contracts                        |  | $       |        |         | $ | 5,348   |  | $     |        |  | $ | 5,348  
|                                            |  |         |         |         |   |         |  |       |         |  |   |        
|Total liabilities                           |  | $       |        |         | $ | 5,348   |  | $     |        |  | $ | 5,348  
|                                            |  |         |         |         |   |         |  |       |         |  |   |        



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|11. | Fair Value (continued)
|--- | ----------------------



The following table provides a reconciliation of the beginning and ending balances for assets and
liabilities measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2008:



|                                                                      |  |                      |         |  
|--------------------------------------------------------------------- |  | -------------------- | ------- | -
|                                                                      |  | Long-terminvestments |        
|Balance as of January 1, 2008                                         |  | $                    |        |  
|Transfers into Level 3                                                |  |                      | 110,000 |  
|                                                                      |  |                      |         |  
|Balance as of March 31, 2008                                          |  | $                    | 110,000 |  
|Liquidation of investments                                            |  |                      | (950    | )
|Reclassification to short-term investments                            |  |                      | (4,225  | )
|Unrealized loss on investments included in other comprehensive income |  |                      | (3,986  | )
|                                                                      |  |                      |         |  
|Balance as of June 30, 2008                                           |  | $                    | 100,839 |  
|Liquidation of investments                                            |  |                      | (1,025  | )
|Unrealized gain on investments included in other comprehensive income |  |                      | 2,059   |  
|                                                                      |  |                      |         |  
|Balance as of September 30, 2008                                      |  | $                    | 101,873 |  
|                                                                      |  |                      |         |  

Transfers into Level 3 result from changes in the observability of fair value inputs used in
determining fair values for different types of financial assets that were previously categorized at a higher level. As a result of failed auctions of auction rate securities and the lack of liquidity in this market, the Company transferred $110.0
million of its auction rate securities into Level 3 during the first quarter of 2008.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|12. | Business Segment Data
|--- | ---------------------

Revenue by principal
business segment is separately stated in the consolidated condensed financial statements. Income (loss) from operations and identifiable assets by principal business segment were as follows:



|                               |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|------------------------------ |  | ------------------------------- | --------- | ------------------------------ | ----------------- | - | --------- |  | - | ------- | - |  | - | -------
|                               |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                               |  | 2007                            |           |                                | 2008              |   | 2007      |  |   | 2008   
|Income (loss) from operations: |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|Development                    |  | $                               | 61,179    |                                |                   | $ | 69,292    |  | $ | 187,485 |   |  | $ | 200,303
|Discovery Sciences             |  |                                 | (8,329    | )                              |                   |   | 1,993     |  |   | (13,503 | ) |  |   | 9,655  
|                               |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|Total                          |  | $                               | 52,850    |                                |                   | $ | 71,285    |  | $ | 173,982 |   |  | $ | 209,958
|                               |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|                               |  |                                 |           |                               
|                               |  | December 31,2007                |           |                                | September 30,2008 |   |           |  |   |        
|Identifiable assets:           |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|Development                    |  | $                               | 1,596,616 |                                |                   | $ | 1,713,905 |  |   |         |   |  |   |        
|Discovery Sciences             |  |                                 | 87,759    |                                |                   |   | 83,016    |  |   |         |   |  |   |        
|                               |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        
|Total                          |  | $                               | 1,684,375 |                                |                   | $ | 1,796,921 |  |   |         |   |  |   |        
|                               |  |                                 |           |                                |                   |   |           |  |   |         |   |  |   |        



|13. | Subsequent Event
|--- | ----------------

In October 2008, the Company
completed its acquisition of InnoPharm, an independent contract research organization, for total consideration of $9.0 million. With offices in Russia and Ukraine, the acquisition of InnoPharm will strengthen our presence in Eastern Europe and will
serve as the foundation for continued growth in a region the Company has targeted for expansion while enhancing our ability to conduct global studies for clients. This acquisition will be included in the Companys Development segment.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, our consolidated condensed
financial statements and accompanying notes. In this discussion, the words PPD, we, our and us refer to Pharmaceutical Product Development, Inc., together with its subsidiaries where appropriate.

Forward-looking Statements

This Form
10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as
might, will, should, expect, plan, anticipate, believe, estimate, predict, intend, potential or continue,
or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual
events or results might differ materially due to a number of factors, including those listed in Potential Volatility of Quarterly Operating Results and Stock Price below and in Item 1A. Risk Factors included in our Annual
Report on Form 10-K for the year ended December 31, 2007. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Company Overview

We are a leading
global contract research organization providing drug discovery and development services, post-approval expertise and compound partnering programs. Our clients and partners include pharmaceutical, biotechnology, medical device, academic and
government organizations. Our corporate mission is to help clients and partners maximize returns on their research and development investments and accelerate the delivery of safe and effective therapeutics to patients.

We have been in the drug development business for more than 22 years. Our development services include preclinical programs and Phase I to Phase IV
clinical development services as well as bioanalytical product testing and clinical laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a multitude of therapeutic areas and in
various parts of the world. In addition, for marketed drugs, biologics and devices, we offer support such as product launch services, medical information, patient compliance programs, patient and disease registry programs, product safety and
pharmacovigilance, Phase IV monitored studies and prescription-to-over-the-counter programs.

With 72 offices in 33 countries and more than
10,500 professionals worldwide, we have provided services to 46 of the top 50 pharmaceutical companies in the world as ranked by 2007 healthcare research and development spending. We also work with leading biotechnology and medical device companies
and government organizations that sponsor clinical research. We are one of the worlds largest providers of drug development services to pharmaceutical, biotechnology and medical device companies, and government organizations based on 2007
annual net revenue generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and
biotechnology clients, we established our Discovery Sciences segment in 1997. This segment primarily focuses on preclinical evaluations of anticancer therapies, biomarker discovery and patient sample analysis services, and compound development and
commercialization collaborations. We have developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients by
sharing the risks and potential rewards of the development and commercialization of drugs at various stages of development.

Our integrated
drug discovery and development services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively. In addition, with global infrastructure, we are able to accommodate the multinational drug discovery and
development needs of our clients. As a result of having core areas of expertise in discovery and development, we provide integrated services across the drug development spectrum. We use our



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proprietary informatics technology to support these services. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended
December 31, 2007.

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see Item 1. Business
 Industry Overview  Trends Affecting the Drug Discovery and Development Industry in our Annual Report on Form 10-K for the year ended December 31, 2007. Although we cannot forecast with certainty the demand for CRO services
for the remainder of 2008, particularly in light of current general economic conditions and uncertainties, the global financial crisis and FDA regulatory developments, the overall market for these services appears to be solid. This is supported by,
among other factors, the increase in the volume and size of requests for proposals for our Phase II-IV clinical development services. For the remainder of 2008, we plan to continue our focus on operational performance and sales execution.

We believe there are specific opportunities for growth and improvement in certain areas of our core development business. In total, the
four Phase II-IV geographic regions showed continued strength in the third quarter of 2008 demonstrated by a 35.3% increase in authorizations and a 20.0% increase in backlog compared to the third quarter of 2007. In addition, as we expand our global
footprint, we expect our ex-United States Phase II-IV units to continue to grow at a higher rate than our overall revenue growth. Our central laboratorys net revenue was 14.3% above the third quarter of 2007. In October 2008, we announced
plans to expand our global central lab services into Southeast Asia in response to growing client demand, which should provide an opportunity for future growth in this business unit.

We review various metrics to evaluate our financial performance, including period-to-period changes in backlog, new authorizations, cancellation rates,
revenue, margins and earnings. In the third quarter of 2008, we had new authorizations of $705.1 million, an increase of 23.6% over the third quarter of 2007. The cancellation rate for the third quarter of 2008 was 29.5% of new authorizations.
Excluding a foreign currency adjustment to backlog, the cancellation rate for the quarter was 24.2%. Backlog grew to $3.0 billion as of September 30, 2008, up 20.0% over September 30, 2007. The average length of our contracts continued to
increase, reaching 35 months as of September 30, 2008 up from 32 months as of September 30, 2007 due to several new contracts with longer than average duration. In the third quarter of 2008, selling, general and administrative costs, or
SG&A, as a percentage of net revenue was 25.5% compared to 24.4% in the third quarter of 2007. Included in SG&A costs is an additional $2.5 million of bad debt expense, which equates to 0.6% of net revenue in the third quarter of 2008. While
a significant portion of the SG&A cost is related to growth in mature and emerging markets, we are focused on decreasing SG&A as a percentage of net revenue in the future. In addition, our operating margin improved sequentially as income
from operations as a percentage of net revenue increased from 17.4% in the second quarter of 2008 to 17.9% in the third quarter of 2008.

Backlog by client type as of September 30, 2008 was 54.1% pharmaceutical, 35.0% biotech and 10.9% government/other, as compared to 51.1% pharmaceutical, 35.9% biotech and 13.0% government/other as of September 30, 2007. This
change in the composition of our backlog was primarily a result of an increase in authorizations from pharmaceutical companies. Net revenue by client type for the quarter ended September 30, 2008 was 56.0% pharmaceutical, 30.8% biotech and
13.2% government/other compared to 58.9% pharmaceutical, 29.3% biotech and 11.8% government/other for the quarter ended September 30, 2007.

For the third quarter of 2008, net revenue contribution by service area was 80.3% for Phase II-IV services, 14.3% for laboratory services, 3.3% for the Phase I clinic and 2.1% for Discovery Sciences, compared to net revenue contribution for
the year ended December 31, 2007 of 81.0% for Phase II-IV services, 14.1% for laboratory services, 3.3% for the Phase I clinic and 1.6% for Discovery Sciences. Top therapeutic areas by net revenue for the quarter ended September 30, 2008
were oncology, infectious diseases, circulatory/cardiovascular, endocrine/metabolic and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the quarter ended September 30, 2008,
see Results of Operations  Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2008 below.

Capital expenditures for the three months ended September 30, 2008 totaled $18.4 million. These capital expenditures were primarily for our new building in Scotland and various other leasehold improvements, computer software and
hardware, and scientific equipment for our laboratory units. We expect our capital expenditures for 2008



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to be approximately $80 million to $90 million, primarily associated with facility expansion and improvements, as well as investments in information
technology and new laboratory equipment.

As of September 30, 2008, we had $612.1 million of cash and cash equivalents and short- and
long-term investments. In the third quarter of 2008, we generated $81.8 million in cash from operations. The number of days revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as DSO, for the
third quarter of 2008 was 42 days, bringing it to 44 days for the nine months ended September 30, 2008, compared to 51 days for the year ended December 31, 2007. DSO decreased during the first nine months of 2008 due to improved cash
collections, the mix of contracts performed and their payment terms. We plan to continue to monitor DSO and the various factors that affect it. However, we expect DSO will continue to fluctuate from quarter to quarter depending on contract terms,
the mix of contracts performed and our success in collecting receivables.

With regard to our compound partnering arrangements,
Johnson & Johnsons marketing authorization application for dapoxetine is under regulatory review in seven European countries. The dipeptidyl peptidase, or DPP-4, program in type 2 diabetes with Takeda is also under regulatory review
in several countries. Takeda submitted the new drug application, or NDA, for alogliptin to the FDA in December 2007. In February 2008, the alogliptin NDA was accepted for filing by the FDA, triggering a $15.0 million milestone payment to us. In
October 2008, the FDA notified Takeda that it would not be able to complete its review of the alogliptin NDA before the Prescription Drug Use Fee Act date of October 27, 2008 due to the lack of internal resources. The FDA did not provide any
timelines for its ongoing review of the alogliptin NDA. In September 2008, Takeda submitted an NDA for alogliptin in Japan, triggering an additional $3.0 million milestone payment to us. Takeda also submitted an NDA for a single tablet product with
alogliptin and Actos with the FDA in September 2008. If additional filings/approvals and launch occur for alogliptin, we will receive additional regulatory milestones, sales-based milestones and royalties.

With regard to our collaboration on the statin compound, PPD10558, as previously announced, we have completed a high dose comparator study in healthy
volunteers. The drug was well-tolerated and a preliminary review of results suggests the statin compound compares favorably to currently marketed statins. We continue to review the data from this trial, identify potential development and
commercialization partners and evaluate the future development of this compound. We continue to conduct limited development activities with respect to the statin compound and expect to incur additional R&D expenses in future periods, but the
level of expenditures should be lower than in prior periods.

We believe these drug development collaborations allow us to leverage our
resources and global drug development expertise to create new opportunities for growth and to share the risks and potential rewards of drug development with our collabrators. For a background discussion of our compound partnering arrangements, see
Item 1. Business  Our Services  Our Discovery Sciences Group  Compound Collaboration Programs in our Annual Report on Form 10-K for the year ended December 31, 2007. We believe our compound partnering strategy uses
our cash resources and drug development expertise to drive mid- to long-term shareholder value. For the remainder of 2008, we plan to continue advancing our existing collaborations and evaluate new potential strategies and opportunities in this
area.

New Business Authorizations and Backlog

New business authorizations, which are sales of our services, are added to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to quarter and contracts
generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the three months ended September 30, 2007 and 2008 were $570.6 million and
$705.1 million, respectively.

Our backlog consists of new business authorizations for which the work has not started but is anticipated to
begin in the future and contracts in process that have not been completed. As of September 30, 2008, the remaining duration of the contracts in our backlog ranged from one to 111 months, with a weighted average duration of 35 months. We expect
the weighted average duration of the contracts in our backlog to fluctuate from quarter to quarter in the future, based on the contracts constituting our backlog at any given time. Amounts included in backlog represent potential future revenue and
exclude revenue that we have recognized. We adjust backlog on a monthly basis to account for fluctuations in exchange rates. Our backlog as of September 30, 2007 and 2008 was $2.5 billion and $3.0 billion, respectively. For various reasons
discussed in Item 1. Business  Backlog in our Annual Report on Form 10-K for the



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year ended December 31, 2007, our backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations

Revenue
Recognition

We record revenue from contracts, other than time-and-material contracts, on a proportional performance basis in our
Development and Discovery Sciences segments. To measure performance on a given date, we compare direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate primarily to the amount of labor and labor
related overhead costs for the delivery of services. We believe this is the best indicator of the performance of the contractual obligations. Changes in the estimated total direct costs to complete a contract without a corresponding proportional
change to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. For time-and-material contracts in both our Development and Discovery Sciences segments, we
recognize revenue as hours are worked, multiplied by the applicable hourly rate. For our Phase I, laboratory and biomarker businesses, we recognize revenue from unitized contracts as subjects or samples are tested, multiplied by the applicable unit
price. We offer volume discounts to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the
period.

In connection with the management of clinical trials, we pay, on behalf of our clients, fees to investigators and test subjects as
well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. Amounts paid by us as a principal for out-of-pocket costs are included in direct costs as reimbursable
out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of operations, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding
reimbursements, or revenue, we receive as an agent. During the three months ended September 30, 2007 and 2008, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $83.9 million and
$75.2 million, respectively.

Most of our contracts can be terminated by our clients either immediately or after a specified period
following notice. These contracts typically require the client to pay us the fees earned to date, the fees and expenses to wind down the study and, in some cases, a termination fee or some portion of the fees or profit that we could have earned
under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation. If we determine that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made.

The
Discovery Sciences segment also generates revenue from time to time in the form of milestone payments in connection with licensing of compounds. We only recognize milestone payments as revenue if the specified milestone is achieved and accepted by
the client, and continued performance of future research and development services related to that milestone is not required.

Recording
of Expenses

We generally record our operating expenses among the following categories:



| |  |  | direct costs;
| | - |  | -------------



| |  |  | research and development;
| | - |  | -------------------------



| |  |  | selling, general and administrative; and
| | - |  | ----------------------------------------



| |  |  | depreciation and amortization.
| | - |  | ------------------------------

Direct costs consist of amounts necessary to carry out the revenue and earnings process, and include direct labor and related benefit charges, other costs directly related to contracts, an allocation of facility and information technology
costs, and reimbursable out-of-pocket expenses. Direct costs, as a percentage of net revenue, tend to and are expected to fluctuate from one period to another as a result of changes in labor utilization and the mix of service offerings involved in
the hundreds of studies being conducted during any period of time.

Research and development, or R&D, expenses consist primarily of
patent expenses, labor and related benefit charges associated with personnel performing internal research and development work, supplies associated with this work, consulting services and an allocation of facility and information technology costs.



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SG&A expenses consist primarily of administrative payroll and related benefit charges, sales,
advertising and promotional expenses, recruiting and relocation expenses, training costs, administrative travel, an allocation of facility and information technology costs and costs related to operational employees performing administrative tasks.

We record depreciation expense on a straight-line method, based on estimated useful lives of 40 years for buildings, five years for
laboratory equipment, two to five years for software, computers and related equipment, and five to ten years for furniture and equipment, except for aircraft, which we depreciate over 30 years. We depreciate leasehold improvements over the shorter
of the life of the relevant lease or the useful life of the improvement. We depreciate property under capital leases over the life of the lease or the service life, whichever is shorter. We record amortization expense on intangible assets on a
straight-line method over the life of the intangible assets.



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Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2008

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the three
months ended September 30, 2007 compared to the three months ended September 30, 2008.



|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|-------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | ----------- |  | - | ----------- | - |  | ------ | -
|                                             |  | Three Months EndedSeptember 30, |         |      |   |         |             |  |  
|(in thousands, except per share data)        |  | 2007                            |         | 2008 |   |         | $ Inc (Dec) |  |   | % Inc (Dec) |  
|Net revenue:                                 |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Development                                  |  | $                               | 323,769 |      | $ | 358,674 |             |  | $ | 34,905      |   |  | 10.8   | %
|Discovery Sciences                           |  |                                 | 4,694   |      |   | 7,773   |             |  |   | 3,079       |   |  | 65.6   |  
|Reimbursed out-of-pockets                    |  |                                 | 28,732  |      |   | 32,020  |             |  |   | 3,288       |   |  | 11.4   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Total net revenue                            |  |                                 | 357,195 |      |   | 398,467 |             |  |   | 41,272      |   |  | 11.6   |  
|Direct costs:                                |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Development                                  |  |                                 | 163,221 |      |   | 173,748 |             |  |   | 10,527      |   |  | 6.5    |  
|Discovery Sciences                           |  |                                 | 2,775   |      |   | 2,741   |             |  |   | (34         | ) |  | (1.2   | )
|Reimbursable out-of-pocket expenses          |  |                                 | 28,732  |      |   | 32,020  |             |  |   | 3,288       |   |  | 11.4   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Total direct costs                           |  |                                 | 194,728 |      |   | 208,509 |             |  |   | 13,781      |   |  | 7.1    |  
|Research and development expenses            |  |                                 | 8,353   |      |   | 1,657   |             |  |   | (6,696      | ) |  | (80.2  | )
|Selling, general and administrative expenses |  |                                 | 87,129  |      |   | 101,684 |             |  |   | 14,555      |   |  | 16.7   |  
|Depreciation and amortization                |  |                                 | 14,135  |      |   | 15,332  |             |  |   | 1,197       |   |  | 8.5    |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Income from operations                       |  |                                 | 52,850  |      |   | 71,285  |             |  |   | 18,435      |   |  | 34.9   |  
|                                             |  |                                 |         |     
|Impairment of investments                    |  |                                 |        |      |   | (2,092  | )           |  |   | (2,092      | ) |  | (100.0 | )
|Interest and other income, net               |  |                                 | 4,224   |      |   | 6,635   |             |  |   | 2,411       |   |  | 57.1   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Income before provision for income taxes     |  |                                 | 57,074  |      |   | 75,828  |             |  |   | 18,754      |   |  | 32.9   |  
|Provision for income taxes                   |  |                                 | 18,834  |      |   | 24,644  |             |  |   | 5,810       |   |  | 30.9   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Net income                                   |  | $                               | 38,240  |      | $ | 51,184  |             |  | $ | 12,944      |   |  | 33.9   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  
|Net income per diluted share                 |  | $                               | 0.32    |      | $ | 0.43    |             |  | $ | 0.11        |   |  | 34.4   |  
|                                             |  |                                 |         |      |   |         |             |  |   |             |   |  |        |  

Total net revenue increased $41.3 million to $398.5 million in the third quarter of 2008. The
increase in total net revenue resulted primarily from an increase in our Development segment revenue. The Development segment generated net revenue of $358.7 million, which accounted for 90.0% of total net revenue for the third quarter of 2008. The
10.8% increase in Development segment net revenue was primarily attributable to an increase in the level of Phase II-IV services and an increase in net revenue from our laboratory units in the third quarter of 2008 as compared to the same period in
2007.

The Discovery Sciences segment generated net revenue of $7.8 million in the third quarter of 2008, an increase of $3.1 million from
the third quarter of 2007. The higher 2008 Discovery Sciences segment net revenue was mainly attributable to the $3.0 million milestone payment we earned in the third quarter of 2008 as a result of Takedas submission of the alogliptin NDA in
Japan.

Total direct costs increased $13.8 million to $208.5 million in the third quarter of 2008 primarily as the result of an increase in
Development segment direct costs. Development segment direct costs increased $10.5 million to $173.7 million in the third quarter of 2008 primarily due to an increase in personnel costs of $9.6 million.

R&D expenses decreased $6.7 million to $1.7 million in the third quarter of 2008. The decrease in R&D expense was primarily due to a decrease in
development costs associated with the statin compound we licensed from Ranbaxy and are developing as a potential treatment for dyslipidemia. We are solely responsible for all costs and expenses for the development, manufacture, marketing and
commercialization of this compound. We continue to



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conduct limited development activities with respect to the statin compound and expect to incur additional R&D expenses in future periods, but at lower
levels than in prior periods. We also plan to continue evaluating other compound partnering strategies and opportunities, which could result in additional R&D expenses in future periods.

SG&A expenses increased $14.6 million to $101.7 million in the third quarter of 2008. As a percentage of total net revenue, SG&A expenses
increased to 25.5% in the third quarter of 2008 as compared to 24.4% for the same quarter in 2007. The increase in SG&A expenses in absolute terms was primarily related to additional personnel costs of $13.3 million and higher bad debt costs of
$2.5 million, partially offset by a $1.4 million decrease in recruitment and relocation costs.

Depreciation and amortization expense
increased $1.2 million to $15.3 million in the third quarter of 2008. The increase was related to property and equipment we acquired to accommodate our growth. Capital expenditures were $18.4 million in the third quarter of 2008. Our capital
expenditures in the third quarter of 2008 primarily consisted of $3.5 million for our new building in Scotland and various other leasehold improvements, $11.4 million for computer software and hardware and $2.9 million for additional scientific
equipment for our laboratory units.

Impairment of investments of $2.1 million in the third quarter of 2008 consisted of a write-down for
an other-than-temporary decline in the fair market value of our equity investment in Accentia. The write-down was based on a decrease in the publicly quoted market price of Accentias common stock on September 30, 2008. For further
details, see Note 2 in the notes to the consolidated condensed financial statements.

Interest and other income, net increased $2.4 million
to $6.6 million in the third quarter of 2008. This increase was due primarily to gains from intercompany long-term loan settlements offset by the change in foreign currency exchange rates from the time invoices are prepared until payment is received
from the client, resulting in a net gain on foreign currency transactions of $1.1 million. Interest and other income, net increased an additional $0.9 million from the sale of our institutional review board unit and $0.4 million from gain on the
sale of investments.

Our provision for income taxes increased $5.8 million to $24.6 million in the third quarter of 2008. Our effective
income tax rate for the third quarter of 2008 was 32.5% compared to 33.0% for the third quarter of 2007. The decrease in tax rate for the third quarter of 2008 compared to the third quarter of 2007 was primarily caused by the change in the
geographic distribution of our pretax earnings among locations with varying tax rates.

Net income of $51.2 million in the third quarter of
2008 represents an increase of 33.9% from $38.2 million in the third quarter of 2007. Net income per diluted share of $0.43 in the third quarter of 2008 represents a 34.4% increase from $0.32 net income per diluted share in the third quarter of
2007.



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Nine Months Ended September 30, 2007 versus Nine Months Ended September 30, 2008

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the nine
months ended September 30, 2007 compared to the nine months ended September 30, 2008.



|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|-------------------------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | ----------- |  | - | ----------- | - |  | ------ | -
|                                             |  | Nine Months EndedSeptember 30, |           |      |   |           |             |  |  
|(in thousands, except per share data)        |  | 2007                           |           | 2008 |   |           | $ Inc (Dec) |  |   | % Inc (Dec) |  
|Net revenue:                                 |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Development                                  |  | $                              | 940,452   |      | $ | 1,077,120 |             |  | $ | 136,668     |   |  | 14.5   | %
|Discovery Sciences                           |  |                                | 13,577    |      |   | 31,798    |             |  |   | 18,221      |   |  | 134.2  |  
|Reimbursed out-of-pockets                    |  |                                | 85,388    |      |   | 92,811    |             |  |   | 7,423       |   |  | 8.7    |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Total net revenue                            |  |                                | 1,039,417 |      |   | 1,201,729 |             |  |   | 162,312     |   |  | 15.6   |  
|                                             |  |                                |           |     
|Direct costs:                                |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Development                                  |  |                                | 472,651   |      |   | 534,484   |             |  |   | 61,833      |   |  | 13.1   |  
|Discovery Sciences                           |  |                                | 7,595     |      |   | 8,065     |             |  |   | 470         |   |  | 6.2    |  
|Reimbursable out-of-pocket expenses          |  |                                | 85,388    |      |   | 92,811    |             |  |   | 7,423       |   |  | 8.7    |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Total direct costs                           |  |                                | 565,634   |      |   | 635,360   |             |  |   | 69,726      |   |  | 12.3   |  
|                                             |  |                                |           |     
|Research and development expenses            |  |                                | 14,221    |      |   | 7,911     |             |  |   | (6,310      | ) |  | (44.4  | )
|Selling, general and administrative expenses |  |                                | 245,016   |      |   | 301,711   |             |  |   | 56,695      |   |  | 23.1   |  
|Depreciation and amortization                |  |                                | 40,564    |      |   | 45,182    |             |  |   | 4,618       |   |  | 11.4   |  
|Impairment of intangible asset               |  |                                |          |      |   | 1,607     |             |  |   | 1,607       |   |  | 100.0  |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Income from operations                       |  |                                | 173,982   |      |   | 209,958   |             |  |   | 35,976      |   |  | 20.7   |  
|                                             |  |                                |           |     
|Impairment of investments, net               |  |                                |          |      |   | (15,435   | )           |  |   | (15,435     | ) |  | (100.0 | )
|Interest and other income, net               |  |                                | 12,798    |      |   | 14,907    |             |  |   | 2,109       |   |  | 16.5   |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Income before provision for income taxes     |  |                                | 186,780   |      |   | 209,430   |             |  |   | 22,650      |   |  | 12.1   |  
|Provision for income taxes                   |  |                                | 63,906    |      |   | 69,110    |             |  |   | 5,204       |   |  | 8.1    |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Net income                                   |  | $                              | 122,874   |      | $ | 140,320   |             |  | $ | 17,446      |   |  | 14.2   |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  
|Net income per diluted share                 |  | $                              | 1.03      |      | $ | 1.16      |             |  | $ | 0.13        |   |  | 12.6   |  
|                                             |  |                                |           |      |   |           |             |  |   |             |   |  |        |  

Total net revenue increased $162.3 million to $1.2 billion in the first nine months of 2008. The
increase in total net revenue resulted primarily from an increase in our Development segment revenue. The Development segment generated net revenue of $1.1 billion, and accounted for 89.6% of total net revenue for the first nine months of 2008. The
14.5% increase in Development segment net revenue was primarily attributable to an increase in the level of Phase II-IV services we provided in the first nine months of 2008 as compared to the same period in 2007. Net revenue from our laboratory
units and Phase I clinic increased in the first nine months of 2008 as compared to 2007 and contributed to the overall increase in net revenue in the Development segment.

The Discovery Sciences segment generated net revenue of $31.8 million in the first nine months of 2008, an increase of $18.2 million from the first nine months of 2007. The higher 2008 Discovery Sciences segment net
revenue was mainly attributable to the $15.0 million milestone payment we earned in the first quarter of 2008 as a result of the FDAs acceptance of the alogliptin NDA and a $3.0 million milestone payment we earned in the third quarter of 2008
as a result of Takedas submission of the alogliptin NDA in Japan.

Total direct costs increased $69.7 million to $635.4 million in
the first nine months of 2008, primarily as the result of an increase in Development segment direct costs. Development segment direct costs increased $61.8 million to $534.5 million in the first nine months of 2008 primarily due to an increase in
personnel costs of $45.9 million. The



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remaining increase in Development segment direct costs was primarily due to increased facility and information technology costs of $9.0 million as a result
of headcount growth and an increase in subcontractor costs of $4.5 million.

SG&A expenses increased $56.7 million to $301.7 million in
the first nine months of 2008. As a percentage of total net revenue, SG&A expenses increased to 25.1% in the first nine months of 2008 compared to 23.6% in the first nine months of 2007. The increase in SG&A expenses in absolute terms was
primarily due to additional personnel costs of $47.5 million, higher facility and information technology costs of $2.2 million and higher bad debt expense of $4.5 million.

Depreciation and amortization expense increased $4.6 million to $45.2 million in the first nine months of 2008. The increase was related to property and
equipment we acquired to accommodate our growth. Capital expenditures were $53.2 million in the first nine months of 2008. Our capital expenditures in the first nine months of 2008 primarily consisted of $15.7 million for our new building in
Scotland and various other leasehold improvements, $20.2 million for computer software and hardware and $11.2 million for additional scientific equipment for our laboratory units.

In March 2008, Accentia announced the results of its SinuNase Phase III clinical trial and reported that SinuNase failed to meet its goal in treating
chronic sinusitis patients, resulting in a significant amount of uncertainty regarding the future clinical development of SinuNase. As a result, we wrote off the $1.6 million of remaining unamortized value of our royalty interest in SinuNase during
the first nine months of 2008.

Income from operations increased $36.0 million to $210.0 million in the first nine months of 2008. Income
from operations in the first nine months of 2008 included $18.0 million in milestone payments under our DPP-4 collaboration agreement with Takeda.

Impairment of investments, net of $15.4 million in the first nine months of 2008 consisted of a net impairment of an investment in our short-term investment portfolio of $3.7 million and a $11.7 million write-down for an
other-than-temporary decline in the fair market value of our equity investment in Accentia. The write-down on Accentia was based on a decrease in the publicly quoted market price of Accentias common stock on September 30, 2008. The net
impairment of investments consisted of an impairment of $7.0 million that occurred in the first quarter of 2008 followed by a net reimbursement of $3.3 million that occurred in the second quarter of 2008 on an investment in a AAA-rated
tax-advantaged investment fund. For further details, see Note 2 in the notes to consolidated condensed financial statements.

Interest and
other income, net increased $2.1 million to $14.9 million in the first nine months of 2008. This increase was due primarily to an increase on the gain on the sale of investments of $1.1 million, the sale of our institutional review board unit for
$0.9 million and an increase in interest income of $0.7 million.

Our provision for income taxes increased $5.2 million to $69.1 million in
the first nine months of 2008. Our effective income tax rate for the first nine months of 2008 was 33.0% compared to 34.2% for the first nine months of 2007. The decrease in tax rate for the first nine months of 2008 was impacted by a 0.9% reduction
due to a tax benefit realized from the disposal of certain assets during the first quarter of 2008. The remaining difference in our effective tax rates for the first nine months of 2008 compared to the first nine months of 2007 was due to the change
in the geographic distribution of our pretax earnings among locations with varying tax rates.

Net income of $140.3 million in the first
nine months of 2008 represents an increase of 14.2% from $122.9 million in the first nine months of 2007. Net income per diluted share of $1.16 in the first nine months of 2008 represents a 12.6% increase from net income per diluted share of $1.03
in the first nine months of 2007. Diluted earnings per share for the first nine months of 2008 included $18.0 million in milestone payments from Takeda under our DPP-4 collaboration agreement with Takeda, a $1.6 million impairment of an intangible
asset and a $15.4 million impairment of investments, net, all discussed above.

Liquidity and Capital Resources

As of September 30, 2008, we had $462.5 million of cash and cash equivalents and $47.8 million of short-term investments. We also had $101.9 million
of long-term investments, consisting of auction rate securities. We have classified these auction rate securities as long-term due to uncertainties about the liquidity in the auction rate securities market. Our cash and cash equivalents and
short-term investments are invested in financial instruments that are rated A or better by Standard & Poors or Moodys and earn interest at market rates. Our expected primary cash needs on both a short- and long-term basis are
for capital expenditures, expansion of services, possible acquisitions, investments and compound partnering collaborations, geographic expansion, dividends, our stock repurchase program, working capital



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and other general corporate purposes. We have historically funded our operations, dividends and growth, including acquisitions, primarily with cash flow from
operations.

We held approximately $209.5 million and $117.1 million in tax-exempt auction rate securities at December 31, 2007 and
September 30, 2008, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate
securities. During the nine months ended September 30, 2008, a significant number of auction rate securities auctions failed. If future auctions fail, we may not be able to liquidate these securities until a future auction is successful, the
issuer redeems the outstanding securities or the securities mature. During the first quarter of 2008, due to the uncertainties about the liquidity in the auction rate securities market, we classified $110.0 million of our auction rate securities to
long-term assets. Liquidation of these investments, reclassification to short-term assets and recognition of unrealized gains and losses during the nine months ended September 30, 2008 result in a remaining balance of $101.9 million. We also
recorded an unrealized loss on these investments of $3.0 million as of September 30, 2008. We concluded that this was a temporary impairment based on the market conditions, our ability and intent to hold the auction rate securities for a
long-term basis and an assessment of credit quality of the underlying collateral. The Company plans to continue to review the classification and valuation of these securities quarterly.

In the first nine months of 2008, our operating activities provided $258.8 million in cash as compared to $146.3 million for the same period last year.
The change in cash flow was due primarily to (1) a $29.3 million increase in noncash items relating to investing or financing activities, including an impairment of investments, net of $15.4 million, an increase in depreciation and amortization
of $4.6 million, an increase in the provision for doubtful accounts of $4.5 million and an increase in stock compensation expense of $3.3 million, and (2) deferrals of past, and accruals of expected future, operating cash receipts and payments
totaling $65.8 million. The change in adjustments for accruals of expected future operating cash receipts and payments includes accounts receivable and unbilled services of $59.7 million, prepaid expenses and investigator advances of $8.2 million
and unearned income of $43.1 million. The change in adjustments for deferrals of past operating cash receipts and payments includes accounts payable and other accrued expenses and deferred rent of ($13.1) million, accrued and deferred income taxes
of ($17.7) million and payables to investigators of ($13.5) million. Fluctuations in receivables and unearned income occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to clients and collect
outstanding accounts receivable. This activity varies by individual client and contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of unbilled services
and unearned revenue can vary significantly from quarter to quarter.

In the first nine months of 2008, our investing activities provided
$117.4 million in cash. We used cash to purchase investments of $198.3 million, make capital expenditures of $53.2 million and purchase equity investments of $2.3 million. These amounts were offset by maturities and sales of investments of $370.8
million. Our capital expenditures in the first nine months of 2008 primarily consisted of $15.7 million for our new building in Scotland and various other leasehold improvements, $20.2 million for computer software and hardware and $11.2 million for
additional scientific equipment for our laboratory units. We expect our capital expenditures for 2008 to be approximately $80 million to $90 million, primarily associated with facility expansions and improvements, as well as investments in
information technology and new laboratory equipment.

In the first nine months of 2008, our financing activities used $74.0 million of
cash. We used $66.6 million of cash to repurchase shares of our common stock and $35.7 million to pay dividends, which was partially offset by proceeds of $25.1 million from stock option exercises and purchases under our employee stock purchase plan
and $3.2 million in income tax benefits from the exercise of stock options and disqualifying dispositions of stock.



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The following table sets forth amounts from our consolidated balance sheet affecting our working capital, along with the
dollar amount of the change from December 31, 2007 to September 30, 2008.



|                                               |  |                  |           |                   |   |             |  |   |          |  
|---------------------------------------------- |  | ---------------- | --------- | ----------------- | - | ----------- |  | - | -------- | -
|(in thousands)                                 |  | December 31,2007 |           | September 30,2008 |   | $ Inc (Dec) | 
|Current assets:                                |  |                  |           |                   |   |             |  |   |          |  
|Cash and cash equivalents                      |  | $                | 171,427   |                   | $ | 462,489     |  | $ | 291,062  |  
|Short-term investments                         |  |                  | 330,957   |                   |   | 47,761      |  |   | (283,196 | )
|Accounts receivable and unbilled services, net |  |                  | 481,477   |                   |   | 458,405     |  |   | (23,072  | )
|Income tax receivable                          |  |                  | 517       |                   |   | 4,225       |  |   | 3,708    |  
|Investigator advances                          |  |                  | 15,318    |                   |   | 17,921      |  |   | 2,603    |  
|Prepaid expenses and other current assets      |  |                  | 49,835    |                   |   | 60,494      |  |   | 10,659   |  
|Deferred tax assets                            |  |                  | 23,682    |                   |   | 24,164      |  |   | 482      |  
|                                               |  |                  |           |                   |   |             |  |   |          |  
|Total current assets                           |  | $                | 1,073,213 |                   | $ | 1,075,459   |  | $ | 2,246    |  
|                                               |  |                  |           |                   |   |             |  |   |          |  
|Current liabilities:                           |  |                  |           |                   |   |             |  |   |          |  
|Accounts payable                               |  | $                | 24,984    |                   | $ | 26,129      |  | $ | 1,145    |  
|Payables to investigators                      |  |                  | 58,952    |                   |   | 53,321      |  |   | (5,631   | )
|Accrued income taxes                           |  |                  | 16,182    |                   |   | 13,304      |  |   | (2,878   | )
|Other accrued expenses                         |  |                  | 167,235   |                   |   | 183,698     |  |   | 16,463   |  
|Deferred tax liabilities                       |  |                  | 101       |                   |   | 204         |  |   | 103      |  
|Unearned income                                |  |                  | 205,779   |                   |   | 232,499     |  |   | 26,720   |  
|                                               |  |                  |           |                   |   |             |  |   |          |  
|Total current liabilities                      |  | $                | 473,233   |                   | $ | 509,155     |  | $ | 35,922   |  
|                                               |  |                  |           |                   |   |             |  |   |          |  
|Working capital                                |  | $                | 599,980   |                   | $ | 566,304     |  | $ | (33,676  | )

Working capital as of September 30, 2008 was $566.3 million compared to $600.0 million at
December 31, 2007. The decrease in working capital was due primarily to a decrease in short-term investments and increases in unearned income and other accrued expenses partially offset by an increase in cash and cash equivalents. In addition,
due to the uncertainties about the liquidity in the auction rate securities market, we reclassified $101.9 million of our auction rate securities to long-term assets at September 30, 2008 due to our ability and intent to hold these securities
on a long-term basis until the auction rate securities market improves.

For the third quarter of 2008 DSO was 42 days, bringing it to 44
days for the nine months ended September 30, 2008, compared to 51 days for the year ended December 31, 2007. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the
applicable period. We expect DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed within a quarter, the levels of investigator advances and unearned income, and our success in collecting
receivables.

Effective July 1, 2008, we reduced our $50.0 million revolving credit facility with Bank of America, N. A. to $25.0
million. Indebtedness under the facility is unsecured and subject to covenants relating to financial ratios and restrictions on certain types of transactions. This credit facility does not expressly restrict or limit the payment of dividends. We
were in compliance with all loan covenants as of September 30, 2008. Outstanding borrowings under the facility bear interest at an annual fluctuating rate equal to the one-month London Interbank Offered Rate, or LIBOR, plus a margin of 0.6%.
Borrowings under this credit facility are available to provide working capital and for general corporate purposes. This credit facility is currently scheduled to expire in June 2009, at which time any outstanding balance will be due. As of
September 30, 2008, no borrowings were outstanding under this credit facility, although the aggregate amount available for borrowing had been reduced by $1.8 million due to outstanding letters of credit issued under this facility.

In October 2007, our Board of Directors amended the annual cash dividend policy to increase the annual dividend rate from $0.12 to $0.40 per share,
payable quarterly at a rate of $0.10 per share. The new dividend rate was effective beginning in the fourth quarter of 2007. In September 2008, our Board of Directors further amended the annual dividend policy to increase the annual dividend rate
from $0.40 to $0.50 per share, payable quarterly at a rate of $0.125 per share. The new dividend rate will be effective beginning in the fourth quarter of 2008. The cash dividend policy and the payment of future quarterly cash dividends under that
policy are not guaranteed and are subject to the



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discretion of and continuing determination by our Board of Directors that the policy remains in the best interests of our shareholders and in compliance with
applicable laws and agreements.

In February 2008, we announced our plan to begin a stock repurchase program whereby up to $350.0 million
of our common stock may be purchased from time to time in the open market. We decided to adopt a share repurchase program in view of the current price at which stock was trading at the time of the adoption of the program, the strength of our balance
sheet and our ability to generate cash, as well as to minimize earnings dilution from future equity compensation awards. We expect to finance potential repurchases of stock, if any, from existing cash and cash flows from operations. During the three
and nine months ended September 30, 2008, we repurchased approximately 769,000 shares and 1,635,000 shares of our common stock, respectively, for an aggregate purchase price, including broker commissions, of $30.1 million and $66.6 million at
an average price per share of $39.18 and $40.75, respectively. As of September 30, 2008, $283.4 million remained available for share repurchases under the stock repurchase program.

We have commitments to invest up to an aggregate additional $21.4 million in four venture capital funds. For further details, see Note 2 in the notes to
consolidated condensed financial statements.

As of September 30, 2008, the total gross unrecognized tax benefits were $25.0 million,
of which $10.7 million, if recognized, would reduce our effective tax rate. We do not anticipate a significant change in total unrecognized tax benefits or our effective tax rate due to the settlement of audits and the expiration of statute of
limitations within the next 12 months.

We have been involved in compound development and commercialization collaborations since 1997. We
developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients by sharing the risks and potential rewards
associated with the development and commercialization of drugs at various stages of development. As of September 30, 2008, we had four such arrangements that involve the potential future receipt of one or more of the following forms of revenue:
payments upon the achievement of specified development and regulatory milestones; royalty payments if the compound is approved for sale; sales-based milestone payments; and a share of net sales up to a specified dollar limit. The compounds that are
the subject of these collaborations are either still in development or are awaiting regulatory approvals in certain countries. None of the compounds have been approved for sale in any country in the world. As a result of the risks associated with
drug development, including poor or unexpected clinical trial results and obtaining regulatory approval to sell in any country, we might not receive any further milestone payments, royalties or other payments with respect to any of our drug
development collaborations.

As of September 30, 2008, we had two collaborations that involved potential future expenditures. The
first is our collaboration with ALZA Corporation, subsequently acquired by Johnson & Johnson, for dapoxetine. In connection with this collaboration, we have an obligation to pay a royalty to Eli Lilly and Company of 5% on annual net sales
of the compound in excess of $800 million. Johnson & Johnson received a not approvable letter from the FDA in October 2005, but continued its global development program. In December 2007, Johnson & Johnson submitted a
marketing authorization application for dapoxetine to regulatory authorities in seven countries in the European Union. Although this regulatory application has been submitted, we do not know if or when Johnson & Johnson will obtain
regulatory approval for dapoxetine in these or any other countries.

The second collaboration involving future expenditures is with
Ranbaxy. In February 2007, we exercised an option to license from Ranbaxy a statin compound that we are developing as a potential treatment for dyslipidemia. Under the agreement, we have an exclusive license to make, use, sell, import and sublicense
the compound and any licensed product anywhere in the world for any human use. We are solely responsible, and will bear all costs and expenses, for the development, manufacture, marketing and commercialization of the compound and licensed products.
In addition to the one-time license fee, we are obligated to pay Ranbaxy milestone payments upon the occurrence of specified clinical development events. If a licensed product is approved for sale, we must also pay Ranbaxy royalties based on sales
of the product, as well as commercial milestone payments based on the achievement of specified worldwide sales targets. If all criteria are met, the total amount of potential clinical and sales-based milestones that we are obligated to pay Ranbaxy
would be $44.0 million. As previously announced, we have completed a high dose comparator study in healthy volunteers. The drug was well-tolerated and a preliminary review of results suggests the statin compound compares favorably to currently
marketed statins. We continue to review the data from this trial, identify potential development and commercialization partners and evaluate the future clinical development of this compound.



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In September 2007, we entered into a contract with a client to construct a laboratory within a leased
building, to supply laboratory equipment and to provide specified laboratory services. The client has agreed to reimburse us for the costs of the construction of the laboratory and related equipment over a two-year period. We completed the
construction and up-fit for this laboratory in the second quarter of 2008 and incurred construction and equipment costs of $5.0 million.

Under most of our agreements for Development services, we typically agree to indemnify and defend the sponsor against third-party claims based on our negligence or willful misconduct. Any successful claims could have a material adverse
effect on our financial condition, results of operations and future prospects.

We expect to continue expanding our operations through
internal growth, strategic acquisitions and investments. We expect to fund these activities, the payment of future cash dividends and potential repurchases of stock, if any, from existing cash, cash flows from operations and, if necessary or
appropriate, borrowings under our existing or future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases, if any, for the foreseeable future. From time to time, we
evaluate potential acquisitions, investments and other growth and strategic opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity or debt securities. While we believe we
have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity and ability to pay dividends or repurchase our stock could be affected by our dependence on a small number of industries and clients; compliance
with regulations; reliance on key personnel; breach of contract, personal injury or other tort claims; international risks; environmental or intellectual property claims; or other factors described below under Potential Liability and
Insurance, Potential Volatility of Quarterly Operating Results and Stock Price and Quantitative and Qualitative Disclosures about Market Risk. In addition, see Risk Factors, Contractual
Obligations and Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2007.

Contractual Obligations

There have been no significant changes to the Contractual Obligation table included in our Annual
Report on Form 10-K for the year ended December 31, 2007.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our 2007 Annual Report on Form 10-K.
There were no material changes to our critical accounting policies and estimates in the first nine months of 2008. For detailed information on our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended
December 31, 2007.



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Recent Accounting Pronouncements

Recently issued accounting standards relevant to our financial statements, which are described in Recent Accounting Pronouncements in Note 1 in the notes to our consolidated condensed financial statements
are:



|               |  |                                                                                                                                                                |  |                                                                                                                                                                                                               
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date           |  | Title                                                                                                                                                          |  | Effective Date                                                                                                                                                                                                
|September 2006 |  | SFAS No. 157, Fair Value Measurements                                                                                                                        |  | Fiscal years beginning after November 15, 2007 and interim periods within those years except those specified in FAS 157-1 and FAS 157-2 which are effective for fiscal years beginning after
November 15, 2008
|               |  |                                                                                                                                                               
|September 2006 |  | SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and
132(R) |  | Measurement date provision  fiscal years ending after December 15, 2008                                                                                                                                      
|               |  |                                                                                                                                                               
|February 2007  |  | SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115                        |  | Fiscal years beginning after November 15, 2007                                                                                                                                                                
|               |  |                                                                                                                                                               
|June 2007      |  | EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards                                                              |  | Fiscal years beginning after December 15, 2007                                                                                                                                                                
|               |  |                                                                                                                                                               
|June 2007      |  | EITF Issue 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities               |  | Fiscal years beginning after December 15, 2007                                                                                                                                                                
|               |  |                                                                                                                                                               
|December 2007  |  | EITF Issue 07-01, Accounting for Collaborative Arrangements                                                                                                  |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|December 2007  |  | SFAS No. 141 (revised 2007), Business Combinations                                                                                                           |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|December 2007  |  | SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51                                                     |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|March 2008     |  | SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities                                                                                 |  | Fiscal years beginning after November 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|April 2008     |  | FSP FAS 142-3, Determination of the Useful Life of Intangible Assets                                                                                         |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|June 2008      |  | FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities                                    |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                
|               |  |                                                                                                                                                               
|June 2008      |  | EITF 08-3, Accounting by Lessees for Nonrefundable Maintenance Deposits                                                                                      |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                



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|            |  |                                                                                                                                                                                |  |                                                  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------
|August 2008 |  | U.S. SEC will issue for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with IFRS published by the IASB. |  | Fiscal years ending on or after December 15, 2014

Income Taxes

Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pretax earnings among locations with varying tax rates. Our profits are
also impacted by changes in the tax rates of the various tax jurisdictions. In particular, as the geographic mix of our pretax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period. The effective
rate will also change due to the discrete recognition of tax benefits when tax positions are effectively settled or as a result of specific transactions, such as the disposal of certain assets in the first quarter of 2008.

Inflation

Our long-term contracts, those in excess
of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. In the event that actual inflation rates are greater than our contractual inflation
rates or cost of living adjustments, inflation could have a material adverse effect on our operations or financial condition.

Potential Liability and
Insurance

Drug development services involve the testing of potential drug candidates on human volunteers pursuant to a study protocol.
This testing exposes us to the risk of liability for personal injury or death to volunteers and patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of the study drug or use of the drug
following regulatory approval. For example, we have been named as a defendant in a number of lawsuits relating to the antibiotic Ketek, as described below in Part II, Item 1  Legal Proceedings. We attempt to manage our risk of
liability for personal injury or death to volunteers and patients from administration of study products through standard operating procedures, patient informed consent, contractual indemnification provisions with clients and insurance. We monitor
clinical trials in compliance with government regulations and guidelines. We have established global standard operating procedures intended to satisfy regulatory requirements in all countries in which we have operations and to serve as a tool for
controlling and enhancing the quality of drug development services. The contractual indemnifications generally do not protect us against all our own actions, such as gross negligence. We currently maintain professional liability insurance coverage
with limits we believe are adequate and appropriate.

Potential Volatility of Quarterly Operating Results and Stock Price

Our quarterly and annual operating results have fluctuated in the past, and we expect that they will continue to fluctuate in the future. Factors that
could cause these fluctuations to occur include:



| |  |  | the timing and level of new business authorizations;
| | - |  | ----------------------------------------------------



| |  |  | the timing of our Discovery Sciences segment milestone payments or other revenue, if any;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the timing of the initiation, progress or cancellation of significant projects;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our ability to properly manage our growth;
| | - |  | ------------------------------------------



| |  |  | our ability to recruit and retain experienced personnel;
| | - |  | --------------------------------------------------------



| |  |  | impairment of investments or intangible assets;
| | - |  | -----------------------------------------------



| |  |  | the timing and amount of costs associated with R&D and compound partnering collaborations;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | litigation costs;
| | - |  | -----------------



| |  |  | the timing of the opening of new offices;
| | - |  | -----------------------------------------



| |  |  | the timing of other internal expansion costs;
| | - |  | ---------------------------------------------



| |  |  | exchange rate fluctuations between periods;
| | - |  | -------------------------------------------



| |  |  | our dependence on a small number of industries and clients;
| | - |  | -----------------------------------------------------------



| |  |  | the mix of products and services sold in a particular period;
| | - |  | -------------------------------------------------------------



| |  |  | pricing pressure in the market for our services;
| | - |  | ------------------------------------------------



| |  |  | rapid technological change;
| | - |  | ---------------------------



| |  |  | the timing and amount of start-up costs incurred in connection with the introduction of new
| | - |  | -------------------------------------------------------------------------------------------



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| | products and services;
| | ----------------------



| |  |  | the timing and extent of new government regulations;
| | - |  | ----------------------------------------------------



| |  |  | intellectual property risks; and
| | - |  | --------------------------------



| |  |  | the timing and amount of costs associated with integrating acquisitions.
| | - |  | ------------------------------------------------------------------------

Delays and terminations of trials are often the result of actions taken by our clients or regulatory authorities, and are not typically controllable by
us. Because a large percentage of our operating costs are relatively fixed while revenue is subject to fluctuation, variations in the timing and progress of large contracts can materially affect our quarterly operating results. For these reasons, we
believe that comparisons of our quarterly financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Fluctuations in quarterly results, actual or anticipated changes in our dividend policy or stock repurchase plan or other factors, including recent general economic and financial market conditions, could affect the
market price of our common stock. These factors include ones beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions in our industry, disclosures by product development partners and actions by regulatory
authorities with respect to potential drug candidates, changes in pharmaceutical, biotechnology and medical device industries and the government sponsored clinical research sector, and general economic conditions. Any effect on our common stock
could be unrelated to our longer-term operating performance. For further details, see Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are exposed to foreign currency risk by virtue of our international operations. We derived approximately 36.2% and 39.8% of our net revenue for the three months ended September 30, 2007 and 2008, respectively, from operations
outside the United States. Our operations in the United Kingdom generated 37.7% and 41.7% of our net revenue from international operations during the three months ended September 30, 2007 and 2008. We generally reinvest funds generated by each
subsidiary in the country where they are earned. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in the pound sterling, euro and Brazilian real.

The vast majority of our contracts are entered into by our U.S. or U.K. subsidiaries. The contracts entered into by the U.S. subsidiaries are almost
always denominated in U.S. dollars. Contracts entered into by our U.K. subsidiaries are generally denominated in U.S. dollars, pounds sterling or euros, with the majority in U.S. dollars. Although an increase in exchange rates for the pound sterling
or euro relative to the U.S. dollar increases net revenue from contracts denominated in these currencies, income from operations is negatively affected due to an increase in operating expenses that occurs when we convert our expenses from local
currencies into the U.S. dollar equivalent.

We also have currency risk resulting from the passage of time between the invoicing of clients
under contracts and the collection of client payments against those invoices. If a contract is denominated in a currency other than the subsidiarys local currency, we recognize a receivable at the time of invoicing for the local currency
equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared until payment from the client will result in our receiving either more or less in local currency than the local currency equivalent of
the receivable. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. If the exchange rate on accounts receivable balances denominated in pounds sterling and euros had
increased by 10%, our foreign currency transaction loss would have increased by $3.9 million in the quarter ended September 30, 2008.

Our strategy for managing foreign currency risk relies primarily on receiving payment in the same currency used to pay expenses. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential
foreign exchange exposure. At September 30, 2008, the face amount of these foreign exchange hedging contracts was $114.0 million. If the U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in the
third quarter of 2008, income from operations would have been approximately $1.6 million lower excluding the impact of hedging for the quarter based on revenues and the costs related to our foreign operations.

Changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of foreign subsidiaries financial
results into U.S. dollars for purposes of reporting our consolidated financial results. The process by which we translate each foreign subsidiarys financial results to U.S. dollars is as follows:



| |  |  | we translate income statement accounts at average exchange rates for the period;
| | - |  | --------------------------------------------------------------------------------



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| |  |  | we translate balance sheet assets and liability accounts at end of period exchange rates; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | we translate equity accounts at historical exchange rates.
| | - |  | ----------------------------------------------------------

Translation of the balance sheet in this manner affects shareholders equity through the cumulative translation adjustment account. This account exists only in the foreign subsidiarys U.S. dollar balance
sheet and is necessary to keep the foreign balance sheet, stated in U.S. dollars, in balance. We report translation adjustments with accumulated other comprehensive income (loss) as a separate component of shareholders equity. During the third
quarter of 2008, several foreign currencies had a large decrease in value relative to the U.S. dollar. This resulted in a larger than normal change in translation adjustment. For further details, see Note 7 in the notes to the consolidated condensed
financial statements. To date, cumulative translation adjustments have not been material to our consolidated financial position. However, future translation adjustments could materially and adversely affect us.

Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of any country in which
we conduct operations. Although we perform services for clients located in a number of jurisdictions, we have not experienced any material difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control
restrictions could have an adverse effect on our financial condition. If the Company were to repatriate dividends from the cumulative amount of undistributed earnings in foreign entities, the Company would incur a tax liability which is not
currently provided for in the Companys balance sheet.

We are exposed to changes in interest rates on our cash, cash equivalents,
investments and amounts outstanding under notes payable and lines of credit. We invest our cash and investments in financial instruments with interest rates based on market conditions. If the interest rates on cash, cash equivalents and investments
decreased by 10%, our interest income would have decreased by approximately $0.4 million in the third quarter of 2008.

We are also exposed
to market risk related to our investments in auction rate securities. For further details, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that
information to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable
assurance discussed above.

Internal Control Over Financial Reporting

No change to our internal control over financial reporting occurred during the third quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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##### Table of Contents

Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Beginning in early 2007, we were
named as a co-defendant in lawsuits involving claims relating to patients who took sanofi-aventis FDA-approved antibiotic Ketek, for which we provided certain clinical trial services to sanofi-aventis predecessor prior to FDA approval.
Lawsuits are pending in New Jersey, North Carolina, Alabama, Wisconsin and New York. These suits allege multiple causes of action, including negligence, fraud, misrepresentation, breach of warranty, conspiracy, wrongful death and violations of
various state and federal statutes, including unfair and deceptive trade practices acts. Generally, the plaintiffs are seeking unspecified damages from alleged injuries from the ingestion of Ketek, and in some of the cases claim damages of at least
$20.0 million. It is possible that additional suits will be filed. While there can be no assurance of a successful outcome and litigation costs can be material, we do not believe that these claims against us have merit and intend to vigorously
defend ourself in these matters.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

In February 2008, we announced our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $350 million of our common stock. Purchases under this repurchase program may be made from time to time in the open
market. The timing and amount of any share repurchases will be determined by our management based on its evaluation of the market conditions and other factors. The following table provides information with respect to purchases made by us of our
common stock pursuant to the share repurchase program during the three months ended September 30, 2008:



|                                        |  |                                |  |                                |       |                                   |   |                                                                                        |  |   |            
|--------------------------------------- |  | ------------------------------ |  | ------------------------------ | ----- | --------------------------------- | - | -------------------------------------------------------------------------------------- |  | - | -----------
|                                        |  | Total Numberof SharesPurchased |  | AveragePrice PaidPer Share (1) |       | Total ValuePaid bythe Company (1) |   | Maximum DollarValue of SharesThat May YetBe PurchasedUnder the ShareRepurchase Program
|Period                                  |  |                                |  |                                |       |                                   |   |                                                                                        |  |   |            
|July 1, 2008 to July 30, 2008           |  | 322,900                        |  | $                              | 37.53 |                                   | $ | 12,118,933                                                                             |  | $ | 301,391,569
|August 1, 2008 to August 31, 2008       |  | 446,000                        |  |                                | 40.37 |                                   |   | 18,003,612                                                                             |  |   | 283,387,957
|September 1, 2008 to September 30, 2008 |  |                               |  |                                |      |                                   |   |                                                                                       |  |   |           



|(1) | Includes broker commissions.
|--- | ----------------------------



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|Item 6. | Exhibits
|------- | --------



|(a) | Exhibits
|--- | --------



|       |  |                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|10.263 |  | Third Amendment dated July 7, 2008 to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, L.P., and PPD Development, LP    
|       | 
|31.1   |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)                                                                         
|       | 
|31.2   |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)                                                                         
|       | 
|32.1   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  Chief Executive Officer
|       | 
|32.2   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  Chief Financial Officer



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SIGNATURES

Pursuant to the requirements 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.



PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.(Registrant)By

/s/ Fredric N. EshelmanChief Executive Officer(Principal Executive Officer)By

/s/ Daniel G. DarazsdiChief Financial Officer(Principal Financial Officer)By

/s/ Peter WilkinsonChief Accounting Officer(Principal Accounting Officer)


Date: November 5, 2008



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