##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



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(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 June 30, 2006.

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



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PHARMACEUTICAL PRODUCT
DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)



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

3151 South Seventeenth Street

Wilmington, North Carolina

(Address of principal executive
offices)

28412

(Zip Code)

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



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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 or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x     Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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: 116,985,102 shares of common stock, par value $0.05 per share, as of July 25,
2006.



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##### Table of Contents

INDEX



|                                                                                                                      |  |     
|--------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                      |  | Page
|                                                                                                                      | 
|Part I.
FINANCIAL INFORMATION                                                                                         |  |     
|                                                                                                                      | 
|Item 1. Financial Statements                                                                                          |  |     
|                                                                                                                      | 
|Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2006 (unaudited) |  | 3   
|                                                                                                                      | 
|Consolidated Condensed Balance Sheets as of December 31, 2005 and June 30, 2006 (unaudited)                           |  | 4   
|                                                                                                                      | 
|Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2006 (unaudited)           |  | 5   
|                                                                                                                      | 
|Notes to Consolidated Condensed Financial Statements (unaudited)                                                      |  | 6   
|                                                                                                                      | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 25  
|                                                                                                                      | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risk                                                    |  | 41  
|                                                                                                                      | 
|Item 4.
Controls and Procedures                                                                                       |  | 42  
|                                                                                                                      | 
|Part II.
OTHER INFORMATION                                                                                            |  |     
|                                                                                                                      | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                                           |  | 43  
|                                                                                                                      | 
|Item 6.
Exhibits                                                                                                      |  | 43  
|                                                                                                                      | 
|Signatures                                                                                                            |  | 44  



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 EndedJune 30, |         | Six Months EndedJune 30,
|                                                      |  | 2005                       |         | 2006                     |   | 2005    |  |   | 2006   
|Net Revenue:                                          |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Development                                           |  | $                          | 224,862 |                          | $ | 278,890 |  | $ | 437,783 |   |  | $ | 536,639
|Discovery Sciences                                    |  |                            | 3,636   |                          |   | 4,550   |  |   | 16,496  |   |  |   | 23,499 
|Reimbursed out-of-pockets                             |  |                            | 16,644  |                          |   | 25,513  |  |   | 34,917  |   |  |   | 48,184 
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total net revenue                                     |  |                            | 245,142 |                          |   | 308,953 |  |   | 489,196 |   |  |   | 608,322
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Direct Costs:                                         |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Development                                           |  |                            | 114,153 |                          |   | 140,022 |  |   | 223,981 |   |  |   | 268,439
|Discovery Sciences                                    |  |                            | 2,107   |                          |   | 2,069   |  |   | 4,034   |   |  |   | 4,477  
|Reimbursable out-of-pocket expenses                   |  |                            | 16,644  |                          |   | 25,513  |  |   | 34,917  |   |  |   | 48,184 
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total direct costs                                    |  |                            | 132,904 |                          |   | 167,604 |  |   | 262,932 |   |  |   | 321,100
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Research and development expenses                     |  |                            | 11,445  |                          |   | 1,261   |  |   | 20,266  |   |  |   | 1,942  
|Selling, general and administrative expenses          |  |                            | 61,749  |                          |   | 79,274  |  |   | 119,632 |   |  |   | 151,231
|Depreciation                                          |  |                            | 9,512   |                          |   | 11,286  |  |   | 17,871  |   |  |   | 22,309 
|Amortization                                          |  |                            | 279     |                          |   | 124     |  |   | 567     |   |  |   | 397    
|Loss on impairment and disposal of assets             |  |                            | 145     |                          |   | 375     |  |   | 250     |   |  |   | 1,386  
|Gain on exchange of assets                            |  |                            |        |                          |   |        |  |   | (5,144  | ) |  |   |       
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total operating expenses                              |  |                            | 216,034 |                          |   | 259,924 |  |   | 416,374 |   |  |   | 498,365
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income from operations                                |  |                            | 29,108  |                          |   | 49,029  |  |   | 72,822  |   |  |   | 109,957
|Interest income, net                                  |  |                            | 1,940   |                          |   | 3,192   |  |   | 3,215   |   |  |   | 6,302  
|Other income, net                                     |  |                            | 952     |                          |   | 1,329   |  |   | 857     |   |  |   | 1,178  
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income before provision for income taxes              |  |                            | 32,000  |                          |   | 53,550  |  |   | 76,894  |   |  |   | 117,437
|Provision for income taxes                            |  |                            | 11,201  |                          |   | 17,136  |  |   | 23,214  |   |  |   | 39,177 
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Net income                                            |  | $                          | 20,799  |                          | $ | 36,414  |  | $ | 53,680  |   |  | $ | 78,260 
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Net income per common share:                          |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic                                                 |  | $                          | 0.18    |                          | $ | 0.31    |  | $ | 0.47    |   |  | $ | 0.67   
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Diluted                                               |  | $                          | 0.18    |                          | $ | 0.31    |  | $ | 0.47    |   |  | $ | 0.66   
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Dividends declared per common share                   |  | $                          |        |                          | $ | 0.025   |  | $ |        |   |  | $ | 0.05   
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Weighted average number of common shares outstanding: |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic                                                 |  |                            | 114,118 |                          |   | 116,618 |  |   | 113,818 |   |  |   | 116,426
|Dilutive effect of stock options and restricted stock |  |                            | 1,676   |                          |   | 1,800   |  |   | 1,620   |   |  |   | 1,790  
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Diluted                                               |  |                            | 115,794 |                          |   | 118,418 |  |   | 115,438 |   |  |   | 118,216
|                                                      |  |                            |         |                          |   |         |  |   |         |   |  |   |        

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



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)





|                                                                      |  |                  |           |               |   |          
|--------------------------------------------------------------------- |  | ---------------- | --------- | ------------- | - | ---------
|                                                                      |  | December 31,2005 |           | June 30, 2006
|                                                                      |  |                  |           | (unaudited)  
|Assets                                                                |  |                  |           |               |   |          
|Current assets:                                                       |  |                  |           |               |   |          
|Cash and cash equivalents                                             |  | $                | 182,000   |               | $ | 120,886  
|Short-term investments                                                |  |                  | 137,820   |               |   | 259,339  
|Accounts receivable and unbilled services, net                        |  |                  | 303,386   |               |   | 341,223  
|Income tax receivable                                                 |  |                  | 14        |               |   | 31       
|Investigator advances                                                 |  |                  | 13,578    |               |   | 9,871    
|Prepaid expenses and other current assets                             |  |                  | 34,651    |               |   | 51,361   
|Deferred tax assets                                                   |  |                  | 11,435    |               |   | 12,133   
|                                                                      |  |                  |           |               |   |          
|Total current assets                                                  |  |                  | 682,884   |               |   | 794,844  
|                                                                      |  |                 
|Property and equipment, net                                           |  |                  | 210,020   |               |   | 263,544  
|Goodwill                                                              |  |                  | 208,883   |               |   | 211,249  
|Investments                                                           |  |                  | 29,171    |               |   | 24,361   
|Intangible assets                                                     |  |                  | 2,772     |               |   | 2,180    
|Long-term deferred tax assets                                         |  |                  | 20,080    |               |   | 22,922   
|Other assets                                                          |  |                  | 5,790     |               |   | 1,574    
|                                                                      |  |                  |           |               |   |          
|Total assets                                                          |  | $                | 1,159,600 |               | $ | 1,320,674
|                                                                      |  |                  |           |               |   |          
|Liabilities and Shareholders Equity                                  |  |                  |           |               |   |          
|Current liabilities:                                                  |  |                  |           |               |   |          
|Accounts payable                                                      |  | $                | 10,363    |               | $ | 16,909   
|Payables to investigators                                             |  |                  | 43,126    |               |   | 38,814   
|Accrued income taxes                                                  |  |                  | 18,099    |               |   | 40,060   
|Other accrued expenses                                                |  |                  | 119,304   |               |   | 143,658  
|Deferred tax liabilities                                              |  |                  | 85        |               |   | 89       
|Unearned income                                                       |  |                  | 162,662   |               |   | 157,114  
|Current maturities of long-term debt and capital lease obligations    |  |                  | 1,607     |               |   | 725      
|                                                                      |  |                  |           |               |   |          
|Total current liabilities                                             |  |                  | 355,246   |               |   | 397,369  
|                                                                      |  |                 
|Long-term debt and capital lease obligations, less current maturities |  |                  | 22,695    |               |   | 39,315   
|Accrued additional pension liability                                  |  |                  | 11,151    |               |   | 11,986   
|Deferred tax liabilities                                              |  |                  | 2,195     |               |   | 3,620    
|Deferred rent and other                                               |  |                  | 17,637    |               |   | 18,217   
|                                                                      |  |                  |           |               |   |          
|Total liabilities                                                     |  |                  | 408,924   |               |   | 470,507  
|                                                                      |  |                 
|Shareholders equity:                                                 |  |                  |           |               |   |          
|Common stock                                                          |  |                  | 5,800     |               |   | 5,841    
|Paid-in capital                                                       |  |                  | 395,452   |               |   | 421,492  
|Retained earnings                                                     |  |                  | 346,417   |               |   | 418,826  
|Accumulated other comprehensive income                                |  |                  | 3,007     |               |   | 4,008    
|                                                                      |  |                  |           |               |   |          
|Total shareholders equity                                            |  |                  | 750,676   |               |   | 850,167  
|                                                                      |  |                  |           |               |   |          
|Total liabilities and shareholders equity                            |  | $                | 1,159,600 |               | $ | 1,320,674
|                                                                      |  |                  |           |               |   |          

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



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in
thousands)



|                                                                                          |  |                          |         |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                          |  | Six Months EndedJune 30, |        
|                                                                                          |  | 2005                     |         |   | 2006 |  
|Cash flows from operating activities:                                                     |  |                          |         |   |      |   |          |  
|Net income                                                                                |  | $                        | 53,680  |   |      | $ | 78,260   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |         |   |      |   |          |  
|Depreciation and amortization                                                             |  |                          | 18,438  |   |      |   | 22,706   |  
|Stock compensation expense                                                                |  |                          | 8,695   |   |      |   | 9,882    |  
|Gain on exchange of assets                                                                |  |                          | (5,144  | ) |      |   |         |  
|Gain on sale of investment                                                                |  |                          |        |   |      |   | (782     | )
|Loss on impairment and disposal of assets                                                 |  |                          | 250     |   |      |   | 1,386    |  
|Gain on sale of assets                                                                    |  |                          | (77     | ) |      |   | (16      | )
|Provision for doubtful accounts                                                           |  |                          | 50      |   |      |   | 10       |  
|Benefit for deferred income taxes                                                         |  |                          | (241    | ) |      |   | (3,296   | )
|Change in operating assets and liabilities, net of acquisitions                           |  |                          | 7,268   |   |      |   | (3,320   | )
|                                                                                          |  |                          |         |   |      |   |          |  
|Net cash provided by operating activities                                                 |  |                          | 82,919  |   |      |   | 104,830  |  
|                                                                                          |  |                          |         |   |      |   |          |  
|Cash flows from investing activities:                                                     |  |                          |         |   |      |   |          |  
|Purchases of property and equipment                                                       |  |                          | (72,440 | ) |      |   | (65,844  | )
|Proceeds from sale of property and equipment                                              |  |                          | 86      |   |      |   | 15       |  
|Purchases of available-for-sale investments                                               |  |                          | (24,720 | ) |      |   | (369,121 | )
|Maturities and sales of available-for-sale investments                                    |  |                          | 129,740 |   |      |   | 246,915  |  
|Deposit on warrants of investee                                                           |  |                          | (5,000  | ) |      |   |         |  
|Purchase of note receivable                                                               |  |                          |        |   |      |   | (7,474   | )
|Proceeds from sale of investments                                                         |  |                          | 25,000  |   |      |   | 1,482    |  
|Purchases of investments                                                                  |  |                          | (5,405  | ) |      |   | (521     | )
|                                                                                          |  |                          |         |   |      |   |          |  
|Net cash provided by (used in) investing activities                                       |  |                          | 47,261  |   |      |   | (194,548 | )
|                                                                                          |  |                          |         |   |      |   |          |  
|Cash flows from financing activities:                                                     |  |                          |         |   |      |   |          |  
|Principal repayments of long-term debt                                                    |  |                          | (185    | ) |      |   | (6,005   | )
|Proceeds from construction loan                                                           |  |                          |        |   |      |   | 22,127   |  
|Repayment of capital leases obligations                                                   |  |                          | (857    | ) |      |   | (829     | )
|Proceeds from exercise of stock options and employee stock purchase plan                  |  |                          | 14,907  |   |      |   | 13,471   |  
|Income tax benefit from exercise of stock options and disqualifying dispositions of stock |  |                          | 5,000   |   |      |   | 3,208    |  
|Cash dividends paid                                                                       |  |                          |        |   |      |   | (5,847   | )
|                                                                                          |  |                          |         |   |      |   |          |  
|Net cash provided by financing activities                                                 |  |                          | 18,865  |   |      |   | 26,125   |  
|                                                                                          |  |                          |         |   |      |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                          | (5,312  | ) |      |   | 2,479    |  
|                                                                                          |  |                          |         |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                          | 143,733 |   |      |   | (61,114  | )
|Cash and cash equivalents, beginning of the period                                        |  |                          | 144,348 |   |      |   | 182,000  |  
|                                                                                          |  |                          |         |   |      |   |          |  
|Cash and cash equivalents, end of the period                                              |  | $                        | 288,081 |   |      | $ | 120,886  |  
|                                                                                          |  |                          |         |   |      |   |          |  

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



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS

(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, 2005. The results of operations for the three-month and six-month periods ended
June 30, 2006 are not necessarily indicative of the results to be expected for the full year or any other period. The amounts in the December 31, 2005 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, 2005.

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.

Stock Split

On December 30, 2005, the Companys Board of Directors approved a two-for-one stock split. The record date for the stock split
was February 17, 2006. The distribution of shares was completed on February 28, 2006. All share and per share amounts for all periods presented in the accompanying consolidated financial statements have been adjusted to reflect the effect
of this stock split.

Recent accounting pronouncements

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised), Share-Based Payment, that requires
compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the fair value on the date of grant of the equity or liability
instruments issued. In addition, the fair value of liability instruments is remeasured each reporting period. Compensation cost is recognized over the period that an employee provides service in exchange for the award. In March 2005, the SEC issued
Staff Accounting Bulletin 107 which describes the SEC staffs expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123 (revised) with existing SEC guidance. In April
2005, the SEC deferred the effective date for SFAS No. 123 (revised) to the beginning of the first fiscal year that begins after June 15, 2005. On January 1, 2006, the Company adopted SFAS No. 123 (revised) using the modified
retrospective transition method permitted by the statement and will continue to value its grants using the Black-Scholes option pricing method. In accordance with the modified retrospective application method prescribed by SFAS No. 123
(revised), financial statements for all periods prior to January 1, 2006 have been adjusted to give effect to the fair-value based method of accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts
previously disclosed as pro-forma adjustments have been reflected in earnings for all prior periods. See Note 9 for further details.

In
March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligation, or FIN 47, to clarify that the term conditional asset retirement obligation as used in SFAS No. 143 refers
to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity must recognize a liability for the
fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective as of the end of fiscal years ending after December 15, 2005. The adoption of this statement did not have a material impact on the Companys financial condition or results of operations.



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS
No. 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 requires that changes in accounting principle
be retrospectively applied. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply SFAS No. 154 for changes occurring after
January 1, 2006, as appropriate.

In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on EITF 05-6,
Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination. EITF 05-6 requires leasehold improvements purchased after the beginning of the initial lease term or
that are acquired in a business combination to be amortized over the lesser of the useful life of the assets or a term that includes the original lease term plus any renewals that are reasonably assured at the date the leasehold improvements are
purchased or acquired. In September 2005, the EITF modified the consensus to clarify that this issue does not apply to preexisting leasehold improvements. This guidance was effective for leasehold improvements purchased or acquired in reporting
periods beginning after June 29, 2005. The adoption of this statement did not have a material impact on the Companys financial condition or results of operations.

In October 2005, the FASB issued Staff Position No. 13-1, Accounting for Rental Costs Incurred During a Construction Period, or FSP
13-1. FSP 13-1 states that rental costs associated with ground or building operating leases incurred during a construction period shall be recognized as rental expense and not capitalized. FSP 13-1 is effective for the first reporting period
beginning after December 15, 2005. The adoption of this statement did not have a material impact on the Companys financial condition or results of operations.

In November 2005, the FASB issued Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This statement addresses the
determination as to when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The statement is effective for reporting periods beginning after December 15, 2005. The
adoption of this statement did not have a material impact on the Companys financial condition or results of operations.

In June
2006, the EITF reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), which
addresses the income statement disclosure on taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer. Taxes within the scope of EITF 06-3 include sales taxes, use taxes,
value-added taxes, and some types of excise taxes. For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement
is presented if those amounts are significant. EITF Issue No. 06-3 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company currently accounts for taxes on a net basis. Therefore, EITF 06-3
should not have any significant impact on the Companys financial condition or results of operations.

In June 2006, the FASB issued
Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R), or FSP FIN 46(R)-6, which introduces a by-design approach in determining variability. FSP FIN 46(R)-6
provides a two-step approach: 1) analyze the nature of the risk in the entity and 2) determine the purpose(s) for which the entity was created and determine the variability. This standard is applicable for all entities (including newly created
entities) with which an enterprise first becomes involved, and for all entities previously required to be analyzed under FIN 46(R) when a reconsideration event has occurred beginning the



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

first day of the reporting period beginning after June 15, 2006. The Company adopted the provisions of FSP FIN 46(R)-6 on July 1, 2006 and does not expect that the statement should have any impact on the Companys financial
condition or results of operations.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109, or FIN 48, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax
position, if that position will more likely than not be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 also provide a measurement attribute for the financial statement recognition of the tax position. FIN
48 will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48 on its financial statements.

Inventory

Inventories, which consist principally of laboratory supplies, are valued at the lower of cost (first-in, first-out method) or market. Inventories totaling $2.3 million and $2.5 million as of December 31, 2005 and June 30, 2006,
respectively, were included in prepaid expenses and other current assets.

Earnings per share

The computation of basic income per share information is based on the weighted average number of common shares outstanding during the period. The
computation of diluted income per share information is based on the weighted average number of common shares outstanding during the period plus the effects of any dilutive common stock equivalents.

Reclassification

The Company has reclassified certain 2005 financial statement amounts to conform to the 2006 financial statement presentation. In addition, prior period financial statements have been restated pursuant to the modified retrospective
application method provided for in SFAS No. 123 (revised), Share-Based Payment. See Note 9 for further details. Additionally, all share and per share amounts for 2005 have been adjusted to reflect the two-for-one stock split
completed on February 28, 2006.

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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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

2. ACQUISITIONS

In February 2005, the Company completed its acquisition of substantially all of the assets of SurroMed, Inc.s biomarker business. In exchange for the assets, the Company surrendered to SurroMed all shares of
preferred stock of SurroMed it held. As additional consideration for the acquisition, the Company assumed approximately $3.4 million of SurroMed liabilities under capital leases and additional operating liabilities, and agreed to guarantee repayment
of up to $1.5 million under a SurroMed bank loan. In February 2006, this amount was reduced to $0.8 million and SurroMed pledged a $0.5 million certificate of deposit to secure payment of the bank loan. In accordance with the requirements of SFAS
No. 5, Accounting for Contingencies, as clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $0.03 million for the estimated fair value of the net obligation it has assumed under this
guarantee. In connection with this transaction, the Company recognized a pre-tax gain on exchange of assets of $5.1 million, primarily related to the $4.9 million gain on the termination of a preexisting facility lease arrangement with SurroMed in
accordance with EITF 04-01, Accounting for Preexisting Relationships between the Parties to a Business Combination. The fair value of the leasing arrangement was determined based on the discounted cash flows of the difference between the
future required rental payments under the lease agreement and the current market rate for similar facilities. This biomarker business is part of the Discovery Sciences segment of the Company.

This acquisition was accounted for using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price
based on the estimated fair values of the assets and liabilities. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in the Companys consolidated condensed balance sheet as of the effective date of
the acquisition.

The total purchase price for the SurroMed acquisition in 2005 was allocated to the estimated fair value of assets
acquired and liabilities assumed as set forth in the following table:



|                                         |  |   |        |  
|---------------------------------------- |  | - | ------ | -
|(in thousands)                           |  |   |       
|Condensed balance sheet:                 |  |   |        |  
|Current assets                           |  | $ | 186    |  
|Property and equipment, net              |  |   | 8,780  |  
|Deferred rent and other                  |  |   | (742   | )
|Current liabilities                      |  |   | (3,512 | )
|Long-term liabilities                    |  |   | (2,267 | )
|                                         | 
|Value of identifiable intangible assets: |  |   |        |  
|Goodwill                                 |  |   | 33,001 |  
|                                         |  |   |        |  
|Total                                    |  | $ | 35,446 |  
|                                         |  |   |        |  

Goodwill related to SurroMed is deductible for tax purposes.

The results of operations from the biomarker assets acquired are included in the Companys consolidated condensed statements of operations as of and
since February 1, 2005, the effective date of the acquisition. Proforma results of operations for the three months and six months ended June 30, 2005 have not been presented because the financial results related to the biomarker assets for
the one-month period ended January 31, 2005 are not material to the consolidated condensed statements of operations.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

3. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES

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



|                                |  |                  |         |   |              |   |         |  
|------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|(in thousands)                  |  | December 31,2005 |         |   | June 30,2006 |  
|Billed                          |  | $                | 204,686 |   |              | $ | 203,350 |  
|Unbilled                        |  |                  | 102,626 |   |              |   | 141,585 |  
|Provision for doubtful accounts |  |                  | (3,926  | ) |              |   | (3,712  | )
|                                |  |                  |         |   |              |   |         |  
|                                |  | $                | 303,386 |   |              | $ | 341,223 |  
|                                |  |                  |         |   |              |   |         |  

4. PROPERTY AND EQUIPMENT

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



|                                               |  |                  |          |   |              |   |          |  
|---------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|(in thousands)                                 |  | December 31,2005 |          |   | June 30,2006 |  
|Land                                           |  | $                | 6,986    |   |              | $ | 7,144    |  
|Buildings and leasehold improvements           |  |                  | 58,321   |   |              |   | 62,505   |  
|Construction in progress                       |  |                  | 31,205   |   |              |   | 76,550   |  
|Furniture and equipment                        |  |                  | 152,952  |   |              |   | 161,692  |  
|Computer equipment and software                |  |                  | 114,331  |   |              |   | 132,180  |  
|                                               |  |                  |          |   |              |   |          |  
|                                               |  |                  | 363,795  |   |              |   | 440,071  |  
|Less accumulated depreciation and amortization |  |                  | (153,775 | ) |              |   | (176,527 | )
|                                               |  |                  |          |   |              |   |          |  
|                                               |  | $                | 210,020  |   |              | $ | 263,544  |  
|                                               |  |                  |          |   |              |   |          |  

Capitalized costs for the new corporate headquarters facility in Wilmington, North Carolina
included in construction in progress as of December 31, 2005 and June 30, 2006 were $19.7 million and $56.4 million, respectively. In February 2006, the Company entered into an $80.0 million construction loan facility with Bank of America,
N.A. Borrowings under this credit facility are available to finance the construction of the Companys new corporate headquarters building and related parking facility. As of June 30, 2006, the Company had borrowed $39.2 million under this
credit facility. During the three months and six months ended June 30, 2006, the Company capitalized interest of approximately $0.5 million and $0.7 million, respectively, relating to the construction of the new corporate headquarters facility.
The Company did not capitalize any interest related to the new facility during the first six months of 2005.

The Company had a note
payable related to a laboratory building in Brussels, Belgium. The balance of $5.9 million remaining on this note was paid in May 2006.

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



|                                               |  |                  |        |   |              |   |        |  
|---------------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|(in thousands)                                 |  | December 31,2005 |        |   | June 30,2006 |  
|Leasehold improvements                         |  | $                | 824    |   |              | $ | 824    |  
|Computer equipment and software                |  |                  | 656    |   |              |   | 656    |  
|Furniture and equipment                        |  |                  | 2,114  |   |              |   | 1,975  |  
|                                               |  |                  |        |   |              |   |        |  
|                                               |  |                  | 3,594  |   |              |   | 3,455  |  
|Less accumulated depreciation and amortization |  |                  | (1,211 | ) |              |   | (1,799 | )
|                                               |  |                  |        |   |              |   |        |  
|                                               |  | $                | 2,383  |   |              | $ | 1,656  |  
|                                               |  |                  |        |   |              |   |        |  



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

5. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the twelve months ended December 31, 2005 and the six months ended June 30, 2006, by operating
segment, were as follows:



|                                                     |  |             |         |   |                   |   |        |  |   |         |  
|---------------------------------------------------- |  | ----------- | ------- | - | ----------------- | - | ------ |  | - | ------- | -
|(in thousands)                                       |  | Development |         |   | DiscoverySciences |   | Total  | 
|Balance as of January 1, 2005                        |  | $           | 159,166 |   |                   | $ | 20,615 |  | $ | 179,781 |  
|Goodwill recorded during the period for acquisitions |  |             |        |   |                   |   | 33,001 |  |   | 33,001  |  
|Translation adjustments                              |  |             | (3,899  | ) |                   |   |       |  |   | (3,899  | )
|                                                     |  |             |         |   |                   |   |        |  |   |         |  
|Balance as of December 31, 2005                      |  |             | 155,267 |   |                   |   | 53,616 |  |   | 208,883 |  
|Translation adjustments                              |  |             | 2,366   |   |                   |   |       |  |   | 2,366   |  
|                                                     |  |             |         |   |                   |   |        |  |   |         |  
|Balance as of June 30, 2006                          |  | $           | 157,633 |   |                   | $ | 53,616 |  | $ | 211,249 |  
|                                                     |  |             |         |   |                   |   |        |  |   |         |  

The Company evaluates goodwill for impairment annually at the reporting unit level as required by
SFAS No. 142.

Information regarding the Companys other intangible assets follows:



|                                   |                |                   |                         |               |     |       |                |   |                         |  |     |       |  |   |       |  |   |      
|---------------------------------- | -------------- | ----------------- | ----------------------- | ------------- | --- | ----- | -------------- | - | ----------------------- |  | --- | ----- |  | - | ----- |  | - | -----
|(in thousands)                     |                | December 31, 2005 |                         | June 30, 2006
|                                   | CarryingAmount |                   | AccumulatedAmortization |               | Net |       | CarryingAmount |   | AccumulatedAmortization |  | Net
|Backlog and customer relationships |                | $                 | 543                     |               | $   | 338   |                | $ | 205                     |  | $   | 543   |  | $ | 405   |  | $ | 138  
|Patents                            |                |                   | 22                      |               |     | 22    |                |   |                        |  |     |      |  |   |      |  |   |     
|License and royalty agreements     |                |                   | 5,000                   |               |     | 2,433 |                |   | 2,567                   |  |     | 4,500 |  |   | 2,458 |  |   | 2,042
|                                   |                |                   |                         |               |     |       |                |   |                         |  |     |       |  |   |       |  |   |      
|Total                              |                | $                 | 5,565                   |               | $   | 2,793 |                | $ | 2,772                   |  | $   | 5,043 |  | $ | 2,863 |  | $ | 2,180
|                                   |                |                   |                         |               |     |       |                |   |                         |  |     |       |  |   |       |  |   |      

The Company amortizes all intangible assets on a straight-line basis, based on estimated useful
lives of three to five years for backlog and customer relationships and three to ten years for license and royalty agreements. The weighted average amortization period is 4.1 years for backlog, approximately 6.2 years for license and royalty
agreements and approximately 5.9 years for all intangibles collectively.

Amortization expense for the three months ended June 30,
2005 and 2006 was $0.3 million and $0.1 million, respectively. Amortization expense for the six months ended June 30, 2005 and 2006 was $0.6 million and $0.4 million, respectively. Estimated amortization expense for the next five years is as
follows:



|                          |  |   |    
|------------------------- |  | - | ---
|(in thousands)            |  |  
|2006 (remaining 6 months) |  | $ | 168
|2007                      |  |   | 312
|2008                      |  |   | 283
|2009                      |  |   | 250
|2010                      |  |   | 250
|2011                      |  |   | 250



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

6. SHORT-TERM INVESTMENTS AND INVESTMENTS

Short-term investments, which are composed of available-for-sale securities, and investments consisted of the following amounts on the dates set forth
below:



|                                            |  |                  |         |              |   |        
|------------------------------------------- |  | ---------------- | ------- | ------------ | - | -------
|(in thousands)                              |  | December 31,2005 |         | June 30,2006
|Short-term investments:                     |  |                  |         |              |   |        
|Auction Rate Securities                     |  | $                | 137,820 |              | $ | 175,070
|Other municipal debt securities             |  |                  |        |              |   | 84,269 
|                                            |  |                  |         |              |   |        
|Total short-term investments                |  | $                | 137,820 |              | $ | 259,339
|                                            |  |                  |         |              |   |        
|Cost-basis investments:                     |  |                  |         |              |   |        
|Oriel Therapeutics, Inc.                    |  | $                | 500     |              | $ | 500    
|Bay City Capital Fund IV, L.P.              |  |                  | 1,852   |              |   | 2,656  
|A.M. Pappas Life Science Ventures III, L.P. |  |                  | 691     |              |   | 879    
|Other equity investments                    |  |                  | 250     |              |   | 250    
|                                            |  |                  |         |              |   |        
|Total cost-basis investments                |  |                  | 3,293   |              |   | 4,285  
|                                            |  |                 
|Marketable equity securities:               |  |                  |         |              |   |        
|BioDelivery Sciences International, Inc.    |  |                  | 1,953   |              |   | 1,628  
|Chemokine Therapeutics Corp.                |  |                  | 2,360   |              |   |       
|Accentia Biopharmaceuticals, Inc.           |  |                  | 21,565  |              |   | 18,448 
|                                            |  |                  |         |              |   |        
|Total marketable equity securities          |  |                  | 25,878  |              |   | 20,076 
|                                            |  |                  |         |              |   |        
|Total investments                           |  | $                | 29,171  |              | $ | 24,361 
|                                            |  |                  |         |              |   |        

Short-term investments

As of December 31, 2005, the Companys short-term investments consisted of Auction Rate Securities (ARS). ARS generally have stated
maturities of 20 to 30 years. However, these securities have economic characteristics of short-term investments due to a rate-setting mechanism and the ability for holders to liquidate them through a Dutch auction process that occurs on
pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. The Companys short-term investments were classified as available-for-sale securities due to managements intent regarding
these securities.Since the fair market value equaled the adjusted cost, there were no unrealized gains or losses associated with these investments as of December 31, 2005.

As of June 30, 2006, the Company had short-term investments in ARS and other municipal debt securities. The unrealized losses associated with these
investments as of June 30, 2006 were $0.7 million. The gross realized (losses)/gains on these securities were $0 in each of the three months ended June 30, 2005 and 2006, and $(17,000) and $0 for the six months ended June 30, 2005 and
2006, respectively, determined on a specific identification basis.

In April 2006, the Company entered into an agreement with Chemokine
Therapeutics Corp. under which the Company agreed to (i) sell 2.0 million shares of Chemokine preferred stock held by the Company either to Chemokine or to a third-party buyer prior to May 27, 2006 and (ii) surrender its license
rights to Chemokines compound CTCE-0214 in exchange for $0.1 million and potential milestone payments up to $2.5 million. As contemplated by the agreement, in May 2006, the Company sold its 2.0 million shares in Chemokine stock for total
consideration of $1.5 million and recorded a gain on sale of its investment of $0.8 million.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

6. SHORT-TERM INVESTMENTS AND INVESTMENTS (continued)

Investments

The Company has equity
investments in publicly traded entities. Investments in publicly traded entities are denoted as marketable equity securities in the above table and are classified as available-for-sale securities and measured at market value. 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 an other-than-temporary decline has occurred. 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 day of the reporting period. As of June 30, 2006, the Companys equity investments in publicly traded
companies were classified as long-term assets due to the Companys ability to hold its investments long-term, the strategic nature of the investment and the lack of liquidity in the public markets for these securities to easily liquidate the
investment without significantly impacting the market value. As of December 31, 2005 and June 30, 2006, gross unrealized gains on long-term investments in marketable securities were $8.5 million and $3.8 million, respectively, and gross
unrealized losses were $0 and $0.3 million, respectively.

The unrealized loss of $0.3 million as of June 30, 2006 related to the
Companys investment in 0.7 million units of BioDelivery Sciences International, Inc., with each unit representing one share of common stock and one warrant for common stock. The Companys ownership of common stock of BioDelivery
Sciences International represented an ownership interest of approximately 5.8% in BioDelivery Sciences Internationals outstanding common stock as of June 30, 2006. Based upon review of BioDelivery Sciences financial position, and
the Companys ability and intent to hold its investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider its investment to be other-than temporarily impaired at June 30,
2006.

The Company also has investments in privately held entities in the form of equity and convertible debt instruments that are not
publicly traded and for which fair values are not readily determinable. The Company records all of its investments in private entities under the cost method of accounting. 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, among other things, the market condition of the overall
industry, historical and projected financial performance, expected cash needs and recent funding events. This impairment analysis requires significant judgment.

In September 2005, the Company became a limited partner in Bay City Capital Fund IV, L.P., a venture capital fund. The Bay City Fund IV was established in July 2004 for the purpose of investing in life sciences
companies. The Company has committed to invest up to a maximum of $10.0 million in the Bay City Fund IV. Capital calls during the first six months of 2006 totaled $0.8 million, of which $0.5 million was accrued as of June 30, 2006 and
subsequently paid in July 2006. Capital calls through June 30, 2006 totaled $2.7 million. Because no capital call can exceed 20% of the Companys aggregate capital commitment, the Company anticipates its remaining capital commitment of
$7.3 million will be made through a series of future capital calls over the next several years. The Company owned approximately 2.9% of the Bay City Fund IV as of June 30, 2006. The Companys capital commitment will expire in June 2009.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, L.P., a venture capital fund. The Pappas
Fund was established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. The Company has committed to invest up to a maximum of $4.75 million. Capital
calls through June 30, 2006 totaled $0.9 million, of which $0.2 million was paid in June 2006. Because no capital call can exceed 10% of the Companys aggregate capital commitment, the Company anticipates its remaining capital commitment
of $3.85 million will be made through a series of future capital calls over the next several years. The Company owned approximately 4.7% of the Pappas Fund as of June 30, 2006. The Companys capital commitment will expire in May 2009.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

7. COMPREHENSIVE INCOME

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



|                                                                                                                                  |      |                            |        |      |                          |   |        |   |  |      |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- | ---- | -------------------------- | ------ | ---- | ------------------------ | - | ------ | - |  | ---- | ------- | - |  | - | ------ | -
|(in thousands)                                                                                                                    |      | Three Months EndedJune 30, |        |      | Six Months EndedJune 30, |  
|                                                                                                                                  | 2005 |                            |        | 2006 |                          |   | 2005   |   |  | 2006 |        
|Net income, as reported                                                                                                           |      | $                          | 20,799 |      |                          | $ | 36,414 |   |  | $    | 53,680  |   |  | $ | 78,260 |  
|Other comprehensive income (loss)                                                                                                 |      |                            |        |      |                          |   |        |   |  |      |         |   |  |   |        |  
|Cumulative translation adjustment                                                                                                 |      |                            | (5,222 | )    |                          |   | 3,718  |   |  |      | (8,215  | ) |  |   | 5,040  |  
|Change in fair value of hedging transaction, net of taxes of $484, $(41), $532 and $(140), respectively                           |      |                            | (1,129 | )    |                          |   | 96     |   |  |      | (1,218  | ) |  |   | 327    |  
|Reclassification adjustment for hedging results included in direct costs, net of taxes of $11, $(56), $40 and $(88),
respectively |      |                            | (26    | )    |                          |   | 133    |   |  |      | (89     | ) |  |   | 206    |  
|Unrealized loss on investments, net of taxes of $0, $(3,611), $0, and $(1,218), respectively                                      |      |                            | (520   | )    |                          |   | (7,864 | ) |  |      | (804    | ) |  |   | (3,790 | )
|Reclassification adjustment for gain realized included in other income                                                            |      |                            |       |      |                          |   | (782   | ) |  |      |        |   |  |   | (782   | )
|                                                                                                                                  |      |                            |        |      |                          |   |        |   |  |      |         |   |  |   |        |  
|Total other comprehensive (loss) income                                                                                           |      |                            | (6,897 | )    |                          |   | (4,699 | ) |  |      | (10,326 | ) |  |   | 1,001  |  
|                                                                                                                                  |      |                            |        |      |                          |   |        |   |  |      |         |   |  |   |        |  
|Comprehensive income                                                                                                              |      | $                          | 13,902 |      |                          | $ | 31,715 |   |  | $    | 43,354  |   |  | $ | 79,261 |  
|                                                                                                                                  |      |                            |        |      |                          |   |        |   |  |      |         |   |  |   |        |  

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



|                                              |  |                  |        |   |              |   |        |  
|--------------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|(in thousands)                                |  | December 31,2005 |        |   | June 30,2006 |  
|Translation adjustment                        |  | $                | 4,766  |   |              | $ | 9,806  |  
|Minimum pension liability, net of tax         |  |                  | (7,329 | ) |              |   | (7,329 | )
|Fair value on hedging transaction, net of tax |  |                  | (533   | ) |              |   |       |  
|Unrealized gain on investments                |  |                  | 6,103  |   |              |   | 1,531  |  
|                                              |  |                  |        |   |              |   |        |  
|Total                                         |  | $                | 3,007  |   |              | $ | 4,008  |  
|                                              |  |                  |        |   |              |   |        |  



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(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
Accounting for Derivative Instruments and Hedging Activities. Changes in the fair value of the effective portion of these outstanding forward and option contracts are recognized 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. Effectiveness for forward cash
flow hedge contracts is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. The fair market value of the hedged exposure is presumed to be the market value of the hedge
instrument when critical terms match. The Companys hedging portfolio had no ineffectiveness during 2005 and the first six months of 2006.

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 purchased currency option
and forward contracts as cash flow hedges to help manage certain foreign currency exposures that can be identified and quantified. Pursuant to its foreign exchange risk hedging policy, the Company may hedge anticipated and recorded transactions, and
the related receivables and payables denominated in non-functional currencies, using forward foreign exchange rate contracts and foreign currency options. The Companys policy is to only use foreign currency derivatives 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 twelve months from their inception.

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 its impact on operating results. Accordingly, for forecasted transactions, non-U.S. dollar 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 June 30, 2006, the face
amount of these foreign exchange contracts was $0.

The Company also enters into foreign currency forward contracts to hedge against
changes in the fair value of monetary assets and liabilities denominated in a non-functional currency. These derivative instruments are not designated as hedging instruments; therefore, the Company recognizes changes in the fair value of these
contracts immediately in other income, net as an offset to the changes in the fair value of the monetary assets or liabilities being hedged. At June 30, 2006, the face amount of these contracts was $15.5 million.

At June 30, 2006, the Companys foreign currency derivative portfolio resulted in the Company recording an $11,000 gain as a component of
prepaid expenses and other current assets and a $25,000 loss as a component of other accrued expenses.



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

9. STOCK PLANS

Adoption of Statement of Financial Accounting Standard No. 123 (R)

Prior to
January 1, 2006, the Company accounted for its stock-based compensation plan in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB
No. 25, and provided the required proforma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, because all stock options granted had an exercise price equal to the market value of the underlying
common stock on the date of the grant, no expense related to employee stock options was recognized. Also, as the employee stock purchase plan was considered noncompensatory, no expense related to this plan was recognized. However, expense related to
the grant of restricted stock was recognized in the income statement under APB No. 25.

Effective January 1, 2006, the Company
adopted SFAS No. 123 (revised) using the modified retrospective application method. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the
employees requisite service period. In accordance with the modified retrospective application method, financial statements for all periods prior to January 1, 2006 have been adjusted to give effect to the fair-value based method of
accounting for all awards granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as proforma adjustments have been reflected in earnings for all prior periods.

The following table details the impact of retrospective application of SFAS No. 123 (revised) on previously reported amounts:



|                                             |          |                                 |                      |                               |          |         |                      |   |         |  |   |        
|-------------------------------------------- | -------- | ------------------------------- | -------------------- | ----------------------------- | -------- | ------- | -------------------- | - | ------- |  | - | -------
|(in thousands, except per share data)        |          | Three Months EndedJune 30, 2005 |                      | Six Months EndedJune 30, 2005
|                                             | Restated |                                 | Aspreviouslyreported |                               | Restated |         | Aspreviouslyreported
|For the quarter ended June 30, 2005:         |          |                                 |                      |                               |          |         |                      |   |         |  |   |        
|                                             |          |                                 |                      |                              
|Total direct costs                           |          | $                               | 132,904              |                               | $        | 131,423 |                      | $ | 262,932 |  | $ | 259,791
|Selling, general and administrative expenses |          |                                 | 61,749               |                               |          | 58,987  |                      |   | 119,632 |  |   | 114,419
|Income from operations                       |          |                                 | 29,108               |                               |          | 33,496  |                      |   | 72,822  |  |   | 81,426 
|Income before provision for income taxes     |          |                                 | 32,000               |                               |          | 36,388  |                      |   | 76,894  |  |   | 85,498 
|Net income                                   |          |                                 | 20,799               |                               |          | 23,652  |                      |   | 53,680  |  |   | 59,273 
|                                             |          |                                 |                      |                              
|Net income per common share:                 |          |                                 |                      |                               |          |         |                      |   |         |  |   |        
|Basic                                        |          |                                 | 0.18                 |                               |          | 0.21    |                      |   | 0.47    |  |   | 0.52   
|Diluted                                      |          |                                 | 0.18                 |                               |          | 0.20    |                      |   | 0.47    |  |   | 0.51   
|                                             |          |                                 |                      |                              
|For the six months ended June 30, 2005:      |          |                                 |                      |                               |          |         |                      |   |         |  |   |        
|                                             |          |                                 |                      |                              
|Net cash provided by operating activities    |          |                                 |                      |                               |          |         |                      |   | 82,919  |  |   | 87,919 
|Net cash provided by financing activities    |          |                                 |                      |                               |          |         |                      |   | 18,865  |  |   | 13,865 



|                              |  |          |           |                      |   |           |  
|----------------------------- |  | -------- | --------- | -------------------- | - | --------- | -
|                              |  | Restated |           | Aspreviouslyreported |  
|At December 31, 2005:         |  |          |           |                      |   |           |  
|                              |  |         
|Long-term deferred tax assets |  | $        | 20,080    |                      | $ | 11,628    |  
|Total assets                  |  |          | 1,159,600 |                      |   | 1,151,148 |  
|Paid-in capital               |  |          | 395,452   |                      |   | 340,451   |  
|Retained earnings             |  |          | 346,417   |                      |   | 396,068   |  
|Deferred compensation         |  |          |          |                      |   | (3,102    | )
|Total shareholders equity    |  |          | 750,676   |                      |   | 742,224   |  



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

9. STOCK PLANS (continued)

Equity Compensation Plan

The Company has an equity compensation plan (the Plan)
under which the Company may grant stock options, restricted stock and other types of stock-based awards to its employees and directors. Total shares authorized for grant under this plan are 21.3 million. The exercise price of each option granted is
equal to the market price of the Companys common stock on the date of grant and the maximum exercise term of each option granted does not exceed 10 years. Options are granted upon approval of the Compensation Committee of the Board of
Directors and vest over various periods, as determined by the Compensation Committee at the date of the grant. The majority of the Companys options vest ratably over a period of three or four years. The options expire on the earlier of ten
years from the date of grant or within specified time limits following termination of employment, retirement or death. Shares are issued from the Companys pool of authorized but unissued stock. The Company does not pay dividends on unexercised
options. As of June 30, 2006, there were 6.2 million shares of common stock available for grant under the Plan.

For the
three-month periods ended June 30, 2005 and 2006, stock-based compensation cost totaled $4.0 million and $4.6 million, respectively. The associated future income tax benefit recognized was $1.4 million and $1.8 million for the three-month
periods ended June 30, 2005 and 2006, respectively. For the six-month periods ended June 30, 2005 and 2006, stock-based compensation cost totaled $7.6 million and $8.2 million, respectively. The associated future income tax benefit
recognized was $2.7 million and $3.1 million for the six-month periods ended June 30, 2005 and 2006, respectively.

For the six-month
periods ended June 30, 2005 and 2006, the amount of cash received from the exercise of stock options was $12.1 million and $9.9 million, respectively. In connection with these exercises, the actual excess tax benefit realized for the tax
deductions by the Company for the six-month periods ended June 30, 2005 and 2006 were $4.9 million and $3.1 million, respectively.

A
summary of the option activity under the Plan as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:



|                                                    |  |        |   |  |                               |       |                                          |      |                         |   |       
|--------------------------------------------------- |  | ------ | - |  | ----------------------------- | ----- | ---------------------------------------- | ---- | ----------------------- | - | ------
|(shares and aggregate intrinsic value in thousands) |  | Shares |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at January 1, 2006                      |  | 6,487  |   |  | $                             | 18.05 |                                          |      |                         |   |       
|Granted                                             |  | 1,434  |   |  |                               | 34.63 |                                          |      |                         |   |       
|Exercised                                           |  | (662   | ) |  |                               | 14.89 |                                          |      |                         |   |       
|Forfeited                                           |  | (134   | ) |  |                               | 22.68 |                                          |      |                         |   |       
|Expired                                             |  | (7     | ) |  |                               | 15.83 |                                          |      |                         |   |       
|                                                    |  |        |   |  |                               |       |                                          |      |                         |   |       
|Outstanding at June 30, 2006                        |  | 7,118  |   |  |                               | 21.60 |                                          | 7.97 |                         | $ | 96,278
|                                                    |  |        |   |  |                               |       |                                          |      |                         |   |       
|Exercisable at June 30, 2006                        |  | 2,506  |   |  | $                             | 15.24 |                                          | 6.53 |                         | $ | 49,843
|                                                    |  |        |   |  |                               |       |                                          |      |                         |   |       
|Vested or expected to vest at June 30, 2006         |  | 6,305  |   |  | $                             | 21.13 |                                          | 7.89 |                         | $ | 88,196
|                                                    |  |        |   |  |                               |       |                                          |      |                         |   |       



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

9. STOCK PLANS (continued)

All options granted during the six months ended June 30, 2005 and 2006 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, except for shares granted under the U.K.
Subplan where the fair value of the Companys common stock on the grant date is 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 of options granted during the six-month periods ended June 30, 2005 and 2006 was $10.94 and $15.97, respectively. The fair value of options granted during the six-month periods ended June 30, 2005 and 2006 was $2.4 million and $22.9
million, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the six-month periods ended June 30, 2005 and 2006
was $19.2 million and $13.3 million, respectively.

A summary of the status of non-vested options as of June 30, 2006, and changes
during the six months then ended, is presented below:



|                              |  |        |   |  |                                      |      
|----------------------------- |  | ------ | - |  | ------------------------------------ | -----
|(shares in thousands)         |  | Shares |   |  | Weighted-AverageGrant DateFair Value
|Non-vested options            |  |        |   |  |                                      |      
|Non-vested at January 1, 2006 |  | 3,744  |   |  | $                                    | 10.09
|Granted                       |  | 1,434  |   |  |                                      | 15.97
|Vested                        |  | (432   | ) |  |                                      | 8.04 
|Forfeited                     |  | (134   | ) |  |                                      | 11.17
|                              |  |        |   |  |                                      |      
|Non-vested at June 30, 2006   |  | 4,612  |   |  | $                                    | 12.08
|                              |  |        |   |  |                                      |      

As of June 30, 2006, the total unrecognized compensation cost related to non-vested stock
options was approximately $36.5 million. This cost is expected to be recognized over a weighted-average period of 2.4 years in accordance with the vesting periods of the options. The total fair value of shares vested during the six months ended
June 30, 2005 and 2006 was $4.6 million and $3.5 million, respectively.

The fair value of each option award is estimated on the grant
date using the Black-Scholes option-pricing model. The following table indicates the assumptions used in estimating fair value for the three months and six months ended June 30, 2005 and 2006.



|                            |  |                            |  |                           |  |             |  |            
|--------------------------- |  | -------------------------- |  | ------------------------- |  | ----------- |  | -----------
|                            |  | Three Months EndedJune 30, |  | Six Months Ended June 30,
|                            |  | 2005                       |  | 2006                      |  | 2005        |  | 2006       
|Expected term (years)       |  | 5.00                       |  | 4.50                      |  | 5.00        |  | 4.50       
|Dividend yield (%)          |  | 0.00                       |  | 0.29                      |  | 0.00        |  | 0.29-0.32  
|Risk-free interest rate (%) |  | 3.72                       |  | 4.82                      |  | 3.72-4.18   |  | 4.36-4.82  
|Expected volatility (%)     |  | 51.33                      |  | 50.51                     |  | 51.33-52.55 |  | 50.51-51.39

The expected term represents an estimate of the period of time options are expected to remain
outstanding and is based on historical exercise and termination data. The dividend yield is based on the most recent dividend payment over the market price of the stock at the beginning of the period. The risk-free interest rate is based on the rate
for zero-coupon United States Treasury bonds at the date of grant with a term that approximates the expected term of the options. Expected volatilities are based on the historical volatility of the Companys stock price over a period equal to
the expected term of the options.



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

9. STOCK PLANS (continued)

Restricted Stock

The Company awards shares of restricted stock to members of the senior
management team and the Companys non-employee directors. The shares awarded to members of the senior management team are subject to a three-year linear vesting schedule with one-third of the grant vesting on each of the first, second and third
anniversaries of the grant date. The Company determines compensation cost based on the market value of shares on the date of grant, and records compensation expense on these shares on a straight-line basis over the three-year vesting period. The
restricted stock shares granted to the Companys non-employee directors vest over a three-year period, with ninety percent of the shares vesting on the first anniversary of the grant and five percent vesting on each of the second and third
anniversary dates. The Company records compensation expense on these shares according to this vesting schedule.

During the three months
ended June 30, 2006, two members of the senior management team had shares of restricted stock vest. These employees elected to surrender to the Company a portion of their vested shares to pay the income taxes due on the vested shares. During
the three months ended June 30, 2006, 10,855 shares were forfeited to satisfy tax obligations.

During the six months ended
June 30, 2005 and 2006, the Company awarded 117,280 and 16,512 shares of restricted stock, respectively, with a fair value of $2.7 million and $0.5 million, respectively. The weighted average fair value of each share was $23.09 and $31.47 for
the six months ended June 30, 2005 and 2006, respectively. Total compensation expense recorded during the three months ended June 30, 2005 and 2006 for restricted stock shares granted was $0.2 million and $0.4 million, respectively. The
associated future income tax benefit recognized was $0.1 million and $0.2 million for the three months ended June 30, 2005 and 2006, respectively. Total compensation expense recorded during the six months ended June 30, 2005 and 2006 for
restricted stock shares granted was $0.3 million and $0.8 million, respectively. The associated future income tax benefit recognized was $0.1 million and $0.3 million for the six months ended June 30, 2005 and 2006, respectively. As of
June 30, 2006, the total unrecognized compensation cost related to 125,374 shares of non-vested restricted stock was approximately $2.8 million. This cost is expected to be recognized over a weighted-average period of 2.15 years in accordance
with the vesting periods of the restricted stock.

Employee Stock Purchase Plan

The Board of Directors had reserved 2.5 million shares of the Companys common stock for issuance under the Employee Stock Purchase Plan (the
ESPP). In May 2006, the Companys shareholders approved the reservation of an additional 2.0 million shares of common stock for issuance under the ESPP, bringing the total shares reserved for the ESPP to 4.5 million
shares. The ESPP has two six-month offering periods (each an Offering Period) each year, beginning January 1 and July 1, respectively. Eligible employees can elect to make payroll deductions from 1% to 15% of their base pay
during each payroll period of an Offering Period. Special limitations apply to eligible employees who own 5% or more of the outstanding common stock of the Company. In addition, in accordance with the ESPP and beginning with the first six-month
Offering Period in 2006, the Board of Directors set a limit on the total payroll deductions for each year of $8.0 million. None of the contributions made by eligible employees to purchase the Companys common stock under the ESPP are
tax-deductible to the employees. During 2005, the purchase price was 85%, and beginning January 1, 2006 it is 90%, of the lesser of (a) the reported closing price of the Companys common stock for the first day of the Offering Period
or (b) the reported closing price of the common stock for the last day of the Offering Period. As of July 25, 2006, there were 2.4 million shares of common stock available for purchase by ESPP participants, after giving effect to
shares purchased for the first Offering Period of 2006 that were issued July 2006.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

9. STOCK PLANS (continued)

The fair value of each ESPP share is estimated using the Black-Scholes option-pricing model. The following table indicates the assumptions used in
estimating fair value for the three months and six months ended June 30, 2005 and 2006.



|                            |  |                            |  |                          |  |       |  |      
|--------------------------- |  | -------------------------- |  | ------------------------ |  | ----- |  | -----
|                            |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|                            |  | 2005                       |  | 2006                     |  | 2005  |  | 2006 
|Expected term (years)       |  | 0.50                       |  | 0.50                     |  | 0.50  |  | 0.50 
|Dividend yield (%)          |  | 0.00                       |  | 0.32                     |  | 0.00  |  | 0.32 
|Risk-free interest rate (%) |  | 3.72                       |  | 4.37                     |  | 3.72  |  | 4.37 
|Expected volatility (%)     |  | 51.33                      |  | 40.38                    |  | 51.33 |  | 40.38

The compensation costs for the ESPP as determined based on the fair value of the discount and
option feature of the underlying ESPP grant, consistent with the method of SFAS No. 123, were $0.4 million for each of the three-month periods ended June 30, 2005 and 2006. The income tax benefit recognized was $0.1 million for each of the
three-month periods ended June 30, 2005 and 2006. The compensation costs for the ESPP were $1.0 million and $0.8 million for the six months ended June 30, 2005 and 2006, respectively. The income tax benefit recognized was $0.4 million and
$0.1 million for the six-month periods ended June 30, 2005 and 2006, respectively. As of June 30, 2006, the total unrecognized compensation cost related to ESPP shares was $0.

For the six-month periods ended June 30, 2005 and 2006, the value of stock issued for ESPP purchases was $2.8 million and $3.6 million,
respectively. In connection with disqualifying dispositions, the tax benefits realized by the Company for the six-month periods ended June 30, 2005 and 2006 were $0.1 million for both periods.

During the six months ended June 30, 2005 and 2006, employees contributed $3.7 million and $3.6 million, respectively, to the ESPP for the purchase
of shares under that plan.

10. INCOME TAXES

The effective tax rate for the second quarter of 2006 and the first six months of 2006 was 32.0% and 33.4%, respectively. The effective tax rate for the second quarter of 2005 and the first six months of 2005 was 35.0% and 30.2%,
respectively. The effective tax rate for the second quarter of 2006 and the first six months of 2006 was positively impacted by the recognition of benefit for state economic development tax credits as well as reduction of tax contingency reserves
and release of valuation allowance due to the closing of certain state statutes and audits. These reductions decreased the effective tax rate for the second quarter of 2006 and the first six months of 2006 by 5.3% and 2.4%, respectively. The
effective tax rate for the first six months of 2005 was positively impacted by a $4.7 million reduction in the valuation allowance provided for the deferred tax asset relating to capital loss carryforwards. This reduction was a result of the
utilization of capital loss carryforwards that previously had a valuation allowance recorded against them as well as the recognition of capital gains for both the SurroMed transaction and the dapoxetine new drug application milestone payment from
ALZA Corporation received in March 2005. This reduction in the valuation allowance decreased the effective tax rate by 5.6%.

The Company
records current and deferred income tax expense related to its foreign operations to the extent those earnings are taxable in a foreign jurisdiction. The American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction
on the repatriation of foreign earnings to a U.S. taxpayer. The Company had not previously recorded a U.S. tax liability on these revenues because it intended to permanently reinvest them in its foreign operations. During the second quarter of 2005,
the Company began evaluating the impact of this law on its permanent reinvestment position and recorded $0.8 million of tax expense in the second quarter of 2005 related to the then projected repatriation of foreign earnings of $22.2 million.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

11. PENSION PLAN

Pension costs are determined under the provisions of SFAS No. 87, Employers Accounting for Pensions, and related disclosures are determined under the provisions of SFAS No. 132 (revised
2003), Employers Disclosures about Pensions and other Postretirement Benefits.

The Company has a separate contributory
defined benefit plan for its qualifying United Kingdom 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. 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. Plan included the following components:



|                                        |      |                            |      |      |                          |   |      |   |  |      |       |   |  |   |       |  
|--------------------------------------- | ---- | -------------------------- | ---- | ---- | ------------------------ | - | ---- | - |  | ---- | ----- | - |  | - | ----- | -
|(in thousands)                          |      | Three Months EndedJune 30, |      |      | Six Months EndedJune 30, |  
|                                        | 2005 |                            |      | 2006 |                          |   | 2005 |   |  | 2006 |      
|Service cost                            |      | $                          | 299  |      |                          | $ | 442  |   |  | $    | 603   |   |  | $ | 866   |  
|Interest cost                           |      |                            | 516  |      |                          |   | 552  |   |  |      | 1,041 |   |  |   | 1,081 |  
|Expected return on plan assets          |      |                            | (431 | )    |                          |   | (506 | ) |  |      | (869  | ) |  |   | (991  | )
|Amortization of transition asset amount |      |                            | (1   | )    |                          |   |     |   |  |      | (3    | ) |  |   |      |  
|Amortization of net loss                |      |                            | 152  |      |                          |   | 181  |   |  |      | 307   |   |  |   | 355   |  
|                                        |      |                            |      |      |                          |   |      |   |  |      |       |   |  |   |       |  
|Net periodic pension cost               |      | $                          | 535  |      |                          | $ | 669  |   |  | $    | 1,079 |   |  | $ | 1,311 |  
|                                        |      |                            |      |      |                          |   |      |   |  |      |       |   |  |   |       |  

For the six months ended June 30, 2006, the Company made contributions of $2.2 million and
anticipates contributing an additional $0.6 million to fund this plan during the remainder of 2006.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

12. 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 $1.0 million.

The Company is self-insured for health
insurance for employees located within the United States, but maintains stop-loss insurance on a claims made basis for expenses in excess of $0.25 million per member per year. As of December 31, 2005 and June 30, 2006, the
Company maintained a reserve of approximately $5.0 million and $6.8 million, respectively, included in other accrued expenses on the consolidated condensed balance sheets, to cover open claims and estimated claims incurred but not reported.

In September 2005, the Company became a limited partner in Bay City Capital Fund IV, L.P., a venture capital fund. The Company has
committed to invest up to a maximum of $10.0 million in the Bay City Fund IV. Capital calls through June 30, 2006 totaled $2.7 million. Because no capital call can exceed 20% of the Companys aggregate capital commitment, the Company
anticipates its remaining capital commitment of $7.3 million will be made through a series of future capital calls over the next several years. The Companys capital commitment will expire in June 2009. For further details, see Note 6.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, L.P., a venture capital fund. The
Company has committed to invest up to a maximum of $4.75 million. Capital calls through June 30, 2006 totaled $0.9 million. Because no capital call can exceed 10% of the Companys aggregate capital commitment, the Company anticipates its
remaining capital commitment of $3.85 million will be made through a series of future capital calls over the next several years. The Companys capital commitment will expire in May 2009. For further details, see Note 6.

In March 2005, the Company entered into a lease for additional space in Austin, Texas for its Phase II through IV operations. The additional space is
adjacent to the Companys new Phase I clinic. To induce the Company to enter into the lease for additional space, the landlord agreed to deposit $5.5 million into an escrow account to be used to reimburse the Company for the rent and other
expenses paid by the Company under the lease for the existing facilities after July 1, 2005 and the costs and expenses to sublease those facilities. The Company accounted for the amount to be received from the escrow account as a lease
incentive that would be recognized in income over the life of the ten-year term of the lease. In April 2006, the Company and the landlord agreed to settle a dispute relating to this escrow account. Under the terms of the settlement, the Company
received $4.3 million in full and final settlement of all claims.

In February 2005, the Company acquired substantially all of
SurroMeds assets related to its biomarker business. As part of this acquisition, the Company agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan with a maturity date of December 31, 2006. In February 2006, this
amount was reduced to $0.8 million and SurroMed pledged a $0.5 million certificate of deposit to secure payment of the bank loan. In accordance with the requirements of FASB Statement No. 5, Accounting for Contingencies, as
clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $0.03 million as of June 30, 2006 for the estimated fair value of the net obligation it has assumed under this guarantee.

In January 2005, the Company acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which the Company is
constructing a new headquarters building. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the 7.5-acre tract, the seller, Almont Shipping



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

12. COMMITMENTS AND CONTINGENCIES (continued)

Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America. This loan was secured by a lien on substantially all of
Almonts assets, including an approximately 30-acre tract of land adjacent to the tract the Company acquired. This loan was also secured by a guarantee from the Company. In March 2006, the loan matured and Almont filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. In early April 2006, Bank of America demanded payment of the loan under the Companys guarantee. The Company subsequently purchased the secured note and all related loan documents for
approximately $7.5 million. This amount is included in prepaid expenses and other current assets on the June 30, 2006 consolidated condensed balance sheet. The note bears interest at a fluctuating rate equal to the one-month London Interbank
Offered Rate, or LIBOR, plus a margin of 1.50% and is secured by a first lien deed of trust on the 30-acre tract of land. The land is currently under a contract for sale that has been approved by the Bankruptcy Court for a purchase price in excess
of the loan amount.

As of June 30, 2006, the Company had liabilities of $7.9 million for certain unsettled matters in connection with
tax positions taken on the Companys tax returns, including interpretations of applicable income tax laws and regulations. The Company establishes a reserve when, despite managements belief that the Companys tax returns reflect the
proper treatment of all matters, the treatment of certain tax matters is likely to be challenged. Significant judgment is required to evaluate and adjust the reserves in light of changing facts and circumstances. Further, a number of years may lapse
before a particular matter for which the Company has established a reserve is audited and finally resolved. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, management believes that the
reserves of $7.9 million reflect the probable outcome of known tax contingencies. The Company believes it is unlikely that the resolution of these matters will have a material adverse effect on the Companys financial position or results of
operations, as presented.

In August 2005, the Company amended its September 2004 royalty stream purchase agreement with Accentia. Under
the terms of the amended agreement, the Company agreed to provide specified clinical development services to Accentia in connection with two pivotal Phase III trials for SinuNase® for the treatment of chronic sinusitis. In exchange for providing these services, Accentia agreed to pay the Company a
royalty equal to 14% of the net sales of specified SinuNase products if approved for sale by the FDA. The Companys obligation to provide Phase III clinical development services expired on December 31, 2005. In April 2006, the FDA granted
SinuNase fast-track status. Accentia is planning to start the Phase III trials in 2006 and the Company is in discussions with Accentia regarding a further amendment to this agreement.

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. Including the collaboration with Accentia discussed above, the Company currently has four such arrangements that involve the potential future receipt of one or more of the following:
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. One of these
arrangements requires the Company to pay a royalty of 5% on annual net sales of the compound in excess of $800 million. The compounds that are the subject of these collaborations are still in development and have not been approved for sale in any
country. Thus, the receipt of any further milestone payments, royalties or other payments is uncertain.

Under most of the agreements for
Development services, the Company 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.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

12. COMMITMENTS AND CONTINGENCIES (continued)

In the normal course of business, the Company is a party to various claims and legal proceedings. In one proceeding currently pending against the Company,
a former client is claiming the Company breached its contract and committed tortious acts in conducting a clinical trial. That former client is claiming that it does not owe the Company the remaining amounts due under the contract and is seeking
other damages from the Companys alleged breach of contract and tortious acts. 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 these matters is currently not determinable, 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.

13. BUSINESS SEGMENT DATA

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



|                               |      |                            |         |      |                          |   |        |   |  |      |        |   |  |   |        
|------------------------------ | ---- | -------------------------- | ------- | ---- | ------------------------ | - | ------ | - |  | ---- | ------ | - |  | - | -------
|(in thousands)                 |      | Three Months EndedJune 30, |         |      | Six Months EndedJune 30,
|                               | 2005 |                            |         | 2006 |                          |   | 2005   |   |  | 2006
|Income (loss) from operations: |      |                            |         |      |                          |   |        |   |  |      |        |   |  |   |        
|Development                    |      | $                          | 41,175  |      |                          | $ | 49,655 |   |  | $    | 79,006 |   |  | $ | 98,253 
|Discovery Sciences             |      |                            | (12,067 | )    |                          |   | (626   | ) |  |      | (6,184 | ) |  |   | 11,704 
|                               |      |                            |         |      |                          |   |        |   |  |      |        |   |  |   |        
|Total                          |      | $                          | 29,108  |      |                          | $ | 49,029 |   |  | $    | 72,822 |   |  | $ | 109,957
|                               |      |                            |         |      |                          |   |        |   |  |      |        |   |  |   |        



|                     |  |                  |           |              |   |          
|-------------------- |  | ---------------- | --------- | ------------ | - | ---------
|                     |  | December 31,2005 |           | June 30,2006
|Identifiable assets: |  |                  |           |              |   |          
|Development          |  | $                | 1,061,038 |              | $ | 1,232,360
|Discovery Sciences   |  |                  | 98,562    |              |   | 88,314   
|                     |  |                  |           |              |   |          
|Total                |  | $                | 1,159,600 |              | $ | 1,320,674
|                     |  |                  |           |              |   |          



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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 Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2005. 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 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 20 years. Our development services include preclinical programs and Phase I to Phase IV clinical development services. We have extensive clinical trial experience across a multitude of therapeutic areas and various
parts of the world, including regional, national and global studies. In addition, for marketed drugs, biologics and devices, we offer support services 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 offices in 27 countries and more than 8,800 professionals worldwide, we have provided services to 46 of the top 50 pharmaceutical companies in the world as ranked by 2004 healthcare research and development spending. We also work with
leading biotechnology and medical device companies and government organizations that sponsor clinical research. We believe that 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 2005 annual net revenues generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our discovery services business in 1997. This business primarily focuses on preclinical evaluations of anticancer and diabetes therapies,
and on 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. In February 2005, we completed the acquisition of a biomarker business. The acquisition
expanded our discovery sciences business by adding biomarker discovery and patient sample analysis capability to the services we offer.

We
believe that our integrated drug discovery and development services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively. We use our proprietary informatics technology to support these development
services. In addition, with global infrastructure, we are able to accommodate the multinational drug discovery and development needs of our customers. As a result of having core areas of expertise in discovery and development, we provide integrated
services across the drug development spectrum. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2005.



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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 our market, see Item 1.
Business  Trends Affecting the Drug Discovery and Development Industry in our Annual Report on Form 10-K for the year ended December 31, 2005. Although we cannot predict the demand for CRO services for the remainder of 2006, we
continue to believe that the traditional market drivers for our industry are intact. In the first half of 2006, the market opportunity was robust and we experienced a new high for our global Phase II through IV business from a proposal volume
standpoint. For the remainder of the year, we plan to focus our efforts on managing our recent growth, delivering timely, high quality services to our clients, and improving our business development efforts in our core markets.

We believe there are specific opportunities for continued growth in certain areas of our business. Our Latin American and European Phase II through IV
units had strong operating and financial performance in the first half of 2006, and we expect to see continued revenue growth in these regions for the rest of this year. We also saw strong demand for our Phase I clinic services in Austin, Texas in
the second quarter of 2006. We believe our state-of-the-art clinic and ability to service large, complex studies should allow us to continue winning business in this arena and enable us to capitalize on our expanded Phase I facilities. Similarly, in
the first half of 2006, the demand for our GMP services increased and we continue to plan expansions and new services for our GMP laboratory facilities over the next two years. Our bioanalytical laboratory authorizations improved in the second
quarter, which should help the financial performance of this business unit for the second half of 2006. Our global central laboratory also achieved good operating and financial performance in the second quarter of 2006 and added two important new
clients. While our central laboratory has historically focused primarily on lipids and metabolic studies, we are expanding service offerings, especially in the area of infectious disease.

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 second quarter of 2006, we had new authorizations of $475.9 million, an increase of 28% over the second quarter of 2005. The cancellation rate for the second quarter of 2006 was 14% compared to 17% in the full
year of 2005. On a net basis, authorizations were up 34% in the second quarter of 2006 compared to the same period in 2005. Backlog grew to $2.0 billion as of June 30, 2006, up 42% over June 30, 2005. The average length of our contracts
increased to 37.1 months as of June 30, 2006 from 27.5 months as of June 30, 2005. Backlog by client type as of June 30, 2006 was 52% pharmaceutical, 34% biotech and 14% government/other as compared to 56% pharmaceutical, 33% biotech
and 11% government/other as of June 30, 2005. Net revenue by client type for the quarter ended June 30, 2006 was 59% pharmaceutical, 29% biotech and 12% government/other compared to 61% pharmaceutical, 28% biotech and 11% government/other
for the second quarter of 2005. Top therapeutic areas by net revenue for the quarter ended June 30, 2006 were anti-infective/anti-viral, oncology, endocrine/metabolic, circulatory/cardiovascular and central nervous system. For a detailed
discussion of our revenue, margins, earnings and other financial results for the quarter ended June 30, 2006, see Results of Operations  Three Months Ended June 30, 2005 versus Three Months Ended June 30, 2006 below.

Capital expenditures for the three months ended June 30, 2006 totaled approximately $37.9 million. These capital expenditures were
for construction costs for our new corporate headquarters building and related parking facility in Wilmington, North Carolina, computer software and hardware, scientific equipment for our laboratory units, and various building improvements in our
Phase II-IV facilities. We made these investments to support our growing businesses and to improve the efficiencies of our operations. For the remainder of 2006, we expect to spend between $100 million and $105 million for capital expenditures. We
expect to spend $60 million in the remainder of 2006 for the ongoing construction of our new headquarters building. The majority of the remaining forecasted capital expenditures will be related to up-fit costs for facilities, construction costs
related to our new building in Scotland, information technology related expenditures and additional lab equipment.

As of June 30,
2006, we had $380.2 million of cash, cash equivalents and short-term investments and $40.0 million of debt primarily related to amounts borrowed to finance the construction of our new headquarters building. In the second quarter of 2006, we
generated $76.4 million cash from operations, including a $15.0 million payment that we received from Takeda in connection with a milestone payment that we earned in the first quarter of 2006. The number of days revenue outstanding in accounts
receivable and unbilled services, net of unearned income, also known as DSO, was 40.4 and 33.0 days as of June 30, 2006 and 2005, respectively. Over the past three years, our year-to-date DSO has



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fluctuated between 32.2 days and 42.2 days. Accounts receivable and unbilled services as of June 30, 2006 increased
12.5% compared to December 31, 2005. We expect DSO and unbilled services 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. Because of our cash position and free cash flow, in late 2005, our Board of Directors declared a special one-time cash dividend and adopted a policy to pay annual cash dividends. The cash dividend
policy and the payment of future cash dividends are not guaranteed and are subject to the 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.

With regards to our Discovery Sciences segment, our preclinical oncology facility had a solid performance in 2005 and the
first two quarters of 2006, and is now offering models to support diabetes drug development. We have added business development resources in an effort to generate additional sales of our biomarker services and improve future performance. Our
Discovery Sciences segment also includes our compound partnering arrangements. These 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 clients. For a background discussion of our compound partnering arrangements, see Item 1. Business  Our Services  Our Discovery Sciences Group  Compound Partnering Programs in our
Annual Report on Form 10-K for the year ended December 31, 2005.

We are committed to our compound partnering strategy and believe it
is an innovative way to use our cash resources and drug development expertise to drive mid- to long-term shareholder value. For the remainder of 2006, we plan to continue advancing our existing collaborations and evaluate new potential opportunities
in this area.

Acquisitions

In
February 2005, we completed our acquisition of substantially all of the assets of SurroMed, Inc.s biomarker business. In exchange for the assets, we surrendered to SurroMed for cancellation all shares of preferred stock of SurroMed we held. As
additional consideration for the acquisition, we assumed approximately $3.4 million of SurroMed liabilities under capital leases and additional operating liabilities, and guaranteed repayment of up to $1.5 million under a SurroMed bank loan. We
recognized a pre-tax gain on the exchange of assets of $5.1 million. The biomarker business is part of the Discovery Sciences segment. For further details regarding this acquisition, see Note 2 to the Notes to Consolidated Condensed Financial
Statements.

New Business Authorizations and Backlog

New business authorizations, which are sales of our services, are reflected in 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 June 30, 2005 and 2006
were $372.1 million and $475.9 million, respectively.

Our backlog consists of new business authorizations for which the work has not
started but is anticipated to begin in the near future and contracts in process that have not been completed. As of June 30, 2006, the remaining duration of the contracts in our backlog ranged from one month to 162 months with an average
duration of 37.1 months. Amounts included in backlog represent future revenue and exclude revenue that we have previously recognized. Once work begins on a project included in backlog, we recognize net revenue over the life of the contract as
services are performed. Our backlog as of June 30, 2005 and 2006 was $1.43 billion and $2.03 billion, respectively. For various reasons discussed in Item 1. Business  Backlog in our Annual Report on Form 10-K for the year
ended December 31, 2005, our backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.



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Results of Operations

Revenue Recognition

We record revenue from contracts, other than time-and-material contracts, on a
proportional performance basis in our Development segment. To measure performance on a given date, we compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance
of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized. 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 and laboratory businesses, we recognize revenue from unitized
contracts as subjects or samples are tested, multiplied by the applicable unit price.

In connection with the management of multi-site
clinical trials, we pay, on behalf of our customers, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. In some cases, we contract directly with these third parties
and are obligated to pay these costs as the principal. In other cases, our customers contract directly with these parties and ask us to pay them on their behalf as an administrative agent. Whether we pay these as principal or agent, our clients
reimburse us for these costs. As required by Emerging Issues Task Force 01-14, 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 June 30, 2005 and 2006, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $76.5 million and $68.3 million, respectively.

Most of the contracts for our Development segment can be terminated by our clients either immediately or after a specified period following notice. These
contracts typically require payment to us of expenses to wind down a study, fees earned to date 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 does not generally require a significant adjustment upon cancellation. If we determine that a loss will result from the performance of a fixed-price 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 customer, and continued performance of
future research and development services related to that milestone are not required.

Recording of Expenses

We generally record our operating expenses among the following categories:



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



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



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



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

Depreciation expenses consist of depreciation costs recorded on a straight-line method, based on estimated useful
lives of 40 to 50 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.

Amortization expenses consist of amortization costs recorded on intangible assets on a straight-line method over the life of the
intangible assets.



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Three Months Ended June 30, 2005 versus Three Months Ended June 30, 2006

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the three
months ended June 30, 2005 compared to the three months ended June 30, 2006.



|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|-------------------------------------------- | ---- | -------------------------------------- | ------- |  | ----------- | ------- |  | ----------- | ------- | - |  | ----- | -
|(in thousands, except per share data)        |      | Three Months EndedJune 30, (unaudited) |         |  |             |         |  |            
|                                             | 2005 |                                        | 2006    |  | $ Inc (Dec) |         |  | % Inc (Dec) |        
|Net revenue:                                 |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Development                                  |      | $                                      | 224,862 |  | $           | 278,890 |  | $           | 54,028  |   |  | 24.0  | %
|Discovery Sciences                           |      |                                        | 3,636   |  |             | 4,550   |  |             | 914     |   |  | 25.1  |  
|Reimbursed out-of-pockets                    |      |                                        | 16,644  |  |             | 25,513  |  |             | 8,869   |   |  | 53.3  |  
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Total net revenue                            |      |                                        | 245,142 |  |             | 308,953 |  |             | 63,811  |   |  | 26.0  |  
|                                             |      |                                        |         | 
|Direct costs:                                |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Development                                  |      |                                        | 114,153 |  |             | 140,022 |  |             | 25,869  |   |  | 22.7  |  
|Discovery Sciences                           |      |                                        | 2,107   |  |             | 2,069   |  |             | (38     | ) |  | (1.8  | )
|Reimbursable out-of-pocket expenses          |      |                                        | 16,644  |  |             | 25,513  |  |             | 8,869   |   |  | 53.3  |  
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Total direct costs                           |      |                                        | 132,904 |  |             | 167,604 |  |             | 34,700  |   |  | 26.1  |  
|                                             |      |                                        |         | 
|Research and development expenses            |      |                                        | 11,445  |  |             | 1,261   |  |             | (10,184 | ) |  | (89.0 | )
|Selling, general and administrative expenses |      |                                        | 61,749  |  |             | 79,274  |  |             | 17,525  |   |  | 28.4  |  
|Depreciation                                 |      |                                        | 9,512   |  |             | 11,286  |  |             | 1,774   |   |  | 18.7  |  
|Amortization                                 |      |                                        | 279     |  |             | 124     |  |             | (155    | ) |  | (55.6 | )
|Loss on impairment and disposal of assets    |      |                                        | 145     |  |             | 375     |  |             | 230     |   |  | 158.6 |  
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Income from operations                       |      |                                        | 29,108  |  |             | 49,029  |  |             | 19,921  |   |  | 68.4  |  
|                                             |      |                                        |         | 
|Interest and other income, net               |      |                                        | 2,892   |  |             | 4,521   |  |             | 1,629   |   |  | 56.3  |  
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Income before taxes                          |      |                                        | 32,000  |  |             | 53,550  |  |             | 21,550  |   |  | 67.3  |  
|Provision for income taxes                   |      |                                        | 11,201  |  |             | 17,136  |  |             | 5,935   |   |  | 53.0  |  
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Net income                                   |      | $                                      | 20,799  |  | $           | 36,414  |  | $           | 15,615  |   |  | 75.1  | %
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  
|Net income per diluted share                 |      | $                                      | 0.18    |  | $           | 0.31    |  | $           | 0.13    |   |  | 72.2  | %
|                                             |      |                                        |         |  |             |         |  |             |         |   |  |       |  

Total net revenue increased $63.8 million to $309.0 million in the second quarter of 2006. The
increase in total net revenue resulted primarily from an increase in our Development segment revenue. The Development segment generated net revenue of $278.9 million, which accounted for 90.3% of total net revenue for the second quarter of 2006. The
24.0% increase in Development net revenue was primarily attributable to an increase in the level of global Phase II through IV services we provided in the second quarter of 2006 as compared to 2005.

Total direct costs increased $34.7 million to $167.6 million in the second quarter of 2006 primarily as the result of an increase in the Development
segment direct costs. Development direct costs increased $25.9 million to $140.0 million in the second quarter of 2006. The primary reason for this was an increase in personnel costs of $22.8 million due to the hiring of additional employees in our
global Phase II through IV division.

R&D expenses decreased $10.2 million to $1.3 million in the second quarter of 2006. R&D
expenses decreased primarily as a result of decreased spending in connection with the DPP4 program with Takeda. Under the DPP4 agreement with Takeda that we entered into in July 2005, Takeda assumed the obligation to fund future development and
commercialization costs of the DPP4 inhibitor program. Thus, we do not expect to incur additional R&D expense for the DPP4 program.



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SG&A expenses increased $17.5 million to $79.3 million in the second quarter of 2006. As a percentage
of total net revenue, SG&A expenses increased to 25.7% in the second quarter of 2006 compared to 25.2% in the second quarter of 2005. The increase in SG&A expenses includes additional personnel costs of $11.9 million. The increase in
personnel costs related mainly to changes in utilization levels due to an increased level of new hires and higher levels of operations infrastructure to manage direct personnel. Utilization was lower as these new hires were undergoing extensive
training programs and preparing for assignment to studies. The increase in SG&A costs also includes an increase of $1.3 million in travel costs due to training initiatives for new and existing operations personnel and higher administrative
travel expense. In addition, SG&A costs include $0.9 million in recruiting costs to hire additional personnel and an increase of $1.0 million in accounting and legal fees.

Depreciation expense increased $1.8 million to $11.3 million in the second quarter of 2006. The increase was related to the depreciation of the property
and equipment we acquired to accommodate our growth, a significant portion of which related to information technology system investments we made in 2005. Capital expenditures were $37.9 million in the second quarter of 2006. Capital expenditures
included $19.6 million for our new corporate headquarters building and related parking facility in Wilmington, North Carolina, $8.9 million for computer software and hardware, $5.2 million related to leasehold improvements at various sites, with the
majority of these costs related to our new facility in Austin, Texas for our Phase II-IV personnel, and $1.2 million for additional scientific equipment for our laboratory units.

Income from operations increased $19.9 million to $49.0 million in the second quarter of 2006. As a percentage of net revenue, income from operations
increased to 15.9% in the second quarter of 2006 from 11.9% in the second quarter of 2005. Income from operations in the second quarter of 2006 included a significant decrease in R&D expenses as discussed above and a $0.4 million impairment
related to the value of our building in Leicester, United Kingdom. This building was the site of our former U.K. Phase I operations.

Interest and other income increased $1.6 million to $4.5 million in the second quarter of 2006. This was due primarily to increased interest income from higher interest rates and a larger average cash balance.

Our provision for income taxes increased $5.9 million to $17.1 million in the second quarter of 2006. Our effective income tax rate for the second
quarter of 2006 was 32.0% compared to 35.0% for the second quarter of 2005. The effective tax rate for the second quarter of 2006 was positively impacted by the recognition of benefit for state economic development tax credits as well as the
reduction of tax contingency reserves and release of valuation allowance due to the closing of certain state statutes and audits. These reductions decreased the effective tax rate for the second quarter of 2006 by 5.3%. The remaining difference in
our effective tax rates for the second quarter of 2006 compared to the second quarter of 2005 is due to the tax on the repatriation of foreign earnings in 2005 and the change in geographic distribution of our pretax earnings among locations with
varying tax rates.

Net income of $36.4 million in the second quarter of 2006 represents an increase of 75.1% from $20.8 million in the
second quarter of 2005. Net income per diluted share of $0.31 in the second quarter of 2006 represents a 72.2% increase from $0.18 net income per diluted share in the second quarter of 2005.



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Six Months Ended June 30, 2005 versus Six Months Ended June 30, 2006

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the six months
ended June 30, 2005 compared to the six months ended June 30, 2006.



|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|-------------------------------------------- | ---- | ------------------------------------ | ------- | ---- |  | ----------- | ------- |  | ----------- | ------- | - |  | ------ | -
|(in thousands, except per share data)        |      | Six Months EndedJune 30, (unaudited) |         |      |  |             |         | 
|                                             | 2005 |                                      |         | 2006 |  | $ Inc (Dec) |         |  | % Inc (Dec) |        
|Net revenue:                                 |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Development                                  |      | $                                    | 437,783 |      |  | $           | 536,639 |  | $           | 98,856  |   |  | 22.6   | %
|Discovery Sciences                           |      |                                      | 16,496  |      |  |             | 23,499  |  |             | 7,003   |   |  | 42.5   |  
|Reimbursed out-of-pockets                    |      |                                      | 34,917  |      |  |             | 48,184  |  |             | 13,267  |   |  | 38.0   |  
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Total net revenue                            |      |                                      | 489,196 |      |  |             | 608,322 |  |             | 119,126 |   |  | 24.4   |  
|                                             |      |                                      |         |     
|Direct costs:                                |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Development                                  |      |                                      | 223,981 |      |  |             | 268,439 |  |             | 44,458  |   |  | 19.8   |  
|Discovery Sciences                           |      |                                      | 4,034   |      |  |             | 4,477   |  |             | 443     |   |  | 11.0   |  
|Reimbursable out-of-pocket expenses          |      |                                      | 34,917  |      |  |             | 48,184  |  |             | 13,267  |   |  | 38.0   |  
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Total direct costs                           |      |                                      | 262,932 |      |  |             | 321,100 |  |             | 58,168  |   |  | 22.1   |  
|                                             |      |                                      |         |     
|Research and development expenses            |      |                                      | 20,266  |      |  |             | 1,942   |  |             | (18,324 | ) |  | (90.4  | )
|Selling, general and administrative expenses |      |                                      | 119,632 |      |  |             | 151,231 |  |             | 31,599  |   |  | 26.4   |  
|Depreciation                                 |      |                                      | 17,871  |      |  |             | 22,309  |  |             | 4,438   |   |  | 24.8   |  
|Amortization                                 |      |                                      | 567     |      |  |             | 397     |  |             | (170    | ) |  | (30.0  | )
|Loss on impairment and disposal of assets    |      |                                      | 250     |      |  |             | 1,386   |  |             | 1,136   |   |  | 454.4  |  
|Gain on exchange of assets                   |      |                                      | (5,144  | )    |  |             |        |  |             | 5,144   |   |  | (100.0 | )
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Income from operations                       |      |                                      | 72,822  |      |  |             | 109,957 |  |             | 37,135  |   |  | 51.0   |  
|                                             |      |                                      |         |     
|Interest and other income, net               |      |                                      | 4,072   |      |  |             | 7,480   |  |             | 3,408   |   |  | 83.7   |  
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Income before taxes                          |      |                                      | 76,894  |      |  |             | 117,437 |  |             | 40,543  |   |  | 52.7   |  
|Provision for income taxes                   |      |                                      | 23,214  |      |  |             | 39,177  |  |             | 15,963  |   |  | 68.8   |  
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Net income                                   |      | $                                    | 53,680  |      |  | $           | 78,260  |  | $           | 24,580  |   |  | 45.8   | %
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  
|Net income per diluted share                 |      | $                                    | 0.47    |      |  | $           | 0.66    |  | $           | 0.19    |   |  | 40.4   | %
|                                             |      |                                      |         |      |  |             |         |  |             |         |   |  |        |  

Total net revenue increased $119.1 million to $608.3 million in the first six months of 2006. The
increase in total net revenue resulted primarily from an increase in our Development segment revenue. The Development segment generated net revenue of $536.6 million, which accounted for 88.2% of total net revenue for the first six months of 2006.
The 22.6% increase in Development net revenue was primarily attributable to an increase in the level of global CRO Phase II through IV services we provided in the first six months of 2006 as compared to the first six months of 2005.

The Discovery Sciences segment generated net revenue of $23.5 million in the first six months of 2006, an increase of $7.0 million from the first six
months of 2005. The increase in the Discovery Sciences net revenue was mainly attributable to the $15.0 million milestone payment we earned from Takeda in March 2006 under the DPP4 collaboration agreement. During the first quarter of 2005, we
received a $10.0 million milestone payment from ALZA Corporation for the filing of the dapoxetine NDA.

Total direct costs increased $58.2
million to $321.1 million in the first six months of 2006 primarily as the result of an increase in Development segment direct costs. Development direct costs increased $44.5 million to $268.4 million in the first six months of 2006. The primary
reason for this was an increase in personnel costs of $42.1 million due to additional employees in our global Phase II through IV division.



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R&D expenses decreased $18.3 million to $1.9 million in the first six months of 2006. R&D
expenses decreased primarily as a result of decreased spending in connection with the DPP4 program with Takeda. Under the DPP4 agreement with Takeda that we entered into in July 2005, Takeda assumed the obligation to fund future development and
commercialization costs of the DPP4 inhibitor program. Thus, we do not expect to incur additional R&D expense for the DPP4 program.

SG&A expenses increased $31.6 million to $151.2 million in the first six months of 2006. As a percentage of total net revenue, SG&A expenses increased to 24.9% in the first six months of 2006 compared to 24.5% in the first six
months of 2005. The increase in SG&A expenses includes additional personnel costs of $22.6 million. The increase in personnel costs related mainly to changes in utilization levels due to an increased level of new hires and higher levels of
operations infrastructure to manage direct personnel. Utilization was lower as these new hires were undergoing extensive training programs and preparing for assignment to studies. The increase in SG&A costs also includes an additional $2.1
million in recruiting costs to hire additional personnel and an increase of $1.5 million in travel costs due to training initiatives for new and existing operations personnel and increased travel related to additional personnel in administrative
functions. In addition, SG&A costs include an increase of $1.8 million in accounting and legal fees.

Depreciation increased $4.4
million to $22.3 million in the first six months of 2006. The increase was related to property and equipment we acquired to accommodate our growth. Capital expenditures were $65.8 million in the first six months of 2006. Capital expenditures
included $30.7 million for our new corporate headquarters building and related parking facility in Wilmington, North Carolina, $14.3 million for computer software and hardware, $7.5 million related to leasehold improvements at various sites, $4.9
million for additional scientific equipment for our Phase I and laboratory units and $3.5 million for additional construction projects, mainly related to our new building in Scotland.

Income from operations increased $37.1 million to $110.0 million in the first six months of 2006. As a percentage of net revenue, income from operations
increased to 18.1% of net revenue in the first six months of 2006 from 14.9% in the first six months of 2005. Income from operations in the first six months of 2006 included a significant decrease in R&D expenses as discussed above and a $1.4
million loss on disposal of assets, composed of $0.8 million related to disposal of assets in our biomarker business, $0.2 million related to the disposal of an intangible asset and a $0.4 million impairment related to the value of our building in
Leicester, United Kingdom. This building was the site of our former U.K. Phase I operations. Income from operations in the first six months of 2005 included a $5.1 million gain on exchange of assets associated with the acquisition of SurroMeds
biomarker business.

Interest and other income increased $3.4 million to $7.5 million in the first six months of 2006. This was due
primarily to increased interest income from higher interest rates and a larger average cash balance.

Our provision for income taxes
increased $16.0 million to $39.2 million in the first six months of 2006. Our effective income tax rate for the first six months of 2006 was 33.4% compared to 30.2% for the first six months of 2005. The effective tax rate for the first six months of
2006 was positively impacted by the recognition of benefit for state economic development tax credits as well as the reduction of tax contingency reserves and release of valuation allowance due to the closing of certain state statutes and audits.
These reductions decreased the effective tax rate for the first six months of 2006 by 2.4%. The effective tax rate for the 2005 period was positively impacted by a $4.7 million reduction in our valuation allowance provided for the deferred tax asset
relating to a capital loss carryforward. This reduction was a result of the utilization of capital loss carryforwards that previously had a valuation allowance recorded against them as well as the recognition of capital gains for both the SurroMed
transaction and the dapoxetine NDA milestone payment. This reduction in the valuation allowance decreased the effective tax rate by 5.6%. The remaining difference in our effective tax rates for the first six months of 2006 compared to the first six
months of 2005 is due to the tax on the repatriation of foreign earnings in 2005 and the change in the geographic distribution of our pretax earnings among locations with varying tax rates.

Net income of $78.3 million in the first six months of 2006 represents an increase of 45.8% from $53.7 million in the first six months of 2005. Net
income per diluted share of $0.66 in the first six months of 2006 represents a 40.4% increase from net income per diluted share of $0.47 in the first six months of 2005. Net income per diluted share during the first six months of 2005 included
$0.035 per share, net of tax, for the gain on exchange of assets associated with the acquisition of SurroMeds biomarker business.



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Liquidity and Capital Resources

As of June 30, 2006, we had $120.9 million of cash and cash equivalents and $259.3 million of short-term investments. Our expected primary cash needs on both a short- and long-term basis are for capital
expenditures, including our new corporate headquarters facility, expansion of services, possible acquisitions, investments and compound collaborations, geographic expansion, dividends, working capital and other general corporate purposes. We have
historically funded our operations and growth, including acquisitions, primarily with cash flow from operations. In the first quarter of 2006, we entered into a construction loan to finance the construction of our new corporate headquarters building
and related parking facility in Wilmington, North Carolina. Our cash and cash equivalents are invested in financial instruments that are rated A or better by Standard & Poors or Moodys and earn interest at market rates.

In the first six months of 2006, our operating activities provided $104.8 million in cash as compared to $82.9 million for the same period
last year. The increase in cash flow from operations is primarily due to a $24.6 million increase in net income, increase in depreciation and amortization of $4.3 million and a gain on exchange of assets of $5.1 million which occurred in the first
six months of 2005 and did not recur in the first six months of 2006. These items were partially offset by a decrease in cash related to changes in operating assets and liabilities of $10.6 million when comparing the 2005 period to the 2006 period.
This decrease in cash related to a decrease in operating assets and liabilities, net, of $3.3 million in the first six months of 2006 compared to an increase of $7.3 million for the same period in 2005. The decrease related to changes in operating
assets and liabilities in 2006 primarily consisted of an increase of $33.0 million in growth of receivables, an increase of $8.4 million in prepaids and other current assets and a decrease of $8.5 million in unearned income partially offset by an
increase of $23.4 million in accrued income taxes and an increase of $19.9 million related to accounts payable and other accrued expenses. 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. Such activity varies by individual client and contract.

In the first six months of 2006, we used $194.6 million in cash related to investing activities. We used cash to purchase available-for-sale investments of $369.1 million, to make capital expenditures of $65.8
million, purchase a note receivable for $7.5 million and to purchase investments of $0.5 million. These amounts were partially offset by maturities and sales of available-for-sale investments of $246.9 million and proceeds from the sale of an
investment of $1.5 million. We expect our capital expenditures for the remainder of 2006 to be approximately $100 million to $105 million. This projection includes updated construction cost estimates for the remainder of this year of approximately
$60 million for the new corporate headquarters building and the related parking facility. The majority of the remaining forecasted capital expenditures are related to up-fit costs for facilities, information technology related expenditures and
additional laboratory equipment.

In the first six months of 2006, our financing activities provided $26.1 million in cash. We received
$22.1 million in borrowings under our new construction loan, $13.5 million in proceeds 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. These amounts were partially offset by repayments of $6.0 million on long-term debt, dividend payments of $5.8 million and repayments of capital lease obligations of $0.8 million.



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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, 2005 to June 30, 2006.



|                                                                   |  |                  |         |              |   |             |  |   |         |  
|------------------------------------------------------------------ |  | ---------------- | ------- | ------------ | - | ----------- |  | - | ------- | -
|(in thousands)                                                     |  | December 31,2005 |         | June 30,2006 |   | $ Inc (Dec) | 
|Current assets:                                                    |  |                  |         |              |   |             |  |   |         |  
|Cash and cash equivalents                                          |  | $                | 182,000 |              | $ | 120,886     |  | $ | (61,114 | )
|Short-term investments                                             |  |                  | 137,820 |              |   | 259,339     |  |   | 121,519 |  
|Accounts receivable and unbilled services, net                     |  |                  | 303,386 |              |   | 341,223     |  |   | 37,837  |  
|Income tax receivable                                              |  |                  | 14      |              |   | 31          |  |   | 17      |  
|Investigator advances                                              |  |                  | 13,578  |              |   | 9,871       |  |   | (3,707  | )
|Prepaid expenses and other current assets                          |  |                  | 34,651  |              |   | 51,361      |  |   | 16,710  |  
|Deferred tax assets                                                |  |                  | 11,435  |              |   | 12,133      |  |   | 698     |  
|                                                                   |  |                  |         |              |   |             |  |   |         |  
|Total current assets                                               |  | $                | 682,884 |              | $ | 794,844     |  | $ | 111,960 |  
|                                                                   |  |                  |        
|Current liabilities:                                               |  |                  |         |              |   |             |  |   |         |  
|Accounts payable                                                   |  | $                | 10,363  |              | $ | 16,909      |  | $ | 6,546   |  
|Payables to investigators                                          |  |                  | 43,126  |              |   | 38,814      |  |   | (4,312  | )
|Accrued income taxes                                               |  |                  | 18,099  |              |   | 40,060      |  |   | 21,961  |  
|Other accrued expenses                                             |  |                  | 119,304 |              |   | 143,658     |  |   | 24,354  |  
|Deferred tax liabilities                                           |  |                  | 85      |              |   | 89          |  |   | 4       |  
|Unearned income                                                    |  |                  | 162,662 |              |   | 157,114     |  |   | (5,548  | )
|Current maturities of long-term debt and capital lease obligations |  |                  | 1,607   |              |   | 725         |  |   | (882    | )
|                                                                   |  |                  |         |              |   |             |  |   |         |  
|Total current liabilities                                          |  | $                | 355,246 |              | $ | 397,369     |  | $ | 42,123  |  
|                                                                   |  |                  |        
|Working capital                                                    |  | $                | 327,638 |              | $ | 397,475     |  | $ | 69,837  |  

Working capital as of June 30, 2006 was $397.5 million, compared to $327.6 million at
December 31, 2005. The increase in working capital was due primarily to the increases in short-term investments, accounts receivable and unbilled services, and prepaid expenses and other current assets. These increases were partially offset by
a decrease in cash and cash equivalents, an increase in accrued income taxes due to higher pretax income and an increase in other accrued expenses. The number of days revenue outstanding in accounts receivable and unbilled services, net of
unearned income, also known as DSO, was 33.0 and 40.4 days as of June 30, 2005 and 2006, respectively. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable
period. Over the past three years, our year-to-date DSO has fluctuated between 32.2 days and 42.2 days. 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.

In July 2006, we renewed our $50.0 million
revolving credit facility with Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. This revolving credit facility
does not expressly restrict or limit the payment of dividends, and we do not expect any of the covenants to affect our ability to pay dividends under our cash dividend policy for the foreseeable future. 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 0.60%. Borrowings under this credit facility are available to provide working capital and for general corporate purposes. As of
June 30, 2006, no amounts were outstanding under this credit facility and we were in compliance with the covenants in the loan agreement. The aggregate amount we are able to borrow has been reduced by $1.25 million due to outstanding letters of
credit issued under this facility. This credit facility is currently scheduled to expire in June 2007, at which time any outstanding balance will be due.

In February 2006, we entered into an $80.0 million construction loan facility with Bank of America, N.A. This new construction loan facility is in addition to the $50.0 million revolving credit facility discussed
above. Indebtedness under the construction loan facility is unsecured and is subject to the same covenants as the revolving credit facility and additional covenants commonly used in construction loan agreements. In addition, we must maintain at
least $50.0 million in cash, cash equivalents and short-term investments while the loan is outstanding. Borrowings under this credit



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facility are available to finance the construction of our new corporate headquarters building and related parking
facility in Wilmington, North Carolina and will bear interest at an annual fluctuating rate equal to the one-month LIBOR plus a margin of 0.60%. Interest on amounts borrowed under this construction loan facility is payable quarterly. This credit
facility has a term of two years and will mature in February 2008, at which time the entire principal balance and all accrued and unpaid interest will be due. As of June 30, 2006, we had borrowed approximately $39.2 million under this facility.

On October 3, 2005, our Board of Directors adopted a cash dividend policy under which we intend to pay an aggregate annual cash
dividend of $0.10 on each outstanding share of common stock, payable quarterly at the rate of $0.025 per share, as adjusted to give effect to our February 2006 two-for-one stock split. We paid the first quarterly cash dividend under our dividend
policy in the fourth quarter of 2005. In each of the first and second quarters of 2006, we paid a dividend of $0.025 per share. The cash dividend policy and the payment of future quarterly cash dividends under that policy are not guaranteed and are
subject to the 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.

In April 2006, we entered into an agreement with Chemokine Therapeutics Corp. under which we agreed to sell our 2.0 million shares of Chemokine
preferred stock either to Chemokine or to a third-party buyer prior to May 27, 2006. In addition, we agreed to surrender our license rights to Chemokines compound CTCE-0214 in exchange for $0.1 million and potential milestone payments up
to $2.5 million. As contemplated by the agreement, in May 2006, we sold our 2.0 million shares in Chemokine stock for total consideration of $1.5 million and recorded a gain on sale of our investment of $0.8 million.

In September 2005, we became a limited partner in Bay City Capital Fund IV, L.P., a venture capital fund formed to invest in life sciences companies. We
have committed to invest up to a maximum of $10.0 million in the Bay City Fund IV. Capital calls during the first six months of 2006 totaled $0.8 million, of which we accrued $0.5 million, which was subsequently paid in July 2006. Capital calls
through June 30, 2006 totaled $2.7 million. Because no capital call can exceed 20% of our aggregate capital commitment, we anticipate that our remaining capital commitment of $7.3 million will be invested through a series of capital calls over
the next several years. Our capital commitment will expire in June 2009.

In November 2003, we became a limited partner in A. M. Pappas
Life Science Ventures III, L.P., a venture capital fund formed to invest in life sciences, healthcare and technology industries. We have committed to invest up to a maximum of $4.75 million in this fund. The first capital call was made in January
2005. Capital calls through June 30, 2006 totaled $0.9 million. Because no capital call can exceed 10% of our aggregate capital commitment, we anticipate that our remaining capital commitment of $3.85 million will be invested through a series
of capital calls over the next several years. Our capital commitment will expire in May 2009.

In March 2005, we entered into a lease for
additional space in Austin, Texas for our Phase II through IV operations. The additional space is adjacent to our new Phase I clinic. To induce us to enter into the lease for additional space, the landlord agreed to deposit $5.5 million in an escrow
account to be used to reimburse us for the rent and other expenses paid by us under the lease for our existing facilities after July 1, 2005 and the costs and expense to sublease those facilities. We accounted for the amount to be received from
the escrow account as a lease incentive that would be recognized in income over the life of the ten-year term of the lease. In April 2006, we agreed to settle a dispute with the landlord relating to this escrow account. Under the terms of the
settlement, we received $4.3 million in full and final settlement of all claims.

In February 2005, we acquired substantially all of
SurroMeds assets related to its biomarker business. As part of this acquisition, we agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan with a maturity date of December 31, 2006. In February 2006, this amount
was reduced to $0.8 million and SurroMed pledged a $0.5 million certificate of deposit to secure payment of the bank loan. In accordance with the requirements of FASB Statement No. 5, Accounting for Contingencies, as clarified by
FASB Interpretation No. 45, we have recorded a liability in the amount of $0.03 million for the estimated fair value of the net obligation assumed under this guarantee.

In January 2005, we acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which we are constructing a new
headquarters building. The new facility will be approximately 400,000 square feet and is expected to be completed in late 2006 or early 2007. At that time, we will begin consolidating our Wilmington operations into the new building. The total cost
for the construction and up-fit of the new building is expected to be approximately $100.0 million. In addition, we are constructing a parking facility on an adjacent tract of



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land that will serve this new building and will cost approximately $18.0 million. The purchase price of the land for the
new building was approximately $2.8 million. In connection with the sale of the 7.5-acre tract, the seller, Almont Shipping Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America, N.A. This
loan was secured by a lien on substantially all of Almonts assets, including an approximately 30-acre tract of land adjacent to our tract. This loan was also secured by a guarantee from us. In March 2006, the loan matured and Almont filed a
petition for relief under Chapter 11 of the United States Bankruptcy Code. In early April 2006, Bank of America demanded payment of the loan under our guarantee. We subsequently purchased the secured note and all related loan documents for
approximately $7.5 million. The note bears interest at a fluctuating rate equal to the one-month LIBOR plus a margin of 1.50% and is secured by a first lien deed of trust on the 30-acre tract of land. The land is currently under a contract for sale
that has been approved by the Bankruptcy Court for a purchase price in excess of the loan amount.

As of June 30, 2006, we had
liabilities of $7.9 million for certain unsettled matters in connection with tax positions taken on our tax returns, including interpretations of applicable income tax laws and regulations. We establish a reserve when, despite managements
belief that our tax returns reflect the proper treatment of all matters, the treatment of certain tax matters is likely to be challenged. Significant judgment is required to evaluate and adjust the reserves in light of changing facts and
circumstances. Further, a number of years may lapse before a particular matter for which we have established a reserve is audited and finally resolved. While it is difficult to predict the final outcome or the timing of resolution of any particular
tax matter, management believes that the reserves of $7.9 million reflect the probable outcome of known tax contingencies. We believe it is unlikely that the resolution of these matters will have a material adverse effect on our financial position
or results of operations, as presented.

In August 2005, we amended our September 2004 royalty stream purchase agreement with Accentia.
Under the terms of the amended agreement, we agreed to provide specified clinical development services to Accentia in connection with two pivotal Phase III trials for SinuNase® for the treatment of chronic sinusitis. In exchange for providing
these services, Accentia agreed to pay us a royalty equal to 14% of the net sales of specified SinuNase products if approved for sale by the FDA. Our obligation to provide clinical development services expired on December 31, 2005. In April
2006, the FDA granted SinuNase fast-track status. Accentia is planning to start the Phase III trials for SinuNase in 2006 and we are in discussions with Accentia regarding a further amendment to this agreement.

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. Including the collaboration with Accentia discussed above, we currently have four such arrangements that involve the potential future receipt of one or more of the following: 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. One of these arrangements requires us to pay a royalty
of 5% on annual net sales of the compound in excess of $800 million. The compounds that are the subject of these collaborations are still in development and have not been approved for sale in any country. Thus, the receipt of any further milestone
payments, royalties or other payments is uncertain. During the first quarter of 2006, we earned a $15.0 million milestone payment under our DPP4 collaboration with Takeda.

Under most of our agreements for Development services, we 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. Additionally, in October 2005, our Board of Directors adopted a policy to pay a quarterly cash dividend
on each outstanding share of common stock. We expect to fund these activities from existing cash, cash flow 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 and dividends for the foreseeable future. From time to time, we evaluate potential acquisitions, investments and other growth 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 could be affected
by our dependence on a small number of industries and clients, compliance with regulations, international risks, personal injury claims, environmental or intellectual property claims, as well as other factors described below under Critical
Accounting Policies and Estimates, Potential Volatility of Quarterly Operating



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Results and Stock Price and Quantitative and Qualitative Disclosures about Market Risk. In addition,
see Risk Factors, Contractual Obligations and Commercial Commitments and Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2005.

Critical Accounting Policies and Estimates

Prior to
January 1, 2006, we accounted for our stock-based compensation plan in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25,
and provided the required proforma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, because all stock options granted had an exercise price equal to the market value of the underlying common stock
on the date of the grant, no expense related to employee stock options was recognized. Also, as the employee stock purchase plan was considered noncompensatory, no expense related to this plan was recognized. However, expense related to the grant of
restricted stock was recognized in the income statement under APB No. 25.

Effective January 1, 2006, we adopted SFAS
No. 123 (revised) using the modified retrospective application method. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employees requisite
service period. In accordance with the modified retrospective application method, financial statements for all periods prior to January 1, 2006 have been adjusted to give effect to the fair-value based method of accounting for all awards
granted in fiscal years beginning after December 15, 1994. Amounts previously disclosed as proforma adjustments have been reflected in earnings for all prior periods. The details of the impact of the retrospective application of SFAS
No. 123 (revised) on previously reported amounts in our Consolidated Condensed Statement of Operations as of June 30, 2005 and our Consolidated Balance Sheet as of December 31, 2005 are shown in Note 9 to the Notes to Consolidated
Condensed Financial Statements.

As of June 30, 2006, the total unrecognized compensation costs related to non-vested stock options
was approximately $36.5 million. This cost is expected to be recognized over a weighted-average period of 2.4 years in accordance with the vesting periods of the options. As of June 30, 2006, the total unrecognized compensation cost related to
non-vested restricted stock was approximately $2.8 million. This cost is expected to be recognized over a weighted-average period of 2.15 years in accordance with the vesting periods of the restricted stock. Our employee stock purchase plan has two
six-month offering periods (each an Offering Period) each year, beginning January 1 and July 1, respectively. As of June 30, 2006, there was no unrecognized compensation cost related to employee stock purchase plan shares.

The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. Expected volatilities are
based on historical volatility of our stock price over a period equal to the expected term of the options. Management believes this is the best estimate of the future results. See Note 9 of our Notes to Consolidated Condensed Financial Statements
for details regarding the other assumptions used in estimating fair value for the quarters ended June 30, 2005 and 2006 regarding our equity compensation plan and our employee stock purchase plan.

There were no other material changes to our critical accounting policies and estimates in the first six months of 2006. For detailed information on our
other critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2005.



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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 to the Notes to Consolidated Condensed Financial Statements are:



|              |  |                                                                                                                                                                               |  |                                                                
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------
|Date          |  | Title                                                                                                                                                                         |  | Effective Date                                                 
|December 2004 |  | SFAS No. 123 (revised 2004), Share-Based Payment                                                                                                                            |  | First fiscal year that begins after June 15, 2005              
|              |  |                                                                                                                                                                              
|March 2005    |  | Interpretation No. 47, Accounting for Conditional Asset Retirement Obligation                                                                                               |  | End of fiscal years ending after December 15, 2005             
|              |  |                                                                                                                                                                              
|May 2005      |  | SFAS No. 154, Accounting Changes and Error Corrections                                                                                                                      |  | Fiscal years beginning after December 15, 2005                 
|              |  |                                                                                                                                                                              
|June 2005     |  | EITF 05-6, Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination                             |  | Reporting periods beginning after June 29, 2005                
|              |  |                                                                                                                                                                              
|October 2005  |  | Staff Position No. 13-1, Accounting for Rental Costs Incurred During a Construction Period                                                                                  |  | First reporting period beginning after December 15, 2005       
|              |  |                                                                                                                                                                              
|November 2005 |  | Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments                                      |  | Reporting periods beginning after December 15, 2005            
|              |  |                                                                                                                                                                              
|June 2006     |  | EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation) |  | Reporting periods beginning after December 15, 2006            
|              |  |                                                                                                                                                                              
|June 2006     |  | Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)                                                          |  | First day of the reporting period beginning after June 15, 2006
|              |  |                                                                                                                                                                              
|July 2006     |  | Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109                                                             |  | Fiscal years beginning after December 15, 2006                 

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.

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.



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Potential Liability and Insurance

Drug development services involve the testing of new drugs on human volunteers pursuant to a study protocol. This testing exposes us to the risk of liability for personal injury or death to patients resulting from,
among other things, possible unforeseen adverse side effects or improper administration of the new drug. Many of these patients are already seriously ill and are at risk of further illness or death. We attempt to manage our risk of liability for
personal injury or death to patients from administration of products under study through measures such as 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 adopted global standard operating procedures intended to satisfy regulatory requirements in the United States and in many foreign countries 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 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:



| |  |  | management of growth;
| | - |  | ---------------------



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



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



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



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



| |  |  | 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;
| | - |  | ------------------------------------------------



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



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



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



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



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



| |  |  | impairment of investments or intangible assets; 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 customers 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 other factors could affect the market price of our common stock. These factors include ones beyond our control, such as changes in 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, 2005.



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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 30.3% and 32.1% of our net revenues for the three months ended June 30, 2005 and 2006, respectively, from operations outside the United States. We generally reinvest funds
generated by each subsidiary in the country where they are earned, although in 2005, we repatriated $48.0 million of undistributed earnings in the form of dividends from our foreign affiliates under the American Jobs Creation Act of 2004. Our
operations in the United Kingdom generated more than 39.3% of our net revenue from international operations during the three months ended June 30, 2006. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in
the pound sterling.

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 pounds sterling, U.S. dollars 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 would increase net revenue from contracts denominated in these currencies, a negative impact on income from operations results from dollar-denominated contracts for services
rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when
translated into U.S. dollars. In January 2004, we began engaging in hedging activities in an effort to manage our potential foreign exchange exposure. Our last economic hedge deal expired June 30, 2006.

We also have currency risk resulting from the passage of time between the invoicing of customers under contracts and the collection of customer 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 customer 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 were to change by 10%, the result to foreign currency transaction gain
or loss would have been $3.0 million as of June 30, 2006.

Our strategy for managing foreign currency risk relies primarily on
receiving payment in the same currency used to pay expenses and from time to time using foreign currency derivatives, such as forward exchange contracts. As of June 30, 2006, we had open foreign exchange derivative contracts with a face amount
totaling $15.5 million to buy the local currencies of our foreign subsidiaries. The estimated fair value of our foreign currency derivative portfolio resulted in us recording an $11,000 gain as a component of prepaid expenses and other current
assets and a $25,000 loss as a component of other accrued expenses. If the U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in the second quarter of 2006, net income would have been reduced by $2.2
million for the quarter. Our foreign currency hedging activities could have partially offset these potential losses.

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;
| | - |  | --------------------------------------------------------------------------------



| |  |  | 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. Translation adjustments are reported with accumulated other comprehensive income (loss) as a separate component of shareholders equity. 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 or from within any country in which we conduct operations. Although we perform
services for clients located in a number of foreign jurisdictions, we have not experienced any difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on
our financial condition.



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We are exposed to changes in interest rates on our cash equivalents and amounts outstanding under notes
payable and lines of credit. We invest our cash and cash equivalents in financial instruments with interest rates based on financial market conditions. We do not expect that a 10% change in interest rates in the future would have a material effect
on our financial statements since we currently have minimal debt and a large outstanding cash balance.

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 are effective to provide the reasonable assurance discussed above.

Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting during the second quarter of 2006 that materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.



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##### Table of Contents

Part II. OTHER INFORMATION

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

The 2006 Annual Meeting of Shareholders of
the Company was held on May 17, 2006. At the Annual Meeting, the following two proposals were voted upon:

1) The following directors were elected to
office for the ensuing year and were approved by the following votes:



|                     |  |             |  |           
|-------------------- |  | ----------- |  | ----------
|                     |  | For         |  | Against*  
|Stuart Bondurant     |  | 101,723,094 |  | 8,915,965 
|                     |  |            
|Fredric N. Eshelman  |  | 110,198,634 |  | 440,425   
|                     |  |            
|Marye Anne Fox       |  | 110,044,447 |  | 594,612   
|                     |  |            
|Frederick Frank      |  | 82,324,476  |  | 28,314,583
|                     |  |            
|David L. Grange      |  | 110,171,339 |  | 467,720   
|                     |  |            
|Catherine M. Klema   |  | 110,183,992 |  | 455,067   
|                     |  |            
|Terry Magnuson       |  | 110,191,107 |  | 447,952   
|                     |  |            
|Ernest Mario         |  | 102,032,787 |  | 8,606,272 
|                     |  |            
|John A. McNeill, Jr. |  | 98,055,088  |  | 12,583,971

2) An amendment to the Employee Stock Purchase Plan increasing the number of shares of the common stock reserved
for issuance under the plan from 2,500,000 to 4,500,000.



|           |  |         
|---------- |  | --------
|For        |  | Against*
|99,940,995 |  | 625,534 

---

|* | Includes abstentions.
|- | ---------------------

Item 6. Exhibits



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



|       |  |                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|10.241 |  | Fourth Amendment dated July 1, 2006 to Loan Agreement, between Pharmaceutical Product Development, Inc. and Bank of America, N.A                
|       | 
|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

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has
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/ Linda BaddourChief Financial Officer(Principal Financial and Accounting Officer)


Date: August 3, 2006



44