<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C. 20549


                                   FORM 10-Q

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
     EXCHANGE ACT OF 1934.
     For the quarterly period ended March 31, 2001.

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.
     For the transition period from ______________ to ______________.

                        Commission File Number 0-27570


                            PHARMACEUTICAL PRODUCT
                               DEVELOPMENT, INC.
            (Exact name of registrant as specified in its charter)


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


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 25,794,015 shares of common
stock, par value $0.10 per share, as of April 27, 2001. This does not include
the one for one stock dividend, which has a distribution date of May 11, 2001.

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<PAGE>

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                    <C>
Part I.  FINANCIAL INFORMATION
Item 1. Financial Statements
  Consolidated Condensed Statements of Operations for the Three Months Ended
       March 31, 2000 and 2001......................................................................     3
  Consolidated Condensed Balance Sheets as of December 31, 2000
       and March 31, 2001...........................................................................     4
  Consolidated Condensed Statements of Cash Flows for the Three Months Ended
       March 31, 2000 and 2001......................................................................     5
  Notes to Consolidated Condensed Financial Statements..............................................     6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......     8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................    12

Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................    14
Signature...........................................................................................    15
</TABLE>

                                       2
<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                  (unaudited)
                   (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                         March 31,
                                                                             -----------------------------
                                                                                2000               2001
                                                                             ---------           ---------
<S>                                                                          <C>                 <C>
Development revenues, net of subcontractor costs of
    $26,145 and $37,099, respectively                                        $  78,365           $  93,772
Discovery sciences revenues, net of subcontractor costs of
    $6 and $111, respectively                                                    3,396              13,181
                                                                             ---------           ---------
Net revenue                                                                     81,761             106,953
                                                                             ---------           ---------
Direct costs - Development                                                      40,198              45,235
Direct costs - Discovery sciences                                                1,215               5,316
Research and development                                                           766                 759
Selling, general and administrative expenses                                    26,292              29,586
Depreciation and amortization                                                    3,998               4,811
                                                                             ---------           ---------
                                                                                72,469              85,707
                                                                             ---------           ---------
Operating income                                                                 9,292              21,246
Interest income, net                                                             1,241               1,480
Other income, net                                                                  154                 309
                                                                             ---------           ---------
Income before provision for income taxes                                        10,687              23,035
Provision for income taxes                                                       4,047               8,498
                                                                             ---------           ---------

Net income                                                                   $   6,640           $  14,537
                                                                             =========           =========

Net income per share:
    Basic                                                                    $    0.13           $    0.28
                                                                             =========           =========
    Diluted                                                                  $    0.13           $    0.28
                                                                             =========           =========

Weighted average number of common shares outstanding:
    Basic                                                                       49,496              51,266
    Dilutive effect of stock options                                               394                 812
                                                                             ---------           ---------
    Diluted                                                                     49,890              52,078
                                                                             =========           =========
</TABLE>

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

                                       3
<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                  (unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                 Assets
                                                                          December 31,           March 31,
                                                                              2000                 2001
                                                                          ------------          -----------
<S>                                                                       <C>                   <C>
Current assets
   Cash and cash equivalents                                              $     76,411          $   106,184
   Accounts receivable and unbilled services, net                              118,400              126,160
   Investigator advances                                                         4,104                4,747
   Prepaid expenses and other current assets                                    12,185               10,240
   Current maturities of notes receivable                                          500                  500
   Deferred tax asset                                                            2,133                4,452
                                                                          ------------          -----------
     Total current assets                                                      213,733              252,283

Property, plant and equipment, net                                              60,240               62,052
Goodwill, net                                                                    9,034                8,515
Notes receivable, long-term portion                                             19,000               18,500
Investments                                                                     38,755               38,755
Other assets, net                                                                4,153                2,870
                                                                          ------------          -----------
     Total assets                                                         $    344,915          $   382,975
                                                                          ============          ===========

                                  Liabilities and Shareholders' Equity
Current liabilities
   Accounts payable                                                       $      8,772          $     7,344
   Payables to investigators                                                     5,538                5,929
   Other accrued expenses                                                       38,248               33,971
   Unearned income                                                              53,385               66,088
   Accrued income taxes                                                            273                4,448
   Current maturities of long-term debt                                            614                  971
                                                                          ------------          -----------
     Total current liabilities                                                 106,830              118,751

Long-term debt, less current maturities                                          1,353                1,744
Deferred rent and other                                                          2,789                2,895
                                                                          ------------          -----------
     Total liabilities                                                         110,972              123,390
                                                                          ------------          -----------

Shareholders' equity
   Common stock                                                                  5,066                5,154
   Paid-in capital                                                             142,975              156,480
   Retained earnings                                                            91,007              105,544
   Deferred compensation                                                             -               (1,329)
   Accumulated other comprehensive loss                                         (5,105)              (6,264)
                                                                          ------------          -----------
     Total shareholders' equity                                                233,943              259,585
                                                                          ------------          -----------

     Total liabilities and shareholders' equity                           $    344,915          $   382,975
                                                                          ============          ===========
</TABLE>

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

                                       4
<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                       March 31,
                                                                          -----------------------------------
                                                                              2000                    2001
                                                                          ------------            -----------
<S>                                                                       <C>                     <C>
Cash flows from operating activities:
   Net income                                                             $      6,640            $    14,537
   Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                                              3,998                  4,811
      Change in operating assets and liabilities                                 5,629                  6,881
                                                                          ------------            -----------
         Net cash provided by operating activities                              16,267                 26,229
                                                                          ------------            -----------

Cash flows from investing activities:
      Cash received from repayment of note receivable                              500                    500
      Purchases of property and equipment                                       (4,367)                (4,279)
      Proceeds from sale of property and equipment                                  74                      9
      Net cash paid for acquisition                                             (1,500)                     -
                                                                          ------------            -----------
      Net cash used in investing activities                                     (5,293)                (3,770)
                                                                          ------------            -----------

Cash flows from financing activities:
      Repayment of long-term debt                                                  (94)                     -
      Repayment of capital leases obligation                                      (147)                  (340)
      Proceeds from exercise of stock options
        and employee stock purchase plan                                         2,201                  8,813
                                                                          ------------            -----------
         Net cash provided by financing activities                               1,960                  8,473
                                                                          ------------            -----------
Effect of exchange rate changes on cash                                           (498)                (1,159)
                                                                          ------------            -----------
Net increase in cash and cash equivalents                                       12,436                 29,773
Cash and cash equivalents, beginning of the period                              61,251                 76,411
                                                                          ------------            -----------
Cash and cash equivalents, end of the period                              $     73,687            $   106,184
                                                                          ============            ===========
</TABLE>

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

                                       5
<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                  (unaudited)

1.   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. We prepared these unaudited consolidated condensed
financial statements in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, we have included all adjustments of a normal recurring
nature necessary for a fair presentation. The accompanying consolidated
condensed financial statements might not include all of the information and foot
notes required by generally accepted accounting principles for complete
financial statements and 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, 2000. The results of operations for the
three-month period ended March 31, 2001 are not necessarily indicative of the
results to be expected for the full year or any other period. We derive the
amounts on the December 31, 2000 consolidated condensed balance sheet from the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.

     Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles 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.

     Reclassifications

     We have reclassified certain 2000 financial statement amounts to conform to
the 2001 presentation.

     Recent Accounting Pronouncements

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Investments and Hedging Activities," or SFAS
No. 133. SFAS No. 133 establishes accounting and reporting standards for
derivatives and hedging activities and supercedes several existing standards.
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect
that the adoption of SFAS No. 133 in fiscal 2001 will have a material impact on
our consolidated financial statements.


2.   PRINCIPLES OF CONSOLIDATION

     The accompanying unaudited consolidated condensed financial statements
include the accounts and operations of the Company and its wholly owned
subsidiaries. We have eliminated all significant intercompany balances and
transactions in consolidation.

3.   ACQUISITIONS

     Purchase

     In February 2000, the Company acquired the assets of the Pharmazyme
division of Immune Complex Corporation for $1,500,000 in cash. In connection
with this acquisition, the Company recorded approximately $929,000 in goodwill.
Pharmazyme develops, produces and markets drug metabolism reagent products and
services.

                                       6
<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                   (unaudited)

4.   EARNINGS PER SHARE

     We compute basic net income per share information using the weighted
average number of shares of common stock outstanding during the period. We
compute diluted net income per common share using the weighted average number of
shares of common and dilutive potential common shares outstanding during the
period.

5.   STOCK DIVIDEND

     On April 16, 2001, the Board of Directors declared a one for one stock
dividend. The record date for the dividend is April 27, 2001, and the
distribution date for the dividend is May 11, 2001. All share and per share
amounts for all periods presented in the accompanying consolidated condensed
financial statements have been restated to reflect the effect of this stock
dividend.

6.   COMPREHENSIVE INCOME

     The Company's total comprehensive income for the three-month periods ended
March 31, 2000 and 2001 was $7,069,000 and $13,378,000, respectively. The
Company's other comprehensive loss consisted of a decrease in the cumulative
translation adjustment for the three-month periods ended March 31, 2000 and 2001
of $497,000 and $1,159,000, respectively, and an unrealized gain on investment
of $926,000 for the 2000 period.

7.   ACCOUNTS RECEIVABLE AND UNBILLED SERVICES:

     Accounts receivable and unbilled services consisted of the following:

<TABLE>
<CAPTION>
                                                  December 31,      March 31,
                                                      2000            2001
                                                  ------------     -----------
                                                                   (unaudited)
     <S>                                          <C>              <C>
     Billed                                       $     81,584     $    78,966
     Unbilled                                           38,770          49,173
     Reserve for doubtful accounts                      (1,954)         (1,979)
                                                  ------------     -----------
                                                  $    118,400     $   126,160
                                                  ============     ===========
</TABLE>

                                       7
<PAGE>

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, the consolidated condensed financial
statements and accompanying notes. In this discussion, the words "PPD",
"Company", "we", "our" and "us" refer to Pharmaceutical Product Development,
Inc., together with its subsidiaries where appropriate.

FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains certain forward-looking statements within the
meaning of the federal securities laws that relate to future events or our
future financial performance. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performances,
expectations, predictions, assumptions and other statements that are other than
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 which could be inaccurate and which are subject to
risks and uncertainties. Actual events or results might differ materially.
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. We generally undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.


COMPANY OVERVIEW

     We are a leading global provider of drug discovery and development services
to pharmaceutical and biotechnology companies. Our corporate mission is to help
clients maximize the return on their research and development investments. We
offer therapeutic expertise, advanced technologies and comprehensive resources
for both drug discovery and drug development.

     We have been in the drug development business for more than 15 years. Our
development services include preclinical programs through Phase 1 to Phase 4
clinical development. In addition, we also offer post-market support services
for drugs receiving approval for market use, such as product launch services,
patient compliance programs, and medical communications programs for consumer
and healthcare providers on product use and adverse events. We have extensive
clinical trial experience across a multitude of therapeutic areas and
encompassing various geographical areas, including regional, national and global
studies.

     With more than 3,800 professionals in 47 offices in 19 countries around the
world, we have provided services to 42 of the top 50 pharmaceutical companies in
the world as ranked by 1999 healthcare research and development spending, in
addition to our work with leading biotechnology companies. We believe that we
are the world's third largest provider of drug development services to
pharmaceutical and biotechnology companies.

     Building on our outsourcing relationship with pharmaceutical and
biotechnology clients, we established our discovery services group in 1997. This
group focuses on functional genomics, which is the study of gene functions to
identify drug targets within the body, as well as biological chemistry research
and preclinical biology services.

     In addition, we developed an innovative risk-sharing research and
development partnership model to help pharmaceutical and biotechnology clients
develop compounds. Through these partnerships, we help our clients research and
evaluate the development potential for early stage compounds, when their
investment is significantly less than the amount at risk at later development
phases.

     We believe that our integrated drug discovery and development services
offer our clients a way to identify and develop successful drugs more quickly
and cost effectively. We also use our proprietary informatics technology to
support our drug discovery and development services. In addition, because we are
positioned globally, we are able to accommodate the multinational drug discovery
and development needs of our customers. As

                                       8
<PAGE>

a result of having these core areas of expertise in discovery and development,
we can provide integrated services across the entire drug development spectrum,
from discovery to market and beyond. For more detailed information on our
company, see our Annual Report on Form 10-K for the year ended December 31,
2000.

RESULTS OF OPERATIONS

     We record revenues from fixed-price contracts on a percentage-of-completion
basis in our Development Group. We recognize revenues from time-and-material
contracts as hours are accumulated, multiplied by the billable rates for each
contract in both our Development Group and Discovery Sciences Group. We record
revenues net of reimbursement received from clients for pass-through expenses,
which generally include subcontractor costs that consist of investigator fees,
travel and other contract costs.

     Discovery Sciences Group revenues also include revenue from sales of
technology license fees. Nonrefundable license fees received at the initiation
of license agreements for which we have an ongoing research and development
commitment are deferred and recognized ratably over the period of the related
research and development. Nonrefundable license fees received from license
agreements for which we are not obligated to perform future research and
development services are recognized upon delivery of the technology.

     We record our recurring operating expenses among three categories:

     .    direct costs;
     .    selling, general and administrative; and
     .    depreciation and amortization.

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

     Selling, general and administrative expenses consist primarily of
administrative payroll and related benefit charges, advertising and promotional
expenses, recruiting and relocation expenses, administrative travel, and an
allocation of facility and information technology costs. Included in
administrative payroll are costs associated with operational employees managing
direct staff, underutilization of direct staff, and administrative support
functions.

     Depreciation and amortization expenses consist of depreciation costs
recorded on a straight-line method on property and equipment with an estimated
useful life over one year. In addition, the excess of the purchase price of a
business acquired over the fair value of net tangible assets and identifiable
intangibles and acquired in-process research and development costs at the date
of the acquisitions has been assigned to goodwill. Goodwill is being amortized
over periods of 10 to 25 years.

Three Months Ended March 31, 2001 Versus Three Months Ended March 31, 2000

     On April 16, 2001, the Board of Directors declared a one for one stock
dividend. The record date for the dividend is April 27, 2001, and the
distribution date for the dividend is May 11, 2001. All share and per share
amounts for all periods presented have been restated to reflect the effect of
this stock dividend.

     Net revenue increased $25.2 million, or 30.8%, to $107.0 million in 2001
from $81.8 million in 2000. The Development Group's operations accounted for
87.7% of net revenue for the first quarter of 2001. The Development Group
generated net revenue of $93.8 million, an increase of $15.4 million, or 19.7%,
from the 2000 first quarter. The growth in the Development Group operations was
primarily attributable to an increase in the size, scope and number of contracts
in the global contract research organization, or CRO, Phase 2 through 4
division, as well as the increase in the number of contracts in the North
America Phase 1 and laboratory services.

     The Discovery Sciences Group generated net revenue of $13.2 million in the
first quarter of 2001, an increase of $9.8 million, or 288.1%, from the first
quarter of 2000. The growth in the Discovery Sciences operations was
attributable to revenue generated by the sublicensing of the compound dapoxetine
to Alza Corporation.

                                       9
<PAGE>

     Total direct costs increased 22.1% to $50.6 million in the first quarter of
2001 from $41.4 million in the first quarter of 2000 and decreased as a
percentage of net revenue to 47.3% for 2001 as compared to 50.7% in 2000.
Development direct costs increased to $45.2 million in the first quarter of 2001
as compared to $40.2 million in the first quarter of 2000. The increased direct
cost dollars resulted primarily from increased personnel costs due to the
increase in the size and number of contracts in the global CRO Phase 2 through 4
division. The Development Group direct costs decreased as a percentage of
related net revenue to 48.2% in the first quarter of 2001 from 51.3% in the
first quarter of 2000. This decrease is principally due to the mix of levels of
personnel involved in the contracts performed and the mix of contracts being
performed during each quarter. Discovery Sciences direct costs increased to $5.3
million in the first quarter of 2001 as compared to $1.2 million in the first
quarter of 2000. This increase was primarily due to the costs associated with
sublicensing dapoxetine to Alza Corporation and the increase in the functional
genomics division's direct costs.

     Research and development, or R&D, expenses remained relatively consistent
at $0.8 million for the first quarter of both 2001 and 2000.

     Selling, general and administrative, or SG&A, expenses increased 12.5% to
$29.6 million in the first quarter of 2001 from $26.3 million in the first
quarter of 2000. The increase was primarily attributable to an investment in
additional administrative personnel and an increase in facility and information
technology costs to support expanding operations. As a percentage of net
revenue, SG&A expenses decreased to 27.7% in 2001 from 32.2% in the first
quarter of 2000. This decrease is primarily attributable to the increase in
revenue associated with sublicensing dapoxetine and to a smaller extent, the
increased efficiencies as our operations expand.

     Total depreciation and amortization expense increased $0.8 million, or
20.3%, to $4.8 million in the first quarter of 2001 from $4.0 million in the
first quarter of 2000. The increase was related to the depreciation of the
increased investment in property and equipment due primarily to our growth.
Capital expenditures were $4.3 million in the first quarter of 2001. Additional
scientific equipment in our laboratories accounted for approximately 53.4% of
this capital investment. Enhancement and expansion of information technology
capacities accounted for approximately 28.2% of this capital investment.

     Operating income increased $11.9 million to $21.2 million in the first
quarter of 2001, as compared to $9.3 million in the first quarter of 2000. As a
percentage of net revenue, operating income of 19.9% in the 2001 period
represents an improvement from 11.4% of net revenue in 2000 period. These
increases were primarily due to the increase in revenue associated with the
sublicensing of dapoxetine and our focus on controlling the increase in both
direct and administrative costs as revenues increased.

     Net interest and other income increased $0.4 million, or 28.2%, to $1.8
million for the first quarter of 2001 from $1.4 million in the first quarter of
2000. The increase was primarily the result of the increase in interest income
of $0.3 million due to larger average cash balances in 2001.

     Our provision for income taxes increased $4.5 million, or 110.0%, to $8.5
million in the first quarter of 2001, as compared to $4.0 million in the first
quarter of 2000. Our effective income tax rate decreased to 36.9% in the first
quarter of 2001 from 37.9% in the first quarter of 2000, primarily due to the
geographic distribution of our pretax earnings among locations with varying tax
rates.

     Net income of $14.5 million in the first quarter of 2001 represents an
increase of $7.9 million over $6.6 million in the first quarter of 2000. Net
income per diluted share of $0.28 for the first quarter of 2000 compares to
$0.13 in the first quarter of 2000.


Liquidity and Capital Resources

     As of March 31, 2001, we had $106.2 million of cash and cash equivalents on
hand. We have historically funded our operations and growth, including
acquisitions, with cash flow from operations, borrowings and sales of our stock.
We are exposed to changes in interest rates on cash equivalents, short-term
investments, and amounts outstanding under notes payable and lines of credit.
Our cash and cash equivalents and short-term investments are invested in
financial instruments with interest rates based on financial market conditions.

                                       10
<PAGE>

     For the three months ended March 31, 2001, our operating activities
provided $26.2 million in cash as compared to $16.3 million for the same period
last year. The increase in cash flow from operations is primarily due to an
increase in our net revenues and an increase in operating margins as a
percentage of net revenues. For the 2001 period, net income of $14.5 million,
depreciation and amortization of $4.8 million and the net increase of $6.9
million in assets and liabilities resulted in this increase in cash flow from
operating activities.

     For the three months ended March 31, 2001, our investing activities used
$3.8 million in cash. Capital expenditures of $4.3 million were partially offset
by $0.5 million received from the repayment of a note receivable.

     For the three months ended March 31, 2001, our financing activities
provided $8.5 million in cash, as net proceeds from stock option exercises of
$8.8 million were partially offset by $0.3 million in repayments of capital
lease obligations.

     Working capital as of March 31, 2001 was $133.5 million, compared to $106.9
million at December 31, 2000. The increase in working capital was due primarily
to the increase in cash and cash equivalents of $29.8 million in 2001. The
number of days revenue outstanding in accounts receivable and unbilled services,
net of unearned income, also known as DSO, were 37.1 and 48.7 days as of March
31, 2001 and March 31, 2000, respectively. This decrease is a result of a
focused effort by management on improving the accounts receivable collection
process along with certain improved temporary terms regarding investigator fee
down payments.

     In June 2000, we renegotiated a revolving credit facility for $50.0 million
from First Union National Bank. Indebtedness under the line is unsecured and
subject to traditional covenants relating to financial ratios and tangible net
worth. The unused portion of the loan is available to provide working capital
and for general corporate purposes. As of March 31, 2001, there was no amount
outstanding under this credit facility. This credit facility expires in June
2001, at which time any outstanding balance is due.

     In August 2000, we renegotiated a credit facility for $50.0 million from
Wachovia Bank, N.A. Indebtedness under the line is unsecured and subject to
traditional covenants relating to financial ratios and tangible net worth. As of
March 31, 2001, there was no amount outstanding under this credit facility. This
credit facility expires in August 2001, at which time any outstanding balance is
due.

     We expect to continue expanding our operations through internal growth and
strategic acquisitions. We expect these activities will be funded from existing
cash, cash flow from operations and borrowings under our credit facilities. We
believe that these sources of liquidity will be sufficient to fund our
operations for the foreseeable future. From time to time, we evaluate potential
acquisitions and other growth opportunities, which might require additional
external financing, and we might seek funds from public or private issuances of
equity or debt securities.

Recently Issued Accounting Standards

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Investments and Hedging Activities," or SFAS
No. 133. SFAS No. 133 establishes accounting and reporting standards for
derivatives and hedging activities and supercedes several existing standards.
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect
that the adoption of SFAS No. 133 in fiscal 2001 will have a material impact on
our consolidated financial statements.


Income Taxes

     Since 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 further
impacted by changes in the tax rates of the various taxing jurisdictions. In
particular, as the geographic mix of our pre-tax earnings among various tax
jurisdictions changes, our effective tax rate might vary from period to period.

Inflation

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     While most of PPD's net revenues are earned under contract, the 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. As a result, PPD believes that the effects of
inflation generally do not have a material adverse effect on its operations or
financial condition.

Potential Volatility of Quarterly Operating Results and Stock Price

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

     .    our dependence on a small number of industries and clients;
     .    the timing of the initiation, progress or cancellation of significant
          projects;
     .    the mix of products and services sold in a particular period;
     .    our need to recruit and retain experienced personnel;
     .    rapid technological change and the timing and amount of start-up costs
          incurred in connection with the introduction of new products and
          services;
     .    intellectual property risks;
     .    the timing of our Discovery Sciences Group milestone payments or other
          revenue;
     .    the timing of the opening of new offices;
     .    the timing of other internal expansion costs;
     .    the timing and amount of costs associated with integrating
          acquisitions; and
     .    exchange rate fluctuations between periods.

     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. 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 or other factors beyond our control could
affect the market price of our common stock. Such factors include changes in
earnings estimates by analysts, market conditions in our industry, changes in
the pharmaceutical or biotechnology industries, and general economic conditions.
Any effect on our common stock could be unrelated to our longer-term operating
performance.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     We are exposed to foreign currency risk by virtue of our international
operations. We conduct business in several foreign countries. Approximately 13%
and 12% of our net revenues for the three-month periods ended March 31, 2000 and
2001, respectively, were derived from operations outside the United States.
Funds generated by each subsidiary are generally reinvested in the country where
they are earned. The operations in the United Kingdom generated more than 48% of
our net revenue from foreign operations during the first quarter of 2001.
Accordingly, we have some exposure to adverse movements in the pound sterling
and other foreign currencies. The United Kingdom has traditionally had a
relatively stable currency compared to our functional currency, the U.S. dollar.
We anticipate that those conditions will persist for at least the next 12
months.

     The vast majority of our contracts are entered into by our United States or
United Kingdom subsidiaries. The contracts entered into by the United States
subsidiaries are almost always denominated in United States dollars. Contracts
between our United Kingdom subsidiaries are generally denominated in pounds
sterling, United States dollar or Euros. In most transactions involving multiple
currencies, contractual provisions either limit or reduce the translation risk.

     We do have some currency risk resulting from the passage of time between
the invoicing of customers under contracts and the ultimate collection of
customer payments against such 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 and payment from the customer is received will result in our receiving
either more or less in

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local currency than the local currency equivalent of the invoice amount at the
time the invoice was prepared and the receivable established. We recognize this
difference as a foreign currency translation gain or loss, as applicable, and
report it in other expense (income).

     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 each foreign subsidiary's financial results are
translated to U.S. dollars is as follows:

     .    income statement accounts are translated at average exchange rates for
          the period;
     .    balance sheet assets and liability accounts are translated at end of
          period exchange rates; and
     .    equity accounts are translated at historical exchange rates.

     Translation of the balance sheet in this manner affects the shareholders'
equity account, referred to as 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. Adjustments might be material in the future to
our financial statements.

     There are no material exchange controls currently in effect in any
country in which we conduct operations on the payment of dividends or otherwise
restricting the transfer of funds outside these countries. Although we perform
services for clients located in a number of foreign jurisdictions, to date, we
have not experienced any difficulties in receiving funds remitted from foreign
countries. However, if any of these jurisdictions imposed or modified existing
exchange control restrictions, the restrictions could have an adverse effect on
our financial condition.

     We are exposed to changes in interest rates on our cash equivalents,
short-term investments and amounts outstanding under notes payable and lines of
credit. We invest our cash and cash equivalents and short-term investments in
financial instruments with interest rates based on financial market conditions.

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Part II.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         None

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended March 31,
         2001.

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     SIGNATURE


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                    PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
                                 -----------------------------------------------
                                                 (Registrant)



                              By               /s/ Philippe Maitre
                                 -----------------------------------------------
                                             Chief Financial Officer
                                          (Principal Financial Officer)


Date:  May 3, 2001

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