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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended June 30, 2009.

OR



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

For the transition period from              to
            .

Commission File Number 0-27570





PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant
as specified in its charter)







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

929 North Front Street

Wilmington, North Carolina

(Address of principal executive
offices)

28401

(Zip Code)

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





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

Indicate by check mark whether the registrant has
submitted electronically and posted on its Corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter
period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



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

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 118,153,475 shares of common stock, par value $0.05 per share, as of July 31, 2009.









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##### Table of Contents

INDEX



|                                                                                                                  |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                  |  | Page
|                                                                                                                  | 
|Part I. FINANCIAL INFORMATION                                                                                     |  |     
|                                                                                                                  | 
|Item 1. Financial Statements                                                                                      |  |     
|                                                                                                                  | 
|Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2008 and 2009
(unaudited) |  | 3   
|                                                                                                                  | 
|Consolidated Condensed Balance Sheets as of December 31, 2008 and June 30, 2009 (unaudited)                       |  | 4   
|                                                                                                                  | 
|Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2009
(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                                                |  | 40  
|                                                                                                                  | 
|Item 4. Controls and Procedures                                                                                   |  | 42  
|                                                                                                                  | 
|Part II. OTHER INFORMATION                                                                                        |  |     
|                                                                                                                  | 
|Item 1. Legal Proceedings                                                                                         |  | 43  
|                                                                                                                  | 
|Item 1A. Risk Factors                                                                                             |  | 43  
|                                                                                                                  | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                       |  | 44  
|                                                                                                                  | 
|Item 6. Exhibits                                                                                                  |  | 44  
|                                                                                                                  | 
|Signatures                                                                                                        |  | 45  



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION



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

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(unaudited)

(in thousands, except
per share data)



|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|---------------------------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | - | ------- |  | - | ------- | - |  | - | -------
|                                                                       |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|                                                                       |  | 2008                       |         | 2009                     |   | 2008    |  |   | 2009   
|Net Revenue:                                                           |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Development                                                            |  | $                          | 370,648 |                          | $ | 330,179 |  | $ | 718,446 |   |  | $ | 665,533
|Discovery Sciences                                                     |  |                            | 385     |                          |   | 768     |  |   | 16,363  |   |  |   | 6,444  
|Reimbursed out-of-pockets                                              |  |                            | 32,110  |                          |   | 24,271  |  |   | 60,791  |   |  |   | 48,133 
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total net revenue                                                      |  |                            | 403,143 |                          |   | 355,218 |  |   | 795,600 |   |  |   | 720,110
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Direct Costs:                                                          |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Development                                                            |  |                            | 183,546 |                          |   | 158,486 |  |   | 360,736 |   |  |   | 322,655
|Discovery Sciences                                                     |  |                            | 289     |                          |   | 502     |  |   | 746     |   |  |   | 1,118  
|Reimbursable out-of-pocket expenses                                    |  |                            | 32,110  |                          |   | 24,271  |  |   | 60,791  |   |  |   | 48,133 
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total direct costs                                                     |  |                            | 215,945 |                          |   | 183,259 |  |   | 422,273 |   |  |   | 371,906
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Research and development expenses                                      |  |                            | 1,895   |                          |   | 4,701   |  |   | 6,198   |   |  |   | 6,227  
|Selling, general and administrative expenses                           |  |                            | 100,560 |                          |   | 97,782  |  |   | 198,963 |   |  |   | 192,019
|Depreciation and amortization                                          |  |                            | 14,847  |                          |   | 16,094  |  |   | 29,594  |   |  |   | 31,327 
|Impairment of intangible asset                                         |  |                            |        |                          |   |        |  |   | 1,607   |   |  |   |       
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Total operating expenses                                               |  |                            | 333,247 |                          |   | 301,836 |  |   | 658,635 |   |  |   | 601,479
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income from operations                                                 |  |                            | 69,896  |                          |   | 53,382  |  |   | 136,965 |   |  |   | 118,631
|Other income, net                                                      |  |                            | 2,555   |                          |   | 1,075   |  |   | 8,272   |   |  |   | 857    
|Reimbursement on (impairment of) investments, net                      |  |                            | 2,976   |                          |   |        |  |   | (13,343 | ) |  |   |       
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income from continuing operations before provision for income taxes    |  |                            | 75,427  |                          |   | 54,457  |  |   | 131,894 |   |  |   | 119,488
|Provision for income taxes                                             |  |                            | 26,887  |                          |   | 15,793  |  |   | 43,740  |   |  |   | 36,526 
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income from continuing operations                                      |  |                            | 48,540  |                          |   | 38,664  |  |   | 88,154  |   |  |   | 82,962 
|Discontinued operations, net of provision for income taxes             |  |                            | 466     |                          |   | 19,397  |  |   | 981     |   |  |   | 19,668 
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Net income                                                             |  | $                          | 49,006  |                          | $ | 58,061  |  | $ | 89,135  |   |  | $ | 102,630
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Income per common share from continuing operations:                    |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic                                                                  |  | $                          | 0.41    |                          | $ | 0.33    |  | $ | 0.74    |   |  | $ | 0.70   
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Diluted                                                                |  | $                          | 0.40    |                          | $ | 0.33    |  | $ | 0.73    |   |  | $ | 0.70   
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic and diluted income per common share from discontinued operations |  | $                          | 0.00    |                          | $ | 0.16    |  | $ | 0.01    |   |  | $ | 0.17   
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Net income per common share:                                           |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic                                                                  |  | $                          | 0.41    |                          | $ | 0.49    |  | $ | 0.75    |   |  | $ | 0.87   
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Diluted                                                                |  | $                          | 0.41    |                          | $ | 0.49    |  | $ | 0.74    |   |  | $ | 0.87   
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Dividends declared per common share                                    |  | $                          | 0.10    |                          | $ | 0.15    |  | $ | 0.20    |   |  | $ | 0.275  
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Weighted-average number of common shares outstanding:                  |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Basic                                                                  |  |                            | 119,195 |                          |   | 117,893 |  |   | 119,285 |   |  |   | 117,860
|Dilutive effect of stock options and restricted stock                  |  |                            | 1,512   |                          |   | 446     |  |   | 1,555   |   |  |   | 584    
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        
|Diluted                                                                |  |                            | 120,707 |                          |   | 118,339 |  |   | 120,840 |   |  |   | 118,444
|                                                                       |  |                            |         |                          |   |         |  |   |         |   |  |   |        

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



3



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited)

(in thousands)



|                                               |  |                  |           |   |              |   |           |  
|---------------------------------------------- |  | ---------------- | --------- | - | ------------ | - | --------- | -
|                                               |  | December 31,2008 |           |   | June 30,2009 |  
|Assets                                         | 
|Current assets:                                |  |                  |           |   |              |   |           |  
|Cash and cash equivalents                      |  | $                | 491,755   |   |              | $ | 559,840   |  
|Short-term investments                         |  |                  | 27,064    |   |              |   | 13,078    |  
|Accounts receivable and unbilled services, net |  |                  | 401,303   |   |              |   | 423,090   |  
|Investigator advances                          |  |                  | 16,901    |   |              |   | 16,163    |  
|Prepaid expenses                               |  |                  | 27,242    |   |              |   | 37,516    |  
|Deferred tax assets                            |  |                  | 27,972    |   |              |   | 20,877    |  
|Other current assets                           |  |                  | 26,973    |   |              |   | 36,588    |  
|                                               |  |                  |           |   |              |   |           |  
|Total current assets                           |  |                  | 1,019,210 |   |              |   | 1,107,152 |  
|                                               |  |                 
|Property and equipment, net                    |  |                  | 385,788   |   |              |   | 382,676   |  
|Goodwill                                       |  |                  | 221,054   |   |              |   | 239,909   |  
|Long-term investments                          |  |                  | 89,618    |   |              |   | 96,276    |  
|Other investments                              |  |                  | 12,032    |   |              |   | 14,509    |  
|Intangible assets                              |  |                  | 5,761     |   |              |   | 23,048    |  
|Deferred tax assets                            |  |                  | 18,330    |   |              |   | 11,611    |  
|Other assets                                   |  |                  | 2,635     |   |              |   | 4,417     |  
|                                               |  |                  |           |   |              |   |           |  
|Total assets                                   |  | $                | 1,754,428 |   |              | $ | 1,879,598 |  
|                                               |  |                  |           |   |              |   |           |  
|                                              
|Liabilities and Shareholders Equity           | 
|Current liabilities:                           |  |                  |           |   |              |   |           |  
|Accounts payable                               |  | $                | 23,022    |   |              | $ | 20,406    |  
|Payables to investigators                      |  |                  | 39,370    |   |              |   | 40,093    |  
|Accrued income taxes                           |  |                  | 18,388    |   |              |   | 18,987    |  
|Other accrued expenses                         |  |                  | 178,926   |   |              |   | 176,183   |  
|Unearned income                                |  |                  | 246,649   |   |              |   | 248,196   |  
|                                               |  |                  |           |   |              |   |           |  
|Total current liabilities                      |  |                  | 506,355   |   |              |   | 503,865   |  
|                                               |  |                 
|Accrued income taxes                           |  |                  | 22,256    |   |              |   | 25,979    |  
|Accrued additional pension liability           |  |                  | 12,355    |   |              |   | 15,110    |  
|Deferred rent                                  |  |                  | 15,873    |   |              |   | 14,666    |  
|Other long-term liabilities                    |  |                  | 16,593    |   |              |   | 16,667    |  
|                                               |  |                  |           |   |              |   |           |  
|Total liabilities                              |  |                  | 573,432   |   |              |   | 576,287   |  
|                                               |  |                 
|Shareholders equity:                          |  |                  |           |   |              |   |           |  
|Common stock                                   |  |                  | 5,881     |   |              |   | 5,896     |  
|Paid-in capital                                |  |                  | 544,891   |   |              |   | 560,685   |  
|Retained earnings                              |  |                  | 684,768   |   |              |   | 754,964   |  
|Accumulated other comprehensive income (loss)  |  |                  | (54,544   | ) |              |   | (18,234   | )
|                                               |  |                  |           |   |              |   |           |  
|Total shareholders equity                     |  |                  | 1,180,996 |   |              |   | 1,303,311 |  
|                                               |  |                  |           |   |              |   |           |  
|Total liabilities and shareholders equity     |  | $                | 1,754,428 |   |              | $ | 1,879,598 |  
|                                               |  |                  |           |   |              |   |           |  

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



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                          |  |                          |          |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                          |  | Six Months EndedJune 30, |         
|                                                                                          |  | 2008                     |          |   | 2009 |  
|Cash flows from operating activities:                                                     |  |                          |          |   |      |   |         |  
|Net income                                                                                |  | $                        | 89,135   |   |      | $ | 102,630 |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |          |   |      |   |         |  
|Depreciation and amortization                                                             |  |                          | 29,850   |   |      |   | 31,492  |  
|Impairment of investments, net of recoveries                                              |  |                          | 13,343   |   |      |   |        |  
|Stock compensation expense                                                                |  |                          | 12,756   |   |      |   | 9,749   |  
|Gain on sale of business                                                                  |  |                          |         |   |      |   | (19,452 | )
|Provision for deferred income taxes                                                       |  |                          | (3,019   | ) |      |   | 3,775   |  
|Other                                                                                     |  |                          | 3,312    |   |      |   | (544    | )
|Change in operating assets and liabilities                                                |  |                          | 31,599   |   |      |   | (45,723 | )
|                                                                                          |  |                          |          |   |      |   |         |  
|Net cash provided by operating activities                                                 |  |                          | 176,976  |   |      |   | 81,927  |  
|                                                                                          |  |                          |          |   |      |   |         |  
|                                                                                          |  |                         
|Cash flows from investing activities:                                                     |  |                          |          |   |      |   |         |  
|Purchases of property and equipment                                                       |  |                          | (34,792  | ) |      |   | (23,484 | )
|Proceeds from sale of property and equipment                                              |  |                          | 94       |   |      |   | 249     |  
|Proceeds from the sale of business                                                        |  |                          |         |   |      |   | 42,095  |  
|Purchases of investments                                                                  |  |                          | (188,386 | ) |      |   |        |  
|Maturities and sales of investments                                                       |  |                          | 352,655  |   |      |   | 16,980  |  
|Proceeds from sale of equity investments                                                  |  |                          |         |   |      |   | 716     |  
|Net cash paid for acquisitions                                                            |  |                          |         |   |      |   | (35,015 | )
|Purchase of intangibles                                                                   |  |                          |         |   |      |   | (500    | )
|Purchases of other investments                                                            |  |                          | (1,780   | ) |      |   | (1,980  | )
|                                                                                          |  |                          |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                                       |  |                          | 127,791  |   |      |   | (939    | )
|                                                                                          |  |                          |          |   |      |   |         |  
|                                                                                          |  |                         
|Cash flows from financing activities:                                                     |  |                          |          |   |      |   |         |  
|Repurchases of common stock                                                               |  |                          | (36,489  | ) |      |   |        |  
|Proceeds from exercise of stock options and employee stock purchase plan                  |  |                          | 17,353   |   |      |   | 6,042   |  
|Income tax benefit from exercise of stock options and disqualifying dispositions of stock |  |                          | 2,846    |   |      |   | 136     |  
|Cash dividends paid                                                                       |  |                          | (23,880  | ) |      |   | (32,434 | )
|                                                                                          |  |                          |          |   |      |   |         |  
|Net cash used in financing activities                                                     |  |                          | (40,170  | ) |      |   | (26,256 | )
|                                                                                          |  |                          |          |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                          | 5,161    |   |      |   | 13,353  |  
|                                                                                          |  |                          |          |   |      |   |         |  
|Net increase in cash and cash equivalents                                                 |  |                          | 269,758  |   |      |   | 68,085  |  
|Cash and cash equivalents, beginning of the period                                        |  |                          | 171,427  |   |      |   | 491,755 |  
|                                                                                          |  |                          |          |   |      |   |         |  
|Cash and cash equivalents, end of the period                                              |  | $                        | 441,185  |   |      | $ | 559,840 |  
|                                                                                          |  |                          |          |   |      |   |         |  

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



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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

The significant
accounting policies followed by Pharmaceutical Product Development, Inc. and its subsidiaries (collectively the Company) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.
The Company prepared these unaudited consolidated condensed financial statements in accordance with Rule 10-01 of Regulation S-X and, in managements opinion, has included all adjustments of a normal recurring nature necessary for a fair
presentation. The accompanying consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008. The results of operations for the three-month and six-month periods ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year or any other period. The amounts in the
December 31, 2008 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, 2008.

Principles of Consolidation

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

Recent Accounting Pronouncements

In September 2006,
the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157, which defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, the statement establishes a framework for measuring fair value and expands disclosure about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. However, in February 2008, the FASB issued FASB Staff Position, or FSP FAS, 157-1 and FSP FAS 157-2, which delayed the
effective date of SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually) and removed certain leasing transactions from the scope of SFAS No. 157. FSP FAS 157-2 partially deferred the effective date of SFAS No. 157 to fiscal years and interim periods beginning after November 15, 2008 for
items within the scope of the FSP. The FASB issued FSP FAS 157-3, Determining the Fair Values of a Financial Asset When the Market for That Asset is Not Active and FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly which provided additional guidance on determining fair value in specific circumstances. The adoption of FSP FAS 157-1, FSP FAS
157-2, FSP FAS 157-3 and FSP FAS 157-4 did not have a material impact on the Companys financial statements. See Fair Value below, and Note 12 for a discussion of the Companys fair value accounting.

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



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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



RecentAccountingPronouncements(continued)



In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or SFAS 141(R). SFAS
141(R) expands the definitions of a business and a business combination and requires that: the purchase price of an acquisition, including the issuance of equity securities to be determined on the acquisition date, be recorded at fair value at the
acquisition date; all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; acquisition costs generally be expensed as
incurred; restructuring costs generally be expensed in periods subsequent to the acquisition date; and changes be made in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to
impact income tax expense. In April 2009, the FASB issued FSP FAS 141(R)-1, which requires an acquirer to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if its
acquisition-date fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer applies the recognition criteria in SFAS No.5 and Interpretation No. 14 to determine whether the
contingency should be recognized as of the acquisition date or thereafter. SFAS 141(R) and FSP FAS 141(R)-1 apply to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The adoption of SFAS 141(R) is expected to have a significant effect on reporting of acquisitions in the financial statements while the adoption of FSP FAS 141(R)-1 did not have a material impact on the
Companys financial statements.

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

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



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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



RecentAccountingPronouncements(continued)



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

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

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

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

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures
About Fair Value of Financial Instruments, or FSP FAS 107-1. FSP FAS 107-1 expands SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial
Reporting, requiring fair value disclosures for all financial instruments in interim periods for publicly traded entities. The FSP FAS 107-1 also requires entities to disclose the methods and significant assumptions used to estimate the fair
value of financial instruments in financial statements on an interim basis and to highlight any changes of the methods and significant assumptions from prior periods. The FSP is effective for interim and annual periods ending after June 15,
2009. The adoption of this FSP FAS 107-did not have a material impact on the Companys financial statements.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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



RecentAccountingPronouncements(continued)



In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. The FSP provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event
has occurred for debt securities. This FSP is effective for interim and annual periods ending after June 15, 2009. The adoption of this FSP did not have a material impact on the Companys financial statements.

In May 2009, the FASB issued Statement No. 165, Subsequent Events, or SFAS No. 165. SFAS No. 165 was issued to establish
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that occur for a potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance
sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 also introduces the concept of financial statements available
to be issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Companys financial statements. The Company has
evaluated subsequent events through August 7, 2009, the date of issuance of our consolidated financial position and results of operations.

In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS No. 167. SFAS No. 167 modifies how a company determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. SFAS No. 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose
and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS No. 167 also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS No. 167 is
effective as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of SFAS No. 167 is not expected to have a material impact on the Companys financial statements.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, or SFAS No. 168. The statement was issued to replace SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establish the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with generally accepted accounting principles, or GAAP. Essentially, the GAAP hierarchy will be modified to only include 2
levels  authoritative and non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and is not expected to have a material impact on the
Companys financial statements.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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



Earnings per Share

The Company computes basic income
per share information based on the weighted-average number of common shares outstanding during the period. The Company computes diluted income per share information based on the weighted-average number of common shares outstanding during the period
plus the effects of any dilutive common stock equivalents. The Company excluded 1,253,200 shares and 6,129,295 shares from the calculation of diluted earnings per share during the three months ended June 30, 2008 and 2009, respectively, and
1,203,000 shares and 6,078,772 shares from the calculation of diluted earnings per share during the six months ended June 30, 2008 and 2009, respectively, because they were antidilutive. Included in the calculation of antidilutive shares are
the Companys stock options, employee stock purchase plan subscriptions and restricted stock that are antidilutive for the period.

Fair Value

The Company adopted the provisions of SFAS No. 157 as modified by FSP FAS 157-1, FSP FAS 157-2, FSP FAS 157-3 and FSP FAS 157-4
effective January 1, 2008 and January 1, 2009 as required by the Standards. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands the disclosure requirements about fair value
measurements.

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



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



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



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

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



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



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



Fair Value (continued)



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

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

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

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP
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

(numbers in tables in thousands)

(unaudited)



|2. | Acquisitions and Dispositions
|-- | -----------------------------

Acquisitions

In October 2008, the Company completed its acquisition of InnoPharm, an independent contract research organization, for total consideration of $9.0
million. The Company paid $7.3 million at closing and will pay an additional $1.7 million on the second anniversary of the closing date, contingent on the satisfaction of conditions specified in the definitive acquisition agreement. With offices in
Russia and Ukraine, the Company believes the acquisition of InnoPharm will strengthen its presence in Eastern Europe and allow for continued growth in this region while enhancing its ability to conduct global studies for clients. This acquisition is
included in the Companys Development segment.

In December 2008, the Company entered into a strategic collaboration with
Merck & Co., Inc., involving vaccine testing and assay development. Under the agreements, the Company purchased Mercks 130,000 square-foot vaccine testing laboratory and related equipment, for total consideration of $25.5 million. As
part of the collaboration, the Company will be providing Merck with assay development and immunogenicity testing services to support Mercks vaccine portfolio over a period of five years. The acquisition of Mercks vaccine testing facility
significantly expands the Companys overall global central laboratory business, adding vaccine and biologic testing, assay development and sample storage capabilities to its current suite of laboratory services. This acquisition is included in
the Companys Development segment. This acquisition was completed in April 2009.

On April 3, 2009, the Company acquired 100
percent of the outstanding equity interests of Magen BioSciences, Inc., a biotechnology company focused on dermatologic therapies, for total consideration of $14.9 million. Of this amount, the Company paid $13.1 million in connection with the
closing and expects to pay the remaining $1.8 million in the second quarter of 2010, which is recorded as a component of other accrued expenses as of June 30, 2009. Through the acquisition, the Company is expanding its compound partnering
program into dermatology and gaining screening capability for dermatologic compounds. This acquisition is included in the Companys Discovery Sciences segment.

On April 21, 2009, the Company acquired 100 percent of outstanding equity interests of AbC.R.O., Inc., a contract research organization operating in Central and Eastern Europe, for total consideration of $39.9
million. Of this amount, the Company paid $36.7 million and is expected to pay the remaining $3.2 million in the second quarter of 2011, which is recorded as a component of other long-term liabilities as of June 30, 2009. Through the
acquisition, the Company is expanding its infrastructure in this region for clinical research by adding offices in Romania, Bulgaria, Serbia and Croatia, as well as strengthening its operations in other countries in the region. This acquisition is
included in the Companys Development segment. The fair value of the financial assets acquired includes accounts receivables of $4.4 million and unbilled receivables of $2.4 million, which are expected to be collected in the normal course of
business.

Acquisition costs related to Magen and AbCRO were not significant and are included in selling, general and administrative costs
in the consolidated condensed statements of income.

The Company accounted for these acquisitions under the purchase method of accounting,
using appropriate fair value techniques to allocate the purchase prices based on the estimated fair value of the assets and liabilities. Accordingly, the Company included the estimated fair value of assets acquired and liabilities assumed in its
consolidated condensed balance sheet as of the effective dates of the acquisitions.



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|2. | Acquisitions and Dispositions (continued)
|-- | -----------------------------------------



The Company allocated the total purchase price for these acquisitions to the estimated fair value of
assets acquired and liabilities assumed as set forth in the following table:



|                                         |  |           |       |   |             |   |        |  |   |        |   |  |       |        |   |  |   |        |  
|---------------------------------------- |  | --------- | ----- | - | ----------- | - | ------ |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | -
|                                         |  | Innopharm |       |   | Vaccine Lab |   | AbCRO  |  |   | Magen  |   |  | Total |       
|                                         |  |           |       |   |            
|Condensed balance sheet:                 |  |           |       |   |             |   |        |  |   |        |   |  |       |        |   |  |   |        |  
|Current assets                           |  | $         | 400   |   |             | $ |       |  | $ | 10,363 |   |  | $     | 3,625  |   |  | $ | 14,388 |  
|Property and equipment                   |  |           | 662   |   |             |   | 21,433 |  |   | 1,025  |   |  |       | 609    |   |  |   | 23,729 |  
|Other long-term assets                   |  |           |      |   |             |   |       |  |   | 90     |   |  |       |       |   |  |   | 90     |  
|Current liabilities                      |  |           | (564  | ) |             |   |       |  |   | (4,780 | ) |  |       | (1,242 | ) |  |   | (6,586 | )
|Value of identifiable intangible assets: |  |           |       |   |             |   |        |  |   |        |   |  |       |        |   |  |   |        |  
|Backlog and customer relationships       |  |           | 308   |   |             |   | 3,500  |  |   | 7,920  |   |  |       |       |   |  |   | 11,728 |  
|In process research and development      |  |           |      |   |             |   |       |  |   |       |   |  |       | 10,361 |   |  |   | 10,361 |  
|Goodwill                                 |  |           | 8,194 |   |             |   | 537    |  |   | 25,291 |   |  |       | 1,513  |   |  |   | 35,535 |  
|                                         |  |           |       |   |             |   |        |  |   |        |   |  |       |        |   |  |   |        |  
|Total                                    |  | $         | 9,000 |   |             | $ | 25,470 |  | $ | 39,909 |   |  | $     | 14,866 |   |  | $ | 89,245 |  
|                                         |  |           |       |   |             |   |        |  |   |        |   |  |       |        |   |  |   |        |  

Pro forma results of operations prior to the dates of acquisition have not been presented because
the financial results are immaterial.

The Company expects to be able to deduct the goodwill related to the Innopharm and Vaccine lab
acquisitions for tax purposes, but not that of AbCRO and Magen.

Dispositions

In May 2009, the Company completed its disposition of substantially all of the assets of its wholly owned subsidiary Piedmont Research Center, LLC, to
Charles River Laboratories International, Inc. for total consideration of $46.0 million. Piedmont Research Center provided preclinical research and evaluation of anticancer agents and therapies and was included in the Companys Discovery
Sciences segment. Due to the unique service offerings of Piedmont Research Center, the Company felt this business unit was not a long-term strategic fit.

The results of Piedmont Research Center, LLC are reported as discontinued operations within the consolidated condensed statements of income as set forth in the following table:



|                                                           |  |                            |       |   |                          |   |         |      |  |   |       |   |  |   |         |  
|---------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------- | ---- |  | - | ----- | - |  | - | ------- | -
|                                                           |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                           |  | 2008                       |       |   | 2009                     |   |         | 2008 |  |   | 2009  |  
|                                                           |  |                            |       |  
|Net revenue                                                |  | $                          | 3,873 |   |                          | $ | 1,079   |      |  | $ | 7,662 |   |  | $ | 4,655   |  
|                                                           |  |                            |       |  
|Income (loss) from discontinued operations                 |  |                            | 847   |   |                          |   | (89     | )    |  |   | 1,707 |   |  |   | 379     |  
|Gain on sale of business                                   |  |                            |      |   |                          |   | 35,505  |      |  |   |      |   |  |   | 35,505  |  
|Provision for income taxes                                 |  |                            | (381  | ) |                          |   | (16,019 | )    |  |   | (726  | ) |  |   | (16,216 | )
|Discontinued operations, net of provision for income taxes |  |                            | 466   |   |                          |   | 19,397  |      |  |   | 981   |   |  |   | 19,668  |  



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|3. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments
|-- | ----------------------------------------------------------------------------------------------

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



|                                        |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|--------------------------------------- |  | ----------------------- | ------- | --------------------- | - | -------------------- |  | ---------------- | ------ |  | - | ------
|                                        |  | Cash andcashequivalents |         | Short-terminvestments |   | Long-terminvestments |  | Otherinvestments
|As of December 31, 2008                 |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Cash                                    |  | $                       | 188,632 |                       |   |                      |  |                  |        |  |   |       
|Time deposits                           |  |                         | 4,191   |                       | $ | 10,000               |  |                  |        |  |   |       
|Money market funds                      |  |                         | 298,932 |                       |   |                      |  |                  |        |  |   |       
|Auction rate securities                 |  |                         |         |                       |   |                      |  | $                | 89,618 |  |   |       
|Municipal debt securities               |  |                         |         |                       |   | 17,064               |  |                  |        |  |   |       
|                                        |  |                         |         |                      
|Cost basis investments:                 |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Bay City Capital Funds                  |  |                         |         |                       |   |                      |  |                  |        |  | $ | 7,504 
|A.M. Pappas Funds                       |  |                         |         |                       |   |                      |  |                  |        |  |   | 2,620 
|Accelerator III and incubator companies |  |                         |         |                       |   |                      |  |                  |        |  |   | 1,158 
|Other investments                       |  |                         |         |                       |   |                      |  |                  |        |  |   | 750   
|                                        |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Total                                   |  | $                       | 491,755 |                       | $ | 27,064               |  | $                | 89,618 |  | $ | 12,032
|                                        |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|                                        |  |                         |         |                      
|As of June 30, 2009                     |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Cash                                    |  | $                       | 177,583 |                       |   |                      |  |                  |        |  |   |       
|Time deposits                           |  |                         | 73,565  |                       |   |                      |  |                  |        |  |   |       
|Money market funds                      |  |                         | 308,692 |                       |   |                      |  |                  |        |  |   |       
|Auction rate securities                 |  |                         |         |                       |   |                      |  | $                | 96,276 |  |   |       
|Municipal debt securities               |  |                         |         |                       | $ | 13,078               |  |                  |        |  |   |       
|                                        |  |                         |         |                      
|Cost basis investments:                 |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Bay City Capital Funds                  |  |                         |         |                       |   |                      |  |                  |        |  | $ | 8,523 
|A.M. Pappas Funds                       |  |                         |         |                       |   |                      |  |                  |        |  |   | 2,825 
|Accelerator III and incubator companies |  |                         |         |                       |   |                      |  |                  |        |  |   | 1,767 
|Other investments                       |  |                         |         |                       |   |                      |  |                  |        |  |   | 1,394 
|                                        |  |                         |         |                       |   |                      |  |                  |        |  |   |       
|Total                                   |  | $                       | 559,840 |                       | $ | 13,078               |  | $                | 96,276 |  | $ | 14,509
|                                        |  |                         |         |                       |   |                      |  |                  |        |  |   |       



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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|3. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments (continued)
|-- | ----------------------------------------------------------------------------------------------------------



Short-term and Long-term Investments

The Company accounts for its investment in marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Companys short-term and long-term investments are classified as available-for-sale securities. The Company determines realized and unrealized gains and losses on short-term and long-term investments on a
specific identification basis.

As of December 31, 2008 and June 30, 2009, the Company had the following unrealized gains and
losses on investments:



|                                               |  |                  |        |              |   |       
|---------------------------------------------- |  | ---------------- | ------ | ------------ | - | ------
|                                               |  | December 31,2008 |        | June 30,2009
|                                               |  |                 
|Unrealized gains on municipal debt securities  |  | $                | 79     |              | $ | 28    
|Unrealized losses on municipal debt securities |  |                  | 117    |              |   | 161   
|Unrealized losses on auction rate securities   |  |                  | 30,457 |              |   | 20,599

For the three months and six months ended June 30, 2008 and 2009, the Company had the
following gross realized gains and losses on investments:



|                                                   |  |                            |     |                          |   |      |  |      |       |  |   |    
|-------------------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | ---
|                                                   |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|                                                   |  | 2008                       |     | 2009                     |   | 2008 |  | 2009
|                                                   |  |                            |     |                         
|Gross realized gains on other investments          |  | $                          | 851 |                          | $ | 716  |  | $    |      |  | $ | 716
|Gross realized gains on municipal debt securities  |  |                            | 13  |                          |   |     |  |      | 694   |  |   |   
|Gross realized losses on other investments         |  |                            |    |                          |   |     |  |      | 3,734 |  |   |   
|Gross realized losses on municipal debt securities |  |                            | 8   |                          |   |     |  |      | 8     |  |   |   

The Company held $89.6 million and $96.3 million, net of unrealized loss, in auction rate
securities at December 31, 2008 and June 30, 2009, respectively. The Companys portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt
obligations and municipal preferred auction rate securities. While the Company liquidated $3.2 million of its auction rate securities portfolio at par value in the second quarter of 2009, due to continuing uncertainties about the liquidity in the
auction rate securities market, the Company classified its entire balance of auction rate securities as long-term assets at June 30, 2009. The Company also recorded an unrealized loss on these investments of $20.6 million as of June 30,
2009 and $30.5 million as of December 31, 2009. This unrealized loss was recorded based on a Level 3 valuation, including assumptions about appropriate maturity periods of the instruments by utilizing an average seven-year workout period based
on industry expectations, market interest rates for comparable securities and the underlying credit worthiness of the issuers. The Company concluded that this impairment was temporary because of its ability and intent to hold the auction rate
securities until the fair value recovers. The Company will continue to seek to liquidate these investments at par value and will review the classification and valuation of these securities quarterly.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|3. | Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments (continued)
|-- | ----------------------------------------------------------------------------------------------------------



Other Investments

The Company has other investments in privately held entities that are not publicly traded and for which fair values are not readily determinable. The
Company records all of its investments in privately held entities at cost. The Company determines realized and unrealized gains and losses on a specific identification basis. The Company assesses the net realizable value of these entities on a
quarterly basis to determine if there has been a decline in the fair value of these entities, and if so, if the decline is other-than-temporary. This quarterly review includes an evaluation of the entity, including, among other things, the market
condition of its overall industry, historical and projected financial performance, expected cash needs and recent funding events, as well as the Companys expected holding period and the length of time and the extent to which the fair value of
the investment has been less than cost. Upon realization or recognition of an other-than-temporary decline in the fair market value of an investment, the Company records an impairment of that investment.As of December 31, 2008 and
June 30, 2009, the Company had $0 and $0.7 million, respectively, in unrealized gains and no unrealized losses on other investments.

In November 2008, the Company invested a total of $1.2 million in Accelerator III Corporation and its incubator companies. The Company has committed to invest a total of $4.6 million. Aggregate investments through June 30, 2009 were
$1.8 million. The Company owns approximately 19.9% of Accelerator III and its ownership in incubator companies will vary, but should not exceed 19.9%.

The Company is a limited partner in several venture capital funds established for the purpose of investing in life sciences and healthcare companies. These funds require the Company to commit to make investments in
the funds over a period of time. The Companys capital commitments in these funds at June 30, 2009 are as follows:



|                                            |  |           |   |  |                        |        |                            |   |                             |  |               
|------------------------------------------- |  | --------- | - |  | ---------------------- | ------ | -------------------------- | - | --------------------------- |  | --------------
|Fund                                        |  | Ownership |   |  | TotalCapitalCommitment |        | RemainingCapitalCommitment |   | CapitalCommitmentExpiration
|Bay City Capital Fund IV, L.P.              |  | 2.9       | % |  | $                      | 10,000 |                            | $ | 3,038                       |  | September 2010
|Bay City Capital Fund V, L.P.               |  | 2.0       | % |  |                        | 10,000 |                            |   | 8,606                       |  | October 2012  
|A.M. Pappas Life Science Ventures III, L.P. |  | 4.7       | % |  |                        | 4,800  |                            |   | 1,784                       |  | December 2009 
|A.M. Pappas Life Science Ventures IV, L.P.  |  | 3.0       | % |  |                        | 2,935  |                            |   | 2,729                       |  | February 2014 



|4. | Accounts Receivable and Unbilled Services
|-- | -----------------------------------------

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



|                                                     |  |                  |         |   |              |   |         |  
|---------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                     |  | December 31,2008 |         |   | June 30,2009 |  
|Billed                                               |  | $                | 257,386 |   |              | $ | 272,083 |  
|Unbilled                                             |  |                  | 154,588 |   |              |   | 162,048 |  
|Allowance for doubtful accounts                      |  |                  | (10,671 | ) |              |   | (11,041 | )
|                                                     |  |                  |         |   |              |   |         |  
|Total accounts receivable and unbilled services, net |  | $                | 401,303 |   |              | $ | 423,090 |  
|                                                     |  |                  |         |   |              |   |         |  



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|5. | Property and Equipment
|-- | ----------------------

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



|                                                     |  |                  |          |   |              |   |          |  
|---------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                                     |  | December 31,2008 |          |   | June 30,2009 |  
|Land                                                 |  | $                | 8,197    |   |              | $ | 8,298    |  
|Buildings and leasehold improvements                 |  |                  | 248,582  |   |              |   | 254,250  |  
|Fixed assets not placed in service                   |  |                  | 3,618    |   |              |   | 2,943    |  
|Information technology and systems under development |  |                  | 28,031   |   |              |   | 30,726   |  
|Furniture and equipment                              |  |                  | 209,474  |   |              |   | 215,314  |  
|Computer equipment and software                      |  |                  | 175,870  |   |              |   | 188,239  |  
|                                                     |  |                  |          |   |              |   |          |  
|Total property and equipment                         |  |                  | 673,772  |   |              |   | 699,770  |  
|Less accumulated depreciation                        |  |                  | (287,984 | ) |              |   | (317,094 | )
|                                                     |  |                  |          |   |              |   |          |  
|Total property and equipment, net                    |  | $                | 385,788  |   |              | $ | 382,676  |  
|                                                     |  |                  |          |   |              |   |          |  

Information technology and systems under development as of June 30, 2009, included software
licenses purchased from a third-party vendor with annual payment terms as follows:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|June 1, 2010                        |  | $ | 4,212  |  
|June 1, 2011                        |  |   | 4,212  |  
|June 1, 2012                        |  |   | 4,212  |  
|                                    |  |   |        |  
|Total future remaining payments     |  | $ | 12,636 |  
|Present value discount              |  |   | (718   | )
|                                    |  |   |        |  
|Present value of remaining payments |  | $ | 11,918 |  
|                                    |  |   |        |  

The Company classified its liability related to these licenses as $4.2 million in other accrued expenses and $7.7
million in other long-term liabilities on its consolidated condensed balance sheet as of June 30, 2009.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|6. | Goodwill and Intangible Assets
|-- | ------------------------------

Changes in the
carrying amount of goodwill for the six months ended June 30, 2009, by operating segment, were as follows:



|                                                     |  |             |         |                   |   |        |       |  |   |         |  
|---------------------------------------------------- |  | ----------- | ------- | ----------------- | - | ------ | ----- |  | - | ------- | -
|                                                     |  | Development |         | DiscoverySciences |   |        | Total | 
|Balance as of December 31, 2008                      |  | $           | 167,438 |                   | $ | 53,616 |       |  | $ | 221,054 |  
|Goodwill recorded during the period for acquisitions |  |             | 25,505  |                   |   | 1,513  |       |  |   | 27,018  |  
|Goodwill disposition                                 |  |             |        |                   |   | (8,487 | )     |  |   | (8,487  | )
|Translation adjustments                              |  |             | 324     |                   |   |       |       |  |   | 324     |  
|                                                     |  |             |         |                   |   |        |       |  |   |         |  
|Balance as of June 30, 2009                          |  | $           | 193,267 |                   | $ | 46,642 |       |  | $ | 239,909 |  
|                                                     |  |             |         |                   |   |        |       |  |   |         |  

In May 2009, the Company completed its disposition of the assets of Piedmont Research Center, LLC
to Charles River Laboratories International, Inc. As a result, $8.5 million in goodwill was disposed of. For further details, see Note 2.

The Companys other intangible assets were composed of the following as of the dates set forth below:



|                                   |  |                   |       |                         |   |      |     |  |                |       |                         |   |        |     |   |        |   |  |   |       
|---------------------------------- |  | ----------------- | ----- | ----------------------- | - | ---- | --- |  | -------------- | ----- | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                                   |  | December 31, 2008 |       | June 30, 2009          
|                                   |  | CarryingAmount    |       | AccumulatedAmortization |   |      | Net |  | CarryingAmount |       | AccumulatedAmortization |   |        | Net
|Backlog and customer relationships |  | $                 | 4,116 |                         | $ | (355 | )   |  | $              | 3,761 |                         | $ | 11,736 |     | $ | (1,049 | ) |  | $ | 10,687
|Other intangible assets            |  |                   | 2,000 |                         |   |     |     |  |                | 2,000 |                         |   | 12,361 |     |   |       |   |  |   | 12,361
|                                   |  |                   |       |                         |   |      |     |  |                |       |                         |   |        |     |   |        |   |  |   |       
|Total                              |  | $                 | 6,116 |                         | $ | (355 | )   |  | $              | 5,761 |                         | $ | 24,097 |     | $ | (1,049 | ) |  | $ | 23,048
|                                   |  |                   |       |                         |   |      |     |  |                |       |                         |   |        |     |   |        |   |  |   |       

Intangible assets consist of backlog, customer relationships and other intangible assets. Backlog
and customer relationships are subject to amortization, which the Company amortizes on a straight-line basis, based on an estimated useful life of three to ten years. The weighted-average amortization period is 5.7 years for backlog and customer
relationships.

Other intangible assets have an indefinite life, and therefore, the Company does not amortize these assets. During the
three months ended June 30, 2009, the Company acquired in process research and development of $10.4 million through the acquisition of Magen BioSciences, Inc., which has been reflected as an other intangible asset. For further details, see Note
2.

Amortization expense for the three months ended June 30, 2008 and 2009 was $15,400 and $0.5 million, respectively. Amortization
expense for the six months ended June 30, 2008 and 2009 was $30,800 and $0.7 million, respectively. As of June 30, 2009, expected amortization expense for each of the next five years is as follows:



|                            |  |   |      
|--------------------------- |  | - | -----
|2009 (remaining six months) |  | $ | 1,014
|2010                        |  |   | 2,029
|2011                        |  |   | 1,982
|2012                        |  |   | 1,397
|2013                        |  |   | 1,220



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|7. | Shareholders Equity
|-- | --------------------

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

During the six months ended June 30, 2009, the
Company granted options to purchase 1,550,000 shares with a weighted-average exercise price of $26.18. This amount includes options to purchase 1,367,000 shares granted in the Companys annual grant during the first quarter of 2009. All options
were granted with an exercise price equal to the fair value of the Companys common stock on the grant date. The fair value of the Companys common stock on the grant date is equal to the Nasdaq closing price of the Companys stock on
the date of grant. The weighted-average grant date fair value per share determined using the Black-Scholes option-pricing method and the aggregate fair value of options granted during the six months ended June 30, 2009 was $6.41 and $10.0
million, respectively. As of June 30, 2009, the Company had 9.2 million options outstanding.



|8. | Comprehensive Income
|-- | --------------------

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



|                                                                                                                                       |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | -------
|                                                                                                                                       |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                                                                                                       |  | 2008                       |        |                          | 2009 |   | 2008   |  |   | 2009  
|Net income, as reported                                                                                                                |  | $                          | 49,006 |                          |      | $ | 58,061 |  | $ | 89,135 |   |  | $ | 102,630
|Other comprehensive income (loss):                                                                                                     |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        
|Cumulative translation adjustment                                                                                                      |  |                            | 1,621  |                          |      |   | 22,100 |  |   | 10,607 |   |  |   | 13,478 
|Change in fair value of hedging transaction, net of taxes of $790, $5,459, $884 and $5,196, respectively                               |  |                            | 1,362  |                          |      |   | 12,473 |  |   | 1,598  |   |  |   | 11,573 
|Reclassification adjustment for hedging results included in direct costs, net of taxes of ($111), $459, ($20) and $1,845,
respectively |  |                            | (88    | )                        |      |   | 876    |  |   | 171    |   |  |   | 4,548  
|Net unrealized gain (loss) on investments, net of taxes of ($2,089), $564, ($1,391) and $3,694, respectively                           |  |                            | (3,284 | )                        |      |   | 1,027  |  |   | (2,554 | ) |  |   | 6,711  
|                                                                                                                                       |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        
|Total other comprehensive income (loss)                                                                                                |  |                            | (389   | )                        |      |   | 36,476 |  |   | 9,822  |   |  |   | 36,310 
|                                                                                                                                       |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        
|Comprehensive income                                                                                                                   |  | $                          | 48,617 |                          |      | $ | 94,537 |  | $ | 98,957 |   |  | $ | 138,940
|                                                                                                                                       |  |                            |        |                          |      |   |        |  |   |        |   |  |   |        

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



|                                                                                                     |  |                  |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                     |  | December 31,2008 |         |   | June 30,2009 |  
|Translation adjustment                                                                               |  | $                | (10,362 | ) |              | $ | 3,116   |  
|Pension liability, net of tax benefit of $4,683                                                      |  |                  | (12,078 | ) |              |   | (12,078 | )
|Fair value on hedging transaction, net of tax benefit (expense) of $5,092 and ($1,883), respectively |  |                  | (12,371 | ) |              |   | 3,750   |  
|Net unrealized loss on investments, net of tax benefit of $10,761 and $7,067, respectively           |  |                  | (19,733 | ) |              |   | (13,022 | )
|                                                                                                     |  |                  |         |   |              |   |         |  
|Total                                                                                                |  | $                | (54,544 | ) |              | $ | (18,234 | )
|                                                                                                     |  |                  |         |   |              |   |         |  



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|9. | Accounting for Derivative Instruments and Hedging Activities
|-- | ------------------------------------------------------------

The Company enters into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS No. 133. The Company recognizes changes in the fair value of the effective
portion of these outstanding contracts in accumulated other comprehensive income, or OCI. The Company reclassifies these amounts from OCI and recognizes them in earnings when either the forecasted transaction occurs or it becomes probable that the
forecasted transaction will not occur. The Company has significant international revenues and expenses, and related receivables and payables, denominated in non-functional currencies in the Companys foreign subsidiaries. As a result, the
Companys operating results can be affected by movements in foreign currency exchange rates. In an effort to minimize this risk, the Company from time to time purchases currency option and forward contracts as cash flow hedges against
anticipated and recorded transactions, and the related receivables and payables denominated in non-functional currencies. The Company only uses currency option and forward contracts as hedges to minimize the variability in the Companys
operating results arising from foreign currency exchange rate movements. The Company does not enter into derivative financial instruments for speculative or trading purposes.

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

The Company recognizes changes in the
ineffective portion of a derivative instrument in earnings in the current period as a component of direct costs. The Company measures effectiveness for forward cash flow hedge contracts by comparing the fair value of the forward contract to the
change in the forward value of the anticipated transaction. The Companys hedging portfolio ineffectiveness during the three months ended June 30, 2008 and 2009 was $0.2 million and $0.1 million, respectively. The Companys hedging
portfolio ineffectiveness for the six months ended June 30, 2008 and 2009 was $0.4 million and $0.2 million, respectively.

As of
June 30, 2009, the Companys existing hedging contracts will expire over the next 18 months. The Company expects to reclassify the current net loss positions of $2.6 million, net of tax, within the next 12 months from OCI into the
statement of income. At December 31, 2008 and June 30, 2009, the Companys foreign currency derivative portfolio resulted in the Company recognizing an asset of $3.1 million and $9.7 million, respectively, as a component of prepaid
expenses and a liability of $20.5 million and $3.9 million, respectively, as a component of other accrued expenses.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|10. | Pension Plan
|--- | ------------

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

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



|                               |  |                            |      |   |                          |   |      |      |  |   |        |   |  |   |       |  
|------------------------------ |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ------ | - |  | - | ----- | -
|                               |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                               |  | 2008                       |      |   | 2009                     |   |      | 2008 |  |   | 2009   |  
|                               |  |                            |      |  
|Service cost                   |  | $                          | 384  |   |                          | $ | 268  |      |  | $ | 770    |   |  | $ | 517   |  
|Interest cost                  |  |                            | 810  |   |                          |   | 636  |      |  |   | 1,623  |   |  |   | 1,225 |  
|Expected return on plan assets |  |                            | (794 | ) |                          |   | (465 | )    |  |   | (1,592 | ) |  |   | (896  | )
|Amortization of losses         |  |                            | 116  |   |                          |   | 243  |      |  |   | 233    |   |  |   | 469   |  
|                               |  |                            |      |   |                          |   |      |      |  |   |        |   |  |   |       |  
|Net periodic pension cost      |  | $                          | 516  |   |                          | $ | 682  |      |  | $ | 1,034  |   |  | $ | 1,315 |  
|                               |  |                            |      |   |                          |   |      |      |  |   |        |   |  |   |       |  

For the six months ended June 30, 2009, the Company made contributions totaling $0.3 million
and anticipates contributing an additional $0.6 million to fund this plan during the remainder of 2009.



|11. | Commitments and Contingencies
|--- | -----------------------------

The Company
currently maintains insurance for risks, among others, 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 in amounts up to $5.0 million.

The Company is self-insured for health insurance for the majority of its employees located within the United States, but maintains
stop-loss insurance on a claims made basis for expenses in excess of $0.3 million per member per year. As of December 31, 2008 and June 30, 2009, the Company maintained a reserve of $3.4 million and $4.0 million, respectively,
included in other accrued expenses on the consolidated condensed balance sheets, to cover open claims and estimated claims incurred but not reported.

As of June 30, 2009, the Company had commitments to invest up to an aggregate additional $16.2 million in four venture capital funds. The Company had also committed to invest up to an aggregate additional $2.8
million in other investments. For further details, see Note 3.

As of June 30, 2009, the Companys total gross unrecognized tax
benefits were $28.1 million, of which $11.7 million, if recognized, would reduce its effective tax rate. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $5.7 million
within the next 12 months due to the settlement of audits and the expiration of the statutes of limitations.



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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|11. | Commitments and Contingencies (continued)
|--- | -----------------------------------------



The Companys policy for recording interest and penalties associated with tax audits is to
record them as a component of provision for income taxes. During the first six months of 2009, the amount of interest and penalties recorded as an expense to the statement of income was $0.8 million and $0.1 million, respectively. As of
June 30, 2009, $6.6 million of interest and $1.1 million of penalties were accrued with respect to uncertain tax positions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, the Company will reduce
amounts accrued and reflect them as a reduction of the overall income tax provision.

The Company has been involved in
compound development and commercialization collaborations since 1997. The Company developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on
this model, the Company assists its clients by sharing the risks and potential rewards associated with the development and commercialization of drugs at various stages of development. As of June 30, 2009, the Companys two main
collaborations were with Johnson & Johnson and Takeda Pharmaceuticals Company Limited and related to dapoxetine and alogliptin, respectively. Both involve the potential future receipt of one or more of the following forms of revenue:
payments upon the achievement of specified regulatory and sales-based milestones; and royalty payments if the compound is approved for sale. To date, Finland, Sweden, Portugal, Austria, Italy, Spain, Germany and Mexico have approved dapoxetine for
marketing under the trade name PriligyTM, and the Company received a $2.5 million
milestone payment on each of the first two national approvals, for a total of $5.0 million, in the first quarter of 2009. The Company is entitled to royalties on net sales of Priligy, followed by sales-based milestones if requisite sales levels are
reached. With regard to alogliptin, the FDA issued a complete response to Takeda on its NDA in June 2009 and requested Takeda to conduct an additional cardiovascular safety trial to satisfy the FDAs December 2008 guidance on anti-diabetes
therapies. As a result of the risks associated with drug development, including poor or unexpected clinical trial results, obtaining regulatory approval to sell in any country and changing regulatory requirements, the Company might not receive any
further milestone payments, royalties or other payments with respect to any of its drug development collaborations.

As of June 30,
2009, the Company had two collaborations that involved potential future expenditures. The first is the Companys collaboration with Johnson & Johnson for Priligy. In connection with this collaboration, the Company has an obligation to
pay a royalty to Eli Lilly and Company of 5% on annual net sales of the compound in excess of $800 million.

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



22



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|11. | Commitments and Contingencies (continued)
|--- | -----------------------------------------



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

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



|12. | Fair Value of Financial Instruments
|--- | -----------------------------------

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

The following table presents information about the Companys assets and liabilities measured at fair value
on a recurring basis as of June 30, 2009:



|                          |  |         |         |         |   |         |  |       |        |  |   |        
|------------------------- |  | ------- | ------- | ------- | - | ------- |  | ----- | ------ |  | - | -------
|                          |  | Level 1 |         | Level 2 |   | Level 3 |  | Total
|Assets                    |  |         |         |         |   |         |  |       |        |  |   |        
|Cash and cash equivalents |  | $       | 308,692 |         | $ | 73,565  |  | $     |       |  | $ | 382,257
|Short-term investments    |  |         |        |         |   | 13,078  |  |       |       |  |   | 13,078 
|Long-term investments     |  |         |        |         |   |        |  |       | 96,276 |  |   | 96,276 
|Derivative contracts      |  |         |        |         |   | 9,728   |  |       |       |  |   | 9,728  
|                          |  |         |         |         |   |         |  |       |        |  |   |        
|Total assets              |  | $       | 308,692 |         | $ | 96,371  |  | $     | 96,276 |  | $ | 501,339
|                          |  |         |         |         |   |         |  |       |        |  |   |        
|                          |  |         |         |        
|Liabilities               |  |         |         |         |   |         |  |       |        |  |   |        
|Derivative contracts      |  | $       |        |         | $ | 3,891   |  | $     |       |  | $ | 3,891  
|                          |  |         |         |         |   |         |  |       |        |  |   |        
|Total liabilities         |  | $       |        |         | $ | 3,891   |  | $     |       |  | $ | 3,891  
|                          |  |         |         |         |   |         |  |       |        |  |   |        



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##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)



|12. | Fair Value of Financial Instruments (continued)
|--- | -----------------------------------------------



The following table provides a reconciliation of the beginning and ending balances for assets and
liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2009:



|                                                                                                          |  |                      |        |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | -
|                                                                                                          |  | Long-terminvestments |       
|Balance as of December 31, 2008                                                                           |  | $                    | 89,618 |  
|                                                                                                          | 
|Adjustment to previously recognized unrealized loss on investments included in other comprehensive income |  |                      | 8,893  |  
|                                                                                                          |  |                      |        |  
|                                                                                                          | 
|Balance as of March 31, 2009                                                                              |  | $                    | 98,511 |  
|                                                                                                          | 
|Liquidation of investments                                                                                |  |                      | (3,200 | )
|                                                                                                          | 
|Adjustment to previously recognized unrealized loss on investments included in other comprehensive income |  |                      | 965    |  
|                                                                                                          |  |                      |        |  
|                                                                                                          | 
|Balance as of June 30, 2009                                                                               |  | $                    | 96,276 |  
|                                                                                                          |  |                      |        |  



|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:



|                                          |  |                            |           |   |                          |   |           |      |  |      |         |  |   |         |  
|----------------------------------------- |  | -------------------------- | --------- | - | ------------------------ | - | --------- | ---- |  | ---- | ------- |  | - | ------- | -
|                                          |  | Three Months EndedJune 30, |           |   | Six Months EndedJune 30, |  
|                                          |  | 2008                       |           |   | 2009                     |   |           | 2008 |  | 2009 |        
|Income (loss) from continuing operations: |  |                            |           |   |                          |   |           |      |  |      |         |  |   |         |  
|Development                               |  | $                          | 72,714    |   |                          | $ | 59,125    |      |  | $    | 131,011 |  | $ | 121,905 |  
|Discovery Sciences                        |  |                            | (2,818    | ) |                          |   | (5,743    | )    |  |      | 5,954   |  |   | (3,274  | )
|                                          |  |                            |           |   |                          |   |           |      |  |      |         |  |   |         |  
|Total                                     |  | $                          | 69,896    |   |                          | $ | 53,382    |      |  | $    | 136,965 |  | $ | 118,631 |  
|                                          |  |                            |           |   |                          |   |           |      |  |      |         |  |   |         |  
|                                          |  |                            |          
|                                          |  | December 31,2008           |           |   | June 30,2009             |   |           |      | 
|Identifiable assets:                      |  |                            |           |   |                          |   |           |      | 
|Development                               |  | $                          | 1,680,317 |   |                          | $ | 1,796,876 |      | 
|Discovery Sciences                        |  |                            | 74,111    |   |                          |   | 82,722    |      | 
|                                          |  |                            |           |   |                          |   |           |      | 
|Total                                     |  | $                          | 1,754,428 |   |                          | $ | 1,879,598 |      | 
|                                          |  |                            |           |   |                          |   |           |      | 



|14. | Subsequent Event
|--- | ----------------

In July 2009, the Company reduced
its workforce in North America by approximately 270 employees. In the third quarter of 2009, the affected employees will receive transition pay and benefits along with outplacement services totaling approximately $4.0 million.



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##### Table of Contents

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

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

Forward-looking Statements

This Form
10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as
might, will, should, expect, plan, anticipate, believe, estimate, predict, intend, potential or continue,
or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual
events or results might differ materially due to a number of factors, including those listed in Potential Volatility of Quarterly Operating Results and Stock Price below and in Item 1A. Risk Factors included in our Annual
Report on Form 10-K for the year ended December 31, 2008. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Company Overview

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

We have been in the drug development business for more than 23 years. Our development services include preclinical programs and Phase I to Phase IV
clinical development services, as well as bioanalytical, cGMP, biomarker product analysis and global central laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a wide spectrum of
therapeutic areas and in 102 countries spanning six continents. In addition, for marketed drugs, biologics and devices, we offer support such as product launch services, medical information, patient compliance programs, patient and disease registry
programs, product safety and pharmacovigilance, Phase IV monitored studies and prescription-to-over-the-counter programs.

With 76 offices
in 38 countries and more than 10,000 professionals worldwide, we have provided services to 46 of the top 50 pharmaceutical companies in the world as ranked by 2007 healthcare research and development spending. We also work with leading biotechnology
and medical device companies and government organizations that sponsor clinical research. We are one of the worlds largest providers of drug development services based on 2008 annual net revenue generated from contract research organizations.

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

Our integrated drug discovery and development services offer our clients a way to identify and develop drug candidates
more quickly and cost-effectively. In addition, with global infrastructure, we are able to accommodate the multinational drug discovery and development needs of our clients. For more detailed information on PPD, see our Annual Report on Form 10-K
for the year ended December 31, 2008.



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##### Table of Contents

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see
Item 1. Business  Industry Overview  Trends Affecting the Drug Discovery and Development Industry in our Annual Report on Form 10-K for the year ended December 31, 2008. In the first half of 2009, we experienced lower
demand for our services, high cancellation rates and significant project delays. We believe this was primarily due to the current general economic conditions and global financial crisis. Despite these conditions and uncertainties about the level of
and delays in R&D spending by pharmaceutical and biotech companies, we continue to believe in the fundamentals that drive the market for CRO services and that the market will rebound in future periods. For the remainder of 2009, we plan to focus
on sales execution, operational performance and building strategic partnerships with pharmaceutical and biotechnology companies.

Despite
the current market for CRO services, we continue to expand our operations. We are making progress on our new laboratories in Ireland and Singapore, expecting both to be operational in the second half of 2009. We recently completed our acquisition of
AbC.R.O., Inc., which expanded our footprint and existing capabilities in Central and Eastern Europe. Finally, we believe there are opportunities to grow our vaccine lab, which we acquired at the end of 2008.

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 2009, we had new authorizations of $465.9 million, a decrease of 15.6% over the same period in 2008. The cancellation rate for the second quarter of 2009 was 6.7% of backlog compared to 5.9%
for the second quarter in 2008. Backlog was to $3.2 billion as of June 30, 2009, up 11.2% over June 30, 2008. The average length of our contracts continued to increase, reaching 37 months as of June 30, 2009, up from 34 months as of
June 30, 2008 due primarily to several new contracts with longer than average duration.

Backlog by client type as of June 30,
2009 was 65.4% pharmaceutical, 25.8% biotech and 8.8% government/other, as compared to 53.9% pharmaceutical, 35.8% biotech and 10.3% government/other as of June 30, 2008. This change in the composition of our backlog is primarily a result of an
increase in authorizations from pharmaceutical companies during the 12 month period ended June 30, 2009. Net revenue by client type for the quarter ended June 30, 2009 was 59.7% pharmaceutical, 29.0% biotech and 11.3% government/other,
compared to 55.5% pharmaceutical, 31.2% biotech and 13.3% government/other for the quarter ended June 30, 2008.

For the second
quarter of 2009, net revenue contribution by service area was 78.6% for Phase II-IV services, 17.4% for laboratory services, 3.7% for the Phase I clinic and 0.2% for Discovery Sciences, compared to 80.2% for Phase II-IV services, 14.3% for
laboratory services, 4.4% for the Phase I clinic and 1.1% for Discovery Sciences for the same period in 2008. Top therapeutic areas by net revenue for the quarter ended June 30, 2009 were oncology, circulatory/cardiovascular, infectious
diseases, endocrine/metabolic and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the quarter ended June 30, 2009, see Results of Operations  Three Months Ended
June 30, 2008 versus Three Months Ended June 30, 2009 below.

In July 2009, we reduced our workforce in North America by
approximately 270 employees. In the third quarter of 2009, the affected employees will receive transition pay and benefits along with outplacement services, totaling approximately $4.0 million.

As of June 30, 2009, we had $669.2 million of cash and cash equivalents and short- and long-term investments, after giving effect to the payment of
our second quarter dividend of $17.7 million and capital expenditures of $9.2 million. In the second quarter of 2009, we generated $14.5 million in cash from operations. The number of days revenue outstanding in accounts receivable and
unbilled services, net of unearned income, also known as DSO, was 32 days for the six months ended June 30, 2009, compared to 42 days for the year ended December 31, 2008. DSO decreased in the first six months of 2009 due to improved cash
collections, the mix of contracts performed and their payment terms. We plan to continue to monitor DSO and the various factors that affect it. However, we expect DSO will continue to fluctuate from quarter to quarter depending on contract terms,
the mix of contracts performed and our success in collecting receivables.



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In May 2009, we completed our disposition of the assets of our wholly owned subsidiary, Piedmont Research
Center, LLC, to Charles River Laboratories International, Inc. for total consideration of $46.0 million. Due to the unique service offering of Piedmont Research Center, we felt this business unit was not a long-term strategic fit for us. Going
forward, we intend to focus our resources on our core development and discovery services, including our compound partnering programs, to drive future revenue and earnings growth.

In April 2009, we acquired Magen BioSciences, Inc., a biotechnology company focused on dermatologic therapies, for total consideration of $14.9 million.
Through this acquisition, we are expanding our compound partnering program into dermatology and gaining screening capability for dermatologic compounds.

With regard to our existing compound partnering arrangements, Johnson & Johnsons marketing authorization application for dapoxetine is under regulatory review in several countries. To date,
Finland, Sweden, Portugal, Austria, Italy, Spain, Germany and Mexico have approved the drug for marketing under the trade name Priligy. In the first quarter of 2009, we received a $2.5 million milestone payment on each of the first two national
approvals, for a total of $5.0 million. We recorded royalties from the sale of Priligy in Europe in the second quarter, which marks the first quarter for receipt of royalties from our compound partnering business. We are entitled to royalties on net
sales of Priligy and sales-based milestones if requisite sales levels are reached.

Takeda submitted the new drug application, or NDA, for
alogliptin to the Food and Drug Administration, or FDA, in December 2007. In June 2009, the FDA issued a complete response to Takeda on its alogliptin NDA and requested Takeda to conduct an additional cardiovascular safety trial that satisfies the
FDAs December 2008 guidance on anti-diabetes therapies. If additional filings and approvals occur for alogliptin, we will receive additional regulatory milestones, royalties on sales and sales-based milestones if specified sales levels are
achieved.

With regard to our collaboration on the statin compound, PPD10558, as previously announced, we have completed a high dose
comparator study in healthy volunteers. The drug was well-tolerated and the results suggest that it compares favorably to currently marketed statins. We continue to evaluate the future development of this compound.

We believe these drug development investments and collaborations allow us to leverage our resources and global drug development expertise to create new
opportunities for growth and to share the risks and potential rewards of drug development with our collabrators. For a background discussion of our compound partnering programs, see Item 1. Business  Our Services  Our Discovery
Sciences Group  Compound Collaboration Programs in our Annual Report on Form 10-K for the year ended December 31, 2008. We believe our compound partnering and investment strategy uses our cash resources and drug development
expertise to drive mid- to long-term shareholder value. For the remainder of 2009, we plan to continue advancing our existing collaborations and recently acquired dermatology assets in addition to evaluating new potential strategies and
opportunities in this area.

New Business Authorizations and Backlog

We add new business authorizations, which are sales of our services, to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to
quarter and contracts generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the three months ended June 30, 2009 and 2008 were
$465.9 million and $552.1 million, respectively.

Our backlog consists of new business authorizations for which the work has not started
but is anticipated to begin in the future and of contracts in process that have not been completed. As of June 30, 2009, the remaining duration of the contracts in our backlog ranged from one to 90 months, with a weighted-average duration of 37
months. We expect the weighted-average duration of the contracts in our backlog to fluctuate from quarter to quarter in the future, based on the contracts constituting our backlog at any given time. Amounts included in backlog represent future
potential revenue and exclude revenue that we have recognized. We adjust backlog on a monthly basis to account for fluctuations in exchange rates, cancellations of contracts and adjustments to the scope of contracts. Our backlog as of June 30,
2009 and 2008 was $3.2 billion and $2.9 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, 2008, including contract
cancellations, 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 and Discovery Sciences segments. To measure performance on a given date, we compare direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate
primarily to the amount of labor and related overhead costs for the delivery of services. We believe this is the best indicator of the performance of the contractual obligations. Changes in the estimated total direct costs to complete a contract
without a corresponding proportional change to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. For time-and-material contracts in both our Development and
Discovery Sciences segments, we recognize revenue as hours are worked, multiplied by the applicable hourly rate. For our Phase I, laboratory and biomarker businesses, we recognize revenue from unitized contracts as subjects or samples are tested,
multiplied by the applicable unit price. We offer volume discounts to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated
total rebate to be earned for the period.

In connection with the management of clinical trials, we pay, on behalf of our clients, fees to
investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. Amounts paid by us as a principal for out-of-pocket costs are included in
direct costs as reimbursable out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of income, 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, 2009 and 2008, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were $97.1 million
and $93.7 million, respectively.

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

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

Recording
of Expenses

We generally record our operating expenses among the following categories:



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



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



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



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

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

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

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, training costs,



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administrative travel, an allocation of facility and information technology costs and costs related to operational employees performing administrative tasks.

We record depreciation expense on a straight-line method, based on the following estimated useful lives:



|                                |  |            
|------------------------------- |  | -----------
|Buildings                       |  | 20-40 years
|Furniture and equipment         |  | 5-10 years 
|Computer equipment and software |  | 2-5 years  
|Aircraft                        |  | 30 years   

We depreciate leasehold improvements over the shorter of the life of the relevant lease or the useful life of the
improvement. We depreciate property under capital leases over the life of the lease or the service life, whichever is shorter. We record amortization expense on intangible assets on a straight-line method over the life of the intangible assets.



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Three Months Ended June 30, 2008 versus Three Months Ended June 30, 2009

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, 2008 compared to the three months ended June 30, 2009.



|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ----------- |  | - | ----------- | - |  | ------ | --
|                                                                    |  | Three Months EndedJune 30, |         |      |   |             |  |  
|(in thousands, except per share data)                               |  | 2008                       |         | 2009 |   | $ Inc (Dec) |  |   | % Inc (Dec) |  
|Net revenue:                                                        |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Development                                                         |  | $                          | 370,648 |      | $ | 330,179     |  | $ | (40,469     | ) |  | (10.9  | )%
|Discovery Sciences                                                  |  |                            | 385     |      |   | 768         |  |   | 383         |   |  | 99.5   |   
|Reimbursed out-of-pockets                                           |  |                            | 32,110  |      |   | 24,271      |  |   | (7,839      | ) |  | (24.4  | ) 
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Total net revenue                                                   |  |                            | 403,143 |      |   | 355,218     |  |   | (47,925     | ) |  | (11.9  | ) 
|                                                                    |  |                            |         |     
|Direct costs:                                                       |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Development                                                         |  |                            | 183,546 |      |   | 158,486     |  |   | (25,060     | ) |  | (13.7  | ) 
|Discovery Sciences                                                  |  |                            | 289     |      |   | 502         |  |   | 213         |   |  | 73.7   |   
|Reimbursable out-of-pocket expenses                                 |  |                            | 32,110  |      |   | 24,271      |  |   | (7,839      | ) |  | (24.4  | ) 
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Total direct costs                                                  |  |                            | 215,945 |      |   | 183,259     |  |   | (32,686     | ) |  | (15.1  | ) 
|                                                                    |  |                            |         |     
|Research and development expenses                                   |  |                            | 1,895   |      |   | 4,701       |  |   | 2,806       |   |  | 148.1  |   
|Selling, general and administrative expenses                        |  |                            | 100,560 |      |   | 97,782      |  |   | (2,778      | ) |  | (2.8   | ) 
|Depreciation and amortization                                       |  |                            | 14,847  |      |   | 16,094      |  |   | 1,247       |   |  | 8.4    |   
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Income from operations                                              |  |                            | 69,896  |      |   | 53,382      |  |   | (16,514     | ) |  | (23.6  | ) 
|                                                                    |  |                            |         |     
|Reimbursement on (impairment of) investments, net                   |  |                            | 2,976   |      |   |            |  |   | (2,976      | ) |  | (100.0 | ) 
|Other income, net                                                   |  |                            | 2,555   |      |   | 1,075       |  |   | (1,480      | ) |  | (57.9  | ) 
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                            |         |     
|Income from continuing operations before provision for income taxes |  |                            | 75,427  |      |   | 54,457      |  |   | (20,970     | ) |  | (27.8  | ) 
|Provision for income taxes                                          |  |                            | 26,887  |      |   | 15,793      |  |   | (11,094     | ) |  | (41.3  | ) 
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Income from continuing operations                                   |  |                            | 48,540  |      |   | 38,664      |  |   | (9,876      | ) |  | (20.3  | ) 
|                                                                    |  |                            |         |     
|Discontinued operations, net of provision for income taxes          |  |                            | 466     |      |   | 19,397      |  |   | 18,931      |   |  | 4062.4 |   
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|Net income                                                          |  | $                          | 49,006  |      | $ | 58,061      |  | $ | 9,055       |   |  | 18.5   |   
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                            |         |     
|Income per diluted share from continuing operations                 |  | $                          | 0.40    |      | $ | 0.33        |  | $ | (0.07       | ) |  | (17.5  | ) 
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                            |         |     
|Income per diluted share from discontinued operations               |  | $                          | 0.00    |      | $ | 0.16        |  | $ | 0.16        |   |  | 0.0    |   
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                            |         |     
|Net income per diluted share                                        |  | $                          | 0.41    |      | $ | 0.49        |  | $ | 0.08        |   |  | 19.5   |   
|                                                                    |  |                            |         |      |   |             |  |   |             |   |  |        |   

Total net revenue decreased $47.9 million to $355.2 million in the second quarter of 2009. The
decrease in total net revenue resulted primarily from a decrease in our Development segment revenue. The Development segment generated net revenue of $330.2 million, which accounted for 93.0% of total net revenue for the second quarter of 2009. The
$40.5 million decrease in Development segment net revenue was primarily attributable to a $37.9 million decrease in net revenue from our Phase II-IV services, of which $7.7 million of the decrease was due to the strengthening of the U.S. dollar
relative to the euro, Brazilian real and pound sterling. Our Phase I clinic also had a decrease in net revenue in the second quarter of 2009 as compared to the same period in 2008, which was partially offset by an increase in net revenue from our
laboratory units primarily due to revenue generated from our vaccine lab acquired in December 2008.



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Total direct costs decreased $32.7 million to $183.3 million in the second quarter of 2009 primarily as
the result of a decrease in Development segment direct costs. Development segment direct costs decreased $25.1 million to $158.5 million in the second quarter of 2009. This decrease was mainly attributable to a decrease in personnel costs of $18.1
million and a decrease in contract labor and subcontractor costs of $8.3 million, partially offset by an increase of $2.2 million related to losses on our foreign currency hedging position. Of the $25.1 million decrease in Development segment direct
costs, $8.0 million of the decrease was due to the strengthening of the U.S. dollar relative to the euro, Brazilian real and pound sterling and $6.6 million of the decrease was attributable to a research credit recognized in the second quarter of
2009 associated with a foreign research incentive program. Of the $6.6 million, $4.9 million was related to qualifying foreign research credits incurred during 2008. We expect to receive quarterly research credits of approximately $0.9 million
during the remainder of 2009.

R&D expenses increased $2.8 million to $4.7 million in the second quarter of 2009. The increase in
R&D expense was primarily due to development costs associated with our dermatology compounds that we acquired as part of the Magen acquisition in April 2009. We plan to continue to evaluating other compound partnering strategies and
opportunities, which could result in additional R&D expenses and earnings dilution in future periods.

SG&A expenses decreased $2.8
million to $97.8 million in the second quarter of 2009. The decrease in SG&A expenses was primarily related to a $4.6 million decrease in personnel costs attributable to $4.0 million in research credits mentioned above and a decrease in
recruitment and relocation costs of $1.9 million, partially offset by a $1.6 million increase in bad debt expense.

Depreciation and
amortization expense increased $1.2 million to $16.1 million in the second quarter of 2009. The increase relates to property and equipment we acquired over the past year to accommodate growth.

Other income, net decreased $1.5 million to $1.1 million in the second quarter of 2009. This decrease was due primarily to a $3.0 million decrease in
interest income from lower interest rates earned on cash balances, partially offset by a $0.7 million gain on the sale of investments. Changes in foreign currency exchange rates from the time we prepare invoices until the client pays also resulted
in a net loss on foreign currency transactions of $0.6 million for the second quarter of 2009, down from a net loss of $1.5 million in the second quarter of 2008.

Our provision for income taxes from continuing operations decreased $11.1 million to $15.8 million in the second quarter of 2009. Our effective income tax rate from continuing operations for the second quarter of 2009
was 29.0% compared to 35.7% for the second quarter of 2008. This decrease in our tax rate was primarily due to the receipt of nontaxable foreign research credits.

Discontinued operations, net of provision for income taxes was $19.4 million for the second quarter of 2009. In May 2009, we completed our disposition of Piedmont Research Center, our preclinical oncology services
business, to Charles River Laboratories. As a result, this business unit has been shown as discontinued operations for the quarters ended June 30, 2008 and 2009. The gain from the sale of business of $19.5 million, net of provision for income
taxes of $16.1 million was recognized in the second quarter of 2009.

Net income of $58.1 million in the second quarter of 2009 represents
an increase of 18.5% from $49.0 million in the second quarter of 2008. Net income per diluted share of $0.49 in the second quarter of 2009 represents a 19.5% increase from $0.41 net income per diluted share in the second quarter of 2008.



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Six Months Ended June 30, 2008 versus Six Months Ended June 30, 2009

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, 2008 compared to the six months ended June 30, 2009.



|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ----------- |  | - | ----------- | - |  | ------ | --
|                                                                    |  |                          |        
|                                                                    |  | Six Months EndedJune 30, |         |   |      |   |             | 
|(in thousands, except per share data)                               |  | 2008                     |         |   | 2009 |   | $ Inc (Dec) |  |   | % Inc (Dec) |  
|Net revenue:                                                        |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Development                                                         |  | $                        | 718,446 |   |      | $ | 665,533     |  | $ | (52,913     | ) |  | (7.4   | )%
|Discovery Sciences                                                  |  |                          | 16,363  |   |      |   | 6,444       |  |   | (9,919      | ) |  | (60.6  | ) 
|Reimbursed out-of-pockets                                           |  |                          | 60,791  |   |      |   | 48,133      |  |   | (12,658     | ) |  | (20.8  | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Total net revenue                                                   |  |                          | 795,600 |   |      |   | 720,110     |  |   | (75,490     | ) |  | (9.5   | ) 
|                                                                    |  |                          |         |  
|Direct costs:                                                       |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Development                                                         |  |                          | 360,736 |   |      |   | 322,655     |  |   | (38,081     | ) |  | (10.6  | ) 
|Discovery Sciences                                                  |  |                          | 746     |   |      |   | 1,118       |  |   | 372         |   |  | 49.9   |   
|Reimbursable out-of-pocket expenses                                 |  |                          | 60,791  |   |      |   | 48,133      |  |   | (12,658     | ) |  | (20.8  | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Total direct costs                                                  |  |                          | 422,273 |   |      |   | 371,906     |  |   | (50,367     | ) |  | (11.9  | ) 
|                                                                    |  |                          |         |  
|Research and development expenses                                   |  |                          | 6,198   |   |      |   | 6,227       |  |   | 29          |   |  | 0.5    |   
|Selling, general and administrative expenses                        |  |                          | 198,963 |   |      |   | 192,019     |  |   | (6,944      | ) |  | (3.5   | ) 
|Depreciation and amortization                                       |  |                          | 29,594  |   |      |   | 31,327      |  |   | 1,733       |   |  | 5.9    |   
|Impairment of intangible asset                                      |  |                          | 1,607   |   |      |   |            |  |   | (1,607      | ) |  | (100.0 | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Income from operations                                              |  |                          | 136,965 |   |      |   | 118,631     |  |   | (18,334     | ) |  | (13.4  | ) 
|                                                                    |  |                          |         |  
|Reimbursement on (impairment of) investments, net                   |  |                          | (13,343 | ) |      |   |            |  |   | 13,343      |   |  | (100.0 | ) 
|Other income, net                                                   |  |                          | 8,272   |   |      |   | 857         |  |   | (7,415      | ) |  | (89.6  | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                          |         |  
|Income from continuing operations before provision for income taxes |  |                          | 131,894 |   |      |   | 119,488     |  |   | (12,406     | ) |  | (9.4   | ) 
|Provision for income taxes                                          |  |                          | 43,740  |   |      |   | 36,526      |  |   | (7,214      | ) |  | (16.5  | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Income from continuing operations                                   |  |                          | 88,154  |   |      |   | 82,962      |  |   | (5,192      | ) |  | (5.9   | ) 
|                                                                    |  |                          |         |  
|Discontinued operations, net of provision for income taxes          |  |                          | 981     |   |      |   | 19,668      |  |   | 18,687      |   |  | 1904.9 |   
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|Net income                                                          |  | $                        | 89,135  |   |      | $ | 102,630     |  | $ | 13,495      |   |  | 15.1   |   
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                          |         |  
|Income per diluted share from continuing operations                 |  | $                        | 0.73    |   |      | $ | 0.70        |  | $ | (0.03       | ) |  | (4.1   | ) 
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                          |         |  
|Income per diluted share from discontinued operations               |  | $                        | 0.01    |   |      | $ | 0.17        |  | $ | 0.16        |   |  | 1600.0 |   
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   
|                                                                    |  |                          |         |  
|Net income per diluted share                                        |  | $                        | 0.74    |   |      | $ | 0.87        |  | $ | 0.13        |   |  | 17.6   |   
|                                                                    |  |                          |         |   |      |   |             |  |   |             |   |  |        |   

Total net revenue decreased $75.5 million to $720.1 million in the first six months of 2009. The
decrease in total net revenue resulted from decreases in both our Development and Discovery Sciences segment revenue. The Development segment generated net revenue of $665.5 million, which accounted for 92.4% of total net revenue for the first six
months of 2009. The $52.9 million decrease in Development segment net revenue was primarily attributable to a $51.0 million decrease in net revenue from our Phase II-IV services, of which $17.4 million of the decrease was due to the strengthening of
the U. S. dollar relative to the euro, Brazilian real and pound sterling. Our Phase I clinic also had a decrease in net revenue in the first six months of 2009 as compared to the same period in 2008, which was offset by an increase in net revenue
from our laboratory units primarily due to revenue generated from our vaccine lab.



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The Discovery Sciences segment generated net revenue of $6.4 million in the first six months of 2009, a
decrease of $9.9 million from the first six months of 2008. The higher 2008 Discovery Sciences segment net revenue was mainly attributable to the $15.0 million milestone payment we earned in the first six months of 2008 as a result of Takedas
submission of the alogliptin NDA to the FDA, while in 2009 we received $5.0 million in milestone payments as a result of regulatory approvals of Priligy in Finland and Sweden.

Total direct costs decreased $50.4 million to $371.9 million in the first six months of 2009 primarily as the result of a decrease in Development segment
direct costs. Development segment direct costs decreased $38.1 million to $322.7 million in the first six months of 2009. This decrease was mainly attributable to a decrease in personnel costs of $27.5 million and a decrease in contract labor and
subcontractor costs of $13.5 million, partially offset by an increase of $6.6 million related to losses on our foreign currency hedging position. Of the $38.1 million decrease in Development segment direct costs, $15.0 million of the decrease was
due to the strengthening of the U.S. dollar relative to the euro, Brazilian real and pound sterling and $6.6 million of the decrease was attributable to a research credit recognized in the second quarter of 2009 associated with a foreign research
incentive program. Of the $6.6 million, $4.9 million was related to qualifying foreign research credits incurred during 2008. We expect to receive quarterly research credits of approximately $0.9 million during the remainder of 2009.

SG&A expenses decreased $6.9 million to $192.0 million in the first six months of 2009. The decrease in SG&A expenses was primarily related to a
$4.0 million decrease in personnel costs attributable to research credits mentioned above, a decrease in recruitment and relocation costs of $3.7 million and a decrease in travel costs of $2.0 million, partially offset by a $1.8 million increase in
information systems.

Depreciation and amortization expense increased $1.7 million to $31.3 million in the first six months of 2009. The
increase relates to property and equipment we acquired over the past year to accommodate growth.

Other income, net decreased $7.4 million
to $0.9 million in the first six months of 2009. This decrease was due primarily to a $7.3 million decrease in interest income from lower interest rates earned on cash balances.

Our provision for income taxes from continuing operations decreased $7.2 million to $36.5 million in the first six months of 2009. Our effective income
tax rate from continuing operations for the first six months of 2009 was 30.6% compared to 33.2% for the first six months of 2008. This decrease in our tax rate was primarily due to the receipt of the nontaxable foreign research credits.

Discontinued operations, net of provision for income taxes was $19.7 million in the first six months of 2009. In May 2009, we completed our
disposition of Piedmont Research Center, our preclinical oncology services business, to Charles River Laboratories. As a result, this business unit has been shown as discontinued operations for the quarters ended June 30, 2008 and 2009. The
gain from the sale of business of $19.5 million, net of provision for income taxes of $16.1 million was recognized in the first six months of 2009.

Net income of $102.6 million in the first six months of 2009 represents an increase of 15.1% from $89.1 million in the first six months of 2008. Net income per diluted share of $0.87 in the first six months of 2009 represents a 17.6%
increase from $0.74 net income per diluted share in the first six months of 2008. Net income per diluted share for the first six months of 2008 included a $15.0 million milestone payment from Takeda under our DPP-4 collaboration agreement, a $1.6
million impairment of an intangible asset and a $13.3 million net impairment of investments discussed above. Net income per diluted share for the first six months of 2009 included $5.0 million in milestone payments in connection with the regulatory
approvals of Priligy in Finland and Sweden and a $19.5 million gain, net of tax, from the sale of Piedmont Research Center.



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Liquidity and Capital Resources

As of June 30, 2009, we had $559.8 million of cash and cash equivalents and $13.1 million of short-term investments. We also had $96.3 million of long-term investments, net of unrealized loss, consisting of
auction rate securities. We have classified these auction rate securities as long-term due to uncertainties about the liquidity in the auction rate securities market. Our cash and cash equivalents and short-term investments are invested in financial
instruments that are issued or guaranteed by the U.S. government and municipal debt obligations. Our expected primary cash needs are for capital expenditures, expansion of services, possible acquisitions, investments and compound partnering
collaborations, geographic expansion, dividends, working capital and other general corporate purposes. We have historically funded our operations, dividends and growth, including acquisitions, primarily with cash flow from operations.

We held $96.3 million and $89.6 million in auction rate securities at June 30, 2009 and December 31, 2008, respectively. Our portfolio of
investments in auction rate securities consists of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. We will not be able to liquidate these securities until a future
auction is successful, the issuer redeems the outstanding securities or the securities mature. While we liquidated $3.2 million of our auction rate securities portfolio at par value in the second quarter of 2009, due to continuing uncertainties
about the liquidity in the auction rate securities market, we classified our entire auction rate securities balance of $96.3 million as long-term assets. We also recorded an unrealized loss on these investments of $20.6 million as of June 30,
2009 and $30.5 million as of December 31, 2008 based on a Level 3 valuation, including assumptions about appropriate maturity periods, market interest rates and underlying credit worthiness of the issuers. We concluded that this impairment was
temporary based on the market conditions, our ability and intent to hold the auction rate securities until the fair value recovers and an assessment of credit quality of the underlying collateral.

In the first six months of 2009, our operating activities provided $82.6 million in cash as compared to $177.0 million for the same period last year. The
change in cash flow was due primarily to (1) a $38.0 million decrease in noncash items relating to investing or financing activities, including decreases in the following: gain on sale of business of $19.5 million; impairment of investments of
$13.3 million and stock option expense of $2.9 million, and (2) deferrals of past, and accruals of expected future, operating cash receipts and payments totaling ($70.5) million. The change in adjustments for accruals of expected future
operating cash receipts and payments includes prepaid expenses and investigator advances of $4.6 million and payables to investigators of $3.0 million. The change in adjustments for deferrals of past operating cash receipts and payments includes
unearned income of ($46.7) million, accounts payable and other accrued expenses and deferred rent of ($20.6) million, accounts receivable and unbilled services of ($8.4) million and accrued and deferred income taxes of ($3.2) million. Fluctuations
in receivables and unearned income occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to clients and collect outstanding accounts receivable. This activity varies by individual client and
contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of unbilled services and unearned revenue can vary significantly from quarter to quarter.

In the first six months of 2009, our investing activities used $0.9 million in cash. We used cash of $35.0 million for acquisitions, $23.5
million for capital expenditures and $2.0 million for other investments. These amounts were partially offset by proceeds from the sale of business of $42.1 million and the maturity and sale of investments of $17.0 million. Our capital expenditures
in the first six months of 2009 primarily consisted of $14.0 million for computer software and hardware, $4.8 million for various leasehold improvements and $3.6 million for additional scientific equipment for our laboratory units.

In the first six months of 2009, our financing activities used $26.3 million of cash. We used $32.4 million to pay dividends, which was offset by
proceeds of $6.0 million from stock option exercises and purchases under our employee stock purchase plan.



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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, 2008 to June 30, 2009.



|                                               |  |                  |           |              |   |             |  |   |         |  
|---------------------------------------------- |  | ---------------- | --------- | ------------ | - | ----------- |  | - | ------- | -
|(in thousands)                                 |  | December 31,2008 |           | June 30,2009 |   | $ Inc (Dec) | 
|Current assets:                                |  |                  |           |              |   |             |  |   |         |  
|Cash and cash equivalents                      |  | $                | 491,755   |              | $ | 559,840     |  | $ | 68,085  |  
|Short-term investments                         |  |                  | 27,064    |              |   | 13,078      |  |   | (13,986 | )
|Accounts receivable and unbilled services, net |  |                  | 401,303   |              |   | 423,090     |  |   | 21,787  |  
|Investigator advances                          |  |                  | 16,901    |              |   | 16,163      |  |   | (738    | )
|Prepaid expenses                               |  |                  | 27,242    |              |   | 37,516      |  |   | 10,274  |  
|Deferred tax assets                            |  |                  | 27,972    |              |   | 20,877      |  |   | (7,095  | )
|Other current assets                           |  |                  | 26,973    |              |   | 36,588      |  |   | 9,615   |  
|                                               |  |                  |           |              |   |             |  |   |         |  
|Total current assets                           |  | $                | 1,019,210 |              | $ | 1,107,152   |  | $ | 87,942  |  
|                                               |  |                  |           |              |   |             |  |   |         |  
|                                               |  |                  |          
|Current liabilities:                           |  |                  |           |              |   |             |  |   |         |  
|Accounts payable                               |  | $                | 23,022    |              | $ | 20,406      |  | $ | (2,616  | )
|Payables to investigators                      |  |                  | 39,370    |              |   | 40,093      |  |   | 723     |  
|Accrued income taxes                           |  |                  | 18,388    |              |   | 18,987      |  |   | 599     |  
|Other accrued expenses                         |  |                  | 178,926   |              |   | 176,183     |  |   | (2,743  | )
|Unearned income                                |  |                  | 246,649   |              |   | 248,196     |  |   | 1,547   |  
|                                               |  |                  |           |              |   |             |  |   |         |  
|Total current liabilities                      |  | $                | 506,355   |              | $ | 503,865     |  | $ | (2,490  | )
|                                               |  |                  |           |              |   |             |  |   |         |  
|                                               |  |                  |          
|Working capital                                |  | $                | 512,855   |              | $ | 603,287     |  | $ | 90,432  |  

Working capital was $603.3 million as of June 30, 2009 compared to $512.9 at
December 31, 2008. The increase in working capital was due primarily to an increase in cash and cash equivalents, an increase in accounts receivable and unbilled services, net and prepaid expenses, partially offset by decreases in short-term
investments.

For the six months ended June 30, 2009, DSO was 32 days compared to 42 days for the year ended December 31, 2008.
We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable period. We expect DSO will continue to fluctuate in the future depending on contract terms, the mix of
contracts performed within a quarter, the levels of investigator advances and unearned income, and our success in collecting receivables.

Effective August 1, 2009, we renewed our $25.0 million revolving credit facility with Bank of America, N.A. Indebtedness under the facility is unsecured and subject to covenants relating to financial ratios and restrictions on certain
types of transactions. This credit facility does not expressly restrict or limit the payment of dividends. We were in compliance with all loan covenants as of June 30, 2009. 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 0.75%. We can use borrowings under this credit facility for working capital and general corporate purposes. This credit facility is currently scheduled
to expire on June 30, 2010, at which time any outstanding balance will be due. As of June 30, 2009, no borrowings were outstanding under this credit facility, although the aggregate amount available for borrowing had been reduced by $1.8
million due to outstanding letters of credit issued under this facility.

In May 2009, the board of directors increased the annual dividend
rate from $0.50 to $0.60 per share per year, payable quarterly at a rate of $0.15 per share effective beginning in the second quarter of 2009. The annual 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 and agreements.



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In 2008, we announced our board of directors approved a stock repurchase program authorizing us to
repurchase up to $350.0 million of our common stock from time to time in the open market. We adopted a share repurchase program in view of the price at which our stock was trading at the time of the adoption of the program, the strength of our
balance sheet and our ability to generate cash, and in order to minimize earnings dilution from future equity compensation awards. During the three and six months ended June 30, 2009, we did not repurchase any shares. As of June 30, 2009,
$260.7 million remained available for share repurchases under the stock repurchase program. Although we do not presently intend to repurchase additional shares in the near term under our existing repurchase program, if we do, we expect to finance
any such potential stock repurchases from existing cash and cash flows from operations.

As of June 30, 2009, we have commitments to
invest up to an aggregate additional $16.2 million in four venture capital funds and $2.8 million in other investments. For further details, see Note 3 in the notes to consolidated condensed financial statements.

As of June 30, 2009, the total gross unrecognized tax benefits were $28.1 million and of this total, $11.7 million is the amount that, if
recognized, would reduce our effective tax rate. We believe that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $5.7 million within the next 12 months due to the settlement of audits and the
expiration of statutes of limitations.

Our policy for recording interest and penalties associated with tax audits is to record them as a
component of provision for income taxes. During the first six months of 2009, the amount of interest and penalties recorded as an expense to the statement of income was $0.8 million and $0.1 million, respectively. As of June 30, 2009, $6.6
million of interest and $1.1 million of penalties were accrued with respect to uncertain tax positions. To the extent these interest and penalties are not assessed, we will reduce amounts accrued and reflect them as a reduction of the overall income
tax provision.

We have been involved in compound development and commercialization collaborations since 1997. We developed a risk-sharing
research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients by sharing the risks and potential rewards associated with the
development and commercialization of drugs at various stages of development. As of June 30, 2009, we had two main collaborations, one with Johnson & Johnson and one with Takeda Pharmaceuticals Company Limited involving dapoxetine and
alogliptin, respectively, both of which involve the potential future receipt of one or more of the following forms of revenue: payments upon the achievement of specified regulatory and sales-based milestones; and royalty payments if the compound is
approved for sale. To date, Finland, Sweden, Portugal, Austria, Italy, Spain, Germany and Mexico approved dapoxetine for marketing under the trade name Priligy, and we received a $2.5 million milestone payment on each of the first two national
approvals, for a total of $5.0 million, in the first quarter of 2009. We are entitled to royalties on net sales of Priligy and sales-based milestones if requisite sales levels are reached. With regard to alogliptin, the FDA issued a complete
response to Takeda on its NDA in June 2009 and requested Takeda to conduct an additional cardiovascular safety trial to satisfy the FDAs December 2008 guidance on anti-diabetes therapies. As a result of the risks associated with drug
development, including poor or unexpected clinical trial results, obtaining regulatory approval to sell in any country and changing regulatory requirements, we might not receive any further milestone payments, royalties or other payments with
respect to any of our drug development collaborations.

As of June 30, 2009, we had two collaborations that involved potential future
expenditures. The first is our collaboration with Johnson & Johnson, for Priligy. In connection with this collaboration, we have an obligation to pay a royalty to Eli Lilly and Company of 5% on annual net sales of the compound in excess of
$800 million.

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



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compares favorably to currently marketed statins. We continue to evaluate the future clinical development of this compound.

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

We expect to
continue expanding our operations through internal growth, strategic acquisitions and investments. We expect to fund these activities, the payment of future cash dividends and potential repurchases of stock, if any, from existing cash, cash flows
from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases, if any, for the
foreseeable future. From time to time, we evaluate potential acquisitions, investments and other growth and strategic opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity
or debt securities. While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity and ability to pay dividends or repurchase our stock could be affected by current and anticipated difficult
economic conditions; our dependence on a small number of industries and clients; compliance with regulations; reliance on key personnel; breach of contract, personal injury or other tort claims; international risks; environmental or intellectual
property claims; or other factors described below under Potential Liability and Insurance, Potential Volatility of Quarterly Operating Results and Stock Price and Quantitative and Qualitative Disclosures about Market
Risk. In addition, see Risk Factors, Contractual Obligations and Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2008.

Contractual Obligations

There have been no
significant changes to the Contractual Obligation table included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Critical
Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in
their application in our 2008 Annual Report on Form 10-K. There were no material changes to our critical accounting policies and estimates in the first six months of 2009. For detailed information on our critical accounting policies and estimates,
see our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

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



|               |  |                                                                                                                      |  |                                                                                                                                                                                                                                     
|-------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date           |  | Title                                                                                                                |  | Effective Date                                                                                                                                                                                                                      
|September 2006 |  | SFAS No. 157, Fair Value Measurements                                                                              |  | Fiscal years beginning after November 15, 2007 and interim periods within those years except those specified in FAS 157-1, FAS 157-2, FAS 157-3 and FAS 157-4 which are effective for fiscal years
beginning after November 15, 2008
|               |  |                                                                                                                     
|December 2007  |  | EITF Issue 07-01, Accounting for Collaborative Arrangements                                                        |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                                      
|               |  |                                                                                                                     
|December 2007  |  | SFAS No. 141 (revised 2007), Business Combinations and FSP FAS 141(R)-1 issued to address concerns of SFAS No. 141 |  | Fiscal years beginning after December 15, 2008                                                                                                                                                                                      



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|              |  |                                                                                                                                                                            |  |                                                                           
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|December 2007 |  | SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51                                                                 |  | Fiscal years beginning after December 15, 2008                            
|              |  |                                                                                                                                                                           
|March 2008    |  | SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities                                                                                             |  | Fiscal years beginning after November 15, 2008                            
|              |  |                                                                                                                                                                           
|April 2008    |  | FSP FAS 142-3, Determination of the Useful Life of Intangible Assets                                                                                                     |  | Fiscal years beginning after December 15, 2008                            
|              |  |                                                                                                                                                                           
|June 2008     |  | FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities                                                |  | Fiscal years beginning after December 15, 2008                            
|              |  |                                                                                                                                                                           
|June 2008     |  | EITF 08-3, Accounting by Lessees for Nonrefundable Maintenance Deposits                                                                                                  |  | Fiscal years beginning after December 15, 2008                            
|              |  |                                                                                                                                                                           
|August 2008   |  | U.S. SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with IFRS published by the IASB. |  | Fiscal years ending on or after December 15, 2014                         
|              |  |                                                                                                                                                                           
|April 2009    |  | FSP FAS 107-1, Interim Disclosures About Fair Value of Financial Instruments                                                                                             |  | Interim and annual periods ending after June 15, 2009                     
|              |  |                                                                                                                                                                           
|April 2009    |  | FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments                                                                            |  | Interim and annual periods ending after June 15, 2009                     
|              |  |                                                                                                                                                                           
|May 2009      |  | SFAS No. 165, Subsequent Events                                                                                                                                          |  | Interim and annual periods ending after June 15, 2009                     
|              |  |                                                                                                                                                                           
|June 2009     |  | SFAS No. 167, Amendments to FASB Interpretation No. 46(R)                                                                                                                |  | The beginning of the first fiscal year that begins after November 15, 2009
|              |  |                                                                                                                                                                           
|June 2009     |  | SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles                                                   |  | Interim and annual periods ending after September 15, 2009                

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 and tax laws of the various tax jurisdictions as applied to certain items of income and loss recognized for GAAP purposes. In particular, as the geographic mix of our pretax earnings among various tax
jurisdictions changes, our effective tax rate might vary from period to period. The effective rate will also change due to the recognition of tax benefits when tax positions are settled or as a result of specific transactions.

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

Potential Volatility of Quarterly Operating Results and Stock Price

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



| |  |  | the timing and level of new business authorizations, especially given current and anticipated financial market and general economic conditions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

Fluctuations in quarterly results, actual or anticipated changes in our dividend policy or stock repurchase plan or other factors, including recent general economic and financial market conditions, could affect the
market price of our common stock. These factors include ones beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions in our industry, disclosures by product development partners and actions by regulatory
authorities with respect to potential drug candidates, changes in pharmaceutical, biotechnology and medical device industries and the government sponsored clinical research sector, and general economic conditions. Any effect on our



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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, 2008.



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

We are exposed to foreign currency risk by virtue of our international operations. We derived 39.5% and 39.9% of our net revenue for the three months ended June 30, 2009 and 2008, respectively, from operations
outside the United States. Our operations in the United Kingdom generated 35.3% and 37.8% of our net revenue from international operations during the three months ended June 30, 2009 and 2008. We generally reinvest funds generated by each
subsidiary in the country where they are earned. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in the pound sterling, euro and Brazilian real.

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

We also have currency risk resulting from the passage of time between the invoicing of clients
under contracts and the collection of client payments against those invoices. If a contract is denominated in a currency other than the subsidiarys local currency, we recognize a receivable at the time of invoicing for the local currency
equivalent of the foreign currency invoice amount. Changes in exchange rates from the time we issued the invoice until the client pays will result in our receiving either more or less in local currency than the amount that was originally invoiced.
We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. If the exchange rate on accounts receivable balances denominated in pounds sterling and euros had increased by 10%, our
foreign currency transaction loss would have increased by $4.3 million in the quarter ended June 30, 2009.

Our strategy for managing
foreign currency risk relies primarily on receiving payment in the same currency used to pay expenses. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. If the
U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in the second quarter of 2009, income from operations, excluding the impact of hedging, would have been $1.0 million lower for the quarter based on
revenues and the costs related to our foreign operations. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. We have hedged a significant portion of our foreign
currency exposure for the remainder of 2009.

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 statement of income 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. We report translation adjustments with accumulated other comprehensive income (loss) as a separate component of shareholders equity. During the first
six months of 2009, several foreign currencies had a large decrease in value relative to the U.S. dollar. This resulted in a larger than normal change in translation adjustment. To date, cumulative translation adjustments have not been material to
our consolidated financial position. However, future translation adjustments could materially and adversely affect us.

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



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We are exposed to changes in interest rates on our cash, cash equivalents and investments and amounts
outstanding under notes payable and lines of credit. We invest our cash and investments in financial instruments with interest rates based on market conditions. If the interest rates on cash, cash equivalents and investments decreased by 10%, our
interest income would have decreased by $0.1 million in the second quarter of 2009.

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



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

Disclosure
Controls and Procedures

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

Internal Control Over Financial Reporting

No change to our internal control over financial reporting occurred during the second quarter of 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

Part II. OTHER INFORMATION



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

As
previously disclosed, beginning in early 2007, we were named as a co-defendant in lawsuits involving claims relating to patients who allege they took sanofi-aventis FDA-approved antibiotic Ketek, for which we provided certain clinical trial
services to sanofi-aventis predecessor. Lawsuits are pending in New Jersey, North Carolina, Wisconsin and New York. These suits allege multiple causes of action, including negligence, fraud, misrepresentation, breach of warranty, conspiracy,
wrongful death and violations of various state and federal statutes, including unfair and deceptive trade practices acts. Generally, the plaintiffs are seeking unspecified damages from alleged injuries from the ingestion of Ketek, and in some of the
cases claim damages of at least $20.0 million. It is possible that additional suits will be filed. In addition, in February 2009, we were added as a co-defendant in a putative class action lawsuit that was previously filed in Illinois federal
district court alleging, among other things, that we violated the Racketeer Influenced and Corrupt Organizations Act in connection with the development of Ketek. While there can be no assurance of a successful outcome and litigation costs can be
material, we do not believe that these claims against us have merit and intend to vigorously defend ourself in these matters.



|Item 1A. | Risk Factors
|-------- | ------------

Set forth
below and elsewhere in this report and in other documents we file with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008, are risks and uncertainties that could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained in this report and other public statements we make. If any of those risks actually occurs, our business, financial condition, or results of operations could suffer. In that
case, the trading price of our common stock could decline, and you may lose all or part of your investment. The risk factor described below is the only material change to the risk factors previously disclosed in Part I, Item 1A of our most
recent Annual Report on Form 10-K.

Risks Related to Our Discovery and Development Businesses

Unanticipated changes in our tax provisions could adversely affect our operating results.

The Obama administration recently proposed significant changes to the U.S. international tax laws that would limit U.S. deductions for expenses related to
offshore earnings and modify the U.S. foreign tax credit and check-the-box rules. It is unclear whether these proposed tax reforms will be enacted or, if enacted, what the scope of the reforms will be. If such legislation is enacted, it
could have a material impact on our net income.



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

Our 2009 Annual Meeting of Shareholders was held on May 20, 2009. At the Annual Meeting, the following directors were elected to office for the ensuing year and were approved by the following votes:



|                    |  |             |  |          
|------------------- |  | ----------- |  | ---------
|                    |  | For         |  | Withheld 
|Stuart Bondurant    |  | 101,029,721 |  | 6,958,886
|Fredric N. Eshelman |  | 101,549,424 |  | 6,439,183
|Frederick Frank     |  | 98,490,323  |  | 9,498,284
|David L. Grange     |  | 101,078,445 |  | 6,910,162
|Catherine M. Klema  |  | 101,135,275 |  | 6,853,332
|Terry Magnuson      |  | 106,742,217 |  | 1,246,390
|Ernest Mario        |  | 100,445,961 |  | 7,542,646
|John A McNeill, Jr. |  | 101,098,299 |  | 6,890,308

At the Annual Meeting our shareholders ratified the appointment of Deloitte & Touche LLP
as our independent registered public accounting firm for the fiscal year ending December 31, 2009 by a vote of 103,235,459 shares for to 3,989,760 shares against, including shares abstaining.

In addition, at the Annual Meeting our shareholders ratified the resolution for approval of an amendment and restatement of the Companys 1995
Equity Compensation Plan which, among other things, increases the number of shares of our common stock reserved for issuance under the plan by 8,300,000 from 21,259,004 shares to 29,559,004 shares by a vote of 85,038,271 shares for to 13,620,817
shares against, including shares abstaining.



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



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



| | 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
| | ---- | -----------------------------------------------------------------------



| | 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
| | ---- | -----------------------------------------------------------------------



| | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  Chief Executive Officer
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  Chief Financial Officer
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.(Registrant)By

/s/ David L. GrangeChief Executive Officer(Principal Executive Officer)By

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

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


Date: August 7, 2009



45