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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the fiscal year ended December 31, 2001

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from _______________ to _______________


                         Commission file number 0-27570

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

             North Carolina                          56-1640186
   (State or other jurisdiction of        (IRS Employer Identification No.)
    incorporation or organization)

    3151 South Seventeenth Street
      Wilmington, North Carolina                        28412
(Address of principal executive offices)             (Zip Code)


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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                                (Title of class)

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $1.4 billion as of February 15, 2002, based upon
the closing price of the Common Stock on that date on the NASDAQ National Market
System. Shares of Common Stock held by each executive officer and director and
by each person who owns 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status might not be conclusive for other purposes.

The number of shares outstanding of the registrant's class of Common Stock, par
value $0.10 per share, was 52,051,829 as of February 15, 2002.

                       DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive Proxy Statement for its 2002 Annual Meeting of
Stockholders (certain parts as indicated in Part III).

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                                     PART I

         Statements in this Report that are not descriptions of historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements reflect management's current
view with respect to future events and financial performance, but are subject to
risks and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
herein and in our other SEC filings, and including, in particular the factors
discussed in Item 1 under the heading "Factors that Might Affect our Business or
Stock Price". Because a large percentage of our operating costs are relatively
fixed, variations in the timing and progress of large contracts can materially
affect results.

Item 1.   Business

Overview

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

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

         With more than 4,500 professionals in 20 countries around the world, we
provided services to 38 of the top 50 pharmaceutical companies in the world as
ranked by 2000 healthcare research and development spending, in addition to our
work with leading biotechnology companies. We believe that we are the world's
second largest provider of drug development services to pharmaceutical and
biotechnology companies in terms of 2001 annual net revenues.

         Building on our outsourcing relationship with pharmaceutical and
biotechnology clients, we established our discovery services group in 1997. This
group focuses on functional genomics, which is the study of gene functions to
identify drug targets within the body, as well as biological chemistry research
and preclinical biology services for biopharmaceutical clients. In addition, in
2001 we formed a dedicated team to focus on research and development using our
functional genomics proprietary platform to internally generate intellectual
property.

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

         We believe that our integrated drug discovery and development services
offer our clients a way to identify and develop successful drugs more quickly
and cost effectively. We also use our proprietary informatics technology to
support our drug discovery and development services. In addition, because we are
positioned globally, we are able to accommodate the multinational drug discovery
and development needs of our customers. As a result of having these core areas
of expertise in discovery and development, we can provide integrated services
across the entire drug development spectrum, from target discovery to market and
beyond.

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Industry Overview

         According to PhRMA and industry research analysts, the pharmaceutical
and biotechnology industries spent approximately $58 billion on global research
and development in 2001. Of this amount, two-thirds, or $39 billion, was
attributable to development. With industry-wide outsourcing penetration
estimated at 25% by industry experts, the total market for outsourced
development in 2001 approximated $10 billion. Excluding subcontracted
investigator fees from this figure, the CRO market in 2001 approached $6
billion. Discovering and developing new drugs is an extremely expensive and
time-consuming process. The Tufts Center for the Study of Drug Development
estimates the cost to develop a new prescription drug to be $802 million and
that it takes between 10 and 15 years to develop a new prescription drug and
obtain approval to market it in the United States.

         The drug development services industry provides independent product
development services to the pharmaceutical and biotechnology industries. This
industry has evolved from providing limited clinical trial services in the 1970s
to a full-service industry today that encompasses broader relationships with
customers, covering the entire drug development process, including preclinical
evaluations, study design, clinical trial management, data collection,
biostatistical analysis and product registration support.

         Over the past 20 years, technological advances have dramatically
changed the drug discovery process. New and improved technologies have evolved
such as combinatorial chemistry, ultra high-throughput screening, new in vitro
and in vivo preclinical profiling techniques, and the revolution in
genetic-based drug research commonly referred to as genomics. The objective of
these innovations is to find more drug targets and to screen against targets
much more quickly with literally millions of chemical compounds. This process
should produce many more molecules having the ability to affect biological
activity. These molecules need to be tested quickly and economically.

The Drug Discovery and Development Process

         Drug discovery and development is the process of creating drugs for the
treatment of human disease. The drug discovery process aims to generate safe and
effective drug candidates, while the drug development process involves the
testing of these drug candidates for safety and efficacy in animals and humans.

     The Drug Discovery Process

         Targets. Historically, scientists have used classical cellular and
molecular biology techniques to map biological pathways in cells to provide a
cellular basis for understanding disease processes. Based on this information,
scientists are now using a new set of technologies called genomics to pinpoint
genes responsible for cellular disease functions. These genes encode proteins
that act as drug targets that can be used in functional screens to provide a
causal link between cellular function and occurrence of disease.

         Screening. After identifying a potential drug target, researchers
develop tests, or assays, in which chemicals are screened for their ability to
alter the functional activity of the target. Thousands of chemicals can be
quickly screened when these assays are incorporated into high throughput
screening processes. Assays can produce chemicals that interact with a drug
target known as "hits". Hits that have good potency and selectivity are called
"leads" which are then tested for their potential as drug candidates.

         Lead Generation. Scientists now design compound libraries to provide a
starting point to identify leads in the drug discovery process and to better
understand the biochemistry and therapeutic relevance of targets. High quality
libraries will contain compounds of known purity, structure and weight, and will
also have diverse structural variations. Once a hit is identified in a
functional assay, the compound is profiled for drug characteristics such as
solubility, metabolism, stability and feasibility for commercial production.

         Lead Optimization.  The process of "lead optimization" involves
refining the chemical structure of a lead to improve its drug characteristics,
with the goal of producing a preclinical drug candidate. Lead optimization
typically combines empirical lead optimization and rational drug design. In
empirical lead optimization procedures, large numbers of related compounds are
screened for selected chemical characteristics. In rational drug design,
chemicals

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are optimized based on the three-dimensional structure of the target. A lead
that has been optimized to meet particular drug candidate criteria and is ready
for toxicity testing is called a preclinical candidate.

         Process Research and Development. Compounds created for screening in
lead generation and lead optimization are made in relatively small, milligram
quantities. Before a drug candidate can be taken into preclinical and clinical
trials, larger quantities must be produced. The goal of process research is to
improve the ease with which compounds can be produced in these larger
quantities, typically by minimizing the number of production steps, and to
determine how to reduce the time and cost of production. Process development
refers to the production scale-up and further refinement required for clinical
trials and commercial manufacturing.

     The Drug Development Process

         The drug development process consists of two stages: preclinical and
clinical. The first stage is preclinical research, in which the new drug is
tested in vitro, or in a test tube, and in vivo, or in animals, generally over a
one- to three-year period. The following discussion describes the role of the
Food and Drug Administration, or FDA, in the drug development process in the
United States. Similar regulatory processes exist in other countries.

         Prior to commencing human clinical trials in the United States, a
company must file an Investigational New Drug, or IND, application with the FDA
which contains details for at least one study protocol and outlines of other
planned studies. The company must provide available manufacturing data,
preclinical data, information about any use of the drug in humans for other
purposes and a detailed plan for the proposed clinical trials. The design of
these trials, also referred to as the study protocols, is essential to the
success of the drug development effort. The protocols must correctly anticipate
the nature of the data to be generated and results that the FDA will require
before approving the drug. If the FDA does not comment within 30 days after an
IND filing, human clinical trials may begin.

         The clinical stage is the most time-consuming and expensive part of the
drug development process. The drug undergoes a series of tests in humans,
including healthy volunteers as well as patients with the targeted disease or
condition.

         Human trials usually start on a small scale to assess safety and then
expand to larger trials to test efficacy. These trials are usually grouped into
the following three phases, with multiple trials generally conducted within each
phase:

    .    Phase 1 trials involve testing the drug on a limited number of healthy
         individuals, typically 20 to 80 persons, to determine the drug's basic
         safety data, including tolerance, absorption, metabolism and
         excretion. This phase lasts an average of six months to one year.

    .    Phase 2 trials involve testing a small number of volunteer patients,
         typically 100 to 200 persons, who suffer from the targeted disease or
         condition, to determine the drug's effectiveness and how different
         doses work. This phase lasts an average of one to two years.

    .    Phase 3 trials involve testing large numbers of patients, typically
         several hundred to several thousand persons, to verify efficacy on a
         large scale, as well as long-term safety. These trials involve
         numerous sites and generally last two to three years.

         After the successful completion of all three clinical phases, a company
submits a New Drug Application, or NDA, or a Product License Application, or
PLA, to the FDA requesting that the drug be approved for marketing. The NDA or
PLA is a comprehensive, multi-volume filing that includes, among other things,
the results of all preclinical and clinical studies. The FDA's review can last
from a few months to several years, depending on the drug and the disease state
that is being treated. Drugs that successfully complete this review may be
marketed in the United States. As a condition to its approval of a drug, the FDA
might require additional clinical trials following receipt of approval, in order
to monitor long-term risks and benefits, to study different dosage levels or to
evaluate different safety and efficacy parameters in target populations. In
recent years, the FDA has increased its reliance on these trials, known as Phase
3b and Phase 4 trials, which allow new drugs that show early promise to reach
patients without the delay typically associated with the conventional review
process.

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Trends Affecting the Drug Discovery and Development Industry

         The drug discovery and development services industry has been and will
continue to be affected by the following trends:

         Rapid Technological Change and Increased Data. Scientific and
technological advancements are rapidly changing the drug discovery and
development processes. The technology to understand gene function, known as
functional genomics, is widely expected to result in a dramatic increase in the
number of potential drug targets within the human body. All of the human
therapeutic drugs on the market today are directed at approximately 500 targets.
The genomics revolution is projected to expand the number of potential targets
to between 5,000 and 10,000. This proliferation of potential targets increases
the need for companies to use state-of-the-art technologies to rapidly and
effectively analyze large numbers of compounds to identify and optimize
promising lead drug candidates. This technology and the human expertise
necessary to manage and keep up with it are costly. Companies can reduce their
fixed costs by outsourcing this technology.

         Increase in Potential New Drug Candidates. The increase in potential
new drug candidates resulting from the genomics revolution has caused a
bottleneck in the drug development industry. While the number of drug candidates
is expected to rapidly increase, the time to develop a new drug candidate has
not been reduced and in fact has increased in the last 30 years. Pharmaceutical
and biotechnology companies do not have the internal resources to pursue
development of all of these new drug candidates on their own. Consequently,
these companies are looking to the drug development services industry for
cost-effective and rapid means of developing new drugs.

         Biotechnology Industry Growth. The United States biotechnology industry
has grown rapidly over the last ten years. This industry is generating
significant numbers of new drug candidates that will require development and
regulatory approval. Many of these new drug candidates are now moving into
clinical development while many biotechnology companies do not have the
necessary staff, operating procedures, experience or expertise to conduct
clinical trials on their own. Because of the time and fixed cost involved, these
companies do not have the inclination to develop their own staff in this area.
Moreover, the United States biotechnology industry is expanding into and within
Europe, providing additional growth opportunities for drug discovery and
development services companies with global capabilities.

         Need for Large Scale Global Support. More pharmaceutical and
biotechnology companies currently are filing drug registration packages in
several major jurisdictions simultaneously, rather than following the past
practice of filing sequentially. The studies to support these registration
packages frequently include a combination of multinational and domestic trials.
This trend puts an emphasis on global experience and significant process
coordination throughout the development process, including the collection,
analysis, integration and reporting of clinical trial data.

         Cost Pressures of Introducing New Drugs. Market forces and governmental
initiatives place significant pressure on pharmaceutical and biotechnology
companies to reduce drug prices. Pressures on profit margins have arisen
primarily from increases in the cost of the drug discovery and development
process. In addition, increased competition as a result of patent expiration,
market acceptance of generic drugs, and governmental and private managed care
organization efforts to reduce healthcare costs have added to the pressures of
introducing a new drug. The industry is responding by consolidating, downsizing
operations, decentralizing the internal discovery and development process, and
minimizing fixed costs. In addition, increased pressure to differentiate
products and justify drug pricing are resulting in growth in healthcare
economics services with respect to drugs under development and those already on
the market. Consequently, pharmaceutical and biotechnology companies are
attempting to increase the speed of new drug discovery and development. By
identifying possible lead compounds and eliminating others from the discovery
process as early as possible, companies can focus their research and development
efforts more efficiently. Turning drug discovery and development processes over
to third parties also minimizes these companies' fixed costs.

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The PPD Solution

         We address the needs of the pharmaceutical and biotechnology industries
for drug discovery and development by providing integrated services to help our
clients maximize the return on their research and development investments. We
believe that our application of innovative technologies, therapeutic expertise
and commitment to quality throughout our integrated drug discovery and
development services offer our clients a way to identify and develop successful
drugs more quickly and cost effectively. We have developed significant drug
development expertise from over 15 years of operation. Over the past four years,
we have expanded our services to include drug discovery services to help our
clients identify potential new drug candidates, reduce drug discovery time and
minimize unproductive compound development. We also use our proprietary
informatics technology to support our drug discovery and development services
and offer alternative models for virtual drug development. Lastly, because we
are positioned globally, we are able to accommodate the multinational drug
discovery and development needs of our customers.

Our Strategy

         Our corporate mission is to help clients maximize the return on their
research and development investments. The key parts of our strategy to
accomplish this mission include the following:

     .   Continue to build upon our core competencies. We are an established
         --------------------------------------------
         company led by executives with significant discovery and development
         experience in major pharmaceutical companies bringing successful drugs
         to market throughout the world. This experience and expertise
         constitute our core operational strengths. Our effective performance
         in drug development services has made us, we believe, the second
         largest provider of those services in the world. We are continually
         leveraging this expertise as we expand our drug discovery services,
         informatics and collaborations to develop new drugs, such as our
         risk-sharing partnership for development of early stage compounds.

     .   Continue to provide a broad range of integrated drug discovery and
         ------------------------------------------------------------------
         development products and services. We offer a broad range of
         ---------------------------------
         integrated products and services that are designed to address our
         clients' needs throughout the entire drug discovery, development and
         post-market spectrum. We believe that our range of drug development
         services is one of the most comprehensive available from a single
         company. By combining our drug discovery technology with our
         comprehensive development services, we believe we can more effectively
         serve our existing clients and attract new ones.

     .   Further develop intellectual property rights. We believe that one of
         --------------------------------------------
         the keys to our long-term performance is the development of our
         intellectual property rights in a variety of areas, including
         genomics, chemistry and software. We expect to invest more in
         developing our functional genomics technology, the GSX/TM/ system,
         including the development of databases of functional information on
         genes. In the future we might, internally or through a partner,
         develop screening assays for our targets. We also plan to synthesize
         additional chemical libraries, both for sale and directed at specific
         targets. We expect to continue to develop associated software, such as
         our SAR System/TM/ for chemical library design and First Pass/TM/ for
         preclinical development program planning.

     .   Continue to master and incorporate advanced technologies into our
         -----------------------------------------------------------------
         service offerings. We believe that optimizing the use of advanced
         -----------------
         technologies can accelerate the drug development process and yield
         valuable marketing information. We have broad experience in the use of
         technology in drug discovery and development services, and offer a
         wide range of technology-based products and services. We use a mixture
         of commercially available third-party systems and selected internally
         developed software to offer our clients advanced technology for
         expediting the drug discovery and development processes. As new
         technologies develop, we equip and train our employees to make use of
         technological innovations. We also plan to continue to leverage and
         build strategic technology relationships, such as those with Oracle
         Corp and PhaseForward.

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     .   Continue to pursue collaborative drug candidate licensing
         ---------------------------------------------------------
         relationships. We plan to continue to selectively seek opportunities
         -------------
         for risk sharing arrangements on early stage compound discovery and
         development. These in-licensing arrangements could provide us with
         opportunities, after further development, to license compounds back to
         the originating company or to others in exchange for up-front,
         milestone and royalty payments. We also periodically evaluate
         in-licensing opportunities from companies and from academic
         institutions seeking outlets for the continued development of their
         discoveries. We also intend to selectively pursue out-licensing
         arrangements where we would own discoveries made by us while providing
         drug discovery services to a customer, which we would be able to
         license or sell for commercial development.

     .   Continue strategic global expansion to meet client needs. We currently
         --------------------------------------------------------
         have operations in the Americas, Europe, South Africa, Asia, the Middle
         East and the Pacific Rim, which we believe, positions us to meet our
         clients' multinational needs. We intend to further expand globally, as
         we deem appropriate to meet our existing and prospective clients'
         demands.

     .   Continue to pursue strategic acquisitions and investments. We will
         ---------------------------------------------------------
         continue to actively seek strategic acquisitions and investments, both
         within and complementary to our current products and services. Our
         criteria for acquisitions and investments include complementary client
         lists, ability to increase market share within and across clients,
         complementary therapeutic area and service segment strengths, strategic
         geographic capabilities, particular process expertise, and
         complementary services, products or technologies.

Our Services

         We have been providing our core drug development services for over 15
years. Over the past few years, we have expanded our service portfolio to
include discovery and post-market support services. We provide services designed
to increase efficiency, reduce timelines and save costs through our global
infrastructure, integrated research and development technologies and experience,
and customer-focused communications.

     Our Discovery Sciences Group

         Our Discovery Sciences Group was established in 1997 and focuses on the
discovery research segment of the pharmaceutical research and development
outsourcing market. We have acquired or developed proprietary genetic and
chemical technologies to improve the productivity of biopharmaceutical research
and development. These technologies cover a number of discovery techniques,
including our patented GSX system, a functional genomics platform technology to
find and confirm drug targets, biochemistry to optimize the targets and
preclinical biology to validate and prioritize these potential drug targets.

         Functional Genomics. Genomics is revolutionizing the process of drug
discovery through the sequencing of the human genome and the identification of
genes associated with disease. It is estimated that there are approximately
35,000-40,000 genes in the human genome. Genes are comprised of chemical
structures called nucleotides and it is the order of these nucleotides that make
up a gene sequence. Through a complex sequence of events, genes specify, or
encode, proteins that have specific functions in cells. Neither a gene sequence
nor gene disease association data alone provide sufficient information to
identify cellular proteins that make effective drug targets. Our proprietary
functional genomics technology provides the means to link gene sequences with
cellular mechanisms known or believed to be involved in disease to develop
effective screens for drug discovery.

         The basis for and the advantage of our proprietary GSX system are that
it identifies essential genes in a disease pathway based on function. A change
in biological function observed by our scientists enables them to identify a
gene that has a causal link to a particular disease. In the GSX system, we start
with a set of genes that we want to test as potential drug targets. These genes
are then broken up to generate a collection of small, random strings of
nucleotides, referred to as gene fragments. These gene fragments are then put
into test cells where the fragments will be converted into protein, or
"expressed." Our scientists observe the test cells to detect any change in a
particular function. We expect that some of the gene fragments will alter the
activity of a component of the test cells causing a desired change in a cellular
property, or "phenotype." Thus, it is essential to have cells that display a

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desired biological property that is known or believed to be part of a disease
pathway. For example, a malignant cell is useful for identifying a gene fragment
that alters the growth pattern of the cell and therefore potentially has
anti-tumor activity.

         Our scientists look for cells in which a particular function has been
inhibited by the gene fragment introduced into the cell, such as loss of
malignant growth. The functional inhibition results from expression of certain
gene fragments in the cells that can effectively inhibit the function of the
whole, or full-length, gene corresponding to the fragment. In general terms, the
gene fragments are said to be acting on targets that are essential to the
cellular function that is inhibited. Such targets are the full-length gene. Each
inhibitory gene fragment is called a genetic suppressor element, or GSE. Some
GSEs interfere with the production of the protein encoded by the target gene,
while others inhibit the biochemical activity of the protein encoded by the
target gene. After our scientists identify cells with altered phenotypes, they
isolate the cells that display the desired phenotype and recover the inserted
GSE from these cells. Our scientists then determine the nucleotide sequence of
each GSE. Upon searching large databases containing gene sequences of the human
genome using a GSE sequence, we can frequently find the gene from which that GSE
came. The role of the newly identified target gene is then validated in a
biological assay that is relevant to a particular disease state.

         GSEs can themselves be used as therapeutic compounds or they can be
used as drug discovery tools. They are potentially useful for both functions
because of their inhibitory nature. Typically, GSEs are used to identify and
validate drug discovery targets based on the premise that if a GSE causes a
desired effect on a target, then a drug acting on the same target as the GSE
should produce the same outcome. Once we identify a target using our GSX system,
a scientist can easily test the ability of a chemical compound to inhibit the
activity of the target using any one of a variety of conventional biological
assays, preferably in a high throughput screening format to expedite the
process.

         Our GSX system can be applied to finding treatment for such diseases as
cancer, heart disease, viral infections and others. In principle, the technology
permits identification of all necessary components of any disease pathway as
long as the component is involved in an observable phenotype. We offer our GSX
system as part of our services to collaborators throughout the drug discovery
process.

         Chemistry and Preclinical Biology. Our chemistry and preclinical
biology groups are devoted to assisting our customers from lead generation
through IND filing. These services include providing chemicals with selected
structures for screening, as well as employing a variety of methods to help
determine which hits and leads have drug-like characteristics that make them
worthy of additional study or optimization. We provide a broad range of
chemistry and preclinical products and services, including:

     .   lead generation;
     .   lead profiling and portfolio prioritization;
     .   lead optimization;
     .   preclinical program design and proprietary preclinical project
         management software;
     .   custom designed combinatorial libraries; and
     .   in vitro metabolism reagents.

         Lead Generation. The availability of high quality compound libraries
that have been designed with structures relevant for screening specifically
against important targets and that are designed for rapid lead optimization is a
rate-limiting step in the drug discovery process. We have developed synthesis
protocols to produce small molecule libraries so that any leads generated
require less optimization and have a greater likelihood of success of becoming
drug candidates. Our chemists can create scaffolds according to customer
specifications or directed toward specific targets. We can also provide library
synthesis as a re-synthesis service for a customer's in-house or previously
purchased compound libraries. The parallel synthesis strategy we employ
typically yields between one to 10,000 components in multi-well plates in which
a library is stored. We use all available components to input a range of
diversity for production of customer-unique libraries. We invest significant
effort in the process and synthesis of each library to ensure that the compounds
generated are of known purity, structure, diversity, and

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amount. We analyze the library during each stage of its development to ensure
the identity of each compound and to maintain quality.

         We have developed proprietary software that uses various parameters to
define diversity in a library. Our SAR System is a proprietary software system
that analyzes how changes in chemical structure correlate with physical and
chemical parameters of compounds in a virtual library. The SAR System software
can be used prior to library synthesis to construct a virtual library based on
customer specifications. We can then minimize the components of the virtual
library to identify compounds that potentially interact with a particular target
to be screened as leads.

         We design and produce custom libraries of compounds for our clients.
These libraries are generally focused toward specific target families or our
customer specifications. We also produce custom-designed libraries for internal
research and development programs.

         Lead Profiling and Prioritization Resources. Our lead profiling and
prioritization services facilitate the early screening process and enable our
customers to choose compounds that have the best chance of success in the
preclinical and clinical arenas. We can also perform computational analysis to
predict absorption, toxicity or metabolite characteristics of a lead compound.
We can employ a variety of assays to profile lead compounds including assays
that use Pharmazyme(TM) isoymes, our patented recombinant human cytochrome P450
enzymes. Cytochrome P450s are enzymes primarily responsible for metabolizing
many drug substances. We can identify metabolizing enzymes and identify
metabolites. Using such in vivo assays, we can also determine pre-formulation,
solubility and stability characteristics. We also employ a process known as
cassette dosing in animals, which allows us to simultaneously evaluate a number
of compounds in screening pharmacokinetic studies.

         Lead Optimization. Our medicinal chemists can optimize structures to
improve the profile of a compound or lead series generated from multiple
starting points, including leads provided by our customers, leads generated
internally from our custom libraries, and leads from internally generated
libraries designed and synthesized to customer specifications. Regardless of the
lead's source, we emphasize simultaneous improvement of multiple parameters of
lead compounds. Our experts are able to evaluate and re-engineer compounds to
improve compound solubility, absorption, half-life, inherent toxicity, delivery
or pro-drug generation.

         Preclinical Program Design and Proprietary Preclinical Project
Management Software. Once a potential drug candidate is identified, we offer
products and services that enable our customers to reach a faster decision
whether to advance the drug candidate into a preclinical program and with a
greater probability of success. We offer our customers access to our proprietary
Web-based interactive tool called First Pass, a software program that helps the
user prepare an efficient preclinical development plan based on a variety of
parameters including route of administration, therapeutic indication being
treated, mechanism of action of the compound or class, structure of the compound
or class, similarity of the compound to known marketed drugs, duration and
patient population. The program estimates costs, amount of material required and
study timelines. The program also helps identify studies critical for
development. Our experts can then provide full preclinical development services
and can integrate other development services internally.

         Our chemistry group also offers chemistry services, including:

     .   synthesis of stable isotope-labeled compounds;
     .   large scale chemical synthesis;
     .   synthesis of structurally complex clinical comparators, impurities and
         degradants;
     .   synthetic feasibility analysis to assess ease of scale-up;
     .   purification of active drug substance;
     .   re-certification of new or expired analytical standards;
     .   SAR analysis of compound portfolios;
     .   review of Type 2 Drug Master Files, IND/NDA Chemistry, Manufacturing
         and Controls sections, and patents; and
     .   drug metabolite, impurity and degradant characterization and
         identification.

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         Drug Development Collaborations. For a number of reasons, mostly
limitations of development resources, biotechnology and pharmaceutical companies
have discovered therapeutic compounds but have not yet begun to develop them.
The failure to develop often is because the discovery has efficacy outside of
the core therapeutic expertise of the company or the potential market for the
discovery falls below the company's minimum threshold for development. We
believe that there are attractive opportunities to selectively in-license these
discoveries, jointly develop them with a third party and license them out again
in collaborative arrangements that combine our global development resources with
these discoveries. We currently offer contract clinical research services as
part of joint development agreements with owners of chemical compounds in need
of development.

         For example, in January 2001, we granted ALZA Corporation, which later
merged with Johnson & Johnson, an exclusive license to our compound, dapoxetine,
for genitourinary indications, including premature ejaculation. We received a
license for such rights in 1998 as part of a development collaboration with Eli
Lilly. Under the terms of the agreement, Johnson & Johnson received worldwide
rights to develop and commercialize dapoxetine and is responsible for
manufacturing, clinical, regulatory, sales and marketing costs resulting from
the license. In exchange, we received an up-front payment and will receive
royalties on net sales and milestone payments based on product approval and
meeting certain sales levels.

         We intend to continue to use our development expertise both on a fee
for service basis and in risk-sharing arrangements. We generally structure these
risk-sharing arrangements to provide us with up-front fees, milestone payments
and royalties as a compound is developed.

     Our Development Group

         We have designed our various global services to be flexible and
integrated in order to assist our clients in optimizing their research and
development spending through the clinical stages of the drug development
process. We provide a broad range of development services, either individually
or as an integrated package, to meet clients' needs. We provide systems
integration services and software development services, and create data links
between discovery and development.

         Phase 1 Clinical Testing. We are one of the industry's largest Phase 1
trial providers, with clinical testing services conducted in a 220-bed unit in
Austin, Texas, a 70-bed unit located near Research Triangle Park, North
Carolina, and a 50-bed unit in Leicester, England. Our professional nursing and
physician staff administers general Phase 1 safety tests, special population
studies, and bioavailability and bioequivalence testing. Bioavailability and
bioequivalence testing involves administration of test compounds and obtaining
biological fluids sequentially over time to measure absorption, distribution,
metabolism and excretion of the drug. Special population studies might involve
the elderly, women or patients with specific diagnoses, such as renal failure or
asymptomatic HIV disease. Our Austin, Texas site also has a Dental Research
Center to evaluate the safety and effectiveness of new analgesic compounds in
molar extraction models.

         Our in-house clinical laboratory supports the Phase 1 operations in
Austin. This laboratory performs analytical assays on volunteer specimens to
ensure that each subject qualifies for the study and is not adversely affected
by a drug. Having our laboratory in the same facility as the volunteers speeds
our response time to unexpected outcomes. This laboratory also provides services
to function as a central laboratory for Phases 2 through 4 studies. We manage
our Phase 1 services to maximize scheduling flexibility and efficiency. These
services also can be integrated with our other services, such as laboratory,
data management, pharmacokinetic and biostatistical services.

         Laboratory Services. We provide bioanalytical services through good
laboratory practice, or GLP, compliant laboratories in Richmond, Virginia and
Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid
samples from animal and human clinical studies. The latter includes those
conducted by our Phase 1 units as well as those conducted on behalf of our
clients from Phase 1 through Phase 4 for drug and metabolite content and
concentration. We currently have over 1,500 validated assays available for our
clients' use in conducting laboratory analyses, qualifying us for a wide range
of assignments. Our laboratories also process fluid samples for preclinical
studies.

                                        9

<PAGE>

         We provide product analysis laboratory services through our good
manufacturing practice, or GMP, compliant laboratory in Middleton, Wisconsin.
Our product analysis services include dissolution and stability studies, which
are necessary to characterize dosage form release patterns and stability under
various environmental conditions in the intended package for marketing. These
studies must be carried out from preclinical through Phase 1 to Phase 4 and
maintained over the commercial life of products. New formulations as well as
generics, those prescription products going to over-the counter status that no
longer require physician prescription for consumer use, require the same set of
studies as the original dosage form.

         Our analytical methods include gas chromatography/mass spectrometry,
liquid chromatography/mass spectrometry, high performance liquid chromatography,
gas chromatography, radioimmunoassay and enzyme linked immunosorbent assay.
Support services include facilities for handling HIV-positive samples, data
management for pharmacokinetic studies from multi-center trials and sample/data
archiving.

         We are one of a few full service companies able to offer our clients
the advantages of both bioanalytical and product analysis, as well as Phase 1
clinical testing.

         Phases 2 through 4 Clinical Trial Management. The core of our
development business is a comprehensive package of services for the conduct of
Phases 2 through 4 clinical trials, which, in concert with our other services,
allow us to offer our clients an integrated package of clinical management
services. We have significant clinical trials experience in the areas of:

<TABLE>
<S>                                      <C>
--------------------------------------------------------------------------------------------------------------------------
General Areas of Expertise               Specific Areas of Expertise
--------------------------------------------------------------------------------------------------------------------------
AIDS                                     Primary disease and treatment/prophylaxis of opportunistic infections
--------------------------------------------------------------------------------------------------------------------------
Analgesia                                Acute and chronic pain modeling
--------------------------------------------------------------------------------------------------------------------------
Biotechnology                            Growth hormone, multiple sclerosis, wound healing
--------------------------------------------------------------------------------------------------------------------------
Cardiovascular disease                   Hypertension, angina pectoris, stroke
--------------------------------------------------------------------------------------------------------------------------
Central nervous disease                  Schizophrenia, depression, epilepsy, chronic pain, anxiety, obsessive-compulsive
                                         disorders, panic disorders
--------------------------------------------------------------------------------------------------------------------------
Critical care                            Sepsis, ARDS (acute respiratory distress syndrome)
--------------------------------------------------------------------------------------------------------------------------
Dermatology                              Wound healing, acne, hair loss, psoriasis
--------------------------------------------------------------------------------------------------------------------------
Gastronenterology                        Duodenal ulcer, gastric ulcer, gastro-esophogeal reflux disease, H.pylori,
                                         nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease,
                                         and irritable bowel disease
--------------------------------------------------------------------------------------------------------------------------
Genitourinary                            Incontinence, sexual dysfunction
--------------------------------------------------------------------------------------------------------------------------
Infectious disease                       Acute and chronic bacterial and fungal diseases, including pneumonia, influenza
                                         and sinusitis
--------------------------------------------------------------------------------------------------------------------------
Metabolic disease                        Diabetes, hormone replacement therapy
--------------------------------------------------------------------------------------------------------------------------
Oncology                                 Prostate, colorectal, breast, lung and other cancers
--------------------------------------------------------------------------------------------------------------------------
Pulmonary/Allergy                        Asthma, allergic rhinitis, community acquired pneumonia
--------------------------------------------------------------------------------------------------------------------------
Rheumatology                             Rheumatoid and osteoarthritis
--------------------------------------------------------------------------------------------------------------------------
Urology                                  Sexual dysfunction, urinary incontinence
--------------------------------------------------------------------------------------------------------------------------
Virology                                 Herpes simplex, hepatitis B, chronic hepatitis C, herpes genitalia, RSV
--------------------------------------------------------------------------------------------------------------------------
Women's health                           Osteoporosis, oral contraception
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

         We serve our clients' needs by conducting clinical trials through a
project team. A project manager supervises all aspects of the conduct of the
clinical trial, while our clinical research associates are in the field
monitoring the trial at the various investigational sites where it is being
conducted. Within this project-oriented structure, we can manage every aspect of
the clinical trial in Phases 2 through 4 of the drug development process. The
services that we offer to initiate clinical trials include protocol development,
case report form design, feasibility studies, investigator selection,
recruitment and training, site initiation and monitoring, accelerated patient
enrollment, development of training materials for investigators and training of
clients' staff.

         We monitor our clinical trials in compliance with government
regulations. We have adopted global standard operating procedures intended to
satisfy regulatory requirements in the United States and in many foreign

                                       10

<PAGE>

countries and serve as a tool for controlling and enhancing the quality of our
clinical trials. All our standard operating procedures are in compliance with
good clinical practice, or GCP, requirements and the International Conference on
Harmonization, or ICH, standards. The FDA and the European community have
adopted these standards, and more recently, the Japanese community, has agreed
to conduct all studies in accordance with these standards. We compile, analyze,
interpret and submit data generated during clinical trials in report form to the
FDA or other relevant regulatory agencies for purposes of obtaining regulatory
approval. We provide consulting on conducting clinical trials for simultaneous
regulatory submissions to multiple countries.

         We provide our clients with one or more of the following Phases 2
through 4 clinical trial management services using parallel processing to
accelerate the development process:

         Study Design.  We serve our clients in the critical area of study
design by applying our experience in the preparation of study protocols and case
report forms.

         Investigator Recruitment. During clinical trials, physicians, who are
also referred to as investigators, at hospitals, clinics or other locations,
supervise administration of the drug to patients. We recruit investigators who
contract directly with either us or our clients to participate in clinical
trials. For large-scale late stage trials, we use our Telecommunications Center,
or TCC, for investigator recruitment. The TCC integrates telephones, relational
databases, computerized scripts and customized tracking software for
investigator recruitment, and centralized management of large-scale trials. In
2001, TCC had two clinical trials that enrolled more than 50,000 patients,
recruited and managed more than 11,000 sites and processed more than 500,000
case report form pages.

         Study Monitoring. We provide study-monitoring services, which include
investigative site initiation, patient enrollment assistance and data collection
through subsequent site visits. We have monitored many clinical trials,
including a number of very large studies. For example, we are engaged in a
project with the National Institute of Health, begun in 1990, which has
approximately 50 protocols open at any given time. This project involves
approximately 700 investigational sites and approximately 100,000 enrolled
patients. To date, this project has generated 300 protocols and over 4,000
pharmacy, regulatory and operational audits at the sites.

         Clinical Data Management and Biostatistical Analysis. We provide
clients with assistance in such areas as study design, sample size
determination, case report form design and production, fax-based monitoring,
database design and construction, data safety and monitoring board summaries and
presentations, interim analyses, new drug application preparation and production
and FDA presentations and defense.

         Medical Writing and Regulatory Services. We provide full planning
services for product development, including preclinical review, chemistry,
manufacturing and controls, or CMC, consulting and clinical protocol
development. These activities are complemented by report writing, program
management and regulatory services designed to reduce overall development time.

         Post-Development Support. We provide custom-designed pharmaceutical and
medical information programs in support of post-marketed pharmaceutical
products. Other services include clinical consultations with pharmacists,
nurses, veterinarians and other customer assistance specialists.

         Healthcare Economics, Outcomes and Marketing Research. We offer a
number of services in the healthcare economics, outcomes and market research to
pharmaceutical and biotechnology companies, as well as managed care payors and
providers. These services include: prospective health economic and outcomes
studies incorporated into Phases 2 through 4 clinical trials; retrospective
studies including database valuations and medical chart reviews to analyze use
patterns; mathematical modeling of health economics and outcomes information to
real world settings; epidemiological study design and implementation; and
development and implementation of publication strategies for health outcomes and
marketing research results.

         Informatics. Our informatics division develops specialized software
products to support different aspects of the pharmaceutical research and
development process, including drug discovery, clinical trials and regulatory
review. Our informatics clients include international and domestic
pharmaceutical and biotechnology companies and government agencies, including
the FDA. Our current informatics software products include:

                                       11

<PAGE>

     .   PPD Patient Profiles, which streamlines patient data review;
     .   TableTrans(R), which automates data transformation and integration;
     .   CrossGraphs(R), which provides graphical displays of complex research
         data;
     .   Resolve(TM), which manages data queries to investigator sites; and
     .   Classify(TM), which manages global coding capabilities.

         A primary focus of our informatics division is to provide consulting
services to help pharmaceutical and biotechnology companies assess and resolve
clinical data management and safety system challenges, such as integrating and
customizing systems, migrating clinical and safety data following mergers, or
replacing legacy systems with commercial Web-based or client-server systems. In
December 2000, we were selected by Oracle, a leading provider of clinical data
management software in the industry, as their first application services
provider offering regulatory compliant hosting services for Oracle's
pharmaceutical applications.

         We are continuing to build on our e- capabilities to offer time
efficiencies and enhanced quality through Web-based programs to our clients. We
retooled our internal clinical data management capabilities with Oracle's new
Web-based applications to help streamline our internal data management processes
and we are working with several clients on Remote Data Capture trials to
accelerate the capturing and cleaning of clinical data. In June 2001, we
launched PPD DirectConnect, which provides secured client Web sites to provide
online access to key study information. In addition, we developed automated
processes for delivery of key sections of clinical regulatory submissions to the
FDA and we use a cancer information Internet site, CancerConsultants.com, with a
reach of up to one million viewers per month as a primary tool for patient
recruitment in this therapeutic area.

         Pharmacogenomics. Pharmacogenomics is the use of genetic information to
predict the safety, toxicity and/or efficacy of drugs in individual patients or
groups of patients. In November 1997, we began providing pharmacogenetic
services for clinical trials with molecular genotyping, phenotyping and DNA
purification and archiving services through our GLP certified laboratories. In
February 1999, this business became part of PPGx, Inc., our pharmacogenomics
joint venture with Axys Pharmaceuticals, Inc. PPGx provides comprehensive
pharmacogenomics products and services to pharmaceutical and biotechnology
companies by combining genetic research technologies from its computational and
research divisions, laboratory services and bioinformatics platform. We believe
that pharmacogenomics is becoming widely adopted as a drug discovery and
development tool and increasingly important in an individual's diagnosis and
treatment regimen. In December 2000, PPGx was acquired by DNA Sciences, a
genetics company focused on identifying the genetic basis of disease
susceptibility, prediction of disease progression and response to drug
treatment. We retained our exclusive marketing rights to PPGx pharmacogenomics
products and services, sold under the brand name Pharmacogenomic Solutions(TM).
During 2001, we modified our agreement with DNA Sciences as follows: DNA
Sciences took over the marketing rights while we acquired the code and rights to
GeneTrialsTM bioinformatics platform and also gained access to their
pharmacogenetic intellectual property to develop therapeutics. We own a minority
position in DNA Sciences.

Clients and Marketing

         We provide a broad range of research and development and consulting
services in the Development and Discovery Sciences Groups to help pharmaceutical
and biotechnology companies from target discovery through development to
post-market.

         Our Development Group provides Phase 1 to Phase 4 clinical development
and post-market support. We believe that the key differentiators that help us
win business for our development services includes our global infrastructure,
quality assurance and control practices, dedicated project teams, and
cross-functional therapeutic units with dedicated expertise. Our services
include Phase 1 trial clinics in the United States and Europe, a unique ability
to offer analytical lab services from in vivo animal analysis through Phase 4
with our GLP bioanalytical and cGMP product analysis laboratories, and
integrated technologies and expertise to provide simultaneous, multinational
Phase 2 through Phase 4 submissions. In addition, we offer medical and drug
information services and marketing services for post-market support from our
medical communications division. We also offer consulting and technology for

                                       12

<PAGE>

clinical management, coding and drug safety from our informatics division. We
market our development services primarily in the United States and Europe and
are growing our capabilities in Asia.

         For the year ended December 31, 2001, approximately 85.0% of our
Development Group's net revenue was attributable to clinical services and 15.0%
to laboratory services. In regards to geographic alignment, approximately 16% of
our Development Group's net revenues in 2001 were derived from outside the
United States, primarily in the United Kingdom.

         Our discovery technology group offers services and technologies to
identify and validate novel drug targets, create compounds, and optimize and
profile drug candidates for clinical evaluation. We provide services under
contract to clients in the pharmaceutical and biotechnology industries as well
as in general chemical, agrochemical, and other industries. In addition, we
conduct research on compounds for which we hold licenses. Our discovery revenues
have all been generated in the United States to date.

         For the year ended December 31, 2001, total net revenue for all of our
services was derived approximately from various industries as follows:

                                                              Percentage of
         Source                                                Net Revenue
         ------                                                -----------
         Pharmaceutical                                             82.2%
         Biotechnology and Other                                    16.2
         Government                                                  1.7


         For the purposes of classifying net revenue, we define Pharmaceutical
to include companies with the majority of their research and development related
to chemical entities and Biotechnology to include companies with the majority of
their research and development related to biologically engineered compounds.

         We believe that concentration of business among certain large customers
is not uncommon in our industry. We have experienced this kind of concentration
in the past and might experience it in the future. In 2001, one client accounted
for 10.3% of our net revenue, while our ten largest clients accounted for
approximately 50.3% of our total net revenue. Approximately 27.6% of our total
2001 net revenue was derived from clients headquartered outside the United
States, in particular in Europe and Japan. Approximately 15% of our net revenue
is generated from services provided by our employees located in countries
outside the United States. See Note 18 of Notes to Consolidated Financial
Statements included elsewhere in this report for the breakdown of this revenue.

         With a primary focus on large pharmaceutical companies, we promote our
functional genomics discovery technology through a dedicated sales team,
localized scientist-to-scientist communications and centralized marketing
efforts.

         For all of our development, medical communications and informatics
products and services, we use centralized corporate marketing to support the
efforts of dedicated business development staff calling on pharmaceutical and
biotechnology companies. Our sales teams focus on client segments and service
areas. In addition, while the service area representatives call on particular
buying groups within a given pharmaceutical client, sales account managers are
responsible for coordinating all outsourcing across our service areas from that
client. To further facilitate cross-functional sales, all business development
staff for all services and products across the company worldwide report up to
the same executive.

         The top 20 pharmaceutical companies accounted for 79.2% of research and
development spending in 2000, as ranked in Med Ad News, so we concentrate on
these companies. The top 50 biotechnology companies accounted for only 55.2% of
the biotechnology research and development expenditures in 2000. To
appropriately focus our sales and marketing efforts among biotechnology
companies, we consider additional factors such as the stage of a drug's
development and the financial stability of a company's business.

         Our business development personnel consult with potential
pharmaceutical and biotechnology clients early in the project consideration
stage in order to determine their requirements. Along with the appropriate
operational,

                                       13

<PAGE>

technical or scientific personnel, our business development representatives
invest significant time to determine the optimal means to design and execute the
potential client's program requirements. For example, for our drug development
services, recommendations we make to the potential client with respect to study
design and implementation are an integral part of our bid proposal process and
an important aspect of the integrated services we offer. We believe our
preliminary efforts relating to the evaluation of a proposed clinical protocol
and implementation plan enhance the opportunity for accelerated initiation and
overall success of the clinical trial.

         Our core global marketing and corporate communications activities
include online advertising and directory listings on predominant industry Web
sources; interactive Web education and information programs, including Web
conferences; direct e-mail campaigns; client presentations and detailing
materials; global speakers' bureau; media relations; corporate materials and
marketing at professional trade shows. In addition, we encourage and sponsor the
participation of our personnel in a variety of professional endeavors, including
the presentation of papers at national and international professional trade
meetings and the publication of scientific articles in medical and
pharmaceutical journals. Through these presentations, publications and
additional promotion via our corporate Web site, we believe these activities
advance and promote our reputation for professional excellence.

Backlog

         Our backlog consists of anticipated net revenue from letters of intent,
verbal commitments and contracts that either have not started but are
anticipated to begin in the near future or are in process and have not been
completed. Amounts included in backlog have not already been recognized as
revenues in our statement of operation. Net revenue is defined as professional
fee income, or gross revenue, less reimbursed costs, consisting principally of
investigator fees and travel. Once contracted work begins, net revenue is
recognized over the life of the contract. The backlog for the services under
written agreements, including signed letters of intent, was $674.2 million in
net revenue at December 31, 2001, compared to $498.2 million in net revenue at
December 31, 2000.

         We believe that our backlog as of any date is not necessarily a
meaningful predictor of future results, because backlog can be affected by a
number of factors, including the size and duration of contracts, many of which
are performed over several years. Additionally, contracts relating to our
clinical development business generally are subject to early termination by the
client or delay for many reasons, including unexpected test results. Also, the
scope of a contract can change during the course of a study. For these reasons,
we might not be able to fully realize our entire backlog as net revenue.

Intellectual Property

         We believe that patents, trademarks, copyrights and other proprietary
rights are important to our business. We also rely on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position.

         We actively seek patent protection both in the United States and
abroad. As of December 31, 2001, we owned or co-owned four issued United States
patents and 12 pending United States patent applications. Our issued United
States patents primarily relate to our proprietary anti-tumor compounds, human
immunodeficiency virus, or HIV, drug target gene sequences and related target
discovery technologies. Our pending United States patent applications primarily
relate to proprietary genomic and genetic information, chemical compounds,
clinical development business methods and software. We have filed or plan to
file applications in other countries corresponding to most of our United States
applications. As of December 31, 2001, we had 21 pending foreign filings,
including 7 pending Patent Cooperation Treaty, or PCT, filings.

         We also have obtained licenses for numerous other patents from academic
institutions and pharmaceutical companies. As of December 31, 2001, we had
exclusive license rights to 17 issued United States patents and five pending
United States patent applications, as well as corresponding foreign filings.

         Pursuant to the terms of the Uruguay Round Agreements Act, patents
issuing from applications filed on or after June 8, 1995 have a term of 20 years
from the date of filing, irrespective of how long it takes for the patent to
issue. Because patent applications in the pharmaceutical industry often take a
long time to issue, this method of

                                       14

<PAGE>

patent term calculation can result in a shorter period of patent protection
afforded to us compared to the prior method of term calculation (17 years from
the date of issue). Under the Drug Price Competition and Patent Term Restoration
Act of 1984 and the Generic Animal Drug and Patent Term Restoration Act, a
patent that claims a product, use or method of manufacture covering drugs may be
extended for up to five years to compensate the patent holder for a portion of
the time required for FDA review. However, we might not be able to take
advantage of the patent term extension provisions of this law.

         In addition, we rely on trade secrets and continuing technological
innovation, which we try to protect with reasonable business procedures for
maintaining trade secrets, including confidentiality agreements with its
collaborators, employees and consultants. We also have numerous trademark
registration applications pending in the United States and other jurisdictions
throughout the world.

Employees

         At December 31, 2001, we had approximately 4,375 professionals, of whom
4,000 were in the Development Group, 110 were in the Discovery Sciences Group
and the remainder served in corporate operations functions. Of our staff,
approximately 325 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately
575 hold other masters or other postgraduate degrees. None of our employees are
subject to a collective bargaining agreement. We believe that our relations with
our employees are good.

         We believe that our success is based on the quality and dedication of
our employees. We strive to hire the best available people in terms of ability,
experience, attitude and fit with our performance philosophy and standard
operating procedures. We train new employees extensively, and we believe that we
are an industry leader in the thoroughness of our training programs. In
addition, we encourage our employees to continually grow and broaden their
skills through internal and external training programs. As new technologies
develop, we equip and train our employees to make use of technological
innovations.

Competition

         The drug development outsourcing industry consists of several hundred
smaller, limited-service providers and a few full-service global drug
development companies. The industry is consolidating and, in recent years, a few
large, full-service competitors have emerged. This trend of industry
consolidation appears to have created greater competition among the larger
companies for clients and acquisition candidates. Our Development Group's
primary competitors include Covance, ICON, Kendle International, MDS Pharma,
Parexel and Quintiles Transnational Corporation. We also compete against some
medium-sized companies, in-house research and development departments of
pharmaceutical and biotechnology companies, as well as universities and teaching
hospitals. In addition, the industry has few barriers to entry. Newer, smaller
entities with specialty focuses, such as those aligned to a specific disease or
therapeutic area, may compete aggressively against larger companies for clients.
Increased competition might lead to price and other forms of competition that
may adversely affect our operating results.

         Providers of outsourced drug development products and services compete
on the basis of a number of factors, including reputation for on-time quality
performance, expertise and experience in specific therapeutic areas, scope of
service offerings, price, strengths in various geographic markets, technological
expertise and systems, data management capabilities for time savings with data
integrity, ability to acquire, process, analyze and report data in a time-saving
accurate manner, ability to manage large-scale clinical trials both domestically
and internationally, and expertise and experience in healthcare economics.
Although there can be no assurance that we will continue to do so, we believe
that we compete favorably in these areas.

         As a general matter, the drug development services industry is not
capital-intensive and the financial costs of entry into the industry are
relatively low. Despite recent consolidation, this industry remains highly
fragmented, with several hundred smaller, limited-service providers and a few
full-service companies with global capabilities. Although there are few barriers
to entry for smaller, limited-service providers, we believe there are
significant barriers to becoming a global provider offering a broad range of
products and services. These barriers include:

     .   the cost and experience necessary to develop broad therapeutic
         expertise;

                                       15

<PAGE>

     .   the ability to manage large, complex clinical trials;
     .   the ability to deliver high quality consistently;
     .   the experience to prepare regulatory submissions throughout the world;
         and
     .   the infrastructure and knowledge to respond to the global needs of
         clients.

         Our informatics division has agreements with several of the major
software vendors in pharmaceutical data applications. Competitors for our
informatics consulting services include major consulting companies with
pharmaceutical industry groups, for example, Cap Gemini, CSC and EDS, and
smaller companies with a pharmaceutical industry focus, for example,
DataCeutics, FCG and CSS. Competitors for our informatics software products
include larger software vendors such as SAS, but are mainly smaller, specialized
software companies.

         Our Discovery Sciences Group competes principally on the basis of
reputation, scientific and technical expertise, experience and qualifications of
professional staff, quality of services, and ability to deliver quality products
to the client's specifications. The outsourced functional genomics, chemistry
and preclinical research industry consists of several dominant providers and
numerous smaller niche companies. Our Discovery Sciences Group faces significant
competition from these companies, as well as competition from research teams
funded internally by pharmaceutical and biotechnology companies. While the trend
to outsource research is increasing, the vast majority of research spending by
these companies is for their own internal research personnel. As such, our
ability to attract and retain qualified technical personnel and to continue to
develop intellectual property are key components in our ability to compete
successfully.

Government Regulation

         Our clients are subject to extensive regulations by government
agencies. Consequently, the services that we provide for these clients must
comply with relevant laws and regulations.

         Prior to commencing human clinical trials in the United States, a
company developing a new drug or biologic must file an investigational new drug
application, or IND, with the FDA. If the product is a drug, the IND is
submitted to FDA's Center for Drug Evaluation and Research, or CDER. If the
product is a biologic, the IND is submitted to FDA's Center for Biologic
Evaluation and Research, or CBER. The IND must include information about animal
toxicity and distribution studies, manufacturing and control data, stability
data and a detailed plan, or study protocol, for the proposed clinical trial of
the drug or biologic in humans. If the FDA does not object within 30 days after
the IND is filed, human clinical trials may begin. The study protocol will also
be reviewed and approved by the institutional review board, or IRB, in each
institution in which a study is conducted, and the IRB may impose additional
requirements on the way in which the study is conducted in its institution.

         Human trials usually start on a small scale to assess safety and then
expand to larger trials to test efficacy along with safety in the target
population. The trials are generally conducted in three phases, which may
overlap, although the FDA may require a fourth phase as a condition of approval.
After the successful completion of the first three clinical phases, a company
requests approval for marketing its product by submitting a new drug
application, or NDA, to CDER, or a biologics license application, or BLA, to
CBER, depending on the nature of the product. The NDA or BLA is a comprehensive,
multi-volume filing that includes, among other things, the results of all
pre-clinical and clinical studies, information about how the product will be
manufactured and tested, additional stability data and proposed labeling. The
FDA's review can last from six months to many years, with the average review
lasting 18 months. Once the NDA or BLA is approved, the product may be marketed
in the United States subject to any conditions imposed by the FDA.

         Laboratories such as ours that provide information that is included in
INDs, NDAs and BLAs, must conform to regulatory requirements that are designed
to ensure the quality and integrity of the testing process. For example, our
bioanalytical laboratories in Richmond, Virginia and Middleton, Wisconsin follow
the FDA's good laboratory practice regulations, or GLPs. These regulations have
also been adopted by the Ministry of Health in the United Kingdom and by similar
regulatory authorities in other countries. Our product analysis lab in
Middleton, Wisconsin follows the FDA's good manufacturing practice, or cGMP,
regulations. For both GLP and cGMP, the regulations require standardization
procedures for studies, for recording and reporting data, and for retaining

                                       16

<PAGE>

appropriate records. To help ensure compliance with these regulations, we have
established quality assurance at our laboratory facilities to monitor ongoing
compliance by auditing test data and conducting regular inspections of testing
procedures and our laboratory facilities.

         In addition, laboratories that analyze human blood or other biological
samples must comply with the Clinical Laboratory Improvement Act, or CLIA. CLIA
requires laboratories to meet certain staffing, proficiency and quality
standards. The laboratory in our Austin, Texas facility is CLIA-certified and
also has a voluntary certification given by the American Society of Clinical
Pathologists.

         The industry standard for the conduct of clinical research is embodied
in the FDA's regulations for IRBs, Investigators, and Sponsor/Monitors which
collectively are termed the good clinical practice, or GCPs by industry, and the
GCP guidelines issued by ICH, which have been agreed upon by the United States,
many European governments and the Japanese government. These standards require
that those conducting clinical trials:

     .   comply with regulations governing the selection of qualified
         investigators;
     .   obtain specific written commitments from investigators;
     .   verify that informed consent is obtained from patients;
     .   monitor the validity and accuracy of data;
     .   verify product accountability; and
     .   instruct investigators to maintain proper records and reports.

         Our global standard operating procedures are written in accordance with
all FDA and ICH requirements. This enables our work to be conducted locally,
regionally and globally to standards that exceed all currently applicable
regulatory requirements.

         In the past few years, both the United States and foreign governments
have become more concerned about the disclosure of confidential personal data.
The European Union, or EU, now prohibits the disclosure of personal confidential
information, including medical information, to any entity that does not comply
with certain security safeguards. Companies in the United States can satisfy
these requirements by filing for safe harbor status according to a
self-certification procedure agreed to by the EU and the United States. We have
registered for and obtained Safe Harbor status.

         The Department of Health and Human Services recently promulgated final
regulations under the Health Insurance Portability and Accountability Act of
1996, or HIPAA, that will govern the disclosure of confidential medical
information in the United States. The Privacy Rule, which governs disclosure of
confidential information, was effective beginning April 14, 2001 and all
companies subject to the Privacy Rule must comply with its provisions on or
before April 14, 2003. We have had a global privacy policy in place since
January 2001, which includes a designated privacy officer, and believe that we
are in compliance with the current EU and HIPAA requirements. Nevertheless, we
will continue to monitor our compliance with these new regulations and will take
appropriate steps to ensure compliance as these and other privacy regulations
come into effect.

         We are also subject to the Occupational Safety and Health
Administration, or OSHA, and federal, state and local regulations that govern
the use or disposal of toxic substances, biological wastes, radioactive
materials.

         The failure on our part to comply with applicable regulations could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. Furthermore, the issuance of a notice
of finding by a governmental authority against either us or our clients, based
upon a material violation by us of any applicable regulation, could materially
and adversely affect our business.

Factors that Might Affect our Business or Stock Price

Changes in trends in the pharmaceutical and biotechnology industries could
adversely affect our operating results.

         Industry trends and economic factors that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
companies like us to conduct large drug development projects. If these
industries reduce their tendency to

                                       17

<PAGE>

outsource those projects, our operations, financial condition and growth rate
could be materially and adversely affected. In the past two years, mergers and
other factors in the pharmaceutical industry appear to have slowed
decision-making by pharmaceutical companies and delayed drug development
projects. Continuation or increase of these trends could have an ongoing adverse
effect on our business. In addition, numerous governments have undertaken
efforts to control growing healthcare costs through legislation, regulation and
voluntary agreements with medical care providers and pharmaceutical companies.
If future regulatory cost containment efforts limit the profits that can be
derived on new drugs, our customers might reduce their drug discovery and
development spending, which could reduce our business.

Our revenue depends on a small number of industries and clients.

         We provide products and services to the pharmaceutical and
biotechnology industries and our revenue is highly dependent on expenditures by
clients in these industries. Accordingly, our operations could be materially
adversely affected by the current trend toward consolidation in these industries
or other factors resulting in a decrease in the number of our potential
customers. If the number of our potential customers declines even further, they
might be able to negotiate price discounts or other terms for our products and
services that are less favorable to us than has historically been the case. We
have experienced customer concentration in the past; for example, in the year
ended December 31, 2001, one customer accounted for 10.3% of our net revenue. We
are likely to experience continued customer concentration in the future. The
loss of business from a significant client could have a material adverse effect
on our results of operations.

         In addition, most of our contracts are terminable by the client upon 30
to 90 days' notice. Clients terminate or delay their contracts for a variety of
reasons, including, but not limited to:

     .   products being tested fail to satisfy safety requirements;
     .   products have undesired clinical results;
     .   the client decides to forego a particular study;
     .   inability to enroll enough patients in the study;
     .   inability to recruit enough investigators; or
     .   production problems cause shortages of the drug.

We might not be able to recruit and retain the experienced personnel we need to
compete in the drug discovery and development industry.

         Our future success depends on our ability to attract, retain and
motivate highly skilled personnel.

         Management

         Our future success depends on the personal efforts and abilities of the
principal members of our senior management and scientific staff to provide
strategic direction, develop business, manage our operations and maintain a
cohesive and stable environment. For example, we rely on the services of Fredric
N. Eshelman, Pharm.D., our Chief Executive Officer. Although we have an
employment agreement with Dr. Eshelman, as we do with other executive managers,
this does not mean Dr. Eshelman or any other executive manager with whom we have
an employment agreement will remain with us. We do not have employment
agreements with all of our key personnel.

         Healthcare Providers

         Our ability to maintain, expand or renew existing business with our
customers and to get business from new customers, particularly in the drug
development sector, depends on our ability to hire and retain healthcare
providers with the skills necessary to keep pace with continuing changes in drug
development technologies. Competition for experienced healthcare providers is
intense. We compete with pharmaceutical and biotechnology companies, including
our customers and collaborators, contract research companies, and academic and
research institutions to recruit healthcare providers.

                                       18

<PAGE>

         Scientists

         Our ability to maintain, expand or renew existing business with our
customers and to get business from new customers in both the drug development as
well as the drug discovery areas also depends on our ability to hire and retain
scientists with the skills necessary to keep pace with continuing changes in
drug discovery and development technologies. We face the same risks and
challenges in attracting and retaining experienced scientists as we do with
healthcare providers.

         Our inability to hire additional qualified personnel might also require
an increase in the workload for both existing and new personnel. We might not be
successful in attracting new healthcare providers, scientists or management or
in retaining or motivating our existing personnel. The shortage of experienced
healthcare providers and scientists, or other factors, might lead to increased
recruiting, relocation and compensation costs for these professionals, which
might exceed our expectations. These increased costs might reduce our profit
margins or make hiring new healthcare providers or scientists impracticable. If
we are unable to attract and retain any of these personnel our ability to
execute our business plan will be adversely affected.

Our future success depends on our ability to keep pace with rapid technological
changes that could make our products and services less competitive or obsolete.

         The biotechnology and pharmaceutical industries generally and drug
discovery and development specifically are subject to increasingly rapid
technological changes. Our competitors or others might develop technologies,
products or services that are more effective or commercially attractive than our
current or future technologies, products or services, or that render our
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and we cannot make
enhancements to our technologies, products and services necessary for them to
remain competitive, our competitive position, and in turn our business, revenues
and financial condition, would be materially and adversely affected.

Any failure by us to comply with existing regulations would harm our reputation
and operating results.

         Any failure on our part to comply with existing regulations could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. This would harm our reputation, our
prospects for future work and our operating results. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at a substantial
cost to us. Furthermore, the issuance of a notice from the Food and Drug
Administration based on a finding of a material violation by us of good clinical
practice, good laboratory practice or good manufacturing practice requirements
would materially and adversely affect us.

Proposed and future regulations might increase the cost of our business or limit
our product or service offerings.

         Federal or state authorities might adopt healthcare legislation or
regulations that are more burdensome than existing regulations. These changes in
regulation could increase our expenses or limit our ability to offer some of our
products or services. For example, the confidentiality of patient-specific
information and the circumstances under which it may be released for inclusion
in our databases or used in other aspects of our business are subject to
substantial government regulation. Additional legislation governing the
possession, use and dissemination of medical record information and other
personal health information has been proposed at both the state and federal
levels. Proposed federal regulations governing patient-specific health
information might require us to implement new security measures that require
substantial expenditures or limit our ability to offer some of our products and
services. These regulations might also increase costs by creating new privacy
requirements for our informatics business and mandating additional privacy
procedures for our clinical research business.

We might lose business opportunities as a result of healthcare reform.

         Numerous governments have undertaken efforts to control growing
healthcare costs through legislation, regulation and voluntary agreements with
healthcare providers and drug companies. Healthcare reform could reduce

                                       19

<PAGE>

demand for our products and services and, as a result, our revenue. In the last
few years, the United States Congress has reviewed several comprehensive health
care reform proposals. The proposals intended to expand healthcare coverage for
the uninsured and reduce the growth of total health care expenditures. While the
United States Congress did not adopt any of the proposals, it might adopt
similar proposals in the future. If Congress approves any of these proposals,
pharmaceutical and biotechnology companies might react by spending less on
research and development. If this were to occur, we would have fewer business
opportunities, which could reduce our earnings. Similarly, pending or future
healthcare reform proposals outside the United States could negatively impact
our revenues from our international operations.

Our drug development business exposes us to personal injury claims that could
affect our financial condition.

         Our drug development business involves the testing of new drugs on
human volunteers. This testing exposes us to the risk of liability for personal
injury or death to patients resulting from, among other things, possible
unforeseen adverse side effects or improper administration of a new drug. Many
of these patients are already seriously ill and are at risk of further illness
or death. We could be materially and adversely affected if we were required to
pay damages or incur defense costs in connection with a claim that is outside
the scope of indemnification agreements we have with clients, if any
indemnification agreement is not performed in accordance with its terms or if
our liability exceeds the amount of any applicable insurance. We might not be
able to get adequate insurance at reasonable rates.

Our business uses biological and hazardous materials, which could injure people
or violate laws, resulting in liability that could hurt our financial condition
and business.

         Our drug discovery and development activities involve the controlled
use of potentially harmful biological materials, as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources. Any contamination or injury could also damage our reputation, which
is critical to getting new business. In addition, we are subject to federal,
state and local laws and regulations governing the use, storage, handling and
disposal of these materials and specified waste products. The cost of compliance
with these laws and regulations could be significant.

Our business has experienced substantial expansion in the past and we must
properly manage that expansion.

         Our business has expanded substantially in the past. Rapid expansion
could strain our operational, human and financial resources. If we fail to
properly manage our expansion, our results of operations and financial condition
might be hurt. In order to manage expansion, we must:

     .   continue to improve our operating, administrative and information
         systems;
     .   accurately predict our future personnel and resource needs to meet
         client contract commitments;
     .   track the progress of ongoing client projects; and
     .   attract and retain qualified management, sales, professional,
         scientific and technical operating personnel.

         In addition, we have numerous business groups, subsidiaries and
divisions. If we cannot properly manage these groups, subsidiaries or divisions,
it will disrupt our operations.

         We will face additional risks in expanding our foreign operations.
Specifically, we might find it difficult to:

     .   assimilate differences in foreign business practices;
     .   hire and retain qualified personnel; and
     .   overcome language barriers.

                                       20

<PAGE>

The fixed price nature of our development contracts could hurt our operating
results.

         The majority of our contracts for the provision of drug development
services are at fixed prices. As a result, we bear the risk of cost overruns. If
we fail to adequately price our contracts or if we experience significant cost
overruns, our operating results could be materially adversely affected. In the
past, we have had to commit unanticipated resources to complete projects,
resulting in lower gross margins on those projects. We might experience similar
situations in the future, which would have a material adverse impact on our
operating results.

If we are unable to attract suitable willing volunteers for our clinical trials,
our development business might suffer.

         Our clinical research studies rely upon the ready accessibility and
willing participation of volunteer subjects. These subjects generally include
volunteers from the communities in which the studies are conducted, including
our Phase 1 centers in Austin, Research Triangle Park and Leicester, which to
date have provided a substantial pool of potential subjects for research
studies. However, our clinical research development could be adversely affected
if we were unable to attract suitable and willing volunteers on a consistent
basis.

Future acquisitions or investments could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
business.

         We anticipate that a portion of any future growth of our business might
be accomplished by acquiring existing businesses, products or technologies. The
success of any acquisitions will depend upon, among other things, our ability to
integrate acquired personnel, operations, products and technologies into our
organization effectively, to retain and motivate key personnel of acquired
businesses and to retain their customers. In addition, we might not be able to
identify suitable acquisition opportunities or obtain any necessary financing on
acceptable terms. Any future acquisitions could involve other risks, including
the assumption of additional liabilities and expenses, potentially dilutive
issuances of equity securities and diversion of management's attention from
other business concerns.

         Acquisitions of foreign companies also might involve the additional
risks of, among others, assimilating differences in foreign business practices
and overcoming language barriers.

         We have made and plan to continue to make investments in other
companies. In many cases, there is no public market for the securities of these
companies and we might not be able to sell these securities on terms acceptable
to us, if at all. In addition, if these companies encounter financial
difficulties, we might lose all or part of our investment.

Our business is subject to international economic, currency, political and other
risks that could negatively affect our revenue and results of operations.

         Because we provide our drug development services worldwide, our
business is subject to risks associated with doing business internationally. Our
revenue from our non-U.S. operations represented approximately 15% of our total
revenues for the year ended December 31, 2001. We anticipate that revenue from
international operations will grow in the future. Accordingly, our future
results could be harmed by a variety of factors, including:

     .   changes in foreign currency exchange rates, which could result in
         foreign currency losses to the income statement;
     .   changes in a specific country's or region's political or economic
         conditions, including Western Europe, in particular;
     .   potential negative consequences from changes in tax laws affecting our
         ability to expatriate profits;
     .   difficulty in staffing and managing widespread operations; and
     .   unfavorable labor regulations applicable to our European operations.

                                       21

<PAGE>

Because we have only limited experience in providing drug discovery services,
our prospects for success in this business remain uncertain and we might be
unsuccessful in our discovery business.

         We established our drug discovery group in 1997 and have only limited
experience with these activities and might not be successful in our drug
discovery efforts. Our ability to generate revenue and income from our drug
discovery business will depend on our ability to:

     .   develop products internally or obtain rights to them from others on
         favorable terms;
     .   complete laboratory testing and human studies;
     .   obtain and maintain necessary intellectual property rights to our
         products;
     .   obtain and maintain necessary regulatory approvals related to the
         efficiency and safety of our products;
     .   enter into arrangements with third parties to manufacture our products
         on our behalf; and
     .   enter into arrangements with third parties to provide sales and
         marketing functions.

Our future success in our drug discovery efforts will depend on our ability to
enter into collaborations with other companies.

         To succeed in our drug discovery business, we will need to enter into
collaborative arrangements, first to obtain rights to potential drug targets,
and then for the development, manufacturing and commercialization of those
products when and if they are approved. We have limited or no control over the
resources that a company that collaborates with us devotes to our product
candidates. Any entity with which we collaborate with might not perform its
obligations as expected. These entities also might breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. Further, parties collaborating with us
might elect not to develop product candidates arising out of collaborative
arrangements or not to devote sufficient resources to the development,
manufacture, marketing or sale of these product candidates.

The drug discovery and development services industry is highly competitive.

         The drug discovery and development services industry is highly
competitive. We often compete for business not only with other drug discovery
and development companies, but also with internal discovery and development
departments within our clients, who are often large pharmaceutical and
biotechnology companies with greater resources than ours. If we do not compete
successfully, our business will suffer. The industry is highly fragmented, with
numerous smaller specialized companies and a few full-service companies with
global capabilities. Increased competition might lead to price and other forms
of competition that might adversely affect our operating results. As a result of
competitive pressures, our industry has been consolidating. This trend is likely
to produce more competition among the larger companies for both clients and
acquisition candidates. In addition, there are few barriers to entry for smaller
specialized companies considering entering the industry. Because of their size
and focus, these companies might compete effectively against larger companies
such as us, which could have a material adverse impact on our business.

Our inability to adequately protect our intellectual property rights would hurt
our business.

         Our success will depend in part on our ability to protect the
proprietary software, compositions, processes and other technologies we develop
during drug discovery and the development process. In addition, one of our
business strategies is to license rights to drug candidates and enter into
collaborations with pharmaceutical and biotechnology companies for the
development of drug candidates. The proprietary rights associated with such drug
candidates must remain protected.

         Any patents that we own or license in the future might not provide
valuable protection for the technology or products. Our efforts to enforce and
maintain our intellectual property rights might not be successful and might
result in substantial costs and diversion of management time. In addition,
others might challenge patents we control and, as a result, these patents could
be narrowed, invalidated, rendered unenforceable or blocked. If blocked, we
might be forced to stop using some or all of the technology or to license the
technology from third parties. In addition, current and future patent
applications on which we depend might not result in the issuance of patents in
the

                                       22

<PAGE>

United States or foreign countries. Even if our rights are valid, enforceable
and broad in scope, competitors might develop products based on similar
technology that is not covered by our patent claims.

         In addition to patent protection, we also rely on copyright, trademark
and trade secrets protection, as well as know-how, continuing technological
innovation and licensing opportunities. In an effort to maintain the
confidentiality and ownership of our intellectual property, we require our
employees, consultants and advisors to execute confidentiality and proprietary
information agreements. However, these agreements might not provide us with
adequate protection against improper use or disclosure of confidential
information and there might not be adequate remedies in the event of
unauthorized use or disclosure. Furthermore, we from time to time hire
scientific personnel formerly employed by other companies involved in one or
more areas similar to the activities we conduct. In some situations, our
confidentiality and proprietary information agreements might conflict with, or
be subject to, the rights of third parties with whom our employees, consultants
or advisors have prior employment or consulting relationships. Although we
require our employees and consultants to maintain the confidentiality of all
confidential information of previous employers, these individuals or we might be
subject to allegations of trade secret misappropriation or other similar claims
as a result of their prior affiliations. Finally, others might independently
develop substantially equivalent proprietary information, or otherwise gain
access to our trade secrets. Our failure to protect our proprietary information
and techniques might inhibit or limit our ability to exclude certain competitors
from the market and to execute our business strategies.

The drug discovery and development industry has a history of patent and other
intellectual property litigation, and we might be involved in costly
intellectual property lawsuits.

         The drug discovery and development industry has a history of patent and
other intellectual property litigation, and these lawsuits will likely continue.
Because we provide many different products and services in this industry, we
face potential patent infringement suits by companies that have patents for
similar products and methods used in business or other suits alleging
infringement of their intellectual property rights. In order to protect or
enforce our intellectual property rights, we might have to initiate legal
proceedings against third parties. Legal proceedings relating to intellectual
property would be expensive, take significant time and divert management's
attention from other business concerns, whether we win or lose. The cost of this
kind of litigation could affect our profitability. Further, if we do not prevail
in an infringement lawsuit brought against us, we might have to pay substantial
damages, including treble damages, and we could be required to stop the
infringing activity or obtain a license to use the patented technology.

Our operations may be interrupted by the occurrence of a natural disaster or
other catastrophic event.

         We depend on our customers, and our laboratories and other facilities
for the continued operation of our business. Although we have contingency plans
in effect for natural disasters or other catastrophic events, catastrophic
events, including terrorist attacks, could still disrupt our operations or those
of our customers, which would also affect us. Even though we carry business
interruption insurance policies, we might suffer losses as a result of business
interruptions that exceed the coverage available under our insurance policies.
Any natural disaster or catastrophic event in our facilities could have a
significant negative impact on our operations.

Because our stock price may be volatile, our stock price could experience
substantial declines.

         The market price of our common stock has historically experienced and
might continue to experience volatility. Our quarterly operating results,
changes in general conditions in the economy or the financial markets and other
developments affecting us or our competitors could cause the market price of our
common stock to fluctuate substantially. In addition, in recent years, the stock
market has experienced significant price and volume fluctuations. The market,
and in particular technology companies, have also experienced significant
decreases in value. This volatility and the recent market decline has affected
the market prices of securities issued by many companies, often for reasons
unrelated to their operating performance, and may adversely affect the price of
our common stock.

                                       23

<PAGE>

Item 2.     Properties

         As of December 31, 2001, we had 48 offices located in 20 countries
spanning six continents. Our principal executive offices are located in
Wilmington, North Carolina. We own and operate 4 facilities, including a 52-bed
Phase 1 facility in Leicester, England, a building in Kersewell, Scotland, and
one building in Durham, North Carolina. We lease all our other facilities. We
believe that our facilities are adequate for our operations and that suitable
additional space will be available when needed. The locations, approximate
square footage and lease expiration dates of our operating facilities comprising
more than 10,000 square feet as of December 31, 2001 were as follows:

                                               Approximate
                                                  Square      Lease Expiration
         Location                  Group          Footage            Date
--------------------------------------------------------------------------------

Morrisville, North Carolina    Development and   258,000     11/30/05 - 1/23/15
                                  Discovery
Wilmington, North Carolina       Development     135,000     11/30/06 - 9/21/09
Austin, Texas                    Development     174,000      7/31/06 - 7/31/10
Richmond, Virginia               Development      79,000          8/31/14
Menlo Park, California            Discovery       60,000           6/1/07
San Bruno, California            Development      18,000          9/30/04
Middleton, Wisconsin           Development and    86,000     7/31/10 - 11/30/11
                                  Discovery
Columbia, Maryland               Development      12,000          7/31/03
Lawrenceville, New Jersey        Development      11,000          5/31/02
Blue Bell, Pennsylvania          Development      21,000          8/31/05
Westminster, Colorado            Development      15,000          1/31/05
Brussels, Belgium                Development      24,000          9/30/08
Charenton-Le-Pont, France        Development      17,000          11/30/10
Granta Park, United Kingdom      Development      28,000          3/30/16
Johannesburg, South Africa       Development      11,000          10/31/02

Item 3.     Legal Proceedings

         In the normal course of business, we are a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is not yet
determined, after consultation with legal counsel we do not believe that the
resolution of these matters will have a material effect upon our financial
condition or results of operations in any interim or annual period.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.

                                       24

<PAGE>

Executive Officers

         The following table contains information concerning our executive
officers as of February 15, 2002:

<TABLE>
<CAPTION>
          Name                       Age                Position(s)
          ----                       ---                -----------
<S>                                  <C>  <C>
Fredric N. Eshelman., Pharm.D...     53   Vice Chairman, Chief Executive Officer
Fred B. Davenport, Jr ..........     50   President, Secretary
Paul S. Covington ..............     45   Executive Vice President - Development
Philippe M. Maitre .............     45   Chief Financial Officer, Treasurer
Francis J. Casieri .............     59   Senior Vice President - Global Business Development
Linda Baddour ..................     43   Chief Accounting Officer, Vice President, Assistant Secretary
</TABLE>

         Fredric N. Eshelman, Pharm.D., has served as Chief Executive Officer
and as a director since July 1990, and as Vice Chairman of the Board of
Directors since 1993. Dr. Eshelman founded our company's predecessor in 1985 and
served as its Chief Executive Officer until its sale to us in 1989. Prior to
rejoining us in 1990, Dr. Eshelman served as Senior Vice President, Development
and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc.

         Fred B. Davenport, Jr. is our President and Secretary.  Prior to his
employment by us in December 1996, Mr. Davenport was a partner in the
Wilmington, North Carolina law firm of Murchison, Taylor, Kendrick and Gibson,
L.L.P., which he joined in 1977. Mr. Davenport was also a member of the faculty
of the University of North Carolina at Wilmington's Cameron School of Business
Administration from 1982 to 1991.

         Paul S. Covington is our Executive Vice President -Development. Dr.
Covington joined us in September 1991. He is board certified in internal
medicine and licensed in North Carolina and Alabama. Prior to joining us, Dr.
Covington was in private practice in Clanton, Alabama from 1985 to 1990 where he
served as Chief of Staff and head of Critical Care and Cardiopulmonary for the
local hospital. From 1991 to 1992, he was Medical Director for the Birmingham
site of Future Healthcare Research Centers.

         Philippe M. Maitre is our Chief Financial Officer and Treasurer. Prior
to joining us in August 2000, Mr. Maitre was Deputy-Chief Financial Officer and
Corporate Controller for Aventis Pharmaceutical Company. Mr. Maitre joined
Rhone-Poulenc in 1981, which subsequently merged with Hoechst Marion Roussel to
form Aventis. Mr. Maitre earned his master's degree in finance from Hautes
Etudes de Commerce business school in Paris.

         Francis J. Casieri is our Senior Vice President - Global Business
Development. Mr. Casieri served as our Director of Business Development from
1991 to 1994. Prior to rejoining us in 1999, Mr. Casieri served as Vice
President, Business Development for PharmaResearch Corporation from 1997 to 1999
and Vice President, Operations for Cytrx Corporation from 1994 to 1997. Prior to
1991, Mr. Casieri worked with Johnson & Johnson for over twenty years in a
variety of capacities, including ten years as Executive Director, Manufacturing
and Logistics for Janssen Pharmaceutica, a Johnson & Johnson subsidiary.

         Linda Baddour is our Chief Accounting Officer, Vice President and
Assistant Secretary. She also served as our Interim Chief Financial Officer from
February 2000 until August 2000. Prior to her employment by us in December 1995,
Ms. Baddour was the Controller for Cooperative Bank for Savings Inc. from 1980
to 1995. Ms. Baddour is a certified public accountant and received her Masters
in Business Administration from the University of North Carolina at Wilmington.

                                       25

<PAGE>

                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder
           Matters

         Our common stock is traded under the symbol "PPDI" in the
over-the-counter market and is quoted on the National Market System of the
National Association of Securities Dealers Automated Quotation System, or
NASDAQ. The following table sets forth the high and low prices for shares of our
common stock, as reported by the National Association of Securities Dealers,
Inc., for the periods indicated. These prices are based on quotations between
dealers, which do not reflect retail mark-up, markdown or commissions.

                               2001                             2000(1)
                 ---------------------------------------------------------------
                       High           Low               High            Low
                 ---------------------------------------------------------------

First Quarter    $     28.906     $   16.844        $   14.500       $   5.438

Second Quarter   $     38.360     $   18.469        $   10.875       $   6.938

Third Quarter    $     38.000     $   19.400        $   13.625       $   9.438

Fourth Quarter   $     33.750     $   22.670        $   29.375       $  12.438

     ______________________
(1)      2000 stock prices restated to reflect the one-for-one stock dividend
         paid in May 2001.


         As of February 15, 2002, there were approximately 16,600 holders of our
common stock.

         We have never declared or paid any cash dividends. Furthermore, we have
no present plans to pay cash dividends to our shareholders and, for the
foreseeable future, intend to retain all of our earnings for use in continuing
to develop our business. The declaration of dividends is within the discretion
of our Board of Directors and is dependent upon our earnings, financial
condition and capital requirements, as well as any other factors deemed relevant
by the Board of Directors

Item 6.         Selected Consolidated Financial Data

         The following table represents selected historical consolidated
financial data. The statement of operations data for the years ended December
31, 1999, 2000 and 2001 and balance sheet data at December 31, 2000 and 2001 are
derived from our audited consolidated financial statements included elsewhere in
this report. The statement of operations data for each of the years ended
December 31, 1997 and 1998, and the balance sheet data at December 31, 1997,
1998 and 1999 are derived from our audited consolidated financial statements
which are not included elsewhere in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
The selected financial data should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes to the financial statements.

                                       26

<PAGE>

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                  1997        1998        1999         2000         2001
                                                               ---------   ---------   ---------    ---------   ---------
                                                                         (in thousands, except per share data)
<S>                                                            <C>         <C>         <C>          <C>         <C>
Net revenues (1)                                               $ 193,851   $ 246,454   $ 302,530    $ 345,318   $ 431,541
                                                               ---------   ---------   ---------    ---------   ---------

Operating expenses                                               175,909     220,831     265,604      301,771     358,949
Merger costs, and acquired in-process
  research and development costs                                   9,670       3,163         218            -           -
                                                               ---------   ---------   ---------    ---------   ---------
                                                                 185,579     223,994     265,822      301,771     358,949
                                                               ---------   ---------   ---------    ---------   ---------
Income from operations                                             8,272      22,460      36,708       43,547      72,592
Other income, net                                                  1,429       3,588       4,337        7,284       5,414
                                                               ---------   ---------   ---------    ---------   ---------
Income from continuing operations
  before provision for income taxes                                9,701      26,048      41,045       50,831      78,006
Provision for income taxes                                         3,363       9,448      12,154       18,521      28,747
                                                               ---------   ---------   ---------    ---------   ---------
Income from continuing operations before equity
  in net loss of investee                                          6,338      16,600      28,891       32,310      49,259
Equity in net loss of investee, net of income taxes                    -           -           -            -          92
                                                               ---------   ---------   ---------    ---------   ---------
Net income from continuing operations                              6,338      16,600      28,891       32,310      49,167
Income (loss) from operations of discontinued
  environmental sciences segment, net (2)                          4,152       4,614        (395)           -           -
                                                               ---------   ---------   ---------    ---------   ---------
Net income                                                     $  10,490   $  21,214   $  28,496    $  32,310   $  49,167
                                                               =========   =========   =========    =========   =========
Income from continuing operations
  per share:
    Basic                                                      $    0.13   $    0.35   $    0.59    $    0.65   $    0.95
                                                               =========   =========   =========    =========   =========
    Diluted                                                    $    0.13   $    0.34   $    0.58    $    0.64   $    0.94
                                                               =========   =========   =========    =========   =========

Income (loss) from discontinued operations per common share:
    Basic                                                      $    0.09   $    0.10   $   (0.01)   $       -   $       -
                                                               =========   =========   =========    =========   =========
    Diluted                                                    $    0.09   $    0.10   $   (0.01)   $       -   $       -
                                                               =========   =========   =========    =========   =========

Net income per common share:
    Basic                                                      $    0.22   $    0.44   $    0.58    $    0.65   $    0.95
                                                               =========   =========   =========    =========   =========
    Diluted                                                    $    0.22   $    0.44   $    0.57    $    0.64   $    0.94
                                                               =========   =========   =========    =========   =========

Weighted average number of common shares
  outstanding:
    Basic                                                         47,110      47,982      49,132       49,930      51,689
    Dilutive effect of stock options                                 120         338         574          424         805
                                                               ---------   ---------   ---------    ---------   ---------
    Diluted                                                       47,230      48,320      49,706       50,354      52,494
                                                               =========   =========   =========    =========   =========

<CAPTION>
                                                                                 As of December 31,
                                                              -----------------------------------------------------------
                                                                 1997       1998        1999         2000         2001
                                                              ---------   ---------   ---------   -----------   ---------
                                                                                   (in thousands)
<S>                                                           <C>         <C>         <C>         <C>           <C>
Consolidated Balance Sheet Data:

Cash and cash equivalents                                     $   16,067   $  34,821   $  61,251    $  76,411   $ 143,173
Marketable securities                                              7,994           -           -            -           -
Working capital (3)                                               70,581      93,309     104,973      106,903     152,829
Total assets                                                     199,653     243,329     288,703      344,915     465,400
Long-term debt                                                       406         224         359        1,353       1,871
Long-term debt, including current portion                          5,315       5,656         570        1,967       3,074
Shareholders' equity                                             129,332     158,769     192,464      233,943     302,635
</TABLE>

(1)  Revenues are presented net of subcontractor costs. See accompanying
     Consolidated Statements of Operations included elsewhere in this report.

(2)  The discontinued operations include the environmental sciences group sold
     in January 1999. All periods presented have been restated to exclude the
     results of operations of the environmental sciences group.

(3)  Working capital is calculated as current assets minus current liabilities.

                                       27

<PAGE>

Item 7.      Management's Discussion and Analysis of Financial Condition and
             Results of Operations

Overview

         During 2001, we reported net income of $49.2 million, or $0.94 per
diluted share, compared to net income of $32.3 million, or $0.64 per diluted
share, during 2000.

         In October 2001, we made an investment in Apothogen, Inc., a new
company formed with JPMorgan Partners (BHCA), L.P., the Chairman of our Board of
Directors, and our Chief Executive Officer to engage in the business of
acquiring, developing and commercializing pharmaceutical products. Due to the
individual interests of the Chairman of our Board of Directors and our Chief
Executive Officer in Apothogen, in connection with this transaction, our board
of directors adopted a policy to address potential conflicts of interest. This
policy identifies the transactions that are subject to the policy and
establishes procedures for the disclosure and disinterested approval of these
transactions Apothogen's shareholders have committed to provide financing to
Apothogen through the purchase of Apothogen's Series A convertible preferred
stock. Our maximum total capital commitment to Apothogen is $18 million, and the
timing of this commitment is subject to capital calls approved by Apothogen's
board of directors and JPMorgan. As such, JPMorgan can control all future
capital calls. As of December 31, 2001, we had contributed approximately $0.3
million to Apothogen for Series A convertible preferred stock. The Series A
preferred stock can be converted to Apothogen common stock at any time and is
subject to a mandatory conversion upon the occurrence of certain events. Given
the involvement of the Chairman of our Board of Directors and our Chief
Executive Officer, we are accounting for our investment in Apothogen under the
equity method of accounting. Accordingly, based on our current ownership
interest of 14.75% of Apothogen's Series A convertible preferred stock, we are
recognizing 14.75% of the net earnings or losses of Apothogen. In connection
with this investment, we also entered into an agreement to be the exclusive
provider of drug development and clinical research program management services
to Apothogen. Under this agreement, these services will be provided to Apothogen
at our customary and usual rates. We also granted Apothogen a first right to
negotiate an exclusive license with respect to compounds acquired or licensed by
us after October 5, 2001. We had a receivable from Apothogen as of December 31,
2001 of $0.2 million. Apothogen rents facility space from us and we provide
Apothogen with development services and specified administrative services.
During 2001, we recorded $0.1 million in rental income and $5 thousand in drug
development services revenues from Apothogen.

         In November 2001, we made a $4.7 million investment in SLIL Biomedical
Corp. SLIL Biomedical is a privately held biopharmaceutical company engaged in
the discovery and development of drugs to treat cancer and other diseases. We
purchased 2.0 million shares of SLIL Biomedical Series C preferred stock. In
connection with this investment, we also received a warrant to purchase up to
$1.2 million of stock which SLIL Biomedical issues in connection with a future
institutional offering at the price per share stated in that offering. We owned
approximately 18.7% of SLIL Biomedical as of December 31, 2001. We are
accounting for this investment under the cost method.

         In March 1999, we acquired ATP, Inc., a health information services
company. We acquired all of the outstanding stock of ATP, Inc. in exchange for
approximately 876,000 shares of our common stock. In February 2001, we changed
the name of this subsidiary to PPD Medical Communications. PPD Medical
Communications provides customized inbound and outbound telecommunications
programs targeting consumers and healthcare providers. We accounted for this
acquisition as a pooling of interests transaction. Accordingly, our financial
statements include results of PPD Medical Communications for all periods
presented.

         In February 1999, we invested in PPGx with Axys Pharmaceuticals, Inc.
to pursue the business of pharmacogenomics, which is the use of genetic
information to predict the characteristics of drugs. We contributed $1.5 million
in cash, the stock of our Intek subsidiary and the rights to a software license
in exchange for an 18.2% ownership interest in PPGx. We accounted for our
investment in PPGx under the cost method. In December 2000, we exercised our
option to increase our ownership to 50% for $5.9 million. Subsequently, PPGx was
acquired by DNA Sciences, Inc., a genetics discovery company focused on
identifying the genetic basis of disease susceptibility, disease progression and
response to drug treatment, in exchange for 1,479,000 shares of Series D
preferred stock of DNA Sciences. We retained our exclusive marketing rights to
PPGx pharmacogenomics products and services, sold

                                       28

<PAGE>

under the brand name Pharmacogenomic Solutions(TM). Also in December 2000, we
purchased 1,478,000 shares of DNA Sciences Series C preferred stock for $15.0
million. In December 2001, we relinquished our exclusive marketing rights for
DNA Science's pharmacogenomics products and services, entered into a new
non-exclusive sales agency agreement, acquired the code and rights to DNA
Sciences' GeneTrials Software, and acquired specified licensing rights to
therapeutic applications of DNA Sciences' genetic research. We owned 10.8% of
DNA Sciences as of December 31, 2001, and account for that investment under the
cost method.

         Effective January 31, 1999, we sold our environmental sciences group to
Environ Holdings, Inc., a new company formed by the management of the
environmental sciences group. We received $1.2 million in cash, a note in the
amount of $7.0 million (which was paid in full in the first quarter of 1999) and
a 12-year note in the amount of $18.0 million. We did not recognize a gain or
loss as a result of the sale because the sales price was equal to the book value
of the net assets sold. We also entered into a three-year consulting agreement
to provide consulting services to Environ Holdings for a fee of $0.5 million per
year.

Results of Operations

         We recognize revenues from fixed-price contracts on a
percentage-of-completion basis in our Development Group. To measure the
percentage of completion, the Company compares actual costs incurred to
estimated total contract costs. We recognize revenues from time-and-materials
contracts as hours are incurred, multiplied by the billable rates for each
contract in both our Development Group and Discovery Sciences Group. We also
recognize revenues from unitized contracts as subjects or samples are tested,
multiplied by the price of each . We record revenues net of reimbursement
received from clients for pass-through expenses, which generally include
subcontractor costs that consist of investigator fees, travel and other contract
costs. Effective January 1, 2002, we plan to account for these expenses in
direct costs and the related reimbursements as a separate revenue line item. See
further discussion regarding Topic D-103 requirements in the "Recently Issued
Accounting Standards" section below.

         Discovery Sciences Group revenues also include nonrefundable technology
license fees and milestone payments. For nonrefundable license fees received at
the initiation of license agreements for which we have an ongoing research and
development commitment, we defer these fees and recognize them ratably over the
period of the related research and development. For nonrefundable license fees
received under license agreements where our continued performance of future
research and development services is not required, we recognize revenue upon
delivery of the technology. These non-refundable fees are generally up-front
payments for the initial license of and access to our technology. In addition to
license fees, our Discovery Sciences Group also generates revenue from time to
time in the form of milestone payments. Milestone payments are only received and
recognized as revenues if the specified milestone is achieved and accepted by
the customer. Although these payments are typically lower than up-front license
fees, these payments can be significant because they are triggered as a result
of achieving specified scientific milestones.

     We record our recurring operating expenses among four categories:

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

         Direct costs consist of appropriate amounts necessary to carry-out the
revenue and earnings process, and include direct labor and related benefit
charges, other costs directly related to contracts, and an allocation of
facility and information technology costs. Direct costs, as a percentage of net
revenues, tend 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
involving the hundreds of studies conducted during any period of time.

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

                                       29

<PAGE>

         Selling, general and administrative, or SG&A, expenses consist
primarily of administrative payroll and related benefit charges, sales,
advertising and promotional expenses, recruiting and relocation expenses,
administrative travel, an allocation of facility and information technology
costs and costs related to professionals working in an indirect capacity.

         Depreciation and amortization expenses consist of depreciation costs
recorded on a straight-line method on property and equipment. In addition, the
excess of the purchase price of a business acquired over the fair value of net
tangible assets and identifiable intangibles and acquired in-process research
and development costs at the date of the acquisitions has been assigned to
goodwill. Goodwill is being amortized over periods of 10 to 25 years. In July
2001, the FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", or SFAS No. 142. We intend to adopt SFAS
No. 142 as of January 1, 2002, as required, and will no longer record
amortization of goodwill in our financial statements. Rather, we will analyze
goodwill for impairment at the reporting unit level during the first quarter of
2002 and, at a minimum, on an annual basis going forward. Amortization expense
related to goodwill for 2001 was $0.9 million and would have been expected to
approximate this amount in 2002 under pre-existing accounting standards.

                                       30

<PAGE>

         The following tables set forth, for the periods indicated, amounts for
certain items in our consolidated financial statements expressed as a percentage
of net revenue from continuing operations and the percentage changes in dollar
amounts of certain items compared with the prior period:

<TABLE>
<CAPTION>
                                                 Percentage of Net Revenue from Continuing Operations
                                                 ----------------------------------------------------

                                                        For the Years Ended December 31,
                                              1999                   2000                     2001
                                     ---------------------   ---------------------    --------------------
                                       Amount         %        Amount           %       Amount         %
                                     ----------   --------   ----------   --------    ----------   -------
                                                                 (dollars in thousands)
<S>                                  <C>          <C>        <C>          <C>         <C>           <C>
Net revenue: (1)
   Development                       $  299,769      99.1%   $  330,516       95.7%   $  403,701      93.5%
   Discovery sciences                     2,761       0.9        14,802        4.3        27,840       6.5
                                     ----------   -------    ----------   --------    ----------    ------
                                        302,530     100.0       345,318      100.0       431,541     100.0
Direct costs:
   Development                          146,921      48.6       166,586       48.3       196,078      45.5
   Discovery sciences                     6,073       2.0         5,978        1.7        11,794       2.7
                                     ----------   -------    ----------   --------    ----------    ------
                                        152,994      50.6       172,564       50.0       207,872      48.2

Research and development expenses         2,638       0.9         2,791        0.8         4,422       1.0
Selling, general and
  administrative expenses                95,130      31.4       109,183       31.6       126,391      29.3
Depreciation and amortization            14,842       4.9        17,233        5.0        20,264       4.7
Merger costs                                218       0.1             -          -             -         -
                                     ----------   -------    ----------   --------    ----------    ------
Operating income                     $   36,708      12.1%   $   43,547       12.6%   $   72,592      16.8%
                                     ==========   =======    ==========   ========    ==========    ======


                                                          Percentage Change
                                                   For the Years Ended December 31,
                                                 -----------------------------------
                                                 2000 vs. 1999         2001 vs. 2000
                                                 -------------         -------------
   Net revenue:
       Development                                    10.3%                22.1%
       Discovery sciences                            436.1                 88.1
         Total net revenue                            14.1                 25.0
   Direct costs:
       Development                                    13.4                 17.7
       Discovery sciences                             (1.6)                97.3
   Research and development expenses                   5.8                 58.4
   Selling, general and administrative expenses       14.8                 15.8
   Depreciation and amortization                      16.1                 17.6

---------------------------------
(1)   Net of subcontractor costs.
</TABLE>



                                       31

<PAGE>

Year Ended December 31, 2001 Versus Year Ended December 31, 2000

         Net revenue increased $86.2 million, or 25.0%, to $431.5 million in
2001 from $345.3 million in 2000. The Development Group's operations accounted
for 93.5% of net revenue for 2001. The Development Group generated net revenue
of $403.7 million, an increase of $73.2 million, or 22.1%, from 2000. The growth
in the Development Group operations was primarily attributable to an increase in
the size, scope and number of contracts in the global contract research
organization, or CRO, Phase 2 through 4 division, as well as the increase in the
number of contracts in the North America laboratory services division.

         The Discovery Sciences Group generated net revenue of $27.8 million in
2001, an increase of $13.0 million, or 88.1%, from 2000. The growth in the
Discovery Sciences operations was primarily attributable to revenue generated by
our sublicensing of the compound dapoxetine to Alza Corporation (which was
acquired by Johnson & Johnson) in the first quarter of 2001 and the payments
from Eli Lilly and Company in 2001 for relinquishing our rights to all compounds
other than dapoxetine licensed by us in 1998.

         Total direct costs increased 20.5% to $207.9 million in 2001 from
$172.6 million in 2000 and decreased as a percentage of net revenue to 48.2% for
2001 as compared to 50.0% in 2000. Development Group direct costs increased to
$196.1 million in 2001 as compared to $166.6 million in 2000. This increase
resulted primarily from increased personnel costs due to the increase in the
size and number of contracts in the global CRO Phase 2 through 4 division. The
Development Group direct costs decreased as a percentage of related net revenue
to 48.6% in 2001 from 50.4% in 2000. This decrease is principally due to the mix
of levels of personnel involved in the contracts performed, variations in the
utilization of personnel and the mix of contracts being performed during each
period. Discovery Sciences direct costs increased to $11.8 million in 2001 as
compared to $6.0 million in 2000. This increase was primarily due to the costs
associated with sublicensing dapoxetine and the increase in the functional
genomics division's direct costs associated with its increased FTE revenue.

         R&D expenses increased 58.4% to $4.4 million in 2001 from $2.8 million
in 2000. This increase was primarily due to the increase in spending on R&D in
the Discovery Sciences segment. As of the end of 2001, the Discovery Sciences
segment had more than double the number of employees working on R&D as compared
to the end of 2000.

         SG&A expenses increased 15.8% to $126.4 million in 2001 from $109.2
million in 2000. The increase was primarily attributable to additional
administrative personnel costs and an increase in recruiting and training costs
associated with new hires to support our expanding operations. As a percentage
of net revenue, SG&A expenses decreased to 29.3% in 2001 from 31.6% in 2000.
This decrease is primarily attributable to the increase in revenue and, to a
smaller extent, to increased efficiencies as our operations expand.

           Total depreciation and amortization expense increased $3.1 million,
or 17.6%, to $20.3 million in 2001 from $17.2 million in 2000. The increase was
related to the depreciation on the increased investment in property and
equipment due primarily to our growth. Capital expenditures were $41.9 million
in 2001 as compared to $21.5 million in 2000. The acquisition of a new airplane,
for cash, to replace our previous one, which was more than 27 years old, as well
as additional facility costs related to our laboratories to increase capacity,
additional software licenses related to our increase in headcount and additional
scientific equipment in our laboratories, accounted for the majority of our
capital investment in 2001.

         Operating income increased $29.1 million to $72.6 million in 2001, as
compared to $43.5 million in 2000. As a percentage of net revenue, operating
income of 16.8% in 2001 represents an improvement from 12.6% of net revenue in
2000. This increase was primarily due to the increase in revenue and our focus
on controlling the increase in both direct and administrative costs as revenues
increased.

         Our provision for income taxes increased $10.2 million, or 55.2%, to
$28.7 million in 2001, as compared to $18.5 million in 2000. Our effective
income tax rate increased to 36.9% in 2001 from 36.4% in 2000. 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. In particular, as the geographic mix of our
pre-tax earnings among various tax jurisdictions changes, our effective tax rate
might vary from period to period.

                                       32

<PAGE>

         In October 2001, we made an investment in Apothogen, Inc.  Given the
involvement of the Chairman of our Board of Directors and our Chief Executive
Officer, we are accounting for our investment in Apothogen under the equity
method of accounting. Equity in net loss of investee, net of income taxes, was
$0.1 million for 2001. We expect to recognize development revenues for services
performed for Apothogen in 2002, which we expect will partially offset our
equity losses in Apothogen.

         Net income of $49.2 million in 2001 represents an increase of $16.9
million over $32.3 million in 2000. Net income per diluted share of $0.94 for
2001 compares to $0.64 in 2000.

Year Ended December 31, 2000 Versus Year Ended December 31, 1999

         Net revenue increased $42.8 million, or 14.1%, to $345.3 million in
2000 from $302.5 million in 1999. The Development Group's operations accounted
for 95.7% of net revenue for 2000. The Development Group generated net revenue
of $330.5 million, an increase of $30.7 million, or 10.3%, from 1999. The growth
in the Development Group operations was primarily attributable to an increase in
the size, scope and number of contracts in the global contract research
organization, or CRO, Phase 2 through 4 division as well as the increase in the
number of contracts in the North America Phase 1 and laboratory services.

         The Discovery Sciences Group generated net revenue of $14.8 million in
2000, an increase of $12.0 million, or 436.1%, from 1999. The growth in the
Discovery Sciences operations was primarily attributable to revenue generated by
the functional genomics division as a result of entering into new contracts in
January 2000 and July 2000. In addition, the combinatorial chemistry division
had an increase in contracts during 2000.

         Total direct costs increased 12.8% to $172.6 million in 2000 from
$153.0 million in 1999 and decreased as a percentage of net revenue to 50.0% for
2000 as compared to 50.6% in 1999. Development direct costs increased to $166.6
million in 2000 as compared to $146.9 million in 1999. The increased direct cost
dollars resulted primarily from increased personnel costs due to the increase in
the size and number of contracts in the global CRO Phase 2 through 4 division.
The Development Group direct costs increased as a percentage of related net
revenue to 50.4% in 2000 from 49.0% in 1999. This increase is principally due to
the mix of levels of personnel involved in the contracts performed and an
increase in personnel utilization due to quality initiatives. Discovery Sciences
direct costs decreased to $6.0 million in 2000 as compared to $6.1 million in
1999.

         R&D expenses increased 5.8% to $2.8 million in 2000 from $2.6 million
in 1999. This increase was primarily due to the increase in spending on R&D in
the Discovery Sciences segment.

         SG&A expenses increased 14.8% to $109.2 million in 2000 from $95.1
million in 1999. The increase was primarily attributable to an investment in
additional administrative personnel and an increase in facility and information
technology costs to support expanding operations. As a percentage of net
revenue, SG&A expenses increased slightly to 31.6% in 2000 from 31.4% in 1999.

         Total depreciation and amortization expense increased $2.4 million, or
16.1%, to $17.2 million in 2000 from $14.8 million in 1999. The increase was
related to the depreciation of the increased investment in property and
equipment due primarily to our growth. Capital expenditures were $21.5 million
in 2000. Additional scientific equipment in our laboratories accounted for
approximately 33.2% of this capital investment. Furniture and leasehold
improvements in existing facilities accounted for approximately 25.6%, while the
enhancement and expansion of information technology capacities accounted for
approximately 26.0%. The remaining capital expenditures were incurred
predominantly in connection with the expansion of existing operations and the
opening of new offices.

         During the first quarter of 1999, we recorded merger costs of $0.2
million in connection with the acquisition of PPD Medical Communications. These
costs were primarily cash expenses, such as legal and accounting fees, related
to this transaction. We had no merger costs in 2000.

         Operating income increased $6.8 million to $43.5 million in 2000, as
compared to $36.7 million in 1999. As a percentage of net revenue, operating
income of 12.6% in 2000 represents an improvement from 12.1% of net

                                       33

<PAGE>

revenue in 1999. These increases were primarily due to our focus on controlling
the increase in both direct and administrative costs, as revenues increased.

         Net interest and other income increased $3.0 million, or 68.0%, to $7.3
million for 2000 from $4.3 million in 1999. The increase was primarily the
result of the increase in interest income of $2.3 million. We recognized $1.6
million in interest income related to the notes receivable from the Chicago
Center for Clinical Research and Environ Holdings in both 1999 and 2000.

         We recorded a loss from discontinued operations, net of income tax
expense, related to our environmental sciences group, of $0.4 million in 1999.
We sold our environmental sciences group on January 31, 1999.

         Our provision for income taxes increased $6.3 million, or 52.4%, to
$18.5 million in 2000, as compared to $12.2 million in 1999. Our effective
income tax rate increased to 36.4% in 2000 from 29.6% in 1999, primarily due to
an investment transaction entered into in the fourth quarter of 1999, which
created a significant capital gain. We offset this capital gain with a capital
loss carryforward, which had previously been fully reserved. As a result of the
reversal of the valuation allowance on this capital loss carryforward, we
recognized a tax benefit of approximately $3.8 million.

         Net income of $32.3 million in 2000 represents an increase of $3.8
million over $28.5 million in 1999. Net income per diluted share of $1.28 for
2000 compares to $1.15 in 1999. Excluding the discontinued operations,
non-recurring tax benefits and merger charges in 1999, our 2000 net income of
$32.3 million was 27.6% higher than net income of $25.3 million for 1999.

Liquidity and Capital Resources

         As of December 31, 2001, we had $143.2 million of cash and cash
equivalents on hand. We have historically funded our operations and growth,
including acquisitions, with cash flow from operations, borrowings and sales of
our stock. We are exposed to changes in interest rates on cash equivalents,
short-term investments, and amounts outstanding under notes payable, notes
receivable and lines of credit. Our cash and cash equivalents and short-term
investments are invested in financial instruments, which are rated A or better
by Standard & Poor's or Moody's and which have market interest rates.

         For the year ended December 31, 2001, our operating activities provided
$101.3 million in cash as compared to $61.9 million last year. The increase in
cash flow from operations is primarily due to an increase in our net revenues,
an increase in operating margins as a percentage of net revenues and our effort
to control accounts receivable. For the 2001 period, net income of $49.2
million, depreciation and amortization of $20.3 million and the net increase of
$33.1 million in assets and liabilities were partially offset by the $4.7
million decrease in deferred income taxes.

         For the year ended December 31, 2001, our investing activities used
$45.5 million in cash. The payment of $5.1 million for several cost method
investments and capital expenditures of $41.9 million were slightly offset by
$0.9 million from proceeds from the sale of property and equipment and $0.5
million received from the repayment of a note receivable.

         For the year ended December 31, 2001, our financing activities provided
$11.9 million in cash, as net proceeds from stock option exercises and the
employee stock purchase plan totaling $13.6 million were partially offset by
$1.7 million in repayments of capital lease obligations.

         Working capital as of December 31, 2001 was $152.8 million, compared to
$106.9 million at December 31, 2000. The increase in working capital was due
primarily to the increase in cash and cash equivalents of $66.8 million and an
increase in accounts receivable and unbilled services, net, of $22.3 million.
This was partially offset by the increase in other accrued expenses and accrued
income taxes of $19.1 million and the increase in unearned income of $29.0
million. The number of days revenue outstanding in accounts receivable and
unbilled services, net of unearned income, also known as DSO, were 43.0 and 51.1
days as of December 31, 2001 and December 31, 2000, respectively. This
improvement is a result of a focused effort by management on improving the
accounts

                                       34

<PAGE>

receivable collection process along with certain improved temporary terms
regarding investigator fee down payments. We expect DSO in future periods will
be approximately 50 days, but no assurance can be given that such expectations
will be achieved.

         In June 2001, we amended our revolving credit facility for $50.0
million from First Union National Bank. The primary purpose of the amendment was
to extend the expiration date and to relax certain covenants governing financial
ratios and investments. Indebtedness under the facility is unsecured and subject
to traditional covenants relating to financial ratios. Borrowings under this
credit facility are available to provide working capital and for general
corporate purposes. As of December 31, 2001, there was no amount outstanding
under this credit facility. This credit facility is currently scheduled to
expire in June 2002, at which time any outstanding balance would be due.

         In July 2001, we amended our revolving credit facility for $50.0
million from Wachovia Bank, N.A. The primary purpose of the amendment was to
extend the expiration date and to relax certain covenants governing financial
ratios and investments. Indebtedness under the line is unsecured and subject to
traditional covenants relating to financial ratios. As of December 31, 2001,
there was no amount outstanding under this credit facility. This credit facility
is currently scheduled to expire in July 2002, at which time any outstanding
balance would be due.

         In September 2001, First Union and Wachovia merged to create Wachovia
Corporation. This merger has had no effect on the structure and terms of our two
revolving credit facilities.

         In April 2000, we made an investment in Spotlight Health, Inc.
(formerly known as ADoctorInYourHouse.com). In January 2001, we entered into an
agreement with Spotlight Health and First Union National Bank to guarantee a
revolving $2.0 million line of credit from First Union to Spotlight Health.
Indebtedness under the line from First Union to Spotlight Health is unsecured
and subject to traditional covenants relating to financial ratios. As of
December 31, 2001, Spotlight Health had $2.0 million outstanding under this
credit facility. This credit facility is currently scheduled to expire in June
2002, at which time any outstanding balance is due. We anticipate that Spotlight
Health will seek to renew the facility at that time and we may elect to extend
our guarantee. We review the financial statements of Spotlight Health on a
quarterly basis to determine if they have sufficient financial resources to
continue operations. While we do not have current concerns regarding this
guarantee, there can be no assurance that we will not have to act upon this
guarantee due to changes in the financial condition of the debtor.

         We expect to continue expanding our operations through internal growth
and strategic acquisitions. We expect these activities will be funded from
existing cash, cash flow from operations and borrowings under our credit
facilities. We believe that these sources of liquidity will be sufficient to
fund our operations for the foreseeable future, but offer no assurances. In
particular, our liquidity could be affected by our dependence on a small number
of industries and clients, compliance with regulations, international risks,
personal injury, environmental or intellectual property claims, as well as other
factors described under "Factors that Might Affect our Business or Stock Price",
"Potential Volatility of Quarterly Operating Results and Stock Price",
"Quantitative and Qualitative Disclosures about Market Risk", and "Judgments,
Assumptions, Risks and Uncertainties". From time to time, we evaluate potential
acquisitions and other growth opportunities, which might require additional
external financing, and we might seek funds from public or private issuances of
equity or debt securities.

Critical Accounting Policies and Estimates

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

         The majority of our revenues are recorded from fixed-price contracts on
a percentage-of-completion basis based on assumptions regarding patient
enrollment and the anticipated scope of work. Each month costs are accumulated
on each project and compared to the budget for that particular project. This
determines the percentage-

                                       35

<PAGE>

of-completion on the project. This percentage is multiplied by the contract
value to determine the amount of revenue that can be recognized. Each month
management reviews the budget on each project to determine if the assumptions
within the budget are still correct and budgets are adjusted accordingly. As the
work progresses, original estimates might be deemed incorrect due to revisions
in the scope of work or patient enrollment rate and a contract modification
might be negotiated with the customer to cover additional costs. We bear the
risk of cost overruns. In the past, we have had to commit unanticipated
resources to complete projects, resulting in lower gross margins on those
projects. We might experience similar situations in the future. Should our
estimated costs on fixed price contracts prove to be low, future margins could
be reduced, absent our ability to negotiate a contract modification. We
accumulate information on each project to refine our bidding process.
Historically, the majority of our estimates and assumptions have been materially
correct, but these estimates might not continue to be accurate. Clients
generally may terminate a study at any time, which might cause unplanned periods
of excess capacity and reduced revenues and earnings. To offset the effects of
early terminations of significant contracts, the Company attempts to negotiate
the payment of an early termination fee as part of the original contract.

         In our Discovery Science Group, we generate revenue from time to time
in the form of milestone payments. Milestone payments are only received and
recognized as revenues if the specified milestone is achieved and accepted by
the customer. Although these payments are typically lower than up-front license
fees, these payments can be significant because they are triggered as a result
of achieving specified scientific milestones. Future potential milestone
payments under various discovery contracts might never be received if the
milestones are not achieved.

         Included in "Accounts receivable and unbilled services, net" on our
Consolidated Balance Sheets is a reserve for doubtful accounts. Generally,
before we do business with a new client, we have a credit check performed on
that company to determine if they have a satisfactory credit rating. Senior
management reviews the accounts receivable aging on a monthly basis to determine
if any receivables will potentially be uncollectable. After all attempts to
collect the receivable have failed, the receivable is written off against the
reserve. Based on the information available to us, we believe our reserve for
doubtful accounts as of December 31, 2001 was adequate. However, no assurances
can be given that actual write-offs will not exceed the recorded reserve. On a
quarterly basis, we review the financial statements and compliance certificates
submitted by the entities that owe us money under outstanding notes receivable.
To date, we have not had any indication that these notes will not be paid in
full on a timely basis. All payments of interest and/or principal due had been
made on a timely basis as of December 31, 2001. Due to unforeseen circumstances
in the future, we may be unable to collect all or part of these notes
receivable.

         Our investments consist of equity instrument investments in private
entities for which fair values are not readily determinable. All of our
investments are recorded under the cost method of accounting, with the exception
of Apothogen. Many of the our investments are in relatively early stage life
sciences or biotechnology companies that do not have long-established products
or proven technologies. Therefore, these investments are subject to write-down
for impairment whenever events or changes in circumstances indicate that the
carrying amount of these investments may not be recoverable. Senior management
reviews these investments for other than temporary declines in value, at a
minimum, on a quarterly basis. Given the nature of these companies, our
assessments of value are judgmental.

         Given the involvement of the Chairman of our Board of Directors and our
Chief Executive Officer, we account for our investment in Apothogen under the
equity basis method of accounting. Our maximum total capital commitment to
Apothogen is $18 million and the timing of this commitment is subject to capital
calls approved by Apothogen's board of directors and JPMorgan. As such, JPMorgan
can control all future capital calls. We believe that the extent of our capital
commitment to Apothogen will depend on the success of Apothogen in identifying
and developing compounds and the resulting licensing or commercialization of
those compounds. As of December 31, 2001, we had contributed approximately $0.3
million to Apothogen.

         Based on estimates of future taxable profits and losses in certain
foreign tax jurisdictions, management has determined that a valuation allowance
of $0.7 million is required for specific foreign tax loss carryforwards as of
December 31, 2001. If these estimates prove inaccurate, a change in the
valuation allowance, up or down, could be required in the future.

                                       36

<PAGE>

         We review long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset might not be
recoverable. If indicators of impairment were present, we would evaluate the
carrying value of property and equipment and intangibles, including goodwill, in
relation to estimates of future undiscounted cash flows of the underlying
business, which are based on judgment and assumptions.

         The only off-balance sheet financing arrangement with non-consolidated
entities that we have is with Spotlight Health. We are the guarantor of a $2.0
million revolving line of credit between Spotlight Health and First Union
National Bank. See full details on this arrangement disclosed in the "Liquidity"
section.

         In the normal course of business, we are party to various claims and
legal proceedings. We record a reserve for these matters when an adverse outcome
is probable and the amount of the potential liability is reasonably estimable.
Although the ultimate outcome of these matters is currently not determinable, we
do not believe that the resolution of these matters will have a material effect
upon our financial condition, results of operations or cash flows for an interim
or annual period. We attempt to manage our risk of liability for personal injury
or death from administration of products under study through stringent operating
procedures, contractual indemnification provisions with clients and minimum
insurance requirements for clients. See full details on this insurance disclosed
in the "Potential Liability and Insurance" section.

Contractual Obligations and Commercial Commitments

         Future minimum payments for all contractual obligations for years
subsequent to December 31, 2001 are as follows (in thousands):
<TABLE>
                                                              2003-     2005-    2007 and
                                        Total    2002         2004      2006   thereafter
                                       --------------------------------------------------
<S>                                    <C>       <C>       <C>       <C>       <C>
Capital lease obligations, including
  interest payments                    $  3,288  $  1,327  $ 1,961   $     -   $     -
Operating leases                        146,935    20,928   38,029    34,019    53,959
Less: sublease income                      (400)     (400)       -         -         -
                                       --------  --------  -------   -------   -------
Total                                  $149,823  $ 21,855  $39,990   $34,019   $53,959
                                       ========  ========  =======   =======   =======
</TABLE>

         Other commercial commitments include the guarantee we provide on
Spotlight Health's $2.0 million line of credit. See full details on this
arrangement in the "Liquidity" section.

Recently Issued Accounting Standards

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Investments and Hedging
Activities," or SFAS No. 133. SFAS No. 133 establishes accounting and reporting
standards for derivatives and hedging activities and supercedes several existing
standards. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Our adoption of SFAS No. 133 as of January 1, 2001 did not have a material
impact on our consolidated financial statements.

         In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations", or SFAS No. 141, and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
or SFAS No. 142. We have adopted SFAS No. 141 as of July 1, 2001, which requires
that all business combinations be accounted for under the purchase method and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. We intend to adopt SFAS No. 142 as of January 1,
2002, as required, and for goodwill and intangible assets acquired after June
30, 2001 (for the nonamortization and amortization provisions of the Statement),
we have adopted the required provisions. We will no longer record amortization
of goodwill in the financial statements effective January 1, 2002, as required
by SFAS No. 142. Rather, we will analyze goodwill for impairment at the
reporting unit level during the first quarter of 2002 and, at a minimum, on an
annual basis going forward. Amortization expense related to goodwill for 2001
was $0.9 million and would have been expected to approximate this amount in 2002
under pre-existing accounting standards.

                                       37

<PAGE>

         In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", or SFAS No. 144, which supersedes SFAS No. 121 and portions of APB
Opinion No. 30. SFAS No. 144 provides guidance on the recognition and impairment
of long-lived assets to be held and used and for long-lived assets to be
disposed. We intend to adopt SFAS No. 144 as of January 1, 2002, as required,
and do not believe the adoption will have a material impact on our consolidated
financial statements.

         In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". Topic D-103 requires reimbursements for out-of-pocket expenses
incurred to be characterized as revenue in the income statement. Currently, we
account for out-of-pocket expenses and contracted physician expenses as a
reduction of revenues. Topic D-103 is effective for periods beginning after
December 1, 2001 and will require comparative financial statements for prior
periods to be reclassified. We are currently in the process of evaluating the
impact that Topic D-103 will have on our consolidated financial statements.

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

Potential Liability and Insurance

         Clinical research services involve the testing of new drugs on human
volunteers pursuant to a study protocol. This testing exposes us to the risk of
liability for personal injury or death to patients resulting from, among other
things, possible unforeseen adverse side effects or improper administration of
the new drug. Many of these patients are already seriously ill and are at risk
of further illness or death. We attempt to manage our risk of liability for
personal injury or death to patients from administration of products under study
through measures such as stringent operating procedures and contractual
indemnification provisions with clients and through insurance maintained by
clients. We monitor our clinical trials in compliance with government
regulations. We have adopted global standard operating procedures intended to
satisfy regulatory requirements in the United States and in many foreign
countries and serve as a tool for controlling and enhancing the quality of our
clinical trials. The contractual indemnifications generally do not protect us
against our own actions, such as negligence. We currently maintain professional
liability insurance coverage of up to $15.0 million per claim, with an annual
aggregate policy limit of $15.0 million.

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 include:

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

                                       38

<PAGE>

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

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

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

         We are exposed to foreign currency risk by virtue of our international
operations. We conduct business in several foreign countries. Approximately
14.8%, 12.2% and 15.0% of our net revenues for the years ended December 31,
1999, 2000 and 2001, respectively, were derived from operations outside the
United States. Funds generated by each subsidiary are generally reinvested in
the country where they are earned. Our operations in the United Kingdom
generated more than 51% of our revenue from international operations during
2001. Accordingly, we do have some exposure to adverse movements in the pound
sterling and other foreign currencies. The United Kingdom has traditionally had
a relatively stable currency compared to our functional currency, the U.S.
dollar. We anticipate that those conditions will persist for at least the next
12 months, but cannot guarantee such.

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

         We do have some currency risk resulting from the passage of time
between the invoicing of customers under contracts and the ultimate collection
of customer payments against those invoices. If a contract is denominated in a
currency other than the subsidiary's local currency, we recognize a receivable
at the time of invoicing for the local currency equivalent of the foreign
currency invoice amount. Changes in exchange rates from the time the invoice is
prepared and payment from the customer is received will result in our receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. We recognize this difference as a foreign currency transaction gain
or loss, as applicable, and report it in other income, net.

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

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

         Translation of the balance sheet in this manner affects the
shareholders' equity account, referred to as the cumulative translation
adjustment account. This account exists only in the foreign subsidiary's U.S.
dollar balance sheet and is necessary to keep the foreign balance sheet, stated
in U.S. dollars, in balance. Translation adjustments are reported with
accumulated other comprehensive income (loss) as a separate component of
shareholders' equity. To date, cumulative translation adjustments have not been
material to our consolidated financial position. Adjustments could in the future
be material to our financial statements.

                                       39

<PAGE>

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

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

Item 8.       Financial Statements and Supplementary Data

         The information called for by this Item is set forth herein commencing
on page F-1.

Item 9.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure

         None.

                                       40

<PAGE>

                                    PART III

         Certain information required by Part III is omitted from this report,
because the Registrant intends to file a definitive proxy statement for its 2002
Annual Meeting of Stockholders to be held on May 15, 2002 (the "Proxy
Statement") within 120 days after the end of its fiscal year pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended, and the information included therein is incorporated herein by
reference to the extent provided below.

Item 10.          Directors and Executive Officers of the Registrant

         The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.

         The other information required by Item 10 of Form 10-K is incorporated
by reference to the information under the headings "Proposal No. 1 - Election of
Directors" and "Other Information-Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

Item 11.          Executive Compensation

         The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1 - Election of
Directors - Information About the Board of Directors and Its Committees," "Other
Information - Executive Compensation Tables," "--Director Compensation,"
"--Report of the Compensation Committee on Executive Compensation,"
"--Compensation Committee Interlocks and Insider Participation," and
"--Performance Graph" in the Proxy Statement.

Item 12.          Security Ownership of Certain Beneficial Owners and Management

         The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information - Principal
Shareholders" in the Proxy Statement.

Item 13.          Certain Relationships and Related Transactions

         The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information - Certain
Transactions" in the Proxy Statement.

                                       41

<PAGE>

                                     PART IV

Item 14.      Exhibits and Reports on Form 8-K

       (a) Financial Statements

           1.  The consolidated financial statements of the Company and its
               subsidiaries filed as part of this Report are listed in the
               attached Index to Consolidated Financial Statements.

           2.  The schedule to the consolidated financial statements of the
               Company and its subsidiaries. None.

           3.  The exhibits filed as part of this Report are listed in Item
               14(c) below.

       (b) Reports on Form 8-K.

       The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on October 16, 2001, relating to the Company's investment
with Apothogen, Inc.

       (c) Exhibits

<TABLE>
<CAPTION>
Exhibit No.            Description
-----------            -----------
<S>               <C>
  2.1**           --Plan of Merger to Merge PPD Subsidiary, Inc. with and into Pharmaceutical Product Development
                    Clinical Research Unit, Inc. ("PPD-CRU").
  2.2**           --Plan of Merger to Merge PPD-Europe, Inc. ("PPD Europe") with and into the Registrant.
  2.3*            --Agreement and Plan of Reorganization, dated as of June 20, 1996, among the Registrant,
                    Wilmington Merger Corp. and Applied Bioscience International Inc.
  2.4*            --Stock and Asset Master Purchase Agreement by and among Huntingdon International Holdings plc,
                    Huntingdon Life Sciences Inc., Applied Bioscience International Inc. and Pharmaco LSR
                    International Inc., dated as of November 1, 1995, incorporated by reference to Exhibit 2 to Applied
                    Bioscience International Inc.'s Current Report on Form 8-K filed with the Securities
                    and Exchange Commission on December 6, 1996.
  2.5*            --Stock Purchase Agreement among Applied Bioscience International Inc., PPD UK Holdings Limited
                    and Environ Holdings Inc. for the acquisition of all the capital stock of APBI Environmental
                    Sciences Group, Inc., Environmental Assessment Group Limited and Environ International Limited,
                    dated January 31, 1999.
  2.6*            --Agreement and Plan of Merger and Reorganization dated December 17, 2000, between DNA Sciences,
                    Inc., PIPO Acquisition Corp., and PPGx, Inc.
  2.7*            --Series C Preferred Stock Purchase Agreement dated December 17, 2000, between DNA Sciences,
                    Inc. and Pharmaceutical Product Development, Inc.
  2.8*            --Agreement and Plan of Reorganization dated January 28, 2002, by and among Pharmaceutical
                    Product Development, Inc., Subsidiary No. 8, LLC and Medical Research Laboratories
                    International, Inc.
  2.9*            --Share Purchase Agreement among Pharmaceutical Product Development, Inc., PPD UK Holdings
                    Limited, Evan A. Stein, M.D., Ph.D. and MRL Select Ltd. Co.
  3.1*            --Restated Articles of Incorporation.
  3.2*            --Amended and Restated Bylaws.
  10.8**          --Pharmaceutical Product Development, Inc. Equity Compensation Plan, effective as of October 30,
                    1995.
  10.9**          --Pharmaceutical Product Development, Inc. Stock Option Plan for Non-Employee Directors,
                    effective as of October 31, 1995.
  10.10**         --Registration Rights Agreement, dated January 24, 1996, by and among the Registrant and certain
                    of its shareholders.
  10.35**         --Lease, dated January 26, 1994, by and between Michael James Lawton, Jeffrey William Ware,
                    Prudential Nominees Limited and Gabbay Group Limited.
  10.39**         --Lease Agreement, dated as of October 25, 1995, by and between PPD-CRU and Perimeter Park West
                    Associates Limited Partnership.
  10.55**         --Lease made January 23, 1996 between PPD-CRU and Western Center Properties, Inc.
  10.57*          --First Amendment to Registration Rights Agreement.
  10.59*          --First Amendment dated May 20, 1999 to Lease Agreement, dated October 25, 1995, between PPD
                    Development and Perimeter Park West Associates Limited Partnership.
  10.60*          --First, Second and Third Amendments to Lease Agreement, dated March 25, 1996, between PPD and
                    BBC Family Limited Partnership.
</TABLE>

                                       42

<PAGE>

<TABLE>
<S>               <C>
  10.61*          --Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership.
  10.71*          --Lease Agreement by and between ABI (TX) QRS 12-11, Inc. and Pharmaco LSR International Inc.,
                    incorporated by reference to Exhibit 10.43 to Applied
                    Bioscience International Inc.'s Annual Report on Form 10-K
                    for the year ended December 31, 1995.
  10.86*          --Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan, dated May 15,1997.
  10.87*          --Amendment to Employee Stock Purchase Plan, dated June 21, 1997.
  10.88*          --Amendment to Stock Option Plan for Non-Employee Directors, dated May 15, 1997.
  10.89*          --Amendment to Equity Compensation Plan, dated May 15, 1997.
  10.90*          --Employment Agreement, effective July 1, 1997, between Pharmaceutical Product Development, Inc.
                    and Fredric N. Eshelman.
  10.93*          --Lease Agreement dated July 9, 1997, between Weeks Realty, Inc. and PPD Pharmaco, Inc.
  10.96*          --Employment Agreement dated January 1, 1998 between PPD Pharmaco, Inc. and Patrick C. O'Connor.
  10.110*         --Amendment to Employee Stock Purchase Plan, dated March 2, 1998.
  10.111*         --Employment Agreement dated May 22, 1998 between Subsidiary No. 5, Inc. and Karl B. Thor.
  10.113*         --Note and Loan Agreement, dated June 24, 1998 between Pharmaceutical Product Development, Inc.
                    and First Union National Bank.
  10.114*         --Lease Agreement dated June 26, 1998 between Weeks Realty Limited Partnership and PPD Pharmaco,
                    Inc.
  10.116*         --First Amendment to Lease Agreement dated October 20, 1998, between PPD Pharmaco, Inc. and
                    Weeks Realty, Inc.
  10.117*         --Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited
                    Partnership.
  10.118*         --Lease Agreement dated December 16, 1998 between PPD Pharmaco, Inc. and Weeks Realty Limited
                    Partnership.
  10.119*         --Employment Agreement dated January 1, 1999 between Pharmaceutical Product Development, Inc.
                    and David R. Williams.
  10.122*         --Second Amendment to Loan Agreement dated January 30, 1999, between Pharmaceutical Product
                    Development, Inc. and First Union National Bank.
  10.124*         --Stock Purchase Agreement dated February 1, 1999 between PPGx, Inc. and Pharmaceutical Product
                    Development, Inc.
  10.128*         --Credit and Security Agreement dated February 2, 1999, between Applied Bioscience International
                    Inc., Environ Holdings, Inc. and APBI Environmental Sciences Group, Inc.
  10.129*         --First Amendment to Credit and Security Agreement dated March 30, 1999, between Applied
                    Bioscience International Inc., Environ Holdings, Inc. and Environ International Corporation
                    (formerly APBI Environmental Sciences Group, Inc.).
  10.130*         --Subordination and Intercreditor Agreement dated March 30, 1999, between First Union National
                    Bank and Applied Bioscience International, Inc.
  10.131*         --Amendment, dated April 14, 1999, to Lease Agreement dated September 15, 1998 between PPD
                    Pharmaco, Inc. and BBC Family Limited Partnership.
  10.132*         --Amendment, dated April 14, 1999, to Lease Agreement dated March 25, 1996 between PPD and BBC
                    Family Limited Partnership.
  10.133*         --Fourth Amendment, dated July 6, 1999, to Lease Agreement dated July 9, 1997 between PPD
                    Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.
  10.134*         --Pharmaceutical Product Development, Inc. Equity Compensation Plan as amended and restated
                    effective May 12, 1999.
  10.136*         --Termination of Employment Agreement dated September 14, 1999 between Pharmaceutical Product
                    Development, Inc. and Thomas D'Alonzo.
  10.137*         --Amendment No. 2 and Restatement of Credit and Security Agreement dated November 24, 1999,
                    between Applied Bioscience International Inc., Environ Holdings, Inc. and Environ
                    International Corporation
  10.138*         --Termination of Employment Agreement dated October 7, 1999 between PPD Development, Inc. and
                    Joshua S. Baker.
  10.140*         --Employment Agreement dated December 17, 1999 between PPD Development, Inc. and Francis J.
                    Casieri.
  10.142*         --Termination of Employment Agreement dated February 8, 2000 between Pharmaceutical Product
                    Development, Inc. and Rudy C. Howard.
</TABLE>

                                       43

<PAGE>

<TABLE>
<S>       <C>
10.143*   --Second Amendment to Loan Agreement dated March 1, 2000, between Pharmaceutical Product
            Development, Inc. and First Union National Bank.
10.145*   --Third Amendment to Employee Stock Purchase Plan, dated June 21, 1997.
10.146*   --Third Amendment to Loan Agreement dated June 23, 2000, between Pharmaceutical Product
            Development, Inc. and First Union National Bank.
10.147*   --Fourth Amendment to Loan Agreement dated June 30, 2000, between Pharmaceutical Product
            Development, Inc. and First Union National Bank.
10.148*   --Employment Agreement dated July 20, 2000, between Pharmaceutical Product Development, Inc. and
            Philippe M. Maitre.
10.154*   --Loan Agreement dated September 22, 2000, by and between PPGx, Inc., Pharmaceutical Product
            Development, Inc. and Axys Pharmaceuticals, Inc.
10.155*   --Second Amendment to Registration Rights Agreement.
10.156*   --Amendment No. 3 to Credit and Security Agreement dated October 17, 2000, between Applied
            Bioscience International Inc., Environ Holdings, Inc. and Environ International Corporation
            and Environ Facility Services Corporation.
10.157*   --Amended and Restated Promissory Note dated October 17, 2000, between Applied Bioscience
            International Inc., Environ Holdings, Inc. and Environ International Corporation and Environ
            Facility Services Corporation.
10.158*   --Deferred Compensation Plan dated February 1, 2001.
10.159*   --Fifth Amendment to Loan Agreement dated December 19, 2000, between Pharmaceutical Product
            Development, Inc. and First Union National Bank.
10.160*   --First Amendment to and Reaffirmation of Subordination
            and Intercreditor Agreement dated October 17, 2000,
            between First Union National Bank and Applied Bioscience
            International, Inc.
10.162*   --Severance Agreement dated January 1, 2001, between Pharmaceutical Product Development, Inc.
            and various individuals.
10.163*   --Loan Agreement dated January 24, 2001, by and among Spotlight Health, Inc., Pharmaceutical
            Product Development, Inc. and First Union National Bank.
10.164*   --First Amendment, dated January 28, 1998, to Lease Agreement dated July 9, 1997 between PPD
            Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.
10.165*   --Second Amendment, dated June 26, 1998, to Lease Agreement dated July 9, 1997 between PPD
            Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.
10.166*   --Third Amendment, dated February 18, 1999, to Lease Agreement dated July 9, 1997 between PPD
            Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.
10.167*   --First Amendment, dated February 28, 2000, to Lease Agreement dated December 16, 1998 between
            PPD Development, Inc. and Duke-Weeks Realty, L.P.
10.168*   --First Amendment, dated January 1, 2001, to Employment Agreement dated December 17, 1999
            between PPD Development, Inc. and Francis J. Casieri.
10.169*   --Sixth Amendment to Loan Agreement dated June 30, 2001, between Pharmaceutical Product
            Development, Inc. and First Union National Bank.
10.170*   --Employment Agreement dated July 9, 2001 between Pharmaceutical Product Development, Inc. and
            Brainard Judd Hartman.
10.171*   --First Amendment dated June 30, 2001, by and among Spotlight Health, Inc., Pharmaceutical
            Product Development, Inc. and First Union National Bank.
10.172*   --Amended and Restated Loan Agreement, dated July 31, 2001, between Pharmaceutical Product
            Development, Inc. and Wachovia Bank, N.A.
10.173*   --Second Amendment to and Reaffirmation of Subordination
            and Intercreditor Agreement dated June 30, 2001, between
            First Union National Bank and Applied Bioscience
            International Inc.
10.174*   --Amendment No. 4 to Credit and Security Agreement dated June 30, 2001, between Applied
            Bioscience International Inc., Environ Holdings, Inc. and Environ International Corporation
            and Environ Facility Services Corporation.
10.175*   --Registration Rights Agreement among Pharmaceutical Product Development, Inc., Evan A. Stein,
            M.D., Ph.D., Paula Steiner, Peter Laskarzewski, Joseph L. Staneck and MRL Select Ltd. Co.
10.176    --Employment Agreement dated January 15, 2002, between Pharmaceutical Product Development, Inc.
            and Fred B. Davenport, Jr.
</TABLE>

                                       44

<PAGE>
<TABLE>

<S>        <C>
10.177     --Employment Agreement dated January 15, 2002, between Pharmaceutical
             Product Development, Inc. and Paul S. Covington.
10.178     --Second Amendment dated December 31, 2001 among Spotlight Health,
             Inc., Pharmaceutical Product Development, Inc. and First Union
             National Bank.
21         --Subsidiaries of the Registrant.
23.1       --Consent of PricewaterhouseCoopers LLP.
</TABLE>

           Exhibit 10.162 has been updated to amend Paul S. Covington's
           severance from two to two and one half years salary.

*    Previously filed.
**   Incorporated by reference to the Registrant's Registration Statement on
     Form S-1, as amended (File No. 33-98996).

                                       45

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page

     Report of Independent Accountants                                       F-2

     Consolidated Statements of Operations for the Years Ended
           December 31, 1999, 2000 and 2001                                  F-3

     Consolidated Balance Sheets as of December 31, 2000 and 2001            F-4

     Consolidated Statements of Shareholders' Equity for the Years
           Ended December 31, 1999, 2000 and 2001                            F-5

     Consolidated Statements of Cash Flows for the Years Ended
           December 31, 1999, 2000 and 2001                                  F-6

     Notes to Consolidated Financial Statements                              F-7

                                      F-1

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Pharmaceutical Product Development, Inc. and its Subsidiaries

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Pharmaceutical Product Development, Inc. and its subsidiaries at December 31,
2000 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.



/s/ PRICEWATERHOUSECOOPERS LLP


McLean, Virginia
January 25, 2002

                                      F-2

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              1999              2000             2001
                                                                            ---------        ---------         ---------
<S>                                                                         <C>              <C>              <C>
Development revenues, net of subcontractor costs of $120,666, $120,455
    and $155,652, respectively                                              $ 299,769        $ 330,516        $  403,701
Discovery sciences revenues, net of subcontractor costs of $57, $145
    and $476, respectively                                                      2,761           14,802            27,840
                                                                            ---------        ---------         ---------
       Net revenue                                                            302,530          345,318           431,541
                                                                            ---------        ---------         ---------

Direct costs - Development                                                    146,921          166,586           196,078
Direct costs - Discovery sciences                                               6,073            5,978            11,794
Research and development expenses                                               2,638            2,791             4,422
Selling, general and administrative expenses                                   95,130          109,183           126,391
Depreciation and amortization                                                  14,842           17,233            20,264
Merger costs                                                                      218                -                 -
                                                                            ---------        ---------         ---------
                                                                              265,822          301,771           358,949
                                                                            ---------        ---------         ---------
       Operating income                                                        36,708           43,547            72,592

Interest:
   Income                                                                       3,555            5,808             5,480
   Expense                                                                       (400)            (505)             (535)
                                                                            ---------        ---------         ---------
   Interest income, net                                                         3,155            5,303             4,945

Other income, net                                                               1,182            1,981               469
       Income from continuing operations before
         provision for income taxes                                            41,045           50,831            78,006
Provision for income taxes                                                     12,154           18,521            28,747
                                                                            ---------        ---------         ---------
       Income from continuing operations before equity in net loss of
           investee                                                            28,891           32,310            49,259
Equity in net loss of investee, net of income taxes                                 -                -                92
                                                                            ---------        ---------         ---------
       Income from continuing operations                                       28,891           32,310            49,167
Loss from operations of discontinued environmental sciences
   segment, net of income tax benefit of $251                                     395                -                 -
                                                                            ---------        ---------         ---------
       Net income                                                           $  28,496        $  32,310         $  49,167
                                                                            =========        =========         =========

Income from continuing operations per common share:
       Basic                                                                $    0.59        $    0.65         $    0.95
                                                                            =========        =========         =========
       Diluted                                                              $    0.58        $    0.64         $    0.94
                                                                            =========        =========         =========

Loss from discontinued operations per common share:
       Basic                                                                $   (0.01)       $       -         $       -
                                                                            =========        =========         =========
       Diluted                                                              $   (0.01)       $       -         $       -
                                                                            =========        =========         =========

Net income per common share:
       Basic                                                                $    0.58        $    0.65         $    0.95
                                                                            =========        =========         =========
       Diluted                                                              $    0.57        $    0.64         $    0.94
                                                                            =========        =========         =========

Weighted average number of common shares outstanding:
       Basic                                                                   49,132           49,930            51,689
       Dilutive effect of stock options                                           574              424               805
                                                                            ---------        ---------         ---------
       Diluted                                                                 49,706           50,354            52,494
                                                                            =========        =========         =========
</TABLE>

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

                                       F-3

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT,INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 2001
                        (in thousands,except share data)

                                     Assets
<TABLE>
<CAPTION>

                                                                                           2000             2001
<S>                                                                                    <C>               <C>
                                                                                       ----------        ----------
Current assets
     Cash and cash equivalents                                                         $   76,411        $  143,173
     Accounts receivable and unbilled services, net                                       118,400           140,744
     Investigator advances                                                                  4,104             6,008
     Prepaid expenses and other current assets                                             12,185            10,507
     Current maturities of note receivable                                                    500               500
     Deferred tax asset                                                                     2,133             9,273
                                                                                       ----------         ---------
        Total current assets                                                              213,733           310,205

Property and equipment, net                                                                60,240            85,690
Goodwill, net                                                                               9,034             7,590
Notes receivable, long-term portion                                                        19,000            17,000
Investments                                                                                38,755            43,758
Other assets                                                                                4,153             1,157
                                                                                       ----------        ----------

        Total assets                                                                   $  344,915        $  465,400
                                                                                       ==========        ==========

                      Liabilities and Shareholders' Equity

Current liabilities
     Accounts payable                                                                  $    8,772        $    8,210
     Payables to investigators                                                              5,538             7,988
     Other accrued expenses                                                                38,248            48,951
     Unearned income                                                                       53,385            82,336
     Accrued income taxes                                                                     273             8,688
     Current maturities of long-term debt and capital lease obligations                       614             1,203
                                                                                       ----------        ----------
        Total current liabilities                                                         106,830           157,376

Long-term debt and capital lease obligations, less current maturities                       1,353             1,871
Deferred rent and other                                                                     2,789             3,518
                                                                                       ----------        ----------

         Total liabilities                                                                110,972           162,765

 Commitments and contingencies (Notes 10 and 14)

Shareholders' equity
     Common stock, $0.10 par value, 95,000,000 shares authorized; 50,669,526 and
         51,930,313 shares issued and outstanding,
         respectively                                                                       5,066             5,193
     Paid-in capital                                                                      142,975           164,162
     Retained earnings                                                                     91,007           140,174
     Deferred compensation                                                                      -              (966)
     Accumulated other comprehensive loss                                                  (5,105)           (5,928)
                                                                                       -----------        ----------
        Total shareholders' equity                                                         233,943           302,635
                                                                                       -----------        ----------

         Total liabilities and shareholders' equity                                    $  344,915        $   465,400
                                                                                       ==========        ===========
</TABLE>

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

                                      F-4

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                              Accumulated
                                                                                                 Other                 Comprehensive
                                         Common             Paid-in   Retained   Deferred    Comprehensive                 Income
                                         Shares  Par Value  Capital   Earnings Compensation      Loss         Total        (Loss)
                                       ---------------------------------------------------------------------------------------------
<S>                                    <C>       <C>       <C>        <C>      <C>           <C>             <C>       <C>
Balance December 31, 1998                48,618   $  4,862 $ 124,277  $ 30,201            -     $     (571)  $ 158,769

Net income                                                              28,496                                  28,496   $  28,496

Other comprehensive loss:
  Translation adjustments                                                                           (2,154)     (2,154)     (2,154)
                                                                                                                         ---------


Comprehensive income                                                                                                     $  26,342
                                                                                                                         =========

Issuance of common shares for exercise
  of stock options and employee stock
  purchase plan                             640         64     6,136                                             6,200

Income tax benefit from exercise of
  stock options                                                1,153                                             1,153
                                       ----------------------------------------------------------------------------------

Balance December 31, 1999                49,258      4,926   131,566    58,697            -         (2,725)    192,464

Net income                                                              32,310                                  32,310   $  32,310

Other comprehensive loss:
  Translation adjustments                                                                           (2,380)     (2,380)     (2,380)
                                                                                                                         ---------

Comprehensive income                                                                                                     $  29,930
                                                                                                                         =========

Issuance of common shares for exercise
  of stock options and employee stock
  purchase plan                           1,412        140     9,028                                             9,168

Income tax benefit from exercise of
  stock options                                                2,381                                             2,381
                                       ----------------------------------------------------------------------------------

Balance December 31, 2000                50,670      5,066   142,975    91,007            -         (5,105)    233,943

Net income                                                              49,167                                  49,167   $  49,167

Other comprehensive loss:
  Translation adjustments                                                                             (823)       (823)       (823)
                                                                                                                         ---------

Comprehensive income                                                                                                     $  48,344
                                                                                                                         =========

Issuance of common shares for exercise
  of stock options and employee stock
  purchase plan                           1,230        124    13,483                                            13,607

Income tax benefit from exercise of
  stock options                                                6,258                                             6,258

Stock issued for deferred compensation       30          3     1,446                 (1,449)                         -

Amortization of stock compensation                                                      483                        483
                                       ----------------------------------------------------------------------------------

Balance December 31, 2001                51,930    $ 5,193 $ 164,162  $140,174        $(966)    $   (5,928)  $ 302,635
                                         ======    ======= =========  ========        =====     ==========   =========
</TABLE>

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

                                       F-5

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         1999              2000             2001
                                                                       ---------        ---------         ---------
<S>                                                                    <C>              <C>               <C>
Cash flows from operating activities:
    Net income                                                         $  28,496        $  32,310         $  49,167
    Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization                                       15,040           17,233            20,264
      Discount on note receivable                                              -                -             1,500
      Stock compensation amortization                                          -                -               483
      Provision for doubtful accounts                                        409            1,060               973
      Equity in net loss of investee                                           -                -                92
      Gain on sale of business                                                 -             (498)                -
      Deferred income taxes                                                  294            1,879            (4,361)
      Loss on disposition of property and equipment, net                       -               34               438
      Change in operating assets and liabilities:
         Accounts receivable and unbilled services, net                   (6,420)          (4,708)          (23,317)
         Prepaid expenses and investigator advances                       (1,987)          (2,519)           (2,293)
         Current income taxes                                             (4,114)           6,190            16,739
         Other assets                                                     (3,962)            (761)              411
         Accounts payable, other accrued expenses and deferred rent        6,428            8,927             9,754
         Payable to investigators                                            712             (379)            2,450
         Unearned income                                                  15,704            3,172            28,951
                                                                       ---------        ---------         ---------
                Net cash provided by operating activities                 50,600           61,940           101,251
                                                                       ---------        ---------         ---------
Cash flows from investing activities:
      Purchases of property and equipment                                (23,233)         (21,515)          (41,889)
      Net cash received from sale of businesses                            3,421                -                 -
      Proceeds from sale of property and equipment                            31              225               946
      Cash received from repayment of note receivable                        500              500               500
      Purchases of investments                                            (3,500)         (30,755)           (5,095)
      Net cash paid for acquisitions                                           -           (1,500)                -
                                                                       ---------        ---------         ---------
                Net cash used in investing activities                    (22,781)         (53,045)          (45,538)
                                                                       ---------        ---------         ---------
Cash flows from financing activities:
      Proceeds from long-term debt                                           982                -                 -
      Principal repayments on long-term debt                              (6,406)             (94)              (54)
      Repayment of capital lease obligations                                 (11)            (429)           (1,680)
      Proceeds from exercise of stock options and employee
        stock purchase plan                                                6,200            9,168            13,606
                                                                       ---------        ---------         ---------
                Net cash provided by financing activities                    765            8,645            11,872
                                                                       ---------        ---------         ---------

Effect of exchange rate changes on cash and cash equivalents              (2,154)          (2,380)             (823)
                                                                       ---------        ---------         ---------
Net increase in cash and cash equivalents                                 26,430           15,160            66,762
Cash and cash equivalents, beginning of the year                          34,821           61,251            76,411
                                                                       ---------        ---------         ---------
Cash and cash equivalents, end of the year                             $  61,251        $  76,411         $ 143,173
                                                                       =========        =========         =========
</TABLE>

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

                                      F-6

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)

1.       Summary of Operations and Significant Accounting Policies:

Nature of Business

         Pharmaceutical Product Development, Inc. and its subsidiaries
(collectively the "Company") provide a broad range of research and development
and consulting services in the development and discovery sciences segments. In
the development segment, the Company provides services, which include
preclinical programs through phase 1 to phase 4 clinical development. In
addition, the Company also offers post-market support services for drugs
receiving approval for market use, such as product launch services, patient
compliance programs, and medical communications programs for consumer and
healthcare providers on product use and adverse events. The discovery sciences
services include functional genomics, which is the study of gene functions to
identify drug targets within the body, as well as biological chemistry research
and preclinical biology services. The Company provides services under contract
to clients in the pharmaceutical, general chemical, biotechnology and other
industries. The Company markets its development services primarily in the United
States and Europe. The Company's discovery revenues have all been generated in
the United States to date.

         Prior to selling its environmental sciences segment on January 31, 1999
(see Note 3), the Company also provided environmental sciences services.
Environmental sciences services included assessment and management of chemical
and environmental health risk, site investigation and remediation planning and
litigation support. In addition to the industries mentioned above, the
environmental sciences segment also marketed services to clients in the
industrial, manufacturing and oil and gas industries. The environmental sciences
segment marketed its services primarily in the United States and Europe.

Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
and results of operations of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated,
including transactions with the equity method investee.

Merger Costs

         The Company recorded merger costs of $218 in connection with the
acquisition of ATP, Inc. (PPD Medical Communications) in 1999 (see Note 2). This
acquisition was accounted for using the pooling of interests method of
accounting. This cost was primarily transaction expenses related to this pooling
transaction.

Revenue Recognition

         The Company records revenues from fixed-price contracts on a
percentage-of-completion basis. To measure the percentage-of-completion, the
Company compares actual costs incurred to estimated total contract costs.
Revenues from time-and-material contracts are recognized as hours are incurred
multiplied by the billable rates for each contract. Revenues from unitized
contracts are recognized as subjects or samples are tested multiplied by the
price for each. Revenues are recorded net of reimbursement received from clients
for pass-through expenses, which generally include subcontractor costs that
consist of investigator fees, travel and certain other contract costs.

         If we determine that a loss will result from the performance of a
fixed-price contract, the entire amount of the estimated loss is charged against
income in the period in which such determination is made. Clients generally may
terminate a study at any time, which might cause unplanned periods of excess
capacity and reduced revenues and earnings. To offset the effects of early
terminations of significant contracts, the Company attempts to negotiate the
payment of an early termination fee as part of the original contract.

         Discovery Sciences Group revenues also include nonrefundable technology
license fees and milestone payments. For nonrefundable license fees received at
the initiation of license agreements for which the Company has an ongoing
research and development commitment, the Company defers these fees and
recognizes them ratably over the period of the related research and development.
Nonrefundable license fees received under license

                                      F-7

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)

1.   Summary of Operations and Significant Accounting Policies (Continued):

Revenue Recognition (Continued)

agreements where the Company's continued performance of future research and
development services is not required, are recognized upon delivery of the
technology. These non-refundable fees are generally up-front payments for the
initial license of and access to technology. In addition to license fees, the
Discovery Sciences Group also generates revenue from time to time in the form of
milestone payments. Milestone payments are only received and recognized as
revenues if the specified milestone is achieved and accepted by the customer.
Although these payments are typically lower than up-front license fees, these
payments can be significant because they are triggered as a result of achieving
specified scientific milestones.

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", ("SAB 101"), which provides
guidance on the recognition, presentation and disclosures of revenue in
financial statements filed with the SEC. SAB 101, as amended by SAB 101A and SAB
101B, outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. SAB
101 was adopted in the Company's fourth quarter of fiscal year 2000. The
adoption of SAB 101 did not have a significant impact on the Company's revenue
recognition policies.

     In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". Topic D-103 requires reimbursements for out-of-pocket expenses
incurred to be characterized as revenue in the income statement. Currently, the
Company accounts for out-of-pocket expenses and contracted physician expenses as
a reduction of revenues. Topic D-103 is effective for periods beginning after
December 1, 2001 and will require comparative financial statements for prior
periods to be reclassified. The Company is currently in the process of
evaluating the impact that Topic D-103 will have on its consolidated financial
statements.

Cash and Cash Equivalents

     Cash and cash equivalents consist of unrestricted cash accounts, which are
not subject to withdrawal restrictions or penalties, and all highly liquid
investments which are rated A or better by Standard & Poor's or Moody's and
which have a maturity of three months or less at the date of purchase.

     Supplemental cash flow information consisted of the following:

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                       --------------------------------------------
                                                                         1999              2000             2001
                                                                       ---------        ---------         ---------
<S>                                                                    <C>              <C>               <C>
Cash paid for interest                                                 $     319        $     565         $     273
                                                                       =========        =========         =========
Cash paid for income taxes, net                                        $  15,972        $  11,252         $  16,627
                                                                       =========        =========         =========
Assets acquired under capital leases                                   $     349        $   2,006         $   2,841
                                                                       =========        =========         =========
Property and equipment additions included in accounts payable          $   1,458        $   1,243         $   1,755
                                                                       =========        =========         =========
Investment acquired for PPGx stock                                     $       -        $  17,005         $       -
                                                                       =========        =========         =========
</TABLE>

                                      F-8

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)

1.   Summary of Operations and Significant Accounting Policies (Continued):

Financial Instruments

     In the fourth quarter of 1999, the Company entered into a short sale and
repurchase of U.S. Treasury bonds with a face value of $520,000. This
transaction matured on May 15, 2000. The Company is required to record these
financial instruments at their net fair value on each reporting date, with any
changes in the fair value recorded as either interest income or interest
expense. Net interest expense of $100 and $349 has been recognized related to
this transaction at December 31, 1999 and 2000, respectively. The Company was
required to make a margin deposit of $2,600 related to this transaction.

Investigator Payments

     Billings and payments to investigators are based on predetermined
contractual agreements that can differ from the accrual of the related costs.
Investigator costs are recognized based upon the status of the work completed as
a percentage of the total procedures required under the contract or based on
patient enrollment over the term of the contract. Payments made in excess of the
accrued costs are classified as investigator advances, and accrued costs in
excess of amounts paid are classified as payables to investigators in the
consolidated balance sheets. Contracted physician costs are considered a
pass-through expense and are recorded as a reduction to revenues in the
consolidated statements of operations. See the discussion of recent accounting
pronouncements (Topic D-103) under "Revenue Recognition".

Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is recorded using the straight-line method, based on
estimated useful lives of 20 to 40 years for buildings, five to seven years for
laboratory equipment, three to five years for computers and related equipment
and seven to 10 years for furniture and equipment, except for the airplane which
is being depreciated over 25 years. Leasehold improvements are amortized over
the shorter of the respective lives of the leases or the useful lives of the
improvements. Property under capital leases is amortized over the life of the
lease or the service life, whichever is shorter.

Internal Use Software

     The Company accounts for internal use software in accordance with the
provisions of AICPA Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which requires
certain direct costs and interest costs that are incurred during the application
stage of development to be capitalized and amortized over the useful life of the
software.

Goodwill

     The excess of the purchase price of businesses acquired over the fair value
of net tangible assets and identifiable intangible assets and acquired
in-process research and development costs at the date of the acquisitions has
been assigned to goodwill. Goodwill is being amortized over periods of 10 to 25
years. Goodwill is presented net of accumulated amortization at December 31,
2000 and 2001 of $5,753 and $6,801, respectively. The amortization charges for
each of the three years ended December 31, 1999, 2000 and 2001 were $1,005, $925
and $929, respectively.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations", or SFAS No. 141. On July 1, 2001, the Company
adopted SFAS No. 141, which requires that all business combinations initiated
after June 30, 2001 be accounted for under the purchase method and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill.

                                      F-9

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)


1.   Summary of Operations and Significant Accounting Policies (Continued):

Realizability of Carrying Value of Long-Lived Assets

     The Company is required to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, in accordance with the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly,
when indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment and intangibles, including goodwill, in
relation to the operating performance and estimates of future undiscounted cash
flows of the underlying business and recognizes an impairment, if necessary, to
state property, plant and equipment and intangibles at their fair value. No such
impairment was recorded during any of the three years ended December 31, 1999,
2000 and 2001.

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", or
SFAS No. 144, which supersedes SFAS No. 121 and portions of APB Opinion No. 30.
SFAS No. 144 provides guidance on the recognition and impairment of long-lived
assets to be held and used and for long-lived assets to be disposed. The Company
intends to adopt SFAS No. 144 as of January 1, 2002, as required, and does not
believe the adoption will have a material impact on the consolidated financial
statements.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", or SFAS No. 142. The Company
intends to adopt SFAS No. 142 as of January 1, 2002, as required, and for
goodwill and intangible assets acquired after June 30, 2001 (for the
nonamortization and amortization provisions of the Statement). The Company will
no longer record amortization of goodwill in the financial statements effective
January 1, 2002 as required by SFAS No. 142. Rather, the Company will analyze
goodwill for impairment at the reporting unit level during the first quarter of
2002 and, at a minimum, on an annual basis going forward. Amortization expense
related to goodwill for 2001 was $929 and would have been expected to
approximate this amount in 2002 under pre-existing accounting standards.

Investments

     Investments consist of equity instrument investments in private entities
for which fair values are not readily determinable. All of the Company's
investments are recorded under the cost method of accounting, with the exception
of Apothogen. These investments are subject to write-down for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these investments may not be recoverable. Given the involvement of the Chairman
of the Board of Directors of the Company and the Chief Executive Officer of the
Company, the Company accounts for its investment in Apothogen under the equity
method of accounting. Accordingly, based on its ownership of 14.75% of
Apothogen's Series A convertible preferred stock, the Company has recognized
14.75% of the net losses of Apothogen.

Other Assets

     Other assets are comprised primarily of other intangible assets and a net
long-term deferred tax asset. Other intangible assets are being amortized on a
straight-line basis over periods of three to ten years. See Note 8.

Unbilled Services and Unearned Income

     In general, prerequisites for billings are established by contractual
provisions, including predetermined payment schedules, the achievement of
contract milestones or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but clients have not been
billed. Conversely, unearned income represents amounts billed in excess of
revenue recognized.

                                      F-10

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)

1.   Summary of Operations and Significant Accounting Policies (Continued):

Income Taxes

     Income taxes are computed using the asset and liability approach, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactment of
changes in tax law or rates. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recorded.

Concentration of Credit Risk

     Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", requires disclosure
of information about financial instruments with off-balance-sheet risk and
financial instruments with concentrations of credit risk. Financial instruments
that subject the Company to concentrations of credit risk consist principally of
accounts receivable, notes receivable and cash equivalents.

     The Company's clients are primarily pharmaceutical and biotechnology
companies. One customer accounted for 10.3% and 10.7% of consolidated net
revenue in 2001 and 2000, respectively. No single client accounted for more than
10% of the Company's net revenue in 1999. These revenues were derived from the
Company's development segment. Concentrations of credit risk with respect to
accounts receivable are limited to a degree due to the large number of clients
comprising the Company's client base. Ongoing credit evaluations of clients'
financial condition are performed and, generally, no collateral is required. The
Company maintains reserves for potential credit losses and these losses, in the
aggregate, have historically not exceeded management's estimates.

     The Company's cash equivalents consist principally of commercial paper.
Bank deposits at times exceed the FDIC insurance limit. Based on the nature of
the financial instruments and/or historical realization of these financial
instruments, the Company believes they bear minimal risk.

Comprehensive Income

     Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires the Company to display an amount representing
comprehensive income for the year in a financial statement which is displayed
with the same prominence as other financial statements. The Company has elected
to present this information in the Statements of Shareholders' Equity. The
Company's comprehensive income (loss) consists of net income and the change in
the cumulative foreign currency translation adjustment.

Foreign Currency Translations and Transactions

     Assets and liabilities of foreign operations, where the functional currency
is the local currency, are translated into U.S. dollars at the rate of exchange
at each reporting date. Income and expenses are translated at the average rates
of exchange prevailing during the month in which a transaction occurs. Gains or
losses from translating foreign currency financial statements are recorded in
other comprehensive income. The cumulative translation adjustment included in
other comprehensive income for the years ended December 31, 1999, 2000 and 2001
totaled $(2,154), $(2,380) and $(823), respectively. Foreign currency
transaction gains and losses are included in other income, net.

Stock Dividend

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

                                      F-11

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)



1.       Summary of Operations and Significant Accounting Policies (Continued):

Earnings Per Share

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

Stock-Based Compensation

         The Company accounts for stock-based compensation based on the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), which states that, for fixed plans, no
compensation expense is recorded for stock options or other stock-based awards
to employees that are granted with an exercise price equal to or above the
estimated fair value per share of the Company's common stock on the grant date.
In the event that stock options are granted with an exercise price below the
estimated fair value of the Company's common stock at the grant date, the
difference between the fair value of the Company's common stock and the exercise
price of the stock option is recorded as deferred compensation. Deferred
compensation is amortized to compensation expense over the vesting period of the
stock option. The Company has adopted the disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which requires compensation expense to be disclosed based on the
fair value of the options granted at the date of the grant. See Note 11.

Advertising Costs

         Advertising costs are charged to operations as incurred. Advertising
costs were approximately $1,206, $2,048 and $1,390 for the years ended December
31, 1999, 2000 and 2001, respectively.

Research and Development Costs

         Research and development costs are charged to operations as incurred.
Research and development costs are listed as a separate line item on the
Company's consolidated statements of operations.

Derivative Investments

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Investments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivatives and hedging activities and
supercedes several existing standards. SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 as of January 1, 2001 did not
have a material impact on the consolidated financial statements.

Use of Estimates

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Reclassifications

         Certain prior year amounts have been reclassified to conform to the
2001 presentation.

                                      F-12

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

2.       Acquisitions:

         In March 1999, the Company acquired PPD Medical Communications
(formerly ATP, Inc.), a health information services company. PPD Medical
Communications provides customized inbound and outbound telecommunications
programs targeting consumers and health care providers. The Company acquired all
of the outstanding stock of ATP, Inc. in exchange for issuance of approximately
876 shares of the Company's common stock. Outstanding ATP, Inc. options were
exchanged for options to acquire approximately 216 shares of the Company's
common stock. This acquisition was accounted for using the pooling of interests
method. Accordingly, the Company's financial statements include the results of
PPD Medical Communications for all periods presented.

3.       Discontinued Operations:

         Effective January 31, 1999, the Company sold its environmental sciences
segment to Environ Holdings, Inc., a new company formed by the management of the
environmental sciences segment, for total consideration of approximately $26,244
in a management buyout. The Company received cash of $1,244, a four-year note
for $7,000 and a 12-year note for $18,000 (see Note 6). The sale resulted in no
gain or loss because the sales price was equal to the book value of the net
assets sold at the date of the sale. In the first quarter of 1999, the Company
received full pre-payment of the four-year note.

         The operating results of the environmental sciences segment for the
year ended December 31, 1999 were as follows:

                      Net revenues           $    3,866
                      Loss from operations         (629)
                      Net loss                     (395)




4.       Accounts Receivable and Unbilled Services:

         Accounts receivable and unbilled services consisted of the following:

                                                            December 31,
                                                    ---------------------------
                                                       2000             2001
                                                    ---------         ---------
         Trade:
               Billed                               $  81,584         $  99,877
               Unbilled                                38,770            43,748
               Reserve for doubtful accounts           (1,954)           (2,881)
                                                    ---------         ---------
                                                    $ 118,400         $ 140,744
                                                    =========         =========

         Change in reserve for doubtful accounts consisted of the following:

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                   ------------------------------------------------
                                                                      1999                2000              2001
                                                                   ----------           ---------         ---------
               <S>                                                 <C>                  <C>               <C>
               Balance at beginning of year                        $    2,042           $   1,066         $   1,954
               Additions charged to costs and expenses                    409               1,060               973
               Deductions                                                (516)               (172)              (46)
               Sale of environmental sciences segment                    (869)                  -                 -
                                                                   ----------           ---------         ---------
               Balance at end of year                              $    1,066           $   1,954         $   2,881
                                                                   ==========           =========         =========
</TABLE>

                                      F-13

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

5.       Property and Equipment:

         Property and equipment, stated at cost, consisted of the following:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                ---------------------------
                                                                                  2000               2001
                                                                                ---------         ---------
         <S>                                                                    <C>               <C>
         Land                                                                   $   1,257         $   1,245
         Buildings and leasehold improvements                                      18,748            21,088
         Construction in progress and asset deposits                                2,661             9,864
         Furniture and equipment                                                   57,495            77,102
         Computer equipment and software                                           46,990            54,211
                                                                                ---------         ---------
                                                                                  127,151           163,510
         Less accumulated depreciation and amortization                           (66,911)          (77,820)
                                                                                ---------         ---------
                                                                                $  60,240         $  85,690
                                                                                =========         =========
</TABLE>

         The annual depreciation and amortization charges on property and
equipment for the years ended December 31, 1999, 2000 and 2001 were $13,936,
$16,291 and $19,200 respectively.

         The Company had property and equipment under capital leases with a net
book value at December 31, 2000 and 2001 of $1,915 and $3,075, respectively.
Capital leases, net of accumulated depreciation, of $451 and $1,706 as of
December 31, 2000 and 2001, respectively, are included in computer equipment and
software.

6.       Notes Receivable:

<TABLE>
<CAPTION>
         Notes receivable consisted of the following:                                   December 31,
                                                                                ---------------------------
                                                                                  2000               2001
                                                                                ---------         ---------
         <S>                                                                    <C>               <C>
         Note receivable from sale of environmental sciences segment            $  18,000         $  16,500
         Other note receivable                                                      1,500             1,000
                                                                                ---------         ---------
                                                                                   19,500            17,500
         Less current maturities                                                     (500)             (500)
                                                                                ---------         ---------
                                                                                $  19,000         $  17,000
                                                                                =========         =========
</TABLE>

         The note receivable related to the sale of the Company's environmental
sciences segment (see Note 3) will be received over 12 years. The first four
years are interest-only payments with the first interest payment received on
December 31, 1999. Principal payments commence on December 31, 2003. The note
bears interest at a rate of 8%. During the fourth quarter of 2001, the Company
was negotiating a potential pre-payment of this note receivable and recorded a
$1,500 discount.

         The other note receivable relates to the sale of a prior business and
bears interest at a rate of 10% and is payable over a five-year period, which
began on February 27, 1998, in equal annual payments.

                                      F-14

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

7.       Investments:

         Investments consisted of the following:

                                                            December 31,
                                                    ---------------------------
                                                        2000            2001
                                                    ---------         ---------
         Investment in DNA Sciences, Inc.           $  32,005         $  32,005
         Investment in Spotlight Health                 5,000             5,000
         Investment in SLIL Biomedical Corp.                -             4,700
         Investment in DAS                              1,500             1,500
         Investment in CancerConsultants.com, Inc.        250               250
         Investment in Apothogen, Inc.                      -               203
         Investment in PrimeCyte, Inc.                      -               100
                                                    ---------         ---------
                                                    $  38,755         $  43,758
                                                    =========         =========

         All of the Company's investments, with the exception of Apothogen,
Inc., are being accounted for using the cost method of accounting as the Company
has determined that it does not have the ability to exercise significant
influence on the operations of these companies.

         In February 1999, the Company invested in PPGx, an entity formed
together with Axys Pharmaceuticals, Inc. ("Axys") to pursue the business of
pharmacogenomics. The Company contributed $1,500 and the net assets of Intek,
and assigned the rights to a certain software license from Axys for an 18.2%
ownership interest in PPGx. In December 2000, the Company exercised its option
to increase its ownership to 50% for $5,900 and subsequently sold its investment
in PPGx to DNA Sciences, Inc. for approximately 1.5 million shares of DNA
Sciences Series D preferred stock. As a result of this transaction, the Company
recognized a gain from the sale of PPGx of $498. In conjunction with this
transaction, the Company repaid a $4,560 loan on PPGx's behalf and forgave a
note receivable from PPGx in the amount of $1,065. In December 2000, the Company
purchased approximately 1.5 million shares of DNA Sciences Series C preferred
stock for $15,000. The Company owned approximately 1.5 million shares of DNA
Sciences Series C preferred stock and approximately 1.5 million shares of DNA
Sciences, Inc. Series D preferred stock, representing an 11.2% and 10.8%
ownership interest as of December 31, 2000 and 2001, respectively.

         In April 2000, the Company purchased 1.0 million shares of Spotlight
Health Series C convertible preferred stock, which represented approximately
8.4% and 7.6% ownership of Spotlight Health as of December 31, 2000 and 2001,
respectively. In January 2001, the Company entered into an agreement with
Spotlight Health and First Union National Bank to serve as the guarantor of a
$2,000 revolving line of credit from First Union. Indebtedness under the line is
unsecured and subject to traditional covenants relating to financial ratios. As
of December 31, 2001, there was $2,000 outstanding under this credit facility.
This credit facility is currently scheduled to expire in June 2002, at which
time any outstanding balance is due. Further extensions of this guarantee beyond
June 2002 are possible.

         In November 2001, the Company purchased 2.0 million shares of SLIL
Biomedical Series C preferred stock, which represents an 18.7% ownership
interest as of December 31, 2001. In connection with this investment, the
Company also received a warrant to purchase up to $1,175 of stock, which SLIL
Biomedical issues in connection with a future institutional offering, at the
price per share stated in that offering. The Company owns 0.6 million shares of
Digital Arts and Sciences ("DAS") Series D preferred stock, which represented a
6.8% and 6.7% ownership interest of December 31, 2000 and 2001, respectively.

         In December 2000, the Company purchased approximately 0.3 million
shares of CancerConsulatants.com common stock, which represented a 2.8% and 2.7%
ownership interest as of December 31, 2000 and 2001, respectively. The Company
also received, as part of the purchase, a warrant to purchase approximately 0.2
million shares of CancerConsultants.com common stock at an exercise price of
$1.25 per common share.

                                      F-15

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

7.       Investments (Continued):

         In October 2001, the Company made an investment in Apothogen, Inc., a
new company formed with JPMorgan Partners (BHCA), L.P., the Chairman of the
Company's Board of Directors and the Chief Executive Officer of the Company to
engage in the business of acquiring, developing and commercializing
pharmaceutical products. Due to the individual interests of the Chairman of the
Company's Board of Directors and the Chief Executive Officer of the Company in
Apothogen, in connection with this transaction, the Company's board of directors
adopted a policy to address potential conflicts of interest. This policy
identifies the transactions that are subject to the policy and establishes
procedures for the disclosure and disinterested approval of these transactions.
Apothogen's shareholders have committed to provide financing to Apothogen
through the purchase of Apothogen's Series A convertible preferred stock. The
Company's maximum total capital commitment to Apothogen is $18,000, and the
timing of this commitment is subject to capital calls approved by Apothogen's
board of directors and JPMorgan. As such, JPMorgan can control all future
capital calls. The Company's level of financing is dependent upon the success of
Apothogen in developing compounds and the resulting licensing or
commercialization of those compounds. JPMorgan can contribute up to $100,000 to
Apothogen. As of December 31, 2001, the Company had contributed $295 to
Apothogen for Series A convertible preferred stock. The Series A preferred stock
can be converted to Apothogen common stock at any time and is subject to a
mandatory conversion upon the occurrence of certain events. Given the
involvement of the Chairman of the Company's Board of Directors and the Chief
Executive Officer of the Company, the Company is accounting for its investment
in Apothogen under the equity method of accounting. Accordingly, based on the
Company's current ownership interest of 14.75% of Apothogen's Series A
convertible preferred stock, the Company is recognizing 14.75% of the net
earnings or losses of Apothogen. Due to the fact that the Company has a future
capital commitment, it is possible that the Company might end up recording
losses in excess of the amount of its investment contributions to Apothogen. In
connection with this investment, the Company also entered into an agreement to
be the exclusive provider of drug development and clinical research program
management services to Apothogen. Under this agreement, these services will be
provided to Apothogen at the Company's customary and usual rates. The Company
also granted Apothogen a first right to negotiate an exclusive license with
respect to compounds acquired or licensed by the Company after October 5, 2001.
The Company had a receivable from Apothogen as of December 31, 2001 of $199.
Apothogen rents facility space from the Company and the Company provides
Apothogen with development services and specified administrative services.
During 2001, the Company recorded $118 in rental income and $5 in drug
development services revenues from Apothogen.

         In November 2001, the Company purchased approximately 67 thousand
shares of PrimeCyte Series D preferred stock, which represented a 0.7% ownership
interest in PrimeCyte as of December 31, 2001. The Company also received, as
part of the purchase, a warrant to purchase 33 thousand shares of common stock
in PrimeCyte at an exercise price of $1.50 per common share.

8.       Other Assets:

         Other assets consisted of the following:

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                        ---------------------------
                                                                                           2000             2001
                                                                                        ---------         ---------
         <S>                                                                            <C>               <C>
         Long-term deferred tax assets                                                  $   2,404         $       -
         Intangible assets, net of accumulated
           amortization of $1,099 and $1,232, respectively                                    880               698
         Other assets                                                                         869               459
                                                                                        ---------         ---------
                                                                                        $   4,153         $   1,157
                                                                                        =========         =========
</TABLE>

         The annual amortization charges on intangible assets for each of the
three years ended December 31, 1999, 2000 and 2001 were $153, $17 and $135,
respectively.

                                      F-16

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT , INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)


9.    Other Accrued Expenses:

      Other accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                               ---------------------------
                                                                  2000             2001
                                                               ---------         ---------
      <S>                                                      <C>               <C>
      Accrued salaries, wages, benefits and related costs      $  28,307         $  35,356
      Other                                                        9,941            13,595
                                                               ---------         ---------
                                                               $  38,248         $  48,951
                                                               =========         =========

<CAPTION>
10.   Long-Term Debt and Lease Obligations:

      Long-term debt consisted of the following:
                                                                      December 31,
                                                               ---------------------------
                                                                  2000             2001
                                                               ---------         ---------
      <S>                                                      <C>               <C>
      Equipment leases at interest rates up to 7.0%            $   1,915         $   3,074
      Various notes at interest rates up to 7.5%                      52                 -
                                                               ---------         ---------
                                                                   1,967             3,074
      Less: current maturities                                      (614)           (1,203)
                                                               ---------         ---------
                                                               $   1,353         $   1,871
                                                               =========         =========
</TABLE>

      In June 2001, the Company amended a $50,000 revolving credit facility with
First Union National Bank. Indebtedness under the line is unsecured and subject
to traditional covenants relating to financial ratios. Borrowings under this
loan are available to provide working capital and for general corporate
purposes. As of December 31, 2000 and 2001, there was no amount outstanding
under this credit facility. This credit facility expires in June 2002, at which
time any outstanding balance is due.

      In July 2001, the Company amended a credit facility for $50,000 with
Wachovia Bank, N.A. Indebtedness under the line is unsecured and subject to
traditional covenants relating to financial ratios. Borrowings under this loan
are available to provide working capital and for general corporate purposes. As
of December 31, 2000 and 2001, there was no amount outstanding under this credit
facility. This credit facility expires in July 2002, at which time any
outstanding balance is due.

      In September 2001, First Union and Wachovia merged to create Wachovia
Corporation. This merger has had no effect on the structure and terms of the
Company's two revolving credit facilities.

      For the years subsequent to December 31, 2001, payment obligations and
interest payments on capital leases are as follows:

                                                    2002             $  1,327
                                                    2003                1,443
                                                    2004                  518
                                                                     --------
                                                                        3,288
              Less: amounts representing interest                        (214)
                                                                     --------
              Net present value                                      $  3,074
                                                                     ========


                                      F-17

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT , INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)


10.  Long-Term Debt and Lease Obligations (Continued):

Operating Leases

     The Company is obligated under noncancellable leases expiring at various
dates through 2016 relating to its operating facilities and certain equipment.
Rental expense for all operating leases, net of sublease income, was $13,625,
$17,832 and $18,520 for the years ended December 31, 1999, 2000 and 2001,
respectively.

     The Company completed a sale-leaseback transaction involving real estate in
Austin, Texas, in November 1995. Total gross proceeds in the transaction were
$12,000, resulting in a pre-tax gain of approximately $2,100. The gain, which
has been deferred, is classified as deferred rent and other in the accompanying
consolidated balance sheets and is being amortized as a reduction of rent
expense on a straight-line basis over the 15-year lease term. The facilities are
leased to the Company with all responsibility of operations and maintenance
residing with the Company.

     Certain facility leases entered into provided for concessions by the
landlords, including payments for leasehold improvements, moving expenses and
free rent periods. These concessions have been reflected as deferred rent and
other in the accompanying consolidated financial statements. The Company is
recording rent expense on a straight-line basis for these leases.

     Future minimum payments for all operating lease obligations for years
subsequent to December 31, 2001 are as follows:

              2002                                        $  20,928
              2003                                           19,457
              2004                                           18,572
              2005                                           17,438
              2006                                           16,581
              2007 and thereafter                            53,959
                                                          ---------
                                                            146,935
              Less: sublease income                            (400)
                                                          ---------
                                                          $ 146,535
                                                          =========
11.  Stock Plans:

Restricted Stock

     In January 2001, the Company awarded 30 thousand shares of restricted stock
to members of the senior management team. This restricted stock vests over three
years. Deferred compensation is being expensed on a straight-line basis over the
three-year vesting period. Total deferred compensation recorded was $1,449.
Deferred compensation, net of accumulated amortization of $483, was $966 as of
December 31, 2001.

Stock Incentive Program

     The Company has two stock option plans (the "Plans") under which the
Company may grant options to its employees and directors. As of December 31,
2001, there were 2.3 million shares of common stock available for grant. Under
the Plans, the exercise price of each option granted must equal the market price
of the Company's stock on the date of grant and an option's maximum exercise
term is 10 years. Options are granted upon approval of the Board of Directors
and vest over various periods, as determined by the Board of Directors at the
date of the grant. The majority of the Company's options vest over a period of
three years.

                                      F-18

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT , INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)


11.  Stock Plan (Continued):

     On January 1, 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock Based Compensation". As permitted by SFAS No. 123, the
Company has chosen to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, in
accounting for the Plans. Accordingly, no compensation cost has been recognized
for options granted under the Plans. Had compensation cost for the Company's
Plans been determined based on the fair value at the grant dates for awards
under the Plans consistent with the method required by SFAS No. 123, the
Company's net income and diluted net income per common share would have been the
pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                1999                      2000                       2001
                                        ---------------------     ---------------------      --------------------
                                           As                        As                         As
                                        Reported    Pro Forma     Reported    Pro Forma      Reported   Pro Forma
                                        --------    ---------     --------    ---------      --------   ---------
<S>                                     <C>         <C>           <C>         <C>            <C>        <C>
Net income                              $ 28,496    $ 25,232      $ 32,310    $ 28,934       $ 49,167   $ 44,666
Basic net income per common share       $   0.58    $   0.51      $   0.65    $   0.58       $   0.95   $   0.86
Diluted net income per common share     $   0.57    $   0.51      $   0.64    $   0.57       $   0.94   $   0.85
</TABLE>

     For the purposes of the pro forma presentation above, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 1999, 2000 and 2001: expected volatility of 81.1%, 68.1% and 76.1%
respectively; risk-free interest of 6.19%, 4.99% and 4.59%, respectively; and
expected lives of five years. The resulting estimated weighted average fair
value of options granted during 1999, 2000 and 2001 was $13.71, $15.78 and
$11.54, per share, respectively. All options granted during the years ended
December 31, 1999, 2000 and 2001 were granted with an exercise price equal to
the fair value of the Company's common stock at the grant date. The estimated
pro forma amounts above include the compensation cost for the Company's Employee
Stock Purchase Plan based on the fair value of the contributions under this
plan, consistent with the method of SFAS No. 123.

     A summary of the status of the Plans at December 31, 1999, 2000 and 2001,
and changes during the years, is presented below and includes common stock
options of the Company:

<TABLE>
<CAPTION>
                                              1999                       2000                       2001
                                    -----------------------   -------------------------- ------------------------

                                                  Weighted                   Weighted                 Weighted
                                     (000's)       Average      (000's)      Average      (000'S)     Average
                                     Shares    Exercise Price   Shares    Exercise Price  Shares   Exercise Price
                                    --------   --------------  --------   -------------- --------  --------------
<S>                                 <C>        <C>             <C>        <C>            <C>       <C>
Outstanding at beginning of year       3,580     $    9.78        3,214    $      9.35      2,802   $      11.05
Granted                                  756          7.11          822          12.96        501          24.21
Exercised                               (442)         9.39         (956)          7.19       (985)         11.03
Forfeited                               (680)        12.34         (278)         10.57        (65)         12.60
                                    --------                   --------                  --------
Outstanding at end of year             3,214     $    9.35        2,802    $     11.05      2,253   $      13.94
                                    ========     =========     ========    ===========   ========   ============
Options exercisable at end of year     2,016     $    9.20        1,500    $     10.44      1,148   $      11.30
                                    ========     =========     ========    ===========   ========   ============
</TABLE>

                                      F-19




<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands,except per share data)


11.      Stock Plans (Continued):

         The following table summarizes information about the Plans' stock
options at December 31, 2001:

<TABLE>
<CAPTION>
                                               Options Outstanding                        Options Exercisable
                               ----------------------------------------------------  ----------------------------

                                  (000's)                                              (000's)
                                  Number         Weighted Average      Weighted         Number        Weighted
             Range of          Outstanding         Remaining           Average       Exercisable      Average
          Exercise Prices      at 12/31/01       Contractual Life    Exercise Price  at 12/31/01   Exercise Price
          ---------------      -----------       ----------------    --------------  -----------   --------------
          <S>                  <C>               <C>                 <C>             <C>           <C>
          $  0.00 -  $  3.23        23            3.9 years          $     1.96            23          $     1.96

          $  3.24 -  $  6.46       203            6.9 years          $     5.00           133          $     4.76

          $  6.47 -  $  9.69       460            6.9 years          $     7.47           340          $     7.42

          $  9.70 -  $ 12.92       448            7.7 years          $    10.87           198          $    11.22

          $ 12.93 -  $ 16.15       305            6.3 years          $    13.76           269          $    13.71

          $ 16.16 -  $ 19.38       304            8.5 years          $    18.12           120          $    17.91

          $ 19.39 -  $ 22.62       299            8.9 years          $    21.77            29          $    20.38

          $ 22.63-   $ 25.85        23            9.1 years          $    23.66             3          $    24.84

          $ 25.86 -  $ 32.31       188            9.7 years          $    27.94            33          $    31.54
                                 -----                                                  -----
                                 2,253                                                  1,148
                                 =====                                                  =====
</TABLE>

Employee Stock Purchase Plan

         The Board of Directors has reserved shares of the Company's common
stock for issuance under the Employee Stock Purchase Plan (the "ESPP"). As of
December 31, 2001, there were 1.2 million shares of common stock available for
issuance. The ESPP has two six-month offering periods (each an "Offering
Period") annually, beginning January 1 and July 1, respectively. Eligible
employees can elect to make deductions from 1% to 15% of their compensation
during each payroll period of an Offering Period. Special limitations apply to
eligible employees who own 5% or more of the outstanding common stock of the
Company. None of the contributions made by eligible employees to purchase the
Company's common stock under the ESPP are tax deductible to the employees. At
the end of an Offering Period, the total payroll deductions by an eligible
employee for that Offering Period will be used to purchase common stock of the
Company at a price equal to 85% of the lesser of (a) the reported closing price
of the Company's common stock for the first day of the Offering Period, or (b)
the reported closing price of the common stock for the last day of the Offering
Period. Only 300 thousand shares will be available for purchase during each of
the Offering Periods.

         Employees eligible to participate in the ESPP include employees of the
Company and its United States operating subsidiaries, except those employees who
customarily work less than 20 hours per week or five months in a year. Since the
eligible employee determines both participation in and contributions to the
ESPP, it is not possible to determine the benefits and amounts that would be
received by an eligible participant or group of participants in the future.

         During 2001, $2,753 had been contributed to the ESPP and 146 thousand
shares were issued. The compensation costs for the ESPP as determined based on
the fair value of the contributions under the ESPP, consistent with the method
of SFAS No. 123, was $466, $497 and $715 and is reflected in the pro forma net
income and basic and diluted net income per share for 1999, 2000 and 2001,
respectively, as disclosed above.

                                      F-20

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands,except per share data)

12.      Income Taxes:

         The components of income (loss) before provision for income taxes were
         as follows:

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                       --------------------------------------------
                                                                         1999              2000             2001
                                                                       ---------        ---------         ---------
         <S>                                                           <C>              <C>               <C>
         Domestic                                                      $  38,782        $  53,172         $  70,893
         Foreign                                                           2,263           (2,341)            7,021
                                                                       ---------        ---------         ---------
                Income from continuing operations                         41,045           50,831            77,914

         Domestic                                                           (683)               -                 -
         Foreign                                                              37                -                 -
                                                                       ---------        ---------         ---------
                Loss from discontinued operations                           (646)               -                 -
                                                                       ---------        ---------         ---------

                Total                                                  $  40,399        $  50,831         $  77,914
                                                                       =========        =========         =========
</TABLE>

         The components of the provision for income taxes were as follows:

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                       --------------------------------------------
                                                                         1999              2000             2001
                                                                       ---------        ---------         ---------
         <S>                                                           <C>              <C>               <C>
         State income taxes:
              Current                                                  $   1,620        $     708         $   3,398
              Deferred                                                      (329)          (1,037)             (270)
         Federal income taxes:
              Current                                                     10,113           15,721            29,288
              Deferred                                                      (589)           1,397            (5,226)
         Foreign income taxes:
              Current                                                      1,288            1,196               422
              Deferred                                                      (200)             536             1,135
                                                                       ---------        ---------         ---------
         Provision for income taxes                                    $  11,903        $  18,521         $  28,747
                                                                       =========        =========         =========
</TABLE>

         The income tax provision is included in the financial statements as
         follows:

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                       --------------------------------------------
                                                                         1999              2000                2001
                                                                       ---------        ---------         ---------
         <S>                                                           <C>              <C>               <C>
         Continuing operations                                         $  12,154        $  18,521         $  28,747
         Discontinued operations                                            (251)               -                 -
                                                                       ---------        ---------         ---------
               Total                                                   $  11,903        $  18,521         $  28,747
                                                                       =========        =========         =========
</TABLE>

        The 1999 federal and state tax expense reflects the benefit related to
the utilization of capital loss carryforwards to offset the capital gains
derived from the Company's investment activities. Additionally, a tax planning
strategy was implemented during 2000 with the full benefit recognized in the
financial statements.

                                      F-21

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)


12.  Income Taxes (Continued):

     Taxes computed at the statutory U.S. federal income tax rate of 35% are
     reconciled to the provision for income taxes as follows:

                                                      Years Ended December 31,
                                                      -------------------------
                                                       1999      2000     2001
                                                      -------  -------  -------

     Effective tax rate                                  29.5%    36.4%   36.9%
                                                      =======  =======  =======
     Statutory rate of 35%                            $14,140  $17,791  $27,270
     State taxes (net of federal benefit)                 839     (919)   2,106
     Utilization of capital loss carryforward          (3,853)    (611)       -
     Nondeductible expenses net of nontaxable income      432      649      210
     Change in valuation allowance                       (205)   1,053   (2,533)
     Deferred taxes set up on S corporation
       acquisition                                       (211)       -        -
     Impact of international operations                   500      679    1,452
     Other                                                261     (121)     242
                                                      -------  -------  -------
     Provision for income taxes                       $11,903  $18,521  $28,747
                                                      =======  =======  =======

     Components of the net current deferred tax asset were as follows:

                                                                 December 31,
                                                               ----------------
                                                                2000     2001
                                                               -------  -------

     Future benefit of foreign net operating losses            $ 3,249  $ 1,047
     Reserve for doubtful accounts                                 650    1,103
     Accrued expenses                                            1,047    3,134
     Unearned income                                               436    4,705
     Valuation allowance                                        (3,249)    (716)
                                                               -------  -------
     Net current deferred tax asset                            $ 2,133  $ 9,273
                                                               =======  =======

     Components of the net long-term deferred tax asset (included in other
assets on the consolidated balance sheet) in 2000 and net long-term deferred tax
liability (included in deferred rent and other on the consolidated balance
sheet) in 2001, were as follows:

                                                                2000     2001
                                                               -------  -------
     Depreciation and amortization                             $ 2,243  $  (281)
     Deferred rent                                                 244      261
     Other                                                         (83)    (354)
                                                               -------  -------
     Net long-term deferred tax asset (liability)              $ 2,404  $  (374)
                                                               =======  =======

                                      F-22

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

12.      Income Taxes (Continued):

         The valuation allowance related to the Company's foreign tax losses was
reduced by $2,533 during 2001. This reduction occurred as a portion of the tax
loss was utilized in 2001 and it was determined there was a greater than 50%
probability that another portion would be utilized in future years.

          The Company records current and deferred income tax expense related to
its foreign operations to the extent those earnings are taxable. No provision
has been made for the additional taxes that would result from the distribution
of earnings of foreign subsidiaries because those earnings are expected to be
invested permanently. The cumulative amount of undistributed retained earnings
of foreign subsidiaries for which no provision has been made is $3,042 as of
December 31, 2001.

13.      Employee Savings and Pension Plans:

Savings Plan

         The Company provides a 401(k) Retirement Savings Plan to its U.S.
employees. The Company matches 50% of an employee's savings up to 6% of pay, and
these contributions vest ratably over a four-year period. Company matching
contributions for all employees for each of the three years ended December 31,
1999, 2000 and 2001 were $2,562, $2,977 and $3,467, respectively.

Pension Plans

         Pension costs are determined under the provisions of Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", and
related disclosures are determined under the provisions of Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and other Postretirement Benefits".

         The Company has a separate contributory defined benefit plan (the "U.K.
Plan") for its qualifying United Kingdom employees employed by the Company's
U.K. subsidiaries. The benefits for the U.K. Plan are based primarily on years
of service and average pay at retirement. Plan assets consist principally of
investments managed in a mixed fund.

         Pension costs for the U.K. Plan included the following components:

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                           -----------------------------------
                                                              1999       2000          2001
                                                           ---------   ---------    ----------
         <S>                                               <C>         <C>          <C>
         Service cost benefits earned during the year      $     740   $     848    $      846
         Interest cost on projected benefit obligation           756         805           843
         Actual return on plan assets                         (1,006)        (72)         (935)
         Net amortization and deferral                           205        (711)            9
                                                           ---------   ---------    ----------
         Net periodic pension cost                         $     695   $     870    $      763
                                                           =========   =========    ==========
</TABLE>

         Assumptions used to determine pension costs and projected benefit
obligations were as follows:

<TABLE>
<CAPTION>
                                                              1999       2000          2001
                                                           ---------   ---------    ----------
         <S>                                               <C>         <C>          <C>
         Discount rate                                          5.5%        6.0%          5.5%
         Rate of compensation increase                          3.0%        4.0%          3.0%
         Long-term rate of return on plan assets                8.0%        5.0%          6.0%
</TABLE>

                                      F-23

<PAGE>


         PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (in thousands, except per share data)


 13.     Employee Savings and Pension Plans (Continued):

         The change in benefit obligation, change in plan assets and funded
         status of the defined benefit plan were as follows:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                              --------------------------------------------
                                                                1999              2000             2001
                                                              ---------        ---------         ---------
         <S>                                                  <C>              <C>               <C>
         Change in benefit obligations
           Benefit of obligation at beginning of year         $  11,545        $  14,507         $  15,776
           Service cost                                             544              848               619
           Interest cost                                            756              805               843
           Participant contributions                                196              248               227
           Net actuarial loss (gain)                              2,047              750            (2,114)
           Benefits paid                                           (273)            (285)             (189)
           Foreign currency translation adjustment                 (308)          (1,097)             (394)
                                                              ---------        ---------         ---------
           Benefit obligation at end of year                  $  14,507        $  15,776         $  14,768
                                                              =========        =========         =========

         Change in plan assets
           Fair value of plan assets at beginning of year     $  12,579        $  16,250         $  15,638
           Actual asset return                                    3,626               72            (1,714)
           Employer contributions                                   457              582               639
           Plan participants' contributions                         195              248               227
           Benefits and expenses paid                              (273)            (285)             (189)
           Foreign currency translation adjustment                 (334)          (1,229)             (389)
                                                              ---------        ---------         ---------
           Fair value of plan assets at end of year           $  16,250        $  15,638         $  14,212
                                                              =========        =========         =========

         Net amount recognized
           Funded status                                      $   1,743        $    (137)        $    (556)
           Unrecognized transition asset                            (69)             (52)              (39)
           Unrecognized net actuarial loss                          265            1,899             2,366
                                                              ---------        ---------         ---------
           Net prepaid pension cost                           $   1,939        $   1,710         $   1,771
                                                              =========        =========         =========

</TABLE>

14.      Commitments and Contingencies:

         The Company currently maintains liability insurance on a "claims made"
basis for professional acts, errors and omissions. The policy has a self-insured
retention per claim of $250. As of December 31, 2000 and 2001, there are no open
claims related to this coverage above the self-insured retention.

         The Company currently is self-insured for group health for employees
located within the United States. The Company maintains insurance on a "claims
made" basis, up to a maximum of $100 per occurrence. As of December 31, 2000 and
2001, the Company maintained a reserve of approximately $2,423 and $2,630,
respectively, included in other accrued expenses on the consolidated balance
sheets, to cover open claims and estimated claims incurred but not reported. The
Company switched plans and administrators at the beginning of 2001. The 2001
plan includes a maximum claims provision to limit the Company's liability.

         In the normal course of business, the Company is a party to various
claims and legal proceedings. The Company records a reserve for these matters
when an adverse outcome is probable and the amount of the potential liability is
reasonably estimable. Although the ultimate outcome of these matters is
currently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial condition, results of operations or
cash flows for an interim or annual period.

                                      F-24

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)


15.      Related Party Transactions:

         The Company is related through common ownership with Apothogen, Inc.
See Note 7 for terms of relationships. The Company had a receivable from
Apothogen as of December 31, 2001 of $199. Apothogen rents facility space from
the Company for which the Company recognized approximately $118 in rental income
in 2001. The Company also provides Apothogen with development services and
professional services such as legal and accounting services. During 2001, the
Company recorded revenues of $5 related to the provisions of these development
services to Apothogen.

16.      Fair Value of Financial Instruments:

         The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:

Accounts Receivable, Accounts Payable and Accrued Liabilities

         The carrying amount approximates fair value because of the short
maturity of these items.

Notes Receivable

         The Company believes the carrying value approximated market value on
December 31, 2001.

Investments

         The Company's investments in DNA Sciences, Spotlight Health, DAS,
CancerConsultants.com, PrimeCyte and SLIL Biomedical Corp. are recorded at
$32,005, $5,000, $1,500, $250, $100 and $4,700, respectively, at December 31,
2001. These investments, for which no public market exists, are accounted for
using the cost method of accounting as the Company does not exert significant
influence on the operations of these companies. The Company monitors these
investments for other than temporary declines in value. As of December 31, 2001,
the Company had not recorded an impairment for these investments.

         The Company's investment in Apothogen, Inc. is recorded at $203 at
December 31, 2001 and is accounted for using the equity method of accounting.

Derivative Financial Instrument

         The Company entered into a purchase and sale of a U.S. Treasury Bond
with a face value of $520,000 during the fourth quarter of 1999 with the same
financial institution. The Company had the legal right of offset with regard to
the obligation to pay for the cost of the U.S. Treasury Bond and the investment
in the U.S. Treasury Bond. The fair value of this net obligation of $(100) at
December 31, 1999 was based on the quoted market price of these investments and
is determined as follows:

         Fair Value of U.S. Treasury Bond                     $ 537,958
         Fair Value of Purchase Obligation                     (538,058)
                                                              ---------
                                                              $    (100)
                                                              =========
Long-Term Debt

         The fair value of the Company's long-term debt approximates net book
value.

Letters of Credit

         From time to time, the Company uses letters of credit to back certain
guarantees and insurance policies. The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees competitively
determined in the marketplace. During 2001, the Company did not utilize any
letters of credit.

                                      F-25

<PAGE>

           PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (in thousands, except per share data)


17.      Business Segment Data:

         During 1999, the Company operated in three business segments -
development, environmental sciences and discovery sciences. The Company sold its
environmental sciences segment in January 1999 (see Note 3). Accordingly, the
income statements have been restated to conform to the provisions of APB 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Operations". The consolidated balance sheets and statement of cash
flows have not been restated to exclude the assets, liabilities and cash flows
of the environmental sciences segment.

         Revenues by principal business segment are separately stated in the
consolidated financial statements. Merger costs of $218 in 1999 and equity in
net loss of investee of $92 in 2001 were not allocated to the Company's business
segments and are shown separately for purposes of business segment analysis. The
equity in net loss of investee is related to the investment in Apothogen, which
operates in the discovery field. See Note 7. Income taxes are allocated ratably
to each division for purposes of business segment analysis, except for the 1999
tax benefit of $3,800 from the reversal of a portion of the valuation allowance
on the Company's capital loss carryforward which has been specifically
identified to the Development segment. Income from operations, net income,
depreciation and amortization, identifiable assets and capital expenditures by
principal business segment were as follows:

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                   -------------------------------------------
                                                                     1999              2000            2001
                                                                   ---------        ---------        ---------
     <S>                                                           <C>              <C>              <C>
     Income (loss) from operations: (a)
            Development                                            $  44,669        $  40,834        $  66,830
            Discovery sciences                                        (7,743)           2,713            5,762
            Merger costs                                                (218)               -                -
                                                                   ---------        ---------        ---------
            Total                                                  $  36,708        $  43,547        $  72,592
                                                                   =========        =========        =========

     Net income (loss):
            Development                                            $  33,630        $  30,592        $  45,620
            Discovery sciences                                        (4,739)           1,718            3,639
            Environmental sciences                                      (395)               -                -
            Equity in net loss of investee                                 -                -             (920)
                                                                   ---------        ---------        ---------
            Total                                                  $  28,496        $  32,310        $  49,167
                                                                   =========        =========        =========

     Depreciation and amortization: (a)
            Development                                            $  14,294        $  16,166        $  18,366
            Discovery sciences                                           548            1,067            1,898
                                                                   ---------        ---------        ---------
            Total                                                  $  14,842        $  17,233        $  20,264
                                                                   =========        =========        =========

     Identifiable assets: (b)
            Development                                            $ 286,424        $ 335,135        $ 451,594
            Discovery sciences                                         2,279            9,780           13,806
                                                                   ---------        ---------        ---------
            Total                                                  $ 288,703        $ 344,915        $ 465,400
                                                                   =========        =========        =========

     Capital expenditures:
            Development                                            $  22,644        $  18,231        $  37,570
            Discovery sciences                                           589            3,284            4,319
                                                                   ---------        ---------        ---------
            Total                                                  $  23,233        $  21,515        $  41,889
                                                                   =========        =========        =========
</TABLE>



(a)  Does not include results of operations of the environmental sciences
     segment, which was sold January 31, 1999.  See Note 3.
(b)  The note receivable from the sale of the environmental sciences segment is
     included in the Development segment.  See Note 3.

                                      F-26

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)



18.      Operations by Geographic Area:

         The following table presents information about the Company's
operations by geographic area:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                             ----------------------------------------------
                                                                 1999              2000             2001
                                                             -----------      -----------       -----------
         <S>                                                 <C>              <C>               <C>
         Net revenue:  (a)
                United States                                $   257,717      $   303,048       $   366,878
                U.K.                                              16,391           15,635            33,138
                Other (b)                                         28,422           26,635            31,525
                                                             -----------      -----------       -----------
                Total                                        $   302,530      $   345,318       $   431,541
                                                             ===========      ===========       ===========

         Operating income (loss): (a)
                United States                                $    35,362      $    47,338       $    65,651
                U.K.                                                (469)          (1,990)            5,630
                Other (b)                                          1,815           (1,801)            1,311
                                                             -----------      -----------       -----------
                Total                                        $    36,708      $    43,547       $    72,592
                                                             ===========      ===========       ===========

         Identifiable assets:
                United States                                $   244,403      $   303,604       $   412,700
                U.K.                                              27,988           27,783            37,454
                Other (b)                                         16,312           13,528            15,246
                                                             -----------      -----------       -----------
                Total                                        $   288,703      $   344,915       $   465,400
                                                             ===========      ===========       ===========
</TABLE>


(a)      Does not include results of operations of the environmental sciences
         segment, which was sold January 31, 1999. See Note 3.


(b)      Principally consists of operations in 19 countries, ten of which are
         located in Europe, none of which individually comprise more than 5% of
         net revenue, operating income (loss) or identifiable assets.

                                      F-27

<PAGE>

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

19.       Quarterly Financial Data (Unaudited):

<TABLE>
<CAPTION>
              2000                    First            Second            Third            Fourth            Total
----------------------------       ---------         ---------         ---------        ---------         ---------
<S>                                <C>               <C>               <C>              <C>               <C>
Net revenue                        $  81,761         $  84,049         $  89,270        $  90,238         $ 345,318
Operating income                       9,292             9,275            12,051           12,929            43,547
Net income                             6,640             6,927             8,776            9,967            32,310
Net income per common share:
         Basic                     $    0.13         $    0.14         $    0.18        $    0.20         $    0.65
         Diluted                   $    0.13         $    0.14         $    0.17        $    0.19         $    0.64

                2001
----------------------------
Net revenue                        $ 106,953         $ 102,038         $ 108,310        $ 114,240         $ 431,541
Operating income                      21,246            14,870            16,612           19,864            72,592
Net income                            14,537            10,464            11,507           12,659            49,167
Net income per common share:
         Basic                     $    0.28         $    0.20         $    0.22        $    0.24         $    0.95
         Diluted                   $    0.28         $    0.20         $    0.22        $    0.24         $    0.94
</TABLE>


20.      Subsequent Event:

         In February 2002, the Company acquired Medical Research Laboratories
International, Inc. ("MRL") and Medical Research Laboratories International,
BVBA ("MRL Belgium"). The Company acquired all of the capital stock of MRL in
exchange for $29,000 in cash and $64,708 in the Company's common stock. The
Company issued approximately 2.3 million unregistered shares of its common stock
in satisfaction of the stock component of the merger consideration. The Company
acquired all of the capital stock of MRL Belgium in exchange for $10,000 million
in cash and $8,792 in the Company's common stock. The Company issued
approximately 0.3 million unregistered shares of its common stock in
satisfaction of the stock component of the acquisition consideration. These
acquisitions will be accounted for using the purchase method. The Company has
not yet quantified the purchase price allocations. Thus the amount of goodwill
recorded with this transaction has not been determined.

         MRL operates a central laboratory in Highland Heights, Kentucky, near
Cincinnati, Ohio and MRL Belgium operates a central laboratory in Brussels,
Belgium. These two MRL companies specialize in the provision of highly
standardized efficacy and safety testing services for pharmaceutical companies
engaged in clinical drug development.

                                      F-28

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.


Date: February 20, 2002                 By: /s/ Fredric N. Eshelman, Pharm.D.
                                            ---------------------------------
                                        Name:  Fredric N. Eshelman, Pharm.D.
                                        Title: Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                     <C>                                            <C>
/s/ Fredric N. Eshelman, Pharm.D.       Chief Executive Officer and Director           February 20, 2002
---------------------------------
Fredric N. Eshelman, Pharm.D.           (Principal Executive Officer)

/s/ Philippe M. Maitre                  Chief Financial Officer (Principal Financial   February 20, 2002
----------------------
Philippe M. Maitre                      Officer)

/s/ Linda Baddour                       Chief Accounting Officer (Principal            February 20, 2002
-----------------
Linda Baddour                           Accounting Officer)

/s/ Ernest Mario, Ph.D.                 Director                                       February 20, 2002
-----------------------
Ernest Mario, Ph.D.

/s/ Stuart Bondurant, M.D.              Director                                       February 20, 2002
---------------------------
Stuart Bondurant, M.D.

/s/ Abraham Cohen                       Director                                       February 20, 2002
-----------------
Abraham E. Cohen

/s/ Frederick Frank                     Director                                       February 20, 2002
---------------------------
Frederick Frank

/s/ Paul J. Rizzo                       Director                                       February 20, 2002
-----------------
Paul J. Rizzo

/s/ John A. McNeill, Jr.                Director                                       February 20, 2002
------------------------
John A. McNeill, Jr.

/s/ Catherine M. Klema                  Director                                       February 20, 2002
----------------------
Catherine M. Klema

/s/ Terry Magnuson, Ph.D.               Director                                       February 20, 2002
-------------------------
Terry Magnuson, Ph.D.
</TABLE>

                                       S-1