<PAGE>   1


                       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, 1996

                                       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
  incorporation or organization)                           Identification No.)
                

         3151 Seventeenth Street Extension
            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 10K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $448,370,794 as of March 10, 1997, 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
may 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 22,185,842 as of March 10, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders (certain parts as indicated herein Part III).




<PAGE>   2



                                     PART I

         Statements in this Annual Report on Form 10-K that are not descriptions
of historical facts are forward-looking statements that 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
the Company's other SEC filings, and including, in particular, risks relating to
government regulation, dependence on certain industries, fixed price nature of
contracts, dependence on personnel, management of growth and competition.


ITEM 1. BUSINESS.

Company Overview

         Pharmaceutical Product Development, Inc. ("PPD" or "the Company")
provides a broad range of research and consulting services in the life and
environmental sciences. The Company's life sciences subsidiaries include PPD
Pharmaco, Inc. and Clinix International Inc. PPD Pharmaco is a leading contract
research organization ("CRO") providing integrated product development services
on a global basis to complement the research and development activities of
companies in the pharmaceutical and biotechnology industries. Through its
environmental sciences subsidiary, APBI Environmental Sciences Group, Inc.,
operating under the trade name ENVIRON, the Company provides assessment and
management of chemical and environmental health risk.

         In September 1996, a wholly-owned subsidiary of the Company was merged
with and into Applied Bioscience International Inc. ("APBI") pursuant to which
APBI became a wholly-owned subsidiary of the Company. Subsequent to the merger,
the Company believes it is the third largest CRO in the world. The Company's CRO
operations (formerly doing business as Pharmaceutical Product Development, Inc.,
or PPD) and APBI's CRO business (formerly doing business as Pharmaco
International) have been integrated and now operate under the trade name PPD
Pharmaco.

     Life Sciences Group

         The Company's Life Sciences Group provides services through PPD
Pharmaco, Inc. and its wholly-owned European, South American and South African
subsidiaries (collectively "PPD Pharmaco"), and through Clinix International
Inc. ("Clinix"), which currently operates through one division using the trade
name Chicago Center for Clinical Research ("CCCR").

         PPD Pharmaco offers its clients high quality, value-added services
designed to reduce drug development time. Reduced development time allows the
client to get its products into the market faster and to maximize the period of
marketing exclusivity and the economic return for such products. In addition,
PPD Pharmaco's integrated services offer its clients a variable cost alternative
to the fixed costs associated with internal drug development. PPD Pharmaco's
professional CRO services include Phase I clinical testing, laboratory services,
Phase II-IV clinical trial management, clinical data management and
biostatistical analysis, treatment Investigational New Drug Applications,
medical writing and regulatory services, and healthcare economics and outcomes
research. The Company believes that it is one of a few CROs in the world capable
of providing such a broad range of clinical development services.

         Clinix was established in 1995 as a wholly-owned subsidiary of APBI. In
August 1995, Clinix acquired the business and substantially all of the assets of
CCCR, a nationally recognized organization which conducts clinical trials in the
pharmaceutical and food and nutrition industries. The Company believes the
acquisition of CCCR is of strategic importance in enhancing and expanding the
range of clinical development services offered.

         In addition to the acquisition of APBI, the Company furthered its
expansion outside of the U.S. in 1996 through the acquisition of Trilife
Gesellschaft Fur Medizinische Entwicklung Verwaltungs GmbH ("Trilife") in
Germany, Medisys S.L. ("Medisys") in Spain and Q&Q Suporte A Pesquisa Clinica
Ltda. ("Q&Q") in Brazil. The consideration for Trilife consisted of
approximately $567,000 paid at closing. In addition, the Company may pay up to
an additional $135,000 as additional purchase price, dependent upon the
performance of Trilife for a certain period after the acquisition. The
consideration for Medisys consisted of $400,000 paid at closing, plus an
additional $300,000 due on each of the first and second anniversaries of the
acquisition. The consideration for Q&Q consisted of $500,000 paid at closing,
plus an additional $100,000 due on each of the first three anniversaries of the
acquisition. In 1996, the Company also acquired Data Acquisition and Research
(DAR) Limited ("DAR"), located in Scotland, which allowed it to expand its
biostatistics and data analysis capabilities in Europe. The consideration for
DAR consisted of cash paid at closing of $992,000, plus an additional $348,000
to be paid in 10 installments between June 1997 and December 2001. Subsequent to
year end, the




                                       1
<PAGE>   3



Company acquired Belmont Research, Inc. ("Belmont") in a transaction to be
accounted for as a pooling of interests. Belmont provides software development
and system integration services to the pharmaceutical industry. The
consideration for Belmont consisted of 502,384 shares of the Company's common
stock plus the issuance of approximately 115,000 options to acquire shares of
the Company's common stock.

         In November 1995, APBI sold its toxicology laboratories, located in New
Jersey and Suffolk, England, to Huntingdon International Holdings plc
("Huntingdon"). The Company received as consideration net cash proceeds of $32.5
million and Huntingdon's Phase I clinical center located in Leicester, England,
at an agreed-upon value of $4.5 million.

   Environmental Sciences Group

         ENVIRON. The Company's Environmental Sciences Group provides services
through APBI Environmental Sciences Group, Inc., operating under the trade name
ENVIRON. ENVIRON is a multidisciplinary environmental and health sciences
consulting firm that provides a broad range of services relating to the presence
of hazardous substances in the environment, in drugs and medical devices, in
consumer products and in the workplace. Services provided by ENVIRON are
concentrated in the assessment and management of chemical risk and are
characterized by engagements supporting private sector clients with complex,
potentially high-liability concerns.

         For the first time, the Company expanded its environmental services
business outside the U.S. with the acquisition of Environmental Assessment Group
Limited ("EAG"), located in the United Kingdom, in September 1996. The
consideration for EAG consisted of $1.9 million cash, a note for approximately
$350,000 and the potential to earn up to an additional $500,000, depending upon
the profits of EAG during the two years after the acquisition. Subsequent to
year end, the Company furthered its expansion in its Environmental Sciences
Group through the acquisition of Technical Assessment Systems, Inc. ("TAS") in
January 1997. The consideration for TAS consisted of cash of $490,000, a note
for $300,000 and the potential to pay an additional amount depending upon TAS'
profitability for a certain period after the acquisition.

Industry Overview

   Life Sciences Group

         The CRO industry provides independent product development services to
the pharmaceutical and biotechnology industries. In general, CROs derive
substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing limited clinical services in the 1970s to a full-service
industry today that encompasses the clinical research process (including
pre-clinical evaluations), study design, clinical trial management, data
collection and biostatistical analysis and product registration support. All of
these services are provided in accordance with applicable government regulations
covering clinical trials and the drug approval process in the jurisdictions
where the services are provided, including the regulations of the Food and Drug
Administration ("FDA") in the United States and the European Medicines
Evaluation Agency ("EMEA").

         The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the pharmaceutical and biotechnology
industries. Implementation of government healthcare reform may adversely affect
research and development expenditures by pharmaceutical and biotechnology
companies which could decrease the business opportunities available to the
Company. The Company is unable to predict the likelihood of such or similar
legislation being enacted into law or the effects such legislation would have on
the Company.

         As a general matter, the clinical CRO industry is not capital intensive
and the financial costs of entry into the industry are relatively low. The CRO
industry is highly fragmented, with several hundred small, limited-service
providers, several medium-sized CROs and a few full-services CROs with
international capabilities. Although there are few barriers to entry for small,
limited-service providers, the Company believes that there are significant
barriers to becoming a full-service CRO with international capabilities. Some of
these barriers include the cost and experience necessary to develop broad
therapeutic expertise, the ability to manage large, complex clinical trials, the
experience to prepare regulatory submissions and the infrastructure and
experience to respond to the international needs of clients.

   Environmental Sciences Group

         The environmental industry has long been dependent upon governmental
programs and regulations developed in response to concerns regarding the safety
of chemicals in the air, water, food, consumer products and land. Historically,
much of the growth experienced by environmental firms has come from assisting
private sector clients respond to the regulatory systems that have been put into
place at both the federal and state levels. In addition, litigation support on




                                       2
<PAGE>   4



behalf of private sector clients involved in disputes with government agencies
or other private parties has been a significant source of market opportunity and
revenue.

         For the next several years, the Company believes that the environmental
industry will find continued, but more limited, opportunities to grow.
Opportunities to provide litigation support are expected to increase. However,
the extent to which new or existing regulations provide a growing base of
business will depend largely on how the differences between the views of the
current and new Congressional Class of 1997 and the President are resolved. In
addition, after many years of dealing with problems created in the past, general
industry, especially the manufacturing, industrial and chemical concerns, is now
able to turn its attention to current operations and prevention of future
environmental issues. The industry's proactive approach will create new and
expanding opportunities for the environmental industry. For example, leaders in
industry are already developing programs to incorporate safety, health and
environmental considerations into their product and process design. A growing
area for the environmental industry to provide services is in assisting
companies to incorporate environmental and public health concerns into plans for
effective corporate strategic growth.

         The Company believes that international opportunities for environmental
industry growth will continue to expand as the world moves toward a global
economy. Companies seeking to enter the world economy will need assistance in
developing environmental management systems and in monitoring these programs for
compliance with international standards. In addition, as world markets become
more developed, opportunities will increase for the environmental industry to
assist private firms in merger and acquisition planning and in general
evaluation and management of environmental and public health risks. The Company
believes that its acquisition of EAG will allow it to better pursue these
opportunities.

The Drug Development Process

         Before a new drug is marketed, the drug must undergo extensive testing
and regulatory review in order to determine that it is safe and effective. The
development process consists of two stages: pre-clinical and clinical. The first
stage is the pre-clinical research, in which the new drug is tested in vitro
(test tube) and in animals, generally over a one-to three-year period, in order
to determine the basic biological activity and safety of the drug. The Company
does not provide animal-based services in this stage of development. If the drug
is perceived to be safe for human testing, the drug then undergoes a series of
clinical tests in humans. During the clinical stage, one of the most
time-consuming and expensive parts of the drug development process, the drug
undergoes a series of tests in humans, including healthy volunteers and patients
with the targeted disease or condition.

         Prior to commencing human clinical trials in the United States, the
sponsor must file an Investigational New Drug ("IND") application with the FDA.
In order to receive IND status, the sponsor of the new drug must provide
available manufacturing data, pre-clinical data, information about any use of
the drug in humans in other countries or in the United States for other purposes
and a detailed plan for the conduct of 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, because the protocols must correctly
anticipate the nature of the data to be generated and results that the FDA will
require before approving the drug. In the absence of any FDA comments within 30
days after the IND filing, human clinical trials may begin.

         Although there is no statutory definition of the structure or design of
clinical trials, 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 I. Phase I 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 relating to tolerance,
                  absorption, metabolism and excretion as well as other
                  pharmacological indications and actions. This phase lasts an
                  average of six months to one year.

         -        Phase II. Phase II 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 dose response relationship. This
                  phase lasts an average of one to two years.

         -        Phase III. Phase III 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.






                                       3
<PAGE>   5


         After the successful completion of all three clinical phases, the 
sponsor of a new drug in the United States submits a New Drug Application
("NDA") to the FDA requesting that the product be approved for marketing. The
NDA is a comprehensive, multi-volume filing that includes, among other things,
the results of all pre-clinical and clinical studies, information about the
drug's composition and the sponsor's plans for producing, packaging and
labeling the drug. In addition, while the FDA does not use price as a criterion
for approving a new drug, advisory panels of scientists that help the FDA
evaluate new types of therapies have started taking cost into consideration.
The FDA's review of an NDA can last from a few months, for drugs related to
life-threatening circumstances, to many years, with the average review lasting
two and one-half years. Drugs that successfully complete this review may be
marketed in the United States, subject to the conditions imposed by the FDA.

         As a condition to its approval of a drug, the FDA may require that the
sponsor conduct additional clinical trials following receipt of NDA approval to
monitor long-term risks and benefits, study different dosage levels or evaluate
different safety and efficacy parameters in target patient populations. In
recent years, the FDA has increased its reliance on these trials, known as Phase
IV trials, which allow new drugs that show early promise to reach patients
without the delay associated with the conventional review process. Phase IV
trials usually involve thousands of patients.

Regulatory Environment

         The market for the services offered by both the Company's CRO
operations and ENVIRON has developed as a result of significant laws and
regulations governing the development and testing of certain drugs and hazardous
substances and the impact of hazardous substances on the environment.

         Many countries require safety testing prior to obtaining governmental
approval to market various substances, including pharmaceutical products,
industrial chemicals and agrochemicals. The most significant laws and
regulations concern the safety of pharmaceutical products. The results of
clinical tests conducted upon pharmaceutical products must be submitted to
appropriate government agencies, such as the FDA in the U.S., the EMEA and
national regulatory agencies in Europe and the Ministry of Health and Welfare in
Japan, as part of the relevant pre-market approval process in individual
countries.

         Manufacturers of industrial chemicals and agrochemicals must also
comply with toxicological testing requirements in connection with the pre-market
approval process. In recent years, heightened concern over the presence of
potentially toxic substances in the environment has focused attention on the
need to evaluate the effects of existing and new chemical substances. As a
result, regulations have been enacted in many jurisdictions expanding the
regulatory process for industrial chemical and agrochemical products, including
the Toxic Substances Control Act ("TSCA") and the Federal Insecticide, Fungicide
& Rodenticide Act in the United States ("FIFRA"), and the council Directive
91/414/EEC in Europe.

         The management and remediation of hazardous substances in the
environment are also subject to extensive federal legislation in the U.S.,
including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA", commonly known as the "Superfund" legislation) and the
Superfund Amendment and Reauthorization Act of 1986 ("SARA"), which address
problems involving the remediation of past waste disposal practices; the
Resource Conservation and Recovery Act of 1976 ("RCRA") and the Hazardous Solid
Waste Amendments of 1984, which regulate the management of newly created wastes;
the Safe Drinking Water Act of 1974; the Clean Water Act; the Occupational
Safety and Health Act ("OSHA") and the 1990 Clean Air Act Amendments. In
addition, state authorities have enacted significant environmental legislation,
including California's Safe Drinking Water and Toxic Enforcement Act of 1986 and
New Jersey's Industrial Site Recovery Act.

Trends Affecting the CRO Industry

         In 1996, worldwide expenditures on research and development by
pharmaceutical and biotechnology companies are estimated to have been $30
billion, of which the Company estimates $10-15 billion was spent on drug
development activities of the type offered by the CRO industry. The Company
believes that approximately $2.7 billion of such spending was outsourced to
CROs.

         The Company believes that the outsourcing of drug development
activities by pharmaceutical and biotechnology companies has been increasing and
will continue to increase for the following reasons:

         Cost Containment Pressures

         Market forces and governmental initiatives have placed significant
pressure on pharmaceutical and biotechnology companies to reduce drug prices.
Pressures on profit margins have arisen from increased competition as a result
of patent expiration, market acceptance of generic drugs and governmental and
private efforts to reduce healthcare


                                       4
<PAGE>   6



costs. In addition, private managed care organizations are beginning to limit
the selection of drugs from which affiliated physicians may prescribe, thereby
further increasing competition among pharmaceutical and biotechnology companies.
The Company believes that the pharmaceutical industry is responding to these
pressures by downsizing operations, decentralizing the internal research and
development process and converting the fixed costs of maintaining a research and
development infrastructure to variable costs by outsourcing drug development
activities to CROs. The downsizing of research and development activities also
creates demand for CROs as internal development bottlenecks arise when a large
number of compounds emerge from the research process and need to be pushed
through the development pipeline. In addition, increased pressure to
differentiate products and to generate support for product pricing serves as the
foundation for growth in the area of healthcare economics, both with respect to
drugs under development and to products already on the market.

         Revenue Enhancement Through Faster Drug Development

         Pharmaceutical and biotechnology companies face increased pressure to
bring innovative, patent-protected medicines to market in the shortest possible
time, while following good science practices and adhering to government
regulations. Pharmaceutical and biotechnology companies are attempting to
increase the speed of new product development, and thereby maximize the period
of marketing exclusivity and economic returns for their products, by outsourcing
development activities to CROs. The Company believes that CROs, by providing
specialized development services, are often able to perform the needed services
with a higher level of expertise or specialization, and more quickly, than a
pharmaceutical or biotechnology company could perform such services internally.
In addition, some pharmaceutical and biotechnology companies are beginning to
contract with large full-service CROs to conduct all phases of clinical trials
for new product programs lasting several years, rather than separately
contracting specific phases of drug development to several different CROs, an
approach which the Company believes may result in shorter overall development
times.

         Biotechnology Industry Growth

         The United States biotechnology industry has grown rapidly over the
last ten years and is developing significant numbers of new drug candidates that
will require regulatory approval. Many of these new drug candidates are now
moving into clinical development and many biotechnology companies do not have
the necessary staff, expertise or financial resources to conduct clinical trials
on their own. Accordingly, many of these companies have chosen to outsource the
product development process rather than expend significant time and resources to
develop an internal clinical development capability. Further, PPD Pharmaco's
experience suggests that biotechnology companies are increasingly turning to
CROs for their sophisticated regulatory expertise to provide assistance in the
generation of the ideal development plan. Moreover, the biotechnology industry
is expanding into and within Europe, providing growth opportunities for CROs
with international capabilities.

         Need for International Support

         Pharmaceutical and biotechnology companies are attempting simultaneous
filings of registration packages in several major jurisdictions rather than
following the past practice of sequential filings. The studies to support such
registration packages may include a combination of multinational and domestic
trials. Pharmaceutical and biotechnology companies may turn to CROs for
assistance with such trials, as well as collecting, analyzing, integrating and
reporting the data. The Company believes that CROs with an international
presence and management experience in the simultaneous filing of multiple
applications may benefit from these trends.

         Consolidation in the CRO Industry

         As a result of competitive pressures, the CRO industry is
consolidating. Mergers and acquisitions, including the Company's merger with
APBI, have resulted in the emergence of several large, full-service CROs that
have the capital, technical and financial resources to conduct all phases of
clinical trials on behalf of pharmaceutical and biotechnology companies. As
pharmaceutical and biotechnology companies increasingly outsource development,
they may turn to larger CROs that provide a broad range of clinical services,
while at the same time they may also limit the number of CROs they choose to
provide such services. The Company believes that this trend will further
concentrate market share among larger CROs with a track record of speed,
flexibility, responsiveness and overall development experience and expertise.

Company Strategy

         The Company's fundamental strategy is to distinguish its services on
the basis of superior performance. The Company strives to deliver to its clients
efficient and innovative services that accelerate the rate of new product
development. The Company intends to expand the depth and breadth of its services
by (i) capitalizing on its managerial






                                       5
<PAGE>   7




and operational strengths, (ii) focusing on hiring and training its staff, (iii)
focusing on its strategic marketing initiatives, (iv) developing its services in
healthcare economics and communications consulting, (v) pursuing strategic
acquisitions, (vi) expanding geographically and (vii) pursuing opportunities
provided by technological advances.

         Management and Operational Strength

         The Company is guided by senior management who have spent much of their
careers as development experts within major pharmaceutical companies and who
have a record of success before the United States FDA and the EMEA in Europe.
PPD Pharmaco concentrates on its core operational strengths in all phases of
clinical studies and other critical path studies such as treatment
Investigational New Drug Applications. Timely performance is based on parallel
drug development processes and leveraging the knowledge and experience of
management and investigators. Basic medical, scientific and regulatory services
continue to be integrated with, and streamlined through, advances in various
areas of technology, all directed toward a reduction in overall development
times. PPD Pharmaco emphasizes efficiencies in each phase of clinical trials,
data acquisition, data management and analysis, report writing and report
filing, in order to reduce the time and cost of obtaining regulatory approval
for its clients' products. As a means of differentiating itself from its
competitors, PPD Pharmaco emphasizes therapeutic area specialization, in
particular in the areas of virology/AIDS/infectious diseases,
gastroenterology/metabolic diseases, cardiovascular diseases, critical care,
pulmonary/allergy, central nervous systems, dermatology, food and nutrition,
oncology, rheumatology and women's health.

         Hiring and Training

         The Company believes that its success is based on the quality and
dedication of its employees. The Company strives to hire the best available
people in terms of ability, attitude, experience and fit with the Company's
performance philosophy. New employees are trained extensively, and the Company
believes that it is an industry leader in the thoroughness of its training
programs. In addition, employees are encouraged to continually upgrade and
broaden their skills through internal and external training. As new technologies
develop, employees are equipped with and trained to make use of such
technological innovations.

         Strategic Marketing

         PPD Pharmaco focuses its marketing and sales efforts with an emphasis
on high volume clients with needs in the service segments and therapeutic areas
in which the Company specializes. Direct salespeople concentrate on a group of
assigned clients, marketing across service segments. PPD Pharmaco's business
development personnel consult with potential clients early in the bidding stage
in order to determine their needs. The business development personnel and PPD
Pharmaco's project managers then invest significant time to determine the
optimal way to design and carry out the potential client's proposal. PPD
Pharmaco's recommendations to the potential client with respect to study design
and implementation are an integral part of PPD Pharmaco's bids and an important
aspect of the integrated services that PPD Pharmaco offers to its clients. PPD
Pharmaco believes that its extensive preliminary efforts relating to the
evaluation of a potential client's proposed clinical protocol and implementation
plan allows accelerated commencement of the clinical trial after the contract
has been awarded to PPD Pharmaco.

         ENVIRON conducts separate marketing activities at each of its office
locations, and believes that its regional presence enables its professionals to
gain a greater knowledge of regional environmental issues, a better
understanding of regional laws and regulations and a more constructive working
relationship with regional governmental agency personnel. Because of the
technical nature of ENVIRON's business, most marketing activities at each of
ENVIRON's operating divisions are conducted by technical and scientific
personnel, with initial contacts frequently followed up by personal visits to
clients' offices.

         The Company sponsors and encourages the participation by its personnel
in a variety of scientific endeavors, including the presentation of papers by
its professional staff at meetings of professional societies and major
conferences and the publication of scientific articles in respected journals.
The Company believes such activities enhance its reputation for professional
excellence. The Company's core marketing efforts are complemented by advertising
in trade journals and by exhibits at scientific conferences.

         Healthcare Economics and Outcomes Research

         The healthcare market in the United States is evolving from a
fragmented system of individual providers with little incentive to control costs
to a managed care system in which large organizations attempt to lower the cost
of healthcare through a number of means. The Company believes that such market
dynamics support the need for healthcare economics analysis and outcomes
research. PPD Pharmaco offers programs integrating such analysis in clinical




                                       6
<PAGE>   8



development programs to support regulatory approval, as well as pricing,
marketing and reimbursement strategies. While PPD Pharmaco's current focus in
this area is on its traditional client base within the pharmaceutical and
biotechnology industries, both with respect to drugs under development and
products already on the market, PPD Pharmaco expects to extend such services to
payers and providers as well.

         Acquisitions

         The Company will continue to actively seek strategic acquisitions, both
within and outside current CRO service segments. Acquisition candidates must
provide opportunities for innovation, synergy and growth. The Company's criteria
for acquisitions may include complementary client lists, ability to increase
market share within and across clients, complementary therapeutic area and
service segment strengths, strategic geographic capabilities or particular
process expertise.

         Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent assimilation
of operations and products, the diversion of management's attention from other
business concerns and the potential loss of key employees of the acquired
company. If the Company consummates any acquisitions in the future, there can be
no assurance that such acquisitions will be successfully integrated into the
Company's operations.

         The Company's merger with APBI allowed the Company to become one of the
few full-service, multi-national CROs, capable of monitoring clinical trials
involving hundreds of investigative sites, conducted simultaneously in North
America and Europe.

         Geographical Expansion

         In addition to the merger with APBI, the Company's recent acquisitions
in Germany, Spain, Brazil, Scotland and England reflect its commitment to
strategic geographic expansion. Outside the United States, PPD Pharmaco
currently has operations in many locations in Europe, along with Australia,
Brazil, Canada and South Africa. PPD Pharmaco has identified certain strategic
areas of promise where CROs currently have limited or no presence and intends to
selectively pursue these and other strategic opportunities internationally.

         With its recent acquisition of EAG in the United Kingdom, the Company's
Environmental Sciences Group has expanded outside the U.S. for the first time.
ENVIRON will continue to pursue other strategic opportunities, both within the
U.S. and internationally.

         Technological Advances

         PPD Pharmaco believes that optimizing the use of information technology
in conjunction with drug development experience can accelerate the drug
development process and yield valuable marketing information. PPD Pharmaco has
experience in the use of information technology in clinical trial management and
offers or is developing a wide range of technology-based services, including
initial market research and study design, remote monitoring and data
acquisition, ongoing study management, outcomes research, patient and disease
management and the filing of Computer Assisted New Drug Applications and Product
License Applications. The Company believes that the use of third-party systems
and selected internally developed software allows it to offer its clients the
best available technology for expediting the drug development process.

Services Offered

   Life Sciences Group

         PPD Pharmaco has designed its various services to be flexible and
integrated in order to assist its clients in optimizing their research and
development spending through the clinical stages of the drug development
process. PPD Pharmaco provides Phase I clinical testing, laboratory services,
Phase II-IV clinical trial management, clinical data management and
biostatistical analysis, treatment Investigational New Drug Applications,
medical writing and regulatory services and healthcare economics and outcomes
research for its clients. PPD Pharmaco's services can be provided individually
or as an integrated package of services to meet its client's needs. Through the
CCCR division of Clinix, the Life Sciences Group participates in and conducts
clinical trials in the pharmaceutical and food and nutrition industries. During
1996, $152.3 million, or 77.0%, of the Company's net revenue was generated by
the Life Sciences Group.

         Phase I Clinical Testing

         After an Investigational New Drug Application has been filed with the
FDA, human testing of a new drug can begin. The drug is typically first
administered to healthy volunteers to determine the drug's basic safety data
based on





                                       7
<PAGE>   9



tolerance, absorption, metabolism, excretion and other pharmacological actions.
Later, special studies are conducted in volunteers and special patient
populations to further define the drug's overall pharmacological profile. PPD
Pharmaco is the largest Phase I provider, with clinical testing services
conducted in its 200-bed unit in Austin, Texas, its 66-bed unit located near
Research Triangle Park, North Carolina and its 52-bed unit in Leicester,
England. The Phase I's professional nursing staff administers general Phase I
safety tests, special population studies and bioavailability and bioequivalence
testing. Special population studies may involve the elderly, women or patients
with specific diagnoses such as renal failure or asymptomatic HIV disease.

         The Company's 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 the Phase I centers in Austin, Texas; Raleigh, North
Carolina and Leicester, England; which have provided a substantial pool of
potential subjects for research studies. The Company's business could be
adversely affected if the Company were unable to attract suitable and willing
volunteers.

         Bioavailability and bioequivalence testing, generally conducted each
time the dosage, form or formulation of the drug is modified, involves
administration of the test compounds and obtaining biological fluids
sequentially over time to measure absorption, distribution, metabolization and
excretion of the drug.

         PPD Pharmaco attempts to manage its Phase I services to maximize
scheduling flexibility and efficiency. The services also can be smoothly and
quickly integrated with PPD Pharmaco's other service segments such as
laboratory, pharmacokinetic and biostatistical services. PPD Pharmaco is one of
the few full-service CROs offering Phase I clinical testing in the United States
and Europe.

         Laboratory Services

         PPD Pharmaco provides bioanalytical and product analysis services
through its laboratories in Richmond, Virginia, and Madison, Wisconsin.
Biological fluid samples from clinical studies, such as those conducted by PPD
Pharmaco's Phase I units, must be transported to a laboratory such as PPD
Pharmaco's to be analyzed for drug and metabolite content and concentration. PPD
Pharmaco currently has approximately 275 non-proprietary validated assays
available for its clients' use in conducting laboratory analyses, thereby
qualifying PPD Pharmaco for a wide range of assignments. PPD Pharmaco's
laboratories also process fluid samples for pre-clinical studies.

         Product analysis services include dissolution and stability studies
which are necessary to characterize a dosage form's release patterns and
stability under various environmental conditions in the intended package for
marketing. These studies must be carried out over the commercial life of
products, beginning at the clinical trial stage. New formulations require the
same set of studies as the original dosage form. Comprehensive measurement
services include Gas Chromatography/Mass Spectrometry, Liquid
Chromatography/Mass Spectrometry, High Performance Liquid Chromatography, Gas
Chromatography, Radioimmunoassay and Enzyme Linked Immunosorbent Assay. Support
services include HIV positive sample handling, sample/data management for
kinetic studies from multi-center trials and sample/data archiving.

         PPD Pharmaco is one of a few full-service CROs able to offer its
clients the advantages of both bioanalytical and product analysis and Phase I
clinical testing.

         Phase II-IV Clinical Trial Management

         The core of PPD Pharmaco's business is a comprehensive package of
services for the conduct of Phase II-IV clinical trials, which, in concert with
its other analytical and Phase I testing services, allows PPD Pharmaco to offer
its clients an integrated package of clinical management services. The Company
has significant clinical trials experience in the areas of:





                                       8
<PAGE>   10

         AIDS                       Primary disease and treatment/prophylaxis of
                                    opportunistic infections

         Analgesia                  Acute and chronic pain modeling

         Biotechnology              Growth hormone, multiple sclerosis, sepsis,
                                    wound healing

         Cardiovascular disease     Congestive heart failure, hypertension,
                                    global survival trials

         Central nervous system     Schizophrenia, depression, anxiety,
         disease                    obsessive-compulsive disorders, panic 
                                    disorders

         Critical care              Acute Respiratory Distress Syndrome,
                                    disseminated fungal diseases, sepsis

         Dermatology                Wound healing, acne, hair loss

         Food and Nutrition         Fat substitutes, beta carotene, 
                                    oligofructose, fibers

         Gastroenterology           Duodenal ulcer, gastric ulcer, 
                                    gastro-esophageal reflux disease, H. pylori,
                                    nonsteroidal anti-inflammatory drug-induced
                                    ulcers

         Infectious disease         Acute and critical

         Metabolic disease          Diabetes, hormone replacement therapy

         Oncology                   Ovarian, lung cancer

         Pulmonary/Allergy          Asthma, allergic rhinitis, community 
                                    acquired pneumonia

         Rheumatology               Rheumatoid and osteoarthritis

         Virology                   AIDS, herpes simplex, chronic hepatitis B, 
                                    chronic hepatitis C

         Women's health             Hormone replacement, oral contraception

         Clients' needs are served by conducting clinical trials through a
dedicated project team. A project manager supervises all aspects of the conduct
of the clinical trial, while PPD Pharmaco's 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, PPD Pharmaco can manage
every aspect of the clinical trials in Phases II through IV of the drug
development process, including protocol development, case report form ("CRF")
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.

         PPD Pharmaco monitors its clinical trials in strict adherence to
government regulations. PPD Pharmaco has adopted standard operating procedures
which are intended to satisfy regulatory requirements and serve as a tool for
controlling and enhancing the quality of its clinical trials. PPD Pharmaco's
procedures are written in accordance with the regulations and guidelines
appropriate to the region where they will be used, thus ensuring compliance with
Good Clinical Practice ("GCP") requirements. In North America, FDA regulations
and guidelines serve as a basis for PPD Pharmaco's procedures. The European
Community has agreed to conduct all studies in accordance with the International
Conference on Harmonization ("ICH")'s recommendations which set global clinical
study standards based on GCP. ICH guidelines have superseded the European
Community Note for Guidance, "Good Clinical Practice for Trials on Medicinal
Products in the European Community." The FDA is expected to adopt the ICH's
standards. Data generated during clinical trials are compiled, analyzed,
interpreted and submitted in report form to the FDA or other relevant regulatory
agencies for purposes of obtaining regulatory approval.

         PPD Pharmaco provides its clients with one or more of the following
core Phase II-IV clinical trials management services using parallel processing
to accelerate the development process:

                  Study Design. PPD Pharmaco serves its clients in the critical
         area of study design by applying its wide development experience in the
         preparation of the study protocols and CRFs. The study protocol defines
         the medical issues to be examined in evaluating the safety and efficacy
         of the drug under study, the number of patients required to produce
         statistically valid results, the clinical tests to be performed in the
         study, the time period over which the study will be conducted, the
         frequency and dosage of drug administration and the exact inclusion and
         exclusion criteria to be met for the patients enrolled in the study.
         The success of the study depends not only on the ability of the
         protocol to correctly predict requirements of regulatory authorities,
         but also on the ability of the protocol to fit coherently with the
         other aspects of the development process and the ultimate marketing
         strategy for the drug. This includes healthcare economic components to
         support rational pricing and positioning.

                                       9
<PAGE>   11

                  Once the study protocol has been finalized, CRFs must be 
         developed to record the desired information to be obtained from the 
         clinical studies. The various other disciplines involved in the drug 
         development process, including data management, must work closely with
         the clinical trial management project team to assure that the right 
         data are acquired in a form which is most efficient for subsequent 
         data entry, management and reporting. Proper CRF design is critical 
         to allowing investigators and field monitors to conduct their 
         respective jobs quickly, accurately and effectively.

                  Investigator Recruitment. During the clinical trials,
         administration of the drug to patients is supervised by physicians,
         also referred to as investigators, at hospitals, clinics or other
         locations, also referred to as investigational sites. The Life Sciences
         Group solicits the participation in the study of investigators who
         contract directly with either PPD Pharmaco, CCCR or its client. The
         successful rapid identification and recruitment of investigators who
         have the appropriate expertise and an adequate base of patients who
         satisfy the requirements of the study protocol are critical to the
         timely completion of the trial.

                  PPD Pharmaco maintains and constantly expands and refines its
         computerized database of approximately 16,000 investigators.
         Information regarding PPD Pharmaco's experience with these
         investigators, including factors relevant to rapid study initiation,
         are contained in the database. This information allows project managers
         to choose the appropriate investigators for a particular study in an
         efficient manner.

                  Study Monitoring. PPD Pharmaco provides study monitoring
         services which include investigational site initiation, patient
         enrollment assistance and data collection through subsequent site
         visits. These visits also serve to assure that data are gathered
         according to GCP, according to the requirements of the client and
         applicable regulatory authorities and as specified in the study
         protocol.

                  Project management and field monitoring services are the
         operational heart of Phase II and III clinical studies. In most
         instances a project will meet, exceed or fail to meet expected
         timeliness for completion based on meeting deadlines during the first
         few months of study initiation. Therefore, PPD Pharmaco focuses at an
         early stage on identifying and quickly completing the critical
         rate-limiting steps of screening and selecting investigators,
         processing pre-study regulatory paperwork, obtaining investigative
         review board approvals and scheduling investigational site initiation
         visits. Drugs under study cannot be released to the investigational
         sites, and thus the study cannot begin, until these activities have
         been completed.

                  Following study initiation, PPD Pharmaco utilizes all
         appropriate methods of accelerating patient recruitment. This may
         involve PPD Pharmaco's integrated systems of telephone recruitment,
         telefaxing and media advertising. As with Phase I clinical trials,
         patient recruitment is critical to the Company's success.

                  Patient data must be obtained from the field efficiently,
         quickly and accurately to speed subsequent data entry, management and
         analysis and report writing. PPD Pharmaco acquires data via visits by
         its field monitors to investigative sites and by electronic means.
         Field monitors are equipped with laptop computers for the purpose of
         data collection.

                  PPD Pharmaco has monitored many clinical trials, including a
         number of very large studies. For example, PPD Pharmaco is in its
         second five-year contract with the National Institutes of Health
         ("NIH") to monitor investigational sites for AIDS treatment related
         trials sponsored by the NIH. This project involves approximately 200
         investigational sites and total enrollment of approximately 58,000
         patients.

         Clinical Data Management and Biostatistical Analysis

         PPD Pharmaco's data management and biostatistical analysis operations
are managed by professionals with extensive pharmaceutical and biotechnology
industry experience in the design and construction of local and multinational
clinical trial databases. PPD Pharmaco provides clients with assistance in such
areas as study design, sample size determination, CRF design and production, fax
based monitoring, database design and construction, New Drug Application
preparation and production, including electronic submission to the FDA, known as
Computer Assisted New Drug Applications and FDA presentations and defense.

         Data management and biostatistical analysis services are offered as
discrete products and as part of an integrated drug development program. During
the design of development plans and protocols, PPD Pharmaco offers consulting
services relating to, and the determination of, sample size parameters for
patient enrollment, development of data analysis plans and randomization
schemes. During the conduct of clinical trials, PPD Pharmaco assists in the
rapid acquisition of clean and accurate data. Following completion of the
clinical trials, PPD Pharmaco assists in report preparation and FDA
presentations. PPD Pharmaco's biostatisticians may participate with clients in
meetings with the FDA to present and

                                       10
<PAGE>   12



defend biostatistical analyses prepared by PPD Pharmaco. PPD Pharmaco has
expertise in electronically capturing and integrating geographically diverse
data. PPD Pharmaco employs SAS, Clintrace, Oracle and BBN Clintrial software, as
specified by clients, combined with customized programs developed by PPD
Pharmaco.

         Drug development time is reduced by performing data management and
biostatistical analysis activities in parallel with other drug development
activities where possible. For example, data management personnel work with
clinical program managers and field monitors to continuously enter data, program
output tables and listings and validate the database so that there is a rapid
progression from data lock, to database freeze, to final tables and listing
preparation and to biostatistical analyses. Similarly, there is a close working
relationship with medical writing and regulatory services personnel.

         Treatment Investigational New Drug Application

         A treatment Investigational New Drug ("IND") Application is an
application by a pharmaceutical or biotechnology sponsor and the associated
procedure to allow patients to receive treatment with an investigational new
drug for a serious or immediate life-threatening disease, such as AIDS or
multiple sclerosis, for which no comparable or satisfactory therapy is
available. This treatment is provided during the clinical trial phase of
development, but outside the controlled clinical trial. For promising new drugs,
the treatment IND application has the advantage of getting the new drug into an
expanded patient base early, as well as allowing earlier publicity about the
potential success of the drug. PPD Pharmaco's involvement in a treatment IND
application may range from monitoring the treatment to an integrated service
project involving full investigational site management, data management and
biostatistical analysis and report writing.

         Medical Writing and Regulatory Services

         PPD Pharmaco provides report writing and regulatory services to its
clients in a manner designed to complement parallel development processes to
reduce overall development time. Strategic plan and protocol design services
provided at the beginning of a project, combined with clear, concise data
presentation, analysis and discussion at the completion of the project assist
the client in obtaining regulatory approvals. These services are fully
integrated with PPD Pharmaco's other services to assure maximum speed consistent
with good service and regulatory compliance.

         PPD Pharmaco maintains a large internal compliance and quality
assurance department to provide in-process monitoring of GCP performance. PPD
Pharmaco also offers these services to clients to assess their own trials,
whether conducted by the client or another CRO.

         Healthcare Economics and Outcomes Research

         PPD Pharmaco is developing a number of services in the healthcare
economics area to be offered to pharmaceutical and biotechnology companies as
well as managed care payers and providers. These services include prospective
and retrospective clinicoeconomics analysis, quality of life and drug therapy
evaluation, large sample market research, clinical hypothesis testing for
product marketing, enhanced patient, investigator and managed care plan
recruiting, managed care consulting, patient therapeutic support systems and
disease management consulting.

   Environmental Sciences Group

         APBI Environmental Sciences Group currently provides health and
environmental sciences and engineering consulting services through its ENVIRON
division. During 1996, the Environmental Sciences Group generated 23.0% of the
Company's net revenue.

         ENVIRON is a leading provider of multidisciplinary consulting services
in the chemical risk assessment and risk management field. ENVIRON provides
services primarily to private sector clients facing potentially high liability
as a result of the presence of hazardous substances in the environment, in drugs
and medical devices, in consumer products and in the workplace. ENVIRON's
engagements typically involve providing creative, multidisciplinary solutions to
complex problems.

         ENVIRON provides services primarily in two areas: (1) health sciences
and (2) environmental sciences and engineering. ENVIRON's health sciences staff
includes professionals trained in toxicology, epidemiology, chemistry,
biochemistry, microbiology, industrial hygiene, risk assessment and allied
fields. Its environmental sciences and engineering staff includes professionals
trained in hydrogeology; geology; environmental chemistry; environmental,
chemical and civil engineering and ecotoxicology, ecology and natural resources.
Approximately 43% of ENVIRON's employees have advanced degrees at the master's
level or above. Of those with advanced degrees, approximately 35% have attained
their Ph.D.





                                       11
<PAGE>   13



         ENVIRON offers services in the following areas:

         Chemical Risk Assessment and Risk Management

         ENVIRON assesses the potential risk of injury to human health and the
environment associated with industrial chemicals during all stages of
manufacturing use and disposal. It also provides assistance in determining
exposures and the potential health impact of chemicals present in food, consumer
products, pharmaceuticals, medical devices and the workplace.

         The chemical risk assessment services provided by ENVIRON typically
involve two components. ENVIRON analyzes toxicological and biological data to
assess the inherent hazard or toxicological properties of industrial chemicals
and other substances. In addition, ENVIRON assesses the physical-chemical
properties of industrial chemicals and other substances in the media in which
they are found to evaluate the fate and transport of such substances in the
environment and the potential for exposure. The assessments performed by ENVIRON
are generally used to evaluate the potential for public health risk and
ecological damage. ENVIRON also assists clients in developing workplace
standards for industrial chemicals and prepares assessments of risks resulting
from occupational exposure. In addition, ENVIRON conducts audits to determine
compliance with specific laws regulating chemical releases into air, water and
other environmental media and to obtain permits for manufacturing or processing
facilities.

         ENVIRON provides such services in a variety of project areas, including
complex hazardous waste sites, current and former industrial manufacturing
facilities, leaking underground storage tanks, municipal and hazardous waste
disposal facilities, incinerators, abandoned mine sites, pesticide-contaminated
agricultural land and large-scale spills and releases. In performing
assessments, ENVIRON also analyzes the potential for exposure at the project
site and the surrounding environment.

         Environmental Liability Assessments

         ENVIRON performs environmental liability assessments of industrial
properties, commercial and residential developments, undeveloped parcels of land
and hazardous waste sites to identify practices that could result in significant
exposure or liability. These services include environmental audits to determine
compliance with current and anticipated federal, state and local regulations and
to estimate the present value of environmental liabilities. Such assessments
have been performed across a broad range of industries, including iron and
steel; pulp and paper; mining, oil and gas; textiles, lumber and wood; plastics,
leather and electronics.

         Site Investigation and Remediation

         ENVIRON assists clients in determining the nature and extent of
contamination at industrial and hazardous waste sites through the collection and
analysis of soil, water and sediment samples. ENVIRON's services in this area
also include the evaluation and analysis of the cost-effectiveness of various
alternative remediation strategies designed to protect human health and the
environment. ENVIRON also designs the selected remedial strategy, hires
subcontractors as appropriate and provides oversight of the implementation of
the strategy. Such services are often provided in connection with the
negotiation and resolution of disputes that relate to the apportionment of
liability arising under various federal, state and local statutes, or private
contracts.

         Litigation Support

         ENVIRON provides expert technical assistance and strategic support to
clients who are or who anticipate becoming involved in litigation relating to
environmental, occupational and product safety issues. These services cut across
substantially all of its practice areas. Services provided in this area include
reviewing environmental data and waste handling records, allocating liability
among multiple site owners, developing information on state-of-the-art waste
disposal practices, determining the timing of contaminant release events,
evaluating sampling programs and remedial measures developed for contaminated
sites, reviewing toxicological and epidemiological data associated with the use
of consumer products and establishing relationships between exposure and disease
or injury. ENVIRON's senior staff members have extensive experience providing
expert testimony in the areas of toxicology, risk assessment and contaminant
releases.

         Product Safety Regulation

         ENVIRON provides strategic scientific support and regulatory affairs
guidance in the pre-market approval process for and subsequent use of various
products, including drugs and pharmaceuticals, medical devices, food additives,
consumer products, agricultural chemicals and biotechnology products.





                                       12
<PAGE>   14



         Air Quality

         ENVIRON offers a full spectrum of air quality services, including: air
emissions and dispersion modeling from industrial facilities and hazardous waste
sites, including siting studies and air toxics impact evaluations; air pollution
compliance assistance, including compliance auditing, regulatory analysis and
obtaining local and state permits, as well as federal Title V operating permits;
ambient and indoor monitoring program design and implementation; process
engineering; emergency release modeling and off-site consequence analysis;
analysis of the potential regional air quality impacts of alternative control
strategies, including advanced vehicles, alternative and reformulated fuels and
other mobile and stationary source control measures and leak detection and
repair services, including monitoring equipment recommendations, software/data
base management system design, program management consulting and field services.

         Other Environmental Services

         ENVIRON also provides a variety of other services that complement its
primary service areas. Such services include facility siting and permitting,
water quality assessments, waste management, emergency planning and development
and integration of environmental management systems. Although such other
services have historically represented a relatively small percentage of
ENVIRON's net revenue, the Company believes that it will have opportunities to
expand its business in these areas in the future.

Clients and Marketing

         The Company's Life Sciences Group provides development services to
pharmaceutical and biotechnology companies. For the year ended December 31,
1996, approximately 83% of the Company's Life Sciences Group's net revenue was
attributable to clinical services and 17% to laboratory services. For the year
ended December 31, 1996, net revenue of the Life Sciences Group was derived
approximately as follows:

                                                              Percentage of
         Source                                                Net Revenue
         ------                                                -----------
         Pharmaceutical                                              80.8%
         Biotechnology                                               11.2
         Government (NIH)                                             1.4
         Other                                                        6.6

         The Company has provided services to 24 of the top 25 pharmaceutical
companies in the world as ranked by 1995 research and development spending.

         The Company provides services to the pharmaceutical and biotechnology
industries and its revenue is highly dependent on expenditures on research and
development by clients in these industries. Accordingly, the Company's
operations could be materially and adversely affected by general economic
downturns in these industries, the current trend toward consolidation in these
industries or other factors resulting in a decrease in research and development
expenditures. Furthermore, the Company has benefited to date from the increasing
tendency of pharmaceutical and biotechnology companies to outsource large
clinical research projects. Should this trend be reversed, the revenue of the
Company could be materially and adversely affected. The Company believes that
concentration of business among certain large customers is not uncommon in the
CRO industry. The Company has experienced such concentration in the past and may
experience such concentration in the future. However, during 1995 and 1996, no
single client contributed more than 10% of the Company's total net revenue. In
1996, the Company's ten largest clients accounted for approximately 33% of the
Company's total net revenue and approximately 44% of the Company's total 1996
net revenue was derived from clients located outside the U.S., in particular in
Europe and Japan.

         ENVIRON's clients come from a wide variety of industrial companies. A
significant portion of these engagements is initiated by lawyers whose clients
are engaged in merger, acquisition or real estate transactions, or who become
involved in or anticipate becoming involved in litigation. ENVIRON also provides
services to investment banks, lenders, insurance firms, trade associations, and
to a lesser extent, state and local government agencies.

Contractual Arrangements

         Many of PPD Pharmaco's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. In other
contracts, PPD Pharmaco is paid based on applying agreed upon hourly rates to
hours worked. Generally, for multi-year contracts involving clinical trials, a
portion of the contract fee is paid at the time the trial is initiated, with the
balance of the contract fee payable in installments over the trial duration. The
installment payments are typically performance-based, relating payment to
previously negotiated events, such as investigator recruitment, patient
enrollment or delivery of databases. For contracts which are fixed price, PPD
Pharmaco bears the risk






                                       13
<PAGE>   15

of cost overruns, but benefits if costs are lower than anticipated.
Under-pricing of contracts or significant cost overruns could have a material
adverse effect on the Company. Most of PPD Pharmaco's contracts for the
provision of its services, including contracts with government agencies, are
terminable by the client upon 30- to 90-days' notice under certain
circumstances, including the client's unilateral decision to terminate the
development of the product or end the study. Contracts may be terminated for a
variety of reasons, including the failure of a product to satisfy safety
requirements, unexpected or undesired results of the product, the client's
decision to forego a particular study or insufficient patient enrollment or
investigator recruitment. Although the contracts typically require payment of
certain fees for winding down the study and, in some cases, a termination fee,
the loss of a large contract or the loss of multiple contracts could materially
and adversely affect the Company.

Backlog

         Backlog consists of anticipated net revenue from letters of intent and
contracts that have not been completed. Net revenue is defined as professional
fee income (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. In certain cases, PPD Pharmaco begins
work for a client before a contract is signed. Backlog does not include
anticipated net revenue for which PPD Pharmaco has begun work but for which PPD
Pharmaco does not have a letter of intent or signed contract, or fee for service
contracts with no specified amount. The order backlog of the Life Sciences Group
for the services described above under written agreements, including signed
letters of intent, was $156.5 million in net revenue at December 31, 1996,
compared to $142.5 million in net revenue at December 31, 1995.

         PPD Pharmaco believes that its backlog as of any date is not
necessarily a meaningful predicator of future results, because backlog can be
affected by a number of factors, including variable size and duration of
contracts, many of which are performed over several years. Additionally,
contracts generally are subject to early termination by the client or delay by
regulatory authorities for many reasons, including unexpected test results.
Moreover, the scope of a contract can change during the course of a study. There
can be no assurances that PPD Pharmaco will be able to fully realize all of its
backlog as net revenue.

         ENVIRON's net revenue is not represented by an order backlog, as
ENVIRON's engagements are generally of an indefinite duration in which services
are performed on a time-and-expenses basis. Clients are billed at fixed hourly
rates for each staff member involved in an assignment, rather than on a project
basis.

Competition

         The CRO industry consists of several hundred small, limited-service
providers, several medium-sized CROs and a few full-service global drug
development companies. The CRO industry is consolidating and, in recent years,
several large, full-service competitors have emerged. This trend of industry
consolidation will likely result in greater competition among the larger CROs
for clients and acquisition candidates. PPD Pharmaco's competitors include
ClinTrials Research Inc., Covance, Inc. (formerly Corning Pharmaceutical
Services, Inc.), IBAH, Inc., Parexel International Corporation and Quintiles
Transnational Corporation. PPD Pharmaco also competes against certain
medium-sized companies. Additionally, PPD Pharmaco competes against the in-house
research and development departments of pharmaceutical and biotechnology
companies, as well as universities and teaching hospitals. In addition, there
are few barriers to entry for small, limited-service entities considering
entering the CRO industry. These entities may compete against larger CROs for
clients. Furthermore, the CRO industry has attracted the attention of the
investment community, which could lead to increased competition by increasing
the availability of financial resources for CROs. Increased competition may lead
to price and other forms of competition that may adversely affect PPD Pharmaco's
operating results.

         CROs compete on the basis of several things, including reputation for
on-time quality performance, expertise and experience in specific therapeutic
areas, scope of service offerings, strengths in various geographic markets,
technological expertise and systems, 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, expertise and experience
in healthcare economics and communication. The Company believes that it competes
favorably in these areas.

         CCCR is among the largest private clinical investigational sites,
capable of conducting over 70 trials simultaneously. CCCR's major competitors
are other large investigator sites, including reSearch for Health Inc. and
Collaborative Clinical Research, Inc.

         ENVIRON competes with many firms, ranging from small local firms to
large national firms. ENVIRON competes principally on the basis of reputation,
scientific and technical expertise, experience and qualifications of
professional staff, quality of services, ability to handle complex problems and
its risk assessment orientation. A large percentage of ENVIRON's business is
generated by existing or former clients. ENVIRON believes that pricing is


                                       14
<PAGE>   16



generally not the primary factor in attracting the types of engagements on which
it focuses, which typically involve providing creative, multidisciplinary
solutions and significant value-added services.

Potential Liability and Insurance

     Clinical research services involve the testing of new drugs on human
volunteers pursuant to a study protocol. Such testing exposes the Company 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. The Company attempts to manage its
risk of liability for personal injury or death to patients from administration
of products under study through measures such as contractual indemnification
provisions with clients and through insurance maintained by clients. The
contractual indemnifications generally do not protect the Company against
certain of its own actions, such as negligence. The contractual arrangements are
subject to negotiation with clients and the terms and scope of such
indemnification vary from client to client and from trial to trial. Although
most of PPD Pharmaco's clients are large, well capitalized companies, the
financial performance of these indemnities is not secured. Therefore, the
Company bears the risk that the indemnifying party may not have the financial
ability to fulfill its indemnification obligations. The Company could be
materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by the client or where the indemnifying party does not fulfill its
indemnification obligations. Until September 25, 1996, the Company did not
maintain liability insurance with respect to these risks. The Company currently
maintains liability insurance coverage of up to $5.0 million per claim, with an
annual aggregate policy limit of $5.0 million. However, there can be no
assurance that liability claims will not exceed the limits of such coverage or
that such insurance will continue to be available on commercially reasonable
terms or at all. Consequently, a product liability claim or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the Company.

Government Regulation

     The laboratory services performed by PPD Pharmaco are subject to various
regulatory requirements designed to ensure the quality and integrity of the
testing process. The industry standards for conducting laboratory testing are
embodied in the regulations for Good Laboratory Practice ("GLP") and Good
Manufacturing Practice ("GMP"). GLP and GMP have been adopted by the FDA, by the
Department of Health in the United Kingdom and by similar regulatory authorities
in other parts of the world. GLP and GMP stipulate requirements for facilities,
equipment and professional staff. The regulations require standardization
procedures for studies, for recording and reporting data and for retaining
appropriate records. To help ensure compliance, PPD Pharmaco has established
quality assurance controls at its laboratory facilities which monitor ongoing
compliance with GLP and GMP regulations by auditing test data and conducting
regular inspections of testing procedures.

     The industry standard for the conduct of clinical research and development
studies is embodied in the ICH regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations include (i)
complying with FDA regulations governing the selection of qualified
investigators, (ii) obtaining specific written commitments from the
investigators, (iii) verifying that patient informed consent is obtained, (iv)
monitoring the validity and accuracy of data, (v) verifying drug or device
accountability and (vi) instructing investigators to maintain records and
reports. PPD Pharmaco must also maintain reports for each study for specified
periods for inspection by the study sponsor and the FDA during audits.
Noncompliance with GCP can result in the disqualification of data collected
during the clinical trial.

     PPD Pharmaco's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region where they will be used.
Within Europe, all work is carried out in accordance with the ICH's guidelines
which superseded the European Community Note for Guidance "Good Clinical
Practice for Trials on Medicinal Products in the European Community." In
addition, FDA regulations and guidelines serve as a basis for PPD Pharmaco's
North American standard operating procedures. From an international perspective
when applicable, PPD Pharmaco has implemented common standard operating
procedures across regions to assure consistency whenever it is feasible and
appropriate to do so.

     PPD Pharmaco's business depends on the continued strict government
regulation of the drug development process, especially in the United States.
Changes in regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, could materially and
adversely affect the demand for the services offered by the Company.





                                       15
<PAGE>   17



         The failure on the part of PPD Pharmaco 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 the FDA to either PPD Pharmaco or its
clients based upon a material violation by the Company of GCP, GLP or GMP
requirements could materially and adversely affect the Company.

         The consulting services provided by ENVIRON are not significantly 
regulated by any governmental authority at this time. However, ENVIRON's
environmental risk management services derive in large part from the
significant federal and state environmental legislation that has been enacted
in the past decade. Recently, the environmental industry has experienced a
slowdown in the enforcement of such government regulation at the federal and
state level based upon a number of factors, including available funding.
Although the Company believes that the environmental industry will find
continued but more limited opportunities to grow if the trend towards decreased
actual enforcement of such regulations continues, the business of ENVIRON could
be adversely affected.

Intellectual Property

         PPD Pharmaco has developed certain computer software and technically
derived procedures intended to maximize the quality and efficiency of its
services. Although the Company does not believe that its intellectual property
rights are as important to its results of operations as are such factors as the
technical expertise, knowledge, ability and experience of the Company's
professionals, the Company believes that its technological capabilities provide
significant benefits to its clients.

Employees

         At December 31, 1996, the Company had approximately 2,264 full-time
equivalent employees, of whom 1,869 were employed in the Life Sciences Group,
375 were employed in the Environmental Sciences Group and the remainder were in
the Company's corporate headquarters. Of the Company's employees, approximately
99 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 250 hold other
masters or postgraduate degrees. None of the Company's employees is represented
by a labor union or is subject to a collective bargaining agreement. The Company
has never had a work stoppage and believes that its relations with its employees
are good.

         The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. The Company believes that
its employee benefit plans enhance employee morale, professional commitment and
work productivity and provide an incentive for employees to remain with the
Company. The Company, like many of its competitors, also relies on a number of
key executives. The loss of services of any of the Company's key executives
could have a material and adverse effect on the Company. While the Company has
not experienced any significant problems in attracting or retaining qualified
staff, there can be no assurance that the Company will be able to avoid such
problems in the future.

Foreign and Domestic Operations

         Set forth in Note 18 of Notes to Consolidated Financial Statements for
each of fiscal years 1996, 1995 and 1994 are the Company's revenue, operating
profit or loss and assets attributable to each geographic area in which the
Company operates.


ITEM 2. PROPERTIES

         The Company's principal executive offices are located in Wilmington,
North Carolina. In March 1996, the Company entered into a new 10-year
build-to-suit lease for approximately 70,000 square feet in Wilmington, which it
occupied in November 1996.

         The Company owns and operates a 52-bed Phase I facility in Leicester,
England. The facility, which was acquired by the Company in November 1995, is a
modern, state-of-the-art building. The Company also owns a building in Kerswell,
Scotland, which it acquired when it purchased DAR in December 1996. All other
facilities are leased. The Company's operations occupy approximately 635,000
square feet of space worldwide, including over 70,000 square feet of space
located outside of the U.S. The Company believes that its facilities have
adequate capacity to handle significant additional business growth. The
locations of the Company's operating facilities as of December 31, 1996, were as
follows:





                                       16
<PAGE>   18


Life Sciences Group
-------------------
         Wilmington, North Carolina                 Kerswell, Scotland
         Austin, Texas (1)                          Sao Paolo, Brazil
         Raleigh, North Carolina                    Brussels, Belgium
         Triangle Township, North Carolina          Prague, Czech Republic
         Richmond, Virginia                         Paris, France
         Madison, Wisconsin                         Karlsruhe, Germany
         Chicago, Illinois                          Nuremberg, Germany
         Columbia, Maryland                         Warsaw, Poland
         Cambridge, England                         Johannesburg, South Africa
         Chelmsford, England                        Barcelona, Spain
         Leicester, England                         Madrid, Spain
         Southampton, England                       Stockholm, Sweden

Environmental Sciences Group
----------------------------
         Arlington, Virginia (2)                    Houston, Texas
         Princeton, New Jersey                      London, England
         Emeryville, California                     Liverpool, England
         Irvine, California                         Edinburgh, Scotland
         Novato, California

--------------
(1)  In November 1995, the Company entered into a sale-leaseback transaction
     related to its Austin, Texas, facilities. See Note 10 of Notes to
     Consolidated Financial Statements.

(2)  ENVIRON has an option to lease additional space in this building in 1998.


ITEM 3. LEGAL PROCEEDINGS.

         In the normal course of business, the Company is a party to various
claims and legal proceedings. Although the ultimate outcome of these matters is
presently not determined, 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 or results of operations.

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, 1996.




                                       17
<PAGE>   19



EXECUTIVE OFFICERS

         The executive officers of the Company as of December 31, 1996, were as
follows:

<TABLE>
<CAPTION>
                Name                        Age                       Position
                ----                        ---                       --------

<S>                                         <C>      <C>
   Fredric N. Eshelman, Pharm.D.            48       Vice Chairman and Chief Executive Officer

   Thomas D'Alonzo                          53       President and Chief Operating Officer

   Rudy C. Howard                           39       Chief Financial Officer, Vice President of Finance, Treasurer
                                                         and Secretary

   Joshua S. Baker                          41       Senior Vice President, Operations, PPD Pharmaco, Inc.

   Joseph H. Highland                       52       Chief Executive Officer, APBI Environmental Sciences
                                                         Group, Inc.

   Fred B. Davenport, Jr.                   45       General Counsel

</TABLE>

         Fredric N. Eshelman, Pharm.D. has served as Chief Executive Officer and
as a director of the Company since July 1990. Dr. Eshelman founded the Company 
in 1989. Prior to rejoining the Company in 1990, Dr. Eshelman served as Senior
Vice President, Development and as a director of Glaxo Inc., a subsidiary of
Glaxo Holdings plc.

         Thomas D'Alonzo is President and Chief Operating Officer of the Company
and of its contract research organization subsidiary, PPD Pharmaco, Inc. Mr.
D'Alonzo served as General Counsel of Adria Laboratories, a pharmaceutical
company, from 1977 to 1983 and was employed from 1983 to 1993, in various
capacities, including as President, by Glaxo Inc., a subsidiary of Glaxo
Holdings plc. Mr. D'Alonzo was President of GenVec, Inc., a gene therapy
biotechnology company, from 1993 until his employment by the Company in October
1996.

         Rudy C. Howard is Chief Financial Officer, Vice President Finance and
Treasurer of the Company. Prior to joining the Company in October 1995, Mr.
Howard worked with Coopers & Lybrand L.L.P., an accounting firm, since 1990 and
had been a Partner at Coopers & Lybrand L.L.P. since 1993.

         Joshua S. Baker, Ph.D. is Senior Vice President, Operations of PPD
Pharmaco, Inc., the Company's contract research organization subsidiary. Prior
to holding this position, Dr. Baker served as Vice President, Biostatistics and
Data Management of the Company. Prior to joining the Company in May 1994, Dr.
Baker served as Director of Biostatistics of Glaxo Research Institute, the
research and development division of Glaxo Inc., a position he had held since
September 1987.

         Joseph H. Highland co-founded ENVIRON in 1982. He is currently the
Chief Executive Officer of ENVIRON and has served as such since February 1992.
Dr. Highland also served as a director of APBI from 1990 to 1995. Dr. Highland,
who holds a Ph.D. in Biochemistry from the University of Minnesota's School of
Medicine, served as co-director for the Hazardous Waste Research Program at
Princeton University before joining ENVIRON.

         Fred B. Davenport, Jr. is General Counsel, Vice President Legal Affairs
and Secretary of the Company. Prior to his employment by the Company 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.


                                       18
<PAGE>   20


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS.

         The Common Stock of the Company, par value $0.10 per share (the "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 ("NASDAQ"). The following table sets forth
the high and low prices for shares of the Common Stock subsequent to the
Company's initial public offering, as reported by the National Association of
Securities Dealers, Inc.

<TABLE>
<CAPTION>
                                                             1996
                                                    ---------------------
                                                     High           Low
                                                     ----           ---
<S>           <C>                                   <C>            <C>   
First Quarter (1)                                   $37.25         $22.75
Second Quarter                                       47.75          33.25
Third Quarter                                        34.50          26.50
Fourth Quarter                                       27.50          14.50
</TABLE>

----------
(1)      From January 23, 1996, the effective date of PPD's initial public
         offering

         As of March 10, 1997, there were approximately 3,371 record holders 
of the Company's Common Stock.

         Since its conversion from an S corporation, the Company has not paid
any cash dividends on its Common Stock. The Company has no present plans to pay
cash dividends to its stockholders and, for the foreseeable future, intends to
retain all of its earnings for use in its business. The declaration of any
future dividends by the Company is within the discretion of its Board of
Directors and is dependent upon the earnings, financial condition and capital
requirements of the Company, as well as any other factors deemed relevant by the
Board of Directors.


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

         The selected consolidated financial data presented below for the year
ended December 31, 1996, have been derived from the audited consolidated
financial statements of the Company, which have been audited by Coopers &
Lybrand L.L.P., independent public accountants. The data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Company's consolidated
financial statements and related notes thereto included elsewhere in this
Report.

         On September 26, 1996, a wholly owned subsidiary of the Company was
merged with and into APBI, pursuant to which APBI became a wholly owned
subsidiary of the Company. The transaction was accounted for as a pooling of
interests. The Company's financial results for each of the years ended December
31, 1992 through December 31, 1995 have been restated to reflect the transaction
as if it had occurred at the beginning of the periods being presented. The
financial results of PPD for each of the years ended December 31, 1992 through
December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent
public accountants. The financial results of APBI for each of the years ended
December 31, 1992 through December 31, 1995 have been audited by Arthur Andersen
LLP, independent public accountants. The combination of the selected
consolidated financial data for each of the years ended December 31, 1992
through December 31, 1995, after restatement for the pooling of interests, has
been audited by Coopers & Lybrand L.L.P., independent public accountants.

         The Company's consolidated financial data reflects certain of its
former Environmental Sciences Group divisions as discontinued operations. See
Note 4 of Notes to Consolidated Financial Statements.



                                       19
<PAGE>   21




<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                             ---------------------------------------------------------------------------------
                                               1996 (4)        1995 (4)            1994           1993               1992 (4)
                                             -----------      -----------       ----------     -----------         -----------
                                                                  (in thousands, except per share data)
<S>                                            <C>             <C>             <C>             <C>                   <C>      
Consolidated Statement of Operations Data:
Net revenue (8)                                $ 197,796       $ 209,778       $ 192,105       $ 165,815             $ 162,330
                                               ---------       ---------       ---------       ---------             ---------
Operating expenses                               182,859         200,022         181,120         169,014               135,984
Loss on sale of business, special charges,
 restructuring costs and merger costs             16,114          24,290            --             9,365                 7,623
                                               ---------       ---------       ---------       ---------             ---------
                                                 198,973         224,312         181,120         178,379               143,607
                                               ---------       ---------       ---------       ---------             ---------
Income (loss) from operations                     (1,177)        (14,534)         10,985         (12,564)               18,723
Other income (expense), net                        1,804          (2,616)         (2,728)         (1,183)               (3,622)
                                               ---------       ---------       ---------       ---------             ---------
Income (loss) from continuing operations
 before provision for income taxes                   627         (17,150)          8,257         (13,747)               15,101
                                                               ---------       ---------       ---------             ---------
Provision for income taxes                         4,134
                                               ---------
Net loss (7)                                      (3,507)
                                               ---------
Weighted average number of shares
 outstanding                                      21,168
                                               ---------
Net loss per share                             $   (0.17)
                                               ---------

Pro Forma Data (1):
Income (loss) from continuing operations
 before provision for income taxes                               (17,150)          8,257         (13,747)               15,101
Pro forma income tax expense (benefit)                           (14,359)          3,371          (2,001)                6,936
                                                               ---------       ---------       ---------             ---------
Pro forma net income (loss) from
 continuing operations (3)(5)(6)                                  (2,791)          4,886         (11,746)                8,165
Discontinued operations                                           (1,716)        (12,873)        (12,133)                 (521)
Extraordinary loss from early
 extinguishment of debt                                             (897)           --              --                    --
                                                               ---------       ---------       ---------             ---------
Pro forma net income (loss)                                    $  (5,404)      $  (7,987)      $ (23,879)            $   7,644
                                                               ---------       ---------       ---------             ---------
Pro forma weighted average number of
 shares outstanding (2)                                           18,815          18,671          18,409                18,919
                                                               ---------       ---------       ---------             ---------
Pro forma net income (loss) per share:
  Continuing                                                   $   (0.15)      $    0.26       $   (0.64)            $    0.43
  Discontinued                                                     (0.09)          (0.69)          (0.66)                (0.03)
  Extraordinary                                                    (0.05)           --              --                    --
                                                               ---------       ---------       ---------             ---------
  Net income (loss)                                            $   (0.29)      $   (0.43)      $   (1.30)            $    0.40
                                                               =========       =========       =========             =========
</TABLE>


<TABLE>
<CAPTION>
                                                                            As of December 31,
                                             ---------------------------------------------------------------------------------
                                               1996 (4)        1995 (4)            1994           1993             1992 (3)(4)
                                             -----------      -----------       ----------     -----------         -----------
                                                                              (in thousands)
<S>                                            <C>             <C>             <C>             <C>                   <C>      
Consolidated Balance Sheet Data:
Cash and cash equivalents                     $   21,838       $  13,565       $   9,804       $  14,854             $  15,700
Marketable securities                             14,210             242             203             --                    --
Working capital                                   66,603          37,320          27,795            (565)               37,320
Total assets                                     181,457         142,661         202,773         195,492               198,801
Long-term debt                                     1,428           3,471          47,620          15,411                15,137
Long-term debt including current portion           5,649           5,672          51,170          19,943                15,888
Shareholders' equity                             115,306          77,300          74,198          79,065               112,294
</TABLE>

----------
(1)      Following termination of its status as an S corporation prior to
         completion of its initial public offering in January 1996, PPD became
         subject to federal and state income taxes. The pro forma data reflect
         the application of corporate income taxes to PPD's net income at the
         statutory combined federal and state tax rate as if the termination of
         PPD's S corporation status had occurred on January 1, 1992. 

(2)      Pro forma weighted average shares outstanding assumes the occurrence of
         events pursuant to PPD's initial public offering and the issuance of
         sufficient shares at $18.00 per share to provide net proceeds, after
         aggregate offering expenses and underwriting discounts, to repay the
         $5.5 million debt incurred by PPD in making the final S corporation
         distribution.


                                       20
<PAGE>   22

(3)      The pro forma income from continuing operations for 1992 was affected
         by (i) a charge against operating income of $7,623,000 in connection
         with the restructuring of APBI's business following the acquisition of
         Pharmaco, (ii) the incurrence of $4,296,000 of merger costs in
         connection with the acquisition of Pharmaco, (iii) a gain of $338,000
         constituting a discount for early payment of a mortgage, (iv) the
         acquisition of certain assets of EDI in July 1992, which was accounted
         for as a purchase transaction and (v) an increase in APBI's effective
         tax rate as a result of the fact that certain merger costs incurred in
         connection with the acquisition of Pharmaco were not deductible for tax
         purposes.

(4)      The acquisitions of Trilife, Medisys, Q&Q, DAR and EAG in 1996; Gabbay
         and CCCR in 1995 and the acquisition by ETC of certain assets of
         Southeastern Capital Corporation in June 1992 were accounted for as
         purchase transactions.

(5)      The pro forma loss from continuing operations for 1993 was affected by
         (i) a charge against operating income of $9,365,000 in connection with
         restructuring APBI's former toxicology services division and planned
         improvements in APBI's corporate management information systems and
         (ii) an increase in reserves for accounts receivable of $5,857,000.

(6)      The pro forma loss from continuing operations for 1995 was affected by
         (i) the sale of APBI's toxicology business which resulted in a pre-tax
         loss of $19,308,000 charged against operating income, (ii) a special
         charge against operating income of $4,982,000 primarily related to the
         impairment of APBI's available for sale investment (see Note 1 of Notes
         to Consolidated Financial Statements) and (iii) an increase in APBI's
         tax benefit as a result of the reversal of certain tax liabilities
         recorded in prior years for which APBI will not be liable for payment.
         See Note 3 of Notes to Consolidated Financial Statements and
         "Management's Discussion and Analysis of Financial Condition and
         Results of Operations."

(7)      The net loss for 1996 was affected by the incurrence of $16,114,000 of
         merger costs in connection with the acquisition of APBI. After
         associated tax benefits, the impact on net income of such merger costs
         was $13,568,000.

(8)      Net of subcontractor costs. 


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


         Statements in this Management's Discussion and Analysis that are not
descriptions of historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 reflecting
management's current view with respect to certain future events and financial
performance that 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 the Company's other SEC filings, and
including, in particular, risks relating to government regulation; dependence on
certain industries; fixed price nature of contracts; the commencement,
completion or cancellation of large contracts; progress of ongoing contracts;
potential liability associated with the Company's lines of business; dependence
on personnel; management of growth and competition. Since a large percentage of
the Company's operating costs are relatively fixed, variations in the timing and
progress of large contracts can materially affect results.

GENERAL

         During 1996, the Company reported a net loss of $3.5 million, or $0.17
per share, compared to a pro forma net loss of $5.4 million, or $0.29 per share,
during 1995. The Company's loss in 1996 is attributable to the $16.1 million of
costs recorded that were associated with the Company's acquisition of APBI.
Excluding merger costs, the Company's net income of $10.1 million, or $0.48 per
share, was 102.6% higher than pro forma net income (before the impact of 1995
special charges and excluding the Company's former toxicology operations) last
year of $5.0 million.

         In September 1996, a wholly-owned subsidiary of the Company was merged
with and into APBI in a pooling-of-interests transaction. As a result, APBI
became a wholly-owned subsidiary of the Company. Under the terms of the merger
agreement, APBI stockholders received 0.4054 of a share of the Company's Common
Stock for each APBI share, which resulted in the Company issuing 12,063,860
shares of its Common Stock in exchange for all of the outstanding shares of
Common Stock of APBI. The Company's financial results have been restated to
reflect the transaction as if it had occurred at the beginning of the periods
presented.

RESULTS OF OPERATIONS

         The following tables set forth, for the periods indicated, amounts for
certain items in the Company's 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:


                                       21
<PAGE>   23



              PERCENTAGE OF NET REVENUE FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
                                                                 For the Year Ended December 31,
                                                1996                              1995                        1994
                                       -----------------------       -----------------------      -------------------------
                                         Amount            %          Amount              %        Amount             %
                                         ------           ---         ------             ---       ------            ---
                                                                      (dollars in thousands)
<S>                                    <C>               <C>         <C>                <C>       <C>                <C>  
Net revenue (4):
   Life sciences                       $ 152,304         77.0%       $ 160,495          76.5%     $ 146,342          76.2%
   Environmental sciences                 45,492         23.0           49,283          23.5         45,763          23.8
                                       ---------        -----        ---------         -----      ---------         -----
                                         197,796        100.0          209,778         100.0        192,105         100.0
Direct costs:
   Life sciences                          79,108                        90,315                       86,647
   Environmental sciences                 31,744                        32,442                       28,670
                                       ---------                     ---------                    ---------
                                         110,852         56.0          122,757          58.5        115,317          60.0
Selling, general, and
 administrative expenses                  61,571         31.1           64,014          30.5         55,428          28.9
Depreciation and amortization             10,436          5.3           13,251           6.3         10,375           5.4
Loss on sale of business                    --           --             19,308           9.2           --            --
Merger costs and special charges          16,114          8.1            4,982           2.4           --            --
                                       ---------        -----        ---------         -----      ---------         -----
Operating income (loss) (2)(3)            (1,177)        (0.6)         (14,534)         (6.9)        10,985           5.7
                                       ---------        -----        ---------         -----      ---------         -----
Net loss                               $  (3,507)        (1.8)%
                                       ---------        -----
Pro forma income (loss) from (1):
   Continuing operations                                                (2,791)         (1.3)         4,886           2.5
   Discontinued operations                                              (1,716)         (0.8)       (12,873)         (6.7)
   Extraordinary loss                                                     (897)         (0.4)          --            --
                                                                     ---------         -----      ---------         -----
Pro forma net loss                                                   $  (5,404)         (2.6)%    $  (7,987)         (4.2)%
                                                                     ---------         -----      ---------         -----
</TABLE>

<TABLE>
<CAPTION>
                                                        Percentage of Increase (Decrease)
                                                         For the Year Ended December 31,
                                                       -----------------------------------
                                                       1996 vs. 1995 (5)     1995 vs. 1994
                                                       -----------------     -------------
<S>                                                          <C>                 <C> 
         Net revenue (4):                                                            
              Life sciences                                  (5.1)%              9.7%
              Environmental sciences                         (7.7)               7.7 
         Direct costs:                                                               
              Life sciences                                 (12.4)               4.2 
              Environmental sciences                         (2.2)              13.2 
         Selling, general and administrative expenses        (3.8)              15.5 
         Depreciation and amortization                      (21.2)              27.7 
         Operating income (loss) (6)                          N/A                N/A 
</TABLE>                                                                       

(1)      Following termination of its status as an S corporation prior to
         completion of its initial public offering in January 1996, PPD became
         subject to federal and state income taxes. The pro forma data reflect
         the application of corporate income taxes to PPD's net income at the
         statutory combined federal and state tax rate as if the termination of
         PPD's S corporation status had occurred on January 1, 1994.

(2)      The operating loss for 1995 was affected by (i) the sale of APBI's
         toxicology operations which resulted in a pre-tax loss of $19,308,000
         and (ii) a special charge against operating income of $4,982,000
         primarily related to the impairment of APBI's available for sale
         investment. See Note 1 of Notes to Consolidated Financial Statements.

(3)      The operating loss for 1996 was affected by the incurrence of
         $16,114,000 of merger costs in connection with the acquisition of APBI.

(4)      Net of subcontractor costs.

(5)      The results from 1995 include the activity of APBI's toxicology
         operations which were sold in November 1995. See Note 3 of Notes to
         Consolidated Financial Statements.

(6)      N/A - Change not meaningful.




                                       22
<PAGE>   24



         Below is a comparison of 1996 and 1995 operating statements which 
reflects only on-going operations and excludes 1996 merger costs and 1995
non-recurring charges.

                          STATEMENT OF OPERATIONS DATA
                   EXCLUDES APBI/PPDI MERGER COSTS IN 1996 AND
        SPECIAL CHARGES, TOXICOLOGY OPERATIONS (SOLD 11/95), DISCONTINUED
                   OPERATIONS AND EXTRAORDINARY LOSS IN 1995
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                 YEAR ENDED          PERCENTAGE CHANGE
                                                                DECEMBER 31,         -----------------
                                                            1996           1995
                                                            ----           ----
<S>                                                       <C>           <C>                  <C>  
Net revenue:
  Life sciences                                           $152,304       $122,049            24.8%
  Environmental sciences                                    45,492         49,283            (7.7)
                                                          --------       --------         
  Total net revenue                                        197,796        171,332            15.4
Direct costs:
  Life sciences                                             79,108         62,839            25.9
  Environmental sciences                                    31,744         32,442             2.1
                                                          --------       --------         
  Total direct costs                                       110,852         95,281            16.3
                                                          --------       --------         
Gross margin                                                86,944         76,051            14.3

Selling, general and administrative expenses                61,571         56,391             9.2

Depreciation and amortization                               10,436          8,768            19.0
                                                          --------       --------         
Income from operations                                      14,937         10,892            37.1

Other income (expense), net                                  1,804         (2,616)           N/A
                                                          --------       --------         

Income before taxes                                         16,741          8,276           102.3
Income tax provision                                         6,680          3,310           101.8
                                                          --------       --------         

Net income                                                $ 10,061       $  4,966           102.6%
                                                          ========       ========         =======


Net income per share                                      $   0.48       $   0.26
                                                          ========       ========   
Weighted average number of common shares outstanding        21,168         18,815
                                                          ========       ========   
</TABLE>



YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995


         Net revenue decreased $12.0 million, or 5.7%, to $197.8 million in 1996
from $209.8 million last year. PPD Pharmaco's operations account for 77.0% of
the Company's net revenue for 1996. PPD Pharmaco generated net revenue of $152.3
million, down $8.2 million, or 5.1%, from last year. After elimination of the
net revenue from APBI's former toxicology operations, which were sold in
November 1995 ($38.4 million in 1995), net revenue increased 15.4% as compared
to 1995. Results of operations which exclude the results of the divested
businesses are considered the results of the Company's ongoing operations.


         Net revenue for the year ended December 31, 1996, from the ongoing PPD
Pharmaco operations of $152.3 million reflects an increase of $30.2 million, or
24.8%, from 1995. The growth in ongoing PPD Pharmaco operations was


                                       23
<PAGE>   25





due in part to an increase in the size, scope and number of contracts in the
North America clinical development and biostatistics business. The acquisitions
of CCCR and the Phase I facility in Leicester, England, both completed in the
second half of 1995, contributed net revenue of $10.8 million for the year,
representing an increase over 1995 of $8.5 million.

         Net revenue from ENVIRON, the Company's environmental consulting
organization, representing 23.0% of the Company's net revenue for 1996, was
$45.4 million, compared with $49.3 million in 1995, a decrease of 7.7%, or $3.8
million. The Company believes that the decrease in net revenue at ENVIRON, the
Company's environmental consulting business and the sole ongoing operation in
the Environmental Sciences Group, is due principally to an overall weakness in
the environmental services market.

         Total direct costs decreased 9.7% to $110.9 million from $122.8 million
last year and declined as a percentage of net revenue to 56.0% from 58.5% last
year. PPD Pharmaco direct costs decreased as a percentage of related net revenue
to 51.9% from 56.3%. The decrease in direct costs is principally due to the
divestiture of APBI's toxicology business in the fourth quarter of 1995. During
1995, the worldwide toxicology business reported direct costs of $27.5 million,
or 71.5%, of related net revenue. ENVIRON's direct costs as a percentage of
related net revenue increased to 69.8% from 65.8% last year. The increase in
direct costs as a percentage of related net revenue is attributable to lower
consultant utilization. ENVIRON's 1996 consultant utilization of 71.0% was 5.0
percentage points below the 76.0% utilization during the prior year.

         Selling, general and administrative ("SG&A") expenses decreased 3.8% to
$61.6 million from $64.0 million in 1995. As a percentage of net revenue, SG&A
expenses increased to 31.1% from 30.5% last year. After factoring out the SG&A
expenses associated with the divested toxicology business last year ($7.6
million), consolidated SG&A expenses increased approximately 9.2%, or $5.2
million, for this year as compared to 1995. SG&A expenses from CCCR and the
Leicester Phase I laboratory comprise $2.0 million of the increase, and the
Company has incurred incremental rent expense of $1.2 million associated with
the sale-leaseback of its real estate in Austin, Texas (this increase is
partially offset by lower interest expense). The remaining increase of $2.0
million is primarily attributable to the investment in the Company's business
development and marketing organization and in the area of information
technology, as well as higher litigation costs incurred associated with
ENVIRON's air quality practice. As a percentage of ongoing net revenue, SG&A
expenses decreased to 31.1% from 32.9% last year.

         Total depreciation and amortization expense of $10.4 million was $2.8
million, or 21.2%, lower than last year. After adjusting out the depreciation
for the divested toxicology business ($4.5 million), total depreciation and
amortization increased $1.7 million, or 19.0%, versus last year. The increase
was related to the Company's growth as well as the ongoing capital investment in
the Company's base business.

         The Company recorded one-time merger costs of $16.9 million in the
third quarter of 1996. These costs are primarily current and future cash
expenses, such as investment banking fees and legal and accounting fees, as well
as severance provisions as a result of the integration of the administrative
functions of PPD and APBI. During the fourth quarter, approximately $0.8 million
of these costs were reversed, primarily relating to severance costs that were
avoided and reductions in net losses on leases for duplicate facilities.

         APBI recorded a charge of $19.3 million in 1995 relating to the book
loss on the sale of the toxicology business in the fourth quarter of last year.
Of that amount, $17.0 million represents a non-cash write off of the net assets
of the divested businesses in excess of the proceeds received from Huntingdon.
The remaining $2.3 million charge recorded consists of $1.2 million of
transaction costs, $1.3 million of severance costs and relocation costs
associated with moving the European headquarters from Suffolk, England, to
Cambridge, England, and $0.6 million to be incurred in connection with changing
the name of Pharmaco to Pharmaco International Inc., net of a $0.8 million gain
recorded as a result of the settlement of the Company's defined benefit pension
plan.

         APBI also recorded special charges of $5.0 million in the fourth
quarter of 1995. Included in this charge was a $3.4 million non-cash expense to
write down to market APBI's EnSys investment and the write-off of other
nonproductive assets. In addition, APBI recorded severance charges totaling $1.2
million relating to the downsizing of its corporate overhead structure. The
remaining $0.4 million relates primarily to accrued lease loss reserves related
to under-utilization of the Richmond laboratory facility.





                                       24
<PAGE>   26




         Operating income improved $13.3 million to an operating loss of 
$1.2 million for the year ended December 31, 1996, as compared to an operating
loss of $14.5 million for the year 1995. As a percentage of net revenue, the
yearly operating loss of 0.6% represents a dramatic improvement from the
operating loss of 6.9% of net revenue last year.

         Other income (expense) improved by $4.4 million, increasing to $1.8
million in income for the year as compared to $2.6 million in expense last year.
The favorable change is attributable to funds received in connection with the
PPD initial public offering and the significant change in the Company's debt
structure this year versus last year. See "Liquidity and Capital Resources."

         The net loss of $3.5 million represents an improvement of $1.9 million.
The net loss per share of $0.17 compares to pro forma net loss per share of
$0.29 last year. Excluding the results of the divested businesses and the impact
of the merger costs and special charges on both years, the Company's net income
of $10.1 million is 102.6% higher than last year's pro forma net income of $5.0
million. On an equivalent earnings-per-share basis the net income per share of
$0.48 compares to $0.26 for the same period last year computed on 2.4 million
less shares outstanding.

YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994

         Net revenue for 1995 increased $17.7 million, or 9.2%, to $209.8
million in 1995 from $192.1 million in 1994. The Company's CRO divisions
generated 76.5% of the Company's net revenue in the year, which equated to net
revenue of $160.5 million, up $14.2 million, or 9.7%, from the previous year.
Net revenue from ENVIRON, representing 23.5% of the Company's net revenue in
1995, was $49.3 million, compared with $45.8 million in 1994, an increase of
7.7%, or $3.5 million.

         After elimination of the net revenue from APBI's former toxicology
operations ($38.4 million for 1995 and $46.4 million in 1994), in 1995 net
revenue increased 17.6% as compared to 1994.

         For the year ended December 31, 1995, net revenue from PPD Pharmaco was
$160.5 million, an increase of 9.7% from 1994. The growth in this business unit
was due in part to an increase in the size, scope and number of contracts in the
North America clinical development and biostatistics business. The acquisitions
of CCCR and the Phase I facility in Leicester, England, both completed in the
second half of 1995, contributed net revenue of $2.3 million for the last half
of 1995.

         Total direct costs increased 6.5% in 1995 to $122.8 million from $115.3
million in 1994 but decreased as a percentage of net revenue to 58.5% from
60.0%. In PPD Pharmaco, direct costs decreased as a percentage of related net
revenue to 56.3% from 59.2%. The decrease in direct costs was principally due to
the divestiture of APBI's toxicology business in the fourth quarter of 1995.
During 1995, the toxicology business reported direct costs of $27.5 million, or
71.5% of related net revenue, as compared to $33.3 million, or 71.8% of related
net revenue, in 1994. ENVIRON's direct costs as a percentage of related net
revenue increased to 65.8% from 62.6% in the prior year. The increase in direct
costs as a percentage of related net revenue was primarily attributable to the
start-up of the new Marin County office in California.

         1995's SG&A expenses increased 15.5% to $64.0 million from $55.4
million in 1994. As a percentage of net revenue, SG&A expenses increased to
30.5% from 28.9% the preceding year. Incremental SG&A expenses from CCCR and the
Leicester Phase I laboratory comprised $0.9 million of the increase. The
remaining increase of $7.7 million was primarily attributable to increases in
business development expenses in Austin and Wilmington, administrative staffing
at the executive and middle-management levels and the number of employees in
finance, human resources and other administrative areas, reflecting the
continued growth of the Company.

         Total depreciation and amortization expense of $13.3 million was $2.9
million, or 27.7%, higher than in the previous year. After adjusting out the
depreciation for the divested toxicology business ($4.5 million in 1995 and $3.3
million in 1994), total depreciation and amortization increased $1.7 million, or
23.6%, versus in 1994. The increase was related to the significant increases in
the Company's operations and amortization of goodwill related to acquisitions.

         The operating loss of $14.5 million in 1995, 6.9% of net revenue, was
adversely impacted by a $24.3 million charge relating to the book loss on the
sale of the toxicology business ($19.3 million) in the fourth quarter and other


                                       25
<PAGE>   27




special charges ($5.0 million). Included in this charge was a $3.4 million
non-cash expense to write down to market the Company's EnSys investment and the
write-off of other non-productive assets. In addition, the Company recorded
severance charges totaling $1.2 million relating to the downsizing of its
corporate overhead structure. The remaining $0.4 million relates primarily to
accrued lease loss reserves related to underutilization of the Richmond
laboratory facility. After adjusting for the one-time charges in 1995, operating
income of $9.8 million, 4.7% of net revenue, was $1.2 million less than the
comparable operating income of $11.0 million, 5.7% of net revenue, in 1994.

         The pro forma net loss in 1995 of $5.4 million represents a favorable
change of $2.6 million as compared to 1994's pro forma net loss. The 1995 pro
forma net loss per share of $0.29 compares to pro forma net loss per share of
$0.43 in 1994.


LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1996, the Company had $21.8 million of cash and cash
equivalents on hand and $14.2 million invested in marketable securities. The
Company has historically funded its operations and growth, including
acquisitions, with cash flow from operations and borrowings. In January 1996,
PPD completed an initial public offering of its common stock. Proceeds of the
offering, after expenses, were approximately $37.2 million and a portion thereof
was used to repay a $5.5 million loan.

         For the year ended December 31, 1996, the Company experienced a net
increase in cash from operating activities of $0.3 million. Capital expenditures
totaled $11.2 million. Net proceeds from the Company's initial public offering,
combined with proceeds from stock option exercises, totaled $42.9 million. The
Company used $5.9 million in cash to pay dividends declared in connection with
the Company's revocation of its S corporation election, effective January 1,
1996, and used $13.8 million of cash to increase its holdings of marketable
securities.

         In February 1996, the Company renegotiated a new credit facility with
Wachovia Bank of North Carolina, N.A. The new facility consists of a $10.0
million line of credit with an additional discretionary line of credit for $20
million. Terms on the $10.0 million line are for one year, with interest at
LIBOR plus 120 basis points, or the Bank's Prime rate, at the Company's option,
with interest payable quarterly. Indebtedness under the line is unsecured and
subject to certain covenants relating to financial ratios and tangible net
worth. As of December 31, 1996, the Company owed $3.3 million under this
facility.

         In February 1995, APBI arranged a $3.0 million master-lease agreement
to provide a means to lease, rather than acquire, certain equipment for use in
the United States without drawing on its principal credit facility.

         The Company completed a sale-leaseback transaction involving owned real
estate in Austin, Texas, in November 1995. Total gross proceeds from the
transaction were $12.0 million. The facilities are leased to the Company as a
bond-type net lease with all responsibility of operations and maintenance
residing with the Company. The initial term of the operating lease is 15 years
followed by four five-year renewal options. The future minimum annual rent is
$1.3 million with renewals at the then current market value. The net proceeds
from the sale-leaseback transaction were used to repay the remaining mortgage
balance on the referenced properties and the remaining cash was applied to
APBI's revolving line of credit (which has since been terminated).

         The Company expects to continue expanding its operations through
internal growth and strategic acquisitions. The Company expects such activities
will be funded from existing cash and marketable securities, cash flow from
operations and borrowings under its credit facility. The Company believes that
such sources of cash will be sufficient to fund the Company's current operations
for the foreseeable future. The Company is currently evaluating a number of
acquisition and other growth opportunities which may require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities.

EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS

         The vast majority of the Company's contracts are entered into by the
Company's United States or United Kingdom subsidiaries. The contracts entered
into by the United States subsidiaries are almost always denominated in United
States dollars.


                                       26
<PAGE>   28





         Contracts between the Company's United Kingdom subsidiaries and their
clients are generally denominated in pounds sterling. Because substantially all
of the United Kingdom subsidiaries' expenses, such as salaries, services,
materials and supplies, are paid in pounds sterling, such subsidiaries' earnings
are not materially affected by fluctuations in exchange rates. However, the
Company's consolidated financial statements are denominated in dollars and,
accordingly, changes in the exchange rate between the pound sterling and the
dollar will affect the translation of such subsidiaries' financial results into
dollars for purposes of reporting the Company's consolidated financial results,
and also affect the dollar amounts actually received by the Company from such
subsidiaries.

         Approximately 11.4% of the Company's net revenue was generated by its
European, South African and South American clinical development services
businesses, primarily in the United Kingdom, Belgium, France and Germany. As a
result of the Company's sale of its toxicology operations, the percentage of the
Company's revenue recorded in currencies other than United States dollars was
significantly lower in 1996 than in 1995. However, because the Company is
currently expanding its foreign operations, it is anticipated that the
percentage of the Company's net revenue denominated in foreign currencies may
increase in the future.

         There are no exchange controls currently in effect in any country in
which the Company's subsidiaries conduct operations on the payment of dividends
or otherwise restricting the transfer of funds outside such countries by a
company resident in such countries. Although the Company performs services for
clients located in a number of foreign jurisdictions, to date, the Company has
not experienced any difficulties in receiving funds remitted from foreign
countries. However, if any such jurisdictions were to impose or modify existing
exchange control restrictions on the remittance of funds to the Company, such
restrictions could have an adverse effect on the Company's business.

POTENTIAL VOLATILITY OF QUARTERLY OPERATING RESULTS AND STOCK PRICE

         The Company's quarterly operating results are subject to volatility due
to such factors as the commencement, completion or cancellation of large
contracts, progress of ongoing contracts, acquisitions, the timing of start-up
expenses for new offices, management of growth and changes in the mix of
services. Since a large percentage of the Company's operating costs are
relatively fixed, variations in the timing and progress of large contracts can
materially affect quarterly results. To the extent the Company's international
business increases, exchange rate fluctuations may also influence these results.
The Company believes that comparisons of its quarterly financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. However, fluctuations in quarterly results or other factors beyond
the Company's control, such as changes in earnings estimates by analysts, market
conditions in the CRO, environmental, pharmaceutical and biotechnology
industries and general economic conditions, could affect the market price of the
Common Stock in a manner unrelated to the longer-term operating performance of
the Company.


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.


                                       27
<PAGE>   29





                                    PART III

         Certain information required by Part III is omitted from this report,
because the Registrant will file a definitive proxy statement for its 1997
Annual Meeting of Stockholders (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 Concerning the Board of Directors and Its Committees,"
"Other Information - Executive Compensation," "--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.


                                       28
<PAGE>   30

                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)  Financial Statements and Financial Statement Schedules

              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 and
                  Financial Statement Schedule.

              2.  The schedule to the consolidated financial statements of the
                  Company and its subsidiaries filed as part of this Report is
                  listed in the attached Index to Consolidated Financial
                  Statements and Financial Statement Schedule.

              3.  The exhibits filed as part of this Report are listed in Item
                  14c 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 10, 1996, relating to the Company's acquisition
of Applied Bioscience International Inc. The financial statements required by
Item 7 of Form 8-K were incorporated therein by reference to prior Company
filings.

         On November 19, 1996, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission reporting the Company's results for
the month of October 1996.

          (c)  Exhibits

    Exhibit No.                      Description
    -----------                      -----------

       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.

       3.1*     --Restated Articles of Incorporation.

       3.2      --Amended and Restated Bylaws.

       10.1**   --Employment Agreement, dated July 1, 1995, by and between the
                  Registrant and Fredric N. Eshelman.

       10.2**   --Employment Agreement, dated July 1, 1995, by and between the
                  Registrant and Peter J. Wise.

       10.3**   --Employment Agreement, dated October 1, 1995, by and between
                  the Registrant and Rudy C. Howard.

       10.4**   --Plan of Merger to Merge PPD Subsidiary, Inc. with and into
                  PPD-CRU (see Exhibit 2.1).

       10.5**   --Plan of Merger to Merge PPD-Europe with and into the
                  Registrant (see Exhibit 2.2).

       10.6**   --Agreement for the Sale and Purchase of the Whole of the
                  Issued Share Capital of Gabbay Group Limited, dated August 1,
                  1995, by and among Dr. Felicity Jane Gabbay, Professor John
                  Gabbay, Leslie Grant Marshall, Mrs. Elizabeth MacKenzie
                  Marshall, the Registrant, PPD-Europe and Gabbay Group
                  Limited.

       10.7**   --Stock Purchase Agreement, dated May 16, 1994, by and among
                  the Registrant, Wisconsin Analytical and Research Services,
                  Ltd. ("WARS"), Richard Johnson and Richard Charles.

       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, 1995, by
                  and among the Registrant and certain of its shareholders.

       10.11**  --Term Loan Agreement, dated July 14, 1995, among the
                  Registrant, PPD-CRU, Pharmaceutical

                                       29
<PAGE>   31

                  Research Plus, Inc. and Wachovia Bank of North Carolina, N.A.
                  ("Wachovia").

       10.12**  --Note and Security Agreement, dated November 15, 1993, made
                  by the Registrant for the benefit of Wachovia, as amended on
                  July 19, 1995.

       10.13**  --Note and Security Agreement, dated May 16, 1994, made by the
                  Registrant for the benefit of Wachovia, as amended on July 19,
                  1995.

       10.14**  --Note and Security Agreement, dated June 28, 1994, made by
                  PPD-CRU for the benefit of Wachovia, as amended on July 19,
                  1995.

       10.15**  --General Security Agreement, dated January 29, 1991, made by
                  the Registrant for the benefit of Wachovia Bank and Trust
                  Company, N.A.

       10.16**  --Note and Security Agreement, dated May 12, 1994, made by
                  PPD-CRU for the benefit of Wachovia.

       10.17**  --General Security Agreement, dated June 28, 1994, made by
                  PPD-CRU for the benefit of Wachovia.

       10.18**  --General Security Agreement, dated March 5, 1991, made by
                  PPD-CRU for the benefit of Wachovia Bank and Trust Company,
                  N.A.

       10.19**  --Loan Agreement, dated August 11, 1995, among Dr. Felicity
                  Jane Gabbay, Professor John Gabbay and Gabbay Limited.

       10.20**  --Promissory Note, dated August 1, 1995, made by the
                  Registrant and PPD-Europe for the benefit of Felicity Jane
                  Gabbay, John Gabbay, Leslie Grant Marshall and Mrs. E.M.
                  Marshall.

       10.21**  --Lease, dated August 18, 1995, by and between LOI Building,
                  Inc. and the Registrant.

       10.22**  --Lease, dated August 18, 1995, by and between LOI Building,
                  Inc. and the Registrant.

       10.23**  --Sublease Agreement, dated July 6, 1993, by and between
                  United Carolina Bank and the Registrant.

       10.24**  --Sublease Agreement, dated April 14, 1993, by and between
                  United Carolina Bank and the Company.

       10.25**  --Lease, dated June 7, 1993, by and between LOI Building, Inc.
                  and the Registrant, as amended on August 18, 1995.

       10.26**  --Lease, dated May 1, 1994, by and between LOI Building, Inc.
                  and the Registrant, as amended on August 18, 1995.

       10.27**  --Lease, dated November 1, 1990, by and between LOI Building,
                  Inc. and the Registrant, as previously amended and as amended
                  on August 18, 1995.

       10.28**  --Lease, dated February 9, 1993, by and between LOI Building,
                  Inc. and the Registrant, as amended on January 23, 1995 and on
                  August 18, 1995.

       10.29**  --Lease Agreement, dated August 17, 1995, by and between the
                  Registrant and Pinehurst National Development Corporation, as
                  amended on September 29, 1995.

       10.30**  --Lease, dated March 7, 1994, by and among John C. Bullock,
                  Jr. and Jean H. Bullock and the Registrant, as supplemented by
                  the Letter dated April 20, 1995 between John C. Bullock and
                  the Registrant.

       10.31**  --Lease Agreement, dated as of August 1, 1991, by and between
                  Connecticut General Life Insurance Company and the Registrant,
                  as amended on January 5, 1993 and on August 18, 1995.

       10.32**  --Lease Agreement, dated as of February 22, 1995, by and
                  between Perimeter Park West Associates Limited Partnership and
                  the Registrant.

       10.33**  --Lease, dated October 15, 1995, by and between John T.
                  Talbert, Jr., Gary M. Garlow and John T. Talbert, III, d/b/a
                  Tagata Properties and the Registrant.

       10.34**  --Assignment and Assumption of Lease, dated May 17, 1994, by
                  and between WARS and PPD-CRU, with respect to a Lease, dated
                  July 1, 1987, by and between The LAB Associates and WARS.

       10.35**  --Lease, dated January 26, 1994, by and between Michael James
                  Lawton, Jeffrey William Ware, Prudential Nominees Limited and
                  Gabbay Group Limited.

       10.36**  --Lease on Offices, dated October 19, 1993, by and between
                  Eucro European Contract Research GmbH and Gabbay Group Ltd.

       10.37**  --Employment Agreement, dated October 18, 1995, by and between
                  the Registrant and Terrence W. Mischler.

       10.38**  --Lease Agreement, dated as of October 25, 1995, by and
                  between the Registrant and Perimeter Park West Associates
                  Limited Partnership.

       10.39**  --Lease Agreement, dated as of October 25, 1995, by and
                  between PPD-CRU and Perimeter Park West Associates Limited
                  Partnership.

       10.40**  --Note and Security Agreement, dated June 1, 1995 made by the
                  Registrant for the benefit of Wachovia.

       10.41**  --Guaranty Agreement, dated June 10, 1994, made by Ronald B.
                  McNeill for the benefit of Wachovia.

                                       30
<PAGE>   32

       10.42**  --Guaranty Agreement, dated June 10, 1994, made by Ernest
                  Mario for the benefit of Wachovia.

       10.43**  --Guaranty Agreement, dated June 10, 1994, made by John A.
                  McNeill, Jr. for the benefit of Wachovia.

       10.44**  --Guaranty Agreement, dated May 12, 1994, made by Ernest Mario
                  for the benefit of Wachovia.

       10.45**  --Guaranty Agreement, dated May 12, 1994, made by Fred
                  Eshelman for the benefit of Wachovia.

       10.46**  --Guaranty Agreement, dated May 12, 1994, made by Ronald B.
                  McNeill for the benefit of Wachovia. 

       10.47**  --Guaranty Agreement, dated May 12, 1994, made by Peter J. 
                  Wise for the benefit of Wachovia.

       10.48**  --Guaranty Agreement, dated May 12, 1994, made by John A.
                  McNeill, Jr. for the benefit of Wachovia.

       10.49**  --First Amendment to Lease Agreement, dated October 25, 1995,
                  with respect to Lease Agreement dated February 22, 1993, by
                  and between the Registrant and Perimeter Park West Associates
                  Limited Partnership.

       10.50**  --First Amendment to Lease, dated as of September 20, 1995,
                  with respect to Lease dated April 14, 1993, by and between
                  United Carolina Bank and the Registrant.

       10.51**  --First Amendment to Lease, dated as of September 20, 1995,
                  with respect to Lease dated July 6, 1993, by and between
                  United Carolina Bank and the Registrant.

       10.52**  --Assignment of Sublease, dated September 21, 1995 with
                  respect to Sublease dated July 6, 1993, by and among United
                  Carolina Bank, the Registrant and Clinical Investigation
                  Review Board.

       10.53**  --Guaranty Agreement, dated June 10, 1994, made by Fred
                  Eshelman for the benefit of Wachovia.

       10.54**  --Guaranty Agreement, dated June 10, 1994, made by Peter J.
                  Wise for the benefit of Wachovia.

       10.55**  --Lease made January 23, 1996 between PPD-CRU and Western
                  Center Properties, Inc.

       10.56**  --Note dated January 23, 1996, made by the Registrant for the
                  benefit of Wachovia.

       10.57*   --First Amendment to Registration Rights Agreement.

       10.58*   --Shareholder Voting Agreement, dated June 7, 1996.

       10.59*   --First Amendment to Lease Agreement, dated October 25, 1995,
                  between PPD 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.

       10.61*   --Lease Agreement, dated March 25, 1996, between PPD and BBC
                  Family Limited Partnership.

       10.62    --Applied Bioscience International Inc. Employee Stock
                  Purchase Program (1988), incorporated by reference to Exhibit
                  10.1 to Applied Bioscience International Inc.'s Annual Report
                  on Form 10-K for the year ended December 31, 1993.

       10.63    --Pharmaco International Limited Retirement Benefits Scheme
                  and Trust Deed, incorporated by reference to Exhibit 10.2 to
                  Applied Bioscience International Inc.'s Registration Statement
                  on Form S-1 (No. 33-11953).

       10.64    --Applied Bioscience International Inc. Stock Incentive
                  Program (1990), incorporated by reference to Exhibit 10.34 to
                  Applied Bioscience International Inc.'s Annual Report on Form
                  10-K for the year ended December 31, 1990.

       10.65    --APBI Retirement Savings Plan, incorporated by reference to
                  Exhibit 4 to Applied Bioscience International Inc.'s
                  Registration Statement on Form S-8 (No. 33-56678).

       10.66    --Letter Agreement dated September 3, 1993, between Applied
                  Bioscience International Inc. and Stephen L. Waechter,
                  incorporated by reference to Exhibit 10.32 to Applied
                  Bioscience International Inc.'s Amended Annual Report on Form
                  10-K/A for the year ended December 31, 1994.

       10.67    --Letter Agreement dated September 14, 1993, between Applied
                  Bioscience International Inc. and Stephen L. Waechter,
                  incorporated by reference to Exhibit 10.44 to Applied
                  Bioscience International Inc.'s Amended Annual Report on Form
                  10-K/A for the year ended December 31, 1994.

       10.68    --Change of Control Agreement by and between Applied
                  Bioscience International Inc. and Stephen L. Waechter dated as
                  of June 14, 1995, incorporated by reference to Exhibit 10.35
                  to Applied Bioscience International Inc.'s Quarterly Report on
                  Form 10-Q for the period ended September 30, 1995.

     10.69a-69f --Non-statutory Stock Option Agreements by and between
                  Applied Bioscience International Inc. and Grover C. Wrenn
                  dated as of September 19, 1995, incorporated by reference to
                  Exhibits 10.40a-10.40f to Applied Bioscience International
                  Inc.'s Quarterly Report on Form 10-Q for the period ended
                  September 30, 1995.

       10.70    --Purchase Agreement by and between ABI (TX) QRS 12-11, Inc.
                  and Applied Bioscience International Inc., incorporated by
                  reference to Exhibit 10.42 to Applied Bioscience

                                       31
<PAGE>   33

                  International Inc.'s Annual Report on Form 10-K for the year
                  ended December 31, 1995.

       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.

       10.72    --Employment Agreement by and between Applied Bioscience
                  International Inc. and Carol P. Hanna dated January 2, 1996,
                  incorporated by reference to Exhibit 10.45 to Applied
                  Bioscience International Inc.'s Annual Report on Form 10-K for
                  the year ended December 31, 1995.

       10.73    --Change of Control Agreement between Applied Bioscience
                  International Inc. and Stephen L. Waechter, dated as of June
                  18, 1996, incorporated by reference to Exhibit 10.46 to
                  Applied Bioscience International Inc.'s Amended Quarterly
                  Report on Form 10-Q/A for the period ended June 30, 1996.

       10.74    --Change of Control Agreement between Applied Bioscience
                  International Inc. and Carol P. Hanna, dated as of June 18,
                  1996, incorporated by reference to Exhibit 10.47 to Applied
                  Bioscience International Inc.'s Amended Quarterly Report on
                  Form 10-Q/A for the period ended June 30, 1996.

       10.75    --Form of Agreement, dated as of June 20, 1996, by and between
                  Applied Bioscience International Inc. and each of Joseph H.
                  Highland, Robert M. Wenger, Robert H. Harris and Joseph V.
                  Rodricks, incorporated by reference to Exhibit 10.62 to the
                  Registrant's Quarterly Report on Form 10-Q for the period
                  ended September 30, 1996.

       10.76    --Agreement, dated as of September 6, 1996, by and between
                  Applied Bioscience International Inc. and John H. Timoney,
                  incorporated by reference to Exhibit 10.63 to the Registrant's
                  Quarterly Report on Form 10-Q for the period ended September
                  30, 1996.

       10.77    --Agreement, dated as of September 25, 1996, by and between
                  Applied Bioscience International Inc. and Kenneth H. Harper,
                  incorporated by reference to Exhibit 10.64 to the Registrant's
                  Quarterly Report on Form 10-Q for the period ended September
                  30, 1996.

       10.78    --Severance Compensation Agreement, dated as of September 25,
                  1996, by and between Applied Bioscience International Inc. and
                  John D. Bryer, incorporated by reference to Exhibit 10.65 to
                  the Registrant's Quarterly Report on Form 10-Q for the period
                  ended September 30, 1996.

       10.79    --Consulting Agreement, dated as of October 1, 1996, by and
                  between Applied Bioscience International Inc., and John D.
                  Bryer, incorporated by reference to Exhibit 10.66 to the
                  Registrant's Quarterly Report on Form 10-Q for the period
                  ended September 30, 1996.

       10.80    --Employment Agreement, dated as of October 5, 1996, by and
                  between Pharmaceutical Product Development, Inc., and Thomas
                  D'Alonzo, incorporated by reference to Exhibit 10.67 to the
                  Registrant's Quarterly Report on Form 10-Q for the period
                  ended September 30, 1996.

       10.81    --Employment Agreement, dated as of September 26, 1996, by and
                  between Pharmaceutical Product Development, Inc., and Fred B.
                  Davenport, Jr.

       10.82    --Employment Agreement, dated as of September 25, 1996, by and
                  between Pharmaceutical Product Development, Inc. and Joshua S.
                  Baker.

     10.83a-83f --Substitute Non-Statutory Stock Option Agreements by and
                  between Pharmaceutical Product Development, Inc. and Grover C.
                  Wrenn, dated as of September 26, 1996.

       21       --Subsidiaries of the Registrant

       23.1     --Consent of Coopers & Lybrand L.L.P.

       23.2     --Consent of Arthur Andersen LLP

       27       --Financial Data Schedule (for SEC use only)

       99       --Report of Arthur Andersen LLP

------------

   *     Previously filed.

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


                                       32
<PAGE>   34

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE


                                                                          Page
                                                                          ----

     Report of Independent Accountants                                     F-2

     Consolidated Statements of Operations for the Years Ended

           December 31, 1996, 1995 and 1994                                F-3

     Consolidated Balance Sheets as of December 31, 1996 and 1995          F-4

     Consolidated Statements of Shareholders' Equity for the Years

           Ended December 31, 1996, 1995 and 1994                          F-5

     Consolidated Statements of Cash Flows for the Years Ended

           December 31, 1996, 1995 and 1994                                F-6

     Notes to Consolidated Financial Statements                            F-7

     Consolidated Financial Statement Schedule

           Schedule II - Valuation and Qualifying Accounts                 F-27


                                       F-1



<PAGE>   35



                        REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors and Shareholders
Pharmaceutical Product Development, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of Pharmaceutical
Product Development, Inc. and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pharmaceutical
Product Development, Inc. and its subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

We previously audited and reported on the combined balance sheet of
Pharmaceutical Product Development, Inc., its affiliates and its consolidated
subsidiaries as of December 31, 1995 and the related combined statements of
operations, shareholders' equity and cash flows for the two years in the period
then ended, prior to their restatement for the 1996 pooling of interests. The
contribution of Pharmaceutical Product Development, Inc., its affiliates and its
consolidated subsidiaries to total assets represented 19 percent of the restated
total assets as of December 31, 1995. The contribution of Pharmaceutical Product
Development, Inc., its affiliates and its consolidated subsidiaries to net
revenue represented 17 percent and 14 percent of the restated total for 1995 and
1994, respectively. The contribution (in thousands) of Pharmaceutical Product
Development, Inc., its affiliates and its consolidated subsidiaries represented
$2,537 of net income compared to a restated consolidated net loss of $5,404 in
1995 and represented $2,021 of net income compared to a restated consolidated
net loss of $7,987 in 1994. Separate financial statements of the other company
included in the restated consolidated balance sheet as of December 31, 1995 and
in the 1995 and 1994 restated consolidated statements of operations,
shareholders' equity and cash flows were audited and reported on separately by
other auditors. We also audited the combination of the accompanying consolidated
balance sheet as of December 31, 1995 and the consolidated statements of
operations, shareholders' equity and cash flows for the two years in the period
then ended, after restatement for the 1996 pooling of interests; in our opinion,
such consolidated statements have been properly combined on the basis described
in Note 2 of notes to consolidated financial statements.


/s/COOPERS & LYBRAND L.L.P.


Raleigh, North Carolina
February 11, 1997





                                      F-2
<PAGE>   36


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                         1996            1995            1994
                                                                      ---------       ---------       ---------
<S>                                                                   <C>             <C>             <C>      
Life sciences revenues, net of subcontractor costs of $47,933,
   $52,066 and $44,864, respectively                                  $ 152,304       $ 160,495       $ 146,342
Environmental sciences revenues, net of subcontractor costs
   of $4,752, $7,230 and $4,564, respectively                            45,492          49,283          45,763
                                                                      ---------       ---------       ---------
       Net revenue                                                      197,796         209,778         192,105
                                                                      ---------       ---------       ---------
Direct costs - Life sciences                                             79,108          90,315          86,647
Direct costs - Environmental sciences                                    31,744          32,442          28,670
Selling, general and administrative expenses                             61,571          64,014          55,428
Depreciation and amortization                                            10,436          13,251          10,375
Loss on sale of business                                                   --            19,308            --
Merger costs and special charges                                         16,114           4,982            --
                                                                      ---------       ---------       ---------
                                                                        198,973         224,312         181,120
                                                                      ---------       ---------       ---------
       Operating income (loss)                                           (1,177)        (14,534)         10,985
Interest:
   Expense                                                                 (420)         (3,304)         (3,190)
   Income                                                                 1,919             263             508
Other income (expense), net                                                 305             425             (46)
                                                                      ---------       ---------       ---------
       Income (loss) from continuing operations before provision
         for income taxes                                                   627         (17,150)          8,257
                                                                                      ---------       ---------
Provision for income taxes                                                4,134
                                                                      ---------
       Net loss                                                          (3,507)
                                                                      ---------
Weighted average number of common shares outstanding                     21,168
                                                                      =========
       Net loss per common share                                      $   (0.17)
                                                                      =========

Pro Forma Data (Note 1):
Income (loss) from continuing operations before provision for
   income taxes                                                                         (17,150)          8,257
Pro forma provision (benefit) for income taxes                                          (14,359)          3,371
                                                                                      ---------       ---------
       Pro forma income (loss) from continuing operations                                (2,791)          4,886
                                                                                      ---------       ---------
Discontinued operations:
   Loss from discontinued operations, net of income tax benefit
     of $128                                                                               --              (285)
   Estimated loss on disposal of discontinued operations, net of
     income tax benefit of $2,036 and $227, respectively                                 (1,716)        (12,588)
                                                                                      ---------       ---------
Loss from discontinued operations                                                        (1,716)        (12,873)
                                                                                      ---------       ---------
       Pro forma net loss before extraordinary item                                      (4,507)         (7,987)
Extraordinary loss on early extinguishment of debt, net of
   income tax benefit of $475                                                              (897)           --
                                                                                      ---------       ---------
       Pro forma net loss                                                             $  (5,404)      $  (7,987)
                                                                                      =========       =========
Pro forma weighted average number of common shares
   outstanding                                                                           18,815          18,671
                                                                                      =========       =========
Pro forma earnings (loss) per common share:
   Income (loss) from continuing operations                                           $   (0.15)      $    0.26
   Loss from discontinued operations                                                      (0.09)          (0.69)
   Extraordinary loss                                                                     (0.05)           --
                                                                                      ---------       ---------
Pro forma loss per common share                                                       $   (0.29)      $   (0.43)
                                                                                      =========       =========
</TABLE>


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


                                      F-3
<PAGE>   37



            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1996 AND 1995
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                           1996            1995
                                                                        ----------       --------
<S>                                                                     <C>             <C>      
                         ASSETS

Current assets
     Cash and cash equivalents                                          $  21,838       $  13,565
     Marketable securities                                                 14,210             242
     Accounts receivable and unbilled services, net                        76,237          70,263
     Investigator advances                                                  5,280           2,960
     Prepaid expenses and other current assets                              5,752           4,414
     Deferred tax asset                                                     4,955           4,756
                                                                        ---------       ---------
         Total current assets                                             128,272          96,200

Property and equipment, net                                                31,479          28,782
Goodwill, net                                                              18,397          12,990
Other assets                                                                3,309           4,689
                                                                        ---------       ---------

         Total assets                                                   $ 181,457       $ 142,661
                                                                        =========       =========

             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
     Current maturities of long-term debt                               $   4,221       $   2,201
     Accounts payable                                                       7,051           9,080
     Payables to investigators                                              5,429           8,428
     Other accrued expenses                                                26,263          24,289
     Unearned income                                                       18,705          14,882
                                                                        ---------       ---------

         Total current liabilities                                         61,669          58,880

Long-term debt, less current maturities                                     1,428           3,471
Deferred rent and other                                                     3,054           3,010
                                                                        ---------       ---------

         Total liabilities                                                 66,151          65,361
                                                                        ---------       ---------
Commitments and contingencies (Notes 10 and 14)

Shareholders' equity:
     Common stock, $0.10 par value, 95,000,000 shares authorized; 
         21,624,000 and 18,677,000 shares issued and outstanding,
         respectively                                                       2,163           1,870
     Paid-in capital                                                      112,606          65,701
     Retained earnings (accumulated deficit)                                 (363)         10,621
     Unrealized gain on investments                                           232               6
     Cumulative translation adjustment                                        668            (425)
     Unearned compensation                                                   --              (473)
                                                                        ---------       ---------

         Total shareholders' equity                                       115,306          77,300
                                                                        ---------       ---------

         Total liabilities and shareholders' equity                     $ 181,457       $ 142,661
                                                                        =========       =========
</TABLE>




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


                                      F-4
<PAGE>   38



            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>                                      Common Stock                 Retained
                                             -----------------              Earnings      Unrealized     Cumulative
                                                          Par    Paid-in  (Accumulated  Gain (Loss) on   Translation     Unearned
                                             Shares      Value   Capital     Deficit)     Investments    Adjustment    Compensation
                                             ------      -----   -------     --------     -----------    ----------    ------------

<S>                                          <C>       <C>       <C>         <C>          <C>             <C>             <C>    
Balance, December 31, 1993,
  as previously reported                      6,913    $   692   $    444    $  1,607                                     $  (268)
    Pooling of interests with APBI (Note 2)  11,365      1,137     58,299      22,070                     $ (3,567)        (1,404)
                                             ------    -------   --------    --------                     --------        -------
Balance, December 31, 1993, as restated      18,278      1,829     58,743      23,677                       (3,567)        (1,672)
    Adjustment to beginning balance for
      change in accounting method                                                         $  16
    Unrealized loss on investments                                                         (763)
    Amortization of unearned compensation                                                                                     671
    Issuance of 26 common shares in
      connection with an acquisition 
      accounted for under the purchase 
      method                                     26          2        798
    Minority interest of 26 common shares 
      of affiliated company                                 (2)      (144)
    Income tax provision from exercise of
      stock options and unearned 
      compensation amortization                                      (249)
    Translation adjustment                                                                                   2,006
    Net loss                                                                   (6,489)
    Dividends                                                                  (1,237)
    Other                                        30          5        518          
                                             ------    -------   --------     -------     -----           --------        -------
Balance, December 31, 1994                   18,334      1,834     59,666      15,951      (747)            (1,561)        (1,001)
    Change in unrealized loss on investments                                                753
    Amortization of unearned compensation                                                                                     539
    Transfer of minority interest to 
      affiliated group                            2                   168
    Issuance of 72 common shares                 72          7        708
    Issuance of 257 common shares in
      connection with an acquisition 
      accounted for under the purchase method   257         26      5,020        (977)
    Income tax benefit from exercise of stock
      options and unearned compensation
      amortization                                                     53
    Sale of business                                                                                         1,699
    Translation adjustments                                                                                   (563)
    Net loss                                                                   (3,630)
    Dividends                                                                    (723)
    Other                                        12          3         86                                                     (11)
                                             ------    -------   --------    --------     -----           --------        -------
Balance, December 31, 1995                   18,677      1,870     65,701      10,621         6               (425)          (473)
    Public offering, net of cash 
      offering costs                          2,300        230     36,952
    Shareholder S-Corp distributions                                1,595      (7,532)
    Unrealized gain on investments                                                          226
    Issuance of 242 common shares               242         24        622
    Stock issued for exercise of 365 options    365         37      5,058
    Income tax benefit from exercise of 
      stock options and unearned 
      compensation amortization                                     1,990
    Translation adjustments                                                                                  1,093
    Net loss                                                                   (3,507)
    Other                                        40          2        688          55                                         473
                                             ------    -------   --------    --------     -----           --------        -------
Balance, December 31, 1996                   21,624    $ 2,163   $112,606    $   (363)    $ 232           $    668        $    --
                                             ======    =======   ========    ========     =====           ========        =======
</TABLE>



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


                                      F-5
<PAGE>   39



            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                               1996           1995           1994
                                                                             --------       --------       --------
<S>                                                                          <C>            <C>            <C>      
Cash flows from operating activities:
    Net loss                                                                 $ (3,507)      $ (3,630)      $ (6,489)

    Adjustments to reconcile net loss to net cash provided by operating
      activities:
      Depreciation and amortization                                            10,436         13,232         11,961
      Deferred income taxes                                                     1,375        (18,204)         3,235
      Stock compensation amortization                                             668            539            671
      Loss on sale of toxicology operations                                      --           16,991           --
      Provision for loss on disposal of discontinued operations                  --            3,752         12,815
      (Gain) loss on disposition of property and equipment                          6         (2,741)           113
      Gain on sale of investments                                                  (8)          --             --
      Impairment of investment in EnSys                                          --            2,638           --
      Early extinguishment of debt                                               --              955           --
      Change in assets and liabilities:
         Accounts receivable and unbilled services, net                        (2,043)           108        (15,126)
         Prepaid expenses and other current assets                             (4,317)         2,076         (4,242)
         Current income taxes                                                   1,354          1,472          5,115
         Goodwill and other assets                                              1,068         (1,968)        (4,015)
         Assets and liabilities of discontinued operations, net                  --           (1,593)        (2,009)
         Accounts payable and accrued liabilities                              (6,872)         9,301         (1,961)
         Unearned income                                                        2,569         (7,011)         1,401
         Other                                                                   (411)             6           (249)
                                                                             --------       --------       --------
                Net cash provided by operating activities                         318         15,923          1,220
                                                                             --------       --------       --------

Cash flows from investing activities:
      Purchases of property and equipment                                     (11,176)       (10,117)       (16,089)
      Proceeds from sale of toxicology operations                                --           32,500           --
      Proceeds from sale of property and equipment                                 74         14,158             69
      Purchase of marketable securities                                       (13,799)           (14)           (13)
      Sale of investments                                                         244           --             --
      Net cash paid for acquisitions                                           (3,867)          (741)        (1,881)
                                                                             --------       --------       --------
                Net cash (used in) provided by investing activities           (28,524)        35,786        (17,914)
                                                                             --------       --------       --------

Cash flows from financing activities:
      Short-term bank (repayments) borrowings, net                               --           (1,687)       (16,929)
      Line of credit (repayments) borrowings, net                                 669        (12,892)        12,973
      Proceeds from long-term debt                                                167           --            2,771
      Principal repayments on long-term debt                                   (2,415)       (32,897)       (13,224)
      Other long-term borrowings                                                 --             --           26,903
      Cash dividends paid                                                      (5,937)          (723)        (1,237)
      Proceeds from issuance of common stock                                   42,902            761            524
                                                                             --------       --------       --------
                Net cash provided by (used in) financing activities            35,386        (47,438)        11,781
                                                                             --------       --------       --------

Effect of exchange rate changes on cash                                         1,093           (510)          (137)
                                                                             --------       --------       --------
Net increase (decrease) in cash and cash equivalents                            8,273          3,761         (5,050)
Cash and cash equivalents, beginning of the year                               13,565          9,804         14,854
                                                                             --------       --------       --------
Cash and cash equivalents, end of the year                                   $ 21,838       $ 13,565       $  9,804
                                                                             ========       ========       ========
</TABLE>


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


                                      F-6
<PAGE>   40


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:


NATURE OF BUSINESS

         Pharmaceutical Product Development, Inc. and its subsidiaries ("PPD"),
collectively (the "Company"), provide a broad range of research and consulting
services in two business segments: life sciences and environmental sciences.
Services provided in the life sciences segment include worldwide clinical
research and development of pharmaceutical products and medical devices,
biostatistical analysis and analytical laboratory services. Environmental
sciences services include assessment and management of chemical and
environmental health risk, site investigation and remediation planning and
litigation support. Such services are provided through both segments under
contract to clients in the pharmaceutical, general chemical, agrochemical,
biotechnology and other industries. The environmental sciences segment also
markets services to clients in the industrial, manufacturing and oil and gas
industries. The Company's life sciences services, which represented 77% of the
Company's business in 1996 based on net revenue, are marketed primarily in the
United States and Europe. The remaining 23% of the Company's 1996 net revenue
was derived from its environmental sciences segment which is primarily domestic.


PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
and operations of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.


MERGER COSTS AND SPECIAL CHARGES

         In connection with the acquisition of Applied Bioscience International
Inc. ("APBI"), the Company implemented a reorganization plan under which the
Company would eliminate certain positions and close a facility. The Company
recorded merger and reorganization costs of $17.0 million in the third quarter
of 1996. Included in these costs were transaction costs of $7.1 million, related
primarily to investment banking, legal and accounting fees. In addition, the
Company recorded $9.9 million in accruals for severance, lease termination and
certain other costs. The Company reversed $0.8 million of these accruals in the
fourth quarter due to changes in estimates. Of the amounts accrued above, $3.2
million is for severance payments for approximately 40 individuals consisting
mainly of administrative personnel. In the fourth quarter of 1996, $1.1 million
in severance was paid and charged against the reserve. Approximately $7.5
million of accrued merger and reorganization costs were accrued as of December
31, 1996 and included in Other accrued expenses. (See Note 2.)

         In the fourth quarter of 1995, the Company recorded special charges of
$5.0 million, primarily related to the impairment of certain investments and
assets and the decision to reduce costs and improve efficiencies. These charges
included approximately $3.4 million associated with the impairment of the
Company's available-for-sale investment (see Note 8) and other assets, $1.2
million related primarily to severance costs associated with the Company's
efforts to reduce future costs and $0.4 million related to accrued lease losses
and other miscellaneous costs.


REVENUE RECOGNITION

         The Company records revenues from fixed-price contracts extending over
more than one accounting period on a percentage-of-completion basis. Revenues
from time-and-material contracts are recognized as billable rates multiplied by
hours delivered, plus pass-through expenses incurred. Pass-through expenses
generally include subcontractor costs which consist of investigator fees, travel
and certain other contract costs that are reimbursed by the client. Accordingly,
such subcontractor costs are deducted in determining net revenues.



                                      F-7
<PAGE>   41

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)




1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         If it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in
the period in which the determination is made. Clients generally may terminate a
study at any time, which may cause unplanned periods of excess capacity and
reduced revenues and earnings. To offset the effects of early terminations, with
respect to contracts of significant size the Company attempts to negotiate the
payment of an early termination fee.


CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consists of unrestricted cash accounts, 
including commercial paper, which are not subject to withdrawal restrictions or
penalties, and all highly liquid debt instruments with a maturity of three
months or less at the date of purchase.

         Supplemental cash flow information and non-cash investing activities 
were as follows (in thousands):

<TABLE>
<CAPTION>

                                                   YEAR ENDED DECEMBER 31,
                                              ---------------------------------
                                               1996         1995          1994
                                              ------      -------       -------
<S>                                           <C>         <C>           <C>    
Cash paid (received):
    Interest                                  $  326      $ 3,707       $ 3,800
                                              ======      =======       =======
    Income taxes, net                         $1,594      $(2,299)      $(6,355)
                                              ======      =======       =======
</TABLE>


         The non-cash assets and liabilities acquired, including the acquisition
of Environmental Assessment Group, Ltd.; Data Acquisition and Research (DAR)
Limited; Medisys S.L.; Trilife GmbH; and Q&Q Suporte A Pesquisa Clinica Ltda. in
1996 and Gabbay Limited and the Chicago Center for Clinical Research in 1995
(see Note 2) and the Phase I clinical center received as consideration for the
sale of the toxicology operations in 1995 (see Note 3) were as follows (in 
thousands):

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
                                                           1996        1995 
                                                           ----        ---- 
<S>                                                      <C>         <C>    
     Acquisitions:                                                          
        Fair value of assets acquired                    $4,841      $7,633 
        Liabilities assumed                               5,242       3,416 
                                                                            
     Non-cash consideration received:                                       
        Fair value of assets acquired                    $ --        $5,098 
        Liabilities assumed                                --           598 
</TABLE>                                               

MARKETABLE SECURITIES

         The Company records its investment in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The classification of
securities is generally determined at the date of purchase. All marketable
securities of the Company have been classified as available for sale and have
been reported at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity. The Company intends to hold these
securities for an indefinite period of time. Gains and losses on sales of
investment securities, computed based on specific identification of adjusted
cost of each security, are included in other income at the time of the sales.
(See Notes 5 and 8.)


                                      F-8
<PAGE>   42


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTIGATOR PAYMENTS

         Investigator payments 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. Billings and payments
are based on predetermined contractual agreements which may differ from the
accrual of the expense. Payments made in excess of the accrued expenses are
classified as investigator advances and accrued expenses in excess of amounts
paid are classified as payables to investigators. Contracted physician costs are
included as a reduction to revenues in the consolidated statements of
operations.


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 50 years for buildings, five to 12 years for
laboratory equipment, three to five years for computers and related equipment, 
and four to 10 years for furniture and equipment. 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. The Company
evaluates impairment of its property and equipment based on whether it is
probable that undiscounted future cash flows from operations are expected to be
less than the asset's carrying value.


GOODWILL

         The excess of the purchase price of the businesses acquired over the
fair value of net tangible assets and identifiable intangibles at the date of
the acquisitions has been assigned to goodwill. Goodwill is being amortized over
periods of 15 to 40 years. As of December 31, 1996 and 1995, accumulated
amortization was $3,036,000 and $2,014,000 respectively. The amortization
charges for each of the three years ended December 31, 1996, 1995 and 1994 were
$950,000, $715,000 and $485,000, respectively. The Company evaluates impairment
of goodwill based on whether it is probable that undiscounted future cash flows
from operations are expected to be less than the asset's carrying value.


OTHER ASSETS

         Other intangible assets, which are included in other assets, are being
amortized over periods of three to five 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. Similarly, unearned income represents amounts billed in excess of
revenue recognized.


INCOME TAXES

         The financial statements of the Company for periods prior to its
initial public offering in January 1996 ("the IPO") do not include a provision
for income taxes, because the taxable income or loss of the Company through
December 31, 1995 (excluding the results of APBI - see Note 2) was included in
the income tax returns of the individual shareholders under the S corporation
election. For informational purposes, the statements of operations include a pro
forma income tax provision on taxable income for financial reporting purposes,
which combines income taxes on PPD's results, excluding APBI, using statutory
federal and state rates that would have resulted if the Company had filed
corporate tax returns during these periods and APBI's previously reported
provision for income taxes.



                                      F-9
<PAGE>   43


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In January 1996, prior to the effectiveness of the IPO, the Company
elected to no longer be treated as an S corporation for tax purposes.
Accordingly, the Company is now subject to federal and state income taxes and
recognizes deferred taxes in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109
requires companies subject to income taxes to adjust their deferred tax assets
and liabilities based on temporary differences between financial statement and
tax basis of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.


TRANSLATION OF FOREIGN FINANCIAL STATEMENTS

         Assets and liabilities of foreign operations, where the functional
currency is the local currency, are translated into U.S. dollars at the year-end
rate of exchange. Income and expenses are translated at the average rates of
exchange prevailing during the year. Gains or losses from translating foreign
currency financial statements are accumulated in a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
in other income.

         Funds generated by each subsidiary of the Company are generally
reinvested in the country where they are earned.


PER SHARE INFORMATION

         The computation of income (loss) per share information is based on 
the weighted average number of common shares outstanding during the year.


NEW ACCOUNTING PRONOUNCEMENTS

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share." SFAS No. 128 is designed to improve the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
comparability of earnings per share data on an international basis. This
pronouncement is effective for periods beginning after December 15, 1997, and is
not expected to have a material impact on the Company's financial statements.


PERVASIVENESS OF ESTIMATES

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


RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
1996 presentation.


2. ACQUISITIONS:


POOLING

         On September 26, 1996, a wholly-owned subsidiary of the Company was
merged with and into APBI in a transaction accounted for as a pooling of
interests. As a result of the merger, APBI became a wholly-owned subsidiary of
the Company. Under the terms of the merger agreement, APBI shareholders received
0.4054 of a share of the Company's common stock for each APBI share. As a result
of the merger, the Company issued 12,063,860 shares of its common stock in
exchange for all the outstanding shares of common stock of APBI.



                                      F-10
<PAGE>   44


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


2. ACQUISITIONS (CONTINUED)


         Holders of options to acquire APBI stock had the choice to receive
either shares of Company stock for the value of the options, or substituted
options to acquire Company common stock. As a result of the APBI option holders'
choices, 202,967 additional shares of Company common stock were issued, and
options to purchase 600,513 shares of Company common stock were issued.

         In accordance with the pooling of interests method of accounting, the
consolidated financial statements are based on the assumption that the companies
were combined for the full year and financial statements of prior years have
been restated to give effect to the combination. Net revenue and net income
(loss) as previously reported for 1995 and for the six months ended June 30,
1996, and as restated for the pooling of interests follow (in thousands):


<TABLE>
<CAPTION>

                                           PPD           APBI         ADJUSTMENT     RESTATED
                                           ---           ----         ----------     --------
<S>                                       <C>          <C>            <C>            <C>      
Year ended December 31, 1995

   Net revenue                            $38,263      $183,253       $(11,738)      $209,778

   Pro forma income (loss) from
   continuing operations                    2,537        (5,328)          --           (2,791)

   Loss from discontinued operations
   and extraordinary items                   --          (2,613)          --           (2,613)
                                          -------      --------       --------       --------

   Pro forma net income (loss)              2,537        (7,941)          --           (5,404)
                                          -------      --------       --------       --------

Six months ended June 30, 1996

   Net revenue                            $25,041      $ 77,011       $ (5,506)      $ 96,546

   Net income                               2,126         2,444           --            4,570
</TABLE>


         Prior to the merger, APBI reported certain items as direct expenses,
while PPD reported those items as a deduction to arrive at net revenue. APBI's
results prior to the pooling have been restated to be presented on a basis
consistent with PPD's results. The impact of the restatement on APBI's net
revenue is presented above in the column labeled "Adjustment."


PURCHASES

         The Company's Life Sciences Group furthered its expansion outside of
the U.S. in 1996 through the acquisition of Trilife Gesellschaft Fur
Medizinische Entwicklung Verwaltungs GmbH ("Trilife") in Germany, Medisys S.L.
("Medisys") in Spain and Q&Q Suporte A Pesquisa Clinica Ltda. ("Q&Q") in Brazil.
The consideration for Trilife consisted of approximately $567,000 paid at
closing. In addition, the Company may pay up to $135,000 as additional purchase
price, dependent upon the performance of Trilife for a certain period after the
acquisition. The consideration for Medisys consisted of $400,000 paid at
closing, plus an additional $300,000 due on each of the first and second
anniversaries of the acquisition. The consideration for Q&Q consisted of
$500,000 paid at closing, plus an additional $100,000 due on each of the first
three anniversaries. The Company also acquired Data Acquisition and Research
(DAR) Limited ("DAR") in Scotland in 1996, which allowed it to expand its
biostatistics and data analysis capabilities in Europe. The consideration for
DAR consisted of cash paid at closing of $992,000, plus an additional $348,000
to be paid in 10 installments between June 1997 and December 2001. The
Company's Environmental Sciences Group also expanded its operations in 1996
with the acquisition of Environmental Assessment Group Limited ("EAG") in
England. The consideration for EAG consisted of $1.9 million cash, a note for
approximately $350,000 and the potential to earn up to an additional $500,000
depending on the profits of EAG during the two years after the acquisition. In
connection with these acquisitions, the Company recorded $6,278,000 in
goodwill. Pro forma information is not presented as the results of operations
prior to the dates of the acquisitions are not material individually or
collectively to the Company.


                                      F-11
<PAGE>   45

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



2. ACQUISITIONS (CONTINUED)

         On August 1, 1995, PPD and PPD-Europe (an S corporation formed in
connection with this transaction), completed the acquisition of Gabbay Group
Limited for $306,000 in cash and $241,000 in assumed debt. Gabbay Group Limited,
a clinical research organization, is located in Southampton, England. The
purchase price resulted in goodwill of $444,000. Pro forma information is not
presented as the results of operations prior to the date of the acquisition are
not material to the Company.

         On August 18, 1995, the Company, through its subsidiary Clinix
International Inc., acquired the business and assets of the Chicago Center for
Clinical Research ("CCCR"), a nationally recognized organization conducting
clinical trials in pharmaceuticals, food and nutrition. The consideration
consisted of 634,188 shares of APBI's common stock valued at $4,043,000,
together with the assumption or retirement of substantially all of CCCR's
outstanding indebtedness and other related liabilities. As a result of this
transaction, the Company recorded $4,517,000 in goodwill. Pro forma information
is not presented, as the results of operations prior to the date of acquisition
are not material to the Company.


3. SALE OF BUSINESS:

         On November 21, 1995, the Company sold its toxicology laboratories
located in New Jersey and Suffolk, England, to Huntingdon International Holdings
plc ("Huntingdon"). In connection with the sale of the New Jersey toxicology
laboratory, which operated as a division of PPD Pharmaco (formerly Pharmaco LSR
International Inc., "Pharmaco"), a wholly-owned subsidiary of the Company,
Huntingdon acquired substantially all of the assets of such laboratory and
assumed substantially all related liabilities. In connection with the sale of
the toxicology laboratory located in Suffolk, England, Huntingdon acquired all
of the capital stock of Pharmaco LSR Ltd., a wholly-owned subsidiary of the
Company. The Company received as consideration cash proceeds of $32,500,000,
plus an additional $6,000,000 for an equal amount of cash conveyed to Huntingdon
as part of the sale. The consideration also included the Company's acquisition
of Huntingdon's Phase I clinical center located in Leicester, England, at an
agreed upon value of $4,500,000.

         As a result of the disposition, the Company recorded a pre-tax loss on
sale of business of $19,308,000 which is reflected in the accompanying
consolidated statement of operations for the year ended December 31, 1995. The
loss reflected the net book value of the net assets sold in excess of
consideration received of $16,991,000, $1,178,000 of transaction costs,
$1,338,000 of severance and relocation costs, and $581,000 of other costs
primarily related to the required name change of the remaining business, net of
a $780,000 gain recorded as a result of the settlement of the Company's U.K.
pension plan. (See Note 13.)

         The assets and liabilities sold to Huntingdon are not included in the
accompanying consolidated balance sheet as of December 31, 1995. The results of
operations (excluding the effect of the loss on the sale of the business) for 
the years ended December 31, 1995 and 1994 included the following for the
disposed business (in thousands):

<TABLE>
<CAPTION>
                                               1995          1994
                                               ----          ----
               <S>                          <C>            <C>    
               Net revenues                 $38,446        $46,387
               Operating (loss) income       (1,136)         2,409
</TABLE>

4. DISCONTINUED OPERATIONS:

         In June 1994, the Company sold Paragon, a division of its wholly owned
subsidiary APBI Environmental Sciences Group, Inc., for cash and a note totaling
$525,000. The sale resulted in a loss on disposal before income tax benefits of
$732,000.

         In December 1993, the Company adopted a formal plan to sell its
environmental testing laboratory division, Environmental Testing and
Certification Corp. ("ETC"). Accordingly, in 1993 the Company's results
reflected charges necessary to reduce the carrying value of its investment in
ETC to its estimated realizable value.


                                      F-12
<PAGE>   46

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


4. DISCONTINUED OPERATIONS (CONTINUED)

         Although it was the Company's desire to exit the environmental
analytical laboratory business completely, it became apparent during 1994 that
the Company would not be able to dispose of its interest in ETC on terms that it
deemed attractive, in part because of the ongoing consolidation within the
environmental analytical laboratory industry. Based on the Company's belief that
a larger network of analytical laboratories could compete more effectively, and
that a minority interest in a larger laboratory business might provide a better
means to pursue divestiture opportunities, in August 1994, the ETC division of
APBI Environmental Sciences Group, including substantially all of its assets and
liabilities, was consolidated with the business operations of PACE Inc. (an
unrelated analytical laboratory) and Coast-to-Coast Analytical Services, Inc.
(another unrelated analytical laboratory). The combined business operations were
operated within PACE Incorporated ("PACE"), a newly formed entity. As a result
of the combination, the Company, through APBI Environmental Sciences Group,
owned preferred and common stock of PACE representing approximately 36% of the
weighted average preferred and common stock outstanding. Due to the additional
time required to divest ETC and after assessment of the estimated fair value of
APBI's investment in PACE, the Company recorded an additional write down of
$2,533,000 in the third quarter of 1994. In the fourth quarter of 1994, the
Company recorded $9,550,000 in additional writedowns to reduce the carrying
value of the investment to its then estimated net realizable value.

         During the fourth quarter of 1995, PACE sold substantially all of its
laboratories in a series of transactions. Net proceeds from such transactions
were used to retire PACE's outstanding bank loan and to partially repay certain
other secured indebtedness. PACE, which is currently winding up its remaining
business operations, does not have sufficient assets to repay its outstanding
liabilities. Accordingly, it is anticipated that equity holders will not receive
any distributions upon completion of PACE's winding up and dissolution.
Effective December 29, 1995, the Company's voting interest was reduced to below
20%, and the Company changed its accounting for the investment from the equity
method to the cost method in accordance with Accounting Principles Board Opinion
No. 18, "The Equity Method of Accounting for Investments in Common Stock."

         In the fourth quarter of 1995, the Company wrote off its remaining
investment in PACE of approximately $3,600,000, and accrued its estimated
exposure for guarantees on leases. PACE, which is currently winding up its
remaining business operations, does not have sufficient assets to repay its
outstanding liabilities and was involuntarily placed in bankruptcy under Chapter
7 of the Bankruptcy Code during 1996. The Company does not believe that any
further charges will be taken with respect to this investment.

         The operating results of the discontinued operations include net
revenues of $12,045,000 for the year ended December 31, 1994. Assets and
liabilities of the discontinued operations were as follows as of December 31,
1994 (in thousands):

<TABLE>
<S>                                                                  <C>    
         Accounts receivable, net                                   $    317
         Property and equipment, net                                   1,542
         Other assets                                                 12,959
         Other liabilities                                           (12,382)
                                                                    --------
         Net assets of discontinued operations                      $  2,436
                                                                    ========
</TABLE>

5. MARKETABLE SECURITIES:

         The estimated market value and aggregate cost of current marketable
securities were as follows (in thousands):

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                          -------------------------------
                                            1996                     1995
                                            ----                     ----
<S>                                       <C>                        <C> 
Estimated market value                    $14,210                    $242
Aggregate cost                             14,210                     236
                                          -------                    ----
Gross unrealized gains                    $  --                      $  6
                                          =======                    ====
</TABLE>


                                      F-13
<PAGE>   47

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


6. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES:

         Accounts receivable and unbilled services consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                               1996            1995
                                                              ------          ------
<S>                                                           <C>             <C>   
Trade:
      Billed                                                  $45,419         $39,257
      Unbilled                                                 30,404          33,509
      Reserve for doubtful accounts                            (1,511)         (3,319)
                                                              -------         -------
                                                               74,312          69,447
Officers and employees                                            363             395
Other                                                           1,562             421
                                                              -------         -------
                                                              $76,237         $70,263
                                                              =======         =======
</TABLE>

7. PROPERTY AND EQUIPMENT:

         Property and equipment, stated at cost, consisted of the following (in
thousands):


<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                               1996            1995
                                                              ------          ------

<S>                                                           <C>             <C>   
Land                                                          $   593         $   543
Buildings and leasehold improvements                           13,049          10,692
Construction in progress                                          167             230
Furniture and equipment                                        28,062          23,879
Computer equipment                                             27,868          22,410
                                                              -------         -------
                                                               69,739          57,754
Less- Accumulated depreciation and amortization                38,260          28,972
                                                              -------         -------
                                                              $31,479         $28,782
                                                              =======         =======
</TABLE>


         The annual depreciation and amortization charges on property and
equipment for each of the three years ended December 31, were (in thousands):

<TABLE>
<S>               <C>                                   <C>      
                  1994                                  $10,453
                  1995                                   12,015
                  1996                                    9,399
</TABLE>

8. OTHER ASSETS:

         Other assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                               1996            1995
                                                              ------          ------

<S>                                                            <C>             <C>   
Investment in SDI                                              $1,240          $1,008
Intangible and other assets, net of accumulated
     amortization of $1,024 and $2,183, respectively            2,069           3,039
Net non-current assets of discontinued operations                --               642
                                                               ------          ------
                                                               $3,309          $4,689
                                                               ======          ======
</TABLE>


         The annual amortization charges on intangible assets for each of the
three years ended December 31, 1996, 1995 and 1994 were $87,000, $602,000 and
$700,000, respectively.


                                      F-14
<PAGE>   48

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



8. OTHER ASSETS (CONTINUED)

         The Company owns 729,600 shares of Strategic Diagnostics Inc. ("SDI"),
formerly EnSys Environmental Products Inc. ("EnSys") common stock. Warrants to
acquire up to an additional 866,667 shares of EnSys common stock at $7.50 per
share expired in October 1996. The trading price per share was $2.00 and $1.63
as of December 31, 1996 and 1995, respectively.

         The Company owns approximately 4.4% of the SDI common stock at
December 31, 1996.

         The Company's investment in SDI is carried at its fair value. In 1996,
the difference between the fair value and the carrying value of $232,000 is
reported as a separate component of shareholders' equity. In 1995, the
difference between the fair value and the carrying value of $2,638,000 was
reported as a loss in the consolidated statement of operations as the decline
was considered other than temporary.

9. OTHER ACCRUED EXPENSES:

         Other accrued expenses consisted of the following (in thousands):


<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                   --------------------------
                                                                      1996              1995
                                                                      ----              ----
<S>                                                                 <C>                <C>  
Accrued salaries, wages, benefits and related costs                 $10,976           $11,457
Accrued merger costs                                                  7,513              --
Accrued loss on sale of business                                       --               2,395
Accrued special charges and restructuring costs                        --               2,223
Other                                                                 7,774             8,214
                                                                    -------           -------
                                                                    $26,263           $24,289
                                                                    =======           =======
</TABLE>

10. LONG-TERM DEBT AND LEASE OBLIGATIONS:

         Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                   --------------------------
                                                                      1996              1995
                                                                      ----              ----
<S>                                                                 <C>               <C>  
LIBOR (5.72% at December 31, 1996) plus 1.2%
  unsecured line of credit due February 19, 1997                    $ 3,300           $  --

Prime (8.5% at December 31, 1995) less 0.5% line of credit
  reducing $520 annually and expiring January 1, 2000                  --               2,210

Equipment leases                                                        689               894

Various notes at interest rates up to 8.5%                            1,660             2,568
                                                                    -------           -------

                                                                      5,649             5,672
Less current maturities                                              (4,221)           (2,201)
                                                                    -------           -------

                                                                    $ 1,428           $ 3,471
                                                                    =======           =======
</TABLE>


     As of December 31, 1996, the Company had $6,700,000 in unused line of
credit borrowings available, as well as an additional $20,000,000 discretionary
line of credit. On February 19, 1997, the Company modified the line of credit to
mature on May 1, 1997.


                                      F-15
<PAGE>   49

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



10. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)

         For the years subsequent to December 31, 1996, annual maturities of
long-term debt outstanding are (in thousands):

<TABLE>
<S>                                                 <C>     
                           1997                     $4,221
                           1998                      1,013
                           1999                        175
                           2000                        161
                           2001                         79
                                                    ------
                                                    $5,649
                                                    ======
</TABLE>

OPERATING LEASES

         The Company is obligated under noncancellable leases expiring at
various dates through 2010 relating to its operating facilities and certain
equipment. Rental expense for all operating leases, net of sublease income, was
$10,334,000, $8,200,000 and $6,034,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

         The Company completed a sale-leaseback transaction involving owned real
estate in Austin, Texas, on November 13, 1995. Total gross proceeds in the
transaction were $12,000,000 resulting in a pre-tax gain of approximately
$2,100,000. The gain, which has been deferred, is classified as deferred rent
and other in the accompanying consolidated balance sheet and is being amortized
on a straight-line basis over the fifteen 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 in 1992 and prior years 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, 1996 are as follows (in thousands):

<TABLE>                                                          
<S>                                                              <C>
                              1997                               $12,422
                              1998                                11,362
                              1999                                 8,701
                              2000                                 6,867
                              2001                                 6,146
                              2002 and thereafter                 31,519
</TABLE>

11. STOCK PLANS:

STOCK INCENTIVE PROGRAM

         The Company has a stock option plan (the "Plan") under which the
Company may grant options to its employees and directors for up to 1,500,000
shares of common stock. Under the Plan, the exercise price of each option equals
the market price of the Company's stock on the date of grant and an option's
maximum term is ten years. Options are granted upon approval of the Board of
Directors and vest over various periods.



                                      F-16
<PAGE>   50


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



11. STOCK PLANS (CONTINUED)

         On January 1, 1996, the Company adopted 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 ("APB No. 25"), "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
Plans. Accordingly, no compensation cost has been recognized for options
granted under the Plan. Had compensation cost for the Company's Plan been
determined based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS No. 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                          1996                    1995
                                   -------------------     --------------------
                                      AS                      AS
                                   REPORTED  PRO FORMA     REPORTED   PRO FORMA
                                   --------  ---------     --------   ---------

<S>                                <C>        <C>           <C>        <C>   
Net loss (in thousands)            $3,507     $7,670        $5,404     $5,637

Net loss per share                 $ 0.17     $ 0.36        $ 0.29     $ 0.30
</TABLE>

         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 1996 and 1995: expected volatility of 49.9%,
risk-free interest of 6.25% and expected lives of five years. The weighted 
average fair value of options granted during 1996 and 1995 was $11.48 and $6.55
per share, respectively.

         A summary of the status of the Company's Plan as of December 31, 1996,
1995 and 1994, and changes during the years ending on those dates, is presented
below:


<TABLE>
<CAPTION>
                                             1996                          1995                        1994
                                     -------------------------   -------------------------   -------------------------
                                                   WEIGHTED                     WEIGHTED                   WEIGHTED
                                                   AVERAGE                      AVERAGE                    AVERAGE
                                     SHARES     EXERCISE PRICE   SHARES     EXERCISE PRICE  SHARES     EXERCISE PRICE
                                     ------     --------------   ------     --------------  ------     --------------

<S>                                 <C>             <C>        <C>               <C>       <C>              <C>   
Outstanding at beginning of year    1,180,809       $16.29     1,240,682         $17.07    1,358,518        $23.07

Granted                             1,056,539        22.57       191,837          12.38      347,959         15.64

Exercised                            (858,800)       15.10       (63,547)          9.82      (25,549)         8.55

Forfeited                            (137,406)       17.96      (188,163)         19.63     (440,246)        35.05
                                    ---------                  ---------                   ---------        

Outstanding at end of year          1,241,142       $22.28     1,180,809         $16.29    1,240,682         17.07
                                    =========       ======     =========         ======    =========        ======

Options exercisable at year-end       771,069       $19.85       766,895         $17.31      734,217        $17.56
                                    =========       ======     =========         ======    =========        ======
</TABLE>


     The following table summarizes information about the Plan's stock options
at December 31, 1996:

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                              ----------------------------------------------    ------------------------------
                                 NUMBER     WEIGHTED-AVERAGE    WEIGHTED          NUMBER          WEIGHTED
          RANGE OF            OUTSTANDING       REMAINING        AVERAGE        EXERCISABLE        AVERAGE
       EXERCISE PRICES        AT 12/31/96   CONTRACTUAL LIFE  EXERCISE PRICE    AT 12/31/96     EXERCISE PRICE
       ---------------        -----------   ----------------  --------------    -----------     --------------

<S>                             <C>            <C>               <C>              <C>               <C>    
        $10.01-$20.00           530,832        8.2 years         $16.12           530,832           $16.12

        $20.01-$30.00           611,605        9.6 years         $25.44           141,532           $22.72

        $30.01-$40.00            87,241        4.8 years         $35.20            87,241           $35.20

        $40.01-$40.55            11,464        5.1 years         $40.55            11,464           $40.55
                              ---------                                           -------

                              1,241,142                                           771,069
                              =========                                           =======
</TABLE>


                                      F-17
<PAGE>   51

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



11. STOCK PLANS (CONTINUED)

OTHER STOCK PROGRAMS

         On August 15, 1995, APBI granted a total of 60,000 restricted stock
units ("RSUs") to two executive officers of APBI. The RSUs vested at the time
the average closing price for APBI's common stock equaled or exceeded $10.00 per
share for a period of 10 consecutive trading days. The RSUs vested on July 5,
1996. The executives were not required to pay any consideration in exchange for
the RSUs. Unearned compensation was amortized to expense over the vesting period
of the RSUs. Compensation expense related to these RSUs of $534,000 and $66,000
has been recorded in the accompanying statement of operations for the years
ended December 31, 1996 and 1995, respectively.

         On September 19, 1995, APBI entered into a Separation Agreement with a
former senior executive officer of APBI. In connection therewith, APBI canceled
the former executive's unexercised options granted under APBI's stock option
plan and provided the officer with options granted outside of APBI's plan to
purchase up to 147,428 shares of APBI's common stock. Of the options granted,
92,761 were fully vested at the grant date. The remaining options vest at
various dates through September 13, 1997, and expire on the earlier of February
11, 2001, or the day immediately following any period of 20 consecutive
trading days in which the last sale for shares of the Company's common stock for
each of such trading days equaled or exceeded $49.33, as adjusted, per share.
The options were granted at the exercise prices established at the original
option grant dates and vary from $13.88 to $39.16, as adjusted. At the grant
date of the new options, 102,000 of the options were priced below fair market
value. Accordingly, in 1995, the Company recorded compensation expense of
$112,000 for the difference between the fair market value and the exercise
price. These options to acquire shares of APBI stock were converted into options
to acquire Company stock, in connection with the merger. The terms and
conditions of the options remained the same, except that the number of options
and their exercise price were adjusted in accordance with the exchange ratio
provided for in the merger agreement.

EMPLOYEE STOCK PURCHASE PLAN

         The Company has an Employee Stock Purchase Plan under which options are
granted to employees who elect to purchase shares of common stock at the end of
a five- or seven-year savings period. Savings are accumulated through voluntary
payroll deductions. The Company contributes a bonus to each participant's
savings account equal to nine monthly contributions at the end of the five-year
period and 18 monthly contributions at the end of the seven-year period.
When the savings period ends, the employee may elect to purchase the shares
using the savings balance, including the bonus; purchase some of the shares and
receive the savings balance in cash; or receive the savings and bonus in cash.
Those employees electing the five-year savings period may also elect to leave
the savings in their accounts for another two years and forfeit the option to
purchase the shares. The United Kingdom Plan, as approved by the shareholders,
was implemented by Pharmaco LSR Ltd. during 1988. Currently, employees of the
Company's United Kingdom subsidiary, Pharmaco International Ltd., participate in
this plan. The United States Plan has not been implemented. Outstanding options
at the time of the merger were converted in accordance with the exchange ratio
provided for in the merger agreement.

         In connection with the sale of the toxicology operations, options
equivalent in value to the savings balance in the terminated employees' accounts
became immediately exercisable. Options in excess of the savings balance were
forfeited. The exercise period for the vested options extended through April
1996.

         At December 31, 1996, there were 4,225 options outstanding at an
average exercise price of $20.33. Of those, 2,425 options were exercisable at
December 31, 1996, at an average exercise price of $21.62.



                                      F-18
<PAGE>   52

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



12. INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                       -----------------------------------
                                                         1996          1995         1994
                                                         ----          ----         ----
<S>                                                     <C>           <C>           <C>     
Domestic                                                $1,228      $(16,778)    $  7,847
Foreign                                                   (601)         (372)         410
                                                        ------      --------     --------
Income (loss) from continuing operations                   627       (17,150)       8,257
Loss from discontinued operations                         --          (3,752)     (13,228)
Extraordinary loss                                        --          (1,372)        --
                                                        ------      --------     --------
      Total                                             $  627      $(22,274)    $ (4,971)
                                                        ======      ========     ========
</TABLE>

         The components of the provision (benefit) for income taxes were as
follows (in thousands):


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                       -----------------------------------
                                                         1996          1995         1994
                                                         ----          ----         ----
<S>                                                   <C>           <C>           <C>     
State income taxes:
     Current                                            $  330      $    (63)     $  (372)
     Deferred                                               90          (166)         182
Federal income taxes:
     Current                                             2,130        (1,021)      (1,922)
     Deferred                                            1,285        (4,716)       2,925
Foreign income taxes:
     Current                                               299           109         --
     Deferred                                             --         (12,788)         705
                                                        ------      --------      -------
Provision (benefit) for income taxes                    $4,134      $(18,645)     $ 1,518
                                                        ======
PPD's pro forma income tax provision (see Note 1)                      1,775        1,498
                                                                    --------      -------
Pro forma provision (benefit) for income taxes                      $(16,870)     $ 3,016
                                                                    ========      =======
</TABLE>

         The income tax provision (benefit) is included in the financial
statements as follows (in thousands):


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                       -----------------------------------
                                                         1996          1995         1994
                                                         ----          ----         ----
<S>                                                   <C>           <C>           <C>     
Continuing operations                                   $4,134      $(14,359)      $3,371
Discontinued operations                                   --          (2,036)        (355)
Extraordinary loss                                        --            (475)        --
                                                        ------      --------       ------
                  Total                                 $4,134      $(16,870)      $3,016
                                                        ======      ========       ======
</TABLE>

         The 1996 current federal and state income tax expense primarily relates
to costs associated with the acquisition of APBI which are not deductible for
federal and state income tax purposes. The 1996 deferred federal and state
income tax expense relates to the utilization of net operating losses and tax
credits generated in prior years. In 1995, federal and state income tax benefits
were recorded which related to the federal and state income tax losses and
credits available for carryforward, discontinued operations reserves and
restructuring reserves established for financial reporting purposes which were
not currently deductible for income tax purposes. In 1994, federal and state
deferred income tax expense resulted primarily from utilization of restructuring
reserves and discontinued operations reserves established in years prior to 1994
for financial reporting purposes which resulted in 1994 deductions for income
tax purposes.

                                      F-19
<PAGE>   53

            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



12. INCOME TAXES (CONTINUED)

         The 1996 current foreign income tax expense represents the foreign
income tax liabilities associated with the Company's foreign operations. In
1995, a foreign deferred income tax benefit was recorded to reflect the reversal
of previously recorded foreign deferred income tax expense associated with the
United Kingdom ("U.K.") toxicology operations which were sold during 1995. The 
1994 foreign income tax expense resulted primarily from temporary differences
related to the excess of U.K. capital allowances for tax purposes over
financial reporting depreciation.

         Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision (benefit) for income taxes as follows (in
thousands):


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                               -----------------------------------------
                                                                   1996           1995          1994
                                                                   ----           ----          ----
<S>                                                              <C>           <C>            <C>     
         Effective tax rate                                        660.2%          83.7%        (30.5%)
                                                                 =======       ========       =======
         United States federal statutory rate                    $   213       $ (7,574)      $(1,690)
         Differential on rates applied to foreign earnings           (72)            30           (96)
         State taxes (net of federal benefit)                        277             47            51
         Write-down of investment in PACE Incorporated
           and EnSys                                                --              (40)        3,774
         Sale of toxicology operations                              --          (10,370)         --
         Allowance for limitation of foreign tax losses              299            841           674
         Merger costs not deductible for income tax purposes       2,751           --            --
         Goodwill and other items not deductible for income
             tax purposes                                            435           --            --
         Other                                                       231            196           303
         Taxes on PPD's subchapter S earnings                       --           (1,775)       (1,498)
                                                                 -------       --------       -------
         Provision (benefit) for income taxes                    $ 4,134       $(18,645)      $ 1,518
                                                                 =======       ========       =======
</TABLE>


         During 1996, significant costs were incurred related to the acquisition
of APBI which were not deductible for income tax purposes. Accordingly, no tax
benefit was recorded on these expenses. As a result of the 1995 sale of the
Company's toxicology operations, the Company will not be liable for the payment
of certain tax liabilities recorded in prior years. These previously recorded
liabilities were reversed in 1995. In 1994, a write-down was recorded of the
Company's investment in PACE Incorporated. No tax benefit was recorded in
connection with this write-down as it was characterized as a write-down giving
rise to a capital loss for income tax purposes. Capital losses can only be
deducted for income tax purposes to the extent of capital gains incurred during
the three prior years and five subsequent years. As the Company's ability to
generate capital gains is uncertain, no benefit was recorded. At December 31,
1994, a deferred tax asset was recorded for the future benefit of U.S. loss
carryforwards. However, a valuation allowance was established as a reserve
against this asset, as the Company only recognized benefits of U.S. losses which
could be realized through a net operating loss carryback. Based on projected
future profits, at December 31, 1996 and 1995, the Company recognized a deferred
tax asset for the future benefit of U.S. loss carryforwards, and the valuation
allowance was reduced to zero.


                                      F-20
<PAGE>   54


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



12. INCOME TAXES (CONTINUED)

         Components of the net current deferred tax asset were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                   --------------------
                                                                     1996        1995
                                                                     ----        ----

<S>                                                                 <C>          <C>   
         Future benefit of foreign net operating losses             $   92        --
         Provision for business restructuring                          --       $1,060
         Allowance for doubtful accounts                               733         314
         Accruals                                                    3,263         524
         Future benefit of U.S. and state net operating losses       1,051       2,680
         Other                                                        (184)        178
                                                                    ------      ------
         Net current deferred tax asset                             $4,955      $4,756
                                                                    ======      ======
</TABLE>


         Components of the net long-term deferred tax asset, included in other
assets, were as follows (in thousands):


<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                   --------------------
                                                                     1996        1995
                                                                     ----        ----

<S>                                                                 <C>          <C>   
         Depreciation and amortization                              $ (836)    $(1,068)
         Provision for discontinued operations                         --          242
         Deferred rent                                               1,228       1,414
         Future benefit of U.S. tax credits                            391         613
         Other                                                         179         290
                                                                    ------     -------
         Net long-term deferred tax asset                           $  962     $ 1,491
                                                                    ======     =======
</TABLE>


         The cumulative amount of undistributed earnings of foreign subsidiaries
for which the Company has not provided U.S. income taxes at December 31, 1996
was $794,000. No provision has been made for the additional taxes that would
result from the distribution of earnings of foreign subsidiaries since such
earnings have been permanently reinvested in the foreign operations.

         As of December 31, 1996, the Company had approximately $2,900,000 of
net operating losses available for carryforward to future years which will
expire in 2010. The Company also had approximately $391,000 of alternative
minimum tax credits available for carryforward which never expire.


13. EMPLOYEE SAVINGS AND PENSION PLANS:

SAVINGS PLANS

         Prior to the merger, PPD maintained the PPD 401(k) Retirement Savings
Plan (the "PPD 401(k) Plan") under which all U.S. employees of PPD were eligible
to participate. PPD matched 50% of an employee's savings up to 5% of pay.
Employer matching contributions vested ratably over a period of six years. APBI
maintained the Applied Bioscience International Inc. 401(k) Retirement Savings
Plan (the "APBI 401(k) Plan"), under which all U.S. employees were eligible to
participate from their date of employment. APBI matched 50% of an employee's
savings up to 6% of pay. All participants were 100% vested in Company
contributions. Effective January 1, 1997, the two 401 (k) plans have been merged
into one plan. Under the new plan, the Company will match 50% of an employee's
savings up to 6% of pay, and employer matching contributions will vest ratably
over a four-year period.

         Company contributions for all employees for the three years ended
December 31, 1996, 1995 and 1994 were $1,483,000, $1,628,000 and $1,309,000,
respectively.


                                      F-21
<PAGE>   55


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



13. EMPLOYEE SAVINGS AND PENSION PLANS (CONTINUED)

PENSION PLANS

         Pension costs and related disclosures are determined under the
provisions of Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" and Statement of Financial Accounting Standards 
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."

         The Company has a separate contributory defined benefit plan (the "U.K.
Plan") for its qualifying United Kingdom employees and directors employed by
APBI's U.K. subsidiaries. The benefits for this plan are based primarily on
years of service and average pay at retirement. Plan assets consist principally
of investments managed in a mixed fund. The sale of the toxicology business
discussed in Note 3 resulted in the termination of employment for the majority
of United Kingdom employees who participated in the U.K. Plan. The projected
settlement gain of $780,000 was reflected as a reduction of the loss on the sale
of business in the accompanying consolidated statement of operations for the
year ended December 31, 1995.

         Pension costs for the United Kingdom plan included the following
components (in thousands):


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                   -------------------------------
                                                    1996         1995         1994

<S>                                                 <C>        <C>          <C>    
                  Service cost-benefits earned
                    during the year                 $ 553      $ 1,311      $ 1,461
                  Interest cost on projected
                    benefit obligation                394        1,361        1,349
                  Actual return on plan assets       (500)      (1,566)         706
                  Net amortization and deferral        (9)         (38)      (2,315)
                                                    -----      -------      -------
                  Net pension cost                  $ 438      $ 1,068      $ 1,201
                                                    =====      =======      =======
</TABLE>


         The funded status of the defined benefit plan was as follows (in
thousands):


<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                            ------------------------
                                                               1996         1995
                                                               ----         ----
<S>                                                          <C>          <C>     
         Actuarial present value of benefit obligations:
              Vested benefit obligation                      $(5,033)     $(4,361)
                                                             =======      =======
              Accumulated benefit obligation                 $(5,249)     $(4,403)
                                                             =======      =======
         Projected benefit obligation                        $(5,459)     $(4,765)
         Plan assets at fair value                             6,497        6,133
                                                             -------      -------
         Plan assets in excess of projected
           benefit obligation                                  1,038        1,368
         Remaining unrecognized net asset arising
           from initial application of SFAS 87                   (67)         (59)
         Unrecognized net loss from past experience
           different from that assumed and effects of
           changes in assumptions                                558          183
                                                             -------      -------
         Prepaid pension cost                                $ 1,529      $ 1,492
                                                             =======      =======
</TABLE>



                                      F-22
<PAGE>   56


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



13. EMPLOYEE SAVINGS AND PENSION PLANS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                 1996        1995
                                                 ----        ----
<S>                                              <C>         <C> 
Discount rate                                    8.5%        8.5%
Rate of compensation increase                    6.5%        5.5%
Long-term rate of return on plan assets          8.5%        8.5%
</TABLE>


         The Company maintains the APBI Environmental Sciences Group, Inc.
Pension Plan (the "Pension Plan"), a tax-qualified, defined-contribution
money-purchase pension plan, for the benefit of its eligible ENVIRON division
employees. ENVIRON is required to make annual contributions to the Pension Plan
in an amount equal to the sum of 3.75% of each eligible employee's total
compensation, plus 3.75% of the portion of such employee's compensation in
excess of the Social Security wage base. Participants vest in 20% of their
account balances after two years of service and 20% per year until they are
fully vested. The annual pension expense of the Pension Plan for the three years
ended December 31, 1996, 1995 and 1994 was $620,000, $645,000 and $633,000,
respectively.

         Effective January 1, 1994, APBI Environmental Sciences Group, Inc.
established the ENVIRON Supplemental Executive Retirement Plan. This plan is
nonqualified and provides certain key employees defined-contribution benefits
that supplement those provided by the Pension Plan. Company contributions to
this plan in 1996, 1995 and 1994 were $39,000, $44,000 and $32,000,
respectively.


14. COMMITMENTS AND CONTINGENCIES:

         The Company currently maintains liability insurance on a "claims made"
basis for professional acts, errors and omissions. As of December 31, 1996, this
insurance policy included a $500,000 self-insurance retention for each of the
Company's Life Sciences Group and Environmental Sciences Group.

         In the normal course of business, the Company is a party to various
claims and legal proceedings. Although the ultimate outcome of these matters is
presently 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 or results of operations.


15. RELATED PARTY TRANSACTIONS:

         The Company is related through common ownership with E.M. Associates,
Inc. which provides investigative review board services to the Company. The
Company had transactions with E.M. Associates, Inc. of $65,900, $102,000 and
$191,000 in expenses for the years ended December 31, 1996, 1995 and 1994,
respectively.

         Several of the Company's shareholders collectively own 14.6% of LOI
Building, Inc. ("LOI"), which leased operating facilities to the Company through
November 1996. Rent paid to LOI for the years ended December 31, 1996, 1995 and
1994, totaled $402,300, $341,000 and $430,000, respectively.

         One of the members of the Company's Board of Directors (who was a
member of APBI's Board of Directors prior to the Company's acquisition of APBI)
is Vice Chairman at Lehman Brothers. Lehman Brothers acted as APBI's investment
banker for APBI's acquisition by the Company and for APBI's sale of its
toxicology laboratories in 1995. For those investment banking services, Lehman
Brothers earned $3,058,718 in 1996 and $500,000 in 1995.

         Until December 1996, PPD-CRU rented a building from Laboratory
Associated Business, Ltd. ("LAB"), a company owned by certain employees of the 
Company. Rent paid to LAB for the years ended December 31, 1996, 1995 and 1994,
totaled $230,200, $186,000 and $112,000, respectively.


                                      F-23
<PAGE>   57


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



15. RELATED PARTY TRANSACTIONS (CONTINUED)

         The Company paid legal fees in 1996 of approximately $333,000 to a firm
which had a partner who became General Counsel of the Company in 1996. At the
time he became the Company's General Counsel he disposed of all of his interest
in the law firm.

         The Company paid legal fees of approximately $39,400, $19,640 and
$79,300 in the years ended December 31, 1996, 1995 and 1994, respectively, to a
firm having a partner who was also a director of APBI until the date of the
merger.


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:

CURRENT ASSETS AND CURRENT LIABILITIES

         The carrying amount approximates fair value because of the short
maturity of those instruments.

INVESTMENT IN SDI

         The Company's investment in SDI is recorded at $1,240,300 which
represents the market price of $1,459,200 as quoted on the National Market
System of the National Association of Securities Dealers Automated Quotation
System at December 31, 1996, less a discount of $218,900 representing the
relatively illiquid nature of the investment.

LONG-TERM DEBT

         The fair value of the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Fair value
approximates the carrying amount as most debt instruments bear interest based on
variable rates.

LETTERS OF CREDIT

         The Company utilizes 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
market place.


17. BUSINESS SEGMENT DATA:

         The Company operates in two business segments - life sciences and
environmental sciences.

         Revenues by principal business segment are separately stated in the
consolidated financial statements. Merger costs incurred in 1996 of $16.1
million were not allocated to the Company's business segments and are shown
separately for purposes of business segment analysis. Loss from operations,
depreciation and amortization, identifiable assets and capital expenditures by
principal business segment were as follows (in thousands):


                                      F-24
<PAGE>   58


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



17. BUSINESS SEGMENT DATA (CONTINUED)

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                           -------------------------
                                              1996           1995
                                              ----           ----
<S>                                        <C>            <C>       
         Income (loss) from operations:

                Life sciences              $   9,580      $ (18,657)
                Environmental sciences         5,357          4,123
                Merger costs                 (16,114)          --
                                           ---------      ---------
                Operating loss             $  (1,177)     $ (14,534)
                                           =========      =========

         Depreciation and amortization:

                Life sciences              $   8,766      $  11,601
                Environmental sciences         1,670          1,650
                                           ---------      ---------
                Total                      $  10,436      $  13,251
                                           =========      =========

         Identifiable assets:

                Life sciences              $ 159,394      $ 117,292
                Environmental sciences        22,063         25,369
                                           ---------      ---------
                Total                      $ 181,457      $ 142,661
                                           =========      =========

         Capital expenditures:

                Life sciences              $   9,895      $   8,853
                Environmental sciences         1,281          1,264
                                           ---------      ---------
                Total                      $  11,176      $  10,117
                                           =========      =========
</TABLE>

18. OPERATIONS BY GEOGRAPHIC AREA:

         The following table presents information about the Company's operations
by geographic area (in thousands):

<TABLE>
<CAPTION>

                                                       DECEMBER 31,
                                            --------------------------------------
                                              1996           1995          1994
                                              ----           ----          ----
<S>                                         <C>            <C>            <C>     
         Net revenue:
                United States               $175,173       $170,465      $153,991
                Europe and other              22,623         39,313        38,114
                                            --------       --------      --------
                Total                       $197,796       $209,778      $192,105
                                            ========       ========      ========

         Operating income (loss):
                United States               $ 14,731       $(14,834)     $  8,734
                Europe and other                 206            300         2,251
                Merger costs                 (16,114)          --            --
                                            --------       --------      --------
                Operating income (loss)     $ (1,177)      $(14,534)     $ 10,985
                                            ========       ========      ========

         Identifiable assets:
                United States               $142,464       $118,310      $133,506
                Europe and other              38,993         24,351        69,267
                                            --------       --------      --------
                Total                       $181,457       $142,661      $202,773
                                            ========       ========      ========
</TABLE>



                                      F-25
<PAGE>   59


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



19. QUARTERLY FINANCIAL DATA (UNAUDITED):
    (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

              1996                      FIRST         SECOND       THIRD         FOURTH          TOTAL
              ----                      -----         ------       -----         ------          -----

<S>                                   <C>           <C>           <C>           <C>           <C>      
Net revenue                           $ 47,075      $ 49,471      $ 49,503      $ 51,747      $ 197,796
Operating income (loss)                  3,214         3,713       (13,987)        5,883         (1,177)
Net income (loss)                        2,147         2,424       (11,957)        3,879         (3,507)
Earnings (loss) per common share      $   0.10      $   0.11      $  (0.56)     $   0.18      $   (0.17)

              1995
              ----

Net revenue                           $ 51,772      $ 53,507      $ 53,127      $ 51,372      $ 209,778
Operating income (loss)                  2,763         2,762         3,168       (23,227)       (14,534)
Income (loss) from continuing
   operations                            1,138         1,236         1,455        (6,620)        (2,791)
Loss from discontinued operations         --            --            --          (1,716)        (1,716)
Extraordinary loss                        --            --            --            (897)          (897)
Net income (loss)                        1,138         1,236         1,455        (9,233)        (5,404)

Earnings (loss) per common share:
   Continuing operations              $   0.06      $   0.07      $   0.08      $  (0.35)     $   (0.15)
   Discontinued operations                --            --            --           (0.09)         (0.09)
   Extraordinary loss                     --            --            --           (0.05)         (0.05)
                                      --------      --------      --------      --------      ---------
   Total                              $   0.06      $   0.07      $   0.08      $  (0.49)     $   (0.29)
                                      ========      ========      ========      ========      =========
</TABLE>


20. SUBSEQUENT EVENTS:

ACQUISITIONS

         In February 1997, the Company agreed to acquire Belmont Research, Inc.
("Belmont") in a transaction to be accounted for as a pooling of interests. The
consideration for Belmont consisted of 502,384 shares of the Company's common
stock plus the issuance of approximately 115,000 options to acquire Company
stock.

         In January 1997, the Company acquired Technical Assessment Systems,
Inc. for $490,000 cash, a note for approximately $300,000 and the potential to
earn an additional amount depending on their profitability for a certain period
after the acquisition.




                                      F-26
<PAGE>   60


            PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                  ADDITIONS
                                                    CHARGED               OTHER
                                       BALANCE AT     TO                  CHANGES      BALANCE
                                       BEGINNING   COSTS AND                ADD       AT END OF
DESCRIPTION                            OF PERIOD   EXPENSES   DEDUCTIONS  (DEDUCT)     PERIOD
-----------                            ---------   --------   ----------  --------     ------

<S>                                      <C>        <C>        <C>          <C>       <C>   
For the year ended December 31, 1996
     Reserve for doubtful accounts       $3,319     $1,715     $(3,497)     $(26)     $1,511
                                         ======     ======     =======      ====      ======

For the year ended December 31, 1995
     Reserve for doubtful accounts       $3,773     $1,689     $(2,113)     $(30)     $3,319
                                         ======     ======     =======      ====      ======

For the year ended December 31, 1994
     Reserve for doubtful accounts       $5,421     $2,594     $(4,305)     $ 63      $3,773
                                         ======     ======     =======      ====      ======
</TABLE>




                                      F-27
<PAGE>   61


                                   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:  March ___, 1997                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.   Director and Chief Executive Officer   March ___, 1997
---------------------------------   (Principal Executive Officer)
Fredric N. Eshelman, Pharm.D.       

/s/ Rudy C. Howard                  Chief Financial Officer and Vice       March ___, 1997
---------------------------------   President, Finance and Treasurer
Rudy C. Howard                      (Principal Financial and Accounting
                                    Officer)

/s/ Ernest Mario, Ph.D.             Director                               March ___, 1997
---------------------------------
Ernest Mario, Ph.D.

/s/ Stuart Bondurant, M.D.          Director                               March ___, 1997
---------------------------------
Stuart Bondurant, M.D.

/s/ Kirby L. Cramer                 Director                               March ___, 1997
---------------------------------
Kirby L. Cramer

/s/ Thomas D'Alonzo                 Director                               March ___, 1997
---------------------------------
Thomas D'Alonzo

/s/ Frederick Frank                 Director                               March ___, 1997
---------------------------------
Frederick Frank

/s/ Frank E. Loy                    Director                               March ___, 1997
---------------------------------
Frank E. Loy

/s/ John A. McNeill, Jr.            Director                               March ___, 1997
---------------------------------
John A. McNeill, Jr.

</TABLE>