##### Table of Contents

---

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, 2004



OR



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



For the transition period from  to



Commission file number 0-27570



---



PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|North Carolina                                                 |  | 56-1640186                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|3151 South Seventeenth Street                                  |  |                                  
|Wilmington, North Carolina                                     |  | 28412                            
|(Address of principal executive offices)                       |  | (Zip Code)                       



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



---



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



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



Common Stock, par value $0.10 per share

(Title of class)



---



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No ̈



The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1.55 billion as of June 30, 2004, based on 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 person might be deemed to be an affiliate. This
determination of affiliate status might not be conclusive for other purposes.



As of February 15, 2005, there were 56,754,305 shares of the registrants common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



The Companys definitive Proxy Statement for its 2005 Annual Meeting of Stockholders (certain parts as indicated in Part III).



---



---

##### Table of Contents

TABLE OF CONTENTS



|          |  |                                                                                                                          |  |     
|--------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|          |  |                                                                                                                          |  | Page
|Part I    |  |                                                                                                                         
|          |  |                                                                                                                         
|          |  | Item 1. Business                                                                                                         |  | 1   
|          |  | Item 2. Properties                                                                                                       |  | 26  
|          |  | Item 3. Legal Proceedings                                                                                                |  | 26  
|          |  | Item 4. Submission of Matters to a Vote of Security Holders                                                              |  | 26  
|          |  | Executive Officers                                                                                                       |  | 27  
|          | 
|Part II.  |  |                                                                                                                         
|          |  |                                                                                                                         
|          |  | Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 28  
|          |  | Item 6. Selected Financial Data                                                                                          |  | 28  
|          |  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation                             |  | 30  
|          |  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 47  
|          |  | Item 8. Financial Statements and Supplementary Data                                                                      |  | 48  
|          |  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 49  
|          |  | Item 9A. Controls and Procedures                                                                                         |  | 49  
|          |  | Item 9B. Other Information                                                                                               |  | 50  
|          | 
|Part III. |  |                                                                                                                         
|          |  |                                                                                                                         
|          |  | Item 10. Directors and Executive Officers of the Registrant                                                              |  | 52  
|          |  | Item 11. Executive Compensation                                                                                          |  | 52  
|          |  | Item 12. Security Ownership of Certain Beneficial Owners and Management                                                  |  | 53  
|          |  | Item 13. Certain Relationships and Related Transactions                                                                  |  | 53  
|          |  | Item 14. Principal Accountant Fees and Services                                                                          |  | 53  
|          | 
|Part IV.  |  |                                                                                                                         
|          |  |                                                                                                                         
|          |  | Item 15. Exhibits and Financial Statement Schedules                                                                      |  | 54  



---

##### Table of Contents

PART I



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



Item 1. Business



Overview



We are a leading global provider of drug discovery and development services
and products to pharmaceutical, biotechnology and medical device companies. Our corporate mission is to help clients maximize the return on their research and development investments. We offer broad therapeutic expertise, advanced technologies and
extensive resources for drug discovery and drug and device development. In addition to providing discovery through post-market services, we also offer our clients compound partnering opportunities.



We have been in the drug development business for more than 19 years. Our
development services include preclinical programs and Phase I to Phase IV clinical development services. We have extensive clinical trial experience across a multitude of therapeutic areas and various parts of the world, including regional, national
and global studies. In addition, for drugs that have received approval for market use, we also offer post-market support services such as product launch services, patient compliance programs, disease registry programs, and medical communications
programs for consumer and healthcare providers on product use and adverse events.



With more than 6,600 professionals worldwide, we have provided services to 41 of the top 50 pharmaceutical companies in the world as ranked by 2003 healthcare research and development spending, in addition to our work
with leading biotechnology and medical device companies. We believe that we are one of the worlds largest providers of drug development services to pharmaceutical, biotechnology and medical device companies based on 2004 annual net revenues
generated from contract research organizations.



Building on
our outsourcing relationship with pharmaceutical and biotechnology clients, we established our discovery services business in 1997. After restructuring the Discovery Sciences segment in 2003 and 2004, this business now primarily focuses on
preclinical evaluations of anticancer therapies and compound partnering arrangements associated with the development and commercialization of potential drug products. We have developed a risk-sharing research and development model to help
pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients research and evaluate the development and commercial potential for compounds at various stages of
development. In February 2005, we completed the acquisition of a biomarker business. The acquisition will expand our business by adding biomarker discovery and patient sample analysis capability to the collection of services offered by us.



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



Industry Overview



Discovering and developing new drugs is an extremely expensive and
time-consuming process. In May 2003, the Tufts Center for the Study of Drug Development released a study that estimates the total cost to develop a new prescription drug increased from approximately $231 million in 1987 to approximately $897 million
in 2000. In addition, it takes between 10 and 15 years to develop a new prescription drug and obtain approval to market it in the United States.



1



---

##### Table of Contents

The drug development services industry provides independent product development services to the
pharmaceutical, biotechnology and medical device industries. This industry has evolved from providing limited clinical trial services in the 1970s to a full-service industry today characterized by broader relationships with customers and by service
offerings that encompass the entire drug development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analysis, regulatory consulting, clinical laboratory and diagnostic services,
product registration support and post-marketing support.



Over
the past 20 years, technological advances, as well as the emergence of the biotechnology industry, have dramatically changed the drug discovery process. New and improved technologies have evolved such as ultra high-throughput screening, new in
vitroand in vivo preclinical profiling techniques, and the revolution in genetic-based drug research commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen against targets much
more quickly with literally millions of chemical compounds. This process should produce many more molecules having the ability to affect biological activity. These molecules then need to be tested quickly and economically to determine their
viability as potentially safe and effective drug candidates. Moreover, many industry participants, including pharmaceutical, biotechnology and contract research companies, have broadened their efforts to collaborate technically and financially to
optimize their drug pipelines.



The Drug Discovery and Development
Process



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



The Drug Discovery Process



Targets. Historically, scientists have used classical cellular and molecular biology techniques to map biological pathways in cells to provide a cellular basis for understanding disease processes. Based on this information,
scientists are now using a set of technologies called genomics to pinpoint genes responsible for cellular disease functions. Once genes are identified, they are tested in cellular assays or animals to identify which genes seem to have a causal link
between cellular function and occurrence of disease. The preferred genes encode proteins that are used as drug targets in chemical screens.



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



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



Lead Optimization. The process of lead optimization involves refining the chemical structure of a lead to improve its drug
characteristics, with the goal of producing a preclinical drug candidate. Lead optimization typically combines empirical and rational drug design. In empirical design procedures, large numbers of related compounds are screened for selected chemical
characteristics. In rational drug design, chemicals are optimized based on the three-dimensional structure of the target. A lead that has been optimized to meet particular drug candidate criteria and is ready for toxicity testing is called a
preclinical candidate.



2



---

##### Table of Contents

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



The
Drug Development Process



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



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



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



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



| |  |  | Phase 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, including tolerance,
absorption, metabolism and excretion. This phase lasts an average of six months to one year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 how different doses work. This phase lasts an average of one to two years.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



3



---

##### Table of Contents

Trends Affecting the Drug Discovery and Development Industry



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



Rapid Technological Change and Increased Data.Scientific and technological advancements are rapidly changing the drug discovery and development processes. The technology to understand gene function, known as functional genomics, is
dramatically increasing the number of identified potential drug targets within the human body. Pharmaceuticals on the market today target fewer than an estimated 500 human gene products. With an estimated 30,000 or so human protein-coding genes,
there exists an enormous untapped pool of targets for therapeutic intervention. This proliferation of targets increases the need for companies to use state-of-the-art technologies to effectively validate and optimize promising targets and lead
candidates. Industry participants are also looking to applications such as biomarker technology to save development time and costs, as well as enable more precise diagnosis and personalized treatment of disease. These technologies and the human
expertise necessary to manage and keep up with them are costly.



Changes in the Regulatory Environment. The drug research and development process is heavily regulated by the FDA and its Center for Drug Evaluation and Research, or CDER. The war on terror, the AIDS epidemic and the 2004 influenza
vaccine shortage in the United States have elevated the FDAs focus on research in the areas of bio-terrorism and vaccine development. In addition, recent product safety concerns, such as the cardiovascular risks identified as being related to
COX 2 inhibitors, and drug importation issues have placed the FDA and other regulatory agencies under increased scrutiny. As a result of these and other events, drug safety and related issues are under intense review by Congress, and the FDA
recently announced that it will establish a new independent Drug Safety Oversight Board to oversee the management of drug safety issues within CDER and to monitor medicines once they are on the market. These events are likely to cause significant
changes to the regulatory environment for the drug development process and could have a lasting and pronounced impact on the drug discovery and development industry.



Increase in Potential New Drug Candidates.The increase in potential new drug candidates resulting from the genomics
revolution has caused a bottleneck in the drug development industry, particularly in the early stages of drug development. While research and development spending and the number of drug candidates are increasing, the time and cost required to
develop a new drug candidate also has increased. Many pharmaceutical and biotechnology companies do not have the internal resources to pursue development of all of these new drug candidates on their own. Consequently, these companies are looking to
the drug discovery and development services industry for cost-effective, innovative and rapid means of developing new drugs.



Declining Research & Development Productivity. While the total number of compounds in clinical development has increased in the last several
years, thereby increasing the aggregate spending on research and development programs associated with new drug candidates, the number of novel new drugs approved for marketing has remained relatively flat or even declined. This declining
productivity in part reflects efforts by pharmaceutical companies to more effectively screen compounds in early stages of development and to extend the value of existing products by pursuing new indications, over-the-counter versions and alternative
delivery technologies. Pharmaceutical and biotechnology companies have responded by focusing on efforts to improve clinical success rates and to lower clinical study costs. Furthermore, many clients have also responded to the productivity challenge
by increasing their focus on licensing and risk-sharing arrangements to improve new drug pipelines and gain financing for future development and marketing programs.



Biotechnology Industry Growth. The United States biotechnology industry has grown rapidly over the last 10 years.
This industry is generating significant numbers of new drug candidates that will require development and regulatory approval. Many of these new drug candidates are now moving into clinical development, but many biotechnology companies do not have
the necessary staff, operating procedures, experience or expertise to conduct clinical trials on their own. Because of the time and cost involved, these companies often do not have the inclination to develop their own staff in this area.



4



---

##### Table of Contents

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



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



The PPD Solution



We address the needs of the pharmaceutical, biotechnology and medical device industries for drug discovery and development by providing integrated
services to help our clients maximize the return on their research and development investments. We believe that our application of innovative technologies, therapeutic expertise and commitment to quality throughout our integrated drug discovery and
development services and products offers our clients a way to identify and develop successful drugs and devices more quickly and cost effectively. We have obtained significant drug development expertise from over 19 years of operation. Starting in
1997, we expanded our services to include drug discovery services to help our clients reduce drug discovery time and minimize unproductive compound development. More recently, we have also expanded into the medical device industry. We use our
proprietary informatics technology to support our discovery and development services. Finally, because we are positioned globally, we are able to accommodate the multinational discovery and development needs of our customers.



Our Strategy



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



| |  |  | Continue to build upon our core competencies. We are an established company led by professionals with significant discovery and development experience in major
pharmaceutical, biotechnology and medical device companies bringing successful products to market throughout the world. This experience and expertise constitute our core operational strengths. Our effective performance in development services has
made us, we believe, one of the largest providers of those services globally. We are continually building our competencies by seeking to hire the best professionals in key markets around the world.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue to provide a broad range of integrated drug discovery and development services and products. We offer a broad range of integrated services and products that
are designed to address our clients needs from preclinical through post-market. By integrating extensive discovery and development services and products across our customers product life cycles, we believe we can more effectively serve
existing clients and attract new customers. We believe that our range of discovery and development services and products is one of the most extensive available from a single company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue to incorporate advanced technologies into our service offerings. We believe that optimizing the use of advanced technologies can improve quality while
creating efficiencies in cost and accelerating the discovery and development processes. We have broad experience in the use of technology in drug
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5



---

##### Table of Contents

discovery and development services. We offer our clients a wide range of technology-based services and products using a mixture of commercially available
third-party systems and internally developed software to help expedite the discovery and development processes for both drugs and devices. As new technologies develop, we equip and train our employees to make use of the innovations. We also plan to
continue to leverage and build strategic technology relationships.



| |  |  | Continue to pursue collaborative drug development relationships. We plan to continue to selectively seek opportunities to develop earlier stage compounds based on our
risk-sharing model. These types of arrangements could provide us with opportunities to receive up-front license fees, milestone payments and royalties on sales of drugs successfully developed and commercialized. We also periodically evaluate
in-licensing opportunities from companies and academic institutions seeking outlets for the continued development of their discoveries. In addition, we intend to selectively pursue out-licensing arrangements, which might also involve us providing
discovery and development services for the continued development of the potential drug candidate.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue to develop intellectual property rights. We believe that one of the keys to our long-term performance is the development of our intellectual property rights
in a variety of areas, including proprietary clinical development processes, tools and software, as well as rights to the compounds and methods of use developed from risk-sharing arrangements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Our Services



We provide services designed to increase efficiency, reduce time and save costs through our global infrastructure, integrated research and development
technologies and experience, and customer-focused communications. We operate in two segments: Discovery Sciences and Development. See our consolidated statements of operations included elsewhere in this report for segment information regarding
revenues and see Note 16 to the Notes to Consolidated Financial Statements for segment information regarding total assets and a measure of profit or loss.



Our Discovery Sciences Group



Our Discovery Sciences Group focuses on the discovery research segment of the pharmaceutical research and development outsourcing market.



Preclinical Biology. Our preclinical biology group integrates
pharmacology, metabolism, pharmacokinetic and toxicology expertise to provide preclinical program design and project management services. We provide a broad range of preclinical services and products including:



| |  |  | preclinical program design;
| | - |  | ---------------------------



| |  |  | specialized preclinical oncology research models;
| | - |  | -------------------------------------------------



| |  |  | toxicology consulting;
| | - |  | ----------------------



| |  |  | laboratory services; and
| | - |  | ------------------------



6



---

##### Table of Contents

| |  |  | technical writing and regulatory submissions.
| | - |  | ---------------------------------------------



Once a potential drug candidate is identified, we offer services and products that enable our customers to decide whether to advance the drug
candidate into a preclinical program both faster and with a greater probability of success. Our experts can provide full preclinical development services and integrate other development services internally.



We offer preclinical consulting as well as a full range of preclinical
efficacy, pharmacokinetic, pharmacodynamic and mechanism models for anticancer therapeutic candidates. Our experienced preclinical oncology staff design and perform the studies needed to identify, profile and optimize lead compounds.



Supported by our board-certified toxicologists, we develop and implement
preclinical toxicology programs. To support the clinical development program, we write the toxicology study protocols, identify qualified good laboratory practice, or GLP, testing facilities, manage the placement and conduct of studies, and prepare
and review pharmacology, toxicology, absorption and metabolism data for regulatory submissions.



We provide non-GLP bioanalytical services in our laboratory located in Middleton, Wisconsin. Our bioanalytical laboratory analyzes biological fluid
samples from preclinical animal studies and conducts in vitro discovery/early development experiments to test potential drug candidates.



Our technical writers prepare pharmacology and toxicology summaries for regulatory submissions and work with regulatory authorities to develop
preclinical plans. We offer a full range of regulatory support services, including document submission, preparation and review of all preclinical regulatory submissions required by regulatory agencies and facilitation of meetings with regulatory
agencies to ensure successful outcomes.



Compound
Partnering Programs. With increased capacity to screen and develop early lead compounds and candidates, pharmaceutical companies now find themselves without the capacity to develop all of these compounds and take them to market within a
reasonable time. Many biotechnology companies have promising drug development candidates but lack the financial resources or the infrastructure to further develop them. These situations provide attractive opportunities for us to use our extensive
experience in strategic, global drug development to selectively in-license and develop compounds or jointly develop drug candidates in collaborative arrangements. Our compound collaborative efforts have created a pipeline of products that leverage
our resources, create new opportunities for growth, and share the risks and rewards of drug development.



In 1998, as part of a development collaboration with Eli Lilly & Company, we acquired an exclusive license to develop and commercialize the compound
dapoxetine for genitourinary indications, including premature ejaculation, or PE. We developed the compound through Phase II proof-of-concept and, in January 2001, out-licensed it to ALZA Corporation, which was subsequently acquired by Johnson &
Johnson. Under the terms of the agreement, we granted ALZA worldwide rights to develop and commercialize dapoxetine, and ALZA is responsible for all clinical, regulatory, manufacturing, sales and marketing costs associated with the compound. In
exchange, we received an up-front payment and are entitled to receive further payments if regulatory milestones are achieved. In addition, we are entitled to receive royalty payments based on sales of dapoxetine, as well as milestone payments when
specified sales levels are reached. In December 2003, we acquired Lillys patents and remaining rights to develop and commercialize dapoxetine in the field of genitourinary disorders in return for a cash payment of $65.0 million. We also agreed
to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800 million. In December 2004, ALZA submitted a new drug application, or NDA, to the FDA for dapoxetine. The FDA accepted the NDA for filing in February 2005. If
approved by the FDA, dapoxetine would be the first prescription treatment designed specifically to treat PE and will be marketed in the U.S. by Ortho-McNeil Pharmaceutical, Inc.



In 2002, we licensed from Bayer AG the worldwide rights to undertake additional Phase II clinical studies on the compound
implitapide for treatment of arteriosclerosis, elevated triglycerides, pancreatitis and hyperlipidemia. In connection with our studies, we have access to Bayers existing information from previously conducted preclinical studies and Phase II
clinical trials, as well as regulatory filings to conduct clinical trials in the United States, Europe and South Africa. We have initiated Phase II proof-of-concept clinical trials for different kinds of elevated cholesterol and triglyceride
indications. Following completion of the Phase II proof-of-concept



7



---

##### Table of Contents

study, Bayer has the right to terminate its license with us and assume further development of the compound. If Bayer elects to assume development, then Bayer
must reimburse our Phase II costs and pay us milestone payments and royalties to be agreed upon by the parties.



In 2003, we made an equity investment in Chemokine Therapeutics Corp., then a privately held biotechnology company, to continue development of a
proprietary peptide that might be useful as a blood recovery therapeutic agent. We worked closely with Chemokine to scale up the product under good manufacturing practice, or GMP, and to conduct the GLP toxicology studies necessary to advance the
program to the clinic. In the second half of 2004, Chemokine initiated a study in healthy volunteers that we understand will be completed in the first half of 2005. Chemokine also granted PPD an exclusive option to license the peptide and the right
to first negotiate a license to other Chemokine peptides. In December 2004, Chemokine completed an initial public offering of its common stock in Canada.



In November 2003, we made an equity investment in Syrrx, Inc., a privately held drug discovery company, and entered into a collaboration agreement to
develop Syrrxs orally active dipeptidyl peptidase IV, or DPP IV, inhibitors to treat type 2 diabetes and other major human diseases. Syrrx has multiple lead candidates for preclinical developments, three of which were investigated in GLP
toxicology programs. In October 2004, we filed an IND for the first DPP IV inhibitor. We initiated the Phase I study in the end of October and this inhibitor is now in Phase Ib, which is when the drug is first administered to subjects suffering from
the indication. We currently anticipate starting Phase II trials in April 2005. We filed an IND for a second DPP IV inhibitor in late December 2004 and a Phase I study for this second DPP IV inhibitor is scheduled to begin in April 2005. In February
2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx. At this time, we do not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.



Our Development Group



We have designed our various global services to be flexible and integrated
in order to assist our clients in optimizing their research and development spending through the clinical stages of the development process. We provide a broad range of development services, either individually or as an integrated package, to meet
clients needs.



Phase I Clinical Testing. We are
one of the industrys largest Phase I trial providers, with clinical testing services currently conducted in a 220-bed unit in Austin, Texas. To accommodate the growing demand for our Phase I services, we leased new facilities in Austin and are
constructing a new 300-bed Phase I unit. We anticipate moving our Phase I operations to the new unit in April 2005. Our professional physician and nursing staff administers general Phase I safety tests, special population studies, and
bioavailability and bioequivalence testing. Bioavailability and bioequivalence testing involves administration of test compounds and obtaining biological fluids sequentially over time to measure absorption, distribution, metabolism and excretion of
the drug. Special population studies might involve the elderly, women or patients with specific diagnoses, such as renal failure or asymptomatic HIV. Our Austin, Texas operations also include a dental research clinic to evaluate the safety and
effectiveness of new analgesic compounds in molar extraction models. We manage our Phase I services to maximize scheduling flexibility and efficiency. These services can also be integrated with our other services that we provide, such as
bioanalytical, data management, pharmacokinetic and biostatistical services.



Laboratory Services. We offer the following laboratory services to the pharmaceutical and device industries:



Austin Central Lab: Austin central lab is located in our Phase I unit and supports the Phase I operations in Austin. This laboratory performs
clinical chemistry assays on volunteer specimens to ensure that each subject qualifies for the study and is not adversely affected by a drug. The laboratory will be relocating with our Phase I unit in April 2005. Having our laboratory in the same
facility as the volunteers speeds our response time to assess unexpected outcomes. This laboratory also serves as a central laboratory for small to medium size Phase II through IV multicenter studies.



8



---

##### Table of Contents

MRL International: We provide global specialty central laboratory services for large clinical
trials through our MRL laboratories in Highland Heights, Kentucky and Brussels, Belgium. Our specialty central laboratories provide highly standardized efficacy and safety testing services for pharmaceutical companies engaged in clinical drug
development as well as U.S. government (National Institutes of Health) funded clinical trials. We are one of the largest specialty central laboratory providers for Phase I through IV global studies involving agents used in cholesterol, endocrine,
metabolic and cardiovascular clinical research.



Bioanalytical Lab: We provide bioanalytical services through GLP-compliant laboratories in Richmond, Virginia and Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid samples from animal and human clinical
studies. The latter studies include those conducted by our Phase I unit as well as those conducted on behalf of our clients from Phase I through Phase IV for drug and metabolite content and concentration. We currently have over 1,500 validated
assays available for our clients use in conducting laboratory analyses, qualifying us for a wide range of assignments. Our laboratories also process fluid samples for preclinical studies. Our bioanalytical methods include gas
chromatography/mass spectrometry (GC/MS), liquid chromatography/mass spectrometry (LC/MS), high performance liquid chromatography (HPLC), gas chromatography (GC), radioimmunoassay (RIA) and enzyme-linked immunosorbent assay (ELISA). Support services
include facilities for handling HIV-positive samples, data management for pharmacokinetic studies from multi-center trials and sample/data archiving.



GMP Lab: We provide product analysis laboratory services through our GMP-compliant laboratory in Middleton, Wisconsin. Our product analysis
services include inhalation, biopharmaceutics, dissolution and stability studies. These studies are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for marketing.
These evaluations must be carried out from preclinical testing through Phase IV and the resulting data maintained over the commercial life of a product. New formulations, as well as generics and prescription products going to over-the counter
status, such that they no longer require physician prescription for consumer use, all require the same set of studies as the original dosage form.



We are one of a few full service companies able to offer our clients the advantages of bioanalytical, product analysis and specialty central laboratory
services, as well as Phase I clinical testing.



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



|                            |  |                                                                                                                                                                                                                                                  
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|General Areas of Expertise  |  | Specific Areas of Expertise                                                                                                                                                                                                                      
|Analgesia                   |  | Acute and chronic pain                                                                                                                                                                                                                           
|                            | 
|Cardiovascular disease      |  | Hypertension, angina pectoris, stroke, peripheral arterial disease                                                                                                                                                                               
|                            | 
|Central nervous disease     |  | Schizophrenia, depression, epilepsy, chronic pain, anxiety, obsessive-compulsive disorders, panic disorders, insomnia, multiple sclerosis                                                                                                        
|                            | 
|Critical care               |  | Sepsis, ARDS (acute respiratory distress syndrome)                                                                                                                                                                                               
|                            | 
|Dermatology                 |  | Wound healing, acne, hair loss, psoriasis                                                                                                                                                                                                        
|                            | 
|Gastroenterology            |  | Duodenal ulcer, gastric ulcer, gastro-esophogeal reflux disease, H.pylori, nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease, irritable bowel
disease                                                               
|                            | 
|Genitourinary               |  | Incontinence, sexual dysfunction                                                                                                                                                                                                                 
|                            | 
|HIV/AIDS                    |  | Primary disease and treatment/prophylaxis of opportunistic infections                                                                                                                                                                            
|                            | 
|Infectious disease          |  | Pneumonia, sinusitis, ear infections, swimmers ear, chronic bronchitis, urinary tract infection, skin and soft tissue infection, vaginal infections, thrush, athletes foot,
ringworm, fungal blood infections, and childhood and adult vaccines
|                            | 
|Metabolic/endocrine disease |  | Diabetes, growth hormone                                                                                                                                                                                                                         
|                            | 
|Oncology                    |  | Prostate, colorectal, breast, lung and other cancers                                                                                                                                                                                             
|                            | 
|Pulmonary/allergy           |  | Asthma, allergic rhinitis                                                                                                                                                                                                                        
|                            | 
|Rheumatology                |  | Rheumatoid arthritis, osteoarthritis, lupus                                                                                                                                                                                                      
|                            | 
|Urology                     |  | Sexual dysfunction, urinary incontinence and overactive bladder                                                                                                                                                                                  
|                            | 
|Virology                    |  | Herpes simplex, chronic hepatitis B, chronic hepatitis C, genital herpes, respiratory syncytial virus and influenza                                                                                                                              
|                            | 
|Womens health              |  | Osteoporosis, hormone replacement therapy                                                                                                                                                                                                        



9



---

##### Table of Contents

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



We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended to
satisfy regulatory requirements in the United States and in many foreign countries and serve as a tool for controlling and enhancing the quality of our clinical trials. All of our standard operating procedures are in compliance with good clinical
practices, or GCP, requirements and the International Conference on Harmonization, or ICH, standards. The FDA has adopted these standards in their guidance documents and, more recently, the members of the European community and Japan have codified
these standards into their clinical research regulations. We compile, analyze, interpret and submit data generated during clinical trials in report form to the FDA or other relevant regulatory agencies for purposes of obtaining regulatory approval.
We provide consulting on the conduct of clinical trials for simultaneous regulatory submissions to multiple countries.



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



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



Investigator Recruitment. During clinical trials, physicians, who are also referred to as investigators, at hospitals, clinics or other locations,
supervise administration of the drug to patients. We recruit investigators who contract with us to participate in clinical trials. We are continually looking for new investigator sites, particularly those that complement our primary therapeutic
areas.



Study Monitoring. We provide study-monitoring
services, which include investigative site initiation, patient enrollment assistance and data collection through subsequent site visits. We have monitored many clinical trials, including a number of very large studies. For example, we are engaged in
a project with the National Institutes of Health, begun in 1990, which has had approximately 60 protocols open at any given time. This project has involved approximately 1,000 investigational sites and greater than 110,000 enrolled patients and has
generated greater than 400 protocols and more than 6,000 pharmacy, regulatory and operational audits at the sites.



Clinical Data Management and Biostatistical Analysis. We provide clients with assistance in areas such as sample size determination, case report
form design and production, database design and construction, fax-based monitoring and electronic data capture. We also provide statistical analysis and summaries, including interim and final analyses, data safety, monitoring board summaries and
presentations, NDA preparation, electronic production and presentations and defense services to regulatory authorities.



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



10



---

##### Table of Contents

Market-Development Support. We provide custom-designed market development programs for
pharmaceutical, biotechnology and medical device clients. Developed with pharmaceutical and biotechnology client feedback, in 2003 we created a dedicated team of clinical, marketing and health outcomes experts to help companies with pre-launch
(Phase II through III) and post-market (Phase IIIb through IV) programs to develop markets for new products and extend market value of existing products. The portfolio of services we offer in this area includes health outcomes, large-volume late
stage trials, medical communications, consumer health and online marketing and education.



Applying advanced technologies and experience, we combine health outcomes, such as epidemiology, psychometrics and economics, with clinical research to measure and compare risks, benefits and economic and
quality-of-life impacts of drug therapies. The resulting data is used to help demonstrate the value of the product and provide insight on needs to optimize user acceptance upon product launch. We also provide late stage trials, such as Phase IIIb
through IV studies, which can produce valuable safety and efficacy data analysis and provide information for the product marketing promotion. Our medical communications services include post-market observational studies, registries and compliance
and persistency programs, which can optimize real-world outcomes and indicate ways to help enhance proper use of the drug by the physician and patient. We also provide consumer health programs, which can provide product life extension through
over-the-counter programs. Our online marketing and education services provide our clients with proprietary Web sites for disseminating medical information, online market research and product marketing services for a variety of clinical specialties.



Device Testing.Through our acquisition of Eminent
Research Systems in 2003, we expanded our service offerings to support clinical trials for the medical device industry, especially in the cardiovascular area. Our device services include study design, regulatory consulting, global trial management,
data management, biostatistics and documentation development. Using PPD GlobalView, a Web-based proprietary software product Eminent developed, we have a leading position for long-term registries of permanent implantable cardiovascular devices.



eClinical Initiatives.Our eClinical initiatives offer
efficiencies, enhanced quality and improved communications with our clients. In 2004, we piloted a customized project progression and resource management tool, which helps project managers provide efficient and cost-effective study management with
quality deliverables. We also implemented a new clinical trial management system, providing Web-based, real-time access to study data from anywhere in the world. We plan to expand use of this system into our Phase IV studies in 2005. We also
continue to expand PPD DirectConnect Web portals,
which are now supporting over 250 client studies with over 3,350 users across 72 pharmaceutical, biotechnology, clinical laboratory and government clients. We continue to expand our Oracle® clinical data management system, including introduction of Oracle clinicals
remote data capture, or RDC, system and a core electronic data capture, or EDC, team to leverage our EDC experience across project teams. In 2004, we expanded our use of a Web-based document management system supporting our data management, safety
and clinical operations businesses. This system enables us to flexibly resource project teams worldwide.



Informatics. Our informatics division, known as CSS Informatics, delivers specialized software products and technical consulting services to
support many aspects of the pharmaceutical research and development process, including drug discovery, clinical trials, regulatory review and pharmacovigilance. Our informatics clients include international and domestic pharmaceutical and
biotechnology companies and government agencies, including the FDA. Our current informatics software products include:



| |  |  | PPD Patient Profiles, which streamlines patient data review and provides graphical displays of complex research data;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | TableTrans®, which automates data transformation and integration;
| | - |  | -----------------------------------------------------------------



| |  |  | eLoader, which streamlines and automates loading of external data into Oracle Clinical;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | CAVS (Computer Aided Validation System), which streamlines the test development and execution process; and
| | - |  | ----------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

| |  |  | OC2SDS, which converts trial data to submission-ready data sets that follow standards recently adopted by the FDA.
| | - |  | ------------------------------------------------------------------------------------------------------------------



A primary focus of our informatics division is to provide consulting services
to help pharmaceutical, biotechnology and medical device companies assess and resolve clinical data management and safety system challenges, such as integrating and customizing systems, migrating clinical and safety data, providing computer systems
validation services that include compliance evaluation and updating or replacing legacy systems to meet regulatory guidance. We provide expertise on the Oracle Pharmaceutical Application suite and the PhaseForward suite of products with a full range
of support services including installation, training, validation, technical support and custom development.



Clients and Marketing



We provide a broad range of discovery and development services and products to help pharmaceutical, biotechnology and medical device companies develop compounds, drugs and devices, as well as the markets in which they plan to sell products
that gain approval.



Client Identification and Mix



Our Development Group provides Phase I to Phase IV clinical development and
market support services. We market these services in the Americas, Asia, Europe, Africa, the Middle East and the Pacific Rim. We believe that the key differentiators that help us win development business from pharmaceutical and biotechnology
companies include our global infrastructure, quality-driven execution based on ongoing training, quality assurance and control practices, and cross-functional groups with dedicated therapeutic expertise. Through our medical device development group,
we offer clinical trial services and regulatory expertise to device companies, including a number of the leading cardiovascular device manufacturers and pharmaceutical companies developing adjunct therapies. In addition, our market development
services combine clinical, marketing and health outcomes expertise to help pharmaceutical, biotechnology and device companies develop markets for new products and extend market value for existing products. We believe that these services help our
clients maximize the life cycle of their products.



For the
year ended December 31, 2004, 82.9% of our Development Groups net revenues were attributable to clinical services and 17.1% to laboratory services. From a geographic perspective, 72.5% of our Development Groups net revenues in 2004 were
derived from the United States with the remaining amount coming primarily from Europe. For additional information on our geographic distribution, see Note 17 to the Notes to Consolidated Financial Statements included elsewhere in this report.



Our Discovery Sciences Group offers services and technologies
to select drug candidates for clinical evaluation. This preclinical-focused group primarily provides services to clients in the pharmaceutical and biotechnology industries. In addition, we perform research on compounds that we own or license and
through our compound risk-sharing collaborative relationships. Our Discovery Sciences Group revenues have all been generated in the United States.



For the year ended December 31, 2004, total net revenue for all of our services were derived from various industries approximately as follows:



|                        |  |                           |  
|----------------------- |  | ------------------------- | -
|Source                  |  | Percentage of Net Revenue |  
|Pharmaceutical          |  | 65.2                      | %
|Biotechnology and other |  | 32.3                      | %
|Government              |  | 2.5                       | %



For the purposes of
classifying net revenue, we define pharmaceutical to include companies with the majority of their research and development related to chemical entities and biotechnology to include companies with the majority of their research and development
related to biologically engineered compounds. Other includes companies primarily focused upon medical devices, diagnostics and generic formulations. We refer to the Standard Industry Classification, or SIC, codes for publicly traded companies to
determine their classification.



12



---

##### Table of Contents

Concentration of business among large customers is not uncommon in our industry. We believe that our
diverse client mix, in which no single client in 2004 accounted for more than 10% of our net revenues, limits our exposure to significant risks associated with industry consolidation and major product cancellations. However, we have experienced
higher concentration in the past and might experience it in the future. Approximately 36% of our 2004 net revenues were derived from clients headquartered outside the United States, in particular in Europe and Japan. Approximately 27.6% of our 2004
net revenues were generated from services provided by our employees located in countries outside the United States. See Note 17 to the Notes to Consolidated Financial Statements included elsewhere in this report for the breakdown of this revenue.



Marketing Strategy



With a primary focus on large pharmaceutical companies, we promote our
discovery services through a dedicated sales team, localized scientist-to-scientist communications and our centralized corporate marketing efforts. In addition, we believe that much of the preclinical oncology work we gain is derived from positive
word-of-mouth communications in the industry.



For our
development services and products other than informatics and specialty central lab services, we use centralized corporate marketing to support the efforts of dedicated business development staff calling on pharmaceutical, biotechnology and device
companies. Our sales teams focus on client segments and service areas. In addition, while the service area representatives call on particular buying groups within a given pharmaceutical client, sales account managers are responsible for coordinating
outsourcing across our service areas for each client. To further facilitate cross-functional sales, worldwide business development staff for development services and products across our company report to the same executive. The informatics division
uses technology expert communications and localized marketing efforts, and our specialty central lab division applies core operation staff communicating with potential clients and networking.



The top 25 publicly traded pharmaceutical companies ranked by research and
development expenses in 2003 accounted for 87% of research and development spending in 2003, so we concentrate on these companies. The top 50 publicly traded biotechnology companies accounted for almost 91% of the biotechnology research and
development expenditures in 2003. To appropriately focus our sales and marketing efforts among biotechnology companies, we consider additional factors such as the stage of a drugs development and the financial stability of a companys
business.



Our business development personnel consult with
potential pharmaceutical and biotechnology clients early in the project consideration stage in order to determine their requirements. Along with the appropriate operational, technical or scientific personnel, our business development representatives
invest significant time to determine the optimal means to design and execute the potential clients program requirements. As an example, recommendations we make to a potential client with respect to a drug development study design and
implementation are an integral part of our bid proposal process and an important aspect of the integrated services we offer. We believe our preliminary efforts relating to the evaluation of a proposed clinical protocol and implementation plan
enhance the opportunity for accelerated initiation and overall success of the trial.



Our core global marketing and corporate communications activities are primarily Web-based. Our initiatives include online advertising and directory listings on predominant industry Web sources; interactive Web-based
education and information programs, including Web conferences and Webcasts; direct e-mail campaigns and electronic newsletters. In late 2004, working with client, media and analyst feedback, we evolved our Web site for improved navigation and use
and added new search optimization tools to help drive traffic to the site. In addition, we integrate client presentations and sales materials, global speakers bureau, media relations, corporate materials and marketing at professional trade
shows to reinforce key messages and selling points. We encourage and sponsor the participation of our personnel in a variety of professional endeavors, including the presentation of papers at national and international professional trade meetings
and the publication of scientific articles in medical and pharmaceutical journals. Through these presentations, publications and additional promotion via our corporate Web site, we seek to advance and promote our reputation for professional
excellence.



13



---

##### Table of Contents

Backlog



Our backlog consists of anticipated net revenue from letters of intent, verbal commitments and contracts that either have not started but are anticipated
to begin in the near future, or are in process and have not been completed. Amounts included in backlog represent future revenue and exclude revenue that has been recognized previously in our statement of operations. Net revenue is defined as
professional fee income, or gross revenue, less fees and associated reimbursements. Once contracted work begins, net revenue is recognized over the life of the contract. Our backlog was $1.29 billion in net revenues at December 31, 2004, compared to
$1.12 billion in net revenues at December 31, 2003.



We believe
that our backlog as of any date is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the
labor increases and decreases that occur at the beginning and end of each study. Additionally, contracts relating to our clinical development business generally are subject to early termination by the client, and clinical trials can be delayed or
canceled for many reasons, including unexpected test results. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is
finalized. For these reasons, we might not fully realize our entire backlog as net revenue.



Intellectual Property



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



We actively seek patent protection
both in the United States and abroad. As of December 31, 2004, we owned or co-owned 11 issued U.S. patents and 23 pending U.S. patent applications. Our issued U.S. patents primarily relate to our proprietary anti-tumor compounds, dapoxetine compound
and methods of use, and HIV drug target gene sequences. Our pending U.S. patent applications primarily relate to proprietary genomic and genetic information, chemical compounds, clinical development business methods and software. We have filed or
plan to file applications in other countries corresponding to most of our U.S. applications. As of December 31, 2004, we had eight granted and 52 pending foreign filings, including eight pending Patent Cooperation Treaty, or PCT, filings.



We also have obtained licenses to other patents from academic
institutions and pharmaceutical companies. As of December 31, 2004, we had exclusive license rights to seven issued U.S. patents and 54 pending U.S. patent applications, as well as corresponding foreign filings.



Pursuant to the terms of the Uruguay Round Agreements Act, patents issued
from applications filed on or after June 8, 1995, have a term of 20 years from the date of filing, irrespective of how long it takes for the patent to issue. Because patent applications in the pharmaceutical industry often take a long time to issue,
this method of patent term calculation can result in a shorter period of patent protection afforded to us compared to the prior method of term calculation (17 years from the date of issue). Under the Drug Price Competition and Patent Term
Restoration Act of 1984 and the Generic Animal Drug and Patent Term Restoration Act of 1988, a patent that claims a product, use or method of manufacture covering drugs may be extended for up to five years to compensate the patent holder for a
portion of the time required for FDA review. However, we might not be able to take advantage of the patent term extension provisions of this law.



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



14



---

##### Table of Contents

Employees



At December 31, 2004, we employed approximately 6,600 professionals, of whom approximately 6,150 were in the Development Group, approximately 50 were in
the Discovery Sciences Group and the remainder served in corporate operations functions. Of our staff, approximately 550 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 925 hold other masters or other postgraduate degrees. None of our
employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.



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



Available Information



Our Web address is www.ppdi.com. We make available free of charge through our Web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.



Competition



The drug and medical device development outsourcing industry consists of hundreds of smaller, limited-service providers and a number of full-service
global development companies. The industry continues to experience consolidation and, in recent years, a group of large, full-service competitors has emerged. In 2004, consolidation continued with the merger of PharmaNet, Inc. into SFBC
International, Inc. and the merger of Inveresk Research Group, Inc. into Charles River Laboratories International, Inc. In addition, PRA International, Inc. completed an initial public offering in 2004. This trend of industry consolidation, along
with other changes and the emergence of new entrants, continues to generate intense competition for clients and acquisition candidates. Additional business combinations by competitors or clients could have a significant impact on the competitive
landscape of the drug development outsourcing industry.



Our
Development Group and Discovery Sciences Group compete principally on the basis of reputation, scientific and technical expertise, experience and qualifications of professional staff, and the ability to deliver timely, high quality services and
products to our clients. In addition to competing with a number of other global, full-service companies, our Development Group also competes against some medium-sized companies, in-house research and development departments of pharmaceutical and
biotechnology companies, as well as universities and teaching hospitals. Newer, smaller entities with specialty focuses, such as those aligned to a specific disease or therapeutic area, compete aggressively against larger companies for clients.
Increased competition might lead to price and other forms of competition that could adversely affect our operating results.



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



As a general matter, the drug development services industry is not capital-intensive and the financial costs of entry into the industry are relatively
low. Despite recent consolidation, this industry remains highly fragmented,



15



---

##### Table of Contents

with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few
barriers to entry for smaller, limited-service providers, we believe there are significant barriers to becoming a global provider offering a broad range of services and products. These barriers include:



| |  |  | the cost and experience necessary to develop broad therapeutic expertise;
| | - |  | -------------------------------------------------------------------------



| |  |  | the ability to manage large, complex clinical trials;
| | - |  | -----------------------------------------------------



| |  |  | the ability to deliver high quality services consistently for large drug development projects;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the experience to prepare regulatory submissions throughout the world; and
| | - |  | --------------------------------------------------------------------------



| |  |  | the infrastructure and knowledge to respond to the global needs of clients.
| | - |  | ---------------------------------------------------------------------------



For specialty areas such as drug information and medical communications, informatics, analytical laboratory services and specialty central laboratory
services, our Development Group competes in a market that has a myriad of niche providers. For the most part, these niche providers offer specialty services and products with a focus on a specific geographic region, a particular service or function
and/or a specific stage or phase of drug development. By contrast, we provide our services on a global basis across functional areas.



The outsourced preclinical research industry consists of a number of large providers and numerous smaller niche companies. Our Discovery Sciences Group
faces significant competition from these companies, as well as competition from research teams funded internally by pharmaceutical and biotechnology companies. Our compound risk-sharing initiatives seek to help our clients maximize the return on
their research and development investments by sharing development costs and risks as well as future revenue streams from successful product launches. Many of these clients search for a collaborative partner through a competitive bidding process,
which can include pharmaceutical, biotechnology and discovery platform and services companies, as well as venture capital firms and financial institutions. As such, there is significant competition for these opportunities, and our success will
depend on our ability to identify and competitively bid for risk-sharing programs that are likely to be productive.



Government Regulation



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



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



Human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy along with
safety in the target population. The trials are generally conducted in three phases, which sometimes overlap, although the FDA may require a fourth phase as a condition of approval. After the successful completion of the first three clinical phases,
a company requests approval for marketing its product by submitting a NDA. The NDA is a comprehensive, multi-volume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will
be manufactured and tested, additional stability data and proposed labeling. The FDAs review can last from six months to many years, with the average review lasting 14 months. Once the NDA is approved, the product may be marketed in the United
States subject to any conditions imposed by the FDA.



Laboratories such as ours that provide information included in IND applications and NDAs must conform to regulatory requirements that are designed to ensure the quality and integrity of the testing process. For example, our bioanalytical
laboratories in Richmond, Virginia, and Middleton, Wisconsin, follow the FDAs GLP regulations. These regulations have also been adopted by the Ministry of Health in the United Kingdom and by similar regulatory



16



---

##### Table of Contents

authorities in other countries. Our product analysis lab in Middleton, Wisconsin, follows the FDAs cGMP regulations. Both GLP and cGMP regulations
require standardization procedures for all equipment, processes and analytical tests, for recording and reporting data, and for retaining appropriate records. To help ensure compliance with these regulations, we have established quality assurance at
our laboratory facilities to audit test data and conduct regular inspections of testing procedures and our laboratory facilities.



In addition, laboratories that analyze human blood or other biological samples for the diagnosis and treatment of study subjects must comply with the
Clinical Laboratory Improvement Act, or CLIA. CLIA requires laboratories to meet staffing, proficiency and quality standards. The laboratory in our Austin, Texas, facility and our specialty central laboratory located in Kentucky are CLIA-certified.
Both of these laboratories and our specialty central clinical laboratory in Europe are accredited by the College of American Pathologists.



The industry standard for the conduct of clinical research is embodied in the FDAs regulations for IRBs, investigators and sponsor/monitors, which
collectively are termed the good clinical practices, or GCP, by industry, and the GCP guidelines issued by ICH, which have been agreed upon by industry and regulatory representatives from the United States, European Union and Japan. Our global
standard operating procedures are written in accordance with all FDA and ICH requirements. This enables our work to be conducted locally, regionally and globally to standards that meet all currently applicable regulatory requirements.



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



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



We are
also subject to regulations enforced by the following agencies:



| |  |  | Occupational Safety and Health Administration,
| | - |  | ----------------------------------------------



| |  |  | Nuclear Regulatory Commission,
| | - |  | ------------------------------



| |  |  | Environmental Protection Agency,
| | - |  | --------------------------------



| |  |  | Department of Transportation,
| | - |  | -----------------------------



| |  |  | International Civil Aviation Organization,
| | - |  | ------------------------------------------



| |  |  | Drug Enforcement Administration, and
| | - |  | ------------------------------------



| |  |  | other related international, federal, state and local regulations that govern the use, handling, disposal, packaging, shipment, and receipt of: certain drugs or unknown compounds,
chemicals and chemical waste, toxic substances, bloodborne pathogens and bloodborne pathogen waste; and radioactive materials and radioactive waste.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to comply with these regulations, we have provided procedures, necessary equipment, and ongoing training for our
employees involved in these activities. To date, we have had no citations or fines from the above agencies.



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



17



---

##### Table of Contents

Factors that Might Affect our Business or Stock Price



Risks Related to Our Discovery and Development Businesses



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



Industry trends and
economic factors that affect our clients and collaboration partners, pharmaceutical, biotechnology and medical device companies, also affect our business. For example, the practice of many companies in these industries has been to hire companies
like us to conduct large development projects. If these industries reduce their tendency to outsource those projects, our operations, financial condition and growth rate could be materially and adversely affected. In the past several years, mergers
and other factors in the pharmaceutical industry appear to have slowed decision-making by pharmaceutical companies and delayed drug development projects. Continuation or increases in these trends could have an adverse effect on our business. In
addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future regulatory cost-containment
efforts limit the profits that can be derived on new drugs, our customers might reduce their drug discovery and development spending, which could reduce our revenue.



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



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



The majority of our customers contracts can be terminated upon short notice.



Most of our contracts for discovery and development
services are terminable by the client upon 30 to 90 days notice. Clients terminate or delay their contracts for a variety of reasons, including but not limited to:



| |  |  | products being tested fail to satisfy safety requirements;
| | - |  | ----------------------------------------------------------



| |  |  | products have undesired clinical results;
| | - |  | -----------------------------------------



| |  |  | the client decides to forego a particular study;
| | - |  | ------------------------------------------------



| |  |  | inability to enroll enough patients in the study;
| | - |  | -------------------------------------------------



| |  |  | inability to recruit enough investigators; or
| | - |  | ---------------------------------------------



| |  |  | production problems cause shortages of the drug.
| | - |  | ------------------------------------------------



The loss or delay of a large contract or multiple smaller contracts could adversely affect our operating results.



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



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



18



---

##### Table of Contents

Management



Our future success depends on the personal efforts and abilities of the principal members of our senior management and
scientific staff to provide strategic direction, develop business, manage our operations and maintain a cohesive and stable environment. For example, we rely on the services of Fredric N. Eshelman, Pharm.D., our chief executive officer. Although we
have employment agreements with Dr. Eshelman and other executives, they are generally only for one year and do not assure that Dr. Eshelman or any other executive with whom we have an employment agreement will remain with us. We do not have
employment agreements with all of our key personnel.



Healthcare Providers



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



Scientists



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



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



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



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



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



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



19



---

##### Table of Contents

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



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



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



Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with healthcare
providers and drug companies. Healthcare reform could reduce demand for our services and products, including potential drug candidates that are being developed by us or with others under our risk-sharing agreements, and, as a result, our revenue. In
the last several years, the United States Congress has reviewed several comprehensive health care reform proposals. The proposals are intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures.
The United States Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Any such legislation
could cause our discovery and development customers to spend less on research and development. If this were to occur, we would have fewer business opportunities for our development and discovery service business, which could reduce our earnings, and
the development of particular compounds might be discontinued. Similarly, pending or future healthcare reform proposals outside the United States could negatively impact our revenues from our international operations.



The drug discovery and development services industry is highly competitive.



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



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



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



| |  |  | continue to improve our operating, administrative and information systems;
| | - |  | --------------------------------------------------------------------------



| |  |  | accurately predict our future personnel and resource needs to meet our commitments;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | track the progress of ongoing projects; and
| | - |  | -------------------------------------------



| |  |  | attract and retain qualified management, sales, professional, scientific and technical operating personnel.
| | - |  | -----------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

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



We will face additional risks in expanding our foreign operations, as we learned from past expansions including the acquisitions of companies in Belgium and Singapore in 2002. Specifically, we might find it difficult
to:



| |  |  | assimilate differences in foreign business practices;
| | - |  | -----------------------------------------------------



| |  |  | hire and retain qualified personnel; and
| | - |  | ----------------------------------------



| |  |  | overcome language and cultural barriers.
| | - |  | ----------------------------------------



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



We anticipate that a portion of any future growth of our
business might be accomplished by acquiring existing businesses, products or technologies. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into
our organization effectively, to retain and motivate key personnel of acquired businesses and to retain their customers. In addition, we might not be able to identify suitable acquisition opportunities or obtain any necessary financing on acceptable
terms. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction. Any future acquisition could involve other risks, including the assumption of additional
liabilities and expenses, issuances of potentially dilutive equity securities or interest-bearing debt, transaction costs, reduction in our stock price as a result of any of these or because of market reaction to a transaction, and diversion of
managements attention from other business concerns.



We
have made and plan to continue to make investments in other companies. In many cases, there is no public market for the securities of these companies and we might not be able to sell these securities on terms acceptable to us, if at all. In
addition, if these companies encounter financial difficulties, we might lose all or part of our investment. For example, in 2003 and 2004 we recorded impairments of equity investments, net, totaling $10.1 million and $2.0 million, respectively, to
write down the carrying value of our investments for other than temporary declines in value. See Note 6 to the Notes to Consolidated Financial Statements included elsewhere in this report for a more detailed discussion of these impairments.



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



The majority of our contracts for the
provision of development services are at fixed prices. As a result, variations in the timing and progress of large contracts can materially affect results. In addition, we bear the risk of cost overruns unless the scope of activity is revised from
the contract specifications and we are able to negotiate a contract modification with the customer shifting the cost overrun to the customer. If we fail to adequately price our contracts, or if we experience significant cost overruns, our operating
results could be materially adversely affected. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future, which would
have a material adverse impact on our operating results.



Our business
exposes us to potential liability for personal injury claims that could affect our financial condition.



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



21



---

##### Table of Contents

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



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



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



The clinical research studies we run in our Development Group rely upon the ready accessibility and willing participation of
physician investigators and volunteer subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial. Volunteer subjects generally
include people from the communities in which the studies are conducted, including our Phase I clinic in Austin, Texas, which to date has provided a substantial pool of potential subjects for research studies. Our clinical research development
business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis.



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



Because we provide our discovery and development services
worldwide, our business is subject to risks associated with doing business internationally. Our revenue from our non-U.S. operations represented approximately 27.6% of our total revenues for the year ended December 31, 2004. We anticipate that
revenue from international operations will grow in the future. Accordingly, our future results could be harmed by a variety of factors, including:



| |  |  | changes in foreign currency exchange rates, which could result in foreign currency losses;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | changes in a specific countrys or regions political or economic conditions,
| | - |  | -----------------------------------------------------------------------------



| |  |  | potential negative consequences from changes in tax laws affecting our ability to expatriate profits;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | difficulty in staffing and managing widespread operations, including risks of violations of local laws or the U.S. Foreign Corrupt Practices Act by employees overseas; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unfavorable labor regulations, including specifically those applicable to our European operations.
| | - |  | --------------------------------------------------------------------------------------------------



For example, in 2004 our operating income was negatively impacted by approximately $4.9 million, net, due to the
effect of the weakening of the U.S. dollar relative to the euro, British pound and Brazilian real. Although we attempt to manage this risk through provisions in our contracts with our customers and other methods, including foreign currency hedging
contracts, we might not be able to eliminate or manage these risks and our operating income could be materially and adversely affected by a further decline in the value of the U.S. dollar.



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



Our success will depend in part on our ability
to protect the proprietary software, compositions, processes and other technologies we develop during the drug development process. In addition, one of our business strategies is to in-license and/or out-license rights to drug candidates and enter
into collaborations with pharmaceutical and biotechnology companies for the development of drug candidates. Any inability to protect our intellectual property rights could materially and adversely affect our business.



22



---

##### Table of Contents

Any patents that we own or license might not provide valuable protection in the future for the covered
technology or products. Our patent applications might never result in the issuance of a patent. Competitors might develop similar products or methods that are not covered by our issued patent claims. In addition, an issued patent might be narrowed
or invalidated by a court upon challenge. The value of an issued patent could also be diminished if a patent is issued to a competitor that blocks our ability to use our patented technology. If blocked, we might be forced to stop using some or all
of the technology or to license technology from third parties on unfavorable terms.



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



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



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



We have only limited experience in the drug discovery business, and our prospects for success in this business remain uncertain and are
dependent on third parties with whom we collaborate.



It
takes many years for a drug discovery business like ours to generate revenue and income. We established our drug discovery group in 1997 and have only limited experience with these activities and might not be successful in our drug discovery
efforts. Generating revenue and income from our drug discovery business will depend on our ability to:



| |  |  | develop products internally or obtain rights to them from others on favorable terms;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | successfully complete laboratory testing and human studies;
| | - |  | -----------------------------------------------------------



| |  |  | obtain and maintain intellectual property rights to these products;
| | - |  | -------------------------------------------------------------------



| |  |  | obtain and maintain regulatory approvals related to the efficacy and safety of these products; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | enter into arrangements with third parties to manufacture products on our behalf and to provide sales and marketing functions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



23



---

##### Table of Contents

Since 1997, we have entered into collaborative agreements to develop and commercialize drugs with others.
Our ability to succeed in our drug discovery business will depend on successfully executing existing and any new arrangements we enter into for the development and commercialization of a drug candidate. The third parties that we collaborate with
might not perform their obligations as expected or they might breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, parties collaborating with us might
elect not to develop the product candidates or not to devote sufficient resources to the development, manufacture, marketing or sale of these product candidates. If the parties to our collaborative agreements do not fulfill their obligations, elect
not to develop a candidate or fail to devote sufficient resources to it, we could be materially and adversely affected.



We are dependent on third parties for certain essential business functions for our risk-sharing arrangements, and failures of these third party providers could
materially adversely affect our business, financial condition and results of operations.



We and some of our collaborative partners are dependent on third parties for certain functions associated with the development and commercialization of our potential drug candidates, including manufacturing and
marketing and sales. Our dependence on third parties for these services might adversely affect us and our ability to develop and commercialize a drug candidate on a timely and competitive basis. If we or our collaborative partners are unable to
retain or replace third-party providers of required services on commercially acceptable terms, our potential drug candidates might not be developed and commercialized as planned, if at all. If we encounter delays or failures by these third parties
to perform, we might have to seek alternative sources of supply, lose sales or abandon a drug candidate, and our business, financial condition and results of operations could be materially and adversely affected.



We might not be able to obtain government approval for our product candidates.



The development and commercialization of pharmaceutical
products are subject to extensive governmental regulation in the United States and foreign countries. Government approvals are required to develop, market and sell the potential drug candidates we are developing alone or with others under our
risk-sharing arrangements. Obtaining government approval to develop, market and sell drug candidates is time-consuming and expensive, and the clinical trial results for a particular drug candidate might not satisfy required government approvals. In
addition, governmental approvals might not be received in a timely manner, if at all, and we and our collaborative partners might not be able to meet other regulatory requirements for our products. Even if we are successful in obtaining all required
approvals to market and sell a drug candidate, post-marketing requirements and the failure to comply with other regulations could result in suspension or limitation of government approvals.



In connection with drug discovery activities outside the United States, we
and our collaborators will be subject to foreign regulatory requirements governing the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. These requirements vary from country to country. Even if approval has
been obtained for a product in the United States, approvals in foreign countries must be obtained prior to marketing the product in those countries. The approval process in foreign countries may be more or less rigorous from country to country and
the time required for approval may be longer or shorter than that required in the United States. Clinical studies conducted outside of any particular country may not be accepted by that country and the approval of a pharmaceutical product in one
country does not assure that the product will be approved in another country.



We might incur substantial expense to develop products that are never successfully developed and commercialized.



We have incurred and expect to continue to incur substantial research and development and other expenses in connection with our compound partnering
agreements. We anticipate that these expenses will exceed our prior research and development expenses, with the possible exception of our $65.0 million payment to Eli Lilly and Company in 2003. The potential drug candidates to which we devote
resources might never be successfully developed or commercialized by us or our collaborative partners for numerous reasons, including:



| |  |  | preclinical and clinical trial results;
| | - |  | ---------------------------------------



24



---

##### Table of Contents

| |  |  | delays in manufacturing, or the inability to manufacture product for use in clinical trials or for sale following regulatory approval, if any;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competitive products with superior safety and efficacy profiles;
| | - |  | ----------------------------------------------------------------



| |  |  | patent conflicts or unenforceable intellectual property rights;
| | - |  | ---------------------------------------------------------------



| |  |  | failures or delays in obtaining regulatory approvals;
| | - |  | -----------------------------------------------------



| |  |  | demand for the particular product; and
| | - |  | --------------------------------------



| |  |  | other factors that could make the product uneconomical.
| | - |  | -------------------------------------------------------



Incurring significant expenses for a potential drug candidate that is not successfully developed and/or commercialized, could have a material adverse effect on our
business, financial condition, results of operations and prospects, because we would not receive the anticipated milestone, royalty or other payments and rights.



Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.



We depend on our customers, investigators, collaboration partners, our own
laboratories and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks and natural disasters, such as
hurricanes or ice storms, could still disrupt our operations or those of our customers, investigators and collaboration partners, which would also affect us. Even though we carry business interruption insurance policies and typically have provisions
in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or
catastrophic event affecting us or our customers, investigators or collaboration partners could have a significant negative impact on our operations.



Our development operations might be affected if there was a disruption to the air travel system.



Our specialty central laboratories and some of our other discovery and development services rely heavily on air
travel for transport of clinical trial kits and other materials and people and disruption to the air travel system could have a material adverse effect on our development business. While we have developed contingency plans for a variety of events
that could disrupt or limit available air transportation, these plans might not be effective or sufficient to avert such a material adverse effect.



Because our stock price is volatile, our stock price could experience substantial declines.



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



25



---

##### Table of Contents

Item 2. Properties



As of
February 15, 2005, we had 61 offices located in 28 countries on six continents. All locations relate to our Development Group, and the Morrisville, North Carolina and Menlo Park, California locations also house our Discovery Sciences Group. Our
principal executive offices are located in Wilmington, North Carolina. We own and operate four facilities, including a building in Leicester, England, a building in Kersewell, Scotland, a laboratory building in Brussels, Belgium and a building in
Durham, North Carolina. We lease all our other facilities. We also own land in Wilmington, North Carolina where we plan to construct a new corporate headquarters facility we intend to occupy in late 2006. We believe that our facilities are adequate
for our operations and that suitable additional space will be available when needed. The locations, approximate square footage and lease expiration dates of our operating facilities comprising more than 10,000 square feet as of February 15, 2005
were as follows:



|                            |  |                            |  |                       
|--------------------------- |  | -------------------------- |  | ----------------------
|Location                    |  | Approximate Square Footage |  | Lease Expiration Dates
|Austin, Texas               |  | 311,000                    |  | 4/18/05 - 12/31/14    
|Morrisville, North Carolina |  | 250,000                    |  | 8/31/09 - 1/23/15     
|Wilmington, North Carolina  |  | 217,000                    |  | 11/30/06 - 8/31/09    
|Middleton, Wisconsin        |  | 140,000                    |  | 7/31/10 - 11/30/11    
|Menlo Park, California      |  | 88,000                     |  | 6/1/12                
|Richmond, Virginia          |  | 79,000                     |  | 8/31/09 - 8/31/14     
|Highland Heights, Kentucky  |  | 72,000                     |  | 12/31/14              
|Granta Park, United Kingdom |  | 48,000                     |  | 6/25/19               
|Blue Bell, Pennsylvania     |  | 43,000                     |  | 8/31/10               
|Sao Paulo, Brazil           |  | 32,000                     |  | 9/5/05  9/5/15       
|Brussels, Belgium           |  | 28,000                     |  | 9/30/08               
|San Diego, California       |  | 28,000                     |  | 3/31/10               
|Munich, Germany             |  | 20,000                     |  | 11/30/08              
|Madrid, Spain               |  | 17,000                     |  | 8/01/07               
|Maisons Alfort, France      |  | 17,000                     |  | 11/09/10              
|Hamilton, New Jersey        |  | 16,000                     |  | 5/31/07               
|Columbia, Maryland          |  | 15,000                     |  | 7/31/08               
|Milan, Italy                |  | 12,000                     |  | 3/31/06               
|New Hope, Minnesota         |  | 12,000                     |  | 6/30/05               
|Warsaw, Poland              |  | 12,000                     |  | 9/30/07               
|Karlsruhe, Germany          |  | 11,000                     |  | 1/15/14               
|Johannesburg, South Africa  |  | 11,000                     |  | 1/31/06               



Item 3. Legal Proceedings



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



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



No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.



26



---

##### Table of Contents

Executive Officers



The following
table contains information concerning our executive officers as of February 15, 2005:



|                               |  |     |  |                                                        
|------------------------------ |  | --- |  | -------------------------------------------------------
|Name                           |  | Age |  | Position(s)                                            
|Fredric N. Eshelman., Pharm.D. |  | 56  |  | Vice Chairman, Chief Executive Officer                 
|Fred B. Davenport, Jr.         |  | 53  |  | President, Assistant Secretary                         
|Paul S. Covington, M.D.        |  | 48  |  | Executive Vice President  Development                 
|Linda Baddour                  |  | 46  |  | Chief Financial Officer, Treasurer, Assistant Secretary
|Colin Shannon                  |  | 45  |  | Executive Vice President  Global Clinical Operations  
|Francis J. Casieri             |  | 62  |  | Senior Vice President  Global Business Development    



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



Fred B. Davenport, Jr. is our President and Assistant Secretary. Mr. Davenport joined us as General Counsel in December
1996. In January 2001, Mr. Davenport was promoted to Executive Vice President and to President in January 2002. Prior to his employment by us, Mr. Davenport was a partner in the Wilmington, North Carolina law firm of Murchison, Taylor, and Gibson,
L.L.P., which he joined in 1977. Mr. Davenport was also a member of the faculty of the University of North Carolina at Wilmingtons Cameron School of Business Administration from 1982 to 1991.



Paul S. Covington, M.D. is our Executive Vice President  Development.
Dr. Covington joined us in September 1991 as a Medical Director. He was promoted from Senior Vice President to his current position in January 2002. He is board certified in internal medicine and licensed in North Carolina and Alabama. Prior to
joining us, Dr. Covington was in private practice in Clanton, Alabama from 1985 to 1990 where he served as Chief of Staff and Director of Critical Care and Cardiopulmonary for the local hospital. From 1991 to 1992, he was Medical Director for the
Birmingham site of Future Healthcare Research Centers.



Linda
Baddour is our Chief Financial Officer, Treasurer, and Assistant Secretary. Ms. Baddour joined us in December 1995. Ms. Baddour was promoted to Chief Accounting Officer in 1997 and to Chief Financial Officer in 2002. Prior to her employment by us,
Ms. Baddour was the Controller for Cooperative Bank from 1980 to 1995. Ms. Baddour is a Certified Public Accountant.



Colin Shannon is our Executive Vice President  Global Clinical Operations. Mr. Shannon joined us in 1995. He has served in numerous management
positions, including Chief Operating Officer, Europe and Chief Financial and Administration Officer, Europe. Prior to his employment by us, Mr. Shannon spent more than 15 years in a variety of financial and accounting positions in the utility and
multimedia industries.



Francis J. Casieri is our Senior Vice
President  Global Business Development.Mr. Casieri has served as our Senior Vice President  Global Business Development since August 2004. Mr. Casieri also served in this same role from January 2000 to April 2002. Mr. Casieri
rejoined us in September 2003 as General Manager  Account Management following a year and a half sabbatical.



27



---

##### Table of Contents

PART II



Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



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



|               |  |      |       |      |   |       |  |     |       |  |   |      
|-------------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|               |  | 2003 |       | 2004
|               |  | High |       | Low  |   | High  |  | Low
|First Quarter  |  | $    | 32.24 |      | $ | 21.76 |  | $   | 31.88 |  | $ | 26.73
|Second Quarter |  | $    | 30.55 |      | $ | 23.96 |  | $   | 33.34 |  | $ | 27.40
|Third Quarter  |  | $    | 29.40 |      | $ | 22.30 |  | $   | 37.19 |  | $ | 29.54
|Fourth Quarter |  | $    | 31.41 |      | $ | 23.76 |  | $   | 44.13 |  | $ | 35.42



As of February 15,
2005, there were approximately 30,600 holders of our common stock.



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



Item 6. Selected Financial Data



The following table represents selected historical consolidated financial data. The statement of operations data for the years ended December 31, 2002, 2003 and 2004 and balance sheet data at December 31, 2003 and 2004 are derived from our
audited consolidated financial statements included elsewhere in this report. The statement of operations data for the year ended December 31, 2000 and 2001, and the balance sheet data at December 31, 2000, 2001 and 2002 are derived from audited
consolidated financial statements not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes to the financial statements included elsewhere in this report.



28



---

##### Table of Contents

Consolidated Statement of Operations Data (in thousands, except per share data):



|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------- | ------- | ---- | - | -------- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | Year Ended December 31, |        
|                                                      |  | 2000                    |         | 2001 |   | 2002 (1) |  |   | 2003 (1) |   |  | 2004 |        
|Net revenues                                          |  | $                       | 372,650 |      | $ | 460,633  |  | $ | 608,657  |   |  | $    | 726,983 |   |  | $ | 841,256 |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Operating expenses (2)                                |  |                         | 329,103 |      |   | 388,041  |  |   | 500,212  |   |  |      | 651,963 |   |  |   | 690,704 |  
|Gain on sale of assets (3)                            |  |                         |        |      |   |         |  |   |         |   |  |      | (5,738  | ) |  |   | (82     | )
|Restructuring charges (4)                             |  |                         |        |      |   |         |  |   |         |   |  |      | 1,917   |   |  |   | 2,619   |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|                                                      |  |                         | 329,103 |      |   | 388,041  |  |   | 500,212  |   |  |      | 648,142 |   |  |   | 693,241 |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Income from operations                                |  |                         | 43,547  |      |   | 72,592   |  |   | 108,445  |   |  |      | 78,841  |   |  |   | 148,015 |  
|Impairment of equity investments, net (5)             |  |                         |        |      |   |         |  |   | (33,787  | ) |  |      | (10,078 | ) |  |   | (2,000  | )
|Other income, net                                     |  |                         | 7,284   |      |   | 5,414    |  |   | 3,989    |   |  |      | 2,482   |   |  |   | 3,830   |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Income before provision for income taxes              |  |                         | 50,831  |      |   | 78,006   |  |   | 78,647   |   |  |      | 71,245  |   |  |   | 149,845 |  
|Provision for income taxes                            |  |                         | 18,521  |      |   | 28,747   |  |   | 38,645   |   |  |      | 24,935  |   |  |   | 50,957  |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Income before equity in net loss of investee          |  |                         | 32,310  |      |   | 49,259   |  |   | 40,002   |   |  |      | 46,310  |   |  |   | 98,888  |  
|Equity in net loss of investee, net of income taxes   |  |                         |        |      |   | 92       |  |   | 105      |   |  |      |        |   |  |   |        |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Net income                                            |  | $                       | 32,310  |      | $ | 49,167   |  | $ | 39,897   |   |  | $    | 46,310  |   |  | $ | 98,888  |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Net income per common share:                          |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Basic                                                 |  | $                       | 0.65    |      | $ | 0.95     |  | $ | 0.73     |   |  | $    | 0.83    |   |  | $ | 1.75    |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Diluted                                               |  | $                       | 0.64    |      | $ | 0.94     |  | $ | 0.72     |   |  | $    | 0.82    |   |  | $ | 1.74    |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Weighted average number of common shares outstanding: |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Basic                                                 |  |                         | 49,930  |      |   | 51,689   |  |   | 54,710   |   |  |      | 55,774  |   |  |   | 56,348  |  
|Dilutive effect of stock options                      |  |                         | 424     |      |   | 805      |  |   | 633      |   |  |      | 512     |   |  |   | 556     |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  
|Diluted                                               |  |                         | 50,354  |      |   | 52,494   |  |   | 55,343   |   |  |      | 56,286  |   |  |   | 56,904  |  
|                                                      |  |                         |         |      |   |          |  |   |          |   |  |      |         |   |  |   |         |  



Consolidated Balance Sheet Data
(in thousands):



|                                                                        |  |                    |         |      |   |         |  |      |         |      |   |         |  |   |        
|----------------------------------------------------------------------- |  | ------------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                                        |  | As of December 31,
|                                                                        |  | 2000               |         | 2001 |   | 2002    |  | 2003 |         | 2004
|Cash and cash equivalents and short-term investments                    |  | $                  | 76,411  |      | $ | 143,173 |  | $    | 181,224 |      | $ | 110,102 |  | $ | 249,368
|Working capital (6)                                                     |  |                    | 106,903 |      |   | 152,829 |  |      | 187,696 |      |   | 156,602 |  |   | 257,103
|Total assets                                                            |  |                    | 344,915 |      |   | 465,400 |  |      | 692,120 |      |   | 779,181 |  |   | 975,201
|Long-term debt and capital lease obligations, including current portion |  |                    | 1,967   |      |   | 3,074   |  |      | 8,406   |      |   | 7,662   |  |   | 6,970  
|Shareholders equity                                                    |  |                    | 233,943 |      |   | 302,635 |  |      | 440,337 |      |   | 512,521 |  |   | 635,310

---

|(1) | For 2002 and 2003, results of operations for acquisitions which occurred during the year are included in our consolidated results of operations as of and since the effective date of
the acquisitions. For further details, see Note 2 to Notes to Consolidated Financial Statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For 2003, operating expenses include a $65.0 million cash payment to Eli Lilly & Company to acquire Lillys rights to dapoxetine.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(3) | For 2003, gain on sale of assets related to the restructuring of our Discovery Sciences Group. For further details, see Note 1 to Notes to Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For 2003 and 2004, restructuring charges related to the restructuring of our Discovery Sciences Group. For further details, see Note 1 to Notes to Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | For 2002, 2003 and 2004, impairment of equity investments, net includes charges to earnings for other than temporary declines in the fair market value of our investment. For further
details, see Note 6 to Notes to Consolidated Financial Statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Working capital equals current assets minus current liabilities.
|--- | ----------------------------------------------------------------



29



---

##### Table of Contents

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



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



Forward-looking Statements



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



Executive Overview



Because our revenues are dependent on a relatively small number of industries and clients, we closely monitor the market for our services. For a
discussion of the trends affecting our market, see Item 1. BusinessTrends Affecting the Drug Discovery and Development Industry. Our new business authorizations for the first two quarters of 2003 were lower than we expected. In
response, we refocused our business development and operational efforts to increase new business authorizations. We believe that those efforts, together with a stronger market for CRO services in the second half of 2003 and in 2004, resulted in
increased new authorizations for those periods.



While we
cannot predict the demand for CRO services in 2005, we believe the overall historical market drivers for our industry are intact. To grow authorizations in 2005, we plan to focus on our business development efforts, including increasing the
percentage of successful proposals, and the delivery of timely, high quality services to our clients. We continue to believe there are several specific opportunities for growth in 2005. We currently conduct a significant amount of
government-sponsored research and plan to continue our efforts to win new opportunities in this market. Our Latin American and European Phase II through IV units had an excellent year in 2004 and we believe there are opportunities for continued
growth in these areas. We have also experienced an increase in the demand for our Phase I services and are expanding our Phase I clinic in Austin, Texas to 300 beds to enhance our ability to service large, complex studies. This expansion should be
completed in April 2005. In 2004, the demand for our bioanalytical and GMP services increased and we have expanded our GMP laboratory facilities and invested in new equipment to meet this increased demand. Finally, we also believe the demand for our
post-marketing development services will continue to grow and we will also seek to expand our medical device services.



We review various metrics, including period-to-period growth in backlog, new authorizations, cancellation rates, revenue, margins and earnings, to
evaluate our financial performance. In 2004, we had record new authorizations of $1.2 billion, an increase of 13.5% over 2003. The cancellation rate for 2004 was 22% compared to 24% in 2003. On a net basis, authorizations were up 17% in 2004
compared to 2003. Backlog grew 15% from $1.1 billion as of December 31, 2003 to $1.3 billion as of December 31, 2004. Backlog by client type as of December 31, 2004 was 58% pharmaceutical, 28% biotech and 14% government/other. Backlog by client type
as of December 31, 2003 was 64% pharmaceutical, 23% biotech and 13% government/other. This change in the composition of our backlog from 2003 to 2004 reflects an increase in new authorizations from biotech clients. Net revenue by client type for the
year ended December 31, 2004 was 65% pharmaceutical, 25% biotech and 10% government/other. Top therapeutic areas by net revenue for the year ended December 31, 2004 were oncology, anti-infective/anti-viral, central nervous system,
circulatory/cardiovascular and endocrine/metabolic. For a detailed discussion of our revenue, margins, earnings and other financial results for the year ended December 31, 2004, see Results of Operations  Year Ended December 31, 2004
versus Year Ended December 31, 2003 below.



30



---

##### Table of Contents

Capital expenditures for the year ended December 31, 2004 totaled approximately $48.6 million. The
majority of the capital expenditures were for software, computer hardware, the expansion of our Phase I unit, and new equipment for our bioanalytical and GMP labs. We bought new liquid chromatography/mass spectrometry instruments in 2004, bringing
our total to 53. In addition to investing in our growing business, we are also focused on improving the efficiency of our operations by streamlining training matrices and clinical procedural documents, decreasing the number of documents needed for
study initiation, centralizing regulatory document collection and rolling out a new clinical trial management system.



With respect to our Discovery Sciences segment, our compound collaboration arrangements allow us to leverage our resources and global drug development
expertise to create new opportunities for growth and to share the risks and potential rewards of drug development. In 2003, in addition to furthering existing collaborations with ALZA Corporation, a subsidiary of Johnson & Johnson, and Bayer AG,
we entered into new collaborations with Syrrx and Chemokine Therapeutics. For a discussion of these compound partnering arrangements, see Item 1. Business  Our Services  Our Discovery Sciences Group  Compound Partnering
Programs above. One of our primary goals in the discovery business at the beginning of 2004 was to end the year with four drug candidates in clinical development, and we delivered on that objective.



In September 2004, we filed an investigational new drug application for one
Syrrx DPP IV inhibitor and started the Phase I trial for that inhibitor in late October 2004. This inhibitor is now in Phase Ib, which is when the drug is first administered to subjects suffering from the indication. We currently anticipate starting
Phase II trials in April 2005. In December 2004, we filed an investigational new drug application for a second DPP IV inhibitor and a Phase I study for this second DPP IV inhibitor is scheduled to begin in April 2005. In February 2005, Takeda
Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. At this time, we do not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.



In addition, ALZA Corporation submitted an NDA for dapoxetine in December
2004. The FDA accepted the dapoxetine NDA for filing in February 2005. As a result of these arrangements and the progression of our pipeline, we expect to incur significant R&D expense during 2005. Furthermore, in addition to progressing our
existing collaborations, we will continue to evaluate opportunities for new collaborations and investments that we believe will help us achieve our mid- to long-term growth objectives.



In February 2005, we completed the acquisition of substantially all of the assets of SurroMed, Inc.s biomarker
business. The acquired business consists of services and technologies that support drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The new business is part of
our Discovery Sciences segment and will expand our discovery business by adding biomarker discovery and patient sample analysis to the collection of services offered by us.



Acquisitions



In 2002, we completed four acquisitions. For details regarding these acquisitions, see Note 2 to the Notes to Consolidated Financial Statements.



In July 2003, PPD acquired Eminent Research Systems, a
clinical research organization specializing in medical device development, and Clinsights, a company affiliated with Eminent through common ownership that provides a range of post-market services to medical device and related pharmaceutical
companies and operates proprietary web sites for the dissemination of medical information, online research and product marketing. As a result, Eminent and Clinsights are now part of the Development segment of PPD. Their results of operations are
included in our consolidated results of operations as of and since July 18, 2003, the effective date of the acquisitions. PPD acquired Eminent and Clinsights for total consideration of $23.5 million in cash. Under the terms of the merger agreement,
the original aggregate purchase price of $25.0 million was reduced by $1.5 million in the first quarter of 2004 as a result of an adjustment to the purchase price based on Eminents closing balance sheet.



We accounted for all of the acquisitions in 2002 and 2003 under the purchase
method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on estimated fair values of the assets and liabilities. The results of operations are included in our consolidated results of operations as of and
since the effective dates of the acquisitions. For further details regarding these acquisitions, see Note 2 to the Notes to Consolidated Financial Statements.



31



---

##### Table of Contents

Investments



In March 2004, PPD loaned Oriel Therapeutics $0.9 million in the form of debt that is convertible into Oriel Therapeutics Series B preferred stock
at $2.00 per share. The loan is secured by a first lien on Oriels assets. In January 2004, we purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. At that time, we also
received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In September 2004, we entered into a royalty stream purchase agreement with Accentia. Under
the terms of that agreement, we paid Accentia a one-time cash payment of $2.5 million for the right to receive royalties on future sales of antifungal products for the treatment of chronic sinusitis. The royalties under this agreement equal 6% of
the net sales of antifungal products sold prior to FDA approval and 7% of the net sales of these products sold after FDA approval, if FDA approval is obtained. In January 2005, PPD exercised the Class A warrant of Accentia for the purchase of an
additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in
this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to us upon conversion of 5.0 million shares of the Series E convertible preferred stock held by us.



As a result of managements quarterly evaluations of our equity
investments, during 2004 we recorded a charge to earnings of $2.0 million for an other than temporary decline in the fair market value of our investment in Chemokine Therapeutics Corp. See Note 6 to the Notes to Consolidated Financial Statements for
a more detailed discussion of these investments.



Restructuring Charges and
Gain on Sale of Assets



In 2004, we recorded a $2.6
million restructuring charge associated with exiting our chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on
sale of assets used in our chemistry services of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease which will end in 2015.



In July 2003, we announced the restructuring of our Discovery Sciences Group. In connection with this restructuring, we
consolidated our Discovery Sciences operations into our Morrisville, North Carolina and Middleton, Wisconsin facilities, and discontinued offering functional genomics services in Menlo Park, California. In the third quarter, we incurred, recorded
and paid a charge to earnings of $1.9 million for this restructuring. Restructuring charges included $0.9 million for one-time termination benefits, $0.7 million for facility charges and $0.3 million for other related charges.



As a part of the 2003 restructuring, we purchased 4.4 million shares of
SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash and $12.0 million in tangible assets and intellectual property from our Menlo Park operations. The value of the tangible assets and intellectual property was
based on an independent appraisal. We recorded a gain on sale of assets of $5.7 million as a result of this transaction. The majority of the remaining tangible assets of the restructured operations were transferred to our CRO Phase II through IV
division and the remaining Discovery Sciences operations.



New Business
Authorizations and Backlog



New business authorizations,
which are sales of our services, are reflected in backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to quarter, and contracts generally have terms ranging
from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the years ended December 31, 2002, 2003 and 2004 were $1,002.5 million, $1,068.2 million and $1,212.4 million,
respectively.



Our backlog consists of new business
authorizations for which the work has not started but is anticipated to begin in the near future, and contracts in process that have not been completed. As of December 31, 2004, the remaining duration of the contracts in our backlog ranged from one
month to 114 months with an average duration of 27.6 months. Amounts included in backlog represent future revenue and exclude revenue that we have previously recognized. Once work begins on a project included in backlog, net revenue is recognized
over the life of the contract. However, there can be no assurance that our backlog will ever be recognized as revenue. Our backlog as of December 31, 2002, 2003 and 2004 was $974.4 million, $1,120.2 million and $1,292.8 million, respectively.



32



---

##### Table of Contents

Results of Operations



Revenue Recognition



We record revenue from fixed-price contracts on a proportional performance basis in our Development Group. To measure performance on a given date, we
compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to
perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized. For time-and-materials contracts in both our Development Group and Discovery Sciences Group, we
recognize revenues as hours are worked, multiplied by the applicable hourly rate. For our Phase I and laboratory businesses, we recognize revenues from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price.



In connection with the management of multi-site clinical
trials, we pay, on behalf of our customers, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. As required by EITF 01-14,
amounts paid by us as a principal for out-of-pocket costs are included in direct costs as reimbursable out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of
operations, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the years ended December 31, 2002, 2003 and 2004, fees paid to investigators and other
fees we paid as an agent and the associated reimbursements were approximately $157.5, $172.5 and $226.9 million, respectively.



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



The Discovery Sciences Group also generates revenue from time to time in the form of milestone payments in connection with licensing of compounds.
Milestone payments are only recognized as revenue if the specified milestone is achieved and accepted by the customer, payment received and continued performance of future research and development services related to that milestone are not required.



Recording of Expenses



We generally record our operating expenses among the following categories:



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



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



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



| |  |  | depreciation; and
| | - |  | -----------------



| |  |  | amortization.
| | - |  | -------------



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



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



33



---

##### Table of Contents

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



Depreciation expenses consist of
depreciation costs recorded on a straight-line method, based on estimated useful lives of 40 to 50 years for buildings, five years for laboratory equipment, two to five years for software, computers and related equipment and five to ten years for
furniture and equipment, except for airplanes, which we depreciate over 30 years. We depreciate leasehold improvements over the shorter of the life of the relevant lease or the useful life of the improvement. We depreciate property under capital
leases over the life of the lease or the service life, whichever is shorter.



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



Year Ended December 31, 2004 Versus Year Ended December 31, 2003



The following table sets forth amounts from our consolidated financial
statements along with the dollar and percentage change for the full year of 2004 compared to the full year of 2003.



|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|-------------------------------------------- |  | ----------------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | - |  | ------ | -
|(dollars in thousands)                       |  | Year Ended December 31, |         |   | $ Inc (Dec) |   |         | % Inc (Dec) | 
|                                             |  | 2004                    |         |   | 2003        |   |         |            
|Net revenue:                                 |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Development                                  |  | $                       | 759,629 |   |             | $ | 654,019 |             |  | $ | 105,610 |   |  | 16.15  | %
|Discovery sciences                           |  |                         | 14,311  |   |             |   | 15,479  |             |  |   | (1,168  | ) |  | -7.55  | %
|Reimbursed out-of-pockets                    |  |                         | 67,316  |   |             |   | 57,485  |             |  |   | 9,831   |   |  | 17.10  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Total net revenue                            |  |                         | 841,256 |   |             |   | 726,983 |             |  |   | 114,273 |   |  | 15.72  | %
|                                             |  |                         |         |  
|Direct costs:                                |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Development                                  |  |                         | 376,439 |   |             |   | 316,942 |             |  |   | 59,497  |   |  | 18.77  | %
|Discovery sciences                           |  |                         | 5,491   |   |             |   | 7,741   |             |  |   | (2,250  | ) |  | -29.07 | %
|Reimbursable out-of-pocket expenses          |  |                         | 67,316  |   |             |   | 57,485  |             |  |   | 9,831   |   |  | 17.10  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Total direct costs                           |  |                         | 449,246 |   |             |   | 382,168 |             |  |   | 67,078  |   |  | 17.55  | %
|                                             |  |                         |         |  
|Research and development expenses            |  |                         | 15,852  |   |             |   | 74,941  |             |  |   | (59,089 | ) |  | -78.85 | %
|Selling, general and administrative expenses |  |                         | 195,752 |   |             |   | 166,253 |             |  |   | 29,499  |   |  | 17.74  | %
|Depreciation                                 |  |                         | 28,609  |   |             |   | 26,968  |             |  |   | 1,641   |   |  | 6.08   | %
|Amortization                                 |  |                         | 1,245   |   |             |   | 1,633   |             |  |   | (388    | ) |  | -23.76 | %
|Gain on sale of assets                       |  |                         | (82     | ) |             |   | (5,738  | )           |  |   | 5,656   |   |  | -98.57 | %
|Restructuring charges                        |  |                         | 2,619   |   |             |   | 1,917   |             |  |   | 702     |   |  | 36.62  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Operating income                             |  |                         | 148,015 |   |             |   | 78,841  |             |  |   | 69,174  |   |  | 87.74  | %
|                                             |  |                         |         |  
|Impairment of equity investments, net        |  |                         | (2,000  | ) |             |   | (10,078 | )           |  |   | 8,078   |   |  | -80.15 | %
|Interest and other income (expense), net     |  |                         | 3,830   |   |             |   | 2,482   |             |  |   | 1,348   |   |  | 54.31  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Income before taxes                          |  |                         | 149,845 |   |             |   | 71,245  |             |  |   | 78,600  |   |  | 110.32 | %
|Provision for income taxes                   |  |                         | 50,957  |   |             |   | 24,935  |             |  |   | 26,022  |   |  | 104.36 | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Net income                                   |  | $                       | 98,888  |   |             | $ | 46,310  |             |  | $ | 52,578  |   |  | 113.53 | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Net income per diluted share                 |  | $                       | 1.74    |   |             | $ | 0.82    |             |  | $ | 0.92    |   |  | 111.22 | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  



Total net revenue
increased $114.3 million to $841.3 million in 2004. The increase in total net revenue resulted primarily from an increase in our Development Group revenues. The Development Groups operations



34



---

##### Table of Contents

generated net revenue of $759.6 million, which accounted for 90.3% of total net revenue for 2004. The 16.2% increase in the Development Groups net
revenue was primarily attributable to an increase in the level of global CRO Phase II through IV services we provided in 2004 as compared to 2003. Net revenue for the Development Group also increased by approximately $4.5 million due to the effect
of the weakening of the U.S. dollar relative to the euro and the British pound based on 2004 revenue translated at the average exchange rates in 2003.



The Discovery Sciences Group generated net revenue of $14.3 million in 2004, a decrease of $1.2 million from 2003. The decrease in the Discovery Sciences
net revenue was mainly attributable to the reduction in net revenue from chemistry services, which we stopped offering in the first quarter of 2004. In both 2003 and 2004, we received a $5.0 million dapoxetine milestone payment from ALZA. ALZA
submitted an NDA for dapoxetine in December 2004. The FDA accepted this NDA for filing in February 2005. As a result, we are entitled to receive a one-time milestone payment of $10.0 million from ALZA within 30 days of the FDAs acceptance of
the NDA.



Total direct costs increased $67.1 million to $449.2
million in 2004 primarily as the result of an increase in the Development Group direct costs. Development Group direct costs increased $59.5 million to $376.4 million in 2004. The primary reason for this increase was an increase in personnel costs
of $40.3 million. Personnel costs increased due to hiring additional employees in our global CRO Phase II through IV division, increased incentive compensation accruals and increased costs in our foreign operations due to the weakening of the U.S.
dollar. In 2003, incentive compensation accruals were lower than our normal accrual levels as a result of our financial and operating performance in that period. The remaining $19.2 million of this increase in Development direct costs primarily
consisted of increased facility costs related to the increase in personnel and increased subcontractor costs to support increased revenues.



Discovery Sciences direct costs decreased $2.2 million to $5.5 million in 2004. The higher costs in 2003 related primarily to a $2.5 million milestone
payment for dapoxetine to Eli Lilly & Company that did not occur again in 2004 because we acquired the dapoxetine patents from Lilly in December 2003.



Gross margin from the Development segment was 50.4% in 2004 compared to 51.5% in 2003. The majority of this decrease was attributable to increased
incentive compensation accruals and increased costs in our foreign operations due to the weakening of the U.S. dollar. The remaining variance relates to expected fluctuations from one period to another as a result of changes in labor utilization and
the mix of service offerings involved in the hundreds of studies conducted during any period of time.



Research and development, or R&D, expenses decreased $59.1 million to $15.9 million in 2004. In the fourth quarter of 2003, we acquired from Eli Lilly
& Company the patents for the compound dapoxetine for development in the field of genitourinary disorders. PPD paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800
million. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine was still in development and had not been approved for sale in any country. Excluding that payment, R&D expenses increased $5.9
million in 2004 compared to 2003 as a result of increased spending in connection with our existing compound partnering arrangements. The increased spending on compound partnering arrangements was offset by the decrease in functional genomics and
chemistry R&D expense as we ceased providing the services in the third quarter of 2003 and first quarter of 2004, respectively. In 2003, R&D expenses for our functional genomics and chemistry services operations totaled $7.0 million. We
expect to incur significant R&D expenses in 2005 in connection with our existing compound partnering arrangements.



Selling, general and administrative, or SG&A, expenses increased $29.5 million to $195.8 million in 2004. As a percentage of total net revenue,
SG&A expenses increased slightly to 23.3% in 2004 compared to 22.9% in 2003. The increase in SG&A expenses includes additional personnel costs of $21.6 million. Personnel costs increased by $5.7 million, due to increased incentive
compensation accruals and $4.4 million related the to foreign currency translation effect of the weakening U.S. dollar mentioned previously. The remaining $11.5 million increase in personnel costs related to training costs for new personnel, higher
levels of operations infrastructure to manage direct personnel and changes in utilization levels. The increase in SG&A costs also includes an increase of $2.4 million for recruiting costs due to an increase in the number of new hires in 2004
compared to 2003 and an increase of $2.3 million in accounting and auditing fees due to new regulatory requirements.



35



---

##### Table of Contents

Depreciation expense increased $1.6 million to $28.6 million in 2004. The increase was related to the
depreciation of the property and equipment we acquired to accommodate our growth. Capital expenditures were $48.6 million in 2004. Capital expenditures primarily included additional spending in the Development Group on software, computer hardware,
and additional scientific equipment for our Phase I and Lab units and a $5.0 million purchase of land in connection with our plans to construct a new corporate headquarters building in Wilmington, North Carolina.



Amortization expense decreased $0.4 million to $1.2 million in 2004 as a
result of the decrease of $0.7 million in amortization expense for our intangible backlog related to the acquisition of MRL in 2002 becoming fully amortized in the first quarter of 2004. This was offset by an increase in amortization of $0.3 million
related to the license agreement and royalty rights agreement in the Discovery Sciences Group that were placed into service during the second quarter of 2003 and the third quarter of 2004.



Operating income increased $69.2 million to $148.0 million in 2004. As a
percentage of net revenue, operating income increased to 17.6% of net revenue in 2004 from 10.8% in 2003. Operating income in 2003 includes the $65.0 million payment to Lilly and a $1.9 million charge related to the restructuring of the Discovery
Sciences Group offset by a $5.7 million gain on the sale of assets. The aggregate impact of these items was a $61.2 million reduction in operating income for 2003. Operating income in 2004 includes a $2.6 million restructuring charge associated with
exiting our chemistry facility in Research Triangle Park, North Carolina. Operating income in 2004 was also negatively impacted by approximately $7.6 million due to the effect of the U.S. dollar weakening relative to the euro, the British pound and
the Brazilian real. During 2004, we recorded a foreign currency hedging gain of $2.7 million, resulting in a net impact to operating income of $4.9 million attributable to foreign currency transactions. Although these currency movements increased
net revenue in the aggregate, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the
U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated to the U.S. dollar.



During 2004, we recorded a charge to earnings for an other than temporary decline in the fair market value of our investment
in Chemokine Therapeutics Corp. of $2.0 million. We deemed our investment in Chemokine to be impaired as a result of the issuance of shares to new investors at a lower valuation than our original investment.



During 2003, we recorded charges to earnings for other than temporary
declines in the fair market value of our investments in SLIL Biomedical of $4.7 million, Spotlight Health of $3.9 million, Signature Bioscience (formerly Primecyte) of $0.2 million and BioDelivery Sciences of $1.4 million. We determined that SLIL
and Signature Bioscience were impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies. We recorded the write-down of our
investment in Spotlight Health primarily based on its historical and projected financial performance and issuance of shares to a new investor at a lower valuation. BioDelivery Sciences is a publicly traded company, so we based the write-down of our
investment in that company on the closing price of its securities as of December 31, 2003. Although these securities had traded above cost for short periods of time throughout 2003, we believe that due to the uncertainty of BioDelivery
Sciences strategic direction, the decline in value was other than temporary and therefore we recorded the charge to earnings. Prior to the third quarter of 2003, we recorded market fluctuations through other comprehensive income.



Our provision for income taxes increased $26.0 million to $51.0 million in
2004. Our effective income tax rate for 2004 was 34.0% compared to 35.0% for 2003. During the second quarter of 2004, our effective tax rate was positively impacted by a $3.7 million tax benefit for a decrease in a valuation allowance for capital
loss carryforwards that we expect to be able to utilize. The remaining difference in our effective rates for 2003 and 2004 is also due to the change in the geographic distribution of our pretax earnings among locations with varying tax rates.



Net income of $98.9 million in 2004 represents an increase of
$52.6 million from $46.3 million in 2003. Net income per diluted share of $1.74 in 2004 represents an increase from $0.82 net income per diluted share in 2003. Net income for 2003 includes a charge of $10.1 million for impairment of equity
investments. This charge, together with the payment to Lilly of $65.0 million and the restructuring charges of $1.9 million offset by the gain on sale of assets of $5.7 million, resulted in an aggregate impact of $44.8 million on 2003 net income,
net of tax. Net income per diluted share of $0.82 in 2003 includes an aggregate impact of $0.80 earnings per share, net of tax, for the items mentioned above.



36



---

##### Table of Contents

Year Ended December 31, 2003 Versus Year Ended December 31, 2002



The following table sets forth amounts from our consolidated financial
statements along with the dollar and percentage change for the full year of 2003 compared to the full year of 2002.



|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|-------------------------------------------- |  | ----------------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | - |  | ------ | -
|(dollars in thousands)                       |  | Year Ended December 31, |         |   | $ Inc (Dec) |   |         | % Inc (Dec) | 
|                                             |  | 2003                    |         |   | 2002        |   |         |            
|Net revenue:                                 |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Development                                  |  | $                       | 654,019 |   |             | $ | 545,139 |             |  | $ | 108,880 |   |  | 19.97  | %
|Discovery sciences                           |  |                         | 15,479  |   |             |   | 17,510  |             |  |   | (2,031  | ) |  | -11.60 | %
|Reimbursed out-of-pockets                    |  |                         | 57,485  |   |             |   | 46,008  |             |  |   | 11,477  |   |  | 24.95  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Total net revenue                            |  |                         | 726,983 |   |             |   | 608,657 |             |  |   | 118,326 |   |  | 19.44  | %
|                                             |  |                         |         |  
|Direct costs:                                |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Development                                  |  |                         | 316,942 |   |             |   | 261,169 |             |  |   | 55,773  |   |  | 21.36  | %
|Discovery sciences                           |  |                         | 7,741   |   |             |   | 7,831   |             |  |   | (90     | ) |  | -1.15  | %
|Reimbursable out-of-pocket expenses          |  |                         | 57,485  |   |             |   | 46,008  |             |  |   | 11,477  |   |  | 24.95  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Total direct costs                           |  |                         | 382,168 |   |             |   | 315,008 |             |  |   | 67,160  |   |  | 21.32  | %
|                                             |  |                         |         |  
|Research and development expenses            |  |                         | 74,941  |   |             |   | 10,540  |             |  |   | 64,401  |   |  | 611.02 | %
|Selling, general and administrative expenses |  |                         | 166,253 |   |             |   | 150,607 |             |  |   | 15,646  |   |  | 10.39  | %
|Depreciation                                 |  |                         | 26,968  |   |             |   | 23,189  |             |  |   | 3,779   |   |  | 16.30  | %
|Amortization                                 |  |                         | 1,633   |   |             |   | 1,042   |             |  |   | 591     |   |  | 56.72  | %
|Gain on sale of assets                       |  |                         | (5,738  | ) |             |   | (174    | )           |  |   | (5,564  | ) |  | 3197.7 | %
|Restructuring charges                        |  |                         | 1,917   |   |             |   |        |             |  |   | 1,917   |   |  |        |  
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Operating income                             |  |                         | 78,841  |   |             |   | 108,445 |             |  |   | (29,604 | ) |  | -27.30 | %
|                                             |  |                         |         |  
|Impairment of equity investments, net        |  |                         | (10,078 | ) |             |   | (33,787 | )           |  |   | 23,709  |   |  | -70.17 | %
|Interest and other income (expense), net     |  |                         | 2,482   |   |             |   | 3,989   |             |  |   | (1,507  | ) |  | -37.78 | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Income before taxes                          |  |                         | 71,245  |   |             |   | 78,647  |             |  |   | (7,402  | ) |  | -9.41  | %
|Provision for income taxes                   |  |                         | 24,935  |   |             |   | 38,645  |             |  |   | (13,710 | ) |  | -35.48 | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Income before equity in net loss of investee |  |                         | 46,310  |   |             |   | 40,002  |             |  |   | 6,308   |   |  | 15.77  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Equity in net loss of investee               |  |                         |        |   |             |   | 105     |             |  |   | (105    | ) |  |        |  
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Net income                                   |  | $                       | 46,310  |   |             | $ | 39,897  |             |  | $ | 6,413   |   |  | 16.07  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  
|Net income per diluted share                 |  | $                       | 0.82    |   |             | $ | 0.72    |             |  | $ | 0.10    |   |  | 13.89  | %
|                                             |  |                         |         |   |             |   |         |             |  |   |         |   |  |        |  



Total net revenue
increased $118.3 million to $727.0 million in 2003. The increase in total net revenue resulted primarily from an increase in our Development Group revenues. The Development Groups operations generated net revenue of $654.0 million, which
accounted for 90.0% of total net revenue for 2003. The 20.0% increase in the Development Groups net revenue was primarily attributable to an increase in the amount of global CRO Phase II through IV services we provided in 2003 as compared to
2002. Net revenue for the Development Group also increased by approximately $5.6 million due to the effect of the weakening of the U.S. dollar relative to the euro and the British pound during 2003.



37



---

##### Table of Contents

The Discovery Sciences Group generated net revenue of $15.5 million in 2003, a decrease of $2.0 million
from 2002. The decrease in the Discovery Sciences net revenue was mainly attributable to a reduction in net revenue from functional genomics and chemistry services of $7.4 million and $2.0 million, respectively, due to fewer contracts for those
services in 2003. We discontinued functional genomics and chemistry services in the third quarter of 2003 and the first quarter of 2004, respectively. The decreases in 2003 Discovery Sciences net revenue were partially offset by a milestone payment
of $5.0 million that we earned under our sublicense agreement with ALZA as a result of the initiation of Phase III clinical trials of dapoxetine, and by an increase of $3.0 million in net revenue associated with our preclinical oncology operation.
In early January 2004, we amended our sublicense agreement with ALZA. Under the terms of the amendment, ALZA made a cash payment to us of $5.0 million in the first quarter of 2004.



Total direct costs increased $67.2 million to $382.2 million in 2003. Development Group direct costs increased $55.8 million
to $316.9 million in 2003. This increase resulted primarily from increased personnel costs of $32.2 million due to hiring additional employees in our global CRO Phase II through IV division and to annual salary increases. Development Group direct
costs increased as a percentage of related net revenue from 47.9% in 2002 to 48.5% in 2003. Direct costs, as a percentage of net revenues, have and are expected to fluctuate from one period to another as a result of changes in labor utilization and
the mix of service offerings involved in the hundreds of studies conducted during any period of time.



Discovery Sciences direct costs decreased $0.09 million to $7.7 million in 2003. This decrease resulted from a decline in direct costs of $3.5 million
related to our functional genomics services and chemistry services due in each case to fewer contracts being performed in those areas in 2003. We will not be generating any direct costs from functional genomics or chemistry services in the future
because we discontinued offering these services in the third quarter of 2003 and the first quarter of 2004, respectively. These decreases were partially offset by increases in direct costs of $2.5 million for a milestone payment to Lilly on
dapoxetine and of $1.5 million associated with our preclinical oncology operations.



R&D expenses increased $64.4 million to $74.9 million in 2003. In the fourth quarter of 2003, we acquired from Eli Lilly the patents for the compound dapoxetine for development in the field of genitourinary
disorders. We paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800 million. The $65.0 million payment to Lilly was recorded to research and development expenses because
dapoxetine was still in development and had not been approved for sale in any country. Excluding that payment, R&D expenses decreased $0.6 million in 2003 compared to 2002 due to discontinuing our functional genomics services.



SG&A expenses increased $15.6 million to $166.3 million in 2003. The
increase was primarily attributable to additional personnel costs of $14.0 million attributable to administrative tasks that are not directly related to client projects, such as training costs. This was partially offset by a decrease in recruitment
agency fees of $1.6 million. As a percentage of net revenue, SG&A expenses decreased to 22.9% in 2003 from 24.7% for 2002. This decrease is primarily attributable to the increase in net revenue and leveraging our SG&A expenses.



Depreciation expense increased $3.8 million to $27.0 million in 2003. The
increase was related to the depreciation of the property and equipment we acquired to accommodate our growth. Capital expenditures were $31.7 million in 2003. Capital expenditures primarily included additional spending in the Development Group to
enhance and expand our information technology capacity.



Amortization expense increased $0.6 million to $1.6 million in 2003, due to the amortization expense for a license agreement in the Discovery Sciences Group that was placed into service during 2003.



Operating income decreased to $78.8 million in 2003. As a percentage of net
revenue, operating income decreased to 10.8% of net revenue in 2003 from 17.8% in 2002. Operating income in 2003 includes the $65.0 million payment to Lilly and a $1.9 million charge related to the restructuring of the Discovery Sciences Group
offset by a $5.7 million gain on the sale of assets. The aggregate impact of these items was a $61.2 million reduction in operating income for 2003. Operating income was also negatively impacted by approximately $6.7 million due to the effect of the
weakening of the U.S. dollar relative to the euro and the British pound, partially offset by the strengthening of the U.S. dollar relative to the Brazilian real during 2003. Although these currency movements



38



---

##### Table of Contents

increased net revenue in the aggregate, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in
countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated
to the U.S. dollar.



During 2003, we recorded charges to
earnings for other than temporary declines in the fair market value of our investments in SLIL Biomedical of $4.7 million, Spotlight Health of $3.9 million, Signature Bioscience (formerly Primecyte) of $0.2 million and BioDelivery Sciences of $1.4
million. We determined that SLIL and Signature Bioscience were impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies. We
recorded the write-down of our investment in Spotlight Health primarily based on its historical and projected financial performance and issuance of shares to a new investor at a lower valuation. BioDelivery Sciences is a publicly traded company, and
we based the write-down of that investment on the closing price of its securities as of December 31, 2003. Although these securities had traded above cost for short periods of time throughout 2003, we believe that due to the uncertainty of
BioDelivery Sciences strategic direction, the decline in value as of each of these periods was other than temporary and therefore we recorded the charges to earnings. Prior to the third quarter of 2003, we recorded market fluctuations through
other comprehensive income.



In 2002, we recorded charges to
earnings for other than temporary declines in the fair market value of our investment in Gallery Systems of $1.5 million and our investment in Intrabiotics Pharmaceuticals of approximately $0.3 million. We also recorded a $32.0 million write-down of
the carrying value of our investment in DNA Sciences for an other than temporary decline in value in 2002. At the time of the write-down, we deemed our investment in DNA Sciences to be impaired as a result of historical and projected performance,
cash needs and an independent valuation of the market value of DNA Sciences. DNA Sciences subsequently filed for bankruptcy and we no longer have any ownership interest in that entity.



Our provision for income taxes decreased $7.4 million to $24.9 million in 2003 from $38.6 million in 2002. Our effective tax
rate decreased to 35.0% in 2003 compared to 49.1% in 2002. The decrease in income tax expense and rate in 2003 was due to the impact on income of acquiring the patents for the compound dapoxetine and the change in geographic distribution of pretax
earnings among locations with varying tax rates. Our effective rate was higher in 2002 due to a large increase in our valuation allowance. During 2003 and 2002, we recorded impairments of equity investments of $10.1 million and $33.8 million,
respectively. Because of the uncertainty about whether we could use the loss related to these impairments during the carryforward period, we recorded a valuation allowance of $1.2 million in 2003 and $11.1 million in 2002, thus providing a tax
benefit of only $3.0 and $2.3 million related to the impairments in the provision for income taxes in those years.



Net income of $46.3 million in 2003 represents an increase of $6.4 million from $39.9 million in 2002. Net income for 2003 includes a charge of $10.1
million for impairment of equity investments, net. This charge, together with the payment to Lilly of $65.0 million and the restructuring charges of $1.9 million offset by the gain on sale of assets of $5.7 million, resulted in an aggregate impact
of $44.8 million on net income, net of tax. Net income per diluted share of $0.82 in 2003 represents an increase from $0.72 net income per diluted share in 2002. Net income per diluted share of $0.82 in 2003 includes an aggregate impact of $0.80
earnings per share, net of tax, for the items mentioned above. Net income per diluted share of $0.72 for 2002 includes a $0.57 charge for the impairment of our equity investments and the related tax benefit.



Liquidity and Capital Resources



As of December 31, 2004, we had $144.3 million of cash and cash equivalents
and $105.0 million of short-term investments. Our expected primary cash needs on both a short- and long-term basis are for capital expenditures, expansion of services, possible acquisitions, geographic expansion, working capital and other general
corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, leasing arrangements, borrowings and sales of our stock. Our cash and cash equivalents are invested in financial
instruments that are rated A or better by Standard & Poors or Moodys and earn interest at market rates.



In 2004, our operating activities provided $179.3 million in cash as compared to $13.6 million last year. The increase in cash flow from operations is
primarily due to a $78.4 million increase in income before provision for



39



---

##### Table of Contents

income taxes and an increase in cash related to changes in operating assets and liabilities of $31.7 million as compared to a decrease of $43.4 million in
2003. In 2003, income from operations was negatively impacted as a result of the $65.0 million one-time payment to Lilly in 2003 to acquire the patents to the dapoxetine compound. In addition, cash flow from operations was positively impacted by a
$23.0 million decrease in the net growth of receivables due to improved collections of receivables and a $23.0 million increase in unearned income due to a different mix of contract terms in 2004. In 2004, net income of $98.9 million, depreciation
and amortization of $29.9 million, a decrease of $12.9 million in deferred income tax as a result primarily of a decrease in depreciation and amortization timing differences of $10.0 million, an increase of $27.8 million in accounts payable and
other accrued expenses as a result of increased employee related accruals of $14.6 million, such as incentive compensation accruals and accrued salary due to the increase in employees, and an increase of $13.2 million in other accruals, such as
subcontractor accruals and volume discount accruals, related to increased revenue and an increase of $24.7 million in unearned income were partially offset by an increase of $16.1 million in receivables due to increased revenue.



In 2004, we used $110.6 million in cash related to investing activities. The
net cash used for net purchases of available-for-sale investments of $55.6 million, purchases of investments of $5.7 million, purchase of royalty rights agreement of $2.5 million and capital expenditures of $48.6 million were partially offset by the
$1.5 million of proceeds from a refund of a portion of the purchase price associated with the acquisition of Eminent Research Systems in 2003. We expect our capital expenditures in 2005 will range from approximately $45.0 to $50.0 million, excluding
our purchase of a corporate airplane for $30.5 million in February 2005 and the construction of the new corporate headquarters building in Wilmington, North Carolina. Construction of the corporate headquarters building is discussed below. The
majority of these anticipated capital expenditures will relate to information technology enhancement and expansion.



In 2004, our financing activities provided $11.0 million in cash. Net proceeds from stock option exercises and purchases under our employee stock purchase
plan totaling $12.1 million were partially offset by $0.4 million in repayments of long-term debt and $0.8 million in repayments of capital lease obligations.



Working capital as of December 31, 2004 was $257.1 million, compared to $156.6 million at December 31, 2003. The increase in working capital was due
primarily to the increase in cash of $83.7 million, increase in short-term investments of $55.6 million and the increase in accounts receivable of $19.4 million which were partially offset by the increase in payables to investigators of $11.7
million, an increase in other accrued expenses of $38.0 million, and an increase in unearned income of $28.5 million. The number of days revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as
DSO, were 40.0 and 42.1 days as of December 31, 2004 and December 31, 2003, respectively. DSO is calculated by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the period presented. Over the
past three years, our year-to-date DSO has fluctuated between 30.8 days and 42.2 days. We expect DSO will fluctuate in the future depending on the mix of contracts performed within a quarter, the level of investigator advances and unearned income,
and our success in collecting receivables.



We maintain a
defined benefit pension plan for certain employees and former employees in the United Kingdom. This pension plan was closed to new participants as of December 31, 2002. The projected benefit obligation for the benefit plan at December 31, 2004 and
December 31, 2003, as determined in accordance with SFAS No. 87, Employers Accounting for Pensions, was $35.7 million and $28.4 million, respectively, and the value of the plan assets was $25.4 million and $19.0 million, respectively. As
a result, the plan was under-funded by $10.4 million in 2004 and by $9.4 million in 2003, net of December contributions of $0.2 million for 2004 and 2003. It is likely that the amount of our contributions to the plan could increase in future years.
The amount of contributions to the plan for the years ended December 31, 2004 and 2003 were $2.0 million and $2.2 million, respectively. We expect the pension cost to be recognized in our financial statements will decrease slightly from the $2.3
million in 2004 to approximately $1.9 million in 2005. The expense to be recognized in future periods could increase depending upon the change in fair market value of the plan assets and change in the projected benefit obligation.



A decrease in the market value of plan assets and/or declines in interest
rates are likely to cause the amount of the under-funded status to increase. After completion of the actuarial valuations in 2005 we could be required to record an additional reduction to shareholders equity. We recorded an increase to
shareholders equity in 2004 of $0.5 million and a reduction to shareholders equity of $0.7 million in 2003. Given the impact that the discount rate



40



---

##### Table of Contents

and stock market performance have on the projected benefit obligation and market value of plan assets, future changes in either one of these may
significantly reduce or increase the amount of our pension plan under-funding. However, we do not believe the under-funded status of the pension plan will materially affect our results of operations, financial position or cash flows.



In July 2004, we renewed our $50.0 million revolving credit facility with
Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. Borrowings under this credit facility are available to provide
working capital and for general corporate purposes. As of December 31, 2004, there was no amount outstanding under this credit facility. However, the aggregate amount we are able to borrow has been reduced by $0.8 million due to outstanding letters
of credit issued under this facility. This credit facility is currently scheduled to expire in June 2005, at which time any outstanding balance would be due.



In April 2000, we made an investment in Spotlight Health, Inc. We entered into an agreement with Spotlight Health and Bank of America, N.A. to guarantee a
$2.0 million revolving line of credit provided to Spotlight Health by Bank of America. Indebtedness under the line of credit is unsecured and subject to traditional covenants relating to financial ratios. This credit facility is scheduled to expire
on June 30, 2005, at which time any outstanding balance would be due. As of December 31, 2004, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, Accounting
for Contingencies, as clarified by FASB Interpretation No. 45, we have recorded a liability in the amount of $0.2 million for the estimated fair value of the obligation we have assumed under this guarantee. We review the financial statements
of Spotlight Health on a quarterly basis to determine if it has sufficient financial resources to continue operations. Future events and circumstances might adversely affect Spotlight Healths financial condition and Spotlight Health might not
be in the position to repay the facility, in which case Bank of America may attempt to collect against us on our guarantee.



In September 2003, we entered into agreements with SurroMed pursuant to which we committed to pay for biomarker discovery services from SurroMed in the
amounts of $2.0 million, $2.0 million, $1.0 million and $1.0 million for the years ended December 31, 2004, 2005, 2006 and 2007, respectively, and to serve as a non-exclusive representative to market and sell additional SurroMed biomarker discovery
services. In February 2005, we acquired substantially all of SurroMeds assets related to its biomarker business and terminated these agreements and the associated purchase commitments.



In November 2003, we entered into a collaboration agreement with Syrrx to
jointly develop and commercialize Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. Under the terms of the agreement, we are obligated to provide
preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. PPD and Syrrx have agreed to share equally
the costs of Phase III development. In addition, we agreed to make milestone payments up to an aggregate amount equal to $17.5 million to Syrrx for each collaboration product upon the occurrence of certain clinical and regulatory events. In
September 2004, we filed an investigational new drug application for one Syrrx DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, we paid Syrrx a milestone payment of
$2.5 million as a result of the commencement of the Phase I studies. The remaining milestone payments will be expensed when the event triggering payment of the milestone occurs. In the event we are successful in obtaining approval to market a drug
product under the collaboration with Syrrx, Syrrx and PPD will share equally the profits from drug sales. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx,
Inc. We own $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, we do not anticipate realizing a loss on this investment. At this time, we do not know what impact, if
any, this acquisition will have on our DPP IV collaboration with Syrrx.



In April 2003, we made an equity investment in Chemokine Therapeutics Corp. In connection with this investment, Chemokine granted us an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. If we
choose to exercise this option, we will be obligated to pay the one-time license fee plus the costs for future development work on the peptide. Chemokine also granted us the right to first negotiate a license to other peptides. Chemokine completed
an initial public offering of its common stock in Canada in December 2004.



41



---

##### Table of Contents

In November 2003, we became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture
capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately-held companies in the life sciences, healthcare and technology industries. Under the terms of our agreements with the Pappas Fund,
we committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of our aggregate capital commitment, and no more than two-thirds of our commitment could be called prior to May 2005. As such,
we anticipate that our aggregate investment will be made through a series of future capital calls over the next several years. The first capital call was made in January 2005 at which time we invested $75,000. The second capital call is due in March
2005, at which time we will invest an additional $90,000. Our capital commitment will expire in May 2009.



In January 2005, we acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which we plan to construct a new
headquarters building. The new facility will be approximately 400,000 square feet and is expected to be completed in November 2006. At that time, we will begin consolidating our Wilmington operations into the new building. The total cost for the
construction and up-fit of the new building is expected to be in the range of $80.0 million to $100.0 million. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont
Shipping Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America, N.A. This loan will mature in January 2006 and is secured by a lien on substantially all of Almonts assets, including a
tract of land containing approximately 30.0 acres adjacent to the 7.5 acre tract we acquired. This loan is also secured by a guarantee from us. Almonts obligation to reimburse us in the event we are required to pay any sums to Bank of America
under the guarantee is also secured by a lien on substantially all of Almonts assets. As a part of this transaction, Almont granted us an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per
acre. The option will expire on January 31, 2007.



In February
2005, we acquired a Dassault Falcon 900EX aircraft for $30.5 million. We intend to use the aircraft for corporate purposes. We financed the acquisition from available cash.



In January 2004, we purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock
for $5.0 million. We also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In January 2005, we exercised the Class A warrant for the purchase
of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. The Class B warrant will expire on the earlier of January 7, 2006 or the effective date of a registration statement for the public sale of Accentia common
stock in a qualifying initial public offering. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in this public offering, in addition to
shares for its own account, up to $12.0 million of common stock issuable to us upon conversion of 5.0 million shares of the Series E convertible preferred stock held by us.



The American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction on the repatriation of
certain foreign earnings to a U.S. taxpayer. We have not previously recorded a U.S. tax liability on such revenues since we intended to permanently reinvest them in our foreign operations. No provision is being made in 2004 relating to this matter
because we are currently evaluating the effect of the new Act on our plan for these previously undistributed foreign earnings. We expect to complete this evaluation by the end of June 2005. The income tax effect of repatriating these earnings is not
estimable at this time.



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



We expect to continue
expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or
future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations for the next 12 months. From time to time, we evaluate potential acquisitions, investments and other growth opportunities that might
require additional external financing, and we



42



---

##### Table of Contents

might seek funds from public or private issuances of equity or debt securities. While we believe we have sufficient liquidity to fund our operations for the
next 12 months, our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, personal injury, environmental or intellectual property claims, as well as
other factors described under Item 1. Business - Factors that Might Affect our Business or Stock Price, in this Item 7 under the subheadings Potential Volatility of Quarterly Operating Results and Stock Price and
Critical Accounting Policies and Estimates, and under Item 7A - Quantitative and Qualitative Disclosures about Market Risk.



Contractual Obligations



As of December 31, 2004, future minimum payments for all contractual obligations for years subsequent to December 31, 2004 are as follows (in
thousands):



|                                            |  |      |        |   |             |   |        |             |  |   |                    |   |  |       |         |   |  |   |         |  
|------------------------------------------- |  | ---- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                            |  | 2005 |        |   | 2006 - 2007 |   |        | 2008 - 2009 |  |   | 2010 andthereafter |   |  | Total |        
|Long-term debt, including interest payments |  | $    | 750    |   |             | $ | 1,500  |             |  | $ | 1,500              |   |  | $     | 5,503   |   |  | $ | 9,253   |  
|Services purchase commitments(1)            |  |      | 2,000  |   |             |   | 2,000  |             |  |   |                   |   |  |       |        |   |  |   | 4,000   |  
|Operating leases                            |  |      | 33,633 |   |             |   | 56,004 |             |  |   | 46,629             |   |  |       | 81,287  |   |  |   | 217,553 |  
|Less: sublease income(1)                    |  |      | (2,498 | ) |             |   | (6,431 | )           |  |   | (6,576             | ) |  |       | (10,820 | ) |  |   | (26,325 | )
|                                            |  |      |        |   |             |   |        |             |  |   |                    |   |  |       |         |   |  |   |         |  
|Total                                       |  | $    | 33,885 |   |             | $ | 53,073 |             |  | $ | 41,553             |   |  | $     | 75,970  |   |  | $ | 204,481 |  
|                                            |  |      |        |   |             |   |        |             |  |   |                    |   |  |       |         |   |  |   |         |  

---

|(1) | In February 2005, we acquired substantially all of SurroMeds assets related to its biomarker business. As part of that acquisition, we terminated our agreement
with SurroMed to pay for biomarker discovery services through December 31, 2007 and we also terminated a sublease to SurroMed with payment obligations totaling $11.1 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As noted above, we became a limited partner in a venture capital fund in
November 2003. Under the terms of our agreements with that fund, we committed to invest up to an aggregate of approximately $2.5 million in the fund. PPD anticipates that its aggregate investment will be made through a series of future capital calls
over the next several years. Also, in November 2003, we entered into a collaboration agreement with Syrrx. Under the terms of the agreement, we are obligated to fund the majority of preclinical and clinical development costs through Phase IIb
development of each collaboration and will share Phase III costs equally with Syrrx. In addition, in connection with our investment in Chemokine, Chemokine granted us an exclusive option to license a proprietary peptide for $1.5 million. If we
choose to exercise this option, we will be obligated to pay the costs for future development work on the peptide. We also have a long-term liability on our balance sheet regarding the underfunding of our U.K. pension plan for $9.9 million. We do not
know when or if this will be funded since this liability will change based on the performance of the investments of the plan and changes in the benefit obligations.



Off-balance Sheet Arrangements



We have guaranteed a $2.0 million line of credit from Bank of America to Spotlight Health. For a description of the guarantee and the line of credit, see
Liquidity and Capital Resources above. In addition, in January 2005, we guaranteed an $8.0 million loan from Bank of America to Almont Shipping Company in connection with the purchase of property from Almont. For a description of the
guarantee, see Note 19 to Notes to Consolidated Financial Statements.



Critical Accounting Policies and 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 materially from those estimates. We believe that the following are
some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with the Finance and Audit
Committee of our Board of Directors.



43



---

##### Table of Contents

Revenue Recognition



The majority of our revenues are recorded from fixed-price contracts on a proportional performance basis. To measure
performance on a given date, we compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance of the contractual obligations because the costs relate primarily to
the amount of labor incurred to perform the service. Direct costs are primarily comprised of labor and overhead related to the delivery of services. Each month we accumulate costs on each project and compare them to the total current estimated costs
to determine the percentage-of-completion. We then multiply this percentage by the contract value to determine the amount of revenue that can be recognized. Each month we review the total current estimated costs on each project to determine if these
estimates are still accurate and, if necessary, we adjust the total estimated costs for each project. As the work progresses, we might decide original estimates were incorrect due to, among other things, revisions in the scope of work or patient
enrollment rate, and a contract modification might be negotiated with the customer to cover additional costs. If a contract modification is not agreed to, we could bear the risk of cost overruns. In the past, we have had to commit unanticipated
resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue
recognized in the period the change in estimate is determined. Should our estimated costs on fixed price contracts prove to be low, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information
on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future. A hypothetical increase to total estimated
remaining project cost by 1% for open projects accounted for under the proportional performance method as of December 31, 2004 would have resulted in a cumulative reduction in revenue of approximately $2.0 million.



In our Discovery Science Group, we generate revenue from time to time in the
form of milestone payments. Milestone payments are only recognized as revenues if the specified milestone is achieved and accepted by the customer, payment is received and continued performance of future research and development services related to
that milestone are not required. Future potential milestone payments under various discovery contracts might never be received if the milestones are not achieved.



Allowance for Doubtful Accounts



Included in Accounts receivable and unbilled services, net on our consolidated balance sheets is an allowance
for doubtful accounts. Generally, before we do business with a new client, we perform a credit check. We also review our accounts receivable aging on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance
for doubtful accounts includes the specific uncollectible accounts and an estimate of losses based on historical loss experience. After all attempts to collect the receivable have failed, the receivable is written off against the allowance. Based on
the information available to us, we believe our allowance for doubtful accounts as of December 31, 2004 was adequate to cover uncollectible balances. However, actual write-offs might exceed the recorded reserve.



Cost Basis Investments



Most of our cost basis investments consist of equity investments in private
entities for which fair values are not readily determinable. Therefore, we record these investments under the cost method of accounting. Many of our investments are in relatively early stage life sciences or biotechnology companies that do not have
established products or proven technologies and some do not have material revenue, if any. Therefore, these investments might be worth less than we paid for them, and they are subject to write-down for impairment. We assess our investment portfolio
on a quarterly basis for impairment; however for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the
investment. This quarterly review includes an evaluation of, among other things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events. Given the nature of these
companies, our assessments of value are highly subjective.



44



---

##### Table of Contents

Tax Valuation Allowance



Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the
recoverability of certain of the deferred tax assets, which arise from net operating losses, tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109, Accounting for
Income Taxes, also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be
realized in future periods.



In evaluating our ability to
recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable
income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for assumptions utilized, including the amount of state, federal and international pre-tax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the
underlying businesses.



Based on estimates of future taxable
profits and losses in certain foreign tax jurisdictions, we determined that a valuation allowance of $0.6 million was required for specific foreign tax loss carryforwards as of December 31, 2004. If these estimates prove inaccurate, a change in the
valuation allowance, up or down, could be required in the future. We also recorded a total valuation allowance of $7.7 million related to the impairment of certain equity investments. The valuation was determined based on the uncertainty regarding
our ability to generate sufficient capital gains to utilize both realized and unrealized capital losses during the loss carryforward period. A change in any of the investees financial health and/or stock price, or a change in our ability to
utilize a potential capital loss, could require a change of valuation allowance in the future.



In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated
tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the
reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to
expense would result.



Long-Lived Assets



We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be recoverable. If indicators of impairment are present, we would evaluate the carrying value of property and equipment in relation to estimates of future undiscounted cash flows.
These undiscounted cash flows and fair values are based on judgments and assumptions. Additionally, we test goodwill for impairment on at least an annual basis by comparing the underlying reporting units goodwill to their estimated fair value.
These tests for impairment of goodwill involve the use of estimates related to the fair market value of the reporting unit with which the goodwill is associated, and are inherently subjective.



Recently Issued Accounting Standards



In December 2003, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 132 (Revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. Revised Statement No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit postretirement plans. We have adopted the disclosure requirements of this statement.



In December 2003, the FASB issued revised FIN 46, Consolidation of Variable Interest Entities. This revised interpretation is effective for
all entities as of the first reporting period that ends after March 15, 2004. We have no investment in or contractual or other business relationship with a variable interest entity and, therefore, the adoption of this interpretation did not have any
impact on our consolidated financial position or results of operations.



45



---

##### Table of Contents

In November 2003, during discussions on Emerging Issues Task Force, or EITF, 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, the EITF reached a consensus that requires quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In September 2004, FASB Staff Position EITF 03-1-1 was issued to delay the
effective date for the measurement and recognition guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. We have adopted the disclosure requirements of
EITF 03-01. Such adoption did not have a material impact on our financial position or results of operations.



In October 2004, the EITF finalized its consensuses on EITF 04-01, Accounting for Preexisting Relationships between the Parties to a Business
Combination. The consensuses in EITF 04-01 provide guidance on how to account for the settlement of a preexisting relationship and how it affects the accounting of the business combination. EITF 04-01 is effective for business combinations
consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The adoption of this statement did not have a material impact on our financial statements.



In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
Share-Based Payment that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the
fair value on the date of grant of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange
for the award. SFAS No. 123 (Revised) is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. We are currently evaluating the impact of the adoption of this statement on our financial statements.



In December 2004, the FASB issued SFAS No. 153, Exchange
of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 replaces the exception from fair value measurement included in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair
value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
This statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe adoption of this statement will have a material impact on our financial
statements.



Taxes



Because we conduct operations on a global basis, our effective tax rate has
and will continue to depend upon the geographic distribution of our pretax earnings among locations with varying tax rates. Our profits are also impacted by changes in the tax rates of the various taxing jurisdictions. In particular, as the
geographic mix of our pre-tax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period.



Inflation



Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be
performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition.



Potential Liability and Insurance



Drug development services involve the testing of new drugs on human volunteers pursuant to a study protocol. This testing exposes us to the risk of
liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of the new drug. Many of these patients are already seriously ill and are at risk of further
illness or death. We attempt to manage our risk of liability for personal injury or death to patients from administration of products under study through measures such as stringent operating procedures, contractual indemnification provisions with
clients and insurance. We monitor clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating



46



---

##### Table of Contents

procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and to serve as a tool for controlling and
enhancing the quality of drug development services. The contractual indemnifications generally do not protect us against our own actions, such as gross negligence. We currently maintain professional liability insurance coverage with limits we
believe are adequate and appropriate.



Potential Volatility of Quarterly
Operating Results and Stock Price



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Item 7A. Quantitative and Qualitative Disclosures about Market Risk



We are exposed to foreign currency risk by virtue of our international operations. Approximately 20.3%, 23.2% and 27.6% of our net revenues for the years
ended December 31, 2002, 2003 and 2004, respectively, were derived from operations outside the United States. Funds generated by each subsidiary are generally reinvested in the country where they are earned. Our operations in the United Kingdom
generated more than 27.8% of our net revenue from international operations during 2004. Accordingly, we are exposed to adverse movements in the pound sterling and other foreign currencies.



The vast majority of our contracts are entered into by our United States or
United Kingdom subsidiaries. The contracts entered into by the United States subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our United Kingdom subsidiaries are generally denominated in pounds sterling, U.S.



47



---

##### Table of Contents

dollars or euros, but the majority of these contracts are in U.S. dollars. As a result of the weakening of the U.S. dollar relative to the euro and pound
sterling during 2003, in January 2004 we began engaging in hedging activities in an effort to manage our potential foreign exchange exposure.



We do have some currency risk resulting from the passage of time between the invoicing of customers under contracts and the ultimate collection of
customer payments against those invoices. If a contract is denominated in a currency other than the subsidiarys local currency, we recognize a receivable at the time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared and payment from the customer is received will result in our receiving either more or less in local currency than the local currency equivalent of the invoice amount at
the time the invoice was prepared and the receivable established. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. If exchange rates were to increase or decrease by 10%
in the future, we do not expect this would have a material effect on our financial statements.



Our strategy for management of currency risk relies primarily on conducting our operations in a countrys currency, intercompany foreign currency denominated loans and may, from time to time, involve use of
currency derivatives, primarily forward exchange contracts, to reduce our exposure to currency fluctuations. As of December 31, 2004, we had open foreign exchange derivative contracts with a face amount totaling $47.7 million to buy the local
currencies of our foreign subsidiaries. The estimated fair value of the foreign currency derivative portfolio was $0.7 million recorded as a component of prepaid expenses and other current assets and $59,000 recorded as a component of other accrued
expenses. The potential loss resulting from a hypothetical weakening of the U.S. dollar relative to the pound sterling and euro of 10% would have been approximately $6.7 million for the year ended December 31, 2004 based on 2004 revenues and the
costs related to the United Kingdom. Because our foreign currency hedging activities would partially offset these potential losses, we do not expect that a 10% change in exchange rates in the future would have a material effect on our financial
statements.



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



| |  |  | we translate income statement accounts at average exchange rates for the period;
| | - |  | --------------------------------------------------------------------------------



| |  |  | we translate balance sheet assets and liability accounts at end of period exchange rates; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | we translate equity accounts at historical exchange rates.
| | - |  | ----------------------------------------------------------



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



Currently, there are no material exchange controls
on the payment of dividends or otherwise prohibiting the transfer of funds out of or from within any country in which we conduct operations. Although we perform services for clients located in a number of foreign jurisdictions, we have not
experienced any difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition.



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



48



---

##### Table of Contents

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.



Item 9A. Controls and Procedures



Disclosure Controls and Procedures



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



Internal Control Over Financial Reporting



No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors
regarding the preparation and fair presentation of published financial statements.



A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met and must reflect the fact that there are resource
constraints that require management to consider the benefits of internal controls relative to their costs. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error
and all fraud.



Management, with the participation of our Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on our assessment, we believe that, as of December 31, 2004, our internal control over financial reporting was effective based on
those criteria. Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on our assessment of our internal control over financial reporting, which appears below.



Report of Independent Registered Public Accounting
Firm



To the Board of Directors and Stockholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North
Carolina



We have audited managements assessment,
included in the accompanying Managements Report on Internal Control over Financial Reporting, that Pharmaceutical Product Development, Inc. and subsidiaries (the Company) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established



49



---

##### Table of Contents

in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.



A companys
internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established inInternal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.



We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 4, 2005
expressed an unqualified opinion on those financial statements.



|                         
|-------------------------
|/s/ DELOITTE & TOUCHE LLP
|Raleigh, North Carolina  
|March 4, 2005            



Item 9B. Other information



On
March 1, 2005, the Company amended its compensatory arrangement for non-employee directors to provide that the annual restricted stock grants to non-employee directors will vest ninety percent on the first anniversary of the grant, five percent on
the second anniversary and five percent on the third anniversary. A copy of the amended and restated non-employee director compensatory arrangement is attached to this report as Exhibit 10.209.



50



---

##### Table of Contents

On March 1, 2005, in response to the FASB Statement No. 123(R), Share-Based Payment, the
Company amended its Employee Stock Purchase Plan to provide that the price per share of the common stock offered to participants under the plan shall equal 95% of the fair market value of a share of common stock on the last day of each offering
period. Previously, the price equaled 85% of the lower of the price on the first day and the last day of the offering period. FASB Statement 123(R) provides that this lower discount does not have to be reflected as compensation expense on our
statements of income. A copy of the Amended and Restated Employee Stock Purchase Plan is attached to this report as Exhibit 10.86.



In December 2004, the Compensation Committee of our Board of Directors approved an increase in the annual base salary for Linda Baddour, our Chief
Financial Officer, from $222,600 to $275,000. Ms. Baddours base salary was increased to be more competitive in the current market and to compensate her for substantial additional duties she assumed in 2004. The salary increase was effective
January 1, 2005. In addition, on March 1, 2005, the Compensation Committee approved cash bonuses for the Companys Named Executive Officers, as will be listed in our proxy statement for our 2005 annual meeting of shareholders. Based
on Company and individual performance in 2004, the Committee approved the following bonuses: Chief Executive Officer Fred Eshelman, $600,000; President Fred Davenport, $225,000; Executive Vice President - Development Paul Covington, $160,000; Chief
Financial Officer Linda Baddour, $150,000; and Executive Vice President - Global Clinical Operations Colin Shannon, $125,000. In addition, Senior Vice President - Global Business Development Frank Casieri will receive a discretionary cash bonus of
$50,000 based on Company and individual performance in 2004.



51



---

##### Table of Contents

PART III



Certain information
required by Part III is omitted from this report because the Registrant intends to file a definitive proxy statement for its 2005 Annual Meeting of Shareholders to be held on May 18, 2005 (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 Board of Directors has determined that the members of the
Finance and Audit Committee are independent as defined in Rule 4200(a)(15) of the National Association of Securities Dealers listing standards. The Board of Directors has also determined that Mr. Frederick Frank is an audit committee
financial expert as defined in Item 401(h) of Regulation S-K.



Our Board of Directors has adopted a code of conduct that applies to all of our directors and employees. Our Board has also adopted a separate code of ethics for our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer
and Controller, or persons performing similar functions. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to
Pharmaceutical Product Development, Inc., 3151 South 17thStreet, Wilmington, NC 28412, Attn: General Counsel.



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 Other Information  Executive Compensation Tables, Director Compensation,
Employment and Severance Agreements, and Compensation Committee Interlocks and Insider Participation in the Proxy Statement.



52



---

##### Table of Contents

Item 12. Security Ownership of Certain Beneficial Owners and Management



The following table sets forth the indicated information as of December 31, 2004 with respect to our equity compensation plans:



|                                                           |  |                                                                                                 |  |                                                                                 |       |                                                                                                                                                |           |    
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                              |  | (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |  | (b) Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights |       | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(Excluding
Securities Reflected in Column (a)) |          
|Equity Compensation Plans Approved by Security Holders     |  | 4,345,562                                                                                       |  | $                                                                               | 31.39 |                                                                                                                                                | 4,498,102 | (1)
|                                                           |  |                                                                                                 | 
|Equity Compensation Plans Not Approved by Security Holders |  | 0                                                                                               |  |                                                                                 | 0     |                                                                                                                                                | 0         |    
|                                                           |  |                                                                                                 | 
|Total                                                      |  | 4,345,562                                                                                       |  | $                                                                               | 31.39 |                                                                                                                                                | 4,498,102 | (1)

---

|(1) | This includes 3,931,773 shares of stock available for issuance under our 1995 Equity Compensation Plan and 566,329 shares available for issuance under our Employee Stock Purchase
Plan.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The other 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



None.



Item 14. Principal Accountant Fees and Services



The information required by Item 14 of Form 10-K is incorporated by reference to the information under the heading Other Information  Report of the Finance & Audit Committee and  Fees
Paid to the Independent Auditors in the Proxy Statement.



53



---

##### Table of Contents

PART IV



Item 15. Exhibits and Financial Statement Schedules



| | (a) | Financial Statements
| | --- | --------------------



Our consolidated financial statements filed as part of this report are listed in the attached Index to Consolidated Financial Statements. There are no
schedules to our consolidated financial statements.



| | (b) | Exhibits
| | --- | --------



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   |  |         |  |                |  |               
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | ------- |  | -------------- |  | --------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                |  | Registrants Form |  | Dated   |  | Exhibit Number |  | Filed Herewith
|2.1           |  | Plan of Merger to Merge PPD Subsidiary, Inc. with and into Pharmaceutical Product Development Clinical Research Unit, Inc.
(PPD-CRU).                                                                                                                                                                                                                                                                                   |  | S-1               |  | 1/24/96 |  | 2.1            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.2           |  | Plan of Merger to Merge PPD-Europe, Inc. (PPD Europe) with and into the Registrant.                                                                                                                                                                                                                                                                                                                                     |  | S-1               |  | 1/24/96 |  | 2.2            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.3           |  | Agreement and Plan of Reorganization, dated as of June 20, 1996, among the Registrant, Wilmington Merger Corp. and Applied Bioscience
International Inc.                                                                                                                                                                                                                                                                  |  | S-4               |  | 7/16/96 |  | 2.3            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|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. |  | S-4               |  | 7/16/96 |  | 2.4            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.5           |  | Stock Purchase Agreement among Applied Bioscience International Inc., PPD UK Holdings Limited and Environ Holdings Inc. for the
acquisition of all the capital stock of APBI Environmental Sciences Group, Inc., Environmental Assessment Group Limited and Environ International Limited, dated January 31, 1999.                                                                                                        |  | S-4               |  | 7/16/96 |  | 2.5            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.8           |  | Agreement and Plan of Reorganization dated January 28, 2002, by and among Pharmaceutical Product Development, Inc., Subsidiary No. 8,
LLC and Medical Research Laboratories International, Inc.                                                                                                                                                                                                                           |  | 8-K               |  | 2/19/02 |  | 2.8            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.9           |  | Share Purchase Agreement among Pharmaceutical Product Development, Inc., PPD UK Holdings Limited, Evan A. Stein, M.D., Ph.D. and MRL
Select Ltd. Co.                                                                                                                                                                                                                                                                      |  | 8-K               |  | 2/19/02 |  | 2.9            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|2.10          |  | Asset Purchase Agreement dated January 14, 2005 relating to the purchase of the biomarker business from SurroMed, Inc.                                                                                                                                                                                                                                                                                                    |  | 8-K               |  | 2/7/05  |  | 99.1           |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|3.1           |  | Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                       |  | S-4               |  | 7/16/96 |  | 3.1            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|3.2           |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                              |  | S-4               |  | 7/16/96 |  | 3.2            |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|10.35         |  | Lease, dated January 26, 1994, by and between Michael James Lawton, Jeffrey William Ware, Prudential Nominees Limited and Gabbay Group
Limited.                                                                                                                                                                                                                                                                           |  | S-1               |  | 1/24/96 |  | 10.35          |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|10.39         |  | Lease Agreement, dated as of October 25, 1995, by and between PPD-CRU and Perimeter Park West Associates Limited
Partnership.                                                                                                                                                                                                                                                                                             |  | S-1               |  | 1/24/96 |  | 10.39          |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|10.55         |  | Lease made January 23, 1996 between PPD-CRU and Western Center Properties, Inc.                                                                                                                                                                                                                                                                                                                                           |  | S-1               |  | 1/24/96 |  | 10.55          |  |               
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 
|10.59         |  | First Amendment dated May 20, 1999 to Lease Agreement, dated October 25, 1995, between PPD Development and Perimeter Park West
Associates Limited Partnership.                                                                                                                                                                                                                                                            |  | S-4               |  | 7/16/96 |  | 10.59          |  |               



54



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                      |  |                   |  |          |  |                |  |               
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -------- |  | -------------- |  | --------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                          |  | Registrants Form |  | Dated    |  | Exhibit Number |  | Filed Herewith
|10.60         |  | First, Second and Third Amendments to Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited
Partnership.                                                                                                                        |  | S-4               |  | 7/16/96  |  | 10.60          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.61         |  | Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership.                                                                                                                                                              |  | S-4/A             |  | 8/20/96  |  | 10.61          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|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-K              |  | 3/26/97  |  | 10.71          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.86         |  | Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan, dated March 1, 2005.                                                                                                                                                         |  | 10-K              |  |          |  |                |  | X             
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.87         |  | Amendment to Employee Stock Purchase Plan, dated June 21, 1997.                                                                                                                                                                                     |  | 10-Q              |  | 8/14/97  |  | 10.87          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.88         |  | Amendment to Stock Option Plan for Non-Employee Directors, dated May 15, 1997.                                                                                                                                                                      |  | 10-Q              |  | 8/14/97  |  | 10.88          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.90         |  | Employment Agreement, effective July 1, 1997, between Pharmaceutical Product Development, Inc. and Fredric N. Eshelman.                                                                                                                             |  | 10-Q              |  | 11/13/97 |  | 10.90          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.93         |  | Lease Agreement dated July 9, 1997, between Weeks Realty, Inc. and PPD Pharmaco, Inc.                                                                                                                                                               |  | 10-Q              |  | 11/13/97 |  | 10.93          |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.110        |  | Amendment to Employee Stock Purchase Plan, dated March 2, 1998.                                                                                                                                                                                     |  | 10-K              |  | 3/27/98  |  | 10.110         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.114        |  | Lease Agreement dated June 26, 1998 between Weeks Realty Limited Partnership and PPD Pharmaco, Inc.                                                                                                                                                 |  | 10-Q              |  | 8/13/98  |  | 10.114         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.116        |  | First Amendment to Lease Agreement dated September 28, 1998, between PPD Pharmaco, Inc. and Weeks Realty, Inc.                                                                                                                                      |  | 10-Q              |  | 11/13/98 |  | 10.116         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.117        |  | Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited Partnership.                                                                                                                                             |  | 10-Q              |  | 11/13/98 |  | 10.117         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.118        |  | Lease Agreement dated December 16, 1998 between PPD Pharmaco, Inc. and Weeks Realty Limited Partnership.                                                                                                                                            |  | 10-K              |  | 3/4/99   |  | 10.118         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.119        |  | Employment Agreement dated January 1, 1999 between Pharmaceutical Product Development, Inc. and David R. Williams.                                                                                                                                  |  | 10-K              |  | 3/4/99   |  | 10.119         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.124        |  | Stock Purchase Agreement dated February 1, 1999 between PPGx, Inc. and Pharmaceutical Product Development, Inc.                                                                                                                                     |  | 10-K              |  | 3/4/99   |  | 10.124         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.131        |  | Amendment, dated April 14, 1999, to Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited
Partnership.                                                                                                         |  | 10-Q              |  | 8/13/99  |  | 10.131         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.132        |  | Amendment, dated April 14, 1999, to Lease Agreement dated March 25, 1996 between PPD and BBC Family Limited Partnership.                                                                                                                            |  | 10-Q              |  | 8/13/99  |  | 10.132         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.133        |  | Fourth Amendment, dated July 6, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD
Pharmaco, Inc.) and Weeks Realty, L.P.                                                                             |  | 10-Q              |  | 11/15/99 |  | 10.133         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.145        |  | Third Amendment to Employee Stock Purchase Plan, dated June 21, 1997.                                                                                                                                                                               |  | 10-Q              |  | 8/11/00  |  | 10.145         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.158        |  | Deferred Compensation Plan dated February 1, 2001.                                                                                                                                                                                                  |  | 10-K              |  | 3/13/01  |  | 10.158         |  |               
|              |  |                                                                                                                                                                                                                                                      |  |                   | 
|10.162        |  | Severance Agreement dated January 1, 2001, between Pharmaceutical Product Development, Inc. and various individuals.                                                                                                                                |  | 10-K              |  |          |  |                |  | X             



55



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                 |  |                   |  |          |  |                |  |               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -------- |  | -------------- |  | --------------
|ExhibitNumber |  | Description                                                                                                                                                                                                     |  | Registrants Form |  | Dated    |  | Exhibit Number |  | Filed Herewith
|10.164        |  | First Amendment, dated January 28, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD
Pharmaco, Inc.) and Weeks Realty, L.P.                                     |  | 10-K              |  | 3/13/01  |  | 10.164         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.165        |  | Second Amendment, dated June 26, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD
Pharmaco, Inc.) and Weeks Realty, L.P.                                       |  | 10-K              |  | 3/13/01  |  | 10.165         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.166        |  | Third Amendment, dated February 18, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD
Pharmaco, Inc.) and Weeks Realty, L.P.                                    |  | 10-K              |  | 3/13/01  |  | 10.166         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.167        |  | First Amendment, dated February 28, 2000, to Lease Agreement dated December 16, 1998 between PPD Development, Inc. and Duke-Weeks
Realty, L.P.                                                                 |  | 10-K              |  | 3/13/01  |  | 10.167         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.170        |  | Employment Agreement dated July 9, 2001 between Pharmaceutical Product Development, Inc. and Brainard Judd Hartman.                                                                                            |  | 10-Q              |  | 8/1/01   |  | 10.170         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.176        |  | Employment Agreement dated January 15, 2002, between Pharmaceutical Product Development, Inc. and Fred B. Davenport, Jr.                                                                                       |  | 10-K              |  | 2/20/02  |  | 10.176         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.177        |  | Employment Agreement dated January 15, 2002, between Pharmaceutical Product Development, Inc. and Paul S. Covington.                                                                                           |  | 10-K              |  | 2/20/02  |  | 10.177         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.181        |  | Employment Agreement dated May 16, 2002, between Pharmaceutical Product Development, Inc. and Linda Baddour.                                                                                                   |  | 10-Q              |  | 8/13/02  |  | 10.181         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.182        |  | Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard Staub.                                                                                                                      |  | 10-Q              |  | 8/13/02  |  | 10.182         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.183        |  | Termination Agreement dated April 30, 2002, between PPD Development, LLC and Francis J. Casieri.                                                                                                               |  | 10-Q              |  | 8/13/02  |  | 10.183         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.186        |  | Loan Agreement dated July 25, 2002 between Pharmaceutical Product Development, Inc. and Bank of America, N.A.                                                                                                  |  | 10-Q              |  | 8/13/02  |  | 10.186         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.187        |  | Deferred Compensation Plan for Directors dated June 15, 2002.                                                                                                                                                  |  | 10-Q              |  | 8/13/02  |  | 10.187         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.188        |  | Lease Agreement dated October 12, 1994 between Evan A. Stein, M.D., Ph.D. and Medical Research Laboratories.                                                                                                   |  | 10-Q              |  | 8/13/02  |  | 10.188         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.189        |  | Lease Agreement dated July 1, 2001 between Brandywine Grande C,L.P. and PPD Development, LLC.                                                                                                                  |  | 10-Q              |  | 8/13/02  |  | 10.189         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.190        |  | Amended and Restated Deferred Compensation Plan dated July 1, 2002.                                                                                                                                            |  | 10-Q              |  | 11/13/02 |  | 10.190         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.191        |  | Second Amendment, dated October 1, 2002, to Lease Agreement dated June 26, 1998 between PPD Development, Inc. (formerly PPD Pharmaco,
Inc.) and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.). |  | 10-Q              |  | 11/13/02 |  | 10.191         |  |               
|              |  |                                                                                                                                                                                                                 |  |                   | 
|10.192        |  | Fifth Amendment, dated October 1, 2002, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. and Duke Realty Limited
Partnership (formerly Weeks Realty, L.P.).                                 |  | 10-Q              |  | 11/13/02 |  | 10.192         |  |               



56



---

##### Table of Contents

|              |  |                                                                                                                                                                                       |  |                   |  |          |  |                |  |               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -------- |  | -------------- |  | --------------
|ExhibitNumber |  | Description                                                                                                                                                                           |  | Registrants Form |  | Dated    |  | Exhibit Number |  | Filed Herewith
|10.193        |  | Second Amendment, dated October 1, 2002, to Lease Agreement dated December 16, 1998 between PPD Development, Inc. and Duke Realty
Limited Partnership (formerly Weeks Realty, L.P.). |  | 10-Q              |  | 11/13/02 |  | 10.193         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.194        |  | First Amendment, dated June 1, 2002, to Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard
Staub.                                                    |  | 10-Q              |  | 11/13/02 |  | 10.194         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.197        |  | First Amendment to Loan Agreement dated July 1, 2003, between Pharmaceutical Product Development, Inc. and Bank of America,
N.A.                                                     |  | 10-Q              |  | 8/6/03   |  | 10.197         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.198        |  | Second Amendment, dated January 1, 2003, to Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard
Staub.                                                |  | 10-Q              |  | 8/6/03   |  | 10.198         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.199        |  | Loan Agreement dated July 1, 2003, by and among Spotlight Health, Inc., Pharmaceutical Product Development, Inc. and Bank of America,
N.A.                                           |  | 10-Q              |  | 8/6/03   |  | 10.199         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.200        |  | Pharmaceutical Product Development, Inc. Equity Compensation Plan as amended and restated effective May 14, 2003.                                                                    |  | Proxy             |  | 3/28/03  |  | 10.200         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.201^       |  | Termination and License Agreement dated as of December 18, 2003 by and among Eli Lilly and Company, Pharmaceutical Product Development,
Inc., GenuPro, Inc. and APBI Holdings, LLC.  |  | 10-K              |  | 2/19/04  |  | 10.201         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.202^       |  | License Agreement dated January 2, 2001 by and among Pharmaceutical Product Development, Inc., GenuPro, Inc. and ALZA
Corporation.                                                   |  | 10-K              |  | 2/19/04  |  | 10.202         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.203^       |  | Amendment No. 1 to License Agreement dated as of December 26, 2003 by and among Pharmaceutical Product Development, Inc., GenuPro, Inc.
and ALZA Corporation.                        |  | 10-K              |  | 2/19/04  |  | 10.203         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.204^       |  | Collaboration Agreement dated as of November 19, 2003 by and between Syrrx, Inc, Development Partners, LLC and Pharmaceutical Product
Development, Inc.                              |  | 10-K              |  | 2/19/04  |  | 10.204         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.205        |  | Termination Agreement dated June 25, 2004, between PPD Development, LP and W. Richard Staub.                                                                                         |  | 10-Q              |  | 8/3/04   |  | 10.205         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.206        |  | Second Amendment to Loan Agreement dated July 1, 2004, between Pharmaceutical Product Development, Inc. and Bank of America,
N.A.                                                    |  | 10-Q              |  | 8/3/04   |  | 10.206         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.207        |  | First Amendment dated July 1, 2004, to Loan Agreement by and among Spotlight Health, Inc., Pharmaceutical Product Development, Inc. and
Bank of America, N.A.                        |  | 10-Q              |  | 11/3/04  |  | 10.207         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.208        |  | Employment Agreement dated July 16, 2004, between PPD Development, LP and Colin Shannon.                                                                                             |  | 10-Q              |  | 11/3/04  |  | 10.208         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.209        |  | Non-Employee Director Compensation, Amended and Restated March 1, 2005                                                                                                               |  | 10-K              |  |          |  |                |  | X             
|              |  |                                                                                                                                                                                       |  |                   | 
|10.210        |  | Amended and Restated Employment Agreement dated January 14, 2005 between PPD Development, LP and Francis J. Casieri                                                                  |  | 8-K               |  | 1/21/05  |  | 10.210         |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.211        |  | Aircraft Purchase Agreement dated February 2, 2005 relating to the purchase of an aircraft from Krispy Kreme Doughnut
Corporation.                                                   |  | 8-K               |  | 2/7/05   |  | 99.1           |  |               
|              |  |                                                                                                                                                                                       |  |                   | 
|10.212        |  | Lease agreement dated June 18, 2004, between Met Center Partners-6, Ltd. And PPD Development, LP                                                                                     |  |                   |  |          |  |                |  | X             



57



---

##### Table of Contents

|              |  |                                                                                                                                                                                      |  |                   |  |       |  |                |  |               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- |  | ----- |  | -------------- |  | --------------
|ExhibitNumber |  | Description                                                                                                                                                                          |  | Registrants Form |  | Dated |  | Exhibit Number |  | Filed Herewith
|21            |  | Subsidiaries of the Registrant.                                                                                                                                                     |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|23.1          |  | Consent of Deloitte & Touche LLP                                                                                                                                                    |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                                            |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                                            |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief
Executive Officer.                                   |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|32.2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief
Financial Officer.                                   |  |                   |  |       |  |                |  | X             
|              |  |                                                                                                                                                                                      |  |                   | 
|              |  | Exhibit 10.162 has been updated to include Edward J. Murray, to reflect amendments to Linda Baddours severance, to delete David R. Williams and to add welfare benefit information. |  |                   |  |       |  |                |  |               

---

|^ | Confidential treatment requested for portions of this exhibit.
|- | --------------------------------------------------------------



58



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|                                                                                                     | 
|Report of Independent Registered Public Accounting Firm                                              |  | F-2 
|                                                                                                     | 
|Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004           |  | F-3 
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2003 and 2004                                         |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2002, 2003 and 2004 |  | F-5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004           |  | F-6 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-7 



F-1



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM



To the Board of Directors and Shareholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North
Carolina



We have audited the accompanying consolidated balance sheets of
Pharmaceutical Product Development, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pharmaceutical Product Development, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys internal control over financial reporting based on our audits.





|                         
|-------------------------
|/s/ DELOITTE & TOUCHE LLP
|Raleigh, North Carolina  
|                         
|March 4, 2005            



F-2



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands, except per share data)



|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | 2002 |         |   | 2003 |   |         | 2004 | 
|Development revenues                                  |  | $    | 545,139 |   |      | $ | 654,019 |      |  | $ | 759,629 |  
|Discovery sciences revenues                           |  |      | 17,510  |   |      |   | 15,479  |      |  |   | 14,311  |  
|Reimbursed out-of-pockets                             |  |      | 46,008  |   |      |   | 57,485  |      |  |   | 67,316  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net revenues                                          |  |      | 608,657 |   |      |   | 726,983 |      |  |   | 841,256 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Direct costs - Development                            |  |      | 261,169 |   |      |   | 316,942 |      |  |   | 376,439 |  
|Direct costs - Discovery sciences                     |  |      | 7,831   |   |      |   | 7,741   |      |  |   | 5,491   |  
|Reimbursable out-of-pocket expenses                   |  |      | 46,008  |   |      |   | 57,485  |      |  |   | 67,316  |  
|Research and development expenses                     |  |      | 10,540  |   |      |   | 74,941  |      |  |   | 15,852  |  
|Selling, general and administrative expenses          |  |      | 150,607 |   |      |   | 166,253 |      |  |   | 195,752 |  
|Depreciation                                          |  |      | 23,189  |   |      |   | 26,968  |      |  |   | 28,609  |  
|Amortization                                          |  |      | 1,042   |   |      |   | 1,633   |      |  |   | 1,245   |  
|Gain on sale of assets                                |  |      | (174    | ) |      |   | (5,738  | )    |  |   | (82     | )
|Restructuring charges                                 |  |      |        |   |      |   | 1,917   |      |  |   | 2,619   |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|                                                      |  |      | 500,212 |   |      |   | 648,142 |      |  |   | 693,241 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Operating income                                      |  |      | 108,445 |   |      |   | 78,841  |      |  |   | 148,015 |  
|                                                      |  |      |        
|Interest:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Income                                                |  |      | 2,887   |   |      |   | 2,257   |      |  |   | 2,517   |  
|Expense                                               |  |      | (689    | ) |      |   | (769    | )    |  |   | (516    | )
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Interest income, net                                  |  |      | 2,198   |   |      |   | 1,488   |      |  |   | 2,001   |  
|                                                      |  |      |        
|Impairment of equity investments, net                 |  |      | (33,787 | ) |      |   | (10,078 | )    |  |   | (2,000  | )
|Other income, net                                     |  |      | 1,791   |   |      |   | 994     |      |  |   | 1,829   |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income before provision for income taxes              |  |      | 78,647  |   |      |   | 71,245  |      |  |   | 149,845 |  
|Provision for income taxes                            |  |      | 38,645  |   |      |   | 24,935  |      |  |   | 50,957  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income before equity in net loss of investee          |  |      | 40,002  |   |      |   | 46,310  |      |  |   | 98,888  |  
|Equity in net loss of investee, net of income taxes   |  |      | 105     |   |      |   |        |      |  |   |        |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                            |  | $    | 39,897  |   |      | $ | 46,310  |      |  | $ | 98,888  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net income per common share:                          |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                                 |  | $    | 0.73    |   |      | $ | 0.83    |      |  | $ | 1.75    |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                               |  | $    | 0.72    |   |      | $ | 0.82    |      |  | $ | 1.74    |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Weighted average number of common shares outstanding: |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                                 |  |      | 54,710  |   |      |   | 55,774  |      |  |   | 56,348  |  
|Dilutive effect of stock options                      |  |      | 633     |   |      |   | 512     |      |  |   | 556     |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                               |  |      | 55,343  |   |      |   | 56,286  |      |  |   | 56,904  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  



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



F-3



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2003 AND 2004

(in
thousands, except share data)



|                                                                                                                                   |  |      |         |      |   |        
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                   |  | 2003 |         | 2004
|Assets                                                                                                                             |  |      |         |      |   |        
|                                                                                                                                   |  |     
|Current assets                                                                                                                     |  |      |         |      |   |        
|Cash and cash equivalents                                                                                                          |  | $    | 60,677  |      | $ | 144,348
|Short-term investments                                                                                                             |  |      | 49,425  |      |   | 105,020
|Accounts receivable and unbilled services, net                                                                                     |  |      | 245,700 |      |   | 265,067
|Income tax receivable                                                                                                              |  |      | 253     |      |   | 6,321  
|Investigator advances                                                                                                              |  |      | 13,660  |      |   | 15,251 
|Prepaid expenses and other current assets                                                                                          |  |      | 19,192  |      |   | 28,189 
|Deferred tax asset                                                                                                                 |  |      | 12,441  |      |   | 10,867 
|                                                                                                                                   |  |      |         |      |   |        
|Total current assets                                                                                                               |  |      | 401,348 |      |   | 575,063
|                                                                                                                                   |  |     
|Property and equipment, net                                                                                                        |  |      | 112,143 |      |   | 136,501
|Goodwill                                                                                                                           |  |      | 178,076 |      |   | 179,781
|Investments                                                                                                                        |  |      | 61,371  |      |   | 66,658 
|Intangible assets                                                                                                                  |  |      | 2,007   |      |   | 3,895  
|Other assets                                                                                                                       |  |      | 841     |      |   | 929    
|Long-term deferred tax asset                                                                                                       |  |      | 23,395  |      |   | 12,374 
|                                                                                                                                   |  |      |         |      |   |        
|Total assets                                                                                                                       |  | $    | 779,181 |      | $ | 975,201
|                                                                                                                                   |  |      |         |      |   |        
|Liabilities and Shareholders Equity                                                                                               |  |      |         |      |   |        
|                                                                                                                                   |  |     
|Current liabilities                                                                                                                |  |      |         |      |   |        
|Accounts payable                                                                                                                   |  | $    | 15,243  |      | $ | 12,863 
|Payables to investigators                                                                                                          |  |      | 31,976  |      |   | 43,726 
|Accrued income taxes                                                                                                               |  |      | 7,672   |      |   | 5,118  
|Other accrued expenses                                                                                                             |  |      | 63,749  |      |   | 101,714
|Deferred tax liability                                                                                                             |  |      | 74      |      |   | 770    
|Unearned income                                                                                                                    |  |      | 124,651 |      |   | 153,170
|Current maturities of long-term debt and capital lease obligations                                                                 |  |      | 1,381   |      |   | 599    
|                                                                                                                                   |  |      |         |      |   |        
|Total current liabilities                                                                                                          |  |      | 244,746 |      |   | 317,960
|                                                                                                                                   |  |     
|Long-term debt and capital lease obligations, less current maturities                                                              |  |      | 6,281   |      |   | 6,371  
|Deferred rent and other                                                                                                            |  |      | 5,461   |      |   | 5,267  
|Accrued additional pension liability                                                                                               |  |      | 9,859   |      |   | 9,923  
|Long-term deferred tax liability                                                                                                   |  |      | 313     |      |   | 370    
|                                                                                                                                   |  |      |         |      |   |        
|Total liabilities                                                                                                                  |  |      | 266,660 |      |   | 339,891
|                                                                                                                                   |  |      |         |      |   |        
|Commitments and contingencies (Notes 8 and 13)                                                                                     |  |      |         |      |   |        
|                                                                                                                                   |  |     
|Shareholders equity                                                                                                               |  |      |         |      |   |        
|Common stock, $0.10 par value, 95,000,000 shares authorized; 56,050,036 and 56,618,201 shares issued and outstanding,
respectively |  |      | 5,605   |      |   | 5,662  
|Paid-in capital                                                                                                                    |  |      | 278,057 |      |   | 293,200
|Retained earnings                                                                                                                  |  |      | 226,381 |      |   | 325,269
|Accumulated other comprehensive income                                                                                             |  |      | 2,478   |      |   | 11,179 
|                                                                                                                                   |  |      |         |      |   |        
|Total shareholders equity                                                                                                         |  |      | 512,521 |      |   | 635,310
|                                                                                                                                   |  |      |         |      |   |        
|Total liabilities and shareholders equity                                                                                         |  | $    | 779,181 |      | $ | 975,201
|                                                                                                                                   |  |      |         |      |   |        



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



F-4



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands)



|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------ | - |  | --------- | ----- | - | -------------- | - | ------- | ---------------- |  | -------------------- | ------- |  | --------------------------------- | ---- | - | ----- | - | ------ | ------------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                               |  | CommonShares |   |  | Par Value |       |   | Paid-inCapital |   |         | RetainedEarnings |  | DeferredCompensation |         |  | AccumulatedOtherComprehensiveLoss |      |   | Total |   |        | ComprehensiveIncome | 
|Balance January 1, 2002                                                                        |  | 51,930       |   |  | $         | 5,193 |   |                | $ | 164,162 |                  |  | $                    | 140,174 |  | $                                 | (966 | ) |       | $ | (5,928 | )                   |  | $ | 302,635 |   |  |   |         |  
|Net income                                                                                     |  |              |   |  |           |       |   |                |   |         |                  |  |                      | 39,897  |  |                                   |      |   |       |   |        |                     |  |   | 39,897  |   |  | $ | 39,897  |  
|Other comprehensive income (loss):                                                             |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Translation adjustments                                                                        |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 4,935  |                     |  |   | 4,935   |   |  |   | 4,935   |  
|Minimum pension liability, net of tax of $(2,372)                                              |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | (5,533 | )                   |  |   | (5,533  | ) |  |   | (5,533  | )
|Unrealized loss on investment, net of tax of $0                                                |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | (1,939 | )                   |  |   | (1,939  | ) |  |   | (1,939  | )
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Comprehensive income                                                                           |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  | $ | 37,360  |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Issuance of common shares for exercise of stock options and employee stock purchase plan       |  | 461          |   |  |           | 46    |   |                |   | 7,478   |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 7,524   |   |  |   |         |  
|Issuance of shares in connection with acquisitions                                             |  | 3,060        |   |  |           | 306   |   |                |   | 90,339  |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 90,645  |   |  |   |         |  
|Income tax benefit from exercise of stock options                                              |  |              |   |  |           |       |   |                |   | 1,870   |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 1,870   |   |  |   |         |  
|Deferred stock compensation forfeited                                                          |  | (15          | ) |  |           | (1    | ) |                |   | (349    | )                |  |                      |         |  |                                   | 350  |   |       |   |        |                     |  |   |        |   |  |   |         |  
|Shareholder contribution                                                                       |  |              |   |  |           |       |   |                |   | 54      |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 54      |   |  |   |         |  
|Amortization of stock compensation                                                             |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   | 249  |   |       |   |        |                     |  |   | 249     |   |  |   |         |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Balance December 31, 2002                                                                      |  | 55,436       |   |  |           | 5,544 |   |                |   | 263,554 |                  |  |                      | 180,071 |  |                                   | (367 | ) |       |   | (8,465 | )                   |  |   | 440,337 |   |  |   |         |  
|Net income                                                                                     |  |              |   |  |           |       |   |                |   |         |                  |  |                      | 46,310  |  |                                   |      |   |       |   |        |                     |  |   | 46,310  |   |  | $ | 46,310  |  
|Other comprehensive income (loss):                                                             |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Translation adjustments                                                                        |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 9,691  |                     |  |   | 9,691   |   |  |   | 9,691   |  
|Minimum pension liability, net of tax of $(326)                                                |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | (687   | )                   |  |   | (687    | ) |  |   | (687    | )
|Reclassification adjustment for investment loss included in net income, net of tax of $0       |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 1,939  |                     |  |   | 1,939   |   |  |   | 1,939   |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Comprehensive income                                                                           |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  | $ | 57,253  |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Issuance of common shares for exercise of stock options and employee stock purchase plan       |  | 614          |   |  |           | 61    |   |                |   | 9,643   |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 9,704   |   |  |   |         |  
|Income tax benefit from exercise of stock options                                              |  |              |   |  |           |       |   |                |   | 4,860   |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 4,860   |   |  |   |         |  
|Amortization of stock compensation                                                             |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   | 367  |   |       |   |        |                     |  |   | 367     |   |  |   |         |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Balance December 31, 2003                                                                      |  | 56,050       |   |  |           | 5,605 |   |                |   | 278,057 |                  |  |                      | 226,381 |  |                                   | 0    |   |       |   | 2,478  |                     |  |   | 512,521 |   |  |   |         |  
|Net income                                                                                     |  |              |   |  |           |       |   |                |   |         |                  |  |                      | 98,888  |  |                                   |      |   |       |   |        |                     |  |   | 98,888  |   |  | $ | 98,888  |  
|Other comprehensive income (loss):                                                             |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Translation adjustments                                                                        |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 6,205  |                     |  |   | 6,205   |   |  |   | 6,205   |  
|Minimum pension liability, net of tax of $200                                                  |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 467    |                     |  |   | 467     |   |  |   | 467     |  
|Change in fair value on hedging transaction, net of tax of $997                                |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 2,296  |                     |  |   | 2,296   |   |  |   | 2,296   |  
|Reclassification adjustment for hedging results included in direct costs, net of tax of $(807) |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | (1,883 | )                   |  |   | (1,883  | ) |  |   | (1,883  | )
|Unrealized gain on investment, net of tax of $0                                                |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   | 1,616  |                     |  |   | 1,616   |   |  |   | 1,616   |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Comprehensive income                                                                           |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  | $ | 107,589 |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Issuance of common shares for exercise of stock options and employee stock purchase plan       |  | 568          |   |  |           | 57    |   |                |   | 12,088  |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 12,145  |   |  |   |         |  
|Income tax benefit from exercise of stock options                                              |  |              |   |  |           |       |   |                |   | 3,055   |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   | 3,055   |   |  |   |         |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  
|Balance December 31, 2004                                                                      |  | 56,618       |   |  | $         | 5,662 |   |                | $ | 293,200 |                  |  | $                    | 325,269 |  | $                                 | 0    |   |       | $ | 11,179 |                     |  | $ | 635,310 |   |  |   |         |  
|                                                                                               |  |              |   |  |           |       |   |                |   |         |                  |  |                      |         |  |                                   |      |   |       |   |        |                     |  |   |         |   |  |   |         |  



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



F-5



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands)



|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                  |  | 2002 |          |   | 2003 |   |            | 2004 | 
|Cash flows from operating activities:                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Net income                                                                        |  | $    | 39,897   |   |      | $ | 46,310     |      |  | $ | 98,888   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |          |   |      |   |            |      |  |   |          |  
|Impairment of investments                                                         |  |      | 33,787   |   |      |   | 10,159     |      |  |   | 2,000    |  
|Restructuring charges                                                             |  |      |         |   |      |   | 1,917      |      |  |   | 2,619    |  
|Depreciation and amortization                                                     |  |      | 24,231   |   |      |   | 28,601     |      |  |   | 29,854   |  
|Stock compensation amortization                                                   |  |      | 249      |   |      |   | 367        |      |  |   |         |  
|Provision for doubtful accounts                                                   |  |      | 342      |   |      |   | 284        |      |  |   | 1,188    |  
|Equity in net loss of investee                                                    |  |      | 119      |   |      |   |           |      |  |   |         |  
|Gain on sale of assets and investments                                            |  |      | (174     | ) |      |   | (5,738     | )    |  |   | (82      | )
|(Benefit) provision for deferred income taxes                                     |  |      | (1,565   | ) |      |   | (25,265    | )    |  |   | 12,949   |  
|Loss on disposition of property and equipment                                     |  |      | 60       |   |      |   | 295        |      |  |   | 205      |  
|Change in operating assets and liabilities, net of acquisitions:                  |  |      |          |   |      |   |            |      |  |   |          |  
|Accounts receivable and unbilled services, net                                    |  |      | (51,295  | ) |      |   | (39,256    | )    |  |   | (16,138  | )
|Prepaid expenses and investigator advances                                        |  |      | (3,213   | ) |      |   | (11,722    | )    |  |   | (9,437   | )
|Current income taxes                                                              |  |      | 3,998    |   |      |   | (305       | )    |  |   | (5,934   | )
|Other assets                                                                      |  |      | 15       |   |      |   | 158        |      |  |   | (72      | )
|Accounts payable, other accrued expenses and deferred rent                        |  |      | 16,519   |   |      |   | (5,341     | )    |  |   | 27,834   |  
|Payable to investigators                                                          |  |      | 12,657   |   |      |   | 11,330     |      |  |   | 10,748   |  
|Unearned income                                                                   |  |      | 30,165   |   |      |   | 1,781      |      |  |   | 24,652   |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash provided by operating activities                                         |  |      | 105,792  |   |      |   | 13,575     |      |  |   | 179,274  |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Cash flows from investing activities:                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Purchases of property and equipment                                               |  |      | (34,496  | ) |      |   | (31,693    | )    |  |   | (48,583  | )
|Proceeds from sale of property and equipment                                      |  |      | 114      |   |      |   | 274        |      |  |   | 319      |  
|Acquisition of intangible assets                                                  |  |      | (2,000   | ) |      |   |           |      |  |   | (2,500   | )
|Purchases of available-for-sale investments                                       |  |      | (164,934 | ) |      |   | (1,232,313 | )    |  |   | (976,993 | )
|Maturities and sales of available-for-sale investments                            |  |      | 206,954  |   |      |   | 1,215,713  |      |  |   | 921,398  |  
|Cash received from repayment of note receivable                                   |  |      | 17,000   |   |      |   | 500        |      |  |   |         |  
|Purchases of investments                                                          |  |      | (8,793   | ) |      |   | (40,457    | )    |  |   | (5,671   | )
|Cash (paid) refunded related to businesses acquired, net of cash acquired         |  |      | (50,579  | ) |      |   | (25,873    | )    |  |   | 1,450    |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash used in investing activities                                             |  |      | (36,734  | ) |      |   | (113,849   | )    |  |   | (110,580 | )
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Cash flows from financing activities:                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Principal repayments on long-term debt                                            |  |      | (166     | ) |      |   | (973       | )    |  |   | (353     | )
|Proceeds from long-term debt                                                      |  |      | 1,464    |   |      |   |           |      |  |   |         |  
|Repayment of capital lease obligations                                            |  |      | (2,741   | ) |      |   | (1,766     | )    |  |   | (830     | )
|Proceeds from exercise of stock options and employee stock purchase plan          |  |      | 7,524    |   |      |   | 9,704      |      |  |   | 12,145   |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash provided by financing activities                                         |  |      | 6,081    |   |      |   | 6,965      |      |  |   | 10,962   |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |      | 4,932    |   |      |   | 5,587      |      |  |   | 4,015    |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |      | 80,071   |   |      |   | (87,722    | )    |  |   | 83,671   |  
|Cash and cash equivalents, beginning of the year                                  |  |      | 68,328   |   |      |   | 148,399    |      |  |   | 60,677   |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents, end of the year                                        |  | $    | 148,399  |   |      | $ | 60,677     |      |  | $ | 144,348  |  
|                                                                                  |  |      |          |   |      |   |            |      |  |   |          |  



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



F-6



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



1. Summary of Operations and Significant Accounting Policies:



Nature of Business



Pharmaceutical Product Development, Inc. and its subsidiaries (collectively the Company) provide a broad range
of research and development and consulting services in the development and discovery sciences segments. In the development segment, the Company provides services, which include preclinical programs and Phase I to Phase IV clinical development. In
addition, for drugs that have received approval for market use, the Company also offers post-market support services such as product launch services, patient compliance programs, disease registry programs and medical communications programs for
consumer and healthcare providers on product use and adverse events. The discovery sciences services include preclinical evaluations of anticancer therapies and compound partnering arrangements associated with the development and commercialization
of potential drug products. The Company provides services to clients in the pharmaceutical, biotechnology and medical device industries and to the United States government and other industries. The Company markets its development services primarily
in the United States and Europe. The Companys discovery sciences revenues have all been generated in the United States.



Principles of Consolidation



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



Recent Accounting
Pronouncements



In December 2003, the Financial Accounting
Standards Board, or the FASB, issued SFAS No. 132 (Revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. Revised Statement No. 132 requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted the disclosure requirements of this statement.



In December 2003, the FASB issued revised FIN 46, Consolidation of Variable Interest Entities. This revised
interpretation is effective for all entities as of the first reporting period that ends after March 15, 2004. The Company has no investment in or contractual or other business relationship with a variable interest entity and, therefore, the adoption
of this interpretation did not have any impact on its consolidated financial position or results of operations.



In November 2003, during discussions on Emerging Issues Task Force, or EITF, 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, the EITF reached a consensus that requires quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS
No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In September 2004, FASB Staff Position EITF Issue 03-1-1 was issued to delay the effective date for the measurement and
recognition guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The Company has adopted the disclosure requirements of EITF 03-01. Such adoption did
not have a material impact on the Companys financial position or results of operations.



In October 2004, the EITF finalized its consensuses on EITF 04-01, Accounting for Preexisting Relationships between the Parties to a Business Combination. The consensuses in EITF 04-01 provide guidance on
how to account for the settlement of a preexisting relationship and how it affects the accounting of the business combination. EITF 04-01 is effective for business combinations consummated and goodwill impairment tests performed in reporting periods
beginning after October 13, 2004. The adoption of this statement did not have a material impact on the Companys financial statements.



F-7



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Recent Accounting Pronouncements (continued)



In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
Share-Based Payment that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the
fair value on the date of grant of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange
for the award. SFAS No. 123 (Revised) is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of the adoption of this statement on the Companys
financial statements.



In December 2004, the FASB issued SFAS
No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 replaces the exception from fair value measurement included in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a
general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. This statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe adoption of this statement will have a
material impact on the Companys financial statements.



Revenue
Recognition



The Company records revenue from fixed-price
contracts on a proportional performance basis in its Development Group. To measure performance on a given date, the Company compares direct costs incurred through that date to estimated total contract direct costs. The Company believes this is the
best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the
amount of revenue recognized. For time-and-material contracts in both Development Group and Discovery Sciences Group, the Company recognizes revenues as hours are worked, multiplied by the applicable hourly rate. For the Companys Phase I and
laboratory businesses, the Company recognizes revenues from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price.



In connection with the management of multi-site clinical trials, the Company pays, on behalf of its customers, fees to investigators and test subjects as
well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. The clients reimburse the Company for these costs. As required by EITF 01-14, amounts paid by the Company as a principal for out-of-pocket costs are
included in direct costs as reimbursable out-of-pocket expenses and the reimbursements the Company receives as a principal are reported as reimbursed out-of-pocket revenue. In the statements of operations, the Company combines amounts paid by the
Company as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, the Company receives as an agent. During the years ended December 31, 2002, 2003 and 2004, fees paid to investigators and other fees the Company paid as
an agent and the associated reimbursements were approximately $157.5 million, $172.5 million and $226.9 million, respectively.



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



F-8



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Revenue Recognition (continued)



The Discovery Sciences Group also generates revenue from time to time in the
form of milestone payments in connection with licensing of compounds. Milestone payments are only recognized as revenue if the specified milestone is achieved and accepted by the customer, payment is received and continued performance of future
research and development services related to that milestone are not required.



Cash and Cash Equivalents



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



Supplemental cash flow
information consisted of the following:



|                                |  |                         |        |      |   |        |  |   |       
|------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                |  | Year Ended December 31,
|(in thousands)                  |  | 2002                    |        | 2003 |   | 2004  
|Cash paid for interest          |  | $                       | 734    |      | $ | 784    |  | $ | 527   
|                                |  |                         |        |      |   |        |  |   |       
|Cash paid for income taxes, net |  | $                       | 36,314 |      | $ | 44,950 |  | $ | 45,743
|                                |  |                         |        |      |   |        |  |   |       



Payables to Investigators and
Investigator Advances



Billings and payments to
investigators are based on predetermined contractual agreements that can differ from the accrual of the related costs. Investigator costs are recognized based upon the status of the work completed as a percentage of the total procedures required
under the contract or based on patient enrollment over the term of the contract. Payments made in excess of the accrued costs are classified as investigator advances and accrued costs in excess of amounts paid are classified as payables to
investigators in the consolidated balance sheets.



Inventory



Inventories, which consist principally of laboratory supplies, are valued
at the lower of cost (first-in, first-out method) or market. Inventories totaling $2.0 million and $2.2 million as of December 31, 2003 and 2004, respectively, were included in prepaid expenses and other current assets.



Property and Equipment



Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line
method, based on estimated useful lives of 40 to 50 years for buildings, five years for laboratory equipment, two to five years for software, computers and related equipment and five to ten years for furniture and equipment, except for the airplanes
which are being depreciated over 30 years. Leasehold improvements are depreciated over the shorter of the respective lives of the leases or the useful lives of the improvements. Property under capital leases is depreciated over the life of the lease
or the service life, whichever is shorter.



Internal Use Software



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



F-9



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Goodwill



The excess of the purchase price of a business acquired over the fair value of net tangible assets, identifiable intangible
assets and acquired in-process research and development costs at the date of the acquisition has been assigned to goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is evaluated for impairment on an
annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired.



Realizability of Carrying Value of Long-Lived Assets



The Company reviews the recoverability of long-lived and finite-lived intangible assets when circumstances indicate that the carrying amount of assets may
not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate an impairment, the Company would record an impairment based on the fair value of
the assets at the date of the impairment. No impairments of long-lived assets were recorded in 2002 and 2003. In 2004, the Company recorded an impairment of property and equipment of approximately $0.5 million related to the restructuring charge
associated with exiting the chemistry facility in Research Triangle Park, North Carolina.



Short-term Investments



The Company has short-term investments in Auction Rate Securities, or ARS. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have certain economic characteristics of short-term investments due to a
rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. The Companys short-term
investments are classified as available-for-sale securities due to managements intent regarding these securities. As of December 31, 2003 and 2004, there were no unrealized gains or losses associated with these investments and the adjusted
fair market value equaled the adjusted cost. ARS, totaling $49.4 million as of December 31, 2003 which were previously recorded as cash and cash equivalents due to their liquidity and pricing reset feature, have been included in short-term
investments in the accompanying financial statements. Prior period information was reclassified to conform to the current year presentation. This change in classification had no effect on total current assets, total assets, net income or cash flows
from operating activities of the Company.



Investments



The Company has equity investments in publicly traded entities. Investments
in publicly traded entities are classified as available-for-sale securities and are measured at market value. The Company records net unrealized gains or losses associated with investments in publicly traded entities as a component of
shareholders equity until they are realized or an other-than-temporary decline has occurred. The market value of the Companys equity investments in publicly traded entities is based on the closing price as quoted by the applicable stock
exchange or association at the end of the reporting period. As of December 31, 2004, gross unrealized gains were $1.6 million and gross unrealized losses were $0. As of December 31, 2003, there were no unrealized gains or losses. The Companys
equity investments are classified as long-term assets due to managements intent to hold these securities for more than 12 months.



F-10



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Investments (continued)



The Company also has investments in privately held entities in the form of
equity and convertible debt instruments that are not publicly traded and for which fair values are not readily determinable. The Company records all of its investments in private entities under the cost method of accounting. The Company assesses the
net realizable value of these entities on a quarterly basis to determine if there has been a decline in the fair value of these entities, and if so, if the decline is other than temporary. This quarterly review includes an evaluation of, among other
things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events. The Companys investments consist of equity investments in private entities for which fair
values are not readily determinable. The Company assesses its investment portfolio on a quarterly basis for impairment; however for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or
circumstances that would likely have a significant adverse effect on the fair value of the investment.



Unbilled Services and Unearned Income



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



Income Taxes



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



Concentration of Credit Risk



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



The Companys clients are primarily pharmaceutical and biotechnology companies. No single client accounted for more than 10% of the Companys
net revenue in 2002, 2003 or 2004. Concentrations of credit risk with respect to accounts receivable are limited to a degree due to the large number of clients comprising the Companys client base. The Company performs ongoing credit
evaluations of clients financial condition and, generally, does not require collateral. The Company maintains reserves for potential credit losses and these losses, in the aggregate, have historically not exceeded estimates.



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



F-11



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Comprehensive Income



The Company has elected to present comprehensive income and its components in the Statements of Shareholders Equity.
The components of comprehensive income (loss) are net income and all other non-owner changes in equity.



The balances in accumulated other comprehensive (loss) income were as follows:



|                                              |  |              |        |   |      |   |        |  
|--------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                              |  | December 31, |       
|(in thousands)                                |  | 2003         |        |   | 2004 |  
|Translation adjustment                        |  | $            | 8,698  |   |      | $ | 14,903 |  
|Minimum pension liability, net of tax         |  |              | (6,220 | ) |      |   | (5,753 | )
|Fair value of hedging transaction, net of tax |  |              |       |   |      |   | 413    |  
|Unrealized loss on investment                 |  |              |       |   |      |   | 1,616  |  
|                                              |  |              |        |   |      |   |        |  
|Total                                         |  | $            | 2,478  |   |      | $ | 11,179 |  
|                                              |  |              |        |   |      |   |        |  



Foreign Currency Translations and
Transactions



Assets and liabilities of foreign
operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange at each reporting date. Income and expenses are translated at the average rates of exchange prevailing during the month in
which a transaction occurs. Gains or losses from translating foreign currency financial statements are recorded in other comprehensive income. The cumulative translation adjustment included in other comprehensive income for the years ended December
31, 2002, 2003 and 2004 totaled $4.9 million, $9.7 million and $6.2 million, respectively. Foreign currency transaction gains and losses are not material and are included in other income, net.



Earnings Per Share



The computation of basic income per share information is based on the weighted average number of common shares outstanding
during the year. The computation of diluted income per share information is based on the weighted average number of common shares outstanding during the year plus the effects of any dilutive common stock equivalents. Excluded from the calculation of
earnings per diluted share were 387,999; 743,715 and 252,546 shares during 2002, 2003 and 2004, respectively, because they were antidilutive.



Stock-Based Compensation



The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25), which states that, for fixed plans, no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated
fair value per share of the Companys common stock on the grant date. If stock options are granted with an exercise price below the estimated fair value of the Companys common stock at the grant date, the difference between the fair value
of the Companys common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense over the vesting period of the stock option.



F-12



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Stock-Based Compensation (continued)



The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and Statement of Financial Accounting Standards No. 148, Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123, which requires compensation expense to be disclosed in the notes based on the fair value of the options granted at the date of the grant. Had compensation cost for the Companys stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with the method required by SFAS No. 123, the Companys net income and diluted net income per common share would have been the pro forma amounts indicated below.



|                                                                                                                                          |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                          |  | Year Ended December 31, |       
|(in thousands, except per share data)                                                                                                     |  | 2002                    |        |   | 2003 |   |        | 2004 | 
|Net income, as reported                                                                                                                   |  | $                       | 39,897 |   |      | $ | 46,310 |      |  | $ | 98,888 |  
|Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                         | (6,216 | ) |      |   | (4,900 | )    |  |   | (7,204 | )
|                                                                                                                                          |  |                         |        |   |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                                                      |  | $                       | 33,681 |   |      | $ | 41,410 |      |  | $ | 91,684 |  
|                                                                                                                                          |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income per share:                                                                                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic  as reported                                                                                                                       |  | $                       | 0.73   |   |      | $ | 0.83   |      |  | $ | 1.75   |  
|Basic  pro forma                                                                                                                         |  | $                       | 0.62   |   |      | $ | 0.74   |      |  | $ | 1.63   |  
|                                                                                                                                          |  |                         |       
|Diluted  as reported                                                                                                                     |  | $                       | 0.72   |   |      | $ | 0.82   |      |  | $ | 1.74   |  
|Diluted  pro forma                                                                                                                       |  | $                       | 0.61   |   |      | $ | 0.74   |      |  | $ | 1.61   |  



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|                                               |  |                         |       |      |   |       |  |   |      
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                               |  | Year Ended December 31,
|                                               |  | 2002                    |       | 2003 |   | 2004 
|Weighted-average fair value of options granted |  | $                       | 13.53 |      | $ | 9.96  |  | $ | 15.72
|Expected lives (years)                         |  |                         | 5.00  |      |   | 5.00  |  |   | 5.00 
|Dividend yield (%)                             |  |                         | 0.00  |      |   | 0.00  |  |   | 0.00 
|Risk-free interest rate (%)                    |  |                         | 2.78  |      |   | 3.25  |  |   | 3.63 
|Expected volatility (%)                        |  |                         | 57.47 |      |   | 41.22 |  |   | 53.99



All options granted
during the years ended December 31, 2002, 2003 and 2004 were granted with an exercise price equal to the fair value of the Companys common stock at the grant date. The estimated pro forma amounts include the compensation cost for the
Companys Employee Stock Purchase Plan based on the fair value of the contributions made under this plan, consistent with the method of SFAS No. 123.



Advertising Costs



Advertising costs are charged to operations as incurred. Advertising costs were approximately $1.0 million, $0.9 million and $0.8 million for the years
ended December 31, 2002, 2003 and 2004, respectively.



F-13



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



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



Research and Development Costs



Research and development costs are charged to operations as incurred.
Research and development costs are listed as a separate line item on the Companys consolidated statements of operations. In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company for $65.0 million the patents for the
compound dapoxetine. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine is still in development and has not been approved for sale in any country.



Restructuring Charges and Gain on Sale of Assets



In 2004, the Company recorded a $2.6 million restructuring charge associated
with exiting the Companys chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on sale of assets used in the
chemistry services of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease which will end in 2015. During 2004, lease payments and termination costs of $1.4 million were paid. At December 31,
2004, the Company had recorded the remaining restructuring liability of $1.2 million, including deferred rent of approximately $0.5 million, in the consolidated balance sheet as a component of other accrued expenses and deferred rent and other.
During 2004, the loss on sale of assets was a non-cash item and was charged to expense during the year.



In July 2003, the Company announced the restructuring of its Discovery Sciences segment. In connection with this restructuring, the Company consolidated
its Discovery Sciences operations into its Morrisville, North Carolina and Middleton, Wisconsin facilities, and discontinued offering functional genomics services in Menlo Park, California. In the third quarter, the Company incurred, recorded and
paid a charge to earnings of 2003 of $1.9 million for this restructuring. Restructuring charges included $0.9 million for one-time termination benefits, $0.7 million for facility charges and $0.3 million for other related charges.



As a part of the 2003 restructuring, the Company purchased 4.4 million shares
of SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash and $12.0 million in tangible assets and intellectual property from the Companys Menlo Park operations. The value of the tangible assets and
intellectual property was based on an independent appraisal. The Company recorded a gain on sale of assets of $5.7 million as a result of this transaction. The majority of the remaining tangible assets of the restructured operations were transferred
to the CRO Phase II through IV division and the remaining Discovery Sciences operations.



Reclassifications



The
Company has reclassified certain 2002 and 2003 financial statement amounts to conform to the 2004 financial statement presentation.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect 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.



F-14



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



2. Acquisitions:



In February 2002, the Company acquired 100% of the outstanding common stock of Medical Research Laboratories International, Inc., or MRL U.S., and Medical
Research Laboratories International, BVBA, or MRL Belgium, collectively, MRL. MRL is part of the Development segment of the Company. MRL U.S. operates a specialty central laboratory in Highland Heights, Kentucky, near Cincinnati, Ohio and MRL
Belgium operates a central laboratory in Brussels, Belgium. MRL provides highly standardized efficacy and safety testing services for pharmaceutical companies engaged in clinical drug development and is one of the largest central laboratory
providers for Phase I-IV global studies involving agents used in cholesterol, endocrine, metabolic and cardiovascular clinical research. The results of operations are included in the Companys consolidated results of operations as of and since
February 19, 2002, the effective date of the acquisition. The Company acquired MRL for total consideration of $113.1 million, including $39.0 million in cash, $73.5 million in the Companys common stock (then approximately 2.6 million
unregistered shares) and direct acquisition costs of $0.6 million for legal, appraisal and accounting fees.



In April 2002, the Company acquired Piedmont Research Center II, Inc, or PRC, a cancer research laboratory based in Morrisville, North Carolina that
performs preclinical evaluations of anti-cancer therapies. The research facility serves national and international pharmaceutical and biotechnology companies. PRC is part of the Discovery Sciences segment of the Company. The results of operations
are included in the Companys consolidated results of operations as of and since April 1, 2002, the effective date of the acquisition. The Company acquired PRC for total consideration of $19.6 million, including $2.4 million in cash, $17.1
million in the Companys common stock (then 0.5 million unregistered shares) and direct acquisition costs of $0.1 million for legal and accounting fees.



In June 2002, the Company acquired Complete Software Solutions, Inc., or CSS, a technical consulting firm offering implementation, validation and training
services as well as specialized software for pharmaceutical and biotechnology industries. CSS is part of the Development segment of the Company. The results of operations are included in the Companys consolidated results of operations as of
and since June 12, 2002, the effective date of the acquisition. The Company acquired CSS for total consideration of $16.8 million in cash.



In June 2002, the Company acquired ProPharma Pte Ltd, an Asian-based clinical research organization with experience in managing pan-Asian clinical trials.
ProPharma is part of the Development segment of the Company. The results of operations are included in the Companys consolidated results of operations as of and since June 27, 2002, the effective date of the acquisition. The Company acquired
ProPharma for total consideration of $3.0 million in cash. In addition, the Company paid $1.4 million as additional purchase price in the second quarter of 2003. This additional and final purchase price payment was based on the financial performance
of ProPharma for the twelve-month period ended March 31, 2003.



In July 2003, the Company acquired Eminent Research Systems, Inc., a clinical research organization specializing in medical device development, and Clinsights, Inc., a company affiliated with Eminent through common ownership that provides a
range of post-market services to medical device and related pharmaceutical companies and operates proprietary web sites for the dissemination of medical information, online research and product marketing. As a result, Eminent and Clinsights are now
part of the Development segment of the Company. Their results of operations are included in the Companys consolidated results of operations as of and since July 18, 2003, the effective date of the acquisitions. The Company acquired Eminent and
Clinsights for total consideration of $23.5 million in cash. Under the terms of the merger agreement, the original aggregate purchase price of $25.0 million was reduced by $1.5 million in the first quarter of 2004 as a result of an adjustment to the
purchase price based on Eminents closing balance sheet.



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



F-15



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



2. Acquisitions (continued):



The total purchase price for the 2003 acquisitions was allocated to the estimated fair value of assets acquired and
liabilities assumed as set forth in the following table:



|                                  |  |         |        |   |            |   |        |       |  |   |        |  
|--------------------------------- |  | ------- | ------ | - | ---------- | - | ------ | ----- |  | - | ------ | -
|(in thousands)                    |  | Eminent |        |   | Clinsights |   |        | Total | 
|Condensed balance sheet:          |  |         |        |   |            |   |        |       |  |   |        |  
|Current assets                    |  | $       | 677    |   |            | $ | 1,346  |       |  | $ | 2,023  |  
|Property and equipment, net       |  |         | 436    |   |            |   | 226    |       |  |   | 662    |  
|Non-current assets                |  |         | 32     |   |            |   | 25     |       |  |   | 57     |  
|Deferred tax asset                |  |         | 1,184  |   |            |   | 1,093  |       |  |   | 2,277  |  
|Current liabilities               |  |         | (4,946 | ) |            |   | (732   | )     |  |   | (5,678 | )
|                                  |  |         |       
|Value of intangible assets:       |  |         |        |   |            |   |        |       |  |   |        |  
|Backlog and customer relationship |  |         | 383    |   |            |   | 250    |       |  |   | 633    |  
|Goodwill                          |  |         | 14,541 |   |            |   | 9,042  |       |  |   | 23,583 |  
|                                  |  |         |        |   |            |   |        |       |  |   |        |  
|Total                             |  | $       | 12,307 |   |            | $ | 11,250 |       |  | $ | 23,557 |  
|                                  |  |         |        |   |            |   |        |       |  |   |        |  



Purchase price
allocations have been finalized for these acquisitions. Goodwill related to Eminent and Clinsights is not expected to be deductible for tax purposes.



The unaudited pro forma results from operations for the Company assuming the 2002 and 2003 acquisitions were consummated as of January 1, 2002 and 2003
were as follows:



|                                      |  |                         |         |      |   |        
|------------------------------------- |  | ----------------------- | ------- | ---- | - | -------
|                                      |  | Year Ended December 31,
|(in thousands, except per share data) |  | 2002                    |         | 2003
|Total revenue                         |  | $                       | 624,772 |      | $ | 729,741
|Net income                            |  | $                       | 41,008  |      | $ | 44,961 
|Net income per share:                 |  |                         |         |      |   |        
|Basic                                 |  | $                       | 0.75    |      | $ | 0.81   
|Diluted                               |  | $                       | 0.74    |      | $ | 0.80   



The above amounts are
based upon certain assumptions and estimates. The Company believes these assumptions and estimates are reasonable, but they do not reflect any benefit from economies that might be achieved from combined operations. Pro forma adjustments were made to
interest income and income tax, decreasing net income by $583,000 and $574,000 for the twelve-month periods ended December 31, 2002 and 2003, respectively. These adjustments are reflected in the above table. The pro forma financial information
presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the period indicated or of future results of operations of the combined companies.



3. Accounts Receivable and Unbilled Services:



Accounts receivable and unbilled services consisted of the following:



|                              |  |              |         |   |      |   |         |  
|----------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                              |  | December 31, |        
|(in thousands)                |  | 2003         |         |   | 2004 |  
|Trade:                        |  |              |         |   |      |   |         |  
|Billed                        |  | $            | 151,525 |   |      | $ | 183,765 |  
|Unbilled                      |  |              | 97,134  |   |      |   | 85,404  |  
|Reserve for doubtful accounts |  |              | (2,959  | ) |      |   | (4,102  | )
|                              |  |              |         |   |      |   |         |  
|                              |  | $            | 245,700 |   |      | $ | 265,067 |  
|                              |  |              |         |   |      |   |         |  



F-16



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



3. Accounts Receivable and Unbilled Services (continued):



The Company had 21.2% and 23.1% of its accounts receivable and unbilled
services in locations outside the United States as of December 31, 2003 and 2004, respectively. Operations in the United Kingdom comprised 75.7% and 81.0% of this balance as of December 31, 2003 and 2004, respectively.



Change in reserve for doubtful accounts consisted of the following:



|                                        |  |                         |       |   |      |   |        |      |  |   |       |  
|--------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                        |  | Year Ended December 31, |      
|(in thousands)                          |  | 2002                    |       |   | 2003 |   |        | 2004 | 
|Balance at beginning of year            |  | $                       | 2,881 |   |      | $ | 3,621  |      |  | $ | 2,959 |  
|Additions charged to costs and expenses |  |                         | 342   |   |      |   | 284    |      |  |   | 1,188 |  
|Deductions                              |  |                         | (402  | ) |      |   | (1,283 | )    |  |   | (45   | )
|Acquisitions                            |  |                         | 800   |   |      |   | 337    |      |  |   |      |  
|                                        |  |                         |       |   |      |   |        |      |  |   |       |  
|Balance at end of year                  |  | $                       | 3,621 |   |      | $ | 2,959  |      |  | $ | 4,102 |  
|                                        |  |                         |       |   |      |   |        |      |  |   |       |  



4. Property and Equipment:



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



|                                               |  |              |          |   |      |   |          |  
|---------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                               |  | December 31, |         
|(in thousands)                                 |  | 2003         |          |   | 2004 |  
|Land                                           |  | $            | 2,322    |   |      | $ | 7,392    |  
|Buildings and leasehold improvements           |  |              | 41,482   |   |      |   | 45,493   |  
|Construction in progress                       |  |              | 12,939   |   |      |   | 21,649   |  
|Furniture and equipment                        |  |              | 95,280   |   |      |   | 99,778   |  
|Computer equipment and software                |  |              | 65,116   |   |      |   | 86,367   |  
|                                               |  |              |          |   |      |   |          |  
|                                               |  |              | 217,139  |   |      |   | 260,679  |  
|Less accumulated depreciation and amortization |  |              | (104,996 | ) |      |   | (124,178 | )
|                                               |  |              |          |   |      |   |          |  
|                                               |  | $            | 112,143  |   |      | $ | 136,501  |  
|                                               |  |              |          |   |      |   |          |  



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



|                                               |  |                  |        |  
|---------------------------------------------- |  | ---------------- | ------ | -
|(in thousands)                                 |  | December 31,2003 |       
|Buildings and leasehold improvements           |  | $                | 1,577  |  
|Computer equipment and software                |  |                  | 3,318  |  
|                                               |  |                  |        |  
|                                               |  |                  | 4,895  |  
|Less accumulated depreciation and amortization |  |                  | (3,827 | )
|                                               |  |                  |        |  
|                                               |  | $                | 1,068  |  
|                                               |  |                  |        |  



As of December 31,
2004, the Company no longer had any property or equipment under capital leases.



F-17



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



5. Goodwill and Intangible Assets:



Changes in the carrying amount of goodwill for the twelve months ended December 31, 2003 and 2004, by operating segment,
were as follows:



|                                                                                                                       |  |             |         |   |           |   |        |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | --------- | - | ------ |  | - | ------- | -
|(in thousands)                                                                                                         |  | Development |         |   | Discovery |   | Total  | 
|Balance as of January 1, 2003                                                                                          |  | $           | 126,936 |   |           | $ | 20,472 |  | $ | 147,408 |  
|Goodwill recorded during the period for prior year acquisitions                                                        |  |             | 1,550   |   |           |   | 143    |  |   | 1,693   |  
|Goodwill recorded during the period for current year acquisitions                                                      |  |             | 24,282  |   |           |   |       |  |   | 24,282  |  
|Translation adjustments                                                                                                |  |             | 4,693   |   |           |   |       |  |   | 4,693   |  
|                                                                                                                       |  |             |         |   |           |   |        |  |   |         |  
|Balance as of December 31, 2003                                                                                        |  |             | 157,461 |   |           |   | 20,615 |  |   | 178,076 |  
|Change in goodwill recorded during the period for prior year acquisitions (finalization of purchase price adjustments) |  |             | (699    | ) |           |   |       |  |   | (699    | )
|Translation adjustments                                                                                                |  |             | 2,404   |   |           |   |       |  |   | 2,404   |  
|                                                                                                                       |  |             |         |   |           |   |        |  |   |         |  
|Balance as of December 31, 2004                                                                                        |  | $           | 159,166 |   |           | $ | 20,615 |  | $ | 179,781 |  
|                                                                                                                       |  |             |         |   |           |   |        |  |   |         |  



Information regarding
the Companys other intangible assets follows:



|                                  |  |                         |       |                         |   |       |  |                |       |                         |   |       |  |   |       |  |   |      
|--------------------------------- |  | ----------------------- | ----- | ----------------------- | - | ----- |  | -------------- | ----- | ----------------------- | - | ----- |  | - | ----- |  | - | -----
|                                  |  | As of December 31, 2003 |       | As of December 31, 2004
|(in thousands)                    |  | CarryingAmount          |       | AccumulatedAmortization |   | Net   |  | CarryingAmount |       | AccumulatedAmortization |   | Net  
|Backlog and customer relationship |  | $                       | 2,100 |                         | $ | 1,969 |  | $              | 131   |                         | $ | 2,733 |  | $ | 2,381 |  | $ | 352  
|Patents                           |  |                         | 280   |                         |   | 236   |  |                | 44    |                         |   | 280   |  |   | 271   |  |   | 9    
|License and royalty agreements    |  |                         | 2,500 |                         |   | 668   |  |                | 1,832 |                         |   | 5,000 |  |   | 1,466 |  |   | 3,534
|                                  |  |                         |       |                         |   |       |  |                |       |                         |   |       |  |   |       |  |   |      
|Total                             |  | $                       | 4,880 |                         | $ | 2,873 |  | $              | 2,007 |                         | $ | 8,013 |  | $ | 4,118 |  | $ | 3,895
|                                  |  |                         |       |                         |   |       |  |                |       |                         |   |       |  |   |       |  |   |      



The Company amortizes
all intangible assets on a straight-line basis, based on estimated useful lives of two to five years for backlog and customer relationship, five years for patents and three to ten years for license and royalty agreements. The weighted average
amortization period for backlog is 2.1 years, patents is 5.0 years, license and royalty agreements is approximately 5.1 years and all intangibles collectively is approximately 3.4 years.



Amortization expense for the twelve months ended December 31, 2002, 2003 and 2004 was $1.0 million, $1.6 million and $1.2
million, respectively. Estimated amortization expense for the next five years is as follows:



|               |  |   |      
|-------------- |  | - | -----
|(in thousands) |  |  
|2005           |  | $ | 1,113
|2006           |  |   | 606  
|2007           |  |   | 369  
|2008           |  |   | 335  
|2009           |  |   | 299  



F-18



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



6. Short-term Investments and Investments:



Short-term investments, which are composed of available-for-sale securities, and Investments consisted of the following:



|                                                       |  |              |        |      |   |        
|------------------------------------------------------ |  | ------------ | ------ | ---- | - | -------
|                                                       |  | December 31,
|(in thousands)                                         |  | 2003         |        | 2004
|Short-term investments:                                |  |              |        |      |   |        
|Preferred stock                                        |  | $            | 19,725 |      | $ | 48,225 
|State and municipal securities                         |  |              | 29,700 |      |   | 51,850 
|Other debt securities                                  |  |              |       |      |   | 4,945  
|                                                       |  |              |        |      |   |        
|Total short-term investments                           |  | $            | 49,425 |      | $ | 105,020
|                                                       |  |              |        |      |   |        
|Cost basis investments:                                |  |              |        |      |   |        
|Investment in Surromed, Inc.                           |  | $            | 29,007 |      | $ | 29,007 
|Investment in Syrrx, Inc.                              |  |              | 25,000 |      |   | 25,000 
|Investment in Accentia Biopharmaceuticals, Inc.        |  |              |       |      |   | 4,771  
|Investment in Spotlight Health, Inc.                   |  |              | 1,230  |      |   | 1,230  
|Investment in Oriel Therapeutics, Inc.                 |  |              | 900    |      |   | 1,800  
|Investment in Chemokine Therapeutics Corp.             |  |              | 2,700  |      |   |       
|Other equity investments                               |  |              | 250    |      |   | 250    
|                                                       |  |              |        |      |   |        
|Total cost basis investments                           |  |              | 59,087 |      |   | 62,058 
|Marketable equity securities:                          |  |              |        |      |   |        
|Investment in BioDelivery Sciences International, Inc. |  |              | 2,284  |      |   | 2,850  
|Investment in Chemokine Therapeutics Corp.             |  |              |       |      |   | 1,750  
|                                                       |  |              |        |      |   |        
|Total marketable equity securities                     |  |              | 2,284  |      |   | 4,600  
|                                                       |  |              |        |      |   |        
|Total investments                                      |  | $            | 61,371 |      | $ | 66,658 
|                                                       |  |              |        |      |   |        



The gross realized
gains on available-for-sale securities were $31,000 in 2002, $0.6 million in 2003 and $0.6 million in 2004 determined on a specific identification basis.



The Companys available-for-sale securities are composed of ARS. ARS generally have long-term stated maturities; the issuer is not required to redeem
the security until 20 to 30 years after issuance. These securities, however, have certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate the security without incurring losses from
changes in market value. The estimated fair value of available-for-sale securities, excluding the preferred stock, at December 31, 2004, by contractual maturity, were as follows:



|                      |  |   |       
|--------------------- |  | - | ------
|(in thousands)        |  |  
|Due in 1 year or less |  | $ | 5,945 
|Due in 1-5 years      |  |   | 1,800 
|Due in 5-10 years     |  |   | 3,000 
|Due after 10 years    |  |   | 46,050
|                      |  |   |       
|                      |  | $ | 56,795
|                      |  |   |       



F-19



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



6. Short-term Investments and Investments (continued):



The Company assesses its investment portfolio on a quarterly basis to
determine whether declines in the market value of marketable securities or the net realizable value of cost basis investments are other than temporary. This quarterly review includes an evaluation of, among other things, the market condition of the
overall industry of the investee, historical and projected financial performance, expected cash needs and recent funding events.



During 2004, the Company recorded a charge to earnings of $2.0 million for an other than temporary decline in the fair market value of its investment in
Chemokine Therapeutics Corp. The write-down of Chemokine was recorded based primarily on its individual historical and projected financial performance and completed or anticipated issuances of shares to new investors at lower valuations than the
Companys recorded value.



During 2003, the Company
recorded charges to earnings for other than temporary declines in the fair market value of its investment in BioDelivery Sciences International of $1.4 million, Spotlight Health, Inc. of $3.9 million, SLIL Biomedical Corp. of $4.7 million and
Signature Bioscience, Inc. (formerly Primecyte, Inc.) of $0.2 million. The write-down of BioDelivery Sciences was based on a decrease in the publicly quoted market price that management believes was other-than-temporary due to the uncertainty of
BioDelivery Sciences strategic direction. The write-down of the Companys investment in Spotlight Health was recorded based primarily on its historical and projected financial performance and the issuance of shares to a new investor at a
lower valuation. SLIL and Primecyte were deemed to be impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies.



During 2002, the Company recorded a charge to earnings for other than
temporary declines in the fair market value of its investments in DNA Sciences of approximately $32.0 million, Gallery Systems of $1.5 million and Intrabiotics Pharmaceuticals of approximately $0.3 million. The investment in DNA Sciences was deemed
to be impaired as a result of adverse events experienced by DNA Sciences during the first quarter of 2002. Gallery Systems and Intrabiotics Pharmaceuticals were deemed to be impaired primarily as a result of the market condition of their respective
industries, historical and projected performance and expected cash needs of the individual companies.



In September 2003, the Company purchased 4.4 million shares of SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash
and $12.0 million in tangible assets and intellectual property from the Companys Menlo Park, California operation. Including the 1.0 million shares of SurroMeds Series E convertible preferred stock that the Company purchased in April
2002 for $5.0 million, the Company owned approximately 13.6% of SurroMeds outstanding capital stock as of December 31, 2004. SurroMed is a privately held company that provides biomarker solutions to pharmaceutical and biotechnology companies
using proprietary, integrated bioanalysis technologies that detect biological markers and compounds to enable precise diagnosis and personalized treatment of disease. In addition to its biomarker business, SurroMed is developing a protein
therapeutic and various nano-technologies for life science and other applications. In February 2005, the Company acquired substantially all of SurroMed, Inc.s assets related to its biomarker business. Under the terms of the purchase agreement,
in exchange for the assets of SurroMeds biomarker business, the Company surrendered for cancellation its shares of SurroMed preferred stock. For additional discussion regarding the acquisition, see Note 19.



F-20



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



6. Short-term Investments and Investments (continued):



In November 2003, the Company purchased 4.8 million shares of Syrrx, Inc.
Series F convertible preferred stock in exchange for $25.0 million. The Company owned approximately 12.1% of Syrrxs outstanding capital stock as of December 31, 2004. The Company signed an agreement to jointly develop and commercialize
Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. The Company will provide preclinical and clinical development resources and expertise for the
collaboration and will fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. In addition, the Company will make milestone payments to Syrrx upon the occurrence of certain clinical and
regulatory events. Syrrx is a privately held drug discovery company with a focus on drug targets that have been validated in human clinical trials. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement
to acquire 100% of the equity of Syrrx, Inc. The Company owns $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, the Company does not anticipate realizing a loss on
this investment.



In January 2004, the Company purchased 5.0
million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. The Company owned approximately 6.9% of the outstanding capital stock of Accentia as of December 31, 2004. Accentias Series E
convertible preferred stock pays a dividend based on a percentage of net sales of certain Accentia products. The Company received dividends in excess of Accentias earnings in 2004 and thus recorded these as a reduction of cost of the
investment in Accentia. The Company also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In January 2005, the Company exercised the Class A
warrant for the purchase of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. The Class B warrant will expire on the earlier of January 7, 2006 or the effective date of a registration statement for the public
sale of Accentia common stock in a qualifying initial public offering. Accentia is a privately-held, specialty biopharmaceutical company that focuses on commercializing targeted therapeutics in the respiratory, oncology and critical care areas. In
February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of
common stock issuable to the Company upon conversion of 5.0 million shares of the Series E convertible preferred stock held by the Company.



In April 2000, the Company purchased 1.0 million shares of Spotlight Health Series C convertible preferred stock for $5.0 million. As of December 31,
2004, the Company owned approximately 5.4% of Spotlights outstanding capital stock. The Company entered into an agreement with Spotlight Health and Bank of America, N.A. to guarantee a $2.0 million revolving line of credit provided to
Spotlight Health by Bank of America. As of December 31, 2004, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, Accounting for Contingencies and as
clarified by FASB Interpretation No. 45, the Company has recorded in 2003 a liability in the amount of $0.2 million for the fair value of the obligation the Company has assumed under this guarantee. The Company reviews the financial statements of
Spotlight Health on a quarterly basis to determine if they have sufficient financial resources to continue operations.



Future events and circumstances might adversely affect Spotlight Healths financial condition and Spotlight Health might not be in the position to
repay the facility, in which case Bank of America might attempt to collect against the Company on this guaranty.



F-21



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



6. Short-term Investments and Investments (continued):



In December 2002, the Company purchased 150,000 shares of Oriel
Therapeutics, Inc. Series A convertible preferred stock for $150,000. The Company also received, as part of the purchase, a warrant to purchase an equal number of shares of stock offered by Oriel Therapeutics in its next round of financing at a
discount. In April 2003, the Company exercised these warrants to purchase 150,000 shares of Oriel Therapeutics Series B convertible preferred stock for $200,000. At the same time, the Company also purchased an additional 255,000 shares of
Oriels Series B convertible preferred stock for $500,000. In March 2004, the Company loaned Oriel $900,000 in the form of debt that is convertible into Oriel Therapeutics Series B preferred stock at $2.00 per share. The loan is secured
by a first lien on Oriels assets. The Company owned approximately 13.5% in Oriel Therapeutics outstanding common stock as of December 31, 2004. Oriel is a privately held company pursuing the development of technology to improve drug
delivery in the treatment of respiratory and pulmonary diseases.



In April 2003, the Company purchased 2.0 million shares of Chemokine Therapeutics Corp. Series A convertible preferred stock for $2.7 million, which represented approximately a 6.4% interest in the outstanding stock of Chemokine as of
December 31, 2004. In December 2004, Chemokine completed an initial public offering, IPO, of its common stock in Canada. Chemokines common stock trades publicly on the Toronto Stock Exchange. In connection with the IPO, the Company received
warrants to purchase 500,000 shares of common stock at the IPO price. These warrants will expire in December 2007. Chemokine focuses on the development of peptide and small molecule therapeutics that are agonists or antagonists of chemokine
activity. Chemokines are small proteins that recruit cells to local sites of infection and might be useful as either blood recovery or anti-metastasis agents.



In June 2002, the Company purchased approximately 0.7 million units of BioDelivery Sciences International, Inc. for $3.6 million. Each unit consisted
of one share of common stock and one warrant for common stock. The Companys ownership of common stock of BioDelivery Sciences International represented an ownership interest of approximately 9.7% in BioDelivery Sciences Internationals
outstanding common stock as of December 31, 2004. BioDelivery Sciences International is a publicly traded company that is developing and seeking to commercialize a drug delivery technology designed for a potentially broad base of pharmaceuticals,
vaccines and over-the-counter drugs.



7. Other Accrued Expenses:



Other accrued expenses consisted of the following:

|                                                    |  |              |        |      |   |        
|--------------------------------------------------- |  | ------------ | ------ | ---- | - | -------
|                                                    |  | December 31,
|(in thousands)                                      |  | 2003         |        | 2004
|Accrued salaries, wages, benefits and related costs |  | $            | 44,603 |      | $ | 59,170 
|Other                                               |  |              | 19,146 |      |   | 42,544 
|                                                    |  |              |        |      |   |        
|                                                    |  | $            | 63,749 |      | $ | 101,714
|                                                    |  |              |        |      |   |        



8. Long-Term Debt, Line of Credit
and Lease Obligations:



Long-Term Debt

Long-term debt consisted of the following:



|                                             |  |              |        |   |      |   |       |  
|-------------------------------------------- |  | ------------ | ------ | - | ---- | - | ----- | -
|                                             |  | December 31, |       
|(in thousands)                               |  | 2003         |        |   | 2004 |  
|Capital leases at interest rates up to 10.4% |  | $            | 836    |   |      | $ |      |  
|Fair value of guarantee                      |  |              | 200    |   |      |   | 200   |  
|Note at interest rate of 5.26%               |  |              | 6,626  |   |      |   | 6,770 |  
|                                             |  |              |        |   |      |   |       |  
|                                             |  |              | 7,662  |   |      |   | 6,970 |  
|Less: current maturities                     |  |              | (1,381 | ) |      |   | (599  | )
|                                             |  |              |        |   |      |   |       |  
|                                             |  | $            | 6,281  |   |      | $ | 6,371 |  
|                                             |  |              |        |   |      |   |       |  



F-22



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



8. Long-Term Debt, Line of Credit and Lease Obligations (continued):



Long-Term Debt (continued)



The Company assumed a note payable in the acquisition of MRL Belgium. This
note relates to the laboratory building in Brussels, Belgium that the Company owns as a result of that acquisition. This note matures during April 2017. For the years subsequent to December 31, 2004, annual principal maturities of long-term debt
outstanding are as follows:



|                    |  |   |      
|------------------- |  | - | -----
|(in thousands)      |  |  
|2005                |  | $ | 399  
|2006                |  |   | 421  
|2007                |  |   | 444  
|2008                |  |   | 468  
|2009 and thereafter |  |   | 5,038
|                    |  |   |      
|Total               |  | $ | 6,770
|                    |  |   |      



Line of Credit



In July 2004, the Company renewed its $50.0 million revolving credit
facility with Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. Borrowings under this credit facility are
available to provide working capital and for general corporate purposes. As of December 31, 2004, there was no amount outstanding under this credit facility. However, the aggregate amount the Company is able to borrow has been reduced by $0.8
million due to outstanding letters of credit issued under this facility. This credit facility is currently scheduled to expire in June 2005, at which time any outstanding balance would be due.



Lease Obligations



The Company is obligated under noncancellable operating leases expiring at various dates through 2019 relating to its
operating facilities and certain equipment. Rental expense for all operating leases, net of sublease income of $0.8 million, $1.0 million and $2.1 million, was $25.8 million, $28.8 million and $30.3 million for the years ended December 31, 2002,
2003 and 2004, respectively.



The Company completed a
sale-leaseback transaction involving real estate in Austin, Texas, in November 1995. Total gross proceeds in the transaction were $12.0 million, resulting in a pre-tax gain of approximately $2.1 million. The gain, which has been deferred, is
classified as deferred rent and other in the accompanying consolidated balance sheets and is being amortized as a reduction of rent expense on a straight-line basis over the 15-year lease term. The facilities are leased to the Company with all
responsibility of operations and maintenance residing with the Company.



Certain facility leases provide for concessions by the landlords, including payments for leasehold improvements 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.



F-23



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



8. Long-Term Debt, Line of Credit and Lease Obligations (continued):



Lease Obligations (continued)



Future minimum payments for all lease obligations for years subsequent to
December 31, 2004 are as follows:



|                      |  |                 |         |  
|--------------------- |  | --------------- | ------- | -
|(in thousands)        |  | Operatingleases |        
|2005                  |  | $               | 33,633  |  
|2006                  |  |                 | 30,640  |  
|2007                  |  |                 | 25,364  |  
|2008                  |  |                 | 24,174  |  
|2009                  |  |                 | 22,455  |  
|2010 and thereafter   |  |                 | 81,287  |  
|                      |  |                 |         |  
|                      |  |                 | 217,553 |  
|Less: sublease income |  |                 | (26,325 | )
|                      |  |                 |         |  
|                      |  | $               | 191,228 |  
|                      |  |                 |         |  



9. Accounting for Derivative
Instruments and Hedging Activities



In January 2004, the
Company entering into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. Changes in the fair value of the
effective portion of these outstanding forward and option contracts are recognized in accumulated other comprehensive income, or OCI. These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or
it becomes probable that the forecasted transaction will not occur.



Changes in the ineffective portion of a derivative instrument are recognized in earnings in the current period. Effectiveness for forward cash flow hedge contracts is measured by comparing the fair value of the forward contract to the
change in the forward value of the anticipated transaction. The fair market value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. Ineffectiveness in 2004 was not significant.



The Company has significant international revenues and purchase
transactions and related receivables and payables denominated in non-functional currencies at the Companys foreign subsidiaries. As a result, the Company purchased currency option and forward contracts as cash flow hedges to reduce or
eliminate certain foreign currency exposures that can be identified and quantified. Pursuant to its foreign exchange risk hedging policy, the Company may hedge anticipated and recorded transactions and the related receivables and payables
denominated in non-functional currencies using forward foreign exchange rate contracts and foreign currency options. Foreign currency derivatives are used only to meet the Companys objective of minimizing the variability in the Companys
operating results arising from foreign currency exchange rate movements. The Company does not enter into derivative financial instruments for speculative or trading purposes. Hedging contracts are measured at fair value using dealer quotes and
mature within twelve-months from their inception.



The
Companys hedging contracts are primarily intended to protect against the impact of changes in the value of the U.S. dollar against other currencies and its impact on operating results. Accordingly, for forecasted transactions, non-U.S. dollar
functional subsidiaries incurring expenses in foreign currencies hedge U.S. dollar revenue contracts. OCI associated with hedges of foreign currency revenue is reclassified into revenue upon recognition of the forecasted transaction in the statement
of operations. All values reported in OCI at December 31, 2004 will be reclassified to earnings within twelve-months. At December 31, 2004, the face amount of the foreign exchange contracts designated as cash flow hedges was $21.0 million.



F-24



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



9. Accounting for Derivative Instruments and Hedging Activities (continued):



The Company also enters into foreign currency forward contracts to hedge
against changes in the fair value of monetary assets and liabilities denominated in a non-functional currency. These derivative instruments are not designated as hedging instruments; therefore, changes in the fair value of these contracts are
recognized immediately in other income, net as an offset to the changes in the fair value of the monetary assets or liabilities being hedged. At December 31, 2004, the face amount of these contracts was $26.7 million.



At December 31, 2004, the fair value of the Companys foreign currency
derivative portfolio was $702,000 recorded as a component of prepaid expenses and other current assets and $59,000 recorded as a component of other accrued expenses.



10. Stock Plans:



Restricted Stock



In January 2001, the Company awarded 60,000 shares of restricted stock with a fair value of $1.4 million to members of the senior management team.
This restricted stock was subject to three-year cliff vesting. Compensation was expensed on a straight-line basis over the three-year vesting period. During 2002, 15,000 shares with a value of $349,000 were forfeited due to terminations of
employment prior to the expiration of the three-year cliff vesting period. All remaining shares vested in January 2004.



Equity Compensation Plan



The Company has an equity compensation plan (the Plan) under which the Company may grant stock options to its employees and directors. As of
December 31, 2004, there were 3.9 million shares of common stock available for grant. The exercise price of each option granted is equal to the market price of the Companys common stock on the date of grant and the maximum exercise term of
each option granted does not exceed 10 years. Options are granted upon approval of the Compensation Committee of the Board of Directors and vest over various periods, as determined by the Compensation Committee at the date of the grant. The majority
of the Companys options vest ratably over a period of three or four years.



A summary of the status of the Plan at December 31, 2002, 2003 and 2004, and changes during the years, is presented below and includes common stock options of the Company:



|                                   |  |        |   |      |                               |       |        |       |   |                               |   |        |  |       |                               |  |   |      
|---------------------------------- |  | ------ | - | ---- | ----------------------------- | ----- | ------ | ----- | - | ----------------------------- | - | ------ |  | ----- | ----------------------------- |  | - | -----
|                                   |  | 2002   |   | 2003 |                               | 2004 
|(shares in thousands)              |  | Shares |   |      | WeightedAverageExercise Price |       | Shares |       |   | WeightedAverageExercise Price |   | Shares |  |       | WeightedAverageExercise Price
|Outstanding at beginning of year   |  | 2,253  |   |      | $                             | 13.94 |        | 2,458 |   |                               | $ | 18.22  |  | 2,503 |                               |  | $ | 21.31
|Granted                            |  | 710    |   |      |                               | 28.89 |        | 651   |   |                               |   | 28.71  |  | 2,323 |                               |  |   | 39.99
|Exercised                          |  | (291   | ) |      |                               | 11.55 |        | (398  | ) |                               |   | 12.08  |  | (376  | )                             |  |   | 18.40
|Forfeited                          |  | (214   | ) |      |                               | 17.86 |        | (208  | ) |                               |   | 26.47  |  | (104  | )                             |  |   | 27.38
|                                   |  |        |   |      |                               |       |        |       |   |                               |   |        |  |       |                               |  |   |      
|Outstanding at end of year         |  | 2,458  |   |      | $                             | 18.22 |        | 2,503 |   |                               | $ | 21.31  |  | 4,346 |                               |  | $ | 31.39
|                                   |  |        |   |      |                               |       |        |       |   |                               |   |        |  |       |                               |  |   |      
|Options exercisable at end of year |  | 1,403  |   |      | $                             | 12.83 |        | 1,501 |   |                               | $ | 16.51  |  | 1,620 |                               |  | $ | 19.75
|                                   |  |        |   |      |                               |       |        |       |   |                               |   |        |  |       |                               |  |   |      



F-25



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



10. Stock Plans (continued):



Equity Compensation Plan (continued)



The following table summarizes information about the Plans stock options at December 31, 2004:



|                         |  |                              |  |                                           |  |                               |       |                              |       |                               |   |      
|------------------------ |  | ---------------------------- |  | ----------------------------------------- |  | ----------------------------- | ----- | ---------------------------- | ----- | ----------------------------- | - | -----
|(shares in thousands)    |  | Options Outstanding          |  | Options Exercisable                      
|Range of Exercise Prices |  | NumberOutstandingat 12/31/04 |  | Weighted AverageRemainingContractual Life |  | WeightedAverageExercise Price |       | NumberExercisableat 12/31/04 |       | WeightedAverageExercise Price
|$  1.96 - $12.76         |  | 456                          |  | 3.7 years                                 |  | $                             | 7.53  |                              | 456   |                               | $ | 7.53 
|$12.77 - $21.26          |  | 346                          |  | 4.8 years                                 |  | $                             | 16.69 |                              | 341   |                               | $ | 16.64
|$21.27 - $29.76          |  | 618                          |  | 7.5 years                                 |  | $                             | 26.15 |                              | 416   |                               | $ | 25.38
|$29.77 - $38.27          |  | 1,110                        |  | 8.5 years                                 |  | $                             | 30.79 |                              | 407   |                               | $ | 30.27
|$38.28 - $42.52          |  | 1,816                        |  | 9.9 years                                 |  | $                             | 42.34 |                              |      |                               | $ |     
|                         |  |                              |  |                                           |  |                               |       |                              |       |                               |   |      
|                         |  | 4,346                        |  | 8.1 years                                 |  | $                             | 31.39 |                              | 1,620 |                               | $ | 19.75
|                         |  |                              |  |                                           |  |                               |       |                              |       |                               |   |      



Employee Stock Purchase Plan



The Board of Directors has reserved shares of the
Companys common stock for issuance under the Employee Stock Purchase Plan (the ESPP). As of December 31, 2004, there were 0.6 million shares of common stock available for issuance. The ESPP has two six-month offering periods (each
an Offering Period) annually, beginning January 1 and July 1, respectively. Eligible employees can elect to make deductions from 1% to 15% of their compensation during each payroll period of an Offering Period. Special limitations apply
to eligible employees who own 5% or more of the outstanding common stock of the Company. None of the contributions made by eligible employees to purchase the Companys common stock under the ESPP are tax deductible to the employees. Beginning
on July 1, 2005, at the end of an Offering Period, the total payroll deductions by an eligible employee for that Offering Period will be used to purchase common stock of the Company at a price equal to 95% of the reported closing price of the
Companys common stock on the last day of the offering period. Prior to July 1, 2005, the purchase price was 85% of the lesser of (a) the reported closing price of the Companys common stock for the first day of the Offering Period, or (b)
the reported closing price of the common stock for the last day of the Offering Period. Only 300,000 shares are available for purchase during each of the Offering Periods.



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



During 2004, $5.7 million was contributed to the ESPP and 229,000 shares were issued. The compensation costs for the ESPP as determined based on the fair value of the contributions under the ESPP, consistent with the
method of SFAS No. 123, was $0.8 million, $0.8 million and $1.2 million and is reflected in the pro forma net income and basic and diluted net income per share for 2002, 2003 and 2004, respectively, as disclosed in Note 1.



F-26



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



11. Income Taxes:



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



|                                  |  |                         |        |      |   |        |  |   |        
|--------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | -------
|                                  |  | Year Ended December 31,
|(in thousands)                    |  | 2002                    |        | 2003 |   | 2004  
|Domestic                          |  | $                       | 57,288 |      | $ | 50,632 |  | $ | 125,817
|Foreign                           |  |                         | 21,359 |      |   | 20,613 |  |   | 24,028 
|                                  |  |                         |        |      |   |        |  |   |        
|Income from continuing operations |  | $                       | 78,647 |      | $ | 71,245 |  | $ | 149,845
|                                  |  |                         |        |      |   |        |  |   |        



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



|                           |  |                         |        |      |   |         |      |  |   |        |  
|-------------------------- |  | ----------------------- | ------ | ---- | - | ------- | ---- |  | - | ------ | -
|                           |  | Year Ended December 31, |       
|(in thousands)             |  | 2002                    |        | 2003 |   |         | 2004 | 
|State income taxes:        |  |                         |        |      |   |         |      |  |   |        |  
|Current                    |  | $                       | 3,914  |      | $ | 7,364   |      |  | $ | 4,837  |  
|Deferred                   |  |                         | 1,776  |      |   | (4,925  | )    |  |   | 2,347  |  
|Federal income taxes:      |  |                         |        |      |   |         |      |  |   |        |  
|Current                    |  |                         | 23,579 |      |   | 40,531  |      |  |   | 28,595 |  
|Deferred                   |  |                         | 3,385  |      |   | (22,808 | )    |  |   | 11,201 |  
|Foreign income taxes:      |  |                         |        |      |   |         |      |  |   |        |  
|Current                    |  |                         | 5,539  |      |   | 3,799   |      |  |   | 4,551  |  
|Deferred                   |  |                         | 452    |      |   | 974     |      |  |   | (574   | )
|                           |  |                         |        |      |   |         |      |  |   |        |  
|Provision for income taxes |  | $                       | 38,645 |      | $ | 24,935  |      |  | $ | 50,957 |  
|                           |  |                         |        |      |   |         |      |  |   |        |  



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



|                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                |  | Year Ended December 31, |       
|(in thousands)                                  |  | 2002                    |        |   | 2003 |   |        | 2004 | 
|Effective tax rate                              |  |                         | 49.2   | % |      |   | 35.0   | %    |  |   | 34.0   | %
|                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Statutory rate of 35%                           |  | $                       | 27,526 |   |      | $ | 24,936 |      |  | $ | 52,446 |  
|State taxes, net of federal benefit             |  |                         | 1,980  |   |      |   | 1,635  |      |  |   | 4,127  |  
|Nontaxable income net of nondeductible expenses |  |                         | (318   | ) |      |   | (1,010 | )    |  |   | (2,214 | )
|Change in valuation allowance                   |  |                         | 11,063 |   |      |   | 1,166  |      |  |   | (4,028 | )
|Impact of international operations              |  |                         | (901   | ) |      |   | (1,004 | )    |  |   | (989   | )
|Other                                           |  |                         | (705   | ) |      |   | (788   | )    |  |   | 1,615  |  
|                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Provision for income taxes                      |  | $                       | 38,645 |   |      | $ | 24,935 |      |  | $ | 50,957 |  
|                                                |  |                         |        |   |      |   |        |      |  |   |        |  



Components of the
current deferred tax asset were as follows:



|                                       |  |              |        |   |      |   |        |  
|-------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                       |  | December 31, |       
|(in thousands)                         |  | 2003         |        |   | 2004 |  
|Future benefit of net operating losses |  | $            | 1,003  |   |      | $ | 932    |  
|Reserve for doubtful accounts          |  |              | 1,316  |   |      |   | 1,806  |  
|Accrued expenses                       |  |              | 4,236  |   |      |   | 6,447  |  
|Unearned income                        |  |              | 6,400  |   |      |   | 2,239  |  
|Valuation allowance                    |  |              | (514   | ) |      |   | (557   | )
|                                       |  |              |        |   |      |   |        |  
|Total current deferred tax asset       |  | $            | 12,441 |   |      | $ | 10,867 |  
|                                       |  |              |        |   |      |   |        |  



F-27



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



11. Income Taxes (continued):



The current deferred tax liability of $74,000 and $770,000 as of December 31, 2003 and 2004, respectively, relates to
various expenses deducted for tax purposes, not book purposes.



Components of the long-term deferred tax asset were as follows:



|                                       |  |              |         |   |      |   |         |  
|-------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                       |  | December 31, |        
|(in thousands)                         |  | 2003         |         |   | 2004 |  
|Other depreciation and amortization    |  | $            | (9,527  | ) |      | $ | (14,326 | )
|Patent depreciation                    |  |              | 25,641  |   |      |   | 20,485  |  
|Deferred rent                          |  |              | 1,811   |   |      |   | 1,945   |  
|Deferred compensation                  |  |              | 747     |   |      |   | 669     |  
|Investment basis differences           |  |              | 17,348  |   |      |   | 4,725   |  
|Capital loss carryforward              |  |              |        |   |      |   | 5,929   |  
|Valuation allowance                    |  |              | (12,430 | ) |      |   | (7,720  | )
|Future benefit of net operating losses |  |              | 1,526   |   |      |   | 1,494   |  
|Other                                  |  |              | (1,721  | ) |      |   | (827    | )
|                                       |  |              |         |   |      |   |         |  
|Total long-term deferred tax asset     |  | $            | 23,395  |   |      | $ | 12,374  |  
|                                       |  |              |         |   |      |   |         |  



Components of the
long-term deferred tax liability were as follows:



|                                       |  |      |        |   |      |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(in thousands)                         |  | 2003 |        |   | 2004 |  
|Other depreciation and amortization    |  | $    | 3,271  |   |      | $ | 3,347  |  
|Pension                                |  |      | (2,958 | ) |      |   | (2,977 | )
|                                       |  |      |        |   |      |   |        |  
|Total long-term deferred tax liability |  | $    | 313    |   |      | $ | 370    |  
|                                       |  |      |        |   |      |   |        |  



The Company has
recorded a deferred tax asset for foreign net operating losses that are subject to either five-year, fifteen-year or indefinite carryforward periods. Management has recorded a valuation allowance against these assets for amounts which it does not
believe are more likely than not to be utilized.



The Company
also recorded a deferred tax asset related to U.S. net operating losses received in an acquisition in 2003. Although the net operating losses are subject to annual limitation under IRC Section 382, management expects all losses to be utilized during
the twenty-year carryforward period that is available. In addition, a deferred tax asset was established for capital losses recognized on the Companys 2003 U.S. tax return and unrealized capital losses. The realized capital loss is eligible to
be carried back two years and forward five years. Management has recorded a valuation allowance for the portion of the realized and unrealized capital losses that it does not believe are more likely than not to be utilized.



As of December 31, 2004, the Company had liabilities of $5.2 million for
certain unsettled matters in connection with tax positions taken in the Companys tax returns that include interpretations of applicable income tax laws and regulations. Such amounts are based on managements expectation regarding the
ultimate tax treatment and outcome of these matters. The Company believes it is unlikely that the resolution of these matters will have a material adverse effect on the Companys financial position or results of operations.



The Companys total valuation allowance relates to the foreign net
operating losses and realized and unrealized capital losses. In 2003, the valuation allowance increased by $1.2 million as a result of a $1.3 million valuation allowance on capital loss carryforward assets, offset by a release of valuation allowance
of $123,000 on the foreign operating loss carryforward assets. In 2004, the valuation allowance decreased by $4.7 million as a result of managements analysis of the capital loss carryforward assets utilized or expected to be utilized offset by
a $43,000 increase in the valuation allowance on foreign operating loss carryforward assets. During 2004, $0.6 million of the $4.7 million change in valuation allowance was recorded as a component of accumulated other comprehensive income and is not
reflected in the calculation of the Companys effective tax rate.



F-28



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



11. Income Taxes (continued):



The Company records current and deferred income tax expense related to its foreign operations to the extent those earnings
are taxable. Historically, no provision has been made for the additional taxes that would result from the distribution of earnings of foreign subsidiaries because those earnings were expected to be invested permanently. The American Jobs Creation
Act of 2004 introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. The Company has not previously recorded a U.S. tax liability on such revenues since we intended to permanently
reinvest them in our foreign operations. No provision is being made in 2004 relating to this matter because the Company is currently evaluating the effect of the new Act on its plan for these previously undistributed foreign earnings. The Company
expects to complete this evaluation by the end of June 2005. The cumulative amount of undistributed retained earnings of foreign subsidiaries for which no provision has been made was $29.7 million and $50.4 million as of December 31, 2003 and 2004,
respectively. The income tax effect of repatriating these earnings is not estimable at this time.



12. Employee Savings and Pension Plans:



Savings Plan



The Company provides a 401(k)
Retirement Savings Plan to its U.S. employees. The Company matches 50% of an employees savings up to 6% of pay and these contributions vest ratably over a four-year period. Company matching contributions, net of forfeitures, for all employees
for each of the three years ended December 31, 2002, 2003 and 2004 were $4.1 million, $4.3 million and $4.8 million, respectively.



Non-Qualified Deferred Compensation Plan



The Company provides non-qualified, unfunded deferred compensation plans, which permits certain highly paid executive employees, employed in the U.S., and
members of the Board of Directors the opportunity to defer current income for future financial and retirement needs. An eligible employee participant may defer up to 25% of their base salary and/or a portion of their annual bonus on a pre-tax basis.
Board of Directors participants may defer up to 100% of their annual retainer and up to 100% of meeting fees on a pre-tax basis. Employee participants also have the opportunity to defer gains on stock options and restricted stock, while the Board of
Director participants have the opportunity to defer stock option gains. Amounts deferred each quarter will earn interest based upon the three month London Interbank Offered Rate, or LIBOR, plus 1.5%. In addition, the plan offers a number of account
distribution options providing flexibility for financial and retirement planning.



Deferred compensation will be paid to a participant on the earliest to occur of termination, retirement, death, disability or a Change of Control. Employee participants can elect to receive their accounts
in the form of a single lump sum payment or, if they retire from the Company after age 55 with ten years of service, in semi-annual installments for five, ten or fifteen years. If they terminate employment prior to attaining age 55 and ten years of
service, the Company has the right to make a lump sum payout to the participant of the balance in their accounts, without regard to the payment date or form of payment they elected. Board of Directors participants can elect to receive their account
balances, with respect to each year of deferral, in the form of a single lump sum payment or in ten semi-annual installments upon the occurrence of each payment event. At December 31, 2003 and 2004, the Company recorded the deferred compensation
liability of $804,000 and $932,000, respectively, in the consolidated balance sheet as a component of other accrued expenses.



F-29



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



12. Employee Savings and Pension Plans (continued):



Pension Plans



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



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



Following closure of the above plan to new participants, the Company set up a new defined contribution plan for qualifying U.K. employees employed by the
Companys U.K. subsidiaries. The employees can contribute between 3% and 6% of their annual compensation and the Company matches those contributions with 5% to 8% of the employees annual compensation. Company contributions for the year
ended December 31, 2003 and 2004 were $59,000 and $182,000, respectively.



The Company uses a November 30 measurement date for its plan.



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



|                                              |  |                         |       |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | Year Ended December 31, |      
|(in thousands)                                |  | 2002                    |       |   | 2003 |   |        | 2004 | 
|Service cost benefits earned during the year  |  | $                       | 1,085 |   |      | $ | 943    |      |  | $ | 1,307  |  
|Interest cost on projected benefit obligation |  |                         | 1,045 |   |      |   | 1,354  |      |  |   | 1,838  |  
|Expected return on plan assets                |  |                         | (848  | ) |      |   | (1,132 | )    |  |   | (1,537 | )
|Net amortization and deferral                 |  |                         | 53    |   |      |   | 457    |      |  |   | 643    |  
|                                              |  |                         |       |   |      |   |        |      |  |   |        |  
|Net periodic pension cost                     |  | $                       | 1,335 |   |      | $ | 1,622  |      |  | $ | 2,251  |  
|                                              |  |                         |       |   |      |   |        |      |  |   |        |  



Weighted average
assumptions used to determine benefit obligation at end of year were as follows:



|                              |  |      |   |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                              |  | 2002 |   |  | 2003 |   |  | 2004 |  
|Discount rate                 |  | 6.2  | % |  | 6.1  | % |  | 6.0  | %
|Rate of compensation increase |  | 4.0  | % |  | 4.4  | % |  | 4.5  | %



F-30



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



12. Employee Savings and Pension Plans (continued):



Pension Plans (continued)



Weighted average assumptions used to determine net periodic pension cost for
years ending December 31 were as follows:



|                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | 2002 |   |  | 2003 |   |  | 2004 |  
|Discount rate                           |  | 6.5  | % |  | 6.2  | % |  | 6.1  | %
|Rate of compensation increase           |  | 4.0  | % |  | 4.0  | % |  | 4.4  | %
|Long-term rate of return on plan assets |  | 5.5  | % |  | 7.2  | % |  | 7.1  | %



To develop the
expected long-term rate of return on assets assumption, the Company considered future expectations for yields on investments weighted in accordance with the asset allocation of the pension schemes invested funds.



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



|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|---------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                               |  | Year Ended December 31, |       
|(in thousands)                                 |  | 2002                    |        |   | 2003 |   |        | 2004 | 
|Change in benefit obligations:                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Benefit of obligation at beginning of year     |  | $                       | 14,768 |   |      | $ | 19,793 |      |  | $ | 28,351  |  
|Service cost                                   |  |                         | 732    |   |      |   | 943    |      |  |   | 1,307   |  
|Interest cost                                  |  |                         | 1,045  |   |      |   | 1,354  |      |  |   | 1,838   |  
|Participant contributions                      |  |                         | 353    |   |      |   | 770    |      |  |   | 894     |  
|Net actuarial loss                             |  |                         | 3,066  |   |      |   | 3,899  |      |  |   | 1,698   |  
|Benefits paid                                  |  |                         | (1,730 | ) |      |   | (570   | )    |  |   | (455    | )
|Foreign currency translation adjustment        |  |                         | 1,559  |   |      |   | 2,162  |      |  |   | 2,106   |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|Benefit obligation at end of year              |  | $                       | 19,793 |   |      | $ | 28,351 |      |  | $ | 35,739  |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|Change in plan assets:                         |  |                         |        |   |      |   |        |      |  |   |         |  
|Fair value of plan assets at beginning of year |  | $                       | 14,212 |   |      | $ | 13,286 |      |  | $ | 18,991  |  
|Actual asset return                            |  |                         | (2,036 | ) |      |   | 1,806  |      |  |   | 2,485   |  
|Employer contributions                         |  |                         | 988    |   |      |   | 2,243  |      |  |   | 2,038   |  
|Plan participants contributions               |  |                         | 353    |   |      |   | 770    |      |  |   | 894     |  
|Benefits and expenses paid                     |  |                         | (1,730 | ) |      |   | (570   | )    |  |   | (455    | )
|Foreign currency translation adjustment        |  |                         | 1,499  |   |      |   | 1,456  |      |  |   | 1,410   |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|Fair value of plan assets at end of year       |  | $                       | 13,286 |   |      | $ | 18,991 |      |  | $ | 25,363  |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|Funded status:                                 |  |                         |        |   |      |   |        |      |  |   |         |  
|Funded status                                  |  | $                       | (6,365 | ) |      | $ | (9,196 | )    |  | $ | (10,219 | )
|Unrecognized transition asset                  |  |                         | (31    | ) |      |   | (20    | )    |  |   | (6      | )
|Unrecognized net actuarial loss                |  |                         | 8,361  |   |      |   | 12,031 |      |  |   | 13,019  |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  
|Prepaid pension costs                          |  | $                       | 1,965  |   |      | $ | 2,815  |      |  | $ | 2,794   |  
|                                               |  |                         |        |   |      |   |        |      |  |   |         |  



F-31



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



12. Employee Savings and Pension Plans (continued):



Pension Plans (continued)



Amounts recognized in statement of financial position were as follows:



|                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | Year Ended December 31, |       
|(in thousands)                         |  | 2002                    |        |   | 2003 |   |        | 2004 | 
|Prepaid pension costs                  |  | $                       | 1,965  |   |      | $ | 2,815  |      |  | $ | 2,794  |  
|Accrued pension liability              |  |                         | (7,905 | ) |      |   | (9,859 | )    |  |   | (9,923 | )
|Accumulated other comprehensive income |  |                         | 7,905  |   |      |   | 9,859  |      |  |   | 9,923  |  
|                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Net amount recognized                  |  | $                       | 1,965  |   |      | $ | 2,815  |      |  | $ | 2,794  |  
|                                       |  |                         |        |   |      |   |        |      |  |   |        |  



The projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were as follows:



|                               |  |                         |        |      |   |        |  |   |       
|------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                               |  | Year Ended December 31,
|(in thousands)                 |  | 2002                    |        | 2003 |   | 2004  
|Projected benefit obligation   |  | $                       | 19,793 |      | $ | 28,351 |  | $ | 35,739
|Accumulated benefit obligation |  | $                       | 19,266 |      | $ | 26,199 |  | $ | 32,650
|Fair value of plan assets      |  | $                       | 13,286 |      | $ | 18,991 |  | $ | 25,363



The accumulated
benefit obligation exceeds the fair value of plan assets. The Company recognized an additional minimum liability in accordance with the provisions of paragraphs 36 and 37 of SFAS No. 87 in the amounts of $7,905,000, $1,954,000 and $64,000 at
December 31, 2002, 2003, and 2004, respectively.



Plan Assets



The Companys pension plan weighted-average
allocations by asset category are as follows:



|                            |  |                    |   |  |      |  
|--------------------------- |  | ------------------ | - |  | ---- | -
|                            |  | As of November 30, |  
|                            |  | 2003               |   |  | 2004 |  
|Asset Category              |  |                    |   |  |      |  
|Equity securities           |  | 82                 | % |  | 82   | %
|Debt securities             |  | 17                 | % |  | 17   | %
|Cash and net current assets |  | 1                  | % |  | 1    | %
|                            |  |                    |   |  |      |  
|Total                       |  | 100                | % |  | 100  | %



The plan assets are
managed by an independent third party which track the return on a benchmark portfolio matching the above strategic asset allocation. The trustees have determined based on advice from our financial advisors the above mix of asset types in order to
meet the investment objectives of the pension plan.



Expected Cash Flows



The Company expects to
contribute $1.9 million to fund its pension plan during 2005. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



|                                                  |  |   |      
|------------------------------------------------- |  | - | -----
|(in thousands)                                    |  |  
|Expected benefit payments for fiscal year ending: |  |   |      
|2005                                              |  | $ | 480  
|2006                                              |  |   | 499  
|2007                                              |  |   | 556  
|2008                                              |  |   | 652  
|2009                                              |  |   | 787  
|Next 5 years                                      |  |   | 4,279



F-32



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



13. Commitments and Contingencies:



The Company currently maintains insurance for risks associated with the operation of its business, provision of professional
services, and ownership of property. These policies provide coverage for a variety of potential losses, including, without limitation, loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and
medical malpractice. The Companys retentions and deductibles associated with these insurance policies range from $0.25 million to $0.5 million.



The Company is self-insured for health insurance for employees located within the United States. The Company maintains stop-loss insurance on a
claims made basis for expenses in excess of $0.25 million per member per year. As of December 31, 2003 and December 31, 2004, the Company maintained a reserve of approximately $3.7 million and $3.6 million, respectively, included in
other accrued expenses on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.



In September 2003, the Company entered into agreements with SurroMed, Inc. pursuant to which the Company committed to pay for biomarker discovery services
from SurroMed for $2.0 million, $2.0 million, $1.0 million and $1.0 million during the years ended December 31, 2004, 2005, 2006 and 2007, respectively. As of December 31, 2004, the Company had paid SurroMed $1.5 million for biomarker discovery
services pursuant to that agreement. In February 2005, the Company acquired substantially all of SurroMeds assets related to its biomarker business. In connection with this acquisition, the biomarker discovery services agreement, together with
the associated purchase commitments, were terminated.



The
Company signed an agreement to jointly develop and commercialize Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. The Company is obligated to
provide preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. The Company and Syrrx have agreed
to share equally the costs of Phase III development. In addition, the Company agreed to make milestone payments up to $17.5 million to Syrrx for each collaboration product upon the occurrence of certain clinical and regulatory events. In September
2004, the Company filed an investigational new drug application for one Syrrx DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, the Company expensed the first milestone
payment to Syrrx of $2.5 million as a result of the commencement of the Phase I studies. The remaining milestone payments will be expensed when the event triggering payment of the milestone occurs. In the event the Company is successful in obtaining
approval to market a drug product under the collaboration with Syrrx, the Company and Syrrx will share equally the profits from drug sales. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to
acquire 100% of the equity of Syrrx. At this time, the Company does not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.



In April 2003, the Company made an equity investment in Chemokine Therapeutics Corp. In connection with this investment,
Chemokine granted the Company an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. If the Company chooses to exercise this option, it will be obligated to pay the license fee plus the costs for future
development work on the peptide. Chemokine also granted the Company the right to first negotiate a license to other peptides.



In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was
established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. Under the terms of the agreements with the Pappas Fund, the Company committed to invest up
to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of the Companys aggregate capital commitment and no more than two-thirds of the Companys commitment could be called prior to May 2005. As
such, the Company anticipates that its aggregate investment will be made through a series of future capital calls over the next several years. The first capital call was made in January 2005 at which time the Company invested $75,000. The second
capital call is due in March 2005, at which time the Company will invest an additional $90,000. The Companys capital commitment will expire in May 2009.



F-33



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



13. Commitments and Contingencies (continued):



In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company the patents for the compound dapoxetine for
development in the field of genitourinary disorders. This compound is currently licensed to ALZA Corporation, a subsidiary of Johnson & Johnson, and is being developed for premature ejaculation. Under the terms of the agreement with Lilly, the
Company paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual net sales of dapoxetine in excess of $800 million. Dapoxetine has not been approved for sale in the United States or any foreign country.



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



In the normal course of
business, the Company is a party to various claims and legal proceedings. The Company is in litigation with a client that is claiming the Company breached its contract and committed tortious acts in conducting a clinical trial. That former client is
claiming that it does not owe us the remaining amounts due under the contract and is seeking other damages from the Companys alleged breach of contract and tortious acts. The Company records a reserve for these matters when an adverse outcome
is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of these matters is currently not determinable, management of the Company, after consultation with legal counsel, does not believe that the
resolution of these matters will have a material effect upon the Companys financial condition, results of operations or cash flows for an interim or annual period.



14. Related Party Transactions:



The Company leases its Highland Heights, Kentucky building under an operating lease with a shareholder of the Company. Rent paid to this shareholder for
the years ended December 31, 2003 and 2004 totaled $651,000 and $652,000, respectively. This lease was renewed on January 1, 2005 and will expire on December 31, 2014. This lease is included in the future minimum payments for all lease obligations
included in Note 8.



15. Fair Value of Financial Instruments:



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



Accounts Receivable, Accounts Payable and Accrued Liabilities



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



Long-Term Debt



The Company believes the carrying value approximates the fair value on December 31, 2003 and 2004.



Investments



The Companys investment in BioDelivery Sciences International and Chemokine are recorded at $2,850,000 and $1,750,000
at December 31, 2004, respectively. BioDelivery Sciences International and Chemokine are publicly traded companies. The Company records a gain or loss related to these investments at the end of each quarter based on the closing price of these
investments at the end of each period. For further information on investments see Note 6.



F-34



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



15. Fair Value of Financial Instruments (continued):



Derivative Instruments



The Companys derivative financial instruments are recorded at a fair value. As of December 31, 2004, the
Companys derivative portfolio had a favorable position of $702,000 recorded as a component of prepaid expenses and other current assets and an unfavorable position of $59,000 recorded as a component of other accrued expenses.



Letters of Credit



From time to time, the Company uses letters of credit to back certain guarantees and insurance policies. The letters of
credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. As of December 31, 2004, the Company has four letters of credit outstanding for a total of $0.8 million related
to its insurance policies and travel department.



16. Business Segment Data:



Revenues by principal business segment are separately
stated in the consolidated financial statements. Income (loss) from operations, depreciation and amortization, identifiable assets and capital expenditures by principal business segment were as follows:



|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                               |  | Year Ended December 31, |        
|(in thousands)                 |  | 2002                    |         |   | 2003 |   |         | 2004 | 
|Income (loss) from operations: |  |                         |         |   |      |   |         |      |  |   |         |  
|Development                    |  | $                       | 117,405 |   |      | $ | 150,444 |      |  | $ | 160,546 |  
|Discovery sciences             |  |                         | (8,960  | ) |      |   | (71,603 | )    |  |   | (12,531 | )
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                          |  | $                       | 108,445 |   |      | $ | 78,841  |      |  | $ | 148,015 |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization: |  |                         |         |   |      |   |         |      |  |   |         |  
|Development                    |  | $                       | 21,546  |   |      | $ | 25,647  |      |  | $ | 28,276  |  
|Discovery sciences             |  |                         | 2,685   |   |      |   | 2,954   |      |  |   | 1,578   |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                          |  | $                       | 24,231  |   |      | $ | 28,601  |      |  | $ | 29,854  |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Identifiable assets:           |  |                         |         |   |      |   |         |      |  |   |         |  
|Development                    |  | $                       | 637,660 |   |      | $ | 688,604 |      |  | $ | 879,123 |  
|Discovery sciences             |  |                         | 54,460  |   |      |   | 90,577  |      |  |   | 96,078  |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                          |  | $                       | 692,120 |   |      | $ | 779,181 |      |  | $ | 975,201 |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Capital expenditures:          |  |                         |         |   |      |   |         |      |  |   |         |  
|Development                    |  | $                       | 30,602  |   |      | $ | 30,584  |      |  | $ | 48,315  |  
|Discovery sciences             |  |                         | 5,894   |   |      |   | 1,109   |      |  |   | 268     |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                          |  | $                       | 36,496  |   |      | $ | 31,693  |      |  | $ | 48,583  |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  



F-35



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



17. Operations by Geographic Area:



Geographic information for net revenue and operating income by country is determined by the location where the services are
provided for the client. Geographic information for identifiable assets by country is determined by the physical location of the assets.



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



|                     |  |                         |         |      |   |         |  |   |        
|-------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                     |  | Year Ended December 31,
|(in thousands)       |  | 2002                    |         | 2003 |   | 2004   
|Net revenue:         |  |                         |         |      |   |         |  |   |        
|United States        |  | $                       | 484,954 |      | $ | 558,456 |  | $ | 609,248
|U.K.                 |  |                         | 47,004  |      |   | 52,902  |  |   | 64,396 
|Other (a)            |  |                         | 76,699  |      |   | 115,625 |  |   | 167,612
|                     |  |                         |         |      |   |         |  |   |        
|Total                |  | $                       | 608,657 |      | $ | 726,983 |  | $ | 841,256
|                     |  |                         |         |      |   |         |  |   |        
|Operating income:    |  |                         |         |      |   |         |  |   |        
|United States        |  | $                       | 85,130  |      | $ | 49,289  |  | $ | 106,705
|U.K.                 |  |                         | 7,998   |      |   | 8,273   |  |   | 9,704  
|Other (a)            |  |                         | 15,317  |      |   | 21,279  |  |   | 31,606 
|                     |  |                         |         |      |   |         |  |   |        
|Total                |  | $                       | 108,445 |      | $ | 78,841  |  | $ | 148,015
|                     |  |                         |         |      |   |         |  |   |        
|Identifiable assets: |  |                         |         |      |   |         |  |   |        
|United States        |  | $                       | 578,146 |      | $ | 628,422 |  | $ | 753,379
|U.K.                 |  |                         | 56,652  |      |   | 70,681  |  |   | 124,076
|Other (a)            |  |                         | 57,322  |      |   | 80,078  |  |   | 97,746 
|                     |  |                         |         |      |   |         |  |   |        
|Total                |  | $                       | 692,120 |      | $ | 779,181 |  | $ | 975,201
|                     |  |                         |         |      |   |         |  |   |        

---

|(a) | Principally consists of operations in 35 countries, 11 of which are located in Europe, none of which comprises more than 8% of net revenue, operating income or identifiable assets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-36



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



18. Quarterly Financial Data (unaudited):



|                                      |  |       |         |        |   |         |  |        |         |  |       |         |    |  |   |        
|------------------------------------- |  | ----- | ------- | ------ | - | ------- |  | ------ | ------- |  | ----- | ------- | -- |  | - | -------
|(in thousands, except per share data) |  |       |         |        |   |         |  |        |         |  |      
|2003                                  |  | First |         | Second |   | Third   |  | Fourth |         |  | Total
|Net revenue                           |  | $     | 169,877 |        | $ | 184,970 |  | $      | 179,515 |  | $     | 192,621 |    |  | $ | 726,983
|Operating income (loss)               |  |       | 32,410  |        |   | 34,180  |  |        | 38,599  |  |       | (26,348 | )* |  |   | 78,841 
|Net income (loss)                     |  |       | 21,167  |        |   | 16,840  |  |        | 24,825  |  |       | (16,522 | )* |  |   | 46,310 
|Net income (loss) per common share:   |  |       |         |        |   |         |  |        |         |  |       |         |    |  |   |        
|Basic                                 |  | $     | 0.38    |        | $ | 0.30    |  | $      | 0.44    |  | $     | (0.30   | )  |  | $ | 0.83   
|Diluted                               |  | $     | 0.38    |        | $ | 0.30    |  | $      | 0.44    |  | $     | (0.30   | )  |  | $ | 0.82   
|                                      |  |       |         |        |  
|2004                                  |  |       |         |        |   |         |  |        |         |  |      
|Net revenue                           |  | $     | 195,280 |        | $ | 200,536 |  | $      | 215,824 |  | $     | 229,616 |    |  | $ | 841,256
|Operating income                      |  |       | 38,494  |        |   | 32,234  |  |        | 38,053  |  |       | 39,234  |    |  |   | 148,015
|Net income                            |  |       | 24,764  |        |   | 23,314  |  |        | 24,990  |  |       | 25,820  |    |  |   | 98,888 
|Net income per common share:          |  |       |         |        |   |         |  |        |         |  |       |         |    |  |   |        
|Basic                                 |  | $     | 0.44    |        | $ | 0.41    |  | $      | 0.44    |  | $     | 0.46    |    |  | $ | 1.75   
|Diluted                               |  | $     | 0.44    |        | $ | 0.41    |  | $      | 0.44    |  | $     | 0.45    |    |  | $ | 1.74   

---

|* | In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company for $65.0 million the patents for the compound dapoxetine. The $65.0 million payment to Lilly was
recorded to research and development expenses because dapoxetine is still in development and has not been approved for sale in any country.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19. Subsequent Events:



Acquisition of Biomarker Business



In February 2005, the Company completed its acquisition of substantially all of the assets of SurroMed, Inc.s biomarker business. The assets
acquired by the Company consist of equipment, fixtures, leasehold improvements, intellectual property and contracts related to SurroMeds biomarker business. The acquired biomarker business consists of services and technologies of SurroMed that
support drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The acquisition will expand the Companys business by adding biomarker discovery and patient sample
analysis capability to the collection of services offered by the Company. In exchange for the assets of SurroMeds biomarker business, the Company surrendered to SurroMed for cancellation all of its shares of preferred stock of SurroMed. As
additional consideration for the acquisition, the Company assumed approximately $3.4 million of SurroMed liabilities under capital leases and certain additional operating liabilities, and agreed to guarantee repayment of up to $1.5 million under a
SurroMed bank loan. This biomarker business will be part of the Discovery Sciences segment of the Company.



As part of the Companys investment in SurroMed in 2003, the Company entered into agreements with SurroMed to purchase biomarker discovery services
from SurroMed for $6.0 million over a period of four years and to serve as a non-exclusive representative to market and sell additional SurroMed biomarker discovery services. These agreements were cancelled upon the closing of the acquisition.



Airplane Acquisition



In February 2005, the Company acquired a Dassault Falcon 900EX aircraft for
$30.5 million in cash. The Company intends to use the aircraft for corporate purposes. The Company financed the acquisition from available cash.



F-37



---

##### Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004



19. Subsequent Events (continued):



Land Purchase



In January 2005, the Company acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which the Company plans to
construct a new headquarters building. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont Shipping Company, refinanced certain existing liens on the property with the
proceeds of an $8.0 million loan from Bank of America, N.A. This loan will mature in January 2006 and is secured by a lien on substantially all of Almonts assets, including a tract of land containing approximately 30.0 acres adjacent to the
7.5 acre tract the Company acquired. This loan is also secured by a guarantee from the Company. Almonts obligation to reimburse the Company in the event the Company is required to pay any sums to Bank of America under the guarantee is also
secured by a lien on substantially all of Almonts assets. As a part of this transaction, Almont granted the Company an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per acre. The option will
expire on January 31, 2007.



Syrrx Acquisition by Takeda



In February 2005, Takeda Pharmaceutical Company Limited
announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. The Company owns $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, the
Company does not anticipate realizing a loss on this investment.



Dapoxetine milestone



In December 2004, ALZA
submitted a new drug application, or NDA, for dapoxetine. The FDA accepted the NDA for filing in February 2005. As a result, the Company is entitled to receive a one-time milestone payment of $10.0 million from ALZA within 30 days of the FDAs
acceptance of the NDA.



F-38



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



|                        |  |                                          |  |                                  
|----------------------- |  | ---------------------------------------- |  | ---------------------------------
|                        |  | PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
|                        |  |                                         
|Date: February 28, 2005 |  | 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.



|                                                               |  |                                                                      |  |                  
|-------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | -----------------
|/s/ Fredric N. Eshelman, Pharm.D.Fredric N. Eshelman, Pharm.D. |  | Chief Executive Officer and Director (Principal
Executive Officer)   |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Linda BaddourLinda Baddour                                 |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Stuart Bondurant, M.D.Stuart Bondurant, M.D.               |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Marye Anne Fox, Ph.D.Marye Anne Fox, Ph.D.                 |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Frederick FrankFrederick Frank                             |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ David L. GrangeDavid L. Grange                             |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Catherine M. KlemaCatherine M. Klema                       |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Terry Magnuson, Ph.D.Terry Magnuson, Ph.D.                 |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ Ernest Mario, Ph.D.Ernest Mario, Ph.D.                     |  | Director                                                             |  | February 28, 2005
|                                                               |  |                                                                     
|/s/ John A. McNeill, Jr.John A. McNeill, Jr.                   |  | Director                                                             |  | February 28, 2005



S-1