<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

          [X]   Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                      For the Year Ended December 31, 2005
                                       OR

          [ ] Transition report pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                        Commission File Number 000-23019

                            KENDLE INTERNATIONAL INC.

Ohio                                                             IRS Employer ID
(State or other jurisdiction                                      No. 31-1274091
of incorporation or organization)

                        441 Vine Street, 1200 Carew Tower
                             Cincinnati, Ohio 45202
                                  513-381-5550

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                           Common Stock, No Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ]. No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]. No [X]

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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

  Large accelerated filer [ ]  Accelerated filer [X]  Non-accelerated filer [ ]

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

The aggregate market value of the Registrant's Common Stock at June 30, 2005
held by non-affiliates was $168,655,572 (based on the closing price of the
Company's Common Stock on The Nasdaq National Market on June 30, 2005 of
$15.15). Shares of Common Stock held by each Executive Officer and Director and
by any 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.

As of February 20, 2006, 14,152,795 shares of no par value Common Stock were
issued and 14,132,898 shares of no par value Common Stock were outstanding.

                       Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement to be filed with the Commission for
its 2006 Annual Meeting of Shareholders to be held May 11, 2006 are incorporated
by reference into Part III.



<PAGE>
See Exhibit Index on page 49.



                                       1
<PAGE>

                            KENDLE INTERNATIONAL INC.
                             INDEX TO ANNUAL REPORT
                                  ON FORM 10-K

<TABLE>
<CAPTION>
                                                                                                                         Page
<S>                                                                                                                      <C>
Part I

    Item 1 - Business ..........................................................................................           3
    Item 1A - Risk Factors .....................................................................................           4
    Item 1B - Unresolved Staff Comments ........................................................................           5
    Item 2 - Properties ........................................................................................           6
    Item 3 - Legal Proceedings .................................................................................           6
    Item 4 - Submission of Matters to a Vote of Security Holders ...............................................           6

Part II

    Item 5 - Market for Registrant's Common Equity and Issuer Purchases of Equity Securities ...................           6
    Item 6 - Selected Financial Data ...........................................................................           7
    Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations .............           7
    Item 7A - Quantitative and Qualitative Disclosures about Market Risk .......................................          15
    Item 8 - Financial Statements and Supplementary Data .......................................................          16
    Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..............          16
    Item 9A - Controls and Procedures ..........................................................................          16
    Item 9B - Other Information ................................................................................          18

Part III

    Item 10 - Directors and Executive Officers of the Registrant ...............................................          18
    Item 11 - Executive Compensation ...........................................................................          19
    Item 12 - Security Ownership of Certain Beneficial Owners and Management ...................................          19
    Item 13 - Certain Relationships and Related Transactions ...................................................          20
    Item 14 - Principal Accounting Fees and Services ...........................................................          20

Part IV

    Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................          20

Signatures
</TABLE>

                                       2

<PAGE>

This Annual Report on Form 10-K contains certain statements that are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to a number of
assumptions, risks and uncertainties, many of which are beyond the control of
Kendle International Inc (the "Company"). See "Risk Factors" for further
information.

The forward-looking statements speak as of the date made and are not guarantees
of future performance. Actual results or developments may differ materially from
the expectations expressed or implied in the forward-looking statements, and the
Company undertakes no obligation to update any such statements.

                                     PART I

ITEM 1.

                                    BUSINESS

General

Kendle International Inc., an Ohio corporation established in 1989, is a global
clinical research organization (CRO) that provides a broad range of Phase I-IV
Clinical Development services to the biopharmaceutical industry. The Company
augments the research and development activities of biopharmaceutical companies
by offering high quality, value added clinical research services and proprietary
information technology designed to reduce drug development time and expense. The
Company is managed in one reportable segment encompassing contract services
related to Phase I-IV clinical trials.

The Company believes that the outsourcing of drug development activities by
biopharmaceutical companies has been increasing and will continue to increase as
these companies strive to increase revenues through faster drug development
while also dealing with cost containment pressures. The CRO industry, by
specializing in clinical trial management, often performs the needed services
with a higher level of expertise or specialization, at a faster pace and at
lower cost than a biopharmaceutical company could internally.

Business Strategy

The Company's strategy is to continue to enhance its reputation as a global
high-quality provider of a full range of CRO services. The Company's strategy
consists of the following key elements: (i) drive strategic business expansion
and diversification in high-potential markets; (ii) deliver internal process
improvements to achieve greater quality; (iii) recruit and retain best-in-class
employees around the world to offer its customers a full range of services that
encompass the clinical research process.

Customers and Marketing

Revenues from the top five customers accounted for approximately 34% of the
Company's total net service revenues for the year ended December 31, 2005. The
Company's net service revenues from Pfizer Inc. accounted for approximately 15%
of the Company's net service revenues for the year ended December 31, 2005. No
other customer accounted for more than 10% of the Company's net service revenues
for the year.

Segment and geographic information of the Company is contained in Note 16 to the
Consolidated Financial Statements.

Backlog

Backlog includes signed contracts and letters of intent. Backlog at December 31,
2005 was approximately $200 million compared to approximately $149 million at
December 31, 2004. Total backlog plus verbally awarded business at December 31,
2005 was approximately $323 million compared to approximately $240 million at
December 31, 2004. No assurance can be given that the Company will be able to
realize the net service revenues that are included in the backlog and verbal
awards. Backlog and verbal awards are not necessarily meaningful indicators of
future results for a variety of reasons, including, but not limited to, the
following: (i) contracts vary in size and duration, with revenue from some
studies realized over a number of years; (ii) the scope of contracts may change,
either increasing or decreasing the value of the contract; and (iii) studies may
be terminated or delayed by the study's sponsor or by regulatory authorities.

Competition

                                       3

<PAGE>

The Company competes primarily against in-house research and development
departments of biopharmaceutical companies, universities, teaching hospitals and
other full-service CROs, some of which possess substantially greater capital,
technical expertise and other resources than the Company. CROs generally compete
on the basis of previous experience, medical and scientific expertise in
specific therapeutic areas, the quality of services provided, the ability to
manage large-scale trials on a global basis, medical database management
capabilities, the ability to provide statistical and regulatory services, the
ability to recruit investigators, the ability to recruit patients into studies,
the ability to integrate information technology with systems to improve the
efficiency of clinical research, an international presence with strategically
located facilities and financial viability and price.

The CRO industry is highly fragmented with hundreds of CROs ranging from small,
limited-service providers to full-service, global drug development corporations.
Some of the full-service CROs competing with the Company include Covance, Inc.,
PAREXEL International Corporation, Pharmaceutical Product Development, Inc.,
ICON plc, Charles River Laboratories International Inc. and Quintiles
Transnational Corporation.

Government Regulation

The Company's clinical services are subject to industry standards for the
conduct of clinical research and developed studies that are contained in
regulations for Good Clinical Practice (GCP). The Food and Drug Administration
(FDA) in the United States and European Agency for the Evaluation of Medicinal
Products in Europe (EMEA) along with other regulatory bodies require that test
results submitted to the regulatory bodies be based on studies conducted in
accordance with GCP.

In addition, the International Conference on Harmonization - Good Clinical
Practice Guidelines provides guidance on GCP. The Company implements and revises
common standard operating procedures to facilitate GCP compliance.

Employees

As of December 31, 2005, the Company employed approximately 1,900 employees,
approximately 51% of whom were employed outside the United States. None of the
Company's employees are covered by a collective bargaining agreement and the
Company believes its relations with its employees are good.

Available Information

The Company maintains a website at the address www.kendle.com. The Company is
not including the information contained on its website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. The Company
makes available free of charge through its website its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission.

Required filings by the Company's officers and directors with respect to the
Company furnished in electronic form are also made available on its website as
are the Company's proxy statements for its annual meetings of shareholders.
These filings also my be read or copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 70549. The SEC also maintains an
Internet site (http://www.SEC.gov) that contains reports, proxy statements and
other information regarding issuers that file electronically with the SEC.

ITEM 1A.

                                  RISK FACTORS

Certain statements contained in this Form 10-K that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.

Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors.

Factors that could cause actual performance to differ materially from these
forward-looking statements include, without limitation, the following:

                                       4

<PAGE>
THE COMPANY DEPENDS ON THE BIOPHARMACEUTICAL INDUSTRY FOR MOST OF ITS REVENUE.

The Company's revenues depend on the outsourcing trends and research and
development expenditures of the biopharmaceutical industry. Economic factors and
industry trends that affect companies in those industries affect the Company's
business. Mergers and acquisitions in the biopharmaceutical industry could
result in delay or cancellation of certain projects.

THE COMPANY'S CONTRACTS MAY BE DELAYED, TERMINATED OR REDUCED IN SCOPE WITH
LITTLE OR NO NOTICE.

Many of the Company's contracts provide for services on a fixed price basis and
may be terminated or reduced in scope with little or no notice. Cancellations
may occur for a variety of reasons, including the failure of the product to
satisfy safety requirements, unexpected results of the product or the client's
decision to terminate the development of a product.

The loss, reduction in scope or delay of a large contract or the delay of
multiple contracts could materially adversely affect the Company's results,
although the Company's contracts entitle the Company to receive payments for
work incurred in the event of a cancellation. No assurance can be given that the
Company will be able to realize the net service revenues included in backlog and
verbal awards. The Company believes that its aggregate backlog and verbal awards
are not necessarily meaningful indicators of future results.

THE FIXED PRICE NATURE OF MANY OF THE COMPANY'S CONTRACTS COULD RESULT IN
FINANCIAL LOSSES.

Because many of the Company's contracts are structured as fixed price, the
Company is at financial risk if it initially underbids the contract or overruns
the initial cost estimates. Such under bidding or significant cost overruns
could have a material adverse effect on the Company's business, results of
operations, financial condition and cash flows.

IF THE COMPANY FAILS TO HIRE, RETAIN AND INTEGRATE QUALIFIED PERSONNEL, IT WILL
BE DIFFICULT FOR THE COMPANY TO ACHIEVE ITS GOALS.

The Company's success depends to a significant extent upon the efforts of the
Company's senior management team and its ability to hire qualified personnel in
the regions in which the Company operates. There is substantial competition
within the industry for qualified personnel, and difficulty recruiting or
retaining qualified personnel will impact the Company's ability to meet its
financial and operational goals.

THE CRO INDUSTRY IS HIGHLY COMPETITIVE.

The CRO industry is comprised of a wide range of competitors, including small,
niche providers as well as full-service global contract research organizations.
The industry members compete based on a variety of factors, including reputation
for quality performance, price, scope of service offerings and geographic
presence. Additionally, the Company's customers have in-house capabilities to
perform services that are provided by CROs.

THE COMPANY MAY EXPAND THROUGH ACQUISITIONS.

In the past, the Company has acquired companies and the Company continues to
evaluate new acquisition opportunities. The Company's ability to grow
successfully through acquisitions could be affected by expenses incurred in
integrating an acquired company, losses of key employees from an acquired
company, unforeseen risks in acquiring companies in certain geographies and
dilution to existing shareholders.

CHANGE IN GOVERNMENT REGULATION COULD ADVERSELY AFFECT THE COMPANY.

Government agencies regulate the drug development process. The Company works
with biopharmaceutical companies in the drug development process. Changes in
regulations that simplify the drug approval process or increases in regulatory
requirements that lessen the research and development efforts of the Company's
customers could negatively affect the Company.

INTERNATIONAL OPERATIONS ARE SUBJECT TO NUMEROUS RISKS.

The Company has international operations in many foreign countries, including
South Africa, India and countries in Eastern Europe and Latin America. These
operations are subject to risks inherent in operating in these countries,
including government regulations, currency restrictions and other restraints,
burdensome taxes and political instability. The Company's ability to deal with
these issues could be affected by applicable U.S. laws and the need to protect
our assets in those locations.

THE COMPANIES FINANCIAL RESULTS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS.

For the year ended December 31, 2005 approximately 42% of the Company's revenues
were derived from operations outside of the United States of America. The
Company's financial statements are denominated in U.S. dollars. As a result,
changes in foreign currency exchange rates could significantly impact the
Company's results of operations, financial position and cash flows as well as
its ability to finance large acquisitions outside of the United States of
America.

ITEM 1B.

                            UNRESOLVED STAFF COMMENTS

None.

                                       5
<PAGE>

ITEM 2.

                                   PROPERTIES

The Company leases all of its facilities with the exception of the Company-owned
facility in Ely, United Kingdom. The Company's principal executive offices are
located in Cincinnati, Ohio, where it leases approximately 111,000 square feet
under a lease expiring in 2009. In addition, the Company leases substantial
facilities in Munich, Germany, Crowthorne, United Kingdom, Utrecht, Netherlands
and Mexico City, Mexico. The Company also maintains offices in various other
North American, European and Australian locations, as well as in Central America
and South Africa.

Management believes that such offices are sufficient to meet its current needs
and does not anticipate any difficulty in securing additional space, as needed,
on terms acceptable to the Company.

ITEM 3.

                                LEGAL PROCEEDINGS

The Company is party to lawsuits and administrative proceedings incidental to
the normal course of business. The Company currently is not a party to any
pending material litigation, nor, to the Company's knowledge, is any material
litigation currently threatened against the Company.

ITEM 4.

               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 2005.

                                     PART II

ITEM 5.

                     MARKET FOR REGISTRANT'S COMMON EQUITY,
      RELATED SHAREHOLDER MATTERS AND ISSUER PRUCHASES OF EQUITY SECURITIES

Shares of the Company's Common Stock are listed on the Nasdaq Stock Market(R)
and are traded under the symbol "KNDL". The following table sets forth the high
and low prices for shares of the Company's Common Stock for the periods
indicated.

<TABLE>
<CAPTION>
                               First       Second        Third       Fourth
<S>                            <C>         <C>           <C>         <C>
2005 Quarterly
Ranges of stock price
    High                       $13.20      $16.53        $28.63      $29.50
    Low                          7.30       10.20         13.65       22.25

2004 Quarterly
Ranges of stock price
    High                        10.39        9.74          7.75        9.29
    Low                          6.15        7.00          5.29        5.00
</TABLE>

The number of holders of record of Kendle International Inc. common stock was
162 as of March 3, 2006. This total excludes shares held under beneficial
ownership in nominee name or within clearinghouse positions of brokerage firms
or banks. The Company has not paid dividends on its Common Stock since its
initial public offering in August 1997. The Company does not currently intend to
pay dividends in the foreseeable future, but instead intends to reinvest
earnings in its business.

                                       6

<PAGE>

Securities Authorized Under Equity Compensation Plans:

The information required for Securities Authorized Under Equity Compensation
Plans can be found in Part III, Item 12, Security Ownership of Certain
Beneficial Owners and Management of this Annual Report on Form 10-K.

ITEM 6.

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
 (in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS(1)              2005        2004        2003        2002        2001
<S>                                                 <C>         <C>         <C>         <C>         <C>
Net service revenues                                $ 202,032   $ 172,888   $ 156,221   $ 165,173   $ 154,302
Reimbursable out-of-pocket revenues                    48,607      42,980      53,436      48,841      40,197
                                                    ---------   ---------   ---------   ---------   ---------
Total revenues                                        250,639     215,868     209,657     214,014     194,499

Costs and expenses:
    Direct costs                                      108,582      96,909      91,133      98,438      93,729
    Reimbursable out-of-pocket costs                   48,607      42,980      53,436      48,841      40,197
    Selling, general and administrative                68,216      59,797      52,402      48,646      44,047
    Depreciation and amortization                       7,991       9,175       9,057       8,347       9,988
    Employee severance and office consolidation
       costs                                               --         302       1,468         408        (766)
    Goodwill impairment                                    --          --          --      67,745          --
                                                    ---------   ---------   ---------   ---------   ---------
Total costs and expenses                              233,396     209,163     207,496     272,425     187,195
Income (loss) from operations                          17,243       6,705       2,161     (58,411)      7,304
Interest income                                         1,019         400         334         534         903
Interest expense                                         (460)       (776)     (1,039)     (1,219)       (877)
Other                                                    (287)       (873)       (725)        (61)         23
Investment impairment                                      --          --        (405)     (1,938)         --
Gain on debt extinguishment                               300         597         558          --          --
                                                    ---------   ---------   ---------   ---------   ---------
Income(loss)before income taxes                        17,815       6,053         884     (61,095)      7,353
Income taxes                                            7,141       2,481       2,574      (6,295)      3,147
                                                    ---------   ---------   ---------   ---------   ---------
NET INCOME (LOSS)                                   $  10,674   $   3,572   $  (1,690)  $ (54,800)  $   4,206

INCOME (LOSS) PER SHARE DATA
Basic:
    Net income (loss) per share                     $    0.79   $    0.27   $   (0.13)  $   (4.30)  $    0.34
    Weighted average shares                            13,572      13,166      12,973      12,734      12,251
Diluted:
    Net income (loss) per share                     $    0.76   $    0.27   $   (0.13)  $   (4.30)  $    0.33
    Weighted average shares                            14,120      13,391      12,973      12,734      12,858

CONSOLIDATED BALANCE SHEET DATA 1
Working capital                                     $  63,992   $  40,714   $  38,523   $  41,451   $  36,664
Total assets                                          184,759     162,680     154,415     155,397     204,051
Total short and long-term debt                          4,572       9,853      15,503      21,236      16,217
Total shareholders' equity                            122,504     102,775      96,369      94,360     142,307
</TABLE>

1    From 2001 to 2005, the Company made three acquisitions. See Note 13 to the
      Consolidated Financial Statements.

ITEM 7.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The information set forth and discussed below is derived from the Company's
Consolidated Financial Statements and the related notes thereto, which are
included herein, and should be read in conjunction therewith.

COMPANY OVERVIEW

                                       7

<PAGE>

Kendle International Inc. (the Company) is a global clinical research
organization (CRO) that delivers integrated clinical research services,
including clinical trial management, clinical data management, statistical
analysis, medical writing, regulatory consulting and organizational meeting
management and publications services on a contract basis to the
biopharmaceutical industry. The Company operates in North America, Europe,
Asia/Pacific, Latin America and Africa. The Company is managed in one reportable
segment encompassing contract services related to Phase I-IV clinical trials.

The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A contract
typically requires a portion of the contract fee to be paid at the time the
contract is entered into, and the balance is received in installments over the
contract's duration, in most cases on a milestone-achievement basis. Net service
revenues from contracts are generally recognized on the percentage of completion
method, measured principally by the total costs incurred as a percentage of
estimated total costs for each contract. The estimated total costs of contracts
are reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When estimates
indicate a loss, such loss is provided in the current period in its entirety.
The Company also performs work under time-and-materials contracts, recognizing
revenue as hours are worked based on the hourly billing rates for each contract.
Additionally, the Company recognizes revenue under units-based contracts as
units are completed multiplied by the contract per-unit price. Finally, at one
of the Company's subsidiaries, the contracts are of a short-term nature and
revenue is recognized under the completed contract method of accounting.

The Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators as well as other out-of-pocket costs. These
out-of-pocket costs are reimbursable by the Company's customers. The Company
includes amounts paid to investigators and other out-of-pocket costs as
reimbursable out-of-pocket revenues and reimbursable out-of-pocket expenses in
the Consolidated Statements of Operations. In certain contracts, these costs are
fixed by the contract terms, so the Company recognizes these costs as part of
net service revenues and direct costs.

Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and an allocation
of indirect costs including facilities, information systems and other costs.
Selling, general and administrative (SG&A) expenses consist of compensation and
related fringe benefits for sales and administrative associates and professional
services, as well as unallocated costs related to facilities, information
systems and other costs.

Depreciation and amortization expenses consist of depreciation and amortization
costs recorded on a straight-line method over the useful life of the property or
equipment and internally developed software. Intangible assets with indefinite
useful lives are reviewed at least annually for impairment. In 2002, the Company
recorded a goodwill impairment charge of $67.7 million.

The CRO industry in general continues to depend on the research and development
efforts of its principal biopharmaceutical customers, and the Company believes
this dependence will continue. The loss of business from any of the major
customers could have a material adverse effect on the Company.

The Company's results are subject to volatility due to a variety of factors. The
cancellation or delay of contracts and cost overruns could have short-term
adverse affects on the Consolidated Financial Statements. Fluctuations in the
Company's sales cycle and the ability to maintain large customer contracts or to
enter into new contracts could hinder the Company's long-term growth. In
addition, the Company's aggregate backlog, consisting of signed contracts and
letters of intent, is not necessarily a meaningful indicator of future results.
Accordingly, no assurance can be given that the Company will be able to realize
the net service revenues included in the backlog.

ACQUISITIONS

On October 1, 2003, the Company completed its acquisition of Mexican CRO
Estadisticos y Clinicos Asociados, S.A. (ECA). ECA is a Phase I-IV clinical
research organization located in Mexico City, Mexico. With the acquisition, the
Company expanded its capability to conduct clinical trials in Latin America. The
Company acquired substantially all of the assets and assumed certain liabilities
of ECA for a purchase price of approximately $3.6 million in cash, including
acquisition costs.

The results of operations for this acquisition are included in the Company's
Consolidated Statements of Operations from the date of acquisition.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

                                       8

<PAGE>

Net service revenues increased 17% to $202.0 million for 2005 from $172.9
million in 2004. Foreign currency exchange rate variances had minimal impact on
revenue. The 17% increase in net service revenues resulted entirely from organic
growth. Net service revenues in North America increased by 15% in 2005 compared
to 2004 due to strong demand in Phase II-IV services and an increased customer
based. Net services revenues in Europe increased by 24% in 2005 compared to
2004, including revenue growth of approximately 58% at the Company's Phase I
unit in The Netherlands due to continued increased customer demand for Phase I
services in 2005.

Approximately 43% of the Company's net service revenues in 2005 were derived
from its operations outside of North America as compared to 41% in 2004.
Revenues from the Company's top five customers accounted for approximately 34%
and 39% of net service revenues in 2005 and 2004, respectively. Net service
revenues from Pfizer Inc. accounted for approximately 15% of the total 2005 net
service revenues as compared to 20% for 2004. The Company's net service revenues
from Pfizer Inc. are derived from numerous projects that vary in size, duration
and therapeutic indication. No other customer accounted for more than 10% of the
Company's net service revenues in either 2005 or 2004.

Reimbursable Out-of-Pocket Revenues

Reimbursable out-of-pocket revenues fluctuate from period to period due
primarily to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues increased 13.1% to $48.6 million in 2005
from $43.0 million in 2004. The increase is due primarily to an increase in the
number of contracts in which the Company is administering payments to
investigators on behalf of the Company's customers.

Operating Expenses

Direct costs increased by 12% from $96.9 million in 2004 to $108.6 million in
2005. Foreign currency exchange rate variances had minimal impact on direct
costs. The increase in direct costs corresponds to the increase in net service
revenues. The Company increased the use of outside contractors in 2005 to
support the increase in project work. Direct costs as a percentage of net
service revenues were 53.7% and 56.1% in 2005 and 2004, respectively. The
decrease in direct costs as a percentage of net service revenues is attributable
primarily from increased utilization of billable employees as well as an
increased revenue base to absorb fixed costs.

Reimbursable out-of-pocket costs fluctuate from period to period due primarily
to the level of investigator activity in a particular period. Reimbursable
out-of-pocket costs increased 13.1% to $48.6 million in 2005 from $43.0 million
in 2004. The increase is due primarily to an increase in the number of contracts
in which the Company is administering payments to investigators on behalf of the
Company's customers.

Selling, general and administrative expenses increased by 14% to $68.2 million
in 2005 from $59.8 million in 2004. Foreign currency exchange rate variances had
minimal impact on SG&A expenses. Primary reasons for the increase in SG&A costs
included increased marketing costs related to the Company's marketing initiative
and increases in employee related costs, including increases in profit-sharing
accrual, sales commissions and recruiting and retention efforts. In addition, in
the fourth quarter of 2005, the Company recorded a bad debt reserve of
approximately $1.7 million associated with one study being conducted in the
United Kingdom. Selling, general and administrative costs as a percentage of net
services revenues were 33.8% in 2005 compared to 34.6% in 2004.

Depreciation and amortization decreased by $1.2 million in 2005, or 13% from
2004. This decrease was due to a reduction in depreciation expense as fixed
assets come to the end of their depreciable life as well as a slowdown in
additions to fixed assets as compared to prior periods.

In the first quarter of 2004, to align the Company's resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan, which resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. In the second quarter of 2004, the Company incurred
an additional $48,000 in costs related to this workforce realignment plan. This
workforce realignment plan affected approximately 3 percent of the Company's
North American workforce. All amounts related to this plan were paid in the
second quarter of 2004 and no amounts remained accrued at December 31, 2004. No
similar charge existed in 2005.

 Other Income

Total other income (expense) was income of $0.6 million in 2005 compared to an
expense of approximately $0.7 million in 2004. In 2005 the Company recorded
foreign currency transaction losses of approximately $79,000 as a result of
fluctuations between the British Pound and the Euro and between the U.S. dollar
and either the Euro or the British Pound. In 2004, these foreign currency
transaction losses were approximately $591,000. In 2005, the Company made a
final partial early repayment on its convertible note and recorded a gain of
approximately $300,000. Similar payments in 2004 resulted in gains of
approximately $597,000. Interest income in 2005 was approximately $1.0 million
compared to approximately $400,000 in 2004. The increased interest income is due
to

                                       9

<PAGE>

larger cash and investment balances in 2005 as well as increased interest rates.
Interest expense decreased to approximately $460,000 in 2005 compared to
$776,000 in 2004 due to lower debt balances outstanding in 2005.

Income Taxes

The Company recorded a tax expense at an effective rate of approximately 40% in
2005 compared to approximately 41% in 2004. In the second quarter of 2005, the
Company recorded a one-time, non-cash charge of approximately $1.2 million, net
of federal income tax effect, to reflect the write-off of deferred state income
tax assets due to a change in Ohio state tax law enacted on June 30, 2005. The
one-time charge results from adoption of a comprehensive change in Ohio
corporate tax laws that provides for the phase-in of a Commercial Activities Tax
(CAT) on gross receipts. Concurrent with the phase-in of the CAT, the Ohio
income tax, net worth tax, and personal property tax will be phased out. In the
fourth quarter of 2005, the Company reversed a previously established valuation
allowance of $820,000 associated with future tax benefits in the Netherlands.
Because Kendle operates on a global basis, the effective tax rate may vary from
year to year based on the locations that generate the pre-tax earnings.

Net Income

The net income for 2005, including the effects of the bad debt reserve, the
reversal of the tax valuation allowance, the gain on debt extinguishment and the
write-off of the deferred state income taxes (of approximately $1.8 million, or
$0.12 per share) was approximately $10.7 million or $0.76 per diluted share and
$0.79 per basic share. The net income for 2004, including the effects of the
severance charge and gain from debt extinguishment (of approximately $177,000 or
$0.02 per share), was approximately $3.6 million or $0.27 per basic and diluted
share.

YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003

Net service revenues increased 11% to $172.9 million for 2004 from $156.2
million in 2003. Excluding the impact of foreign currency exchange rates, net
service revenues increased 6% in 2004. The 11% increase in net service revenues
includes growth in organic revenues of 9% and growth of 2% due to the Company's
acquisition. Net service revenues in North America were at similar levels in
2004 as compared to 2003, with the majority of the Company's resulting growth
coming from its European operations. Revenue from the Company's Phase I unit in
the Netherlands grew by approximately 13% due to increased customer demand for
Phase I services in 2004.

Approximately 41% of the Company's net service revenues in 2004 were derived
from its operations outside of North America as compared to 34% in 2003.
Revenues from the Company's top five customers accounted for approximately 39%
and 47% of net service revenues in 2004 and 2003, respectively. Net service
revenues from Pfizer Inc. (including the former Pharmacia Corp.) accounted for
approximately 20% of the total 2004 net service revenues as compared to 27% for
2003. The Company's net service revenues from Pfizer Inc. are derived from
numerous projects that vary in size, duration and therapeutic indication. No
other customer accounted for more than 10% of the Company's net service revenues
in either 2004 or 2003.

Reimbursable Out-of-Pocket Revenues

Reimbursable out-of-pocket revenues fluctuate from period to period due
primarily to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues decreased 19.6% to $43.0 million in 2004
from $53.4 million in 2003. The decrease is due primarily to a decrease in the
number of contracts in which the Company is administering payments to
investigators on behalf of the Company's customers.

Operating Expenses

Direct costs increased by 6% from $91.1 million in 2003 to $96.9 million in
2004. The 6% increase in direct costs includes a 5% increase in organic direct
costs and a 1% increase in direct costs due to the Company's acquisition.
Foreign currency exchange rate fluctuations accounted for the majority of the
increase in direct costs. Direct costs as a percentage of net service revenues
were 56.1% and 58.3% in 2004 and 2003, respectively. Gross margin improvements
resulted primarily from increased utilization of billable employees as well as
the overall mix of contracts.

Reimbursable out-of-pocket costs fluctuate from period to period due primarily
to the level of investigator activity in a particular period. Reimbursable
out-of-pocket costs decreased 19.6% to $43.0 million in 2004 from $53.4 million
in 2003. The decrease is due primarily to a decrease in the number of contracts
in which the Company is administering payments to investigators on behalf of the
Company's customers.

Selling, general and administrative expenses increased by 14% to $59.8 million
in 2004 from $52.4 million in 2003. The 14% increase in SG&A costs is composed
of a 13% increase in organic SG&A costs and a 1% increase in SG&A costs due to
the Company's acquisition. Foreign currency exchange rate fluctuations accounted
for a 4% increase in selling, general and administrative expenses in

                                       10

<PAGE>

2004 as compared to 2003. Primary reasons for the increase in SG&A costs
included increased accounting costs related to compliance with the
Sarbanes-Oxley Act of 2002, specifically compliance with Section 404; increased
costs related to the Company's expansion into new geographies; and increased
SG&A costs in Europe to support the growth in the Company's European business.

Depreciation and amortization increased by $0.1 million in 2004, or 1% over
2003.

In the first quarter of 2004, to align the Company's resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan, which resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. In the second quarter of 2004, the Company incurred
an additional $48,000 in costs related to this workforce realignment plan. This
workforce realignment plan affected approximately 3 percent of the Company's
North American workforce. All amounts related to this plan were paid in the
second quarter of 2004 and no amounts remained accrued at December 31, 2004. In
the first quarter of 2003, the Company recorded a charge of approximately
$680,000 for severance and outplacement benefits related to a workforce
reduction program that affected approximately 1 percent of its total workforce.
In the second quarter of 2003, the Company recorded an adjustment to reduce this
charge by approximately $106,000 as a result of lower-than-expected severance
costs related to the workforce reduction. In the third quarter of 2003, the
Company recorded a charge of approximately $897,000 for severance and
outplacement costs in connection with a workforce realignment plan implemented
in August 2003. Approximately $15,000 remained accrued at December 31, 2004,
related to this plan.

 Other Income

Total other income (expense) was expense of $0.7 million in 2004 compared to an
expense of approximately $1.3 million in 2003. In 2004 the Company recorded
foreign currency transaction losses of approximately $591,000 as a result of
fluctuations between the British Pound and the Euro and between the U.S. dollar
and either the Euro or the British Pound. In 2003, these foreign currency
transaction losses were approximately $449,000. In 2004, the Company made
partial early repayments on its convertible note and recorded gains from these
repayments of approximately $597,000. In 2003, the Company recorded a similar
gain on partial early retirement of convertible debt of $558,000. In the second
quarter of 2003, the Company determined that its investment in KendleWits, its
50% owned joint-venture in the People's Republic of China was permanently
impaired and recorded a $405,000 non-cash charge to reduce the carrying value of
its investment to zero.

Income Taxes

The Company recorded tax expense at an effective rate of 41% in 2004 compared to
tax expense at an effective rate in excess of 100% in 2003. The improvement in
the effective rate in 2004 is due primarily to the improvement in operating
results at the Company's European subsidiaries that have valuation allowances
against net operating loss carryforwards. Valuation allowances in 2003 against
these net operating loss carryforwards amounted to approximately $1.4 million.
Because Kendle operates on a global basis, the effective tax rate may vary from
year to year based on the locations that generate the pre-tax earnings.

Net Income

The net income for 2004, including the effects of the severance charge and gain
from debt extinguishment (of approximately $177,000 or $0.02 per share), was
approximately $3.6 million or $0.27 per basic and diluted share. Inclusive of
the severance and outplacement charges, the write-off of the KendleWits
investment and the gain on early partial extinguishment of debt (items with an
aggregate after-tax impact of approximately $1.1 million, or $0.08 per share),
the net loss for 2003 was $1.7 million or $0.13 per basic and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

In 2005, cash and cash equivalents increased by $19.8 million as a result of
cash provided by operating activities of $23.0 million offset by cash used in
investing activities of $5.2 million and cash provided by financing activities
of $2.2 million. In addition, the Company has restricted cash of approximately
$592,000, which represents cash received from customers that is segregated in a
separate Company bank account and available for use only for specific
project-related expenses, primarily investigator fees, upon authorization from
the customer.

Net cash provided by operating activities consisted primarily of net income
increased by non-cash adjustments (primarily depreciation and amortization). The
change in net operating assets provided $3.1 million in cash during 2005, due
primarily to an increase in advanced billings and accrued liabilities offset by
an increase in accounts receivable. This net change in net operating assets used
$6.2 million in cash in 2004, due primarily to an increase in accounts
receivable. Fluctuations in accounts receivable and advance billings occur on a
regular basis as services are performed, milestones or other billing criteria
are achieved, invoices are sent to customers and

                                       11

<PAGE>
payments for outstanding accounts receivable are collected from customers.
Accounts receivable, net of advance billings, increased from $31.1 million at
December 31, 2004 to $33.2 million at December 31, 2005.

Cash flows from investing activities for the year ended December 31, 2005
consisted primarily of capital expenditures of $5.0 million, primarily for the
purchase of new computer equipment and software for newly hired employees.
Investing activities for the year ended December 31, 2004 consisted primarily of
capital expenditures of $5.3 million and net purchases of available-for-sale
securities of $1.5 million.

Cash flows from financing activities for the year ended December 31, 2005
consisted primarily of proceeds from stock option exercises offset by payments
under the Company's credit facility of $2.9 million and a partial repayment of
the Company's convertible debt of $1.2 million. Cash flows from financing
activities for the year ended December 31, 2004 consisted primarily of net
payments under the Company's credit facilities of $3.0 million, partial
repayments of the Company's convertible debt of $1.9 million and payments of
capital lease obligations of approximately $975,000.

The Company had available-for-sale securities totaling $10.7 million and $10.3
million at December 31, 2005 and 2004, respectively.

Cash used for capital expenditures was $5.0 million, $5.3 million and $5.6
million in 2005, 2004 and 2003, respectively.

In May 2005, the Company entered into the Second Amended and Restated Credit
Agreement (the "Facility") that replaced the previous credit agreement. The
Facility is in addition to an existing $5.0 million Multicurrency Facility that
is renewable annually and is used in connection with the Company's European
operations.

The Facility is comprised of a $20.0 million revolving credit loan that expires
in May 2008. The existing term loan is carried over from the previous agreement
and matures in March 2007.

The revolving credit loan bears interest at a rate equal to either (a) the LIBOR
Rate plus the Applicable Percentage (as defined) or (b) the higher of the
Federal Fund's Rate plus 0.5% or the bank's Prime Rate. The existing term loan
bears interest at a rate equal to the higher of the Federal Funds Rate plus 0.5%
and the Prime Rate or an Adjusted Eurodollar Rate.

Under terms of the Facility, revolving loans are convertible into new five year
term loans within the Facility if used for acquisitions. The Facility contains
various restrictive financial covenants, including the maintenance of certain
fixed coverage and leverage ratios. The Company is in compliance with the
financial covenants contained in the Facility as of December 31, 2005.

The $5.0 million Multicurrency Facility is comprised of a euro overdraft
facility up to the equivalent of $3.0 million and a pound sterling overdraft
facility up to the equivalent of $2.0 million. This Multicurrency Facility bears
interest at a rate equal to either (a) the rate published by the European
Central Bank plus a margin (as defined) or (b) the Bank's Base Rate (as
determined by the bank having regard to prevailing market rates) plus a margin
(as defined).

At December 31, 2005 no amounts were outstanding under the Company's revolving
credit loan, $3.8 million was outstanding under the term loan, and no amounts
were outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the term loan at a rate of 5.8%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
2007.

Effective July 1, 2002, the Company entered into an interest rate swap agreement
to fix the interest rate on the $15.0 million term loan. The swap is designated
as a cash flow hedge under the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under the swap agreement, the interest rate on the term loan is
fixed at 4.32% plus the applicable margin (currently 1.5%). The swap is in place
through the life of the term loan, ending on March 31, 2007. Changes in fair
value of the swap are recorded in Accumulated Other Comprehensive Loss on the
Consolidated Balance Sheet. At December 31, 2005, approximately $7,000 has been
recorded in Accumulated Other Comprehensive Income to reflect an increase in the
fair value of the swap compared to a decrease in the fair value of approximately
$92,000 at December 31, 2004.

With the acquisition of Clinical and Pharmacologic Research, Inc. (CPR) in 2002,
the Company entered into a $6.0 million convertible note payable to the
shareholders of CPR. The principal balance was convertible at the holders'
option into 314,243 shares of the Company's Common Stock at any time through
January 29, 2005 (the Maturity Date). If the note had not been converted at the
Maturity Date, the Company had the option to extend the Maturity Date of the
note for another three years. The note bore interest at an annual rate of 3.80%
from January 29, 2002 through the Maturity Date. Interest was payable
semi-annually.

In June 2003, the Company and the shareholders of CPR entered into Note
Prepayment Agreements. Under the Note Prepayment Agreements, the Company agreed
to satisfy its payment obligations under the $6.0 million convertible note by
making a series of four payments between June 30, 2003 and January 10, 2005. The
four payments were initiated either by the Company through the exercise of a
"call" option or by the CPR shareholders through the exercise of a "put" option.
Gains resulting from this early extinguishment of debt were recorded in the
Company's Consolidated Statements of Operations when payments were made by the
Company.

                                       12
<PAGE>


In the first quarter of 2005, the Company paid approximately $1.2 million to
settle the remaining $1.5 million of the convertible note that was outstanding
at December 31, 2004. A gain of $300,000 was recorded in the first quarter of
2005 in the Company's Consolidated Statements of Operations. No amounts remain
outstanding under this convertible note at December 31, 2005. The total gains
resulting from early extinguishment of debt since inception of the Note
Prepayment Agreement were approximately $1.5 million.

The Company's primary cash needs on both a short-term and long-term basis are
for the payment of salaries and fringe benefits, hiring and recruiting expenses,
business development costs, capital expenditures, acquisitions and
facility-related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
the Facility and the Multicurrency Facility, will be sufficient to meet its
foreseeable cash needs. In the future, the Company will continue to consider the
acquisition of businesses to enhance its service offerings, therapeutic base and
global presence. Any such acquisitions may require additional external
financings and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities. There can be no
assurance that such financings will be available on terms acceptable to the
Company.

CONTRACTUAL OBLIGATIONS

Future minimum payments for all contractual obligations for years subsequent to
December 31, 2005 are as follows:

<TABLE>
<CAPTION>
                                                      YEAR         YEARS         YEARS      YEARS
(IN THOUSANDS)                                        2006       2007-2008     2009-2010  AFTER 2010   TOTAL
                                                   ----------    ---------     ---------  ----------  --------
<S>                                                <C>           <C>           <C>        <C>         <C>
Capital lease obligations (including interest)     $      399    $     371     $      87  $        -  $    857
Operating Leases                                        7,672       12,385         6,618         894    27,569
Purchase Obligations                                      535          535             -           -     1,070
Debt payments                                           3,000          750             -           -     3,750
Interest on debt                                          154           11             -           -       165
                                                   ----------    ---------     ---------  ----------  --------
Total                                              $   11,760    $  14,052     $   6,705  $      894  $ 33,411
                                                   ==========    =========     =========  ==========  ========
</TABLE>

Short-term obligations arising in the ordinary course of business are excluded
from the above table.

CRITICAL ACCOUNTING POLICES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
significant estimates and assumptions that affect the reported Consolidated
Financial Statements for a particular period. Actual results could differ from
those estimates.

Revenue Recognition

The majority of the Company's net service revenues are based on fixed-price
contracts calculated on a percentage-of-completion basis based upon assumptions
regarding the estimated total costs for each contract. Costs are incurred for
each project and compared to the estimated budgeted costs for each contract to
determine a percentage of completion on the project. The percentage of
completion is multiplied by the total contract value to determine the amount of
revenue recognized. Management regularly reviews the budget on each contract to
determine if the budgeted amounts are correct, and budgets are adjusted as
needed. As the work progresses, original estimates might be changed due to
changes in the scope of the work. When estimates indicate a loss, such loss is
provided in the current period in its entirety. The Company attempts to
negotiate contract amendments with the sponsor to cover services provided
outside the terms of the original contract. However, there can be no guarantee
that the sponsor will agree to proposed amendments, and the Company ultimately
bears the risk of cost overruns.

The Company also recognizes revenue under units-based contracts, recognizing
revenue as units are completed multiplied by the contract per-unit price.

Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed.

As the Company provides services on projects, it also incurs third-party and
other pass-through costs, which are typically reimbursable by its customers
pursuant to the contract. In certain contracts, however, these costs are fixed
by the contract terms. In these contracts, the Company is at risk for costs
incurred in excess of the amounts fixed by the contract terms. In these
instances, the Company

                                       13

<PAGE>

recognizes these costs as direct costs with corresponding net service revenues.
Excess costs incurred above the contract terms would negatively affect the
Company's gross margin.

Accounts Receivable/Allowance for Doubtful Accounts

Billed accounts receivable represent amounts for which invoices have been sent
to customers. Unbilled accounts receivable are amounts recognized as revenue for
which invoices have not yet been sent to customers. Advance billings represent
amounts billed or payment received for which revenues have not yet been earned.
The Company maintains an allowance for doubtful accounts receivable based on
historical evidence of accounts receivable collections and specific
identification of accounts receivable that might pose collection problems. The
bad debt provision is monitored on a regular basis and adjusted as circumstances
warrant. In the fourth quarter of 2005, the Company recorded a bad debt
provision of approximately $1.7 million related to receivables due from one
customer. If the Company is unable to collect all or part of its outstanding
receivables, there could be a material impact to the Company's Consolidated
Results of Operations or financial position.

Long-Lived Assets

The Company analyzes goodwill and other indefinite-lived intangible assets to
determine any potential impairment loss on an annual basis, unless conditions
exist that require an updated analysis on an interim basis. A fair value
approach is used to test goodwill for impairment. The goodwill impairment
testing involves the use of estimates related to the fair market value of the
reporting unit and is inherently subjective. An impairment charge is recognized
for the amount, if any, by which the carrying amount of goodwill exceeds fair
value. At December 31, 2004 and December 31, 2005 the fair value of the Company
exceeded the carrying value, resulting in no goodwill impairment charge. In
addition, the Company has a $15 million indefinite lived intangible asset
representing one customer relationship acquired in the Company's acquisition of
CPR. The intangible asset is evaluated each reporting period to determine
whether events or circumstances continue to support an indefinite useful life.

Internally Developed Software

The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, and amortizes these costs over the useful life of the product, not to
exceed five years. Internally developed software represents software in the
application development stage, and there is no assurance that the software
development process will produce a final product for which the fair value
exceeds its carrying value. Internally developed software is an intangible asset
subject to impairment write-downs whenever events indicate that the carrying
value of the software may not be recoverable. As with other long-lived assets,
this asset is reviewed at least annually to determine the appropriateness of the
carrying value of the asset. Assessing the fair value of the internally
developed software requires estimates and judgment on the part of management.

Tax Valuation Allowance

The Company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. Because the Company conducts
business on a global basis, its effective tax rate has and will continue to
depend upon the geographic distribution of its pre-tax earnings (losses) among
jurisdictions with varying tax rates. These estimates include judgments about
deferred tax assets and liabilities resulting from temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. The Company has assessed the realization of
deferred tax assets and a valuation allowance has been established based on an
assessment that it is more likely than not that realization cannot be assured.
The ultimate realization of this tax benefit is dependent upon the generation of
sufficient operating income in the respective tax jurisdictions. If estimates
prove inaccurate or if the tax laws change unfavorably, significant revisions in
the valuation allowance may be required in the future.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (the FASB) issued FASB
Statement 154, "Accounting Changes and Error Corrections" which replaces APB
Opinion No. 20, "Accounting Changes" and FASB Statement 3 "Reporting Accounting
Changes in Interim Financial Statements." This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instances that the pronouncement does not include specific
transition provisions. This statement requires voluntary changes in accounting
principles be recognized retrospectively to prior periods' financial statements,
rather than recognition in the net income of the current period. Retrospective
application requires restatements of prior period financial statements as if
that accounting principle had always been used. This statement carries forward
without change the guidance contained in Opinion 20 for reporting the correction
of an error in previously issued financial statements and a change in accounting
estimate. The

                                       14

<PAGE>

provisions of FASB Statement 154 are effective for accounting changes and
corrections of error made in fiscal years beginning after December 15, 2005. The
application of SFAS-154 did not have any impact on earnings and financial
position.

Statement No. 153, "Exchanges of Non-monetary Assets", an amendment of APB
Opinion No. 29, "Accounting for Non-monetary Transactions" is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of non-monetary assets that do not have
commercial substance. The Statement is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The application of SFAS-153 did
not have any impact on earnings and financial position.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R) requires that
compensation costs related to share-based payment transactions be recognized in
the financial statements. The cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS 123(R) covers a range of
share-based compensation arrangements, including share options, restricted stock
plans, performance-based awards, share appreciation rights, and employee stock
purchase plans. SFAS 123(R) replaces FAS Statement 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. In April 2005, the Securities and Exchange Commission
announced the adoption of a new rule that amends the effective date of SFAS
123(R). The effective date of the new standard under these new rules for the
Company's Consolidated Financial Statements is January 1, 2006. The Company is
in the process of evaluating the impact SFAS 123(R) will have on its reported
earnings.

SUBSEQUENT EVENT

In March 2006, the Company entered into agreements to acquire certain assets of
International Clinical Research Limited (IC-Research) and the ownership
interests in its related operating companies in each of Argentina, Brazil, Chile
and Columbia. IC-Research is a leading CRO in Latin America with operations in
Argentina, Brazil, Chile and Columbia. The acquisition supports the Company's
goal of strategic business expansion and diversification in high growth regions
to deliver global clinical trials for its customers.

The acquisition is expected to be completed in the second quarter of 2006. The
aggregate purchase price is expected to be approximately $900,000 plus
acquisition costs. In addition, there is expected to be an earnout provision,
with a maximum additional amount to be paid of $260,000. The Company will
complete its purchase price allocation after completion of the acquisition.

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

Certain statements contained in this Form 10-K that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.

Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors.

Factors that could cause actual performance to differ materially from these
forward-looking statements include those risk factors set forth in Item 1A.

ITEM 7A.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

The Company operates on a global basis and is therefore exposed to various types
of currency risks. Two specific transaction risks arise from the nature of the
contracts the Company executes with its customers. From time to time contracts
are denominated in a currency different than the particular local currency. This
contract currency denomination issue is applicable only to a portion of the

                                       15

<PAGE>

contracts executed by the Company. The first risk occurs as revenue recognized
for services rendered is denominated in a currency different from the currency
in which the subsidiary's expenses are incurred. As a result, the subsidiary's
net service revenues and resulting net income can be affected by fluctuations in
exchange rates.

The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, the Company recognizes a receivable at the
time of invoicing at the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
until the payment from the customer is received will result in the Company
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. This difference is recognized by the Company as a
foreign currency transaction gain or loss, as applicable, and is reported in
Other Income (Expense) in the Consolidated Statements of Operations.

The Company's Consolidated Financial Statements are denominated in U.S. dollars.
Accordingly, changes in exchange rates between the applicable foreign currency
and the U.S. dollar will affect the translation of each foreign subsidiary's
financial results into U.S. dollars for purposes of reporting Consolidated
Financial Statements. The Company's foreign subsidiaries translate their
financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account referred to as the foreign currency translation adjustment account. This
account exists only in the foreign subsidiaries' U.S. dollar balance sheet and
is necessary to keep the foreign subsidiaries' balance sheet stated in U.S.
dollars in balance. Foreign currency translation adjustments, reported as a
separate component of shareholders' equity in the Consolidated Balance Sheet,
were approximately $62,000 at December 31, 2005 compared to $2.7 million at
December 31, 2004.

Interest Rates

The Company is exposed to changes in interest rates on its available-for-sale
securities and amounts outstanding under the Facility and Multicurrency
Facility. Available for sale securities are recorded at fair value in the
Consolidated Financial Statements. These securities are exposed to market price
risk, which also takes into account interest rate risk. At December 31, 2005,
the potential loss in fair value resulting from a hypothetical decrease of 10%
in quoted market price would be approximately $1.1 million.

In July 2002, the Company entered into an interest rate swap agreement with the
intent of managing the interest rate risk on its five-year term loan. Interest
rate swap agreements are contractual agreements between two parties for the
exchange of interest payment streams on a principal amount and an agreed-upon
fixed or floating rate, for a defined period of time. See discussion of debt in
the Liquidity and Capital Resources section of the Management's Discussion and
Analysis of Financial Conditions and Results of Operations.

ITEM 8.

                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data called for by this Item are
incorporated herein from page F-1.

ITEM 9.

                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

None to report.

ITEM 9A.                 CONTROLS AND PROCEDURES

Management's Evaluation of Disclosure Controls and Procedures

Based on the Company's most recent evaluation, which was completed as of the end
of the period covered by this Form 10-K, our Chairman (principal executive
officer) and Chief Financial Officer (principal financial and accounting
officer) believe the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are

                                       16

<PAGE>

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

Management's Report on Internal Control over Financial Reporting

The management of Kendle International Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. Kendle's system
of internal control was designed to provide reasonable assurance to the
company's management and board of directors regarding the preparation and fair
presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.

Management assessed the effectiveness of the company's internal control over
financial reporting as of December 31, 2005. In making this assessment, it 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, 2005, the company's internal
control over financial reporting is effective based on those criteria.

Deloitte and Touche LLP, Kendle's independent auditors, have issued an audit
report on our assessment of the company's internal control over financial
reporting. This report appears below.

    /s/ Candace Kendle         Chairman of the Board of           March 16, 2006
---------------------------    Directors, Chief Executive
Candace Kendle                 Officer and Principal Executive
                               Officer

    /s/ Karl Brenkert III      Senior Vice President,             March 16, 2006
---------------------------    Chief Financial Officer,
Karl Brenkert III              Treasurer and Principal Financial
                               and Accounting Officer

Report of Independent Registered Public Accounting Firm

 To the Board of Directors and Shareholders of Kendle International Inc.
Cincinnati, Ohio

We have audited management's assessment, included in the accompanying
management's report on internal control over financial reporting that Kendle
International Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established 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

                                       17

<PAGE>

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, 2005, 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, 2005, based on the criteria established in Internal
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, 2005 of the Company and our
report dated March 16, 2006 expressed an unqualified opinion on those financial
statements.

      DELOITTE & TOUCHE LLP

Cincinnati, Ohio
March 16, 2006

ITEM 9B                     OTHER INFORMATION

Nothing to report.

                                    PART III

ITEM 10.

               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS OF THE COMPANY

The name, age and background information for each of the Company's Directors is
set forth in the section entitled "Information about Nominees" contained in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission and is incorporated herein by reference.

AUDIT COMMITTEE

Information regarding the members of the audit committee and the audit committee
financial expert is set forth in the section entitled "Audit Committee" under
the heading "Committees of the Board of Directors" in the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission. The
information in this section (excluding the "Report of the Audit Committee" is
incorporated herein by reference.

EXECUTIVE OFFICERS OF THE COMPANY

The Executive Officers of the Company at March 1, 2006 were as follows:

                                       18

<PAGE>

<TABLE>
<CAPTION>
      NAME               AGE                  POSITION                      OFFICER SINCE
      ----               ---                  --------                      -------------
<S>                      <C>     <C>                                        <C>
Candace Kendle           59      Chief Executive Officer and Chairman          1989
                                 of the Board of Directors

Christopher C. Bergen    55      President, Chief Operating                    1989
                                 Officer and Director

Simon Higginbotham       44      Vice President and Chief                      2004
                                 Marketing Officer

Karl Brenkert III        58      Senior Vice President, Chief Financial        2002
                                 Officer and Treasurer
</TABLE>

Background information regarding Dr. Kendle and Mr. Bergen is set forth in a
section entitled "Information about Nominees." Background information regarding
Mr. Higginbotham and Mr. Brenkert is set forth in a section entitled "Securities
Ownership of Management." Both sections are contained in the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission, and the information in those sections is incorporated herein by
reference.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Information on compliance with Section 16(a) of the Exchange Act set forth in
the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
is contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission and is incorporated herein by reference.

CODE OF ETHICS

The Company has adopted a Code of Ethics and Conduct, which applies to the
Company's employees, including its Chief Executive Officer and its principal
financial and accounting officer. The Code of Ethics and Conduct is available on
the Company's Web site at www.kendle.com. Amendments to the Code of Ethics and
Conduct will be posted to the Company's Web site. In addition, the Company will
make available, free of charge, to any person, a copy of its Code of Ethics and
Conduct upon written request submitted to the Company. This written request
should be addressed to the Company's Secretary at the Company's principal
executive offices.

ITEM 11.

                             EXECUTIVE COMPENSATION

The information required by this item is set forth in the definitive proxy
statement to be filed with the Securities and Exchange Commission under the
heading "Election of Directors" and within the following sections under such
heading: "Executive Compensation" , "Stock Options", "Compensation of
Directors", "Protective Compensation and Benefits Agreement" and "Compensation
Committee Interlocks and Insider Participation." The information required by
this item also is set forth under the section entitled "Management Development
and Compensation Committee" in the definitive proxy statement to be filed with
the Securities and Exchange Commission. The information set forth in each of the
foregoing sections is incorporated herein by reference.

ITEM 12.

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information on the number of shares beneficially owned by each Director and by
all Directors and Executive Officers as a group is set forth in the section
entitled "Securities Ownership of Management" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission. The
information set forth in such section is incorporated herein by reference.

Information on the number of shares beneficially owned by any person who is
known to the Company to be the beneficial owner of more than five percent of the
Company's Common Stock is set forth in the section entitled "Principal
Shareholders" in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission. The information set forth in such section is
incorporated herein by reference.

The following table presents summary information at December 31, 2005 with
respect to all of the Company's equity compensation plans.

                                       19

<PAGE>

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                                         (c)
                                           (a)                                              Number of securities remaining
                                Number of Securities to be                (b)                available for future issuance
                                 issued upon exercise of       Weighted-average exercise    under equity compensation plans
                              outstanding options, warrants  price of outstanding options,  (excluding securities reflected
Plan Category                         and rights (1)            warrants and rights (1)               in column (a))
----------------------------  -----------------------------  -----------------------------  -------------------------------
<S>                           <C>                            <C>                            <C>
Equity compensation plans
approved by security holders            1,127,329                     $    10.58                        1,207,609

Equity compensation plans not
approved by security holders                   --                             --                               --

     Total                              1,127,329                     $    10.58                        1,207,609
</TABLE>

(1) Excludes the 2003 Directors' Compensation Plan under which no options,
warrants or rights are granted. This plan has been approved by shareholders for
up to 75,000 shares.

ITEM 13.

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None to report.

ITEM 14.

                     PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this Item is contained in the sections entitled "Audit
Committee's Pre-Approval Policies and Procedures" and "Fees Paid to Independent
Public Accountant" in the Company's Proxy Statement for its 2006 Annual Meeting
of Shareholders and is incorporated herein by reference.

                                     PART IV

ITEM 15.

                   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a)   (1) and (2) - All financial statements and schedules required to be
            filed by Item 8 of this Form 10-K and included in this report are
            listed beginning on page F-1. No additional financial statements or
            schedules are being filed as the required information is not
            applicable or because the information is required and is included in
            the respective financial statements or notes thereto.

            (3) Exhibits - Exhibits set forth below that are on file with the
            Securities and Exchange Commission are incorporated by reference as
            exhibits hereto.

<TABLE>
<CAPTION>
Exhibit
Number                           Description of Exhibit                             Filing Status
-------                          ----------------------                             -------------
<S>       <C>                                                                       <C>
2.1       Stock Purchase Agreement dated July 1, 1997 by and among the
          Company and Shareholders of U-Gene Research B.V.                               A

2.2       Escrow Agreement dated June 27, 1997 among the Company, Keating,
          Muething & Klekamp, P.L.L., Bio-Medical Research Holdings, B.V.,
          Utrechtse Particatiemaatschappij B.V., P.J. Morrison, T.S. Schwarz,
          I.M. Hoepelman , Ph.K. Peterson, J. Remington, M. Rozenberg-Arska and
</TABLE>

                                       20

<PAGE>

<TABLE>
<S>       <C>                                                                            <C>
          L.G.W. Sterkman                                                                A

2.3       Share Purchase Agreement dated July 2, 1997 by and among the Company
          and the Shareholders of GMI Gescellschaft fur Angewandte Mathematick
          und Informatik mbH                                                             A

2.4       Stock Purchase Agreement dated February 11, 1998 by and among the
          Company and the Shareholders of ACER/EXCEL Inc.                                B

2.5       Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan
          Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee,
          as Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee,
          Citicorp Trust-South Dakota and The Fifth Third Bank                           C

2.6       Registration Rights Agreement dated February 11, 1998 among the
          Company and Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee,
          Steven Lee, Jean C. Lee, as Trustee under a Trust dated March 8, 1991
          fbo Jennifer Lee, Citicorp Trust-South Dakota                                  C

2.7       Share Purchase Agreement dated December 23, 1998 by and among the
          Company and the Shareholders of Research Consultants (International)
          Holdings Limited                                                               D

2.8       Escrow Agreement dated January 5, 1999 among the Company, John Glasby,
          Gillian Gregory, Michael Roy Broomby and Peter Nightingale                     D

2.9       Option Agreement dated September 9, 1998 by and between the Company
          and Component Software International, Inc.                                     D

2.10      Notice of Option Exercise dated January 11, 1999 of the Option
          Agreement dated September 9, 1998                                              D

2.11      Multi-Year Strategic Services Agreement dated January 20, 1999 by and
          between the Company and Component Software International, Inc.                 D

2.12      Asset Purchase Agreement dated June 27, 1999 by and among the Company
          and the Shareholders of Health Care Communications, Inc.                       F

2.13      Stock Purchase Agreement dated June 4, 1999 by and among the Company
          and the Shareholders of ESCLI S.A.                                             G

2.14      Asset Purchase Agreement dated July 13, 1999 by and among the Company
          and the Shareholders of HCC Health Care Communications (1991), Ltd.            G

2.15      Share Purchase Agreement dated August 31, 1999 by and among the
          Company and the Shareholder of Specialist Monitoring Services Limited          G

2.16      Escrow Agreement dated July 13, 1999 by and among the Company,
          Geoffrey H. Kalish, M.D., Bradley D. Kalish, Jill Kalish, and The
          Fifth Third Bank, as Escrow Agent                                              I

2.17      Escrow Agreement dated August 31, 1999 by and among the Company, Paul
          Martin, and The Fifth Third Bank, as Escrow Agent                              I

2.18      Units Purchase Agreement dated April 7, 2000 by and among the Company
          and the Shareholders of SYNERmedica PTY Limited and SYNERmedica Unit
          Trust                                                                          J

2.19      Stock Purchase Agreement dated February 27, 2001 by and among the
          Company and the Shareholders of AAC Consulting Group, Inc.                     L

2.20      Form of Note Prepayment Agreement                                              O

2(a)      Asset Purchase Agreement dated January 29, 2002 among Kendle
          International Inc., Clinical and Pharmacologic Research, Inc., Thomas
          S. Clark, M.D., Charles T. Clark, and E. Stuart Clark                          M

2(b)      Convertible Subordinated Note, dated January 29, 2002 issued by Kendle
          International Inc. to Clinical and Pharmacologic Research, Inc.                M

3.1       Restated and Amended Articles of Incorporation                                 A

3.2       Amended and Restated Code of Regulations                                       A

3.3       Amendment of the Restated and Amended Articles of Incorporation to
          Increase the Authorized Shares                                                 E

4         Specimen Common Stock Certificate                                              A

4.1       Shareholder Rights Agreement dated August 13, 1999 between the Company
          and The Fifth Third Bank, as Rights Agent                                      H

10.1      Amended and Restated Shareholders' Agreement dated June 26, 1997               A

10.2      Master Lease Agreement dated November 27, 1996 by and between the
          Company and Bank One Leasing Corporation, as amended on April 18, 1997         A

10.6      Master Equipment Lease dated August 16, 1996 by and between the
          Company and The Fifth Third Leasing Company                                    A

10.7      Lease Agreement dated December 9, 1991 by and between the Company and
          Carew Realty, Inc., as amended on December 30, 1991, March 18, 1996,
          October 8, 1996, January 29, 1997, and February 16, 1999                       D

10.8      Indemnity Agreement dated June 21, 1996 by and between the Company and
          Candace Kendle Bryan                                                           A

10.9      Indemnity Agreement dated June 21, 1996 by and between the Company and
          Christopher C. Bergen                                                          A

10.10     Indemnity Agreement dated June 21, 1996 by and between the Company and
          Timothy M. Mooney                                                              A

10.11     Indemnity Agreement dated May 14, 1997 by and between the Company and
          Charles A. Sanders                                                             C

10.12     Indemnity Agreement dated May 14, 1997 by and between the Company and
          Philip E. Beekman                                                              C

10.13     Indemnity Agreement dated December 10, 1998 by and between the Company
          and Robert Buck                                                                D
</TABLE>

                                       21

<PAGE>

<TABLE>
<S>       <C>                                                                            <C>
10.14     Indemnity Agreement dated December 10, 1998 by and between the Company
          and Mary Beth Price                                                            D

10.15     Form of Indemnity Agreement by and between the Company and each member
          of the Company's Board of Directors, except for those Indemnity
          Agreements noted above and filed previously.                                   P

10.16     Second Amended and Restated Credit Agreement dated as of May 27, 2005
          among Kendle International Inc., the several lenders from time to time
          party thereto and JPMorgan Chase Bank, N.A., as agent                          R

10.17     Amended and Restated Guarantee Agreement dated June 3, 2002 and
          re-affirmed as of May 27, 2005                                                 R

10.18     Security Agreement dated May 14, 2003 and re-affirmed as of May
          27, 2005                                                                       T

10.20              MANAGEMENT CONTRACTS AND COMPENSATION PLANS

          (a)      1995 Stock Option and Stock Incentive Plan                            A

          (b)      1995 Stock Option and Stock Incentive Plan --
                   Individual Stock Option Agreement for Incentive Stock
                   Option (contained in Exhibit 10.20(a))                                A

          (c)      1997 Stock Option and Stock Incentive Plan                            A

          (c)(1)   Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan         N

          (c)(2)   Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan         K

          (c)(3)   Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan         N

          (c)(4)   Form of Restricted Stock Award Agreement                              S

          (d)      Form of Protective Compensation and Benefit Agreement                 A

          (e)      1998 Employee Stock Purchase Plan                                     D

          (e)(1)   Amendment No. 1 to 1998 Employee Stock Purchase Plan                  N

          (e)(2)   Amendment No. 2 to 1998 Employee Stock Purchase Plan                  N

          (e)(3)   Amendment No. 3 to 1998 Employee Stock Purchase Plan                  N

          (e)(4)   Amendment No. 4 to 1998 Employee Stock Purchase Plan                  Q

          (e)(5)   Amendment No. 5 to 1998 Employee Stock Purchase Plan                  R

          (n)      2003 Directors Compensation Plan                                      O

14        Code of Ethics                                                                 Y

21        List of Subsidiaries                                                           U

23.1      Consent of Deloitte & Touche LLP                                               U

24        Powers of Attorney                                                             U

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

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

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                                                                        U

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                                                                        U
</TABLE>

<TABLE>
<CAPTION>
Filing
Status                       Description of Filing Status
------                       ----------------------------
<S>       <C>
A         Incorporated by reference to the Company's Registration Statement No.
          333-30581 filed under the Securities Act of 1933

B         Filed as an exhibit to the Company's Current Report on Form 8-K dated
          November 13, 1997

C         Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1997

D         Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1998

E         Incorporated by reference to the Company's Proxy Statement for its
          1999 Annual Shareholders' Meeting

F         Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarterly period ended June 30, 1999

G         Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarterly period ended September 30, 1999

H         Incorporated by reference to the Company's filing on Form 8-A dated
          September 7, 1999
</TABLE>

                                       22

<PAGE>

<TABLE>
<S>       <C>
I         Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1999

J         Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarterly period ended March 31, 2000

K         Incorporated by reference to the Company's Proxy Statement for its
          2000 Annual Shareholders' Meeting

L         Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 2000

M         Filed as an exhibit to the Company's Current Report on Form 8-K dated
          January 29, 2002

N         Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 2002

O         Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
          the quarterly period ended June 30, 2003

P         Filed as an exhibit to the Company's Annual Report on Form 10-K for
          the year ended December 31, 2003

Q         Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarterly period ended March 31, 2005

R         Incorporated by reference to the Company's Current Report on Form 8-K
          dated June 3, 2005.

S         Filed as an exhibit to the Company's Annual Report on Form 10-K for
          the year ended December 31, 2004

T         Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarterly period ended March 31, 2003

U         Filed herewith

Y         Available on the Company's Web site at www.kendle.com
</TABLE>

The Company will furnish, without charge, to a security holder upon request a
copy of the documents, portions of which are incorporated by reference (Annual
Report to Shareholders and Proxy Statement), and will furnish any other Exhibit
upon payment of reproduction charges.

          (b) Exhibits required by this Form 10-K:

          See (a)(3) above.

          (c) Financial Statements and Schedules

          See (a)(2) above.

                                       23

<PAGE>

                            Kendle International Inc.

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                              Page
<S>                                                                                           <C>
Report of Independent Registered Public Accounting Firm                                       F-2

Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003.                                                                                F-3

Consolidated Balance Sheets as of December 31, 2005 and 2004.                                 F-4

Consolidated Statements of Shareholder's Equity for the years ended December 31,
2005, 2004 and 2003.                                                                          F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003.                                                                                F-6

Notes to Consolidated Financial Statements.                                                   F-7
</TABLE>

                                       F-1

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Kendle International Inc.
Cincinnati, Ohio

We have audited the accompanying consolidated balance sheets of Kendle
International Inc. and subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. 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 the Company at December 31, 2005
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2005, 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, 2005, 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 16, 2006 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.

DELOITTE & TOUCHE LLP

Cincinnati, Ohio
March 16, 2006

                                       F-2

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
(in thousands except per share data)
For the Years Ended December 31,                                 2005            2004           2003
<S>                                                            <C>             <C>            <C>
Net service revenues                                           $ 202,032       $ 172,888      $ 156,221
Reimbursable out-of-pocket revenues                               48,607          42,980         53,436
                                                               ---------       ---------      ---------
Total revenues                                                   250,639         215,868        209,657

Cost and expenses:
       Direct costs                                              108,582          96,909         91,133
       Reimbursable out-of-pocket costs                           48,607          42,980         53,436
       Selling, general and administrative                        68,216          59,797         52,402
       Depreciation and amortization                               7,991           9,175          9,057
       Employee severance and office consolidation costs              --             302          1,468
                                                               ---------       ---------      ---------
Total costs and expenses                                         233,396         209,163        207,496

Income from operations                                            17,243           6,705          2,161

Other income (expense):
       Interest income                                             1,019             400            334
       Interest expense                                             (460)           (776)        (1,039)
       Other                                                        (287)           (873)          (725)
       Investment impairment                                          --              --           (405)
       Gain on debt extinguishment                                   300             597            558
                                                               ---------       ---------      ---------
Total other income (expenses)                                        572            (652)        (1,277)
Income before income taxes                                        17,815           6,053            884
Income taxes                                                       7,141           2,481          2,574
                                                               ---------       ---------      ---------
Net income (loss)                                              $  10,674       $   3,572      $  (1,690)
                                                               =========       =========      =========

Income (loss) per share data:
Basic:
       Net income (loss) per share                             $    0.79       $    0.27      $   (0.13)
       Weighted average shares                                    13,572          13,166         12,973
Diluted:
       Net income (loss) per share                             $    0.76       $    0.27      $   (0.13)
       Weighted average shares                                    14,120          13,391         12,973
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                      F-3

<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(in thousands except share data)
December 31,                                                                                    2005       2004
                                                                                             ---------   ---------
<S>                                                                                          <C>         <C>
ASSETS

Current assets:

         Cash and cash equivalents                                                           $  37,437   $  17,665
         Restricted cash                                                                           592         971
         Available-for-sale securities                                                          10,726      10,271
         Accounts receivable                                                                    65,112      56,025
         Other current assets                                                                   10,083      10,243
                                                                                             ---------   ---------
                 Total current assets                                                          123,950      95,175

         Property and equipment, net                                                            15,084      16,821
         Goodwill                                                                               24,075      26,003
         Other finite-lived intangible assets                                                      511         663
         Other indefinite-lived intangible assets                                               15,000      15,000
         Long-term deferred tax asset                                                            2,213       2,621
         Other assets                                                                            3,926       6,397
                                                                                             ---------   ---------
                 Total assets                                                                $ 184,759   $ 162,680
                                                                                             =========   =========

Liabilities and Shareholders' Equity
Current liabilities:

         Current portion of obligations under capital leases                                 $     391   $     740
         Current portion of amounts outstanding under credit facilities                          3,000       3,000
         Convertible note                                                                           --       1,500
         Trade payables                                                                          9,174       9,169
         Advance billings                                                                       31,958      24,924
         Other accrued liabilities                                                              15,435      15,128
                                                                                             ---------   ---------
                 Total current liabilities                                                      59,958      54,461
Obligations under capital leases, less current portion                                             431         863
Long-term debt                                                                                     750       3,750
Deferred income taxes payable                                                                      484         486
Other liabilities                                                                                  632         345
                                                                                             ---------   ---------
                 Total liabilities                                                              62,255      59,905

Commitments and contingencies
Shareholders' equity:

         Preferred stock--no par value; 100,000 shares authorized; none issued
         and outstanding
         Common stock--no par value; 45,000,000 shares authorized;
                 14,105,653 and 13,262,826 shares issued and 14,085,756 and 13,242,929
                 outstanding at December 31, 2005 and 2004, respectively                            75          75
         Additional paid-in capital                                                            147,712     136,111
         Accumulated deficit                                                                   (24,922)    (35,596)
         Accumulated other comprehensive income:
                 Net unrealized holding losses on available-for-sale securities                    (39)        (49)
                 Unrealized gain/(loss) on interest rate swap                                        7         (92)
                 Foreign currency translation adjustment                                            64       2,719
                                                                                             ---------   ---------
                 Total accumulated other comprehensive income                                       32       2,578
                                                                                             ---------   ---------
         Less: Cost of Common Stock held in treasury, 19,897
                 shares at December 31, 2005 and 2004                                             (393)       (393)
                                                                                             ---------   ---------
                 Total shareholders' equity                                                    122,504     102,775
                                                                                             ---------   ---------
                 Total liabilities and shareholders' equity                                  $ 184,759   $ 162,680
                                                                                             =========   =========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                      F-4

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                    common                                (accumulated  accumulated
                                    stock    common additional              deficit)       other          total
                                    number   stock   paid-in    treasury    retained    comprehensive  shareholders'  comprehensive
(in thousands except share data)  of shares  amount  capital     stock      earnings    income (loss)      equity     income (loss)
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
<S>                               <C>        <C>    <C>         <C>       <C>           <C>            <C>            <C>
BALANCE AT JANUARY 1, 2003        12,841,613 $   75 $  134,266  $   (393) $    (37,478) $      (2,110) $      94,360
Net loss                                                                        (1,690)                       (1,690)        (1,690)
Other comprehensive income:
   Foreign currency translation
      adjustment                                                                                2,708          2,708          2,708
   Net unrealized holding gains
      on available-for-sale
      securities, net of tax                                                                        7              7              7
   Net unrealized holding gains
      on interest rate swap
      agreement                                                                                   216            216            216
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Comprehensive income                                                                                                          1,241
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Shares issued under stock plans      218,402               684                                                   684
Income tax benefit from
   exercise of stock options                                84                                                    84
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
BALANCE AT DECEMBER 31, 2003      13,060,015 $   75 $  135,034  $   (393) $    (39,168) $         821  $      96,369
Net income                                                                       3,572                         3,572          3,572
Other comprehensive income:
   Foreign currency translation
      adjustment                                                                                1,549          1,549          1,549
   Net unrealized holding
      losses on
      available-for-sale
      securities, net of tax                                                                      (50)           (50)           (50)
   Net unrealized holding gains
      on interest rate swap
      agreement                                                                                   258            258            258
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Comprehensive income                                                                                                          5,329
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Shares issued under stock plans      182,914               985                                                   985
Deferred compensation -
   restricted stock                                       (116)                                                 (116)
Income tax benefit from
   exercise of stock options                               208                                                   208
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
BALANCE AT DECEMBER 31, 2004      13,242,929 $   75 $  136,111  $   (393) $    (35,596) $       2,578  $     102,775
Net income                                                                      10,674                        10,674         10,674
Other comprehensive income:
   Foreign currency translation
      adjustment                                                                               (2,655)        (2,655)        (2,655)
   Net unrealized holding gains
      on available-for-sale
      securities, net of tax                                                                       10             10             10
   Net unrealized holding gains
      on interest rate swap
      agreement                                                                                    99             99             99
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Comprehensive income                                                                                                          8,128
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
Shares issued under stock plans      842,827             9,633                                                 9,633
Deferred compensation -
   restricted stock                                        (66)                                                  (66)
Income tax benefit from
   exercise of stock options                             2,034                                                 2,034
                                  ---------- ------ ----------  --------  ------------  -------------  -------------  -------------
BALANCE AT DECEMBER 31, 2005      14,085,756 $   75 $  147,712  $   (393) $    (24,922) $          32  $     122,504
                                  ========== ====== ==========  ========  ============  =============  =============  =============
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                      F-5
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,                                          2005           2004           2003
                                                                        --------       --------       --------
<S>                                                                     <C>            <C>            <C>
Cash flows from operating activities
      Net income (loss)                                                 $ 10,674       $  3,572       $ (1,690)
      Adjustments to reconcile net income (loss) to cash provided by
        operating activities:
          Depreciation and amortization                                    7,991          9,175          9,057
          Goodwill and investment impairment                                  --             --            405
          Deferred income taxes                                            1,416            514          1,358
          Other                                                              169            589            513
          Gain on convertible note repayment                                (300)          (597)          (558)
          Changes in operating assets and liabilities, net of effects
            from acquisitions:
              Accounts receivable                                         (9,562)       (10,727)         5,245
              Other current assets                                          (385)          (225)        (1,469)
              Other assets                                                   256            (58)          (271)
              Investigator and project costs                                (766)           131          1,482
              Trade payables                                                 355          3,302         (1,072)
              Advance billings                                             7,471            786         (1,595)
              Accrued liabilities and other                                5,707            616          4,429
                                                                        --------       --------       --------
Net cash provided by operating activities                                 23,026          7,078         15,834

Cash flows from investing activities
      Purchase of available-for-sale securities                           (9,552)        (9,419)       (47,741)
      Proceeds from sale and maturity of available-for-sale securities     9,050          7,889         56,149
      Acquisitions of property and equipment                              (4,732)        (3,663)        (3,801)
      Additions to internally developed software                            (233)        (1,651)        (1,791)
      Acquisitions of businesses, less cash acquired                          --             --         (3,584)
      Cash provided (used) by restricted cash                                293            804         (1,684)
      Other                                                                   20             17             33
                                                                        --------       --------       --------
Net cash used in investing activities                                     (5,154)        (6,023)        (2,419)

Cash flows from financing activities
      Net repayments under credit facility                                (2,937)        (3,024)        (3,000)
      Payment of convertible note                                         (1,200)        (1,903)        (1,442)
      Proceeds from issuance of Common Stock                               7,422            141            192
      Amounts payable - book overdraft                                      (353)           327             18
      Payments on capital lease obligations                                 (691)          (975)          (851)
      Debt issue costs                                                       (30)            --            (71)
                                                                        --------       --------       --------
Net cash provided by (used in) financing activities                        2,211         (5,434)        (5,154)
      Effects of exchange rates on cash and cash equivalents                (311)           294            818
      Net increase (decrease) in cash and cash equivalents                19,772         (4,085)         9,079

Cash and cash equivalents
      Beginning of year                                                   17,665         21,750         12,671
                                                                        --------       --------       --------
      End of year                                                       $ 37,437       $ 17,665       $ 21,750

Supplemental disclosure of cash flow information
      Cash paid during the year for interest                            $    489       $    805       $    921
      Cash paid (received) during the year for income taxes             $  3,154       $    (90)      $  1,227

Supplemental schedule of noncash investing and financing activities
      Acquisition of equipment under capital leases                     $     --       $    938       $    339

      Acquisitions of businesses:
          Fair value of assets acquired                                 $     --       $     --       $  3,806
          Fair value of liabilities assumed or incurred                 $     --       $     --       $   (222)
          Stock issued                                                  $     --       $     --       $     --
                                                                        --------       --------       --------
      NET CASH PAYMENTS                                                 $     --       $     --       $  3,584
                                                                        ========       ========       ========
</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                      F-6

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS

Kendle International Inc. (the Company) is a global clinical research
organization (CRO) that delivers integrated clinical research services,
including clinical trial management, clinical data management, statistical
analysis, medical writing, regulatory consulting and organizational meeting
management and publication services on a contract basis to the biopharmaceutical
industry. The Company has operations in North America, Europe, Asia/Pacific,
Latin America and Africa.

PRINCIPLES OF CONSOLIDATION AND ORGANIZATION

The Consolidated Financial Statements include the financial information of
Kendle International Inc. and its wholly-owned subsidiaries. Investments in
unconsolidated companies that are at least 20% owned and in which the Company
can exercise significant influence but not control, are carried at cost plus
equity in undistributed earnings since acquisition. Investments in
unconsolidated companies, which are less than 20% owned and the Company cannot
exercise significant influence, are carried at cost. There are no significant
amounts on the Consolidated Balance Sheet related to investments in
unconsolidated companies.

All intercompany accounts and transactions have been eliminated. The results of
operations of the Company's wholly-owned subsidiaries have been included in the
Consolidated Financial Statements of the Company from the respective dates of
acquisition.

Certain amounts reflected in the prior years Consolidated Financial Statements
have been reclassified to be comparable with the current year.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's wholly-owned subsidiaries are translated
into U.S. dollars at year-end exchange rates. Income statement accounts are
translated at average exchange rates for the year. These translation adjustments
are recorded as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in the Consolidated Statements of
Operations.

CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH

Cash and cash equivalents consist of demand deposits and money market funds held
with a financial institution, with an initial maturity of three months or less.

The Company maintains its demand deposits with certain financial institutions.
The balance of one account from time-to-time exceeds the maximum U.S. federally
insured amount. Additionally, there is no state insurance coverage on bank
balances held in The Netherlands.

In 2005, the Company held cash of approximately $592,000 that is restricted as
to its use as compared to approximately $971,000 in 2004. The restricted cash
represents cash received from customers that is segregated in a separate Company
bank account and available for use only for specific project related expenses,
primarily investigator fees, upon authorization from the customer.

In the Company's consolidated statement of cash flows for the year ended
December 31, 2005, the Company changed the classification of changes in
restricted cash balances to present such changes as an investing activity. The
Company previously presented such changes as an operating activity. In the
accompanying consolidated statements of cash flows for the year 2004, the
Company reclassified changes in restricted cash balances to be consistent with
the Company's 2005 presentation which resulted in a $804,000 increase in
investing cash flows and a corresponding decrease in operating cash flows from
the amounts previously reported. In 2003, the reclassification resulted in a
$1.7 million increase in operating cash flow and a corresponding decrease in
investing cash flows from the amounts previously reported.

AVAILABLE- FOR-SALE SECURITIES

Investments purchased with initial maturities greater than three months are
classified as available-for-sale securities and consist of highly liquid debt
securities. These securities are stated in the Consolidated Financial Statements
at market value. The Company's investments represent the investment of cash
available for current operations and are therefore classified as current assets
in the Consolidated Balance Sheets. Realized gains and losses are included in
the Consolidated Statements of Operations, calculated based on a specific
identification basis. Unrealized gains and losses, net of tax, are reported as a
separate component of shareholders' equity.

                                      F-7

<PAGE>

REVENUE RECOGNITION

Net service revenues are earned by performing services primarily under
fixed-price contracts. Net service revenues from contracts are generally
recognized on the percentage of completion method, measured principally by the
total costs incurred as a percentage of estimated total costs for each contract.
This method is used because management considers total costs incurred to be the
best available measure of progress on these contracts. The estimated total costs
of contracts are reviewed and revised periodically throughout the lives of the
contracts with adjustment to revenues resulting from such revisions being
recorded on a cumulative basis in the period in which the revisions are made.
Hence, the effect of the changes on future periods of contract performance is
recognized as if the revised estimates had been the original estimates. When
estimates indicate a loss, such loss is provided in the current period in its
entirety. Because of the uncertainties inherent in estimating costs, it is at
least reasonably possible that the estimates used will change in the near term
and could result in a material change. Work is also performed under
time-and-materials contracts, recognizing revenue as hours are worked based on
the hourly billing rate for each contract. Additionally, the Company recognizes
revenue under units-based contracts by multiplying units completed by the
applicable contract per-unit price. Finally, at one of the Company's
subsidiaries, the contracts are of a short-term nature and revenue is recognized
under the completed contract method of accounting.

Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and an allocated
portion of indirect costs including facilities, information systems, and other
costs. Selling, general, and administrative costs are charged to expense as
incurred.

Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed. Advance billings represent amounts
billed in excess of revenue recognized.

CONCENTRATION OF CREDIT RISK

Accounts receivable represent amounts due from customers that are concentrated
mainly in the biopharmaceutical industry. The concentration of credit risk is
subject to the financial and industry conditions of the Company's customers. The
Company does not require collateral or other securities to support customer
receivables. The Company monitors the creditworthiness of its customers. Refer
to Note 16 for additional information regarding revenue concentration.

LONG-LIVED ASSETS

Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed over estimated useful lives of two to ten years using
the straight-line method. Leasehold improvements are amortized over the lesser
of the useful life of the improvement or the remaining term of the underlying
lease. Repairs and maintenance are charged to expense as incurred. Upon
disposition, the asset and the related accumulated depreciation are relieved and
any gains or losses are reflected in the Consolidated Statements of Operations.

Equipment under capital leases is recorded at the present value of future
minimum lease payments and is amortized over the estimated useful lives of the
assets, not to exceed the terms of the related leases. Accumulated amortization
on equipment under capital leases was $2.0 million and $2.9 million at December
31, 2005 and 2004, respectively.

The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, and amortizes these costs on a straight-line basis over the estimated
useful life of the product, not to exceed five years. Unamortized software costs
included in the consolidated balance sheets at December 31, 2005 and 2004 were
$16.0 million and $16.1 million, respectively. The related accumulated
amortization at December 31, 2005 and 2004 was $12.9 million and $11.0 million,
respectively.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets," long-lived assets
such as property, plant and equipment, software, and investments are reviewed
for impairment whenever facts and circumstances indicate that the carrying value
may not be recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the asset. The fair value is
determined based on estimates of future cash flows, market value of similar
assets, if available, or independent appraisals, if required. If the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows, an impairment loss is recognized for the difference between the carrying
amount and fair value of the asset.

DERIVATIVES

From time to time, the Company may use derivative instruments to manage exposure
to interest rates. Derivatives meeting the hedge criteria established by SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138,

                                      F-8

<PAGE>

are recorded in the Consolidated Balance Sheet at fair value at each balance
sheet date. When the derivative is entered into, the Company designates whether
or not the derivative instrument is an effective hedge of an asset, liability or
firm commitment and classifies the hedge as a cash flow hedge or a fair value
hedge. If the hedge is determined to be an effective cash flow hedge, changes in
the fair value of the derivative instrument are recorded as a component of other
comprehensive income (loss). Changes in the value of fair value hedges are
recorded in results of operations. In July 2002, the Company entered into an
interest rate swap agreement to fix the interest rate on its $15 million term
loan. The swap is designated as a cash flow hedge. At December 31, 2005,
approximately $7,000 has been recorded in Accumulated Other Comprehensive Income
to reflect the unrealized gain of the swap compared to the unrealized loss of
approximately $92,000 at December 31, 2004.

INVESTIGATOR AND PROJECT COSTS

In addition to various contract costs previously described, the Company incurs
costs, in excess of contract amounts, which are reimbursable by its customers.
Emerging Issues Task Force (EITF) 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred", requires the
Company to include amounts paid to investigators and other out-of-pocket costs
as reimbursable out-of-pocket revenues and reimbursable out-of-pocket expenses
in the Consolidated Statements of Operations. In certain contracts, these costs
are fixed by the contract terms, so the Company recognizes these costs as part
of net service revenues and direct costs.

NET INCOME (LOSS) PER SHARE DATA

Net income (loss) per basic share is computed using the weighted average common
shares outstanding. Net income (loss) per diluted share is computed using the
weighted average common shares and potential common shares outstanding.

The weighted average shares used in computing net income (loss) per diluted
share have been calculated as follows:

NET INCOME (LOSS) PER SHARE DATA

<TABLE>
<CAPTION>
(in thousands)                                  2005    2004    2003
                                               ------  ------  ------
<S>                                            <C>     <C>     <C>
Weighted average common shares outstanding     13,572  13,166  12,973
Stock options                                     548     225      --
                                               ------  ------  ------
Weighted average shares                        14,120  13,391  12,973
</TABLE>

Options to purchase approximately 0.2 million shares of common stock were
outstanding during 2005 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.

Options to purchase approximately 1.4 million shares of common stock were
outstanding during 2004 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.

Options to purchase approximately 2.1 million shares of common stock were
outstanding during 2003 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.

INCOME TAXES

The Company records deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities and for tax benefit carryforwards using enacted tax rates in effect
in the year in which the differences are expected to reverse. Management
provides valuation allowance against deferred tax assets for amounts which are
not considered more likely than not to be realized.

STOCK OPTIONS

The Company accounts for stock options issued in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, the Company recognizes expense based on the
intrinsic value of the options. The Company has adopted disclosure requirements
of SFAS No. 123 "Accounting for Stock-Based Compensation,", as amended by SFAS
No.148, which requires compensation expense to be disclosed based on the fair
value of the options granted at the date of grant.

On May 12, 2005, the Compensation Committee amended the vesting schedule of a
total of approximately 140,000 options outstanding that met the following
criteria:

                                      F-9

<PAGE>

      1)    Outstanding/unvested as of May 12, 2005

      2)    Have an option price greater than $11.73 (fair market value on May
            12, 2005)

      3)    Were granted between May 1, 2001 and May 1, 2002.

All unvested shares that met the above criteria, with the exception of options
held by any executive officer of the company, were immediately vested as of May
12, 2005. The Compensation Committee decided to accelerate the vesting schedule
of these options primarily to enhance employee appreciation of the importance of
focusing on increasing shareholder value and to avoid expensing the options upon
adoption of SFAS 123(R).

The weighted average fair value of the options granted in 2005, 2004 and 2003
was estimated as $9.21, $4.34 and $3.50, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:


<TABLE>
<CAPTION>
                                 2005                 2004                2003
                               --------             --------            --------
<S>                            <C>                  <C>                 <C>
Expected dividend yield               0%                   0%                  0%
Risk-free interest rate             3.7%                 3.7%                3.0%
Expected volatility               110.3%                67.5%               69.8%
Expected holding period        4.7 years            5.0 years           5.3 years
</TABLE>

Had the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for expense recognition purposes, the amount of compensation expense that would
have been recognized in 2005, 2004 and 2003 would have been $4.8 million, $3.9
million and $4.7 million respectively. Approximately $2.2 million of the $4.8
million in compensation expense that would have been recognized for the year
ended December 31, 2005 resulted from the amendment made to the vesting
schedule. The Company's pro forma net income (loss) and pro forma net income
(loss) per basic and diluted share for 2005, 2004, and 2003 would have been
reduced to the amounts below:

<TABLE>
<CAPTION>
(in thousands, except per share data)                                       2005                2004                 2003
                                                                          --------             -------             --------
<S>                                                                       <C>                  <C>                 <C>
Pro forma net income (loss)
As reported                                                               $ 10,674             $ 3,572             $ (1,690)
Less:  pro forma adjustment for stock-based compensation, net of tax        (3,739)             (3,015)              (3,487)
                                                                          --------             -------             --------
Pro forma net income (loss)                                                  6,935                 557               (5,177)
                                                                          ========             =======             ========

Pro forma net income (loss) per diluted share
As reported                                                                   0.76                0.27                (0.13)
Pro forma                                                                     0.49                0.04                (0.40)
                                                                          --------             -------             --------
Effect of pro forma expense                                                  (0.27)              (0.23)               (0.27)

Pro forma net income (loss) per basic share
As reported                                                                   0.79                0.27                (0.13)
Pro forma                                                                     0.51                0.04                (0.40)
                                                                          --------             -------             --------
Effect of pro forma expense                                                  (0.28)              (0.23)               (0.27)
</TABLE>

USE OF ESTIMATES

The preparation of Consolidated 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 Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (FASB) issued FASB
Statement 154, "Accounting Changes and Error Corrections" which replaces APB
Opinion No. 20, "Accounting Changes" and FASB Statement 3 "Reporting Accounting
Changes in Interim Financial Statements." This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instances that the pronouncement does not include specific
transition provisions. This statement requires voluntary changes in accounting
principles be recognized retrospectively to prior periods' financial statements,
rather than recognition in the net income of the current period. Retrospective
application requires restatements of prior period financial statements as if
that accounting principle had always been used. This statement carries forward
without change the guidance contained in Opinion 20 for reporting the correction
of an error in previously issued financial statements and a change in accounting
estimate. The

                                      F-10

<PAGE>

provisions of FASB Statement 154 are effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The application of SFAS-154 did not have any impact on earnings and financial
position.

Statement No. 153, "Exchanges of Non-monetary Assets", an amendment of APB
Opinion No. 29, "Accounting for Non-monetary Transactions" is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of non-monetary assets that do not have
commercial substance. The Statement is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The application of SFAS-153 did
not have any impact on earnings and financial position.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R) requires that
compensation costs related to share-based payment transactions be recognized in
the financial statements. The cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS 123(R) covers a range of
share-based compensation arrangements, including share options, restricted stock
plans, performance-based awards, share appreciation rights, and employee stock
purchase plans. SFAS 123(R) replaces FAS Statement 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. In April 2005, the Securities and Exchange Commission
announced the adoption of a new rule that amends the effective date of SFAS
123(R). The effective date of the new standard under these new rules for the
Company's Consolidated Financial Statements is January 1, 2006. The Company is
in the process of evaluating the impact SFAS 123(R) will have on its reported
earnings.

2. AVAILABLE-FOR-SALE SECURITIES:

The fair value of available-for-sale securities is estimated based on quoted
market prices. The Company views its available-for-sale portfolio as available
for use in current operations. Accordingly, the Company has classified all
investments as short-term, even though the stated maturity date may be one year
or more beyond the current balance sheet date. The following is a summary as of
December 31, 2005 of available-for-sale securities by contractual maturity where
applicable (in thousands):

<TABLE>
<CAPTION>
                                                    AMORTIZED  UNREALIZED    FAIR
AVAILABLE-FOR-SALE SECURITIES:                        COST     GAIN (LOSS)   VALUE
                                                    ---------  ----------   --------
<S>                                                 <C>        <C>          <C>
Corporate-backed securities:
        Maturing in one year or less                $   8,667  $      (27)  $  8,640
        Maturing after 1 year through 5 years             818         (12)       806
        Maturing after 10 years                            --          --         --
Government-backed securities:
        Maturing in one year or less                       --          --         --
        Maturing after 1 year through 5 years             530          --        530
        Maturing after 10 years                           750          --        750
                                                    ---------  ----------   --------
12/31/05 Totals                                     $  10,765  $      (39)  $ 10,726
                                                    =========  ==========   ========
</TABLE>

The following is a summary as of December 31, 2004 of available-for-sale
securities by contractual maturity where applicable (in thousands):

<TABLE>
<CAPTION>
                                                    AMORTIZED  UNREALIZED    FAIR
AVAILABLE-FOR-SALE SECURITIES:                        COST     GAIN (LOSS)   VALUE
                                                    ---------  ----------   --------
<S>                                                 <C>        <C>          <C>
Corporate-backed securities:
        Maturing in one year or less                $   2,477  $       (9)  $  2,468
        Maturing after 1 year through 5 years           4,978         (40)     4,938
        Maturing after 10 years                           445          --        445
Government-backed securities:
        Maturing in one year or less                       --          --         --
        Maturing after 1 year through 5 years             690          --        690
        Maturing after 10 years                         1,730          --      1,730
                                                    ---------  ----------   --------
12/31/04 Totals                                     $  10,320  $      (49)  $ 10,271
                                                    =========  ==========   ========
</TABLE>

                                      F-11

<PAGE>

Proceeds from the sales or maturities of investments in securities were $9.1
million, $7.9 million and $56.1 million in 2005, 2004 and 2003, respectively.
There were no gross losses realized on these sales for the years ended December
31, 2005, 2004 and 2003.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, available-for-sale securities, amounts outstanding under
credit facility, and notes payable, approximate their fair value.

4. ACCOUNTS RECEIVABLE:

Accounts receivable are billed when certain milestones defined in customer
contracts are achieved. All unbilled accounts receivable are expected to be
collected within one year.

<TABLE>
<CAPTION>
(in thousands)
December 31,             2005       2004
                       --------   --------
<S>                    <C>        <C>
Billed                 $ 40,388   $ 34,508
Unbilled                 24,724     21,517
                       --------   --------
                       $ 65,112   $ 56,025
                       ========   ========
</TABLE>

The Company maintains an allowance for doubtful accounts receivable based on
historical evidence of accounts receivable collections and specific
identification of accounts receivable that might cause collection problems. The
balance in allowance for doubtful accounts receivable was as follows:

<TABLE>
<CAPTION>
(in thousands)
<S>                             <C>
Balance at 12/31/02             $   444
       Invoice write-offs            (8)
       Additional expense            97
                                -------
Balance at 12/31/03             $   533
       Invoice write-offs          (436)
       Additional expense           149
                                -------
Balance at 12/31/04             $   246
       Invoice write-offs           (90)
       Additional expense         1,901
                                -------
Balance at 12/31/05             $ 2,057
</TABLE>

In the fourth quarter of 2005, the Company recorded a bad debt reserve of
approximately $1.7 million associated with one study being conducted in the
United Kingdom.

5. PROPERTY AND EQUIPMENT:

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
(in thousands)
DECEMBER 31,                                             2005       2004
                                                        --------  --------
<S>                                                     <C>       <C>
Furnishings, equipment and other                        $ 48,186  $ 45,225
Equipment under capital leases                             2,723     4,453
Less:  accumulated depreciation and amortization         (35,825)  (32,857)
                                                        --------  --------
Property and equipment, net                             $ 15,084  $ 16,821
                                                        ========  ========
</TABLE>

Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was
$5.1 million, $5.3 million and $5.4 million, respectively.

6. GOODWILL AND OTHER INTANGIBLE ASSETS:

                                      F-12

<PAGE>

In accordance with SFAS No.142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002 the Company discontinued the amortization of goodwill
and other identifiable intangible assets that have indefinite useful lives.
Intangible assets that have finite useful lives will continue to be amortized
over their useful lives.

In accordance with SFAS No. 142, goodwill is evaluated on an annual basis for
impairment at the reporting unit level. Such evaluation is based on a two-step
test starting with a comparison of the carrying amount of the reporting unit to
the fair value of the reporting unit. If the carrying amount of the reporting
unit exceeds the fair value, the second phase of the test measures the
impairment.

The Company has identified the reporting unit as the Company as a whole. The
Company analyzed goodwill for impairment by comparing the carrying amount of the
Company to the fair value of the Company. The fair value of the Company was
calculated based on the Income Approach, which uses discounted cash flows, as
well as public information regarding the market capitalization of the Company.

The Company completed the testing in the fourth quarter of 2005. The fair value
of the Company exceeded the carrying value, resulting in no goodwill impairment
for 2005. Similarly, the analysis in the fourth quarter of 2004 resulted in no
goodwill impairment.

Non-amortizable intangible assets at December 31, 2005 and December 31, 2004 are
composed of:

<TABLE>
<CAPTION>
                                                        Indefinite-lived
    (in thousands)                           Goodwill      intangible
                                             --------   ----------------
<S>                                          <C>        <C>
Balance at 12/31/03                          $ 25,404   $         15,000
       Additional amount acquired                  --                 --
       Purchase accounting adjustment             (13)                --
       Foreign currency fluctuations            1,001                 --
       Tax benefit to reduce goodwill            (389)                --
                                             --------   ----------------
Balance at 12/31/04                          $ 26,003   $         15,000
       Additional amount acquired                  --                 --
       Foreign currency fluctuations           (1,539)                --
       Tax benefit to reduce goodwill            (389)                --
                                             --------   ----------------
Balance at 12/31/05                          $ 24,075   $         15,000
</TABLE>

The Company acquired $1.9 million of goodwill in 2003 resulting from the
acquisition of Estadisticos y Clinicos Asociados, S.A. (ECA). The goodwill
acquired is deductible for income tax purposes. Approximately $1.6 million of
the goodwill is immediately deductible with the remainder deductible over a 15
year period.

The Company acquired $2.9 million of goodwill in 2002 resulting from the
acquisition of Clinical and Pharmacologic Research, Inc. (CPR). The goodwill and
the intangible asset acquired in the acquisition are deductible for income tax
purposes over a 15-year period.

The $15 million intangible asset represents one customer relationship acquired
in the Company's acquisition of CPR, the fair value of which was determined by
management based on a third party valuation. The nature of this identifiable
intangible asset was reviewed at the end of 2003, 2004 and 2005 and the
determination was made that the original indefinite life remains appropriate.
The contract was determined to have an indefinite useful life based on a number
of factors, including the unique nature of the services provided by CPR, high
barriers to entry to a competitor, and the long-term historical relationship
between CPR and its sole customer without material modifications to the terms of
the arrangement and without substantial cost of renewal. The intangible asset
will continue to be evaluated each reporting period to determine whether events
or circumstances continue to support an indefinite useful life. The Company
completed impairment testing on the intangible asset in the fourth quarter of
2005. The fair value of intangible asset exceeded the carrying value, resulting
in no goodwill impairment in 2005. Similarly, the analysis in the fourth quarter
of 2004 resulted in no goodwill impairment.

Amortizable intangible assets at December 31, 2005 and December 31, 2004 are
composed of:

                                      F-13

<PAGE>

<TABLE>
<CAPTION>
    (in thousands)
                                                Customer      Non-Compete   Internally-Developed
                                              Relationships   Agreements          Software
                                              -------------   -----------   --------------------
<S>                                           <C>             <C>           <C>
Balance at 12/31/03                           $         389   $       432   $              6,968
       Additional amount acquired                        --            --                  1,651
       Dispositions                                      --            --                   (586)
       2004 amortization                                (43)         (115)                (2,936)
                                              -------------   -----------   --------------------
Balance at 12/31/04                           $         346   $       317   $              5,097
       Additional amount acquired                        --            --                    233
       Dispositions                                      --            --                    (68)
       2005 amortization                                (37)         (115)                (2,123)
                                              -------------   -----------   --------------------
Balance at 12/31/05                           $         309   $       202   $              3,139
                                              =============   ===========   ====================
</TABLE>

Amortization expense for the next five years relating to these amortizable
intangible assets is estimated to be as follows:

<TABLE>
<CAPTION>
(in thousands)
<S>                       <C>
     2006                 $ 1,386
     2007                 $ 1,080
     2008                 $   526
     2009                 $   258
     2010                 $    84
</TABLE>

For further detail regarding the amortizable assets acquired during 2003, see
Note 13, Acquisitions.

7. OTHER ACCRUED LIABILITIES:

Other accrued liabilities at December 31, 2005 and 2004 consisted of the
following:

<TABLE>
<CAPTION>
(in thousands)
DECEMBER 31,                                                            2005         2004
                                                                     -----------  ---------
<S>                                                                  <C>          <C>
Accrued compensation and related payroll withholdings and taxes      $     7,447  $   6,592
Amounts payable - book overdraft                                              89        453
Other                                                                      7,899      8,083
                                                                     -----------  ---------
                                                                     $    15,435  $  15,128
                                                                     ===========  =========
</TABLE>

8. DEBT:

In May 2005, the Company entered into the Second Amended and Restated Credit
Agreement (the "Facility") that replaced the previous credit agreement. The
Facility is in addition to an existing $5.0 million Multicurrency Facility that
is renewable annually and is used in connection with the Company's European
operations.

The Facility is comprised of a $20.0 million revolving credit loan that expires
in May 2008. The existing term loan is carried over from the previous agreement
and matures in March 2007.

The revolving credit loan bears interest at a rate equal to either (a) the LIBOR
Rate plus the Applicable Percentage (as defined) or (b) the higher of the
Federal Fund's Rate plus 0.5% or the bank's Prime Rate. The existing term loan
bears interest at a rate equal to the higher of the Federal Funds Rate plus 0.5%
and the Prime Rate or an Adjusted Eurodollar Rate.

Under terms of the Facility, revolving loans are convertible into new five year
term loans within the Facility if used for acquisitions. The Facility contains
various restrictive financial covenants, including the maintenance of certain
fixed coverage and leverage ratios. The Company is in compliance with the
financial covenants contained in the Facility as of December 31, 2005.

The $5.0 million Multicurrency Facility is comprised of a euro overdraft
facility up to the equivalent of $3.0 million and a pound sterling overdraft
facility up to the equivalent of $2.0 million. This Multicurrency Facility bears
interest at a rate equal to either (a) the rate published by the European
Central Bank plus a margin (as defined) or (b) the Bank's Base Rate (as
determined by the bank having regard to prevailing market rates) plus a margin
(as defined).

                                      F-14

<PAGE>

At December 31, 2005 no amounts were outstanding under the Company's revolving
credit loan, $3.8 million was outstanding under the term loan, and no amounts
were outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the term loan at a rate of 5.8%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
2007.

Effective July 1, 2002, the Company entered into an interest rate swap agreement
to fix the interest rate on the $15.0 million term loan. The swap is designated
as a cash flow hedge under the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under the swap agreement, the interest rate on the term loan is
fixed at 4.32% plus the applicable margin (currently 1.5%). The swap is in place
through the life of the term loan, ending on March 31, 2007. Changes in fair
value of the swap are recorded in Accumulated Other Comprehensive Loss on the
Consolidated Balance Sheet. At December 31, 2005, approximately $7,000 has been
recorded in Accumulated Other Comprehensive Income to reflect an increase in the
fair value of the swap compared to a decrease in the fair value of approximately
$92,000 at December 31, 2004.

With the acquisition of CPR in 2002, the Company entered into a $6.0 million
convertible note payable to the shareholders of CPR. The principal balance was
convertible at the holders' option into 314,243 shares of the Company's Common
Stock at any time through January 29, 2005 (the Maturity Date). If the note had
not been converted at the Maturity Date, the Company had the option to extend
the Maturity Date of the note for another three years. The note bore interest at
an annual rate of 3.80% from January 29, 2002 through the Maturity Date.
Interest was payable semi-annually.

In June 2003, the Company and the shareholders of CPR entered into Note
Prepayment Agreements. Under the Note Prepayment Agreements, the Company agreed
to satisfy its payment obligations under the $6.0 million convertible note by
making a series of four payments between June 30, 2003 and January 10, 2005. The
four payments were initiated either by the Company through the exercise of a
"call" option or by the CPR shareholders through the exercise of a "put" option.
Gains resulting from this early extinguishment of debt were recorded in the
Company's Consolidated Statements of Operations when payments were made by the
Company. In the first quarter of 2005, the Company paid approximately $1.2
million to settle the remaining $1.5 million of the convertible note that was
outstanding at December 31, 2004. A gain of $300,000 has been recorded in the
first quarter of 2005 in the Company's Consolidated Statements of Operations. No
amounts remain outstanding under this convertible note at December 31, 2005. The
total gains resulting from early extinguishment of debt since inception of the
Note Prepayment Agreement were approximately $1.5 million.

9. EMPLOYEE SEVERANCE AND OFFICE CONSOLIDATION COSTS:

In the first quarter of 2004, in order to align its resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan that resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. An additional $48,000 in net costs (composed of
approximately $80,000 in additional costs offset by a reduction to the liability
of approximately $32,000) was incurred in the second quarter of 2004 related to
this plan. The workforce realignment plan affected approximately 3 percent of
the Company's North American workforce. Payments in 2004 totaled $302,000 and no
amounts remained accrued at December 31, 2004.

In August 2003, the Company initiated a workforce realignment plan that
immediately eliminated approximately 65 positions from its global workforce. In
the third quarter of 2003, the Company recorded a pre-tax charge of
approximately $897,000 for severance and outplacement benefits relating to this
workforce realignment. In 2005, the Company recorded an additional $70,000 in
costs related to on-going arbitration proceedings for an individual whose
position was eliminated as a result of the realignment plan. Payments in 2005
and 2003 totaled $85,000 and $882,000, respectively, and no amounts remained
accrued at December 31, 2005. Costs related to this program are reflected in the
line item entitled Severance and Office Consolidation Costs in the Company's
Consolidated Statements of Operations.

To bring its cost structure more in line with the then current revenue
projections, in the first quarter of 2003, the Company recorded a pre-tax charge
of approximately $680,000 for severance and outplacement benefits related to a
workforce reduction program affecting approximately 17 employees. In the second
quarter of 2003, the Company recorded an adjustment to reduce this charge by
$106,000 as a result of lower than expected severance costs related to the
workforce reduction. No amounts remained accrued at December 31, 2003. Costs
related to this program are reflected in the line item entitled Severance and
Office Consolidation Costs in the Company's Consolidated Statements of
Operations.

On August 29, 2002, the Company committed to a plan that consolidated its three
New Jersey offices into one central office, located in Cranford, New Jersey. At
that time, the Company maintained separate offices in Princeton, Cranford and
Ft. Lee, New Jersey. The leases for the Ft. Lee and Princeton offices expired
during the fourth quarter of 2002 and the first quarter of 2003, respectively.
The Company vacated these offices in the fourth quarter in advance of the
expiration of each of the respective office leases. As part of this plan, the
Company eliminated approximately 22 full-time positions.

                                      F-15

<PAGE>

In connection with the office consolidation, the Company recorded a pre-tax
charge of $321,000 in the third quarter of 2002, consisting primarily of
facility lease costs and severance and outplacement costs. In the first quarter
of 2003, the Company incurred an additional $52,000 in costs related to the
office consolidation.

<TABLE>
<CAPTION>
                                         Employee
(in thousands)                           Severance   Facilities    Other     Total
                                         ---------   ----------   -------   -------
<S>                                      <C>         <C>          <C>       <C>
Liability at December 31, 2002           $      73   $       44   $    40   $   157
Amounts accrued                              1,639           --        --     1,639
Amounts paid                                (1,568)         (25)       --    (1,593)
Non-cash charge                                 --           (4)       --        (4)
Adjustment to liability                       (129)         (15)      (30)     (174)
                                         ---------   ----------   -------   -------
Liability at December 31, 2003           $      15   $       --   $    10   $    25
Amounts accrued                                334           --        --       334
Amounts paid                                  (302)          --       (10)     (312)
Non-cash charge                                 --           --        --        --
Adjustment to liability                        (32)          --        --       (32)
                                         ---------   ----------   -------   -------
Liability at December 31, 2004           $      15   $       --   $    --   $    15
Amounts accrued                                 70           --        --        70
Amounts paid                                   (85)          --        --       (85)
Non-cash charge                                 --           --        --        --
Adjustment to liability                         --           --        --        --
                                         ---------   ----------   -------   -------
Liability at December 31, 2005           $      --   $       --   $    --   $    --
                                         =========   ==========   =======   =======
</TABLE>

10. EMPLOYEE BENEFIT PLANS:

401(k) PLAN

The Company maintains a 401(k) retirement plan covering substantially all U.S.
associates who have completed at least six months of service and meet minimum
age requirements. The Company makes a matching contribution of 50% of each
participant's contribution of up to 6% of salary. The Company's matching
contributions to this plan totaled approximately $1,005,000, $1,042,000 and
$1,144,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Company maintains an Employee Stock Purchase Plan (the Purchase Plan) that
is intended to provide eligible employees an opportunity to acquire the
Company's Common Stock. Participating employees have the option to purchase
shares at 85% of the lower of the fair market value of the Common Stock on the
first or last day of the Purchase Period. The Purchase Period is defined as the
twelve month period beginning on July 1 of each year. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended. The Board of Directors has
reserved 500,000 shares of Common Stock for issuance under the Purchase Plan.
During 2005, 2004 and 2003, respectively, 111,000, 103,693 and 63,812 shares
were purchased under the Purchase Plan. At December 31, 2005, 28,331 shares were
available for issuance under the Purchase Plan. The remaining shares were issued
in January 2006 and the plan has been discontinued.

STOCK OPTION AND STOCK INCENTIVE PLAN

In 1997, the Company established the 1997 Stock Option and Stock Incentive Plan
(the 1997 Plan) that provides for the grant of up to 1,000,000 options to
acquire the Company's Common Stock, consisting of both incentive and
non-qualified stock options. In April 2000, shareholders approved an amendment
to the 1997 Plan increasing the number of stock options that can be granted to
3,000,000. Participation in the 1997 Plan is at the discretion of the Board of
Directors' Management Development and Compensation Committee. Prior to August
2002, the 1997 Plan was administered by the Board of Director's Compensation
Subcommittee. The exercise price of incentive stock options granted under the
1997 Plan must be no less than the fair market value of the Common Stock, as
determined under the 1997 Plan provisions, at the date the option is granted
(110% of fair market value for shareholders owning more than 10% of the
Company's Common Stock). The exercise price of non-qualified stock options must
be no less than 95% of the fair market value of the Common Stock at the date the
option is granted. The vesting provisions of the options granted under the 1997
Plan are determined at the discretion of the Management Development and
Compensation Committee. The options generally expire either 90 days after
termination of employment or, if earlier, ten years after date of grant. No
options under this 1997 plan can be granted after August

                                      F-16

<PAGE>

2007. The Company has reserved 3,000,000 shares of Common Stock for the 1997
Plan, of which 1,207,609 are available for grant at December 31, 2005.

The 1997 Plan replaced a similar plan under which 29,512 options were
outstanding at December 31, 2005.

Aggregate stock option activity during 2005, 2004 and 2003 was as follows:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                  Average
                                                      Shares   Exercise Price
                                                    ---------  --------------
<S>                                                 <C>        <C>
Options outstanding at 12/31/02                     2,378,867     $ 11.84
Granted                                               329,300        5.72
Canceled                                             (498,353)      12.26
Exercised                                            (137,511)       1.40
                                                    ---------     -------
Options outstanding at 12/31/03                     2,072,303       11.24
Granted                                               307,000        6.89
Canceled                                             (313,070)      13.39
Exercised                                             (65,860)       2.14
                                                    ---------     -------
Options outstanding at 12/31/04                     2,000,373       10.51
Granted                                                51,500       11.80
Canceled                                             (197,583)      10.57
Exercised                                            (726,961)      10.48
                                                    ---------     -------
Options outstanding at 12/31/05                     1,127,329     $ 10.58
</TABLE>

Options Outstanding

<TABLE>
<CAPTION>
                                                        Weighted Average                Weighted
     Range of                Outstanding at                 Remaining                    Average
  Exercise Price           December 31, 2005            Contractual Life             Exercise Price
-----------------          -----------------            ----------------             --------------
<S>                        <C>                          <C>                          <C>
$ 0.91  -  $ 3.10                41,511                       3.1                       $  1.43
$ 3.11  -  $ 6.20               145,440                       7.4                          5.00
$ 6.21  -  $ 9.30               476,936                       7.3                          7.72
$ 9.31  -  $12.40               158,740                       6.9                         10.33
$12.41  -  $15.50                61,250                       3.1                         13.57
$15.51  -  $21.70               200,452                       5.3                         19.74
$21.71  -  $31.00                43,000                       2.6                         23.94
</TABLE>

Options Exercisable

<TABLE>
<CAPTION>
    Range of                   Options Exercisable              Weighted Average
 Exercise Price               at December 31, 2005               Exercise Price
-----------------             --------------------              ----------------
<S>                           <C>                               <C>
$ 0.00  -  $ 3.10                     29,512                        $ 2.01
$ 3.11  -  $ 6.20                     57,780                          5.34
$ 6.21  -  $ 9.30                    169,496                          8.05
$ 9.31  -  $12.40                    104,540                         10.41
$12.41  -  $15.50                     50,650                         13.78
$15.51  -  $21.70                    197,592                         19.75
$21.71  -  $31.00                     43,000                         23.94
                                     -------                        ------
                                     652,570                        $12.95
</TABLE>

At December 31, 2004, 1,071,338 options were exercisable with a weighted-average
exercise price of $11.36. At December 31, 2003, 1,001,469 options were
exercisable with a weighted-average exercise price of $11.59.

                                      F-17

<PAGE>

Effective October 1, 2002 the Company granted awards of restricted shares to
certain executives pursuant to the 1997 Plan. Such shares vest ratably over a
three year period, with shares restricted from transfer until vesting. If a
participant ceases to be an eligible employee prior to the lapsing of transfer
restrictions, such shares return to the Company without consideration. The
Company granted 18,000 shares of restricted stock in May 2004, 6,000 of which
have vested as of December 31, 2005. In 2002, 24,500 restricted shares were
issued, As of December 31, 2005, 16,000 of the shares granted in 2002 are
vested, with the remaining cancelled.

11. COMMITMENTS AND CONTINGENCIES:

LEASES:

The Company leases facilities, office equipment and computers under agreements
that are classified as either capital or operating leases. The leases have
initial terms that range from two to seven years, with eight facility leases
that have provisions to extend the leases for an additional three to five years.
Future minimum payments, by year and in the aggregate, net of sublease income,
under non-cancelable capital and operating leases with initial or remaining
terms of one year or more, are as follows at December 31, 2005:

<TABLE>
<CAPTION>
                                                          Capital  Operating
(in thousands)                                            Leases    Leases
                                                          -------  --------
<S>                                                       <C>      <C>
2006                                                      $   399  $  7,672
2007                                                          193     6,393
2008                                                          178     5,992
2009                                                           83     4,164
2010                                                            4     2,454
thereafter                                                     --       894
                                                          -------  --------
Total minimum lease payments                                  857  $ 27,569
Amounts representing interest                                 (35)
                                                          -------
Present value of net minimum lease payments                   822
Current portion                                               391
                                                          -------
Obligations under capital leases, less current portion    $   431
                                                          =======
</TABLE>

The Company expects rental income from subleases of approximately $0.1 million
in 2006 based on a sublease agreement executed in June 2000.

Rental expense under operating leases for 2005, 2004 and 2003 was $7.6 million,
$7.0 million and $5.7, million, respectively.

PROTECTIVE COMPENSATION AND BENEFIT AGREEMENTS:

The Company has entered into Protective Compensation and Benefit Agreements with
certain associates, including all Executive Officers of the Company. These
Agreements, subject to annual review by the Company's Board of Directors, expire
on the last day of the fiscal year, and are automatically extended in one year
increments unless canceled by the Company. These Agreements provide for
specified benefits in the event of a change in control, as defined in the
Agreements. At December 31, 2005, the maximum amount which could be required to
be paid under these Agreements, if such events occur, is approximately $6.8
million.

LEGAL PROCEEDINGS:

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

12. INCOME TAXES:

The provision for income taxes for the years ended December 31, 2005, 2004 and
2003, is as follows:

                                      F-18

<PAGE>

<TABLE>
<CAPTION>
(in thousands)                       2005      2004      2003
                                    -------   -------   -------
<S>                                 <C>       <C>       <C>
Current:
Federal                             $ 1,149   $  (708)  $(2,330)
State and local                         (20)     (639)      241
Foreign                               4,207     2,925     2,916
                                    -------   -------   -------
       Subtotal                       5,336     1,578       827
Deferred:
Federal                                 (95)      395     1,610
State and local                       2,081      (114)     (418)
Foreign                                (570)      233       166
                                    -------   -------   -------
       Subtotal                       1,416       514     1,358
Benefit applied to reduce goodwill      389       389       389
                                    -------   -------   -------
Total provision                     $ 7,141   $ 2,481   $ 2,574
                                    =======   =======   =======
</TABLE>

The sources of income (loss) before income taxes are presented as follows:

<TABLE>
<CAPTION>
(in thousands)                       2005      2004      2003
                                    -------   -------   -------
<S>                                 <C>       <C>       <C>
United States                       $ 6,055   $  (529)  $(1,726)
Foreign                              11,760     6,582     2,610
                                    -------   -------   -------
Income (loss) before income taxes   $17,815   $ 6,053   $   884
                                    =======   =======   =======
</TABLE>

The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate of 35% as set forth below:

<TABLE>
<CAPTION>
                                                                          2005    2004    2003
                                                                          ----    ----    -----
<S>                                                                       <C>     <C>     <C>
Income tax expense at the U.S. federal statutory rate                     35.0%   35.0%    35.0%
Effects of foreign taxes, net of foreign tax credits and deductions        2.2    13.9    235.1
State and local income taxes, net of federal benefit                       7.8    (7.6)    (8.6)
Non-deductible write-down of joint venture                                  --      --     16.0
Dutch operating loss carryforward- reversal of valuation allowance        (4.6)     --       --
Other                                                                     (0.3)   (0.3)    13.7
                                                                          ----    ----    -----
Total                                                                     40.1%   41.0%   291.2%
</TABLE>

A provision has not been made for U.S. or additional foreign taxes on the
undistributed portion of earnings of foreign subsidiaries as those earnings have
been permanently reinvested. The undistributed earnings of foreign subsidiaries
approximate $19.4 million.

Components of the Company's net deferred tax asset and liability included in the
consolidated balance sheet at December 31, 2005 and 2004 are as follows:

                                      F-19

<PAGE>

<TABLE>
<CAPTION>
(in thousands)                                             2005            2004
                                                         --------        --------
<S>                                                      <C>             <C>
Deferred tax assets:
Compensation and employee benefits                       $    294        $    518
Accrued expenses and other future deductible items            920             725
Foreign operating loss carryforward                         3,819           5,162
State and local operating loss carryforward                   781           2,295
Federal operating loss carryforward                           639              --
Tax benefit of unrealized losses                               23              33
Contributions carryforward                                     96              73
Capital loss carryforward                                     728             992
Foreign tax credit carryforward                                47             373
Intangible assets                                           3,697           5,741
Unrealized foreign exchange losses                             68              --
Accounting method differences                                 317             248
                                                         --------        --------
Total deferred tax assets                                  11,429          16,160

Deferred tax liabilities:
Depreciation and software costs                             1,312           2,912
Unrealized foreign exchange gains                              --             128
Deferred state income taxes                                   191             310
                                                         --------        --------
Total deferred tax liability                                1,503           3,350
                                                         --------        --------
Valuation allowance                                         4,548           7,014
                                                         --------        --------
Total net deferred tax (asset)/liability                 $ (5,378)       $ (5,796)
                                                         ========        ========
</TABLE>

The Company has a federal operating loss carryforward of $1.9 million with a
recognized tax benefit of $639,000 that will expire in 2026.

The deferred tax asset for state and local operating loss carryforward of
$781,000 relates to amounts that expire at various times from 2006 to 2026.

The Company has foreign operating loss carryforwards of $2.9 million with a
recognized tax benefit of $867,000. Of this benefit, $47,000 will expire in 2014
and $820,000 can be carried forward indefinitely. A valuation allowance that
existed at the beginning of the year related to $820,000 of this tax benefit was
completely reversed during the year 2005.

The Company has foreign operating loss carryforwards of $9.9 million with a tax
benefit of $3.0 million for which a valuation allowance has been established
based upon an assessment that it is more likely than not that realization cannot
be assured. The ultimate realization of this tax benefit is dependent upon the
generation of sufficient operating income in the respective tax jurisdictions.
Of this benefit, $15,000 will expire in 2010, $16,000 will expire in 2011,
$76,000 will expire in 2013, $58,000 will expire in 2014, $10,000 will expire in
2021 and $2.8 million can be carried forward indefinitely.

The Company has capital loss carryforwards of $2.0 million with a tax benefit of
$728,000 for which a valuation allowance has been established based upon an
assessment that it is more likely than not that realization cannot be assured.
Of this tax benefit, $12,000 will expire in 2006, $3,000 will expire in 2007,
$708,000 will expire in 2008 and $5,000 will expire in 2010. The ultimate
realization of this tax benefit is dependent upon the generation of sufficient
capital gains within the carryforward periods.

The Company has foreign tax credit carryforwards with a tax benefit of $47,000
for which a valuation allowance has been established based upon an assessment
that it is more likely than not that realization cannot be assured. Of this
benefit, $17,000 will expire in 2007 and $30,000 can be carried forward
indefinitely.

A valuation allowance has been established for other deferred tax assets of
$821,000 related to operations in foreign tax jurisdictions based upon an
assessment that it is more likely than not that realization cannot be assured.

Income tax benefits related to stock option exercises and the employee stock
purchase plan were $2.0 million, $208,000 and $84,000 for 2005, 2004 and 2003,
respectively, and have been shown as increases to additional paid-in capital.

The income tax costs (benefits) related to unrealized gains and losses in other
comprehensive income components of shareholders' equity were $(23,000) in 2005,
$(34,000) in 2004 and $5,000 in 2003.

                                      F-20

<PAGE>

13.  ACQUISITIONS:

Details pertaining to Company's acquisition in 2003 are listed below. The
acquisition has been accounted for using the purchase method of accounting.

2003:

In October 2003, the Company acquired substantially all of the assets and
assumed certain liabilities of Estadisticos y Clinicos Asociados, S.A., a CRO
located in Mexico City, Mexico. The acquisition enables the Company to expand
its capability to conduct clinical trials in Latin America.

The aggregate purchase price was approximately $3.6 million in cash (including
acquisition costs).

The following summarizes the fair value of the assets acquired and liabilities
assumed at the date of acquisition.

<TABLE>
<CAPTION>
(in thousands)               At October 1, 2003
                             ------------------
<S>                          <C>
Current assets                    $   727
Fixed assets                          275
Other assets                           12
Goodwill                            1,932
Intangible assets                     860
                                  -------
Total assets acquired               3,806
Current liabilities                   222
                                  -------
Net assets acquired               $ 3,584
                                  =======
</TABLE>

Of the $860,000 of intangible assets, $400,000 was assigned to customer
relationships and $460,000 was assigned to non-compete agreements. The
intangible assets are amortizable over a period of 20 years for the customer
relationships and four years for the non-compete agreements. The fair value of
the intangible assets was determined by management based on a third party
valuation. The goodwill acquired is deductible for income tax purposes.

The following unaudited pro forma results of operations assume the 2003
acquisition occurred at the beginning of 2003:

<TABLE>
<CAPTION>
(in thousands, except per share data)                       2003
                                                          ---------
<S>                                                       <C>
Net service revenues                                      $ 161,563
Net loss                                                       (880)
Net loss per diluted share                                $   (0.07)
Weighted average shares                                      12,973
</TABLE>

The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
on January 1, 2003, nor are they necessarily indicative of future operating
results.

14. INVESTMENTS:

The Company has a 50% owned joint venture investment in Beijing KendleWits
Medical Consulting Co., Ltd. (KendleWits), a company located in China. This
investment is accounted for under the equity method. To date, the Company has
contributed approximately $750,000 for the capitalization of KendleWits. In the
second quarter of 2003, the Company determined that its investment in KendleWits
was permanently impaired and as a result recorded a $405,000 non-cash charge to
reduce the carrying value of its investment to zero. Future capital investment
needs will be dependent upon the on-going capitalization needs of KendleWits and
the Company's willingness to provide additional capital. The Company is not
obligated to make any additional investment in KendleWits and currently has no
plans to do so.

15. RELATED PARTY TRANSACTIONS:

                                      F-21

<PAGE>

The Company made payments in 2003 totaling approximately $21,000 to a
construction company owned by a relative of the Company's primary shareholder,
for construction and renovations at various Company locations. No such payments
were made in 2004 or 2005.

The former majority shareholder of CPR is no longer employed by CPR and never
was employed by the Company, but he has provided consulting services to the
Company. In the past, he provided consulting services to the customer that
accounted for the majority of CPR's business. Payments to this individual for
consulting services in 2003 totaled approximately $65,000. No such payments were
made in 2004 or 2005.

16. SEGMENT INFORMATION:

During 2005 Kendle completed its re-organization into four operating units and
two support units. The operating units are the production units for the Company
while the support units provide administrative support or technical operational
support.

The Company has concluded that the four operating units meet the SFAS 131
definition of operating segments. The Company has also concluded that the four
operating units qualify for aggregation under the aggregation criteria in SFAS
131.

Financial information by geographic area is as follows:

<TABLE>
<CAPTION>
(in thousands)                2005             2004             2003
                            --------         --------         --------
<S>                         <C>              <C>              <C>
Net service revenues
North America               $115,708         $101,012         $102,596
Non-North America             86,324           71,876           53,625
                            --------         --------         --------
                            $202,032         $172,888         $156,221
                            ========         ========         ========
Identifiable assets
North America               $134,759         $113,566         $127,912
Non-North America             50,000           49,114           26,503
                            --------         --------         --------
                            $184,759         $162,680         $154,415
                            ========         ========         ========
</TABLE>

Net revenues from sponsors that accounted for more than 10% of the Company's
consolidated net revenues for 2005, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                 2005            2004            2003
                                 ----            ----            ----
<S>                              <C>             <C>             <C>
Sponsor A                         15%             20%             27%
</TABLE>

Sponsor A accounted for approximately 5% and 13% of the Company's consolidated
accounts receivable at December 31, 2005 and December 31, 2004, respectively.

17. SUBSEQUENT EVENT:

In March 2006, the Company entered into agreements to acquire certain assets of
International Clinical Research Limited (IC-Research) and the ownership
interests in its related operating companies in each of Argentina, Brazil, Chile
and Columbia. IC-Research is a leading CRO in Latin America with operations in
Argentina, Brazil, Chile and Columbia. The acquisition supports the Company's
goal of strategic business expansion and diversification in high growth regions
to deliver global clinical trials for its customers.

The acquisition is expected to be completed in the second quarter of 2006. The
aggregate purchase price is expected to be approximately $900,000 plus
acquisition costs. In addition, there is expected to be an earnout provision,
with a maximum additional amount to be paid of $260,000. The Company will
complete its purchase price allocation after completion of the acquisition.

18. QUARTERLY FINANCIAL DATA (UNAUDITED): (in thousands, except per share data)

Earnings per basic share as presented on the income statement for 2005 does not
equal the sum of earnings per share for each quarter presented below due to
rounding differences in each quarter.

                                      F-22

<PAGE>

<TABLE>
<CAPTION>
Quarter                            First       Second        Third       Fourth
                                  -------      -------      -------      -------
<S>                               <C>          <C>          <C>          <C>
2005
Net service revenues              $47,687      $49,965      $51,581      $52,799
Gross profit                       21,961       22,813       24,130       24,546
Income from operations              2,849        3,652        5,541        5,201
Net income                          2,145        1,442        3,394        3,693
Net income per diluted share         0.16         0.10         0.24         0.25
Net income per basic share           0.16         0.11         0.25         0.26

2004
Net service revenues              $40,786      $41,217      $42,920      $47,965
Gross profit                       17,525       16,996       19,126       22,331
Income from operations                696          287        1,916        3,806
Net income                            673          211          600        2,088
Net income per diluted share         0.05         0.02         0.04         0.16
Net income per basic share           0.05         0.02         0.04         0.16
</TABLE>

                                      F-23

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 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.

                            KENDLE INTERNATIONAL INC.

DATE SIGNED: March 16, 2006

                                   /s/ CANDACE KENDLE
                                   ---------------------------------------------
                                   Candace Kendle
                                   Chairman, CEO and Principal Executive Officer

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

<TABLE>
<CAPTION>
           Signature                                Capacity                      Date
----------------------------------       ---------------------------------   --------------
<S>                                      <C>                                 <C>
  /s/ Candace Kendle                     Chairman of the Board of            March 16, 2006
----------------------------------       Directors, Chief Executive
Candace Kendle                           Officer and Principal Executive
                                         Officer

  /s/ Christopher Bergen                 President, Chief Operating          March 16, 2006
----------------------------------       Officer and Director
Christopher C. Bergen

  /s/ Karl Brenkert III                  Senior Vice President,              March 16, 2006
----------------------------------       Chief Financial Officer,
Karl Brenkert III                        Treasurer and Principal Financial
                                         and Accounting Officer

                                 *       Director                            March 16, 2006
----------------------------------
G. Steven Geis, Ph.D., M.D.

                                 *       Director                            March 16, 2006
----------------------------------
Donald C. Harrison, M.D.

                                 *       Director                            March 16, 2006
----------------------------------
Timothy E. Johnson, Ph.D.

                                 *       Director                            March 16, 2006
----------------------------------
Frederick A. Russ, Ph.D.

                                 *       Director                            March 16, 2006
----------------------------------
Robert C. Simpson

                                 *       Director                            March 16, 2006
----------------------------------
Robert R. Buck

  /s/ Karl Brenkert III                  as Attorney In-Fact                 March 16, 2006
----------------------------------
Karl Brenkert III
</TABLE>

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number                            Description of Exhibit                           Filing Status
-------                           ----------------------                           -------------
<S>       <C>                                                                      <C>
2.1       Stock Purchase Agreement dated July 1, 1997 by and among the Company
          and Shareholders of U-Gene Research B.V.                                        *

2.2       Escrow Agreement dated June 27, 1997 among the Company, Keating,
          Muething & Klekamp, P.L.L., Bio-Medical Research Holdings, B.V.,
          Utrechtse Particatiemaatschappij B.V., P.J. Morrison, T.S. Schwarz,
          I.M. Hoepelman , Ph.K. Peterson, J. Remington, M. Rozenberg-Arska and
          L.G.W. Sterkman                                                                 *

2.3       Share Purchase Agreement dated July 2, 1997 by and among the Company
          and the Shareholders of GMI Gescellschaft fur Angewandte Mathematick
          und Informatik mbH                                                              *

2.4       Stock Purchase Agreement dated February 11, 1998 by and among the
          Company and the Shareholders of ACER/EXCEL Inc.                                 *

2.5       Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan
          Lee, Jean C. Lee Michael Minor, Conway Lee, Steven Lee, Jean C. Lee,
          as Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee,
          Citicorp Trust-South Dakota and The Fifth Third Bank                            *

2.6       Registration Rights Agreement dated February 11, 1998 among the
          Company and Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee,
          Steven Lee, Jean C. Lee, as Trustee under a Trust dated March 8, 1991
          fbo Jennifer Lee, Citicorp Trust-South Dakota                                   *

2.7       Share Purchase Agreement dated December 23, 1998 by and among the
          Company and the Shareholders of Research Consultants (International)
          Holdings Limited                                                                *

2.8       Escrow Agreement dated January 5, 1999 among the Company, John Glasby,
          Gillian Gregory Michael Roy Broomby and Peter Nightingale                       *

2.9       Option Agreement dated September 9, 1998 by and between the Company
          and Component Software International, Inc.                                      *

2.10      Notice of Option Exercise dated January 11, 1999 of the Option
          Agreement dated September 9, 1998                                               *

2.11      Multi-Year Strategic Services Agreement dated January 20, 1999 by and
          between the Company and Component Software International, Inc.                  *

2.12      Asset Purchase Agreement dated June 27, 1999 by and among the Company
          and the Shareholders of Health Care Communications, Inc.                        *

2.13      Stock Purchase Agreement dated June 4, 1999 by and among the Company
          and the Shareholders of ESCLI S.A.                                              *

2.14      Asset Purchase Agreement dated July 13, 1999 by and among the Company
          and the Shareholders of HCC Health Care Communications (1991), Ltd.             *

2.15      Share Purchase Agreement dated August 31, 1999 by and among the
          Company and the Shareholder of Specialist Monitoring Services Limited           *

2.16      Escrow Agreement dated July 13, 1999 by and among the Company,
          Geoffrey H. Kalish, M.D., Bradley D. Kalish, Jill Kalish, and The
          Fifth Third Bank, as Escrow Agent                                               *

2.17      Escrow Agreement dated August 31, 1999 by and among the Company, Paul
          Martin, and The Fifth Third Bank, as Escrow Agent                               *

2.18      Units Purchase Agreement dated April 7, 2000 by and among the Company
          and the Shareholders of SYNERmedica PTY Limited and SYNERmedica Unit
          Trust                                                                           *

2.19      Stock Purchase Agreement dated February 27, 2001 by and among the
          Company and the Shareholders of AAC Consulting Group, Inc.                      *

2.20      Form of Note Prepayment Agreement                                               *

2(a)      Asset Purchase Agreement dated January 29, 2002 among Kendle
          International Inc., Clinical and Pharmacologic Research, Inc., Thomas
          S. Clark, M.D., Charles T. Clark, and E. Stuart Clark                           *

2(b)      Convertible Subordinated Note, dated January 29, 2002 issued by Kendle
          International Inc. to Clinical and Pharmacologic Research, Inc.                 *

3.1       Restated and Amended Articles of Incorporation                                  *

3.2       Amended and Restated Code of Regulations                                        *

3.3       Amendment of the Restated and Amended Articles of Incorporation to
          Increase the Authorized Shares                                                  *

4         Specimen Common Stock Certificate                                               *

4.1       Shareholder Rights Agreement dated August 13, 1999 between the Company
          and The Fifth Third Bank, as Rights Agent                                       *

10.1      Amended and Restated Shareholders' Agreement dated June 26, 1997                *

10.2      Master Lease Agreement dated November 27, 1996 by and between the
          Company and Bank
</TABLE>

<PAGE>

<TABLE>
<S>       <C>                                                                             <C>
          One Leasing Corporation, as amended on April 18, 1997                           *

10.6      Master Equipment Lease dated August 16, 1996 by and between the
          Company and The Fifth Third Leasing Company                                     *

10.7      Lease Agreement dated December 9, 1991 by and between the Company and
          Carew Realty, Inc., as amended on December 30, 1991, March 18, 1996,
          October 8, 1996, January 29, 1997, and February 16, 1999                        *

10.8      Indemnity Agreement dated June 21, 1996 by and between the Company and
          Candace Kendle Bryan                                                            *

10.9      Indemnity Agreement dated June 21, 1996 by and between the Company and
          Christopher C. Bergen                                                           *

10.10     Indemnity Agreement dated June 21, 1996 by and between the Company and
          Timothy M. Mooney                                                               *

10.11     Indemnity Agreement dated May 14, 1997 by and between the Company and
          Charles A. Sanders                                                              *

10.12     Indemnity Agreement dated May 14, 1997 by and between the Company and
          Philip E. Beekman                                                               *

10.13     Indemnity Agreement dated December 10, 1998 by and between the Company
          and Robert Buck                                                                 *

10.14     Indemnity Agreement dated December 10, 1998 by and between the Company
          and Mary Beth Price                                                             *

10.15     Form of Indemnity Agreement by and between the Company and each member
          of the Company's Board of Directors, except for those Indemnity
          Agreements noted above and filed previously.                                    *

10.16     Second Amended and Restated Credit Agreement dated as of May 27, 2005
          among Kendle International Inc., the several lenders from time to time
          party thereto and JPMorgan Chase Bank, N.A., as agent                           *

10.17     Amended and Restated Guarantee Agreement dated June 3, 2002 and
          re-affirmed as of May 27, 2005                                                  *

10.18     Security Agreement dated May 14, 2003 and re-affirmed as of May 27,
          2005                                                                            *

10.20             MANAGEMENT CONTRACTS AND COMPENSATION PLANS

          (a)     1995 Stock Option and Stock Incentive Plan                              *

          (b)     1995 Stock Option and Stock Incentive Plan --
                  Individual Stock Option Agreement for Incentive Stock
                  Option (contained in Exhibit 10.20(a))                                  *

          (c)     1997 Stock Option and Stock Incentive Plan                              *

          (c)(1)  Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan           *

          (c)(2)  Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan           *

          (c)(3)  Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan           *

          (c)(4)  Form of Restricted Stock Award Agreement                                *

          (d)     Form of Protective Compensation and Benefit Agreement                   *

          (e)     1998 Employee Stock Purchase Plan                                       *

          (e)(1)  Amendment No. 1 to 1998 Employee Stock Purchase Plan                    *

          (e)(2)  Amendment No. 2 to 1998 Employee Stock Purchase Plan                    *

          (e)(3)  Amendment No. 3 to 1998 Employee Stock Purchase Plan                    *

          (e)(4)  Amendment No. 4 to 1998 Employee Stock Purchase Plan                    *

          (e)(5)  Amendment No. 5 to 1998 Employee Stock Purchase Plan                    *

          (n)     2003 Directors Compensation Plan                                        *

14        Code of Ethics                                                                  *

21        List of Subsidiaries                                                            U

23.1      Consent of Deloitte & Touche LLP                                                U

24        Powers of Attorney                                                              U

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

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

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          U

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                                                                         U
</TABLE>

<TABLE>
<CAPTION>
Filing
Status                  Description of Exhibit
-------         ---------------------------------------
<S>             <C>
*               Incorporated by reference - See Item 15

U               Filed herewith
</TABLE>