<PAGE>
                                                                      Exhibit 13



                                                                              15


16 selected financial data
17 quarterly financial data
18 management's discussion and analysis
26 consolidated statements of operations
27 consolidated balance sheets
28 consolidated statements of shareholders' equity
30 consolidated statements of cash flows
32 notes to consolidated financial statements
45 report of independent accountants


<PAGE>


16

SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,              2001        2000         1999        1998         1997
--------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
NET REVENUES                              $ 154,302    $ 120,487    $ 117,151    $  89,516    $  44,233
Costs and expenses:
    Direct costs                             93,729       74,077       61,032       44,880       23,883
    Selling, general and administrative      44,047       39,249       37,316       29,157       13,538
    Depreciation and amortization             9,988        7,930        6,731        4,711        1,583
    Employee severance and other costs         (766)       2,980
--------------------------------------------------------------------------------------------------------
                                            146,998      124,236      105,079       78,748       39,004
Income (loss) from operations                 7,304       (3,749)      12,072       10,768        5,229
Interest income                                 903          988        1,059        1,587          369
Interest expense                               (877)        (643)        (367)        (284)        (425)
Other                                            23         (292)         (67)         (13)         (59)
--------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and         7,353       (3,696)      12,697       12,058        5,114
    extraordinary item
Income taxes                                  3,147       (1,566)       4,968        4,893        1,451
--------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item       4,206       (2,130)       7,729        7,165        3,663
Extraordinary item, net of tax benefit(2)                                                        (1,140)
Net income (loss)                         $   4,206    $  (2,130)   $   7,729    $   7,165    $   2,523
--------------------------------------------------------------------------------------------------------
Pro forma net income(3)                                                                       $   1,914
INCOME (LOSS) PER SHARE DATA
    (PRO FORMA FOR 1997)
Basic:
    Income (loss) per share before
      extraordinary item                  $    0.34    $   (0.18)   $    0.69    $    0.75    $    0.60
    Extraordinary item per share                                                                  (0.22)
--------------------------------------------------------------------------------------------------------
    Net income (loss) per share           $    0.34    $   (0.18)   $    0.69    $    0.75    $    0.38
--------------------------------------------------------------------------------------------------------
    Weighted average shares                  12,251       11,708       11,251        9,589        5,055
Diluted:
    Income (loss) per share before
      extraordinary item                  $    0.33    $   (0.18)   $    0.65    $    0.70    $    0.53
    Extraordinary item per share                                                                  (0.20)
    Net income (loss) per share           $    0.33    $   (0.18)   $    0.65    $    0.70    $    0.33
    Weighted average shares                  12,858       11,708       11,826       10,226        5,763
CONSOLIDATED BALANCE SHEET DATA(1,4)
Working capital                           $  36,664    $  39,396    $  44,838    $  65,496    $  20,710
Total assets                                204,051      176,519      184,382      153,240       79,625
Total short and long-term debt               16,217        2,746       10,188        4,013        3,715
Total shareholders' equity                  142,307      132,870      133,646      122,500       50,349
</TABLE>

(1)  From 1997 to 2001, the Company made nine acquisitions. See Note 12 to the
     consolidated financial statements.

(2)  In 1997, the Company recorded an extraordinary item for early
     extinguishment of indebtedness resulting from the write-off of the debt
     discount recorded in connection with long-term borrowings.

(3)  Pro forma net income reflects the application of corporate income taxes to
     the Company's net income at an assumed statutory combined federal, state
     and local rate which would have been recorded if the Company had been taxed
     as a C corporation during such periods.

(4)  In 1998 and 1997, the Company and its shareholders completed common stock
     offerings, in which the Company raised net proceeds of $51.4 million and
     $45.2 million, respectively.


<PAGE>


                                                                              17

QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------
(In thousands, except per share data)
QUARTER                               FIRST      SECOND      THIRD      FOURTH
--------------------------------------------------------------------------------
2001
Net revenues                      $  32,253   $  38,661    $ 39,439   $  43,949
Income from operations                  257       1,556       1,913       3,578
Net income                              262         878       1,173       1,893
Net income per diluted share           0.02        0.07        0.09        0.15
Ranges of stock price
    High                              14.69       20.04       21.35       22.25
    Low                                9.91       11.50       15.20       15.55
2000
Net revenues                      $  34,298   $  30,002    $ 27,153   $  29,034
Income (loss) from operations         2,579      (4,381)     (1,392)       (555)
Net income (loss)                     1,656      (2,576)       (844)       (366)
Net income (loss) per share            0.14       (0.22)      (0.07)      (0.03)
Ranges of stock price
    High                              14.50       12.38        9.75       12.94
    Low                                8.63        6.00        6.88        8.00


<PAGE>


18

MANAGEMENT'S DISCUSSION AND ANALYSIS

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 included herein and should be read in
conjunction therewith.

COMPANY OVERVIEW

Kendle International Inc. (the Company) is an international contract research
organization (CRO) that provides integrated clinical research services,
including clinical trial management, clinical data management, statistical
analysis, medical writing and regulatory consulting, on a contract basis to the
pharmaceutical and biotechnology industries. Kendle also provides
organizational, meeting management and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications, Inc. (HCC). The Company is managed through two reportable
segments, the contract research services group and the medical communications
group. The medical communications group includes only HCC.

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
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. 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. The Company incurs costs,
in excess of contract amounts, in subcontracting with third-party investigators.
Such costs, which are reimbursable by its customers, are generally excluded from
direct costs and net revenues. In certain contracts, however, these costs are
fixed by the contract terms. In these instances, the Company recognizes these
costs as direct costs with corresponding net revenues. Further information
regarding an accounting change recently released by the Financial Accounting
Standards Board (FASB) impacting income statement presentation of reimbursable
expenses is included under New Accounting Pronouncements, and is effective for
periods beginning after December 15, 2001.

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 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 costs recorded on
a straight-line method over the useful life of the property or equipment. In
addition, goodwill acquired in the Company's acquisitions is being amortized
over a thirty year period. In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 142, that requires intangible assets with indefinite
useful lives to no longer be amortized, but instead be reviewed at least
annually for impairment. The Company will adopt SFAS No. 142 as of January 1,
2002, and will no longer record goodwill amortization expense. The adoption of
SFAS No. 142 is expected to reduce goodwill amortization expense by
approximately $3.2 million annually based on 2001 results and result in
additional earnings per share of approximately $0.20.

The CRO industry in general continues to be dependent on the research and
development efforts of the principal pharmaceutical and biotechnology companies
as major 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 immediate
adverse affects on the 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 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 revenues included in the backlog.


<PAGE>


                                                                              19

In order to bring its cost structure more in line with revenue projections, in
the second quarter of 2000 the Company announced a plan to eliminate
approximately 125 full-time positions globally. Through December 31, 2001 the
Company had completed the workforce reduction program, and eliminated
approximately 125 positions. In connection with the workforce reduction, the
Company recorded a pre-tax charge of approximately $3.0 million ($1.8 million
net of tax) in the second quarter of 2000, consisting primarily of severance,
outplacement, other employee benefit costs, and facility related charges. In the
fourth quarter of 2001, the Company completed the initiative, and recorded a
$766,000 adjustment to pre-tax income ($460,000 net of tax) to reflect
lower-than-anticipated costs associated with the program.

ACQUISITIONS

In 2001, the Company acquired AAC Consulting Group, a regulatory consulting firm
based in Rockville, Maryland. Further information regarding the Company's
acquisitions is included in Note 12 to the consolidated financial statements.

The acquisition has been accounted for using the purchase method of accounting,
with goodwill as a result of the transaction being amortized over 30 years. The
results of operations are included in the Company's consolidated statements of
operations from the date of acquisition.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Net Revenues

Net revenues increased 28% to $154.3 million for 2001 from $120.5 in 2000.
Excluding the negative impact of foreign currency exchange rates, net revenues
increased 30% in 2001. The 28% increase in net revenues is composed of organic
growth of 18% and growth due to the Company's acquisition of 10%. The growth in
organic revenues is primarily attributable to the increased level of clinical
development activity in 2001. Approximately 31% of the Company's net revenues in
2001 were derived from the Company's operations outside the United States
compared to 37% in 2000. Revenues from the top five customers accounted for
approximately 45% and 48% of net revenue in 2001 and 2000, respectively.

NET REVENUES
($ millions)
---------------------------

1999            117.2

2000            120.5

2001            154.3


Operating Expenses
--------------------------------------------------------------------------------
OPERATING EXPENSES
($ millions)                                    1999    2000    2001
--------------------------------------------------------------------------------
Direct costs                                    $61.0   $74.1   $93.7
Selling, general and administrative              37.3    39.2    44.0
Depreciation and amortization                     6.7     7.9    10.0


Direct costs increased by $19.6 million, or 27%, for 2001 as compared to 2000.
The 27% increase in direct costs is composed of a 19% increase in organic direct
costs and an 8% increase in direct costs due to the Company's acquisition. The
increase in organic direct costs is primarily related to increased employee
costs to support the increased revenue base as well as an increase in certain
project-related costs. These project-related costs are normally billed back to
the customer as a "pass-through" expense and are excluded from costs and
revenues. However, in a small number of the Company's contracts, these costs are
fixed by the contract terms, and have been recorded as direct costs, producing a
zero profit margin. In 2001, the Company incurred costs of approximately $1.2
million in excess of the contract value on a contract where these "pass-through"
expenses are fixed by the contract terms, negatively impacting the Company's
overall gross margin. Direct costs as a percentage of net revenues were 60.7%
and 61.5% in 2001 and 2000, respectively.

Selling, general and administrative expenses increased by $4.8 million, or 12%,
from 2000 to 2001. The 12% increase in selling, general and administrative costs
is composed of a 7% increase in organic costs and a 5% increase in costs due to
the Company's acquisition. The increase in organic SG&A costs is primarily due
to increased employee-related costs such as accrued bonus,


<PAGE>


20

recruiting costs and other employee costs incurred to support the larger revenue
base. Selling, general and administrative expenses expressed as a percentage of
net revenues were 28.5% for 2001 and 32.6% for 2000. The decrease in these costs
as a percentage of net revenues is primarily due to efficiencies realized from
the workforce reduction program implemented in the second quarter of 2000.

The increase in depreciation and amortization expense is a result of the
amortization of goodwill associated with the Company's acquisition and an
increase in depreciation expense as a result of the Company's capital
expenditures.

As previously mentioned, in the second quarter of 2000, the Company recorded a
pre-tax charge of approximately $3.0 million in connection with a workforce
reduction program. This program was completed in 2001, and in the fourth quarter
of 2001 the Company recorded a pre-tax increase in income of approximately
$766,000 to reflect lower-than-anticipated costs associated with the workforce
reduction reserve. The $766,000 adjustment was related to lower-than-expected
severance costs in Europe of approximately $388,000 as well as lower than
expected facility costs of $159,000 and other costs (primarily legal costs) of
$219,000.

Income Taxes

The Company reported tax expense at an effective rate of 42.8% for 2001 compared
to a tax benefit at an effective rate of 42.4% in 2000. Since Kendle operates on
a global basis, the effective tax rate may vary from year to year based on the
locations which generate the pre-tax earnings.

Net Income

Inclusive of the severance charge and related adjustment, net income increased
to $4.2 million in 2001 compared to a net loss of $2.1 million in 2000.
Excluding the after-tax impact of this charge and subsequent adjustment, net
income increased to $3.7 million in 2001 from a net loss of approximately
$310,000 in 2000.

Segment Information

Net revenues from the contract research services group increased to $147.0
million for 2001 compared to $114.8 million in 2000. Net income (loss) from the
contract research services group was $2.0 million and ($3.8) million in 2001 and
2000, respectively.

Net revenues from the medical communications group increased to $7.3 million for
2001 compared to $5.7 million in 2000. Net income from the medical
communications group was $2.2 million and $1.7 million for 2001 and 2000,
respectively.

Overhead costs are included in the contract research services group and have not
been allocated.

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

Net Revenues

Net revenues increased to $120.5 million for the year ended December 31, 2000
from $117.2 million for the year ended December 31, 1999. The 3% increase in net
revenues in 2000 was comprised of growth from acquisitions of 13% offset by a
decline in organic revenues of 10%. The decrease in organic revenues in 2000 is
primarily attributable to the negative impact of foreign currency exchange rates
and the slowdown in clinical development activities, including project delays
and cancellations, resulting, in part, from mergers and consolidations within
the pharmaceutical industry. Using the exchange rates in effect for 1999,
revenues for the year 2000 would have been $127.1 million, an increase of 9%
over 1999. Approximately 37% and 30% of the Company's net revenues in 2000 and
1999, respectively were derived from the Company's operations outside of the
United States. Revenues from the top five customers accounted for approximately
48% and 56% of net revenues for the years ended December 31, 2000 and 1999,
respectively.

Operating Expenses

Direct costs increased by $13.1 million, or 21%, for the year ended December 31,
2000 as compared to 1999. The increase is primarily a result of increases in
direct salaries and fringe benefits to support the increases in net revenues and
increases in direct costs due to the impact of acquisitions. Direct costs
expressed as a percentage of net revenues were 61.5% and 52.1% for the years


<PAGE>


                                                                              21

December 31, 2000 and 1999, respectively. The increase in these costs as a
percentage of net revenues is due to project delays and cancellations that
caused a lower-than-anticipated revenue base to absorb direct costs in the year
2000 as well as the varying levels of profitability within the mix of contracts
among periods.

Selling, general and administrative expenses increased by $1.9 million, or 5%,
for the year ended December 31, 2000 as compared to 1999. The increase in these
costs in 2000 is primarily due to the existence of an infrastructure in the
first half of the year that was established to support a higher revenue base. As
previously mentioned, in the second quarter of 2000 the Company implemented a
workforce reduction program to bring its infrastructure more in line with
revenue projections. Selling, general and administrative expenses as a
percentage of net revenues were 32.6% for the year ended December 31, 2000 and
31.9% in 1999.

The increase in depreciation and amortization expense is a result of the
amortization of goodwill as a result of the Company's acquisition and an
increase in depreciation expense as a result of the Company's capital
expenditures.

As previously mentioned, in the second quarter of 2000, the Company recorded a
pre-tax charge of approximately $3.0 million in connection with a workforce
reduction program.

Income Taxes

The Company reported a tax benefit at an effective tax rate of 42.4% for the
year ended December 31, 2000 as compared to tax expense at an effective rate of
39.1% in 1999. Since Kendle operates on a global basis, the effective tax rate
may vary from year to year based on the locations which generate the pre-tax
earnings.

Net Income

Inclusive of the severance charge, the Company incurred a net loss of $2.1
million in 2000 compared to net income of $7.7 million in 1999. Excluding the
after-tax impact of this charge, the net loss was approximately $310,000 in
2000.

Segment Information

Net revenues from the contract research services group were $114.8 million and
$114.5 million for 2000 and 1999, respectively. Net income (loss) from the
contract research services group was ($3.8) million and $7.0 million for 2000
and 1999, respectively.

Net revenues from the medical communications group increased to $5.7 million for
2000 compared to $2.7 million for 1999. Net income increased to $1.7 million in
2000 from $0.7 million in 1999. The increase in revenue and net income for the
medical communications group in 2000 is due to a full year of operations for HCC
included in 2000 compared to six months in 1999.

Overhead costs are included in the contract research services group and have not
been allocated.

LIQUIDITY AND CAPITAL RESOURCES

In 2001, cash and cash equivalents decreased by $0.7 million as a result of cash
provided by operating activities of $9.6 million and cash provided by financing
activities of $11.8 million offset by cash used in investing activities of $21.8
million. Net cash provided by operating activities consisted primarily of net
income increased by non-cash adjustments, primarily depreciation and
amortization, offset primarily by 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 payments for outstanding accounts
receivable are collected from customers. Such activity varies by individual and
customer. Accounts receivable, net of advance billings, increased from $24.5
million at December 31, 2000 to $37.2 million at December 31, 2001. Unreimbursed
investigator and project costs, net of advances, decreased from $3.7 million at
December 31, 2000 to $3.4 million at December 31, 2001.

WORKING CAPITAL
($ millions)
----------------------

1999            44.8

2000            39.4

2001            36.7


Cash flows from investing activities for the year ended December 31, 2001
consisted primarily of capital expenditures of $7.5 million, costs related to
the acquisition of AAC Consulting Group of $10.8 million (net of cash acquired),
and additional purchase price of $2.1 million paid in relation to the Company's
1999 acquisition of HCC.


<PAGE>


22

Cash flows from financing activities for the year ended December 31, 2001
consisted primarily of net borrowings under the Company's credit facility of
$12.6 million.

Cash and cash equivalents increased by $ 1.0 million for the year ended December
31, 2000 as a result of cash provided by operating activities of $20.8 million
offset by cash used in investing and financing activities of $10.3 million and
$9.4 million, respectively. Net cash provided by operating activities resulted
primarily from the net loss adjusted for non-cash activity, a decrease in
accounts receivable and unreimbursed investigator and project costs and an
increase in advanced billings.

Cash flows from investing activities for the year ended December 31, 2000
consisted primarily of capital expenditures of $7.2 million and additional
purchase price of $2.7 million paid in relation to the Company's 1999
acquisition of HCC.

Cash flows from financing activities for the year ended December 31, 2000
consisted primarily of net repayments under the Company's credit facility of
$7.1 million.

Cash and cash equivalents decreased by $8.3 million for the year ended December
31, 1999 as a result of cash used in operating and investing activities of $5.0
million and $11.9 million respectively, offset by cash provided by financing
activities of $9.2 million. Net cash used in operating activities resulted from
net income primarily offset by an increase in accounts receivable.

Investing activities for the year ended December 31, 1999 consisted primarily of
the costs related to the Company's acquisitions of $20.7 million (net of cash
acquired) and capital expenditures of $10.8 million offset by net proceeds from
sales and purchases of available-for-sale securities of $20.9 million.

Financing activities for the year ended December 31, 1999 consisted primarily of
net borrowings under the Company's credit facility of $8.7 million.

The Company had available for sale securities totaling $19.5 million and $17.9
million at December 31, 2001 and 2000, respectively.

Net cash used for capital expenditures was $7.5 million, $7.2 million and $10.8
million in 2001, 2000 and 1999, respectively.

CASH, CASH EQUIVALENTS &
AVAILABLE-FOR-SALE SECURITIES
($ millions)
------------------------------

1999            25.2

2000            24.6

2001            25.5

The Company has two Senior Credit Facilities (the Credit Facilities). The Credit
Facilities are composed of a $35.0 million revolving credit loan that expires in
October 2003 and a $5.0 million Multi-currency Facility that is renewable
annually and is used in connection with the Company's European operations. The
$35.0 million facility bears interest at a rate equal to either (a) LIBOR plus
the Applicable Percentage (as defined) or (b) the higher of the Federal Funds
Rate plus 0.5%, plus the Applicable Margin or the Bank's prime rate. The $5.0
million facility is composed of a euro overdraft facility up to the equivalent
of $3.0 million and a sterling overdraft facility up to the equivalent of $2.0
million. The 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). The facilities contain various
restrictive financial covenants, including the maintenance of certain fixed
coverage and leverage ratios and minimum net worth levels. At December 31, 2001,
$10.0 million was outstanding under the $35 million loan and $4.2 million was
outstanding under the $5.0 million Multi-currency Facility. Interest is payable
on the $10.0 million outstanding at a weighted average rate of 3.8% and on the
$4.2 million at a weighted average rate of 4.6%.

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
its credit facility, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring 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.


<PAGE>


                                                                              23

KEY ACCOUNTING POLICES AND ESTIMATES

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

The majority of the Company's revenues are based on fixed-price contracts
calculated on a percentage-of-completion basis based on 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 reviews the budget on each contract periodically to
determine if the budgeted amounts are correct, and budgets are adjusted as
needed. Historically, the majority of the Company's estimates have been
materially correct, but there can be no guarantee that these estimates will
continue to be accurate. As the work progresses, original estimates might be
changed due to changes in the scope of the work. The Company attempts to
negotiate contract amendments with the sponsor to cover these services provided
outside the terms of the original contract. Historically, the Company has been
successful in negotiating amendments in the majority of these instances.
However, there can be no guarantee that the sponsor will agree to proposed
amendments, and the Company ultimately bears the risk of cost overruns. In the
past, the Company has had to commit additional resources to existing projects,
resulting in lower gross margins. Similar situations may occur in the future.

As the Company works on projects, the Company incurs costs, in excess of
contract amounts, in subcontracting with third party investigators. Such costs,
which are normally reimbursable by its customers are excluded from direct costs
and net revenues. 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 recognizes these costs as direct costs with corresponding net revenues.
Excess costs incurred above the contract terms would negatively affect the
Company's gross margin. Further information regarding an accounting change
recently released by the FASB impacting income statement presentation of
reimbursable expenses is included under New Accounting Pronouncements, and is
effective for periods beginning after December 15, 2001.

The Company's primary customers are concentrated in the pharmaceutical and
biotechnology industries. The Company derives a significant portion of its
revenue from a small number of large pharmaceutical companies. The Company's
revenue could be negatively impacted by changes in the financial condition of
these companies, including potential mergers and acquisitions involving any of
these companies. Additionally, customers may generally terminate a study at any
time, which might cause unplanned periods of excess capacity and reduced
revenues and earnings.

The Company has an investment in a private company, Digineer, for which the fair
value is not readily determinable. The Company accounts for this investment
under the cost method. Digineer is a software consulting and development company
that does not have established marketable products and is highly dependent on
its ability to raise additional capital to fund its operations until such time
as it generates sufficient revenues and operating cash flows to meet its
obligations. There is no guarantee Digineer will be successful in raising
additional capital necessary in the short-term, or be successful in establishing
marketable products in the long run. The investment in Digineer is subject to
impairment write-downs whenever events indicate that the carrying value of this
investment may not be recoverable. Management reviews these investments for
declines in value on a quarterly basis or more frequently, if circumstances
warrant. Assessing the value of this investment requires significant judgement.
The carrying value of this investment is $1.9 million at December 31, 2001.

The Company has a 50% owned joint-venture investment with 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 and the carrying value recorded as of December 31, 2001 is
approximately $500,000. Future capitalization needs will be dependent upon the
on-going capitalization needs of KendleWits. The losses recorded from the equity
investment in KendleWits for the years ended December 31, 2001, 2000, and 1999
were approximately $199,000, $67,000 and $75,000, respectively. Future results
of KendleWits may vary, and are dependent upon the demand for clinical research
services in China and the ability of KendleWits to generate additional business.


<PAGE>


24

The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management, 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. Assessing the fair value of the internally
developed software requires estimates and judgement on the part of management.

The Company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. Because we conduct business on a
global basis, our effective tax rate has and will continue to depend upon the
geographic distribution of our pre-tax earnings (losses) among jurisdictions
with varying tax rates. These estimates include judgements 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 based on estimates of future taxable profits and losses in
the various jurisdictions. Based on these projections and the time period for
the realization of these loss carryforwards, a valuation allowance has not been
recorded. If estimates prove inaccurate or if the tax laws change unfavorably, a
valuation allowance could be required in the future.

CONTRACTUAL OBLIGATIONS
Future minimum payments for all contractual obligations for years subsequent to
December 31, 2001 are as follows:
--------------------------------------------------------------------------------
                                           2002   2003-2004 2005-2006 AFTER 2006
--------------------------------------------------------------------------------
Capital lease obligations, including
   interest                              $   753   $ 1,119   $   325   $
Operating leases                           6,448     9,677     5,314     1,451
--------------------------------------------------------------------------------
TOTAL                                    $ 7,201   $10,796   $ 5,639   $ 1,451

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 since from time to time
contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. 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 revenues
and resultant net income can be affected by fluctuations in exchange rates.
Historically, fluctuations in exchange rates from those in effect at the time
contracts were executed have not had a material effect upon the Company's
consolidated financial results.

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 subsidiary's U.S. dollar balance sheet


<PAGE>


                                                                              25

and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. Foreign currency translation adjustments, reported as a separate
component of shareholders' equity were ($3.8) million at December 31,
2001 compared to ($2.9) at December 31, 2000.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" that
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. The Company has adopted SFAS No. 141, and the
adoption did not have an impact on the Company's results of operations or its
financial position.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" that requires that all intangible assets determined to have an
indefinite useful life no longer be amortized, but instead be reviewed at least
annually for impairment. The Company will adopt SFAS No. 142 as of January 1,
2002, as required. The adoption of SFAS No. 142 is expected to reduce goodwill
amortization expense by approximately $3.2 million annually ($2.5 million on an
after-tax basis), and result in additional earnings per share of approximately
$0.20. The Company will analyze goodwill for impairment at the reporting level
during the first quarter of 2002 and, at a minimum, on an annual basis going
forward.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" and
certain provisions of APB Opinion No. 30, "Reporting the Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The Company intends
to adopt SFAS No. 144 as of January 1, 2002, as required, and does not believe
the adoption will have a material impact on our consolidated financial
statements.

In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred." Topic D-103 requires reimbursements for out-of-pocket expenses
incurred to be characterized as revenue and expenses in the income statement.
Currently, reimbursements for out-of-pocket expenses and payments to
investigators are excluded from direct costs and net revenues. The Company is in
the process of evaluating the impact that Topic D-103 will have on the
consolidated financial statements.

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

Certain statements contained in this Annual Report 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 that 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 which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue to attract and
retain qualified personnel, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint-venture businesses to be integrated with the Company's
operations, the fixed-price nature of contracts or the loss of large contracts,
cancellation or delay of projects, the progress of ongoing projects, cost
overruns, the Company's sales cycle, the ability to maintain large customer
contracts or to enter into new contracts, the effects of exchange rate
fluctuations, and the other risk factors set forth in the Company's SEC filings,
copies of which are available upon request from the Company's investor relations
department. No assurance can be given that the Company will be able to realize
the net revenues included in backlog and verbal awards. The Company believes its
backlog and verbal awards are not necessarily meaningful indicators of future
results.
<PAGE>


26

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,             2001          2000          1999
-------------------------------------------------------------------------------

NET REVENUES                              $ 154,302     $ 120,487     $ 117,151
Costs and expenses:
    Direct costs                             93,729        74,077        61,032
    Selling, general and administrative      44,047        39,249        37,316
    Depreciation and amortization             9,988         7,930         6,731
    Employee severance and other costs         (766)        2,980
--------------------------------------------------------------------------------
                                            146,998       124,236       105,079

INCOME (LOSS) FROM OPERATIONS                 7,304        (3,749)       12,072
Other income (expense):
    Interest income                             903           988         1,059
    Interest expense                           (877)         (643)         (367)
    Other                                        23          (292)          (67)
--------------------------------------------------------------------------------
                                                 49            53           625

Income (loss) before income taxes             7,353        (3,696)       12,697
Income taxes                                  3,147        (1,566)        4,968
--------------------------------------------------------------------------------
NET INCOME (LOSS)                         $   4,206     $  (2,130)    $   7,729
Income (loss) per share data:
Basic:
    Net income (loss) per share           $    0.34     $   (0.18)    $    0.69
--------------------------------------------------------------------------------
    Weighted average shares                  12,251        11,708        11,251
Diluted:
    Net income (loss) per share           $    0.33     $   (0.18)    $    0.65
--------------------------------------------------------------------------------
    Weighted average shares                  12,858        11,708        11,826


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


<PAGE>


                                                                              27

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------
(In thousands, except share data)
DECEMBER 31,                                                                       2001          2000
--------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                   $   6,016     $   6,709
    Available-for-sale securities                                                  19,508        17,851
    Accounts receivable                                                            53,124        40,817
    Unreimbursed investigator and project costs                                     6,487         5,426
    Other current assets                                                            5,305         7,052
--------------------------------------------------------------------------------------------------------
         Total current assets                                                      90,440        77,855
    Property and equipment, net                                                    16,407        15,103
    Goodwill, net                                                                  86,094        73,077
    Other assets                                                                   11,110        10,484
--------------------------------------------------------------------------------------------------------
         TOTAL ASSETS                                                           $ 204,051     $ 176,519

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Current portion of obligations under capital leases                         $     660     $     674
    Amounts outstanding under credit facilities                                    14,195         1,600
    Trade payables                                                                  6,502         5,268
    Advances against investigator and project costs                                 3,063         1,736
    Advance billings                                                               15,888        16,342
    Other accrued liabilities                                                      13,468        12,839
--------------------------------------------------------------------------------------------------------
         Total current liabilities                                                 53,776        38,459

Obligations under capital leases, less current portion                              1,362           472
Deferred income taxes payable                                                       5,954         4,203
Other liabilities                                                                     652           515
--------------------------------------------------------------------------------------------------------
         Total liabilities                                                         61,744        43,649

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;
       12,399,406 and 11,763,307 shares issued and 12,382,126 and 11,763,307
       outstanding at December 31, 2001 and 2000, respectively                         75            75
    Additional paid-in capital                                                    128,986       122,725
    Retained earnings                                                              17,322        13,116
    Accumulated other comprehensive loss:
         Net unrealized holding gain (losses) on available for sale securities         35          (117)
         Foreign currency translation adjustment                                   (3,761)       (2,929)
--------------------------------------------------------------------------------------------------------
         Total accumulated other comprehensive loss                                (3,726)       (3,046)
--------------------------------------------------------------------------------------------------------
    Less: cost of common stock held in treasury, 17,280 and 0 shares at
       December 31, 2001 and 2000 respectively                                       (350)
--------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                               142,307       132,870
--------------------------------------------------------------------------------------------------------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $ 204,051     $ 176,519
</TABLE>


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


<PAGE>


28
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
                                                  common stock
                                                  ------------
                                                                                              accumulated                   compre-
                                                                  additional                     other        total         hensive
(In thousands, except share data)                number            paid-in  treasury retained comprehensive shareholders'   income
                                               of shares   amount  capital    stock  earnings  income (loss)  equity        (loss)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>   <C>       <C>      <C>       <C>          <C>           <C>
BALANCE, JANUARY 1, 1999                        10,955,390  $ 75  $ 114,426          $  7,517   $     482   $ 122,500
Net income                                                                              7,729                   7,729     $   7,729
Other comprehensive income:
    Foreign currency translation adjustment                                                        (2,349)     (2,349)       (2,349)
    Net unrealized holding gains on
       available for sale securities, net of tax                                                     (483)       (483)         (483)
    Reclassification adjustment for holding
       gains included in net income, net of tax                                                       131         131           131
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                      $   5,028
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock for investment
  and acquisitions                                 423,792            5,275                                     5,275
Shares issued under stock plans                    110,136              702                                       702
Income tax benefit from exercise
  of stock options                                                      141                                       141
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999                      11,489,318    75    120,544            15,246      (2,219)    133,646
Net loss                                                                               (2,130)                 (2,130)    $  (2,130)
Other comprehensive income:
Foreign currency translation adjustment                                                            (1,144)     (1,144)       (1,144)
Net unrealized holding gains on
  available-for-sale securities, net of tax                                                           297         297           297
Reclassification adjustment for holding
  losses included in net income, net of tax                                                            20          20            20
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss                                                                                                        $  (2,957)
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock for acquisition            78,500              742                                       742
Issuance of Common Stock in connection
  with prior acquisition                           124,473            1,040                                     1,040
Shares issued under stock plans                     71,016              377                                       377
Income tax benefit from exercise
  of stock options                                                       22                                        22
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000                      11,763,307    75    122,725            13,116      (3,046)    132,870
</TABLE>

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


<PAGE>


                                                                              29

<TABLE>
<CAPTION>
                                                  common stock
                                                  ------------
                                                                                              accumulated                   compre-
                                                                  additional                     other        total         hensive
(In thousands, except share data)                number            paid-in  treasury retained comprehensive shareholders'   income
                                               of shares   amount  capital    stock  earnings  income (loss)  equity        (loss)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>   <C>       <C>      <C>       <C>          <C>           <C>
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                              4,206                 4,206      $   4,206
Other comprehensive income:
Foreign currency translation adjustment                                                            (832)       (832)          (832)
Net unrealized holding gains on
  available for sale securities, net of tax                                                         147         147            147
Reclassification adjustment for holding
  losses included in net income, net of tax                                                           5           5              5
-----------------------------------------------------------------------------------------------------------------------------------
    Comprehensive income                                                                                                  $  3,526
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock from acquisition        374,665             3,873                                    3,873
Issuance of Common Stock in connection with
  prior acquisition                               84,450               796                                      796
Shares issued under stock plans                  176,984             1,197                                    1,197
Income tax benefit from exercise
  of stock options and stock purchase plan                             395                                      395
Treasury stock transaction                       (17,280)                      (350)                           (350)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001                    12,382,126   $ 75  $ 128,986    $(350) $ 17,322   $(3,726)  $ 142,307
</TABLE>


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


<PAGE>


30
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,                                           2001        2000       1999
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                    <C>         <C>         <C>
    Net income (loss)                                                  $  4,206    $ (2,130)   $  7,729
    Adjustments to reconcile net income (loss) to cash provided
       by (used in) operating activities:
    Depreciation and amortization                                         9,988       7,930       6,731
    Deferred income taxes                                                   382      (1,013)      2,355
    Other                                                                    25         227          88
    Changes in operating assets and liabilities, net of effects
     from acquisitions:
         Accounts receivable                                            (10,789)     10,332     (20,606)
         Other current assets                                             2,785        (617)       (481)
         Other assets                                                      (105)       (329)        (74)
         Investigator and project costs                                     252       2,717      (4,132)
         Trade payables                                                   1,262        (119)        597
         Advance billings                                                  (275)      1,637       2,574
         Accrued liabilities and other                                    1,882       2,117         184
-------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                       9,613      20,752      (5,035)
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of available for sale securities                           (40,587)                (20,244)
    Proceeds from sale and maturity of available for sale securities     39,272       2,100      41,137
    Acquisitions of property and equipment                               (4,425)     (4,760)     (6,557)
    Additions to internally developed software                           (3,061)     (2,405)     (4,215)
    Acquisitions of businesses, less cash acquired                      (10,822)     (1,825)    (20,727)
    Additional purchase price paid in connection with prior
     acquisition                                                         (2,144)     (2,680)
    Other investments                                                        (5)       (724)     (1,305)
-------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                   (21,772)    (10,294)    (11,911)
CASH FLOWS FROM FINANCING ACTIVITIES
    Net proceeds (repayments) under credit facility                      12,630      (7,148)      8,700
    Proceeds from issuance of Common Stock                                  656          31          90
    Amounts payable - book overdraft                                       (665)     (1,430)      1,340
    Payments on capital lease obligations                                  (850)       (717)       (934)
    Debt issue costs                                                        (14)        (95)
-------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                      11,757      (9,359)      9,196
    Effects of exchange rates on cash and cash equivalents                 (291)       (110)       (510)
-------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       (693)        989      (8,260)
Cash and cash equivalents
    Beginning of year                                                     6,709       5,720      13,980
-------------------------------------------------------------------------------------------------------
    END OF YEAR                                                        $  6,016    $  6,709    $  5,720
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash paid during the year for interest                             $    714    $    654    $    431
    Cash paid (received) during the year for income taxes              $   (535)   $    780    $  1,905
</TABLE>


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


<PAGE>


                                                                              31
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                                 2001       2000       1999
--------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>         <C>         <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
  Acquisition of equipment under capital leases                               $  1,735    $    374    $     20
  Issuance of Common Stock in connection with investment                                              $    371
  Amounts accrued for additional consideration
    pursuant to acquisition agreement (note 12)                               $  2,976    $  2,976    $  4,000
  Issuance of Common Stock in connection with employee stock purchase plan$        488    $    322    $    502
  Treasury stock acquired in escrow settlement                                $   (350)
  Acquisitions of businesses:
  Fair value of assets acquired                                               $ 16,507    $  3,185    $ 29,748
  Fair value of liabilities assumed or incurred                                 (1,812)       (618)     (4,117)
  Stock issued                                                                  (3,873)       (742)     (4,904)
--------------------------------------------------------------------------------------------------------------
  NET CASH PAYMENTS                                                          $  10,822    $  1,825    $ 20,727
</TABLE>


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


<PAGE>


32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business

Kendle International Inc. (the Company) is an international contract research
organization (CRO) providing integrated clinical research services, including
clinical trial management, clinical data management, statistical analysis,
medical writing and regulatory consultation, on a contract basis to the
pharmaceutical and biotechnology industries. The Company also provides
organizational, meeting management and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications, Inc. (HCC). The Company has operations in North America, Europe,
Asia and Australia.

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 which are at least 20% owned and 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.

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.

As a significant percentage of the Company's cash flow from operations is
derived from operations outside the United States, the Company is subject to the
risks of currency exchange rate fluctuations.

Cash and Cash Equivalents

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.

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. 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.

Revenue Recognition

Revenues are earned by performing services primarily under fixed-price
contracts. Net 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


<PAGE>


                                                                              33

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. Because of the
inherent uncertainties 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 as units are completed multiplied by the contract per-unit price.

Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and indirect
costs including facilities, information systems and other costs. Selling,
general, and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are recognized in the period in
which such losses become known.

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 who are concentrated
mainly in the pharmaceutical and biotechnology industries. 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 and credit losses have been immaterial and consistent with
management's expectations. Management considers the likelihood of material
credit risk exposure as remote. Refer to Note 16 for additional information
regarding revenue concentration.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of two to ten years using the straight-line method.
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 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 $3.0 million and $2.4 million at December
31, 2001 and 2000, respectively.

Internally Developed Software

The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management 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, 2001 and 2000 were $11.7 million
and $8.6 million, respectively. The related accumulated amortization at December
31, 2001 and 2000 was $3.7 million and $1.6 million, respectively.

Goodwill

Goodwill acquired in the Company's acquisitions is being amortized on a
straight-line basis over a thirty-year period. Upon adoption of SFAS No. 142,
(see New Accounting Pronouncements) as of January 1, 2002 goodwill will no
longer be amortized. Goodwill will be evaluated on an annual basis for
impairment at the reporting unit level. Such evaluation is based on a two-step
test starting with comparison of the carrying amount of the reporting unit to
the fair value of the reporting unit. If the carrying amount of the unit's
goodwill exceeds the fair value, an impairment loss will be recognized for the
excess. Accumulated amortization of goodwill was $9.4 million and $6.4 million
at December 31, 2001 and 2000, respectively.


<PAGE>


34

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.
Such pass-through costs incurred, but not yet reimbursed, are generally excluded
from direct costs and net revenues and are reflected as a current asset in the
accompanying consolidated balance sheets. Advances from customers for
pass-through costs not yet incurred are reflected as a current liability. Such
costs and reimbursement for such costs that were excluded from direct costs and
net revenues and totaled $38.6 million, $36.2 million and $33.3 million for the
years ended December 31, 2001, 2000 and 1999, respectively.

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:


--------------------------------------------------------------------------------
(in thousands)                                            2001    2000    1999
--------------------------------------------------------------------------------
Weighted average common shares outstanding              12,251  11,708  11,251
Stock options                                              584             507
Contingently issuable shares                                23              68
--------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES                                 12,858  11,708  11,826


For additional disclosure regarding the contingently issuable shares, see Note
12, Acquisitions.

Options to purchase approximately 739,000 and 398,000 shares of common stock
were outstanding during 2001 and 1999 respectively, but were not included in the
computation of earnings per diluted share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.

Options to purchase approximately 1,600,000 shares of common stock
(approximately 400,000 shares of common stock equivalents) were outstanding
during 2000 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 using enacted tax rates in effect in the year in which the
differences are expected to reverse.

Stock Options

The Company accounts for stock options issued to associates 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 Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of grant. For
additional disclosure regarding the effect of SFAS 123, see Note 9.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the 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 July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" that
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. The Company has adopted SFAS No. 141, and the
adoption did not have an impact on the Company's results of operations or its
financial position.

<PAGE>
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" that requires that all intangible assets determined to have an
indefinite useful life no longer be amortized, but instead be reviewed at least
annually for impairment. The Company will adopt SFAS No. 142 as of January 1,
2002, as required. The adoption of SFAS No. 142 is expected to reduce goodwill
amortization expense by approximately $3.2 million annually ($2.5 million on an
after-tax basis), and result in additional earnings per share of approximately
$0.20. The Company will analyze goodwill for impairment at the reporting level
during the first quarter of 2002 and, at a minimum, on an annual basis going
forward.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" and
certain provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The Company intends
to adopt SFAS No. 144 as of January 1, 2002, as required, and does not believe
the adoption will have a material impact on our consolidated financial
statements.

In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred." Topic D-103 requires reimbursements for out-of-pocket expenses
incurred to be characterized as revenue and expenses in the income statement.
Currently, reimbursements for out-of-pocket expenses and payments to
investigators are excluded from direct costs and net revenues. The Company is in
the process of evaluating the impact that Topic D-103 will have on the
consolidated financial statements.

2.  AVAILABLE-FOR-SALE SECURITIES:
The fair value of available-for-sale securities is estimated based on quoted
market prices. Information related to the Company's available-for-sale
securities at December 31, 2001 and 2000 is as follows:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                       amortized       unrealized           fair
  (In thousands)                                                          cost         gain (loss)          value
--------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>             <C>
  2001:
  Debt securities:
  Mortgage-backed securities                                           $  19,450         $    58         $  19,508
--------------------------------------------------------------------------------------------------------------------
  2000:
  Debt securities:
  Municipal securities                                                 $  18,047         $  (196)         $ 17,851
</TABLE>

At December 31, 2001 all debt securities have contractual maturities of one year
or less.

Proceeds from the sales or maturities of investments in securities were $39.3
million, $2.1 million and $41.1 million in 2001, 2000 and 1999, respectively.
Gross losses realized on these sales were approximately $8,500, $33,000 and
$218,000 during 2001, 2000 and 1999, respectively.

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,                                                               2001              2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>
  Billed                                                                   $  25,740        $  20,465
  Unbilled                                                                    27,384           20,352
--------------------------------------------------------------------------------------------------------------------
                                                                           $  53,124        $  40,817
</TABLE>




                                       35

<PAGE>


5.  PROPERTY AND EQUIPMENT:

Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
 (In thousands)
 DECEMBER 31,                                                                2001           2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>
  Furnishings, equipment and other                                                     $  28,372        $  22,994
  Equipment under capital leases                                                           3,886            3,577
  Less: accumulated depreciation and amortization                                        (15,851)         (11,468)
--------------------------------------------------------------------------------------------------------------------
 Property and equipment, net                                                           $  16,407        $  15,103
</TABLE>

Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$4.2 million, $3.7 million and $3.1 million, respectively.

6.  OTHER ACCRUED LIABILITIES:

Other accrued liabilities at December 31, 2001 and 2000 consisted of the
following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
  (In thousands)
  DECEMBER 31,                                                                2001           2000

<S>                                                                      <C>              <C>
  Accrued compensation and related payroll withholdings and taxes        $   5,082        $   3,587
  Amounts payable - book overdraft                                             503            1,234
  Amounts accrued for contingent consideration pursuant to acquisition
    agreement (Note 12)                                                      2,976            2,976
  Other                                                                      4,907            5,042
--------------------------------------------------------------------------------------------------------------------
                                                                         $  13,468        $  12,839
</TABLE>

7.  DEBT:

The Company has two Senior Credit Facilities (the Credit Facilities). The Credit
Facilities are composed of a $35.0 million revolving credit loan that expires in
October 2003 and a $5.0 million Multicurrency Facility that is renewable
annually and is used in connection with the Company's European operations. The
$35.0 million facility bears interest at a rate equal to either (a) LIBOR plus
the Applicable Percentage (as defined) or (b) the higher of the Federal Funds
Rate plus 0.5%,plus the Applicable Margin or the Bank's prime rate. The $5.0
million facility is composed of a euro overdraft facility up to the equivalent
of $3.0 million and a sterling overdraft facility up to the equivalent of $2.0
million. The 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). The facilities contain various
restrictive financial covenants, including the maintenance of certain fixed
coverage and leverage ratios and minimum net worth levels. At December 31, 2001,
$10.0 million was outstanding under the $35 million loan and $4.2 million was
outstanding under $5.0 million Multicurrency loan. Interest is payable on the
$10.0 million outstanding at a weighted average rate of 3.8% and on the $4.2
million at a weighted average rate of 4.6%.

8.  EMPLOYEE SEVERANCE AND OTHER COSTS:

In order to bring its cost structure more in line with revenue projections, in
the second quarter of 2000 the Company announced a plan to eliminate
approximately 125 full-time positions globally. Through December 31, 2001 the
Company had completed the workforce reduction program, and eliminated
approximately 125 positions. In connection with the workforce reduction, the
Company recorded a pre-tax charge of approximately $3.0 million ($1.8 million
net of tax) in the second quarter of 2000, consisting primarily of
severance, outplacement, other employee benefit costs, and facility related
charges. In the fourth quarter of 2001,the Company completed the initiative, and
recorded $766,000 of pre-tax income ($460,000 net of tax) to reflect
lower-than-anticipated costs associated with the program. The remaining
liability of $293,000 will be used primarily for facility-related obligations
that will be paid out over the next few years.



                                       36
<PAGE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                     employee
                                                   severance and
  (In thousands)                                    outplacement     facilities            other             total
--------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>               <C>               <C>
Amount accrued originally                             $1,270            $1,181            $  529            $2,980
Amount paid                                              882               607               179             1,668
Non-cash charges                                                           172                81               253
Adjustment to original liability                         388               159               219               766
--------------------------------------------------------------------------------------------------------------------
Liability at December 31, 2001                        $    0            $  243            $   50            $  293
</TABLE>

9.  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. In 1999, 2000 and the first half of 2001,the Company
made a matching contribution of 25% of each participant's contribution of up to
6% of salary. In the second half of 2001,the matching contribution was increased
to 50% of each participant's contribution of up to 6% of salary. The Company's
matching contributions to this plan totaled approximately $570,000, $277,000 and
$306,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The company maintains an Employee Stock Purchase Plan (the Purchase Plan) which
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 2001, 2000 and 1999, respectively, 60,579,47,740 and 46,747 shares were
purchased under the Purchase Plan. At December 31, 2001, 344,934 shares were
available for issuance under the Purchase Plan.

INCENTIVE STOCK OPTION AND STOCK INCENTIVE PLAN

In 1997,the Company established a plan that provides for the grant of up to
1,000,000 options to acquire the companies Common Stock, consisting of both
incentive and non-qualified stock options (the 1997 Plan). 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 Director's Compensation Subcommittee, which
is responsible for administration of the Plan. 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
Compensation Subcommittee of the Board of Directors. The options generally
expire either 90 days after termination of employment or, if earlier, ten years
after date of grant. No options can be granted after August 2007. The Company
has reserved 3,000,000 shares of Common Stock for the 1997 Plan, of which
1,449,210 are available for grant at December 31, 2001.

The 1997 Plan replaced a similar plan under which 432,866 options were
outstanding at December 31, 2001.


                                       37
<PAGE>

Aggregate stock option activity during 2001, 2000, and 1999 was as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                                             weighted
                                                                                         average exercise
                                                                    shares                     price
----------------------------------------------------------------------------------------------------------
<S>                                                                <C>                      <C>
OPTIONS OUTSTANDING AT 1/1/99                                      1,115,233                $   10.06
 Granted                                                             372,800                    12.37
 Canceled                                                            (70,668)                   20.75
 Exercised                                                           (61,647)                    1.40
----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT 12/31/99                                    1,355,718                    10.50
 Granted                                                             508,900                     8.77
 Canceled                                                           (267,956)                   13.52
 Exercised                                                           (20,630)                    1.51
----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT 12/31/00                                    1,576,032                     9.56
 Granted                                                             774,680                    18.29
 Canceled                                                           (310,390)                   12.83
 Exercised                                                          (112,330)                    5.56
----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT 12/31/01                                    1,927,992                $   12.62
</TABLE>

The weighted average fair value of the options granted in 2001, 2000 and 1999
was estimated as $16.97,$6.34 and $9.30, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                     2001                 2000                   1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>                    <C>
Expected dividend yield                                                0%                   0%                     0%
Risk-free interest rate                                              4.7%                 6.4%                   5.0%
Expected volatility                                                 67.4%                75.6%                  63.5%
Expected holding period                                           6.4 yrs.               7 yrs.                 7 yrs.
<CAPTION>

OPTIONS OUTSTANDING
---------------------------------------------------------------------------------------------------------------------
                                                                weighted average
         range of                                                   remaining                      weighted
         exercise                outstanding at                    contractual                 average exercise
          price                December 31, 2001                      life                           price
---------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                            <C>                      <C>
      $ 0.91 -  $ 3.10                  432,866                        4.5                      $     1.52
      $ 6.20 -  $ 9.30                  304,340                        8.4                            8.55
      $ 9.31 -  $12.40                  160,296                        7.8                           10.33
      $12.41 -  $15.50                  271,850                        7.4                           13.54
      $15.51 -  $21.70                  607,260                        9.4                           19.87
      $21.71 -  $31.00                  151,380                        6.6                           24.24
<CAPTION>

OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------------------------
             range of                       options exercisable                  weighted-average
          exercise price                   at December 31, 2001                   exercise price
---------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                                    <C>
           $ 0.91  - $ 3.10                               305,899                                $     1.40
           $ 6.20  - $ 9.30                                60,220                                      8.52
           $ 9.31  - $12.40                                52,156                                     10.36
           $12.41  - $15.50                               107,400                                     14.31
           $15.51  - $21.70                                40,720                                     27.68
           $21.71  - $31.00                                88,192                                     24.23
</TABLE>


                                       38
<PAGE>

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 2001, 2000 and 1999 would have been $3.6 million, $2.6
million and $2.0 million respectively. The Company's pro-forma net income and
pro-forma net income per diluted share for 2001, 2000,and 1999 would have been
reduced to the amounts below:
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
  (In thousands, except per share data)                                    2001           2000            1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>               <C>
  Net income (loss)
   As reported                                                     $    4,206        $  (2,130)        $   7,729
   Pro forma                                                            1,575           (3,846)            6,159
  Net income (loss) per diluted share
   As reported                                                           0.33            (0.18)             0.65
   Pro forma                                                             0.12            (0.33)             0.52
</TABLE>

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 December 31, 2002, and will be 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
31,2001,the maximum amount which could be required to be paid under these
Agreements, if such events occur, is approximately $6.4 million.

10. LEASES:

The Company leases facilities, office equipment and computers under agreements
which are classified as capital and operating leases. The leases have initial
terms which range from two to seven 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, 2001:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                              capital               operating
  (in thousands)                                                               leases                 leases
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                     <C>
  2002                                                                     $    753                $  6,448
  2003                                                                          598                   5,545
  2004                                                                          521                   4,132
  2005                                                                          289                   3,554
  2006                                                                           36                   1,760
  Thereafter                                                                                          1,451
-------------------------------------------------------------------------------------------------------------
  Total minimum lease payments                                                2,197                $ 22,890
  Amounts representing interest                                                (175)
-------------------------------------------------------------------------------------------------------------
  Present value of net minimum lease payments                                 2,022
  Current portion                                                               660
-------------------------------------------------------------------------------------------------------------
  Obligations under capital leases, less current portion                   $  1,362
</TABLE>

The Company expects rental income from subleases of approximately $0.4 million
per year from 2002 through 2005 and $0.1 million in 2006 based on a sublease
agreement executed in June 2000.

Rental expense under operating leases for 2001, 2000 and 1999 was $6.1
million, $5.6 million and $4.9 million, respectively.


                                       39
<PAGE>

11. INCOME TAXES:

The provision for income taxes for the years ended December 31, 2001, 2000 and
1999, is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
  (In thousands)                                                  2001                   2000                   1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                    <C>                    <C>
 Current:
 Federal                                                        $ 1,604                $(1,060)               $ 1,845
 State and local                                                    233                    (77)                   171
 Foreign                                                            540                    203                    219
----------------------------------------------------------------------------------------------------------------------
  Subtotal                                                        2,377                   (934)                 2,235

 Deferred:
 Federal                                                            944                    107                  1,850
 State and local                                                   (288)                  (632)                   443
 Foreign                                                           (274)                  (488)                    62
----------------------------------------------------------------------------------------------------------------------
  Subtotal                                                          382                 (1,013)                 2,355

 Benefit applied to reduce goodwill                                 388                    381                    378
----------------------------------------------------------------------------------------------------------------------
Total provision                                                 $ 3,147                $(1,566)               $ 4,968
</TABLE>

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
(In thousands)                                                  2001                    2000                   1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                    <C>                    <C>
United States                                                   $ 9,225                $(2,284)               $13,301
Foreign                                                          (1,872)                (1,412)                  (604)
----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                               $ 7,353                $(3,696)               $12,697
</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>

----------------------------------------------------------------------------------------------------------------------
                                                                2001                   2000                   1999
----------------------------------------------------------------------------------------------------------------------
<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             7.6                   (5.6)                   3.9
State and local income taxes, net of federal benefit            (1.3)                   7.4                    3.5
Tax-exempt interest income                                      (1.5)                   7.2                   (3.2)
Non-deductible goodwill amortization                             1.8
Other                                                            1.2                   (1.6)                   (.1)
----------------------------------------------------------------------------------------------------------------------
Total                                                           42.8%                  42.4%                  39.1%
</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 $1.7 million.


                                       40
<PAGE>

Components of the Company's net deferred tax asset and liability included in the
consolidated balance sheet at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
  (In thousands)                                                                       2001                 2000
--------------------------------------------------------------------------------------------------------------------

<S>                                                                                  <C>                    <C>
  DEFERRED TAX ASSETS:
  Compensation and employee benefits                                                 $  369                 $  106
  Accrued expenses and other future deductible items                                    639                    876
  Operating loss carryforward                                                         2,390                  1,166
  Tax benefit of unrealized losses                                                                              78
  Deferred state income taxes                                                           420                    255
  Capital loss carryforward                                                             158                    155
  Foreign tax credit carryforward                                                       287
  Other                                                                                  34
--------------------------------------------------------------------------------------------------------------------
  TOTAL DEFERRED TAX ASSETS                                                           4,297                  2,636

  Deferred tax liabilities:
  Software costs                                                                      3,429                  3,003
  Depreciation                                                                          903                      1
  Intangible assets                                                                   2,248                  1,638
  Unrealized foreign exchange gains                                                     244                    214
  Change of tax accounting method                                                       479
  Tax cost of unrealized gains                                                           23
--------------------------------------------------------------------------------------------------------------------
  TOTAL DEFERRED TAX LIABILITY                                                        7,326                  4,856
--------------------------------------------------------------------------------------------------------------------
  TOTAL NET DEFERRED TAX LIABILITY                                                   $3,029                 $2,220
</TABLE>

Of the deferred tax asset for operating loss carryforward of $2.4 million, $1.1
million relates to amounts that can be carried forward indefinitely, and $1.3
million relates to amounts that expire at various times from 2005 to 2020.Of the
deferred tax asset for capital loss carryforward of $158,000, $140,000 will
expire in 2005,$14,000 will expire in 2006, and $4,000 will expire in 2007. The
deferred tax asset for foreign tax credit carryforward of $287,000 will expire
in 2007.

The Company believes that it will have sufficient operating income and capital
gains to utilize the loss carryforwards before their expiration and,
accordingly, no valuation allowances have been recorded. Likewise, the Company
believes that it will be able to utilize the foreign tax credit carryforward
before its expiration and, accordingly, no valuation allowance has been
recorded.

Income tax benefits related to stock option exercises and the employee stock
purchase plan were $395,000, $22,000 and $141,000 for 2001, 2000 and
1999, 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 $101,000 in
2001, $211,000 in 2000 and ($289,000) in 1999.

12. ACQUISITIONS:

Details of the Company's acquisitions from 1999 through 2001 are listed below.
The acquisitions have been accounted for using the purchase method of
accounting. The escrow accounts referred to have been established at acquisition
date to provide indemnification of sellers' representations and warranties.

Valuation of the Common Stock issued in the 1999-2001 acquisitions was based on
an appraisal obtained by the Company which provided for a discount of the shares
due to lock-up restrictions and the lack of registration of the shares.

                                       41
<PAGE>

2001:

In February 2001,the Company acquired AAC Consulting Group, Inc., a full service
regulatory consulting firm with offices in Rockville, Maryland. Total
acquisition costs consisted of approximately $10.9 million in cash and 374,665
shares of the Company's Common Stock. Of the total shares,124,888 shares were
placed in an escrow account and have subsequently been released.

2000:

In April 2000,the Company acquired SYNERmedica Pty Ltd., a contract research
organization with offices in Melbourne and Sydney, Australia. Total acquisition
costs consisted of approximately $2.2 million in cash and 78,500 shares of the
Company's Common Stock. The shares were placed in an escrow account,67% of which
were released in April 2001 with the remainder to be released in April 2002.

1999:

In August 1999, the Company acquired Specialist Monitoring Services (SMS), a
contract research organization located in Crowthorne, United Kingdom. Total
acquisition costs consisted of approximately $7.5 million in cash and 141,680
shares of the Company's Common Stock.

In July 1999, the Company acquired Health Care Communications Inc. (HCC), a New
Jersey based medical communications company, and HCC Health Care Communications
(1991) Ltd., a Toronto based contract research organization. Total acquisition
costs consisted of approximately $5.7 million in cash and 174,559 shares of the
Company's Common Stock. Of the total purchase price,$0.5 million in cash and
31,943 shares were placed in an escrow account pursuant to the HCC Purchase
Agreement, of which $0.1 million and 17,541 shares were released in July 2000
and the remainder released in July 2001.

The purchase price of HCC has been increased based upon the achievement of
certain operating results from acquisition date through December 31, 2001.The
purchase price has been increased by $9.6 million as a result of the additional
consideration.

In June 1999, the Company acquired ESCLI S.A., a contract research organization
located in Paris, France, for approximately $2.7 million in cash.

In January 1999, the Company acquired Research Consultants (International)
Holdings Ltd. (IRC), a U.K.-based company. Total acquisition costs consisted of
approximately $4.4 million in cash and 87,558 shares of Common Stock.

The following unaudited pro-forma results of operations assume the 2001 and 2000
acquisitions occurred at the beginning of 2000:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
  (In thousands)                                                             2001                        2000
----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                         <C>
Net revenues                                                              $ 156,182                   $ 131,195
Net income (loss)                                                             4,333                      (1,806)
Net income (loss) per diluted share                                            0.34                       (0.15)
Weighted average shares                                                      12,918                      12,104
</TABLE>

The pro-forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been consummated
at January 1,2001 and 2000,nor are they necessarily indicative of future
operating results.

In 2001,the Company reached an agreement with the sellers relating to the final
release of escrow established in connection with a 1998 acquisition. The Company
received 17,280 shares of its Common Stock, valued at $350,000, with the
remainder of the escrow released to the sellers.

13. INVESTMENT:

In January 1999, the Company acquired a minority interest in Digineer, Inc.
(Digineer, formerly Component Software International, Inc.), an internet
healthcare consulting and software development company, for approximately $1.6
million in cash and 19,995 shares of the Company's Common Stock valued at
approximately $0.3 million. The Company accounts for this investment under the
cost method and the investment is classified in Other Assets in the consolidated
balance sheet. Concurrent with this transaction, the



                                       42
<PAGE>

Company entered into a Multi-Year Strategic Service Agreement with Digineer
whereby the Company could pay Digineer $7.0 million over a four-year period in
exchange for strategic software consulting and development services from
Digineer. During the first two years of the agreement, the Company was required
to pay $3.5 million. The Company reached this minimum fee obligation for the
first two years, and in October 2000, the Company exercised its right to
terminate the Multi-Year Strategic Service Agreement.

14. RELATED PARTY TRANSACTION:

The Company made payments in 2001, 2000 and 1999 totaling approximately $0.1
million, $0.2 million, and $0.5 million, respectively, to a construction company
owned by a relative of the Company's primary shareholder, for construction and
renovations at various Company locations.

15. SUBSEQUENT EVENT:

In January 2002, the Company acquired the assets of Clinical and Pharmacologic
Research, Inc., a specialist in Phase I studies for the generic drug industry
located in Morgantown, West Virginia. Total acquisition costs consisted of
approximately $8.0 million cash, 314,243 shares of the Company's common stock,
and a $6.0 million convertible subordinated note. The note is convertible to
314,243 shares of the Company's common stock at any time before January 29,2005,
the Maturity Date. This acquisition will be accounted for using the purchase
method of accounting. The Company has not yet quantified the purchase price
allocations. Thus, the amount of goodwill and other indefinite-lived assets
recorded with this transaction has not been determined.

16. SEGMENT INFORMATION:

With its July 1999, acquisition of HCC, the Company is managed through two
reportable segments, namely, the contract research services group and the
medical communications group. The contract research services group constitutes
the Company's core business and includes clinical trial management, clinical
data management, statistical analysis, medical writing and regulatory/validation
consultation and representation. The medical communications group, which
includes only HCC, provides organizational, meeting management and publication
services to professional organizations and pharmaceutical companies. Overhead
costs are included in the contract research services group and have not been
allocated.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
  (In thousands)                                                 2001              2000             1999
----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>
Net revenues
Contract research services                                   $  146,982        $  114,785        $  114,492
Medical communications                                            7,320             5,702             2,659
----------------------------------------------------------------------------------------------------------------
                                                             $  154,302        $  120,487        $  117,151
Depreciation and amortization
Contract research services                                   $    9,491        $    7,501        $    6,587
Medical communications                                              497               429               144
----------------------------------------------------------------------------------------------------------------
                                                             $    9,988        $    7,930        $    6,731
Income tax
Contract research services                                   $    1,793        $   (2,460)       $    4,428
Medical communications                                            1,354               894               540
----------------------------------------------------------------------------------------------------------------
                                                             $    3,147        $   (1,566)       $    4,968
Net income (loss)
Contract research services                                   $    2,048        $   (3,818)       $    6,952
Medical communications                                            2,158             1,688               777
----------------------------------------------------------------------------------------------------------------
                                                             $    4,206        $   (2,130)       $    7,729
Identifiable assets
Contract research services                                   $  180,964        $  158,150        $  172,542
Medical communications                                           23,087            18,369            11,840
----------------------------------------------------------------------------------------------------------------
                                                             $  204,051        $  176,519        $  184,382
</TABLE>


                                       43
<PAGE>

Financial information by geographic area is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
  (In thousands)                                                 2001          2000          1999
----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>
   Net revenues
   North America                                             $  107,200    $   75,563    $   81,883
   Foreign                                                       47,102        44,924        35,268
----------------------------------------------------------------------------------------------------------------
                                                             $  154,302    $  120,487    $  117,151

   Identifiable assets
   North America                                             $  137,642    $  118,869    $  123,935
   Foreign                                                       66,409        57,650        60,447
----------------------------------------------------------------------------------------------------------------
                                                             $  204,051    $  176,519    $  184,382
</TABLE>

Net revenues from sponsors that accounted for more than 10% of the Company's
consolidated net revenues for 2001, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                               2001           2000            1999
----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>              <C>
  Sponsor A                                                     12%              15%              24%
  Sponsor B                                                     11%              13%               6%
  Sponsor C                                                      3%               8%              18%
</TABLE>



                                       44
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

Kendle International Inc.

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

/s/ PricewaterhouseCoopers LLP

February 15,2002