##### 



Securities and Exchange Commission

Washington, D.C. 20549


Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the Quarterly Period Ended
March 31, 2003

Commission file number
000-23520

QUINTILES TRANSNATIONAL CORP.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                 |  | 56-1714315                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|4709 Creekstone Dr., Suite 200
Durham, NC                      |  | 27703-8411                          
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

(919) 998-2000




(Registrants telephone number, including area code)


N/A




(Former name, former address and former fiscal year, if changed since last report)


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

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

The number of shares of Common Stock, $.01 par value, outstanding as of March
31, 2003 was 118,283,920.





---



##### 



Index

|                              |                                                                                                     |                                                                                              |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                                     |                                                                                              |    | Page
|                              |                                                                                                     |                                                                                              |    |     
|Part I. Financial Information |                                                                                                     |                                                                                              |    |     
|                              | Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
March 31, 2003 and |                                                                                              |    |      |  
|                              |                                                                                                     | December 31, 2002                                                                            |    |      | 3 | 
|                              |                                                                                                     | Condensed consolidated statements of
operations  Three months ended
March 31, 2003 and 2002 |    |      | 4 | 
|                              |                                                                                                     | Condensed consolidated statements of
cash flows  Three months ended
March 31, 2003 and 2002 |    |      | 5 | 
|                              |                                                                                                     | Notes to condensed consolidated financial
statements  March 31, 2003                        |    |      | 6 | 
|                              | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations       |                                                                                              |    | 22   |  
|                              | Item 3. Quantitative and Qualitative Disclosure
about Market Risk                                   |                                                                                              |    | 38   |  
|                              | Item 4. Controls and Procedures                                                                     |                                                                                              |    | 38   |  
|Part II. Other Information    |                                                                                                     |                                                                                              |    |     
|                              | Item 1. Legal Proceedings                                                                           |                                                                                              |    | 38   |  
|                              | Item 2. Changes in Securities and Use of Proceeds                                                   |                                                                                              |    | 40   |  
|                              | Item 3. Defaults upon Senior Securities  Not Applicable                                            |                                                                                              |    | 40   |  
|                              | Item 4. Submission of Matters to a Vote of Security
Holders  Not Applicable                        |                                                                                              |    | 40   |  
|                              | Item 5. Other Information  Not Applicable                                                          |                                                                                              |    | 40   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                            |                                                                                              |    | 40   |  
|Signatures                    |                                                                                                     |                                                                                              | 42 |     
|Certifications                |                                                                                                     |                                                                                              | 43 |     
|Exhibit Index                 |                                                                                                     |                                                                                              | 47 |     

2



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##### 



Quintiles Transnational Corp. and Subsidiaries

Condensed Consolidated Balance Sheets


|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |         |           |           | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------------------- | ------- | --------------------------------- | --------- | ----------- | ------- | --------- | --------- | 
|                                     |                                                                                                                                                              |                                            |                      |         | March 31                          |           | December 31
|                                     |                                                                                                                                                              |                                            |                      |         | 2003                              |           | 2002       
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |            
|                                     |                                                                                                                                                              |                                            |                      |         | (unaudited)                       |           | (Note 1)   
|                                     |                                                                                                                                                              |                                            |                      |         | (in thousands, except share data)
|Assets                               |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|Current assets:                      |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     | Cash and cash equivalents                                                                                                                                    |                                            | $                    | 704,124 |                                   |           | $           | 644,284 |          
|                                     | Trade accounts receivable and unbilled services, net                                                                                                         |                                            |                      | 319,453 |                                   |           |             | 353,535 |          
|                                     | Investments in debt securities                                                                                                                               |                                            |                      | 27,137  |                                   |           |             | 27,218  |          
|                                     | Prepaid expenses                                                                                                                                             |                                            |                      | 23,660  |                                   |           |             | 22,516  |          
|                                     | Other current assets and receivables                                                                                                                         |                                            |                      | 45,157  |                                   |           |             | 42,654  |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              |                                            | Total current assets |         |                                   | 1,119,531 |             |         |           | 1,090,207 | 
|Property and equipment               |                                                                                                                                                              |                                            | 474,705              |         |                                   |           | 475,543     |        
|Less accumulated depreciation        |                                                                                                                                                              |                                            | (218,402             | )       |                                   |           | (213,385    | )      
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              |                                            | 256,303              |         |                                   |           | 262,158     |        
|Intangibles and other assets:        |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     | Investments in debt securities                                                                                                                               |                                            |                      | 9,846   |                                   |           |             | 9,453   |          
|                                     | Investments in marketable equity securities                                                                                                                  |                                            |                      | 48,081  |                                   |           |             | 64,926  |          
|                                     | Investments in non-marketable equity securities and loans                                                                                                    |                                            |                      | 46,269  |                                   |           |             | 46,449  |          
|                                     | Investments in unconsolidated affiliates                                                                                                                     |                                            |                      | 121,101 |                                   |           |             | 121,101 |          
|                                     | Commercial rights and royalties                                                                                                                              |                                            |                      | 130,284 |                                   |           |             | 131,536 |          
|                                     | Goodwill                                                                                                                                                     |                                            |                      | 71,217  |                                   |           |             | 70,133  |          
|                                     | Other identifiable intangibles, net                                                                                                                          |                                            |                      | 135,942 |                                   |           |             | 142,715 |          
|                                     | Deferred income taxes                                                                                                                                        |                                            |                      | 177,078 |                                   |           |             | 174,534 |          
|                                     | Deposits and other assets                                                                                                                                    |                                            |                      | 49,192  |                                   |           |             | 38,871  |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              |                                            | 789,010              |         |                                   |           | 799,718     |        
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              |                                            | Total assets         |         | $                                 | 2,164,844 |             |         | $         | 2,152,083 | 
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|Liabilities and Shareholders Equity |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|Current liabilities:                 |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     | Accounts payable and accrued expenses                                                                                                                        |                                            | $                    | 237,800 |                                   |           | $           | 238,269 |          
|                                     | Credit arrangements                                                                                                                                          |                                            |                      | 20,009  |                                   |           |             | 21,719  |          
|                                     | Unearned income                                                                                                                                              |                                            |                      | 227,231 |                                   |           |             | 239,606 |          
|                                     | Income taxes payable                                                                                                                                         |                                            |                      | 17,177  |                                   |           |             | 20,067  |          
|                                     | Other current liabilities                                                                                                                                    |                                            |                      | 2,343   |                                   |           |             | 2,073   |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              | Total current liabilities                  |                      |         | 504,560                           |           |             |         | 521,734   |          
|Long-term liabilities:               |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     | Credit arrangements, less current portion                                                                                                                    |                                            |                      | 17,352  |                                   |           |             | 18,855  |          
|                                     | Other liabilities                                                                                                                                            |                                            |                      | 17,925  |                                   |           |             | 13,108  |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              |                                            | 35,277               |         |                                   |           | 31,963      |        
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              | Total liabilities                          |                      |         | 539,837                           |           |             |         | 553,697   |          
|Shareholders equity:                |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     | Preferred stock, none issued and outstanding
at March 31, 2003 and December 31, 2002                                                                         |                                            |                      |        |                                   |           |             |        |          
|                                     | Common stock and additional paid-in capital,
118,283,920 and 117,850,597 shares issued
and outstanding at March 31, 2003 and
December 31, 2002, respectively |                                            |                      | 884,605 |                                   |           |             | 881,927 |          
|                                     | Retained earnings                                                                                                                                            |                                            |                      | 741,621 |                                   |           |             | 716,465 |          
|                                     | Accumulated other comprehensive loss                                                                                                                         |                                            |                      | (1,219  | )                                 |           |             | (6      | )        
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              | Total shareholders equity                 |                      |         | 1,625,007                         |           |             |         | 1,598,386 |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        
|                                     |                                                                                                                                                              | Total liabilities and shareholders equity |                      | $       | 2,164,844                         |           |             | $       | 2,152,083 |          
|                                     |                                                                                                                                                              |                                            |                      |         |                                   |           |             |        

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

3



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##### 



Quintiles Transnational Corp. and Subsidiaries

Condensed Consolidated Statements of Operations


(unaudited)


|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------ | ------- | ------------------------------------- | ------- | ---- | ------- | ------- | ------- | -
|                                                                                                                               |                                                     |                                |         | Three Months Ended March 31,         
|                                                                                                                               |                                                     |                                |         |                                      
|                                                                                                                               |                                                     |                                |         | 2003                                  |         | 2002
|                                                                                                                               |                                                     |                                |         |                                       |         |     
|                                                                                                                               |                                                     |                                |         | (in thousands, except per share data)
|Gross revenues                                                                                                                 |                                                     | $                              | 511,607 |                                       |         | $    | 493,296 |        
|Costs, expenses and other:                                                                                                     |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               |                                                     | Costs of revenues              |         |                                       | 341,751 |      |         |         | 342,494 |  
|                                                                                                                               |                                                     | General and administrative     |         |                                       | 131,004 |      |         |         | 127,233 |  
|                                                                                                                               |                                                     | Interest (income) expense, net |         |                                       | (3,768  | )    |         |         | (3,262  | )
|                                                                                                                               |                                                     | Other expense (income), net    |         |                                       | 4,499   |      |         |         | 1,069   |  
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               |                                                     |                                | 473,486 |                                       |         |      | 467,534 |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Income before income taxes                                                                                                     |                                                     |                                | 38,121  |                                       |         |      | 25,762  |        
|Income tax expense                                                                                                             |                                                     |                                | 12,961  |                                       |         |      | 8,501   |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Income before equity in losses of unconsolidated
affiliates and other                                                          |                                                     |                                | 25,160  |                                       |         |      | 17,261  |        
|Equity in losses of unconsolidated affiliates and other                                                                        |                                                     |                                | (4      | )                                     |         |      |        |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Income from operations                                                                                                         |                                                     |                                | 25,156  |                                       |         |      | 17,261  |        
|Cumulative effect on prior years (to December 31,
2001) of changing to a different method of recognizing
deferred income taxes |                                                     |                                |        |                                       |         |      | 45,659  |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Net income                                                                                                                     |                                                     | $                              | 25,156  |                                       |         | $    | 62,920  |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Basic net income per share:                                                                                                    |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               | Income from operations                              |                                | $       | 0.21                                  |         |      | $       | 0.15    |        
|                                                                                                                               | Cumulative effect of change in accounting principle |                                |         |                                      |         |      |         | 0.38    |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               | Basic net income per share                          |                                | $       | 0.21                                  |         |      | $       | 0.53    |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Diluted net income per share:                                                                                                  |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               | Income from operations                              |                                | $       | 0.21                                  |         |      | $       | 0.14    |        
|                                                                                                                               | Cumulative effect of change in accounting principle |                                |         |                                      |         |      |         | 0.38    |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               | Diluted net income per share                        |                                | $       | 0.21                                  |         |      | $       | 0.52    |        
|                                                                                                                               |                                                     |                                |         |                                       |         |      |         |        
|Shares used in computing net income per share:                                                                                 |                                                     |                                |         |                                       |         |      |         |        
|                                                                                                                               | Basic                                               |                                |         | 118,100                               |         |      |         | 118,685 |        
|                                                                                                                               | Diluted                                             |                                |         | 118,564                               |         |      |         | 120,227 |        

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

4



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##### 



Quintiles Transnational Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows


(unaudited)


|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |         |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | - | --------------------------- | ------- | ---- | - | ------- | ------- | -
|                                                                                              |                                                                                                                                |   | Three Months Ended March 31
|                                                                                              |                                                                                                                                |   |                            
|                                                                                              |                                                                                                                                |   | 2003                        |         | 2002
|                                                                                              |                                                                                                                                |   |                             |         |     
|                                                                                              |                                                                                                                                |   | (in thousands)             
|Operating activities                                                                          |                                                                                                                                |   |                             |         |      |   |         |        
|                                                                                              | Net income                                                                                                                     |   | $                           | 25,156  |      |   | $       | 62,920  |  
|                                                                                              | Cumulative effect on prior years (to December 31, 2001) of
changing to a different method of recognizing
deferred income taxes |   |                             |        |      |   |         | (45,659 | )
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|                                                                                              | Income from operations                                                                                                         |   |                             | 25,156  |      |   |         | 17,261  |  
|Adjustments to reconcile income from operations to net cash
provided by operating activities: |                                                                                                                                |   |                             |         |      |   |         |        
|                                                                                              | Depreciation and amortization                                                                                                  |   |                             | 22,643  |      |   |         | 21,792  |  
|                                                                                              | Restructuring charge (payments) accrual, net                                                                                   |   |                             | (1,752  | )    |   |         | (8,414  | )
|                                                                                              | (Gain) loss from sales and impairments of investments, net                                                                     |   |                             | (17,952 | )    |   |         | (4,782  | )
|                                                                                              | Benefit from deferred income tax expense                                                                                       |   |                             | (2,088  | )    |   |         | (2,233  | )
|                                                                                              | Change in operating assets and liabilities                                                                                     |   |                             | 32,166  |      |   |         | 32,637  |  
|                                                                                              | Other                                                                                                                          |   |                             | (195    | )    |   |         | (1,120  | )
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|Net cash provided by operating activities                                                     |                                                                                                                                |   | 57,978                      |         |      |   | 55,141  |        
|Investing activities                                                                          |                                                                                                                                |   |                             |         |      |   |         |        
|Acquisition of property and equipment                                                         |                                                                                                                                |   | (9,362                      | )       |      |   | (10,703 | )      
|Acquisition of businesses, net of cash acquired                                               |                                                                                                                                |   |                            |         |      |   | (25,248 | )      
|Acquisition of commercial rights                                                              |                                                                                                                                |   | (11,874                     | )       |      |   | (3,750  | )      
|Proceeds from disposition of property and equipment                                           |                                                                                                                                |   | 2,265                       |         |      |   | 2,336   |        
|(Purchases of) proceeds from debt securities, net                                             |                                                                                                                                |   | (527                        | )       |      |   | (215    | )      
|Purchases of equity securities and other investments                                          |                                                                                                                                |   | (393                        | )       |      |   | (6,025  | )      
|Proceeds from sale of equity securities and other investments                                 |                                                                                                                                |   | 22,703                      |         |      |   | 9,937   |        
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|Net cash provided by (used in) investing activities                                           |                                                                                                                                |   | 2,812                       |         |      |   | (33,668 | )      
|Financing activities                                                                          |                                                                                                                                |   |                             |         |      |   |         |        
|Principal payments on credit arrangements, net                                                |                                                                                                                                |   | (4,770                      | )       |      |   | (2,490  | )      
|Issuance of common stock, net                                                                 |                                                                                                                                |   | 2,328                       |         |      |   | 1,964   |        
|Repurchase of common stock                                                                    |                                                                                                                                |   |                            |         |      |   | (4,781  | )      
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|Net cash used in financing activities                                                         |                                                                                                                                |   | (2,442                      | )       |      |   | (5,307  | )      
|Effect of foreign currency exchange rate changes on cash                                      |                                                                                                                                |   | 1,492                       |         |      |   | (1,606  | )      
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|Increase in cash and cash equivalents                                                         |                                                                                                                                |   | 59,840                      |         |      |   | 14,560  |        
|Cash and cash equivalents at beginning of period                                              |                                                                                                                                |   | 644,284                     |         |      |   | 565,063 |        
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        
|Cash and cash equivalents at end of period                                                    |                                                                                                                                | $ | 704,124                     |         |      | $ | 579,623 |        
|                                                                                              |                                                                                                                                |   |                             |         |      |   |         |        

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

5



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##### 



Quintiles Transnational Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)


March 31, 2003

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the Consolidated Financial Statements and Notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2002 of Quintiles
Transnational Corp. (the Company), as amended.

The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 2002
financial statements have been reclassed or modified to conform with the 2003
financial statement presentation.

2. Employee Stock Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

Pro forma information regarding net income and net income per share is required
by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. The per share weighted-average fair value of stock
options granted during the three months ended March 31, 2003 and 2002 was $3.59
and $5.38 per share, respectively, on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:

|                                      |  |                        |      |                              |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------------------- |  | ---------------------- | ---- | ---------------------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                      |  | Employee Stock Options |      | Employee Stock Purchase Plan
|                                      |  | Three months ended     |      | Three months ended          
|                                      |  |                        |      |                             
|                                      |  | 2003                   |      | 2002                         |  | 2003 |      | 2002
|                                      |  |                        |      |                              |  |      |      |     
|Expected dividend yield               |  |                        | 0    | %                            |  |      | 0    | %    |  |  | 0    | % |  |  | 0    | %
|Risk-free interest rate               |  |                        | 2.0  | %                            |  |      | 4.1  | %    |  |  | 1.2  | % |  |  | 1.7  | %
|Expected volatility                   |  |                        | 40.0 | %                            |  |      | 40.0 | %    |  |  | 40.0 | % |  |  | 40.0 | %
|Expected life (in
years from vesting) |  |                        | 0.88 |                              |  |      | 0.88 |      |  |  | 0.25 |   |  |  | 0.25 |  

6



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##### 



The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are freely
transferable. All available option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Companys employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.

The Companys pro forma information follows (in thousands, except for net
income (loss) per share information):

|                                                                            |  |                              |        |      |  |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | - | ------ | -
|                                                                            |  | Three months Ended March 31,
|                                                                            |  |                             
|                                                                            |  | 2003                         |        | 2002
|                                                                            |  |                              |        |     
|Net income as reported                                                      |  | $                            | 25,156 |      |  | $ | 62,920 |  
|Less: pro forma adjustment for stock-
based compensation, net of income tax |  |                              | (3,819 | )    |  |   | (3,981 | )
|                                                                            |  |                              |        |      |  |   |        |  
|Pro forma net income                                                        |  | $                            | 21,337 |      |  | $ | 58,939 |  
|                                                                            |  |                              |        |      |  |   |        |  
|Basic net income per share:                                                 |  |                              |        |      |  |   |        |  
|As reported                                                                 |  | $                            | 0.21   |      |  | $ | 0.53   |  
|Pro forma                                                                   |  |                              | 0.18   |      |  |   | 0.50   |  
|                                                                            |  |                              |        |      |  |   |        |  
|Effect of pro forma adjustment                                              |  | $                            | (0.03  | )    |  | $ | (0.03  | )
|                                                                            |  |                              |        |      |  |   |        |  
|Diluted net income per share:                                               |  |                              |        |      |  |   |        |  
|As reported                                                                 |  | $                            | 0.21   |      |  | $ | 0.52   |  
|Pro forma                                                                   |  |                              | 0.18   |      |  |   | 0.49   |  
|                                                                            |  |                              |        |      |  |   |        |  
|Effect of pro forma adjustment                                              |  | $                            | (0.03  | )    |  | $ | (0.03  | )
|                                                                            |  |                              |        |      |  |   |        |  

3. Commercial Rights and Royalties

The Company has entered into financial transactions and other arrangements with
customers and other parties in which a portion of the Companys revenues and
operating income depends on the performance of a specific pharmaceutical
product. These transactions may include providing product development and/or
commercialization services to customers, as well as the funding of such
services, in return for royalties or commissions based on the sales of the
customers product. Below is a brief description of these agreements:

In May 1999, the Company entered into an agreement with CV Therapeutics, Inc.
(CVTX) to commercialize Ranexa for angina in the United States and Canada.
Under the terms of this agreement, the Company purchased 1,043,705 shares of
CVTXs common stock for $5 million of which the Company owns 126,705 shares as
of March 31, 2003, and has made available a $10 million credit line for
pre-launch sales and marketing activities. If Ranexa, which has been
submitted to the United States Food and Drug Administration (FDA) under a New
Drug Application (NDA) for review, is approved, the Company will provide a
$10 million milestone payment to CVTX which will be used to pay off any
outstanding balances on the credit line. The Company will also make available
an additional line of credit to help fund a portion of the first year sales and
marketing expenses. Additionally, the Company has committed to provide a
minimum of approximately $14.4 million per year of commercialization services
and to fund a minimum of $7.8 million per year of marketing activities, for a
period of five years. In return it will receive payment for services rendered
by the Company in year one and royalties based on the net sales of Ranexa in
years two through five subject to a cap not to exceed 300% of funding by the
Company in any year or over the life of the contract. In addition, the Company
will also receive royalties in years six and seven.

7



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In December 1999, the Company obtained the distribution rights to market four
pharmaceutical products in the Philippines from a large pharmaceutical customer
in exchange for providing certain commercialization services amounting to
approximately $5.1 million during the two-year period ended December 31, 2001.
As of March 31, 2003, the Company has capitalized 251.8 million philippino
pesos (approximately $4.7 million) related to the cost of acquiring these
commercial rights, and is amortizing these costs over five years. Under the
terms of the agreement, the customer has the option to reacquire the rights to
the four products from the Company after seven years for a price to be
determined at the exercise date.

In January 2001, the Company entered into an agreement with Scios Inc. (SCIO)
to market Natrecor® for acute congestive heart failure in the United States and
Canada. Under the terms of the agreement, the Company agreed to provide $30
million in funding over a two and one-half year period for sales and marketing
activities following product launch. The $30 million in payments are included
in the net present value calculation which serves as the basis for revenue to
be recognized over the service period. As of March 31, 2003, $26.8 million has
been paid by the Company. The payments are reported in the accompanying
statement of cash flows as an investing activity  acquisition of commercial
rights. In addition to receiving payments on a fee for service basis for
providing commercialization services, the Company will receive royalties based
on net sales of the product from 2002 through 2008. The royalty payments are
subject to minimum and maximum amounts of $50 million and $65 million,
respectively, over the life of the agreement. Through March 31, 2003, the
Company received payments totaling approximately $12.7 million, of which
approximately $11.8 million was received during the three months ended March
31, 2003. The proceeds are reported in the accompanying statement of cash
flows as an operating activity  change in operating assets and liabilities.
Initially, the Company also received warrants to purchase 700,000 shares of
SCIOs common stock at $20 per share, exercisable in installments over two and
one-half years. During December 2002, the Company agreed to permit SCIO to
hire the sales force the Company had previously provided under the contract
effective December 31, 2002 in return for (a) SCIO reimbursing the Company for
the operating profit that the Company would have earned between that date and
May 31, 2003, the date on which SCIO would be permitted to hire the sales force
under the contract, and (b) advancing from May 31, 2003 to December 31, 2002
the Companys ability to exercise the remaining unexercisable warrants. The
early settlement of the Companys service obligation resulted in accelerating
the recognition of revenues of approximately $9.3 million in the fourth quarter
of 2002.

In June 2001, the Company entered into an agreement with Pilot Therapeutics,
Inc. (PLTT) to commercialize a natural therapy for asthma, AIROZIN, in the
United States and Canada. Under the terms of the agreement, the Company will
provide commercialization services for AIROZIN and a milestone-based $6
million line of credit which is convertible into PLTTs common stock, of which
$4 million was funded by the Company as of March 31, 2003. Further, based on
achieving certain milestones, the Company has committed to funding 50% of sales
and marketing activities for AIROZIN over five years with a $6 million limit
per year. Following product launch, the Company will receive royalties based
on the net sales of AIROZIN. The royalty percentage will vary to allow the
Company to achieve a minimum rate of return.

In December 2001, the Company entered into an agreement with Discovery
Laboratories, Inc. (DSCO) to commercialize, in the United States, DSCOs
humanized lung surfactant, Surfaxin®, which is currently in Phase III studies.
Under the terms of the agreement, the Company acquired 791,905 shares of DSCOs
common stock and a warrant to purchase 357,143 shares of DSCOs common stock at
$3.48 per share for a total of $3 million, and has agreed to make available a
line of credit up to $10 million for pre-launch commercialization services as
certain milestones are achieved by DSCO. As of March 31, 2003, the Company

8



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has made $5.7 million available under the line of credit, of which $1.6 million
has been funded. In addition, the Company receives warrants to purchase
approximately 38,000 shares of DSCO common stock at an exercise price of $3.03
per share for each million dollars made available by the Company under the line
of credit as milestones are achieved. The Company has agreed to fund the sales
and marketing activities of this product up to $10 million per year for seven
years. In return, the Company will receive commissions based on net sales of
Surfaxin® for meconium aspiration syndrome, infant respiratory distress
syndrome and all off-label uses for 10 years. During November 2002, the
Company purchased an additional 266,246 shares of DSCO common stock along with
detachable warrants to purchase 119,811 shares of DSCO common stock for
$517,000.

In December 2001, the Company acquired the license to market SkyePharmas
Solaraze skin treatment in the United States, Canada and Mexico for 14 years
from Bioglan Pharma Plc for a total consideration of $26.7 million. The
Company will amortize the rights ratably over 14 years. The Company has a
commitment to pay royalties to SkyePharma based on a percentage of net sales of
Solaraze. Pursuant to the license, the Company may pursue additional
indications for the compound, which will be facilitated through the Companys
ownership rights in the Solaraze NDA and Investigational New Drug.

In January 2002, the Company entered into an agreement with Kos
Pharmaceuticals, Inc. (KOSP) to commercialize, in the United States, KOSPs
treatments for cholesterol disorders, Advicor® and Niaspan®. Advicor® was
launched in January 2002 and Niaspan® is also on the market. Under the terms
of the agreement, the Company will provide, at its own expense, a dedicated
sales force of 150 cardiovascular-trained representatives who, in combination
with KOSPs sales force of 300 representatives, will commercialize Advicor® and
Niaspan® for two years. In return, the Company received warrants to purchase
150,000 shares of KOSPs common stock at $32.79 per share, exercisable in
installments over two years. Further, the Company will receive commissions
based on net sales of the product from 2002 through 2006. The commission
payments are subject to minimum and maximum amounts, as amended March 31, 2003,
of $50 million and $65 million, respectively, over the life of the agreement.
Through March 31, 2003, the Company has received payments totaling approximately
$3.2 million. The proceeds are reported in the accompanying statement of cash
flows as an operating activity  change in operating assets and liabilities

In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc. for
a total consideration of approximately $27.9 million. The assets included
distribution rights to market ADOXATM in the United States for nine years along
with other products and product rights that Bioglan Pharma, Inc., had
previously marketed, as well as approximately $1.6 million in cash. Under the
purchase method of accounting, the results of operations of Bioglan Pharma,
Inc. are included in the Companys results of operations as of March 22, 2002
and the assets and liabilities of Bioglan Pharma, Inc. were recorded at their
respective fair values. The acquisition did not have a material impact on the
financial position or results of operations for the Company. The acquisition
resulted in total intangible assets of $29.3 million. The Company will
amortize the intangible assets ratably over the lives of these products. Under
certain of the contracts acquired, the Company has commitments to pay royalties
based on a percentage of net sales of the acquired product rights.

9



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During the second quarter of 2002, the Company finalized the arrangements under
its previously announced letter of intent with a large pharmaceutical customer
to market pharmaceutical products in Belgium, Germany and Italy. Either party
may cancel the contract at six-month intervals in the event that sales are not
above certain levels specified. In the first quarter of 2003, the Company
exercised its rights to terminate the contract in Germany. The Company will
provide, at its own expense, sales and marketing resources over the five-year
life of the agreement. As of March 31, 2003, the Company estimates the cost of
its minimum obligation over the remaining contract life for the remaining
territories of Belgium and Italy to be approximately $24 million, in return for
which the customer will pay the Company royalties on product sales in excess of
certain baselines. The total royalty is comprised of a minimal royalty on the
baseline sales targets for these products plus a share of incremental net sales
above these baselines. Revenues under these agreements will be recognized as
they are earned and costs expensed as incurred.

In July 2002, the Company entered into an agreement with Eli Lilly and Company
(LLY) to support LLY in its commercialization efforts for Cymbalta in the
United States. LLY has submitted a NDA for Cymbalta, which is currently under
review by the FDA for the treatment of depression. Under the terms of the
agreement, the Company will provide, at its expense, more than 500 sales
representatives to supplement the extensive LLY sales force in the promotion of
Cymbalta for the five years following product launch. The sales force will
promote Cymbalta in its primary, or P1, position within sales calls. During
the first three years LLY will pay for the remainder of the capacity of this
sales force, referred to as the P2 and P3 positions, on a fee-for-service
basis. The Company will make marketing and milestone payments to LLY totaling
$110 million of which $70 million was paid in 2002 and the remaining $40
million is due throughout the four quarters following FDA approval. The $70
million in payments made by the Company is on an at-risk basis, and is not
refundable in the event the FDA does not grant final approval for Cymbalta.
However, if any such non-approval occurs solely as a result of regulatory
issues the FDA cites with respect to LLYs manufacturing processes and
facilities, the Company will be entitled to recoup its pre-approval outlays,
plus interest at the prime rate plus five percent, from a percentage of any
revenues or royalties LLY derives from the sales of Cymbalta by LLY or
sublicense of Cymbalta to third parties, if any. The $110 million in
payments will be capitalized and amortized ratably as a reduction of revenue
over the five-year service period. The sales force costs will be expensed as
incurred. The payments are reported in the accompanying statement of cash flows
as an investing activity  acquisition of commercial rights. In return for the
P1 position for Cymbalta and the marketing and milestone payments, LLY will
pay to the Company 8.25% of U.S. Cymbalta sales for depression and other
neuroscience indications over the five year service period followed by a 3%
royalty over the subsequent three years. In addition to the Companys
obligations, LLY is obligated to spend at specified levels. The Company or LLY
has the ability to cancel this agreement if Cymbalta is not approved by
January 31, 2005, in which case the Company would write-off any payments made
through that date, unless the FDA had failed to grant approval for Cymbalta
based on concerns over LLYs manufacturing processes and facilities.

10



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In July 2002, the Company entered into an agreement with Columbia Laboratories,
Inc. (COB) to commercialize, in the United States, the following womens
health products: Prochieve 8%, Prochieve 4%, Advantage-S® and RepHresh.
Under the terms of the agreement, the Company purchased 1,121,610 shares of COB
common stock for $5.5 million. The Company will also pay to COB four quarterly
payments of $1.125 million each which commenced in the third quarter of 2002 in
exchange for royalties of 5% on the sales of the four COBs womens healthcare
products in the United States for a five-year period beginning in the first
quarter of 2003. The Company has funded $3.38 million as of March 31, 2003.
The payments are reported in the accompanying statement of cash flows as an
investing activity-acquisition of commercial rights. The royalties are subject
to minimum and maximum amounts of $8.0 million and $12.0 million, respectively,
over the life of the agreement. In addition, the Company will provide to COB,
at COBs expense on a fee-for-service basis, a sales force to commercialize the
products.

In December 2002, the Company entered into an agreement with a large
pharmaceutical customer to market two products in Belgium. Under the terms of
an asset purchase agreement, the Company will have the rights to one product in
Belgium in exchange for payments of 5.5 million euros (approximately $5.7
million). The customer will continue to manufacture the product through 2005.
Under the terms of a distribution agreement, the Company will have the rights
to market the other product in Belgium for a period of six years in exchange
for payments of 6.9 million euros (approximately $7.2 million) of which 2.2
million euros (approximately $2.3 million) are in the form of services to be
completed by December 31, 2008, based on the Companys standard pricing. The
Company has funded 5.5 million euros (approximately $5.8 million) as of March
31, 2003. The payments are reported in the accompanying statement of cash
flows as an investing activity  acquisition of commercial rights. The
customer will continue to manufacture the product for the six years of the
distribution agreement. The Company has accrued for the remaining payments as
of March 31, 2003.

In March 2003, the Company entered into an agreement with COB to commercialize
COBs Striant testosterone buccal bioadhesive product in the United States.
COB has submitted an NDA for Striant, which is currently under review by the
FDA for the treatment of hypogonadism. Under the terms of the agreement, the
Company will pay to COB five quarterly payments of $3.0 million each beginning
in the first quarter of 2003. In return, the Company will receive a 9% royalty
on the net sales of Striant in the United States up to agreed levels of annual
sales revenues, and a 4.5% royalty of net sales above those levels. The
royalty term is seven years. Royalty payments will commence with the launch of
Striant and are subject to minimum and maximum amounts of $30.0 million and
$55.0 million, respectively, over the life of the agreement. The Company has
funded $3.0 million as of March 31, 2003. The payments are reported in the
accompanying statement of cash flows as an investing activity-acquisition of
commercial rights. In addition, the Company will provide to COB, at COBs
expense on a fee-for-service basis, a sales force to commercialize the products
for a two-and-a-half year term.

11



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The asset balances related to commercial rights and royalty agreements as of
March 31, 2003 were as follows (in thousands):

|                     |  |                |         | 
|-------------------- |  | -------------- | ------- | 
|                     |  | March 31, 2003
|                     |  |               
|SCIO                 |  | $              | 31,050  | 
|KOSP                 |  |                | 21,891  | 
|COB (Womens Health) |  |                | 4,325   | 
|COB (Striant)       |  |                | 3,018   | 
|LLY                  |  |                | 70,000  | 
|                     |  |                |         | 
|Total                |  | $              | 130,284 | 
|                     |  |                |         | 

The Company has firm commitments under the above arrangements to provide
funding of approximately $297.2 million in exchange for various commercial
rights. As of March 31, 2003, the Company has funded approximately $223.1
million. Further, the Company has additional future funding commitments that
are contingent upon satisfaction of certain milestones being met by the third
party such as receiving FDA approval, obtaining funding from additional third
parties, agreement of a marketing plan and other similar milestones. Due to
the uncertainty of the amounts and timing, these contingent commitments are not
included in the firm commitment amounts. If all of these contingencies were
satisfied over approximately the same time period, the Company estimates these
commitments to be a minimum of approximately $115-140 million per year for a
period of five to six years, subject to certain limitations and varying time
periods.

Below is a summary of the remaining firm commitments with pre-determined
payment schedules under such arrangements (in thousands):

|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|--------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                  |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter |  | Total
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Milestone payments                |  | $    | 13,355 |      |  | $    | 3,000  |      |  | $    |       |            |  | $     |      |  |  | $ |      |  |  | $ |      |  |  | $ | 16,355 | 
|Sales force commitments           |  |      | 17,879 |      |  |      | 10,939 |      |  |      | 9,407  |            |  |       | 5,243 |  |  |   | 3,916 |  |  |   | 1,327 |  |  |   | 48,711 | 
|Licensing and distribution rights |  |      | 4,926  |      |  |      | 2,693  |      |  |      | 1,407  |            |  |       |      |  |  |   |      |  |  |   |      |  |  |   | 9,026  | 
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|                                  |  | $    | 36,160 |      |  | $    | 16,632 |      |  | $    | 10,814 |            |  | $     | 5,243 |  |  | $ | 3,916 |  |  | $ | 1,327 |  |  | $ | 74,092 | 
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 

4. Investments  Marketable Equity Securities

The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment. The equity investments may be subject to certain trading
restrictions including lock-up agreements. The Companys portfolio in such
transactions as of March 31, 2003 is as follows (in thousands, except share
data):

|                                   |  |                |  |                  |           |            |  |                   |       |   |        |   |        |   |        | 
|---------------------------------- |  | -------------- |  | ---------------- | --------- | ---------- |  | ----------------- | ----- | - | ------ | - | ------ | - | ------ | 
|Company                            |  | Trading Symbol |  | Number of Shares |           | Cost Basis |  | Fair Market Value
|                                   |  |                |  |                  |           |            |  |                  
|Common Stock:                      |  |                |  |                  |           |            |  |                   |       |   |        |   |        |   |        | 
|The Medicines Company              |  | MDCO           |  |                  | 2,062,520 |            |  | $                 | 8,992 |   |        | $ | 38,445 |  
|Columbia Laboratories, Inc.        |  | COB            |  |                  | 1,121,610 |            |  |                   | 5,500 |   |        |   | 4,486  |  
|CV Therapeutics, Inc.              |  | CVTX           |  |                  | 126,705   |            |  |                   | 617   |   |        |   | 2,284  |  
|Other                              |  |                |  |                  |           |            |  |                   |       |   | 4,155  |   |        |   | 2,866  | 
|                                   |  |                |  |                  |           |            |  |                   |       |   |        |   |        |   |        | 
|Total marketable equity securities |  |                |  |                  |           |            |  |                   |       | $ | 19,264 |   |        | $ | 48,081 | 
|                                   |  |                |  |                  |           |            |  |                   |       |   |        |   |        |   |        | 

The Company may from time to time acquire equity instruments, primarily
warrants, of companies in which a current market value is not readily
available. As such, these investments are included in deposits and other

12



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assets. During the quarter ended March 31, 2003, the Company recognized an
$11.0 million gain on the warrants to acquire 700,000 shares of SCIO as a
result of the pending acquisition of SCIO by Johnson & Johnson, Inc.

During the first quarter of 2003, Gilead Sciences, Inc. (Gilead) acquired
Triangle Pharmaceuticals, Inc. (VIRS) at $6.00 per share. As a result, the
Company received $22.7 million of proceeds and recognized a gain of $7.6
million during the first quarter of 2003.

5. Investments  Non-marketable Equity Securities and Loans

The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment in non-marketable securities or loans. These financial arrangements
are comprised of direct and indirect investments. The indirect investments are
made through eight venture capital funds in which the Company is an investor.
The Companys portfolio in such transactions as of March 31, 2003 is as follows
(in thousands):

|                                                 |  |            |        |            |  |                   |        | 
|------------------------------------------------ |  | ---------- | ------ | ---------- |  | ----------------- | ------ | 
|                                                 |  |            |        |            |  | Remaining Funding
|Company                                          |  | Cost Basis |        | Commitment
|                                                 |  |            |        |           
|Venture capital funds                            |  | $          | 27,798 |            |  | $                 | 22,552 | 
|Equity investments (seven companies)             |  |            | 11,745 |            |  |                   |       | 
|Convertible loans (three companies)              |  |            | 5,013  |            |  |                   | 2,377  | 
|Loans (two companies)                            |  |            | 1,713  |            |  |                   | 16,892 | 
|                                                 |  |            |        |            |  |                   |        | 
|Total non-marketable equity securities and loans |  | $          | 46,269 |            |  | $                 | 41,821 | 
|                                                 |  |            |        |            |  |                   |        | 

Below is a table representing managements best estimate as of March 31, 2003
of the amount and timing of the above remaining funding commitments (in
thousands):

|                      |  |      |        |      |  |       |        |  |  |   |        | 
|--------------------- |  | ---- | ------ | ---- |  | ----- | ------ |  |  | - | ------ | 
|                      |  | 2003 |        | 2004 |  | Total
|                      |  |      |        |      |  |      
|Venture capital funds |  | $    | 12,972 |      |  | $     | 9,580  |  |  | $ | 22,552 | 
|Convertible loans     |  |      | 2,377  |      |  |       |       |  |  |   | 2,377  | 
|Loans                 |  |      | 2,250  |      |  |       | 14,642 |  |  |   | 16,892 | 
|                      |  |      |        |      |  |       |        |  |  |   |        | 
|                      |  | $    | 17,599 |      |  | $     | 24,222 |  |  | $ | 41,821 | 
|                      |  |      |        |      |  |       |        |  |  |   |        | 

The Company also has future loan commitments that are contingent upon
satisfaction of certain milestones by the third party such as receiving FDA
approval, obtaining funding from additional third parties, agreement of a
marketing plan and other similar milestones. Due to the uncertainty of the
amounts and timing, these commitments are not included in the commitment
amounts described above.

The Company has determined that it is not practicable at each reporting date to
estimate the fair value of its investments in non-marketable equity securities
and loans; however, the carrying values are reviewed if the facts and
circumstances suggest that a potential impairment, representing an other than
temporary decline in fair value, may have occurred. The Company recognized
$820,000 and $400,000 of losses due to such impairments in the first quarter of
2003 and 2002, respectively, relating to non-marketable equity securities and
loans mainly due to declining financial condition of investees.

13



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6. Goodwill and Identifiable Intangible Assets

Identifiable intangible assets consist primarily of software, which are
amortized over the estimated useful life ranging from three to five years, and
licensing and distribution rights, which are amortized ratably, based on
estimated cash flows, over the life of the rights or service period ranging
from five to 15 years. Amortization expense associated with identifiable
intangible assets was $10.0 million and $6.0 million for the three months ended
March 31, 2003 and 2002, respectively.

The following is a summary of identifiable intangible assets as of March 31,
2003 (in thousands):

|                                |                                           |   |              |         |             |   |              |        |  |   |         |        | 
|------------------------------- | ----------------------------------------- | - | ------------ | ------- | ----------- | - | ------------ | ------ |  | - | ------- | ------ | 
|                                |                                           |   |              |         |             |   | Amortization |        |  |   |        
|                                |                                           |   | Gross Amount |         | Accumulated |   | Net Amount  
|                                |                                           |   |              |         |             |   |             
|Identifiable intangible assets: |                                           |   |              |         |             |   |              |        |  |   |         |       
|                                | Software and related assets               |   | $            | 150,470 |             |   | $            | 90,848 |  |   | $       | 59,622 | 
|                                | Product licensing and distribution rights |   |              | 84,766  |             |   |              | 8,446  |  |   |         | 76,320 | 
|                                |                                           |   |              |         |             |   |              |        |  |   |         |       
|                                |                                           | $ | 235,236      |         |             | $ | 99,294       |        |  | $ | 135,942 |       
|                                |                                           |   |              |         |             |   |              |        |  |   |         |       

Estimated amortization expense for existing identifiable intangible assets is
targeted to be approximately $35.5 million, $28.6 million, $22.9 million, $15.0
million and $10.3 million for each of the years in the five-year period ended
December 31, 2007, respectively. Estimated amortization expense can be affected
by various factors including future acquisitions or divestitures of product
and/or licensing and distribution rights.

The following is a summary of goodwill by segment as of March 31, 2003 (in
thousands):

|                                        |  |             |        |            |  |              |        |  |  |   |        | 
|--------------------------------------- |  | ----------- | ------ | ---------- |  | ------------ | ------ |  |  | - | ------ | 
|                                        |  | Product     |        | Commercial |  |              |        | 
|                                        |  | Development |        | Services   |  | Consolidated
|                                        |  |             |        |            |  |             
|Balance as of December 31, 2002         |  | $           | 38,918 |            |  | $            | 31,215 |  |  | $ | 70,133 | 
|Add: acquisition                        |  |             |       |            |  |              |       |  |  |   |       | 
|Less: impairment                        |  |             |       |            |  |              |       |  |  |   |       | 
|Impact of foreign currency fluctuations |  |             | 1,040  |            |  |              | 44     |  |  |   | 1,084  | 
|                                        |  |             |        |            |  |              |        |  |  |   |        | 
|Balance as of March 31, 2003            |  | $           | 39,958 |            |  | $            | 31,259 |  |  | $ | 71,217 | 
|                                        |  |             |        |            |  |              |        |  |  |   |        | 

7. Stock Repurchase

The Company was authorized by its Board of Directors in March 2001 to
repurchase up to $100 million of the Companys Common Stock until March 1,
2002. On February 7, 2002, the Board of Directors extended this authorization
until March 1, 2003. The authorization expired March 1, 2003. The Company did
not repurchase any shares of its Common Stock during the three months ended
March 31, 2003.

8. Significant Customers

No customer accounted for 10% of consolidated gross service revenues less
reimbursed service costs for the three months ended March 31, 2003. One
customer accounted for 13.0% of consolidated gross service revenues less
reimbursed service costs for the three months ended March 31, 2002. The
revenues were derived from the product development, commercial services and
informatics group.

14



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##### 



9. Investment Revenues

The following table is a summary of investment revenues for the three months
ended March 31, 2003 and 2002 (in thousands):

|                                             |                       |   |                             |        |      |   |       |       |  
|-------------------------------------------- | --------------------- | - | --------------------------- | ------ | ---- | - | ----- | ----- | -
|                                             |                       |   | Three months ended March 31
|                                             |                       |   |                            
|                                             |                       |   | 2003                        |        | 2002
|                                             |                       |   |                             |        |     
|Marketable equity and derivative securities: |                       |   |                             |        |      |   |       |      
|                                             | Gross realized gains  |   | $                           | 18,772 |      |   | $     | 5,208 |  
|                                             | Gross realized losses |   |                             |       |      |   |       | (26   | )
|                                             | Impairment losses     |   |                             |       |      |   |       |      |  
|Non-marketable equity securities and loans:  |                       |   |                             |        |      |   |       |      
|                                             | Gross realized gains  |   |                             |       |      |   |       |      |  
|                                             | Gross realized losses |   |                             |       |      |   |       |      |  
|                                             | Impairment losses     |   |                             | (820   | )    |   |       | (400  | )
|                                             |                       |   |                             |        |      |   |       |      
|                                             |                       | $ | 17,952                      |        |      | $ | 4,782 |      
|                                             |                       |   |                             |        |      |   |       |      

10. Restructuring Charge

During the second quarter of 2002, the Company revised its estimates of the
restructuring plan adopted during 2001 (2001 Plan) which resulted in a
reduction of $9.1 million in accruals for the 2001 Plan. The reduction
included approximately $5.7 million in severance payments and $3.4 million of
exit costs. The reductions are primarily the result of a higher than expected
number of voluntary terminations and the reversal of restructuring accruals due
to the Companys contribution of its informatics segment to the Verispan,
L.L.C. joint venture.

Also during the second quarter of 2002, the Company recognized $9.1 million of
restructuring charges as a result of the continued implementation of the
strategic plan announced during 2001. This restructuring charge included
revisions to 2001 and 2000 restructuring plans of approximately $2.5 million
and $1.9 million, respectively, due to a revision in the estimates for the exit
costs relating to the abandoned leased facilities. In addition, the adopted
follow-on restructuring plan (2002 Plan) consisted of $4.3 million related to
severance payments, $310,000 related to exit costs and $112,000 of asset
write-offs. As part of this plan, approximately 99 positions are to be
eliminated mostly in the Europe and Africa region. As of March 31, 2003, 85
individuals have been terminated.

15



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As of March 31, 2003, the following amounts were recorded for the 2002
restructuring plan (in thousands):

Activity Three Months Ended March 31, 2003

|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|--------------------------- |  | ----------------- | ----- | ----------- |  | -------------- | ---- | - |  | - | ----- | 
|                            |  | Balance at        |       | Write-Offs/ |  | Balance at    
|                            |  | December 31, 2002 |       | Payments    |  | March 31, 2003
|                            |  |                   |       |             |  |               
|Severance and related costs |  | $                 | 2,066 |             |  | $              | (434 | ) |  | $ | 1,632 | 
|Exit costs                  |  |                   | 154   |             |  |                | (3   | ) |  |   | 151   | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|                            |  | $                 | 2,220 |             |  | $              | (437 | ) |  | $ | 1,783 | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 

During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating primarily to severance costs from the
reorganization of the Internet initiative and the commercial services group in
the United States. All of the 40 positions to be eliminated as part of this
restructuring were terminated as of June 30, 2001.

During the third quarter of 2001, the Company recognized a $50.9 million
restructuring charge. In addition, the Company recognized a restructuring
charge of approximately $1.1 million as a revision of an estimate to a 2000
restructuring plan. The restructuring charge consisted of $31.1 million
related to severance payments, $8.2 million related to asset impairment
write-offs and $12.7 million of exit costs. As part of this restructuring,
approximately 1,000 positions worldwide will be eliminated and as of March 31,
2003, 885 individuals have been terminated. In certain circumstances,
international regulations and restrictions have caused the terminations to
extend beyond one year. Positions have been eliminated in each of the
segments.

As of March 31, 2003, the following amounts were recorded for the 2001
restructuring plans (in thousands):

Activity Three Months Ended March 31, 2003

|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|--------------------------- |  | ----------------- | ----- | ----------- |  | -------------- | ---- | - |  | - | ----- | 
|                            |  | Balance at        |       | Write-Offs/ |  | Balance at    
|                            |  | December 31, 2002 |       | Payments    |  | March 31, 2003
|                            |  |                   |       |             |  |               
|Severance and related costs |  | $                 | 1,306 |             |  | $              | (217 | ) |  | $ | 1,089 | 
|Exit costs                  |  |                   | 3,381 |             |  |                | (588 | ) |  |   | 2,793 | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|                            |  | $                 | 4,687 |             |  | $              | (805 | ) |  | $ | 3,882 | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 

16



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In January 2000, the Company announced the adoption of a restructuring plan
(January 2000 Plan). In connection with this plan, the company recognized a
restructuring charge of $58.6 million. The restructuring charge consisted of
$33.2 million related to severance payments, $11.3 million related to asset
impairment write-offs and $14.0 million of exit costs. As part of this plan,
approximately 770 positions worldwide were eliminated as of December 31, 2001.
Although positions eliminated were across all functions, most of the eliminated
positions were in the product development group.

In the fourth quarter of 2000, the Company revised its estimates of the January
2000 Plan. This revision resulted in a reduction of the January 2000 Plan of
$6.9 million. This reduction included $6.3 million in severance payments and
$632,000 in exit costs. The severance reduction resulted primarily from a
higher than expected number of voluntary terminations, reduced outplacement
costs and related fringes.

Also, during the fourth quarter of 2000, management conducted a detailed review
of the resource levels within each business group. Based on this review, the
Company adopted a follow-on restructuring plan (2000 Follow-On Plan)
resulting in a restructuring charge of $7.1 million. The restructuring charge
consisted of $5.8 million related to severance payments and $1.3 million
related to exit costs. As part of this plan, approximately 220 positions were
to be eliminated mostly in the commercial services group. As of March 31,
2003, 145 individuals have been terminated. In certain circumstances,
international regulations and restrictions have caused the terminations to
extend beyond one year.

As of March 31, 2003, the following amounts were recorded for the 2000
restructuring plans (in thousands):

Activity Three Months Ended March 31, 2003

|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|--------------------------- |  | ----------------- | ----- | ----------- |  | -------------- | ---- | - |  | - | ----- | 
|                            |  | Balance at        |       | Write-Offs/ |  | Balance at    
|                            |  | December 31, 2002 |       | Payments    |  | March 31, 2003
|                            |  |                   |       |             |  |               
|Severance and
related costs |  | $                 | 117   |             |  | $              | (29  | ) |  | $ | 88    | 
|Exit costs                  |  |                   | 1,443 |             |  |                | (481 | ) |  |   | 962   | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 
|                            |  | $                 | 1,560 |             |  | $              | (510 | ) |  | $ | 1,050 | 
|                            |  |                   |       |             |  |                |      |   |  |   |       | 

As a result of the restructuring plans, the Company has approximately 235,000
square feet of abandoned leased facilities as of March 31, 2003. A portion of
these facilities has been subleased and the Company is pursuing disposition of
the remaining abandoned facilities. Below is a summary of the total lease
obligations for the abandoned facilities (in thousands):

|                                                                                            |  |   |        |  
|------------------------------------------------------------------------------------------- |  | - | ------ | -
|2003                                                                                        |  | $ | 3,801  |  
|2004                                                                                        |  |   | 3,603  |  
|2005                                                                                        |  |   | 2,892  |  
|2006                                                                                        |  |   | 2,836  |  
|Thereafter                                                                                  |  |   | 8,577  |  
|                                                                                            |  |   |        |  
|Gross abandoned lease obligations                                                           |  |   | 21,709 |  
|Less: sublease/restructuring accrual                                                        |  |   | (5,812 | )
|                                                                                            |  |   |        |  
|Total obligation in excess of existing subleases and related
restructuring accrual balances |  | $ | 15,897 |  
|                                                                                            |  |   |        |  

17



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##### 



11. Net Income Per Share

The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in
thousands):

|                         |                                 |  |                             |         |      |  |  |         | 
|------------------------ | ------------------------------- |  | --------------------------- | ------- | ---- |  |  | ------- | 
|                         |                                 |  | Three months ended March 31
|                         |                                 |  |                            
|                         |                                 |  | 2003                        |         | 2002
|                         |                                 |  |                             |         |     
|Weighted average shares: |                                 |  |                             |         |      |  |  |        
|                         | Basic weighted average shares   |  |                             | 118,100 |      |  |  | 118,685 | 
|                         | Effect of dilutive securities:  |  |                             |         |      |  |  |         | 
|                         | Stock options                   |  |                             | 464     |      |  |  | 1,542   | 
|                         |                                 |  |                             |         |      |  |  |        
|                         | Diluted weighted average shares |  |                             | 118,564 |      |  |  | 120,227 | 
|                         |                                 |  |                             |         |      |  |  |        

Options to purchase approximately 28.3 million and 14.4 million shares of the
Companys Common Stock were outstanding during the three months ended March 31,
2003 and 2002, respectively, but were not included in the computation of
diluted net income per share because the options exercise price was greater
than the average market price of the Companys Common Stock and, therefore, the
effect would be antidilutive.

12. Comprehensive Income

The following table represents the Companys comprehensive income for the three
months ended
March 31, 2003 and 2002, respectively (in thousands):

|                                   |                                                                      |   |                             |        |      |   |        |        |  
|---------------------------------- | -------------------------------------------------------------------- | - | --------------------------- | ------ | ---- | - | ------ | ------ | -
|                                   |                                                                      |   | Three months ended March 31
|                                   |                                                                      |   |                            
|                                   |                                                                      |   | 2003                        |        | 2002
|                                   |                                                                      |   |                             |        |     
|Net income                         |                                                                      | $ | 25,156                      |        |      | $ | 62,920 |       
|Other comprehensive income (loss): |                                                                      |   |                             |        |      |   |        |       
|                                   | Unrealized gain (loss) on marketable
securities, net of income taxes |   |                             | 2,811  |      |   |        | 1,650  |  
|                                   | Reclassification adjustment, net of income taxes                     |   |                             | (4,807 | )    |   |        | (3,153 | )
|                                   | Minimum pension liability, net of income taxes                       |   |                             | (3,098 | )    |   |        |       |  
|                                   | Foreign currency adjustment                                          |   |                             | 3,881  |      |   |        | (7,786 | )
|                                   |                                                                      |   |                             |        |      |   |        |       
|Comprehensive income               |                                                                      | $ | 23,943                      |        |      | $ | 53,631 |       
|                                   |                                                                      |   |                             |        |      |   |        |       

18



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##### 



13. Segments

The following table presents the Companys operations by reportable segment.
The Company is managed through three reportable segments, namely, the product
development group, the commercial services group, and the PharmaBio Development
group. The informatics group was transferred to a joint venture in May 2002.
Management has distinguished these segments based on the normal operations of
the Company. The product development group is primarily responsible for all
phases of clinical research and outcomes research consulting. The commercial
services group is primarily responsible for sales force deployment and
strategic marketing services. Before being transferred to the joint venture,
the informatics group was primarily responsible for providing market research
solutions and strategic analysis to support healthcare decisions. The PharmaBio
Development group is primarily responsible for facilitating non-traditional
customer alliances and consists primarily of product revenues, royalties and
commissions and investment revenues relating to the financial arrangements with
customers and other third parties. The Company does not include general and
administrative expenses, depreciation and amortization except amortization of
commercial rights, interest (income) expense, other (income) expense and income
tax expense (benefit) in segment profitability. Intersegment revenues have been
eliminated (in thousands):

Three Months Ended March 31, 2003

|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |         |         | 
|--------------------------------------------------------------------------------------------------- | ------------------------ | -------------- | ------- | ----------- | ------- | ---------- | ------- | ----------- | ------- | ------------ | ------ | ------------ | ------ | - | ------ | ------ | ------ | - | ------- | ------- | ------- | 
|                                                                                                    |                          |                |         | Product     |         | Commercial |         | PharmaBio   |         |              |        |              |        |   |        |       
|                                                                                                    |                          |                |         | Development |         | Services   |         | Development |         | Eliminations |        | Consolidated
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |             
|Service revenues:                                                                                   |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|                                                                                                    | External                 |                | $       | 250,036     |         |            | $       | 118,620     |         |              | $      |             |        |   | $      |       |        |   | $       | 368,656 |        
|                                                                                                    | Intersegment             |                |         |            |         |            |         | 8,095       |         |              |        |             |        |   |        | (8,095 | )      |   |         |        |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|                                                                                                    | Total net services       |                |         | 250,036     |         |            |         | 126,715     |         |              |        |             |        |   |        | (8,095 | )      |   |         | 368,656 |        
|                                                                                                    | Reimbursed service costs |                |         | 80,156      |         |            |         | 14,185      |         |              |        |             |        |   |        |       |        |   |         | 94,341  |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|Gross service revenues                                                                              |                          |                | 330,192 |             |         |            | 140,900 |             |         |              |       |              |        |   | (8,095 | )      |        |   | 462,997 |        
|Commercial rights and royalties                                                                     |                          |                |        |             |         |            |        |             |         |              | 30,658 |              |        |   |       |        |        |   | 30,658  |        
|Investment                                                                                          |                          |                |        |             |         |            |        |             |         |              | 17,952 |              |        |   |       |        |        |   | 17,952  |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|                                                                                                    |                          | Total revenues |         | $           | 330,192 |            |         | $           | 140,900 |              |        | $            | 48,610 |   |        | $      | (8,095 | ) |         | $       | 511,607 | 
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|Contribution (revenues less
costs of revenues excluding
depreciation and
amortization shown below): |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        
|                                                                                                    |                          | $              | 126,314 |             |         | $          | 44,910  |             |         | $            | 18,780 |              |        | $ |       |        |        | $ | 190,004 |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |              |        |              |        |   |        |        |        |   |         |        

Three Months Ended March 31, 2002

|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |         |         | 
|--------------------------------------------------------------------------------------------------- | ------------------------ | -------------- | ------- | ----------- | ------- | ---------- | ------- | ----------- | ------- | ----------- | ------ | ------------ | ------ | ------------ | ------ | - | ------ | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                    |                          |                |         | Product     |         | Commercial |         |             |         |             |        | PharmaBio    |        |              |        |   |        |   |         |         |         |   |         |        
|                                                                                                    |                          |                |         | Development |         | Services   |         | Informatics |         | Development |        | Eliminations |        | Consolidated |        |   |        |  
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |             
|Service revenues:                                                                                   |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|                                                                                                    | External                 |                | $       | 230,457     |         |            | $       | 136,020     |         |             | $      | 12,690       |        |              | $      |  |        |   | $       |        |         |   | $       | 379,167 |        
|                                                                                                    | Intersegment             |                |         |            |         |            |         | 11,212      |         |             |        |             |        |              |        |  |        |   |         | (11,212 | )       |   |         |        |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|                                                                                                    | Total net services       |                |         | 230,457     |         |            |         | 147,232     |         |             |        | 12,690       |        |              |        |  |        |   |         | (11,212 | )       |   |         | 379,167 |        
|                                                                                                    | Reimbursed service costs |                |         | 68,787      |         |            |         | 26,363      |         |             |        | 3            |        |              |        |  |        |   |         |        |         |   |         | 95,153  |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|Gross service revenues                                                                              |                          |                | 299,244 |             |         |            | 173,595 |             |         |             | 12,693 |              |        |              |       |   |        |   | (11,212 | )       |         |   | 474,320 |        
|Commercial rights and royalties                                                                     |                          |                |        |             |         |            |        |             |         |             |       |              |        |              | 14,194 |   |        |   |        |         |         |   | 14,194  |        
|Investment                                                                                          |                          |                |        |             |         |            |        |             |         |             |       |              |        |              | 4,782  |   |        |   |         |         |         |   | 4,782   |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|                                                                                                    |                          | Total revenues |         | $           | 299,244 |            |         | $           | 173,595 |             |        | $            | 12,693 |              |        | $ | 18,976 |   |         | $       | (11,212 | ) |         | $       | 493,296 | 
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|Contribution (revenues less
costs of revenues excluding
depreciation and amortization
shown below): |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        
|                                                                                                    |                          | $              | 112,413 |             |         | $          | 50,768  |             |         | $           | 4,470  |              |        | $            | 4,540  |   |        | $ |        |         |         | $ | 172,191 |        
|                                                                                                    |                          |                |         |             |         |            |         |             |         |             |        |              |        |              |        |   |        |   |         |         |         |   |         |        

19



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##### 



|                                                         |                       |   |                             |        |      |   |        |        | 
|-------------------------------------------------------- | --------------------- | - | --------------------------- | ------ | ---- | - | ------ | ------ | 
|                                                         |                       |   | Three months ended March 31
|                                                         |                       |   |                            
|                                                         |                       |   | 2003                        |        | 2002
|                                                         |                       |   |                             |        |     
|Depreciation and amortization expense:                   |                       |   |                             |        |      |   |        |       
|                                                         | Product development   |   | $                           | 14,947 |      |   | $      | 14,422 | 
|                                                         | Commercial services   |   |                             | 4,991  |      |   |        | 5,216  | 
|                                                         | Informatics           |   |                             |       |      |   |        | 1,521  | 
|                                                         | Corporate             |   |                             | 210    |      |   |        | 230    | 
|                                                         |                       |   |                             |        |      |   |        |       
|Depreciation and amortization excluded from contribution |                       |   | 20,148                      |        |      |   | 21,389 |       
|                                                         | PharmaBio Development |   |                             | 2,495  |      |   |        | 403    | 
|                                                         |                       |   |                             |        |      |   |        |       
|Total depreciation and amortization                      |                       | $ | 22,643                      |        |      | $ | 21,792 |       
|                                                         |                       |   |                             |        |      |   |        |       

14. Commitments and Contingencies

On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
a subsidiary of the Company, on behalf of 185 Alzheimers patients who
participated in drug studies involving an experimental drug manufactured by
defendant Novartis and their surviving spouses. The complaint alleges claims
for breach of fiduciary duty, civil conspiracy, unjust enrichment,
misrepresentation, Georgia RICO violations, infliction of emotional distress,
battery, negligence and loss of consortium as to class member spouses. The
complaint seeks unspecified damages, plus costs and expenses, including
attorneys fees and experts fees. The parties are in the discovery phase of
the litigation. The Company continues to believe the claims to be without merit
and is defending the suit vigorously.

On January 22, 2002, Federal Insurance Company (Federal) and Chubb Custom
Insurance Company (Chubb) filed suit against the Company, Quintiles Pacific,
Inc. and Quintiles Laboratories Limited, two of the Companys subsidiaries, in
the United States District Court for the Northern District of Georgia. In the
suit, Chubb, the Companys primary commercial general liability carrier, and
Federal, the Companys excess liability carrier, seek to rescind the policies
issued to the Company for coverage years 2000-2001 and 2001-2002 based on an
alleged misrepresentation by the Company on the policy application.
Alternatively, Chubb and Federal seek a declaratory judgment that there is no
coverage under the policies for some or all of the claims asserted against the
Company and its subsidiaries in the litigation described in the prior paragraph
and, if one or more of such claims is determined to be covered, Chubb and
Federal request an allocation of the defense costs between the claims they
contend are covered and non-covered claims. The Company has filed an answer
with counterclaims against Federal and Chubb in response to their complaint.
Additionally, the Company has amended its pleadings to add AON Risk Services as
a counterclaim defendant, as an alternative to the Companys position that
Federal and Chubb are liable under the policies. In order to preserve its
rights, on March 27, 2003, the Company also filed a separate action against AON
Risk Services in the United States District Court for the Middle District of
North Carolina. The Company believes the allegations made by Federal and Chubb
are without merit and is defending this case vigorously.

20



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##### 



In October 2002, seven purported class action lawsuits were filed in Superior
Court, Durham County, North Carolina by shareholders seeking to enjoin the
consummation of a transaction proposed by Pharma Services Company, a newly
formed company wholly owned by Dennis B. Gillings, Ph.D., to acquire all the
Companys outstanding shares for $11.25 per share in cash. All of the lawsuits
were subsequently transferred to the North Carolina Business Court. The
lawsuits name as defendants Dr. Gillings, other members of the Companys Board
of Directors, the Company and, in some cases Pharma Services Company. The
complaints allege, among other things, that the directors breached their
fiduciary duties with respect to the proposal. The complaints seek to enjoin
the transaction proposed by Pharma Services Company, and the plaintiffs seek to
recover damages. On November 11, 2002, a Special Committee of the Companys
Board of Directors announced its rejection of the proposal by Pharma Services
Company and its intention to investigate strategic alternatives available to
the Company for purposes of enhancing shareholder value, including the
possibility of a sale of the Company and alternatives that would keep the
Company independent and publicly owned. On January 6, 2003, the North Carolina
Business Court entered a Case Management Order consolidating all seven lawsuits
for all purposes and staying the lawsuits until March 29, 2003 or until the
Company provides notice of a change-of-control transaction involving the
Company.

On March 28, 2003, the Court entered an Order Maintaining the Status Quo, which
continued its prior Case Management Order in all respects until the earlier of
a date selected by the Court or until the Company provides the notice
contemplated by the Case Management Order. On April 10, 2003, the Companys
Board of Directors approved a merger agreement with Pharma Services Holding,
Inc. for the Companys public shareholders to receive $14.50 per share in cash.
The Company anticipates filing a proxy statement and holding a special meeting
later this year at which the shareholders will vote on the transaction. Under
the terms of the Case Management Order, the Company is required to give
Plaintiffs counsel and Court notice of a change-of-control transaction
involving the Company at least forty (40) days prior to the closing of such a
transaction. Plaintiffs are required to serve an amended consolidated
complaint within thirty (30) calendar days of the notice. The Company believes
the original lawsuits are without merit and the Company intends to defend these
claims vigorously. The scope or substance of any new or additional claims that
might be asserted by Plaintiffs in the pending litigation, or through
independent actions by Plaintiffs or any other shareholder, cannot be
determined with certainty at this time, but it is possible that such claims
could seek to challenge the fairness or adequacy of any transaction announced
by the Company, including the proposed transaction with Pharma
Services Holding, or the
process employed by the Company or the Special Committee, or seek to
enjoin it. In the event that
Plaintiffs elect to file any amended complaint, or in the event that any new
litigation is filed, the Company will evaluate those claims and respond as
appropriate.

The Company also is party to other legal proceedings incidental to its
business. While the Companys management currently believes that the ultimate
outcome of these proceedings, individually and in the aggregate, will not have
a material adverse effect on the Companys consolidated financial statements,
litigation is subject to inherent uncertainties. Were an unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the results
of operations of the period in which the ruling occurs.

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15. Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, which
requires the assets, liabilities and results of operations of variable interest
entities (VIE) be consolidated into the financial statements of the company
that has controlling financial interest. FIN 46 also provides the framework
for determining whether a VIE should be consolidated based on voting interest
or significant financial support provided to the VIE. The Company will adopt
these provisions, as required, in the third quarter of 2003; however, the
Company has not assessed the impact of the adoption on its financial position
or results of operations.

16. Subsequent Event

On April 10, 2003, the Company entered into a merger agreement with Pharma
Services Holding, Inc. (Pharma Services) for the Companys public
shareholders to receive $14.50 per share in cash. Pharma Services was founded
by Dennis B. Gillings, Ph.D., the Companys Chairman of the Board and Founder,
and One Equity Partners LLC, the private equity arm of Bank One Corporation.
Dr. Gillings and certain of his affiliates will retain their equity interest in
the Company. In addition, in order to finance the transaction, Pharma Services
has received an equity commitment of $415.7 million from One Equity Partners
LLC and debt commitments totaling $875 million from Citicorp North America,
Inc. and Citigroup Global Markets Inc. Pharma Services also intends to use
approximately $586 million of the Companys existing cash to fund the
transaction. The transaction, which is anticipated to be completed later in
2003, is subject to Pharma Services completion of its committed financing and
customary conditions, including regulatory and shareholder approvals.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement for Forward Looking Information

Information set forth in this Form 10-Q, including Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward looking statements represent our judgment
concerning the future and are subject to risks and uncertainties that could
cause our actual operating results and financial position to differ materially.
Such forward looking statements can be identified by the use of forward
looking terminology such as may, will, expect, anticipate, estimate,
believe, continue, or target or the negative thereof or other variations
thereof or comparable terminology.

We caution you that any such forward looking statements are further qualified
by important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, uncertainties arising in connection with the proposed merger with a
subsidiary of Pharma Services Holding, Inc., including the possibility that
regulatory authorities and shareholders might not approve the merger or that
other conditions to closing under the merger agreement may not be satisfied or
waived, the risk that the market for our products and services will not grow as
we expect, the risk that our PharmaBio Development transactions will not
generate revenues, profits or return on investment at the rate or levels we
expect or that royalty revenues under our PharmaBio Development arrangements
may not be adequate to

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offset our upfront and on-going expenses in providing sales and marketing
services or in making milestone and marketing payments, our ability to
efficiently distribute backlog among project management groups and match demand
to resources, our actual operating performance, variation in the actual savings
and operating improvements resulting from previous restructurings, our ability
to maintain large customer contracts or to enter into new contracts, changes in
trends in the pharmaceutical industry, our ability to operate successfully a
new line of business, the risk that Verispan, our joint venture with McKesson
Corporation relating to the informatics business, will not be successful, and
liability risks associated with our business which could result in losses or
indemnity to others not covered by insurance. See Risk Factors below for
additional factors that could cause actual results to differ.

Results of Continuing Operations

Three Months Ended March 31, 2003 and 2002

Gross revenues for the first quarter of 2003 were $511.6 million versus $493.3
million for the first quarter of 2002. Gross revenues include service
revenues, revenues from commercial rights and royalties and revenues from
investments. Net revenues are gross revenues less reimbursed service costs.
Reimbursed service costs may fluctuate due, in part, to the payment provisions
of the respective service contract. Below is a summary of revenues (in
thousands):

|                                |  |                             |         |      |  |   |         | 
|------------------------------- |  | --------------------------- | ------- | ---- |  | - | ------- | 
|                                |  | Three months ended March 31
|                                |  |                            
|                                |  | 2003                        |         | 2002
|                                |  |                             |         |     
|Service revenues                |  | $                           | 462,997 |      |  | $ | 474,320 | 
|Less: reimbursed service costs  |  |                             | 94,341  |      |  |   | 95,153  | 
|                                |  |                             |         |      |  |   |         | 
|Net service revenues            |  |                             | 368,656 |      |  |   | 379,167 | 
|Commercial rights and royalties |  |                             | 30,658  |      |  |   | 14,194  | 
|Investments                     |  |                             | 17,952  |      |  |   | 4,782   | 
|                                |  |                             |         |      |  |   |         | 
|Total net revenues              |  | $                           | 417,266 |      |  | $ | 398,143 | 
|                                |  |                             |         |      |  |   |         | 



| |  |  | Service revenues were $463.0 million for the first quarter of
2003 compared to $474.3 million for the first quarter of 2002.
Service revenues less reimbursed service costs, or net service
revenues, for the first quarter of 2003 were $368.7 million, a
decrease of $10.5 million or (2.8%) over net service revenues of
$379.2 million for the first quarter of 2002. Included in net service
revenues for the first quarter of 2002 was $12.7 million from our
informatics group, which was transferred to a joint venture during May
2002 and, therefore, was not included in net service revenues for
2003. Net service revenues for the first quarter of 2003 were
positively impacted by approximately $27.6 million due to the effect
of the weakening of the US Dollar relative to the euro, the British
pound, the South African Rand and the Japanese yen. Net service
revenues increased in the Asia Pacific region $11.4 million or 27.3%
to $53.3 million for the first quarter of 2003 from the first quarter
of 2002 and was positively impacted by $4.8 million due to the effect
of foreign currency fluctuations. Net service revenues increased $35.8
million or 23.9% to $185.6 million for the first quarter of 2003 from
the first quarter of 2002 in the Europe and Africa region, which was
positively impacted by $23.4 million due to the effect of foreign
currency fluctuations. Net service revenues decreased $57.8 million
or (30.8%) to $129.7 million for the first quarter of 2003 from the
first quarter of 2002 in the Americas region primarily as a result of
the decline in the commercial services group revenues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Commercial rights and royalties revenues, which include product
revenues, royalties and commissions, for the first quarter of 2003
were $30.7 million, an increase of $16.5 million over the first
quarter 2002 commercial rights and royalties revenues of $14.2
million. Commercial rights and royalties revenues were positively
impacted by approximately $3.8 million due to the effect of foreign
currency fluctuations related to the weakening of the US Dollar
relative to the euro. These revenues include products for which we
have acquired certain commercial rights, such as the dermatology
products, Solaraze and ADOXA. Also included are royalties or
commissions on product sales that we receive in exchange for providing
commercial or product development services. The $16.5 million increase
is primarily the result of our acquisition of certain assets of
Bioglan Pharma, Inc., or Bioglan, and its suite of dermatology
products in March, 2002, our contract with Kos Pharmaceuticals, Inc.,
or KOSP, and contracts in Europe with two large pharmaceutical
customers. These increases were partially offset by a reduction in
revenue as a result of the completion of the services portion of our
Scios, Inc., or SCIO, contract during the fourth quarter of 2002. For
the first quarter of 2003, approximately 21.4% of our commercial
rights and royalties revenues was attributable to our contracts with
KOSP and Columbia Labs, Inc., or COB, approximately 32.0% was
attributable to our contracts with two large pharmaceutical customers
in Europe, approximately 44.7% was attributable to our suite of
dermatology products and the remaining 1.9% was attributable to
miscellaneous contracts and activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Investment revenues related to our PharmaBio Development
groups financing arrangements, which include gains and losses from
the sale of equity securities and impairments from other than
temporary declines in the fair values of our direct and indirect
investments, for the first quarter of 2003 were $18.0 million versus
$4.8 million for the first quarter of 2002. Investment revenues for
the first quarter of 2003 included a $7.6 million gain from our
investment in Triangle Pharmaceuticals, Inc., or VIRS, and a $11.0
million gain on the warrants to acquire 700,000 shares of SCIO as a
result of the pending acquisition of SCIO by Johnson & Johnson, Inc.
During the first quarter of 2003 and 2002, we recognized $820,000 and
$400,000, respectively, of impairment losses on investments whose
decline in fair value was considered to be other than temporary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Costs of revenues were $341.8 million for the first quarter of 2003 versus
$342.5 million for the first quarter of 2002. Bonus expense included in cost
of revenues increased approximately $4.2 million in the three months ended
March 31, 2003 as compared to the three months ended March 31, 2002 as a result
of our movement towards a more cash-based incentive program for our employees.
Below is a summary of the costs of revenues (in thousands):

|                                      |  |                             |         |      |  |   |         | 
|------------------------------------- |  | --------------------------- | ------- | ---- |  | - | ------- | 
|                                      |  | Three months ended March 31
|                                      |  |                            
|                                      |  | 2003                        |         | 2002
|                                      |  |                             |         |     
|Reimbursed service costs              |  | $                           | 94,341  |      |  | $ | 95,153  | 
|Service costs                         |  |                             | 197,432 |      |  |   | 211,516 | 
|Commercial rights and royalties costs |  |                             | 29,830  |      |  |   | 14,278  | 
|Investment costs                      |  |                             |        |      |  |   | 158     | 
|Depreciation and amortization         |  |                             | 20,148  |      |  |   | 21,389  | 
|                                      |  |                             |         |      |  |   |         | 
|                                      |  | $                           | 341,751 |      |  | $ | 342,494 | 
|                                      |  |                             |         |      |  |   |         | 

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| |  |  | Reimbursed service costs were $94.3 million and $95.2 million
for the first quarter of 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Service costs, which include compensation and benefits for
billable employees, and certain other expenses directly related to
service contracts, were $197.4 million or 53.6% of net service
revenues versus $211.5 million or 55.8% of net service revenues for
the first quarter of 2003 and 2002, respectively. This reduction is
primarily a result of the continued effect of our process
enhancements and cost reduction efforts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Commercial rights and royalties costs, which include
compensation and related benefits for employees, amortization of
commercial rights, infrastructure costs of the PharmaBio Development
group and other expenses directly related to commercial rights and
royalties, were $29.8 million for the first quarter of 2003 versus
$14.3 million for the first quarter of 2002. These costs include
services and products provided by third parties, as well as services
provided by our other service groups, totaling approximately $8.1
million and $11.2 million for the first quarter of 2003 and 2002,
respectively. The three months ended March 31, 2003 includes three
months of expenses of our Bioglan operations, which we acquired in
March 2002, as well as the costs related to the launch and marketing
of Solaraze and ADOXA and our contracts in Europe with two large
pharmaceutical customers.
|
| |  |  | Investment costs, which include costs directly related to
direct and indirect investments in our customers or other strategic
partners as part of the PharmaBio Development groups financing
arrangements, were $158,000 for the first quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Depreciation and amortization, which include depreciation of
our property and equipment and amortization of our definite-lived
intangible assets except commercial rights, decreased to $20.1
million for the first quarter of 2003 versus $21.4 million for the
first quarter of 2002. This decrease is primarily a result of the
transfer of our informatics group to Verispan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

General and administrative expenses, which include compensation and benefits
for administrative employees, non-billable travel, professional services, and
expenses for advertising, information technology and facilities, were $131.0
million or 31.4% of total net revenues for the first quarter of 2003 versus
$127.2 million or 32.0% of total net revenues for the first quarter of 2002.
General and administrative expenses increased approximately $3.8 million
primarily due to a $2.9 million increase in expenses associated with changes to
our employee cash-based incentive program and the effect of foreign currency
fluctuations. These increases offset the reduction of approximately $5.1
million due to the transfer of our informatics group into the Verispan joint
venture.

Net interest income, which represents interest income received from bank
balances and investments in debt securities net of interest expense incurred on
lines of credit, notes and capital leases, was $3.8 million for the first
quarter of 2003 versus $3.3 million for the first quarter of 2002.

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Other expense was $4.5 million for the first quarter of 2003 versus $1.1
million for the first quarter of 2002. The increase is a result of several
factors, including the effects of foreign currency translations, disposals of
assets and transaction costs. Included in the three months ended March 31,
2003 were approximately $3.7 million in foreign currency translation losses and
$1.7 million of expenses related to the special committee of our Board of
Directors and its financial and legal advisors.

Income before income taxes was $38.1 million or 9.1% of total net revenues for
the first quarter of 2003 versus $25.8 million or 6.5% of total net revenues
for the first quarter of 2002.

The effective income tax rate was 34.0% for the first quarter of 2003 versus
33.0% for the first quarter of 2002. Since we conduct operations on a global
basis, our effective income tax rate may vary.

During the first quarter of 2003, we recognized $4,000 of losses from equity in
unconsolidated affiliates and other which represents our pro rata share of net
losses of unconsolidated affiliates, primarily Verispans net loss, net of
minority interest in a consolidated subsidiary.

Effective January 2002, we changed our method for calculating deferred income
taxes related to our multi-jurisdictional tax transactions. Under the previous
method, we followed an incremental approach to measuring the deferred income
tax benefit of our multi-jurisdictional transactions. Under this approach, we
considered the income tax benefit from the step-up in tax basis, net of any
potential incremental foreign income tax consequences determined by projecting
taxable income, foreign source income, foreign tax credit provisions and the
interplay of these items among and between their respective tax jurisdictions,
based on different levels of intercompany foreign debt. Under the new method,
we record deferred income taxes only for the future income tax impact of book
and tax basis differences created as a result of multi-jurisdictional
transactions. We believe the new method has become more widely used in
practice and is preferable because it eliminates the subjectivity and
complexities involved in determining the timing and amount of the release or
reversal of the valuation allowance under the prior method. In order to effect
this change, we recorded a cumulative effect adjustment of $45.7 million in the
first quarter of 2002 which represents the reversal of the valuation allowance
related to deferred income taxes on these multi-jurisdictional income tax
transactions.

Net income was $25.2 million for the first quarter of 2003 versus $62.9 million
for the first quarter of 2002. The net income for the first quarter of 2002
included $45.7 million for the cumulative effect of changing to a different
method of recognizing deferred income taxes.

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Analysis by Segment:

The following table summarizes the operating activities for our reportable
segments for the first quarter of 2003 and 2002, respectively. We do not
include reimbursed service costs, general and administrative expenses,
depreciation and amortization except amortization of commercial rights,
interest (income) expense, other (income) expense and income tax expense
(benefit) in our segment analysis. Intersegment revenues have been eliminated
and the profit on intersegment revenues is reported within the service group
providing the services (dollars in millions).

|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |          |       |  |  |          |      |   |  |   |       |          |  |  |      |  
|--------------------- |  | ------------------ | ----- | ------------ |  | -------- | ----- | ---- |  | -------- | ------ | ---- |  | -------- | ----- |  |  | -------- | ---- | - |  | - | ----- | -------- |  |  | ---- | -
|                      |  | Total Net Revenues |       | Contribution
|                      |  |                    |       |             
|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |          |       |  |  | % of Net |      |   |  |   |       | % of Net
|                      |  | 2003               |       | 2002         |  | Growth % |       | 2003 |  | Revenues |        | 2002 |  | Revenues
|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |         
|Product development   |  | $                  | 250.0 |              |  | $        | 230.5 |      |  |          | 8.5    | %    |  | $        | 126.3 |  |  |          | 50.5 | % |  | $ | 112.4 |          |  |  | 48.8 | %
|Commercial services   |  |                    | 126.7 |              |  |          | 147.2 |      |  |          | (13.9  | )    |  |          | 44.9  |  |  |          | 35.4 |   |  |   | 50.8  |          |  |  | 34.5 |  
|PharmaBio Development |  |                    | 48.6  |              |  |          | 19.0  |      |  |          | 156.2  |      |  |          | 18.8  |  |  |          | 38.6 |   |  |   | 4.5   |          |  |  | 23.9 |  
|Informatics           |  |                    |      |              |  |          | 12.7  |      |  |          | (100.0 | )    |  |          |      |  |  |          |     |   |  |   | 4.5   |          |  |  | 35.2 |  
|Eliminations          |  |                    | (8.1  | )            |  |          | (11.2 | )    |  |          |       |      |  |          |      |  |  |          |     |   |  |   |      |          |  |  |     |  
|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |          |       |  |  |          |      |   |  |   |       |          |  |  |      |  
|                      |  | $                  | 417.3 |              |  | $        | 398.1 |      |  |          | 4.8    | %    |  | $        | 190.0 |  |  |          | 45.5 | % |  | $ | 172.2 |          |  |  | 43.2 | %

The product development groups financial performance improvement was a result
of several factors, including an increase in revenues which was primarily a
result of foreign currency fluctuations and improvement in the contribution
margin due to greater efficiency and improved contract management. We believe
that this group has realized most of the efficiencies which we originally set
out to achieve from the prior years restructurings.

The commercial services groups financial performance was negatively impacted
by the completion of the services portion of the SCIO contract during the
fourth quarter of 2002 and the difficult business conditions for large
fee-for-service contracts in the United States. The impact of the revenue
decline was offset by the effects of our cost management efforts.

The PharmaBio Development groups increase in net revenues, which consist of
commercial rights and royalties and investments, was primarily the result of
investment gains, our March 2002 acquisition of certain assets of Bioglan and
its suite of dermatology products and our two contracts in Europe. The
investment gains for the three months ended March 31, 2003 included $7.6
million on our investment in VIRS and $11.0 million on the SCIO warrants which
we own. The investment revenues (net of related costs) increased the
contribution of this group by approximately $13.3 million when compared to the
first quarter of 2002. In addition, this group benefited this quarter from a
drug distributor increasing their purchases of Bioglan products, which we
believe will have the effect of reducing revenues and contribution in this
group in the second quarter of 2003. The services provided to PharmaBio
Development by our commercial services group decreased approximately $3.1
million primarily as a result of the completion of the services portion of the
SCIO contract during the fourth quarter of 2002.

The informatics group was transferred into the Verispan joint venture in May
2002 and is no longer a segment in 2003.

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Liquidity and Capital Resources

Cash and cash equivalents were $704.1 million at March 31, 2003 as compared to
$644.3 million at December 31, 2002.

Cash provided by operations was $57.6 million for the three months ended March
31, 2003 versus $55.1 million for the comparable period of 2002.

Cash provided by investing activities was $2.8 million for the three months
ended March 31, 2003 versus cash used in investing activities of $33.7 million
for the comparable period of 2002. Investing activities consist primarily of
the purchases and sales of equity securities and other investments, capital
asset purchases, the purchases of commercial rights, and in the first quarter
of 2002, the acquisition of certain assets of Bioglan.

Capital asset purchases required an outlay of cash of $9.4 million for the
three months ended March 31, 2003 compared to an outlay of $10.7 million for
the same period in 2002. The decrease was due primarily to the transfer of our
informatics group to Verispan.

Cash used for the acquisition of commercial rights was $11.9 million for the
three months ended March 31, 2003 as compared to an outlay of $3.8 million for
the comparable period in 2002. The acquisitions for the three months ended
March 31, 2003 included $4.1 million for the contracts with COB, $3.2 million
of payments to SCIO, $3.2 million for the contract with a large pharmaceutical
customer in Belgium and approximately $781,000 for the acquisition of product
and marketing rights. On March 22, 2002, we acquired certain assets of Bioglan,
including its management team and sales force and approximately $1.6 million in
cash, for approximately $27.9 million.

Purchases of equity securities and other investments required an outlay of cash
of $393,000 for the three months ended March 31, 2003 compared to an outlay of
$6.0 million for the same period in 2002. Proceeds from the sale of equity
securities and other investments were $22.7 million during the three months
ended March 31, 2003 as compared to $9.9 million for the same period in 2002.
The proceeds received during the three months ended March 31, 2003 primarily
resulted from the return on our investment in VIRS which was acquired by Gilead
Sciences, Inc. in January 2003.

The following table is a summary of our net service receivables outstanding
(dollars in thousands):

|                                               |  |                |          |                   |  |   |          |  
|---------------------------------------------- |  | -------------- | -------- | ----------------- |  | - | -------- | -
|                                               |  | March 31, 2003 |          | December 31, 2002
|                                               |  |                |          |                  
|Trade service accounts receivable, net         |  | $              | 201,327  |                   |  | $ | 227,636  |  
|Unbilled services                              |  |                | 111,911  |                   |  |   | 120,383  |  
|Unearned income                                |  |                | (227,223 | )                 |  |   | (239,598 | )
|                                               |  |                |          |                   |  |   |          |  
|Net service receivables outstanding            |  | $              | 86,015   |                   |  | $ | 108,421  |  
|                                               |  |                |          |                   |  |   |          |  
|Number of days of service revenues
outstanding |  |                | 17       |                   |  |   | 21       |  

The decrease in the number of days of service revenues outstanding is a result
of our continued focus on the fundamentals of our business and efficiencies
generated by our shared service centers.

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Investments in debt securities were $37.0 million at March 31, 2003 as compared
to $36.7 million at December 31, 2002. Our investments in debt securities
consist primarily of U.S. Government Securities, which are callable by the
issuer at par, and money funds.

Investments in marketable equity securities decreased $16.8 million to $48.1
million at March 31, 2003 as compared to $64.9 million at December 31, 2002
primarily as a result of the return on our investment in VIRS which was
acquired by Gilead in January 2003.

Investments in non-marketable equity securities and loans at March 31, 2003
were $46.3 million, as compared to $46.4 million at December 31, 2002.

Investments in unconsolidated affiliates, primarily Verispan, were $121.1
million at March 31, 2003 and December 31, 2002.

We have available to us a £10.0 million (approximately $15.7 million) unsecured
line of credit and a £1.5 million (approximately $2.3 million) general banking
facility with a U.K. bank. At March 31, 2003, we did not have any outstanding
balances on these facilities.

In March 2001, the Board of Directors authorized us to repurchase up to $100
million of our common stock until March 1, 2002 which was subsequently extended
to March 1, 2003. This authorization expired on March 1, 2003. We did not
enter into any agreements to repurchase our common stock during the first
quarter of 2003.

Shareholders equity at March 31, 2003 was $1.625 billion versus $1.598 billion
at December 31, 2002.

The proposed merger described under the caption Subsequent Event calls for
the use of a large portion of our existing cash as part of the financing for
the transaction. In addition, the proposed merger calls for substantial debt
financing and after the merger, assuming its completion, much of our available
cash would be used to service the debt incurred in the merger.

Based on our current operating plan, we believe that our available cash and
cash equivalents, together with future cash flows from operations and
borrowings under our line of credit agreements will be sufficient to meet our
foreseeable cash needs in connection with our operations. As part of our
business strategy, we review many acquisition candidates in the ordinary course
of business, and in addition to acquisitions already made, we are continually
evaluating new acquisition and expansion possibilities. In addition, as part
of our business strategy going forward, we intend to review and consider
opportunities to acquire additional product rights, as appropriate. We may
from time to time seek to obtain debt or equity financing in our ordinary
course of business or to facilitate possible acquisitions or expansion.

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Subsequent Event

On April 10, 2003, we entered into a merger agreement with Pharma Services
Holding, Inc., or Pharma Services, for our public shareholders to receive
$14.50 per share in cash. Pharma Services was founded by Dennis B. Gillings,
Ph.D., our Chairman of the Board and Founder, and One Equity Partners LLC, the
private equity arm of Bank One Corporation. Dr. Gillings and certain of his
affiliates will retain their equity interest in us. In addition, in order to
finance the transaction, Pharma Services has received an equity commitment of
$415.7 million from One Equity Partners LLC and debt commitments totaling $875
million from Citicorp North America, Inc. and Citigroup Global Markets Inc.
Pharma Services also intends to use approximately $586 million of our existing
cash to fund the transaction. The transaction, which is anticipated to be
completed later in 2003, is subject to Pharma Services completion of its
committed financing and customary conditions, including regulatory and
shareholder approvals.

RISK FACTORS

In addition to the other information provided in this report, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also
impair our business operations. If any of the following risks occur, our
business, financial condition, or results of operations could be materially
adversely affected.

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

Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice grew substantially during the 1990s and we
benefited from this trend. Some industry commentators believe that the rate of
growth of outsourcing will tend to decrease. If these industries reduce their
tendency to outsource those projects, our operations, financial condition and
growth rate could be materially and adversely affected. Recently, we also
believe we have been negatively impacted by mergers and other factors in the
pharmaceutical industry, which appear to have slowed decision making by our
customers and delayed certain trials. A continuation of these trends would
have an ongoing adverse effect on our business. In addition, numerous
governments have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers
and pharmaceutical companies. If future regulatory cost containment efforts
limit the profits which can be derived on new drugs, our customers may reduce
their research and development spending, which could reduce the business they
outsource to us. We cannot predict the likelihood of any of these events or the
effects they would have on our business, results of operations or financial
condition.

If we are unable to successfully develop and market potential new services, our
growth could be adversely affected.

Another key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If
we are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this

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element of our growth strategy, and our future business, results of operations
and financial condition could be adversely affected.

Our plan to web-enable our product development and commercialization services
may negatively impact our results in the short term.

We are currently developing an Internet platform for our product development
and commercialization services. We have entered into agreements with certain
vendors for them to provide web-enablement services to help us develop this
platform. If such vendors fail to perform as required or if there are
substantial delays in developing and implementing this platform, we may have to
make substantial further investments, internally or with third parties, to
achieve our objectives. Meeting our objectives is dependent on a number of
factors which may not take place as we anticipate, including obtaining adequate
web-enablement services, creating web-enablement services which our customers
will find desirable and implementing our business model with respect to these
services. Also, these expenditures are likely to negatively impact our
profitability, at least until our web-enabled products are operationalized.
Over time, we envision continuing to invest in extending and enhancing our
Internet platform in other ways to further support and improve our services.
We cannot assure you that any improvements in operating income resulting from
our Internet capabilities will be sufficient to offset our investments in the
Internet platform. Our results could be further negatively impacted if our
competitors are able to execute their services on a web-based platform before
we can launch our Internet services or if they are able to structure a platform
that attracts customers away from our services.

We may not be able to derive the benefits we hope to achieve from Verispan, our
joint venture with McKesson.

In May 2002, we completed the formation of a joint venture, Verispan, with
McKesson designed to leverage the operational strengths of the healthcare
information business of each party. As part of the formation of Verispan, we
contributed our former informatics business. As a result, Verispan remains
subject to the risks to which our informatics business was exposed. If
Verispan is not successful or if it experiences any of the difficulties
described below, there could be an adverse effect on our results of operations
and financial condition, as Verispan is a pass-through entity and, as such, its
results are reflected in our financial statements to the extent of our interest
in Verispan. We may not achieve the intended benefits of Verispan if it is not
able to secure additional data in exchange for equity. Verispan also could
encounter other difficulties, including:



| |  | its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to
support its informatics products;                                 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | its ability to process and use the volume of data received from a variety of data providers;                                                                                              
| 
| |  | its ability to attract customers, besides Quintiles and McKesson, to purchase its products and services;                                                                                  
| 
| |  | the risk of changes in healthcare information privacy laws and regulations that could create a risk of liability, increase
the cost of Verispans business or limit its service offerings;
| 
| |  | the risk that industry regulation may restrict Verispans ability to analyze and disseminate pharmaceutical and healthcare
data; and                                                      
| 
| |  | the risk that it will not be able to effectively and cost-efficiently replace services previously provided to                                                                             

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| |  | the contributed businesses by the former parent corporations.
| |  | -------------------------------------------------------------

Although we have a license to use Verispans commercially available data
products and we may pay Verispan to create customized data products for us, if
Verispan is unable to provide us with the quality and character of data
products that we need to support those services, we would need to seek other
strategic alternatives to achieve our goals.

In contributing our former informatics business to Verispan, we assigned
certain contracts to Verispan. Verispan has agreed to indemnify us against any
liabilities we may incur in connection with these contracts after contributing
them to Verispan, but we still may be held liable under the contracts to the
extent Verispan is unable to satisfy its obligations, either under the
contracts or to us.

The potential loss or delay of our large contracts could adversely affect our
results.

Many of our customers can terminate our contracts upon 15-90 days notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. Thus,
the loss or delay of a large contract or the loss or delay of multiple
contracts could adversely affect our net revenue and profitability. We believe
that this risk has potentially greater effect as we pursue larger outsourcing
arrangements with global pharmaceutical companies. Also, over the past two
years we have observed that customers may be more willing to delay, cancel or
reduce contracts more rapidly than in the past. If this trend continues, it
could become more difficult for us to balance our resources with demands for
our services and our financial results could be adversely affected.

Underperformance of our commercial rights strategies could have a negative
impact on our financial performance.

As part of our PharmaBio Development business strategy, we enter into
arrangements with customers in which we take on some of the risk of the
potential success or failure of the customers product. These transactions may
include making a strategic investment in a customer, providing financing to a
customer, or acquiring an interest in the revenues from a customers product.
For example, we may build or provide a sales organization for a biotechnology
customer to commercialize a new product in exchange for a share in the revenues
of the product. We anticipate that in the early periods of many of these
relationships, our expenses will exceed revenues from these arrangements,
particularly where we are providing a sales force for the product at our own
cost. Aggregate royalty or other payments made to us under these arrangements
may not be adequate to offset our total expenditure in providing a sales force
or in making milestone or marketing payments to our customers. We must
carefully analyze and select the customers and products with which we are
willing to structure our risk-based deals. Products underlying our commercial
rights strategies may not complete clinical trials, receive FDA approval or
achieve the level of market acceptance or consumer demand that we expect, in
which case we might not be able to earn a profit or recoup our investment with
regard to a particular arrangement. In addition, the timing of regulatory
approval and product launch and the achievement of other milestones are
generally beyond our control and can affect our actual return from these
investments. The potential negative effect to us could increase depending on
the nature and timing of our investments and the length of time before it
becomes apparent that the product will not achieve commercial success. Our
financial results would be adversely affected if our customers or their
products do not achieve the level of success that we anticipate and/or our
return or payment from the product investment or financing

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is less than our
costs of performance, investment or financing.

Our rights to market and sell certain pharmaceutical products expose us to
product risks typically associated with pharmaceutical companies.

Our acquisition of the rights to market and sell Solaraze and the rights to
other dermatology products acquired from Bioglan Pharma, Inc., as well as any
other product rights we may hold at any time, subject us to a number of risks
typical to the pharmaceutical industry. For example, we could face product
liability claims in the event users of these products, or of any other
pharmaceutical product rights we may acquire in the future, experience negative
reactions or adverse side effects or in the event it causes injury, is found to
be unsuitable for its intended purpose or is otherwise defective. While we
believe we currently have adequate insurance in place to protect against these
risks, we may nevertheless be unable to satisfy any claims for which we may be
held liable as a result of the use or misuse of products which we manufacture
or sell, and any such product liability claim could adversely affect our
business, operating results or financial condition. In addition, like
pharmaceutical companies, our commercial success in this area will depend in
part on our obtaining, securing and defending our intellectual property rights
covering our pharmaceutical product rights.

These risks may be augmented by certain risks relating to our outsourcing of
the manufacturing and distribution of these products or any pharmaceutical
product rights we may acquire in the future. For example, as a result of our
decision to outsource the manufacturing and distribution of Solaraze, we are
unable to directly monitor quality control in the manufacturing and
distribution processes.

Our plans to market and sell Solaraze and other pharmaceutical products also
subject us to risks associated with entering into a new line of business. We
have limited experience operating in this line of business. If we are unable
to operate this new line of business as we expect, the financial results from
this new line of business could have a negative impact on our results of
operations as a whole. The risk that our results may be affected if we are
unable to successfully operate our pharmaceutical operations may increase in
proportion with (1) the number of products or product rights we license or
acquire in the future, (2) the applicable stage of the drug approval process of
the products and (3) the levels of outsourcing involved in the development,
manufacture and commercialization of such products.

If we lose the services of Dennis Gillings, Pamela Kirby or other key
personnel, our business could be adversely affected.

Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman, and Pamela J. Kirby, Ph.D., our Chief Executive Officer. Our
performance also depends on our ability to attract and retain qualified
management and professional, scientific and technical operating staff, as well
as our ability to recruit qualified representatives for our contract sales
services. The departure of Dr. Gillings, Dr. Kirby, or any key executive, or
our inability to continue to attract and retain qualified personnel could have
a material adverse effect on our business, results of operations or financial
condition.

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Our product development services could result in potential liability to us.

We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive.
If we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards, trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants. Similar risks apply to our product development
services relating to medical devices.

We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. For example, we are among the defendants
named in a purported class action by participants in an Alzheimers study
seeking to hold us liable for alleged damages to the participants arising from
the study. Nonetheless, it is possible we could be found liable for those
types of losses.

In addition to supervising tests or performing laboratory analysis, we also own
a number of facilities where Phase I clinical trials are conducted. Phase I
clinical trials involve testing a new drug on a limited number of healthy
individuals, typically 20 to 80 persons, to determine the drugs basic safety.
We also could be liable for the general risks associated with ownership of such
a facility. These risks include, but are not limited to, adverse events
resulting from the administration of drugs to clinical trial participants or
the professional malpractice of Phase I medical care providers.

We also provide limited clinical trial packaging services. We could be held
liable for any problems that result from the trial drugs we package, including
any quality control problems in our packaging facilities. For example,
accounting for drug samples that contain controlled substances is subject to
regulation by the United States Drug Enforcement Administration, or the DEA.
Some of our facilities have been audited by the DEA. In one case, the DEA
indicated that it found that we miscounted certain drugs. Though we provided a
corrected accounting of these drugs to the DEA and no audit report or action
has been taken, the DEA could pursue one or more courses of action, including a
re-audit of the facility, the assessment of civil fines, or in extreme cases,
criminal penalties.

We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or
breach of contract if one of our laboratories inaccurately reports or fails to
report lab results. Although, we maintain insurance to cover ordinary risks,
insurance would not cover the risk of a customer deciding not to do business
with us as a result of poor performance.

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Our insurance may not cover all of our indemnification obligations and other
liabilities associated with our operations.

We maintain insurance designed to cover ordinary risks associated with our
operations and our ordinary indemnification obligations. This insurance might
not be adequate coverage or may be contested by our carriers. For example, our
insurance carrier, to whom we paid premiums to cover risks associated with our
product development services, has filed suit against us seeking to rescind the
insurance policies or to have coverage denied for some or all of the claims
arising from class action litigation involving an Alzheimers study. The
availability and level of coverage provided by our insurance could have a
material impact on our profitability if we suffer uninsured losses or are
required to indemnify third parties for uninsured losses.

In connection with our contribution to Verispan, Verispan assumed our
obligation under our settlement agreement with WebMD to indemnify WebMD for
losses arising out of or in connection with the cancelled Data Rights Agreement
with WebMD, our data business that we contributed to the joint venture, the
collection, accumulation, storage or use of data by ENVOY for the purpose of
transmitting or delivering data to us, any transmission or delivery by ENVOY of
data to us or violations of law or contract attributable to any such event.
This indemnity obligation is limited to 50% for the first $20 million in
aggregate losses, subject to exceptions for certain indemnity obligations that
were not transferred to Verispan. Although Verispan has assumed our indemnity
obligations to WebMD relating to our data business, WebMD may seek indemnity
from us and we would have to proceed against Verispan.

In addition, we remain subject to other indemnity obligations to WebMD,
including for losses arising out of the settlement agreement itself or out of
the sale of ENVOY to WebMD. In particular, we could be liable for losses which
may arise in connection with a class action lawsuit filed against ENVOY prior
to its purchase by us and subsequent sale to WebMD. Our indemnification
obligation with regard to losses arising from the sale of ENVOY to WebMD
including ENVOYs class action lawsuit is not subject to the limitation on the
first $20 million of losses described above.

Relaxation of government regulation could decrease the need for the services we
provide.

Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for our
services, and, as a result, our business, results of operations and financial
condition could be materially adversely affected. Potential regulatory changes
under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on the
business opportunities available to us.

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Failure to comply with existing regulations could result in a loss of revenue.

Any failure on our part to comply with applicable regulations could result in
the termination of ongoing clinical research or sales and marketing projects or
the disqualification of data for submission to regulatory authorities, either
of which could have a material adverse effect on us. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at substantial
cost to us.

Our services are subject to evolving industry standards and rapid technological
changes.

The markets for our services are characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. To succeed, we must continue to:



| |  |  | enhance our existing services;                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
|
| |  |  | integrate new services with existing services;                                                     
|
| |  |  | achieve market acceptance for new services; and                                                    
|
| |  |  | respond to emerging industry standards and other technological changes.                            

Exchange rate fluctuations may affect our results of operations and financial
condition.

We derive a large portion of our net revenue from international operations. Our
financial statements are denominated in U.S. dollars; thus, factors associated
with international operations, including changes in foreign currency exchange
rates, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:

|  |  |                                                                                                                                                                        
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Foreign Currency Translation Risk. The revenue and expenses of
our foreign operations are generally denominated in local currencies.                                   
|  |  |                                                                                                                                                                        
| |  | Foreign Currency Transaction Risk. Our service contracts may
be denominated in a currency other than the currency in which we
incur expenses related to such contracts.

We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at March 31, 2003. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably
reduce our currency transaction risk associated with our service contracts.

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We may be adversely affected by customer concentration.

Although we did not have one customer that accounted for 10% of net service
revenues for the three months ended March 31, 2003, one customer accounted for
approximately 13% of our net service revenues for the three months ended March
31, 2002 due, in part, to the effect of a long term contract that is set to
expire as of the end of 2003. These revenues resulted from services provided
by the product development and commercial services groups. If this customer or
any large customer decreases or terminates its relationship with us, our
business, results of operations or financial condition could be materially
adversely affected.

If we are unable to submit electronic records to the FDA according to FDA
regulations, our ability to perform services for our customers which meet
applicable regulatory requirements could be adversely affected.

If we were unable to submit electronic records to the FDA, which meet the
requirements of FDA regulations, this may adversely affect our customers when
they submit the data concerned to the FDA in support of an application for
approval of a product. The FDA published 21 CFR Part 11 Electronic Records;
Electronic Signatures; Final Rule (Part 11) in 1997. Part 11 became
effective in August 1997 and defines the regulatory requirements that must be
met for FDA acceptance of electronic records and/or electronic signatures in
place of the paper equivalents. Part 11 requires that those utilizing such
electronic records and/or signatures employ procedures and controls designed to
ensure the authenticity, integrity and, as appropriate, confidentiality of
electronic records and, Part 11 requires those utilizing electronic signatures
ensure that a person appending an electronic signature cannot readily repudiate
the signed record. Pharmaceutical, medical device and biotechnology
companies are increasing their utilization of electronic records and
electronic signatures and are requiring their service providers and partners to
do likewise. Becoming compliant with Part 11 involves considerable complexity
and cost. Our ability to provide services to our customers in full compliance
with applicable regulations includes a requirement that, over time, we become
compliant and maintain compliance with the requirements of Part 11. If we are
unable to achieve this objective, our ability to provide services to our
customers which meet FDA requirements may be adversely affected.

Our proposed transaction with Pharma Services is subject to uncertainties.

Our proposed transaction with Pharma Services is subject to customary
conditions, including regulatory and shareholder approval, and Pharma Services
completion of its committed financing. If any of the conditions to closing are
not satisfied or waived, the proposed transaction would not be completed and
our public shareholders would not receive $14.50 per share in cash. In
addition, the merger agreement relating to the proposed transaction can be
terminated prior to completion of the transaction under certain circumstances,
including where we receive an acquisition proposal from a third party that our
board believes is more favorable to our shareholders than the Pharma Services
transaction (after following specific procedures described in our merger
agreement with Pharma Services). If the merger agreement is terminated, the
proposed transaction would not be completed, our public shareholders would not
receive $14.50 per share in cash and, in certain circumstances, we could be
required to pay Pharma Services a termination fee of $52 million, as well as
reimburse its costs, fees and expenses up to $5 million. If the merger is not
completed, our common stock would continue to trade on the Nasdaq National
Market, however, the value of our stock could decline substantially below the
$14.50 per share consideration in the merger. We are currently targeting to
close the proposed transaction, assuming the satisfaction or waiver of all
conditions, in the third quarter of 2003. The closing of the proposed
transaction could be delayed beyond the third quarter of 2003 due to many
factors, including factors beyond the control of either party. In addition, we may not
prevail in pending

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litigation regarding Pharma Services Companys proposal to acquire
us. An injunction or other adverse outcome in that litigation could have a
material adverse effect on our financial condition, regardless of whether the
merger is completed.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company did not have any material changes in market risk from December 31,
2002.

Item 4. Controls and Procedures

Based on the Companys most recent evaluation, which was completed within 90
days of the filing of this Form 10-Q, the Companys Chairman (principal
executive officer) and Chief Financial Officer believe the Companys disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) provide reasonable assurances that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time period required by the United States
Securities and Exchange Commissions rules and forms. There have been no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of the most recent
evaluation of the Companys internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Part II.Other Information

Item 1. Legal Proceedings

On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
one of our subsidiaries, on behalf of 185 Alzheimers patients who participated
in drug studies involving an experimental drug manufactured by defendant
Novartis and their surviving spouses. The complaint alleges claims for breach
of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation,
Georgia RICO violations, infliction of emotional distress, battery, negligence
and loss of consortium as to class member spouses. The complaint seeks
unspecified damages, plus costs and expenses, including attorneys fees and
experts fees. The parties are in the discovery phase of the litigation. We
believe the claims to be without merit and are defending the suit vigorously.

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On January 22, 2002, Federal Insurance Company and Chubb Custom Insurance
Company filed suit against us, Quintiles Pacific, Inc. and Quintiles
Laboratories Limited, two of our subsidiaries, in the United States District
Court for the Northern District of Georgia. In the suit, Chubb, our primary
commercial general liability carrier, and Federal, our excess liability
carrier, seek to rescind the policies issued to us for coverage years 2000-2001
and 2001-2002 based on an alleged misrepresentation by us on our policy
application. Alternatively, Chubb and Federal seek a declaratory judgment that
there is no coverage under the policies for some or all of the claims asserted
against us and our subsidiaries in the litigation described in the prior
paragraph and, if one or more of such claims is determined to be covered, Chubb
and Federal request an allocation of the defense costs between the claims they
contend are covered and non-covered claims. We have filed an answer with
counterclaims against Federal and Chubb in response to their complaint.
Additionally, we have amended our pleadings to add AON Risk Services as a
counterclaim defendant, as an alternative to our position that Federal and
Chubb are liable under the policies. In order to preserve our rights, on March
27, 2003, we also filed a separate action against AON in the United States
District Court for the Middle District of North Carolina. We believe the
allegations made by Federal and Chubb are without merit and are defending this
case vigorously.

In October 2002, seven purported class action lawsuits were filed in Superior
Court, Durham County, North Carolina by shareholders seeking to enjoin the
consummation of a transaction proposed by Pharma Services Company, a newly
formed company wholly owned by Dennis B. Gillings, Ph.D., to acquire all of our
outstanding shares for $11.25 per share in cash. All of the lawsuits were
subsequently transferred to the North Carolina Business Court. The lawsuits
name as defendants Dr. Gillings, other members of our Board of Directors, our
company and, in some cases, Pharma Services Company. The complaints allege,
among other things, that the directors breached their fiduciary duties with
respect to the proposal. The complaints seek to enjoin the transaction
proposed by Pharma Services Company, and the plaintiffs seek to recover
damages. On November 11, 2002, a special committee of our Board of Directors
announced its rejection of the proposal by Pharma Services Company and its
intention to investigate strategic alternatives available to us for purposes of
enhancing shareholder value, including the possibility of a sale of our company
and alternatives that would keep us independent and publicly owned. On January
6, 2003, the North Carolina Business Court entered a Case Management Order
consolidating all seven lawsuits for all purposes and staying the lawsuits
until March 29, 2003 or until we provide notice of a change-of-control
transaction involving our company.

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On March 28, 2003, the Court entered an Order Maintaining the Status Quo, which
continued its prior Case Management Order in all respects until the earlier of
a date selected by the Court or until we provide the notice contemplated by the
Case Management Order. On April 10, 2003, our Board of Directors approved a
merger agreement with Pharma Services Holding, Inc. for the public shareholders
to receive $14.50 per share in cash. We anticipate filing a proxy statement
and holding a special meeting later this year at which shareholders will vote
on the transaction. Under the terms of the Case Management Order, we are
required to give Plaintiffs counsel and Court notice of a change-of-control
transaction involving us at least forty (40) days prior to the closing of such
a transaction. Plaintiffs are required to serve an amended consolidated
complaint within thirty (30) calendar days of the notice. We believe the
original lawsuits are without merit and we intend to defend these claims
vigorously. The scope or substance of any new or additional claims that might
be asserted by Plaintiffs in the pending litigation, or through independent
actions by Plaintiffs or any other shareholder, cannot be determined with
certainty at this time, but it is possible that such claims could seek to
challenge the fairness or adequacy of any transaction announced by us,
including the proposed transaction with Pharma Services Holding, or the process
employed by us or the Special Committee, or seek to enjoin it. In the event that Plaintiffs elect
to file any amended complaint, or in the event that any new litigation is
filed, we will evaluate those claims and respond as appropriate.

We also are party to other legal proceedings incidental to our business. While
management currently believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our consolidated financial statements, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations of the
period in which the ruling occurs.

Item 2. Changes in Securities and Use of Proceeds

During the three months ended March 31, 2003, options to purchase 13,000 shares
of our common stock were exercised at an average exercise price of $4.3175 per
share in reliance on Rule 701 under the Securities Act of 1933. We granted
such options prior to becoming subject to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, pursuant to our
Non-qualified Employee Incentive Stock Option Plan.

Item 3. Defaults upon Senior Securities   Not applicable

Item 4. Submission of Matters to a Vote of Security Holders  Not applicable

Item 5. Other Information  Not applicable

Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|     |  |                                                                                                                                                                                                                                                                                                                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002 [Furnished in accordance with the Commissions
guidance published in SEC Rel. No. 34-47551. This exhibit
shall not be deemed to be incorporated by reference into any
document or filed herewith for purposes of liability under the
Securities Exchange Act of 1934.]

40



---



##### 



|     |  |                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002 [Furnished in accordance with the Commissions
guidance published in SEC Rel. No. 34-47551. This exhibit
shall not be deemed incorporated by reference into any
document or filed herewith for purposes of liability under the
Securities Exchange Act of 1934.]



| | (b) |  | No reports on Form 8-K were filed or furnished during the three
months ended March 31, 2003.
| | --- |  | --------------------------------------------------------------------------------------------

41



---



##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Quintiles Transnational Corp.




Registrant


|     |  |             |  |                                                                       
|---- |  | ----------- |  | ----------------------------------------------------------------------
|Date |  | May 1, 2003 |  | /s/ Dennis B. Gillings                                                
|     |  |             |  |                                                                       
|     |  |             |  | Dennis B. Gillings, Chairman                                          
|    
|Date |  | May 1, 2003 |  | /s/ Pamela J. Kirby                                                   
|     |  |             |  |                                                                       
|     |  |             |  | Pamela J. Kirby, Chief Executive Officer                              
|    
|Date |  | May 1, 2003 |  | /s/ James L. Bierman                                                  
|     |  |             |  |                                                                       
|     |  |             |  | James L. Bierman, Executive Vice President
and Chief Financial Officer

42



---



##### 



CERTIFICATIONS

I, Dennis B. Gillings, Ph.D., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Quintiles
Transnational Corp.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

43



---



##### 





|6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |             |  |                                   
|----- |  | ----------- |  | ----------------------------------
|Date: |  | May 1, 2003 |  |                                   
|      |  |             |  |                                   
|      |  |             |  |                                   
|      |  |             |  | /s/ Dennis B. Gillings            
|      |  |             |  |                                   
|      |  |             |  | Dennis B. Gillings,
Ph.D.
Chairman

44



---



##### 



I, James L. Bierman, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Quintiles
Transnational Corp.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

45



---



##### 





|6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |             |  |                                         
|----- |  | ----------- |  | ----------------------------------------
|Date: |  | May 1, 2003 |  |                                         
|      |  |             |  |                                         
|      |  |             |  |                                         
|      |  |             |  | /s/ James L. Bierman                    
|      |  |             |  |                                         
|      |  |             |  | James L. Bierman
Chief Financial Officer

46



---



##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|99.1    |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 [Furnished in accordance
with the Commissions guidance published in SEC Rel. No. 34-47551. This
exhibit shall not be deemed to be incorporated by reference into any
document or filed herewith for purposes of liability under the Securities
Exchange Act of 1934.] 
|99.2    |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The
Sarbanes-Oxley Act of 2002 [Furnished in accordance with the
Commissions guidance published in SEC Rel. No. 34-47551. This exhibit
shall not be deemed to be incorporated by reference into any document or
filed herewith for purposes of liability under the Securities Exchange
Act of 1934.]

47