##### 



Securities and Exchange Commission

Washington, D.C. 20549


Form 10-Q/A

Amendment No. 1

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

For the Quarterly Period Ended June 30, 2003

Commission file number 000-23520

QUINTILES TRANSNATIONAL CORP.

(Exact name of registrant as specified in its charter)


North Carolina
(State or other jurisdiction of
incorporation or organization)
    
    56-1714315
(I.R.S. Employer Identification No.)4709 Creekstone Dr., Suite 200
Durham, NC
(Address of principal executive offices)
    
    27703-8411
(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 June
30, 2003 was 118,501,009.





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##### 



EXPLANATORY NOTE

Quintiles Transnational Corp. is
filing this amendment to
the Companys Quarterly Report on Form 10-Q for the three months ended June 30,
2003, which was originally filed on August 13, 2003. This report
clarifies or expands certain disclosures in the Companys Unaudited Financial Statements and
Managements Discussion and Analysis of Financial Condition and Results of
Operation. In
addition, certain balance sheet items have been reclassified.
Specifically, the Company is no longer grossing up its balance sheet
for amounts representing accounts receivable billed to customers in
accordance with contract terms for services that have not yet been
rendered. Also, the Company is presenting separately from commercial
rights and royalties on its balance sheet certain accounts
receivable and advances to customers. The revisions had no effect on previously reported net income
(loss), shareholders equity or net income (loss) per share. This report
continues to be presented as of the date of the original filing, and the
Company has not updated the disclosure in this report to a later date. All
information contained in this report and the original filing is subject to
updating and supplementing as provided in the Companys periodic reports filed
with the Securities and Exchange Commission.

2



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##### 



Index

PagePart I. Financial InformationItem 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 2003 and December 31, 2002
    
    
    4Condensed consolidated statements of
operations  Three months ended
June 30, 2003 and 2002; six months ended
June 30, 2003 and 2002
    
    
    5Condensed consolidated statements of
cash flows  Six months ended
June 30, 2003 and 2002
    
    
    6Notes to condensed consolidated financial
statements  June 30, 2003
    
    
    7Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    26Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    49Signatures
    
    
    51Exhibit Index
    
    
    52


3



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##### 



Quintiles Transnational Corp. and Subsidiaries
Condensed Consolidated Balance Sheets

June 30
    
    December 312003
    
    2002(unaudited)
    
    (Note 1)(in thousands, except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    754,519
    
    
    $
    644,284Trade accounts receivable and unbilled services, net
    
    
    258,031
    
    
    
    255,647Investments in debt securities
    
    
    593
    
    
    
    27,218Prepaid expenses
    
    
    34,006
    
    
    
    22,516Other current assets and receivables
    
    
    47,295
    
    
    
    42,654Total current assets
    
    
    1,094,444
    
    
    
    992,319Property and equipment
    
    
    496,257
    
    
    
    475,543Less accumulated depreciation
    
    
    (234,243
    )
    
    
    (213,385
    )262,014
    
    
    
    262,158Intangibles and other assets:Investments in debt securities
    
    
    10,101
    
    
    
    9,453Investments in marketable equity securities
    
    
    53,064
    
    
    
    64,926Investments in non-marketable equity securities and loans
    
    
    48,427
    
    
    
    46,449Investments in unconsolidated affiliates
    
    
    121,135
    
    
    
    121,101Commercial
rights and royalties
    
    
    9,408
    
    
    
    1,786Accounts receivable  unbilled
    
    
    58,981
    
    
    
    59,750Advances to customer
    
    
    70,000
    
    
    
    70,000Goodwill
    
    
    74,141
    
    
    
    70,133Other identifiable intangibles, net
    
    
    134,899
    
    
    
    142,715Deferred income taxes
    
    
    171,300
    
    
    
    174,534Deposits and other assets
    
    
    34,616
    
    
    
    38,871786,072
    
    
    
    799,718Total assets
    
    $
    2,142,530
    
    
    $
    2,054,195Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    239,694
    
    
    $
    238,269Credit arrangements
    
    
    19,397
    
    
    
    21,719Unearned income
    
    
    145,953
    
    
    
    141,718Income taxes payable
    
    
    17,528
    
    
    
    20,067Other current liabilities
    
    
    2,589
    
    
    
    2,073Total current liabilities
    
    
    425,161
    
    
    
    423,846Long-term liabilities:Credit arrangements, less current portion
    
    
    16,076
    
    
    
    18,855Other liabilities
    
    
    20,905
    
    
    
    13,10836,981
    
    
    
    31,963Total liabilities
    
    
    462,142
    
    
    
    455,809Shareholders equity:Preferred stock, none issued and outstanding
at June 30, 2003 and December 31, 2002
    
    
    
    
    
    
    Common stock and additional paid-in capital,
118,501,009 and 117,850,597 shares issued
and outstanding at June 30, 2003 and
December 31, 2002, respectively
    
    
    887,355
    
    
    
    881,927Retained earnings
    
    
    771,218
    
    
    
    716,465Accumulated other comprehensive income (loss)
    
    
    21,815
    
    
    
    (6
    )Total shareholders equity
    
    
    1,680,388
    
    
    
    1,598,386Total liabilities and shareholders equity
    
    $
    2,142,530
    
    
    $
    2,054,195


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 Operations
(unaudited)

Three months ended June 30,
    
    Six months ended June 302003
    
    2002
    
    2003
    
    2002(in thousands, except per share data)Gross revenues
    
    $
    520,033
    
    
    $
    498,233
    
    
    $
    1,031,640
    
    
    $
    991,529Costs, expenses and other:Costs of revenues
    
    
    348,409
    
    
    
    347,898
    
    
    
    690,160
    
    
    
    690,392General and administrative
    
    
    137,232
    
    
    
    125,895
    
    
    
    268,236
    
    
    
    253,128Interest (income) expense, net
    
    
    (4,360
    )
    
    
    (3,436
    )
    
    
    (8,128
    )
    
    
    (6,698
    )Other expense (income), net
    
    
    (6,062
    )
    
    
    (2,198
    )
    
    
    (1,563
    )
    
    
    (1,129
    )475,219
    
    
    
    468,159
    
    
    
    948,705
    
    
    
    935,693Income before income taxes
    
    
    44,814
    
    
    
    30,074
    
    
    
    82,935
    
    
    
    55,836Income tax expense
    
    
    15,237
    
    
    
    9,925
    
    
    
    28,198
    
    
    
    18,426Income before equity in earnings of unconsolidated
affiliates and other
    
    
    29,577
    
    
    
    20,149
    
    
    
    54,737
    
    
    
    37,410Equity in earnings of unconsolidated affiliates and other
    
    
    20
    
    
    
    477
    
    
    
    16
    
    
    
    477Income from operations
    
    
    29,597
    
    
    
    20,626
    
    
    
    54,753
    
    
    
    37,887Cumulative effect on prior years (to December 31, 2001)
of changing to a different method of recognizing deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,659Net income
    
    $
    29,597
    
    
    $
    20,626
    
    
    $
    54,753
    
    
    $
    83,546Basic net income per share:Income from operations
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.32Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.39Basic net income per share
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.70Diluted net income per share:Income from operations
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.32Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.38Diluted net income per share
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.70Shares used in computing net income per share:Basic
    
    
    118,420
    
    
    
    118,352
    
    
    
    118,261
    
    
    
    118,518Diluted
    
    
    119,393
    
    
    
    118,944
    
    
    
    118,871
    
    
    
    119,553


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

5



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##### 



Quintiles Transnational Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)

Six months ended June 302003
    
    2002(in thousands)Operating activitiesNet income
    
    $
    54,753
    
    
    $
    83,546Cumulative effect on prior years (to December 31, 2001) of
changing to a different method of recognizing
deferred income taxes
    
    
    
    
    
    
    (45,659
    )Income from operations
    
    
    54,753
    
    
    
    37,887Adjustments to reconcile income from operations to net cash
provided by operating activities:Depreciation and amortization
    
    
    45,743
    
    
    
    43,787Restructuring charge (payments) accrual, net
    
    
    (4,070
    )
    
    
    (14,862
    )(Gain) loss from sales and impairments of investments, net
    
    
    (28,448
    )
    
    
    (11,048
    )Provision for (benefit from) deferred income tax expense
    
    
    1,374
    
    
    
    (4,131
    )Change in operating assets and liabilities
    
    
    (3,491
    )
    
    
    40,259Other
    
    
    (1,268
    )
    
    
    531Net cash provided by operating activities
    
    
    64,593
    
    
    
    92,423Investing activitiesAcquisition of property and equipment
    
    
    (24,206
    )
    
    
    (21,186
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (25,450
    )Acquisition of intangible assets
    
    
    (4,519
    )
    
    
    Acquisition
of commercial rights and royalties
    
    
    (14,710
    )
    
    
    (7,080
    )Proceeds from disposition of property and equipment
    
    
    4,151
    
    
    
    1,674Proceeds from (purchases of) debt securities, net
    
    
    25,846
    
    
    
    (666
    )Purchases of equity securities and other investments
    
    
    (5,131
    )
    
    
    (8,283
    )Proceeds from sale of equity securities and other investments
    
    
    53,815
    
    
    
    18,540Advances to unconsolidated affiliates
    
    
    
    
    
    
    (10,000
    )Net cash provided by (used in) investing activities
    
    
    35,246
    
    
    
    (52,451
    )Financing activitiesPrincipal payments on credit arrangements, net
    
    
    (9,579
    )
    
    
    (5,725
    )Issuance of common stock, net
    
    
    5,079
    
    
    
    6,828Repurchase of common stock
    
    
    
    
    
    
    (25,244
    )Net cash used in financing activities
    
    
    (4,500
    )
    
    
    (24,141
    )Effect of foreign currency exchange rate changes on cash
    
    
    14,896
    
    
    
    11,082Increase in cash and cash equivalents
    
    
    110,235
    
    
    
    26,913Cash and cash equivalents at beginning of period
    
    
    644,284
    
    
    
    565,063Cash and cash equivalents at end of period
    
    $
    754,519
    
    
    $
    591,976


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

6



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Quintiles Transnational Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(unaudited)

June 30, 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 six-month period
ended June 30, 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 June 30, 2003 and 2002 was $4.33
and $4.04 per share, respectively, on the date of grant using the Black-Scholes
option pricing model with the following assumptions:

Employee Stock OptionsThree months ended June 30,2003
    
    2002Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    1.8
    %
    
    
    3.4
    %Expected volatility
    
    
    40.0
    %
    
    
    40.0
    %Expected life (in years from vesting)
    
    
    0.89
    
    
    
    0.89


7



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Quintiles Transnational Corp. and Subsidiaries

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 suspended its employee
stock purchase plan effective April 2003 due to the pending transaction with
Pharma Services Holding, Inc. (Pharma Services).

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

Three months ended June 30,
    
    Six months ended June 30,2003
    
    2002
    
    2003
    
    2002Net income as reported
    
    $
    29,597
    
    
    $
    20,626
    
    
    $
    54,753
    
    
    $
    83,546Less: pro forma adjustment for stock-
based compensation, net of income tax
    
    
    (3,662
    )
    
    
    (3,888
    )
    
    
    (7,481
    )
    
    
    (7,869
    )Pro forma net income
    
    $
    25,935
    
    
    $
    16,738
    
    
    $
    47,272
    
    
    $
    75,677Basic net income per share:As reported
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.70Pro forma
    
    
    0.22
    
    
    
    0.14
    
    
    
    0.40
    
    
    
    0.64Effect of pro forma adjustment
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.06
    )Diluted net income per share:As reported
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.46
    
    
    $
    0.70Pro forma
    
    
    0.22
    
    
    
    0.14
    
    
    
    0.40
    
    
    
    0.63Effect of pro forma adjustment
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )


8



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Quintiles Transnational Corp. and Subsidiaries

3. Commercial Rights and Royalties

Commercial rights and royalties
related assets are classified as commercial rights and royalties, accounts
receivable  unbilled or advances to customers in the non-current asset
section of the accompanying balance sheet. Below is a summary of the
commercial rights and royalties related assets (in thousands):

June 30,
    
    December 31,2003
    
    2002Commercial
rights and royalties
    
    $
    9,408
    
    
    $
    1,786Accounts receivable - unbilled
    
    
    58,981
    
    
    
    59,750Advances
to customer
    
    
    70,000
    
    
    
    70,000Total
commercial rights and royalties related assets
    
    $
    138,389
    
    
    $
    131,536


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 the May 1999 agreement, the Company purchased 1,043,705
shares of CVTXs common stock for $5 million; the Company owned no shares of
CVTX as of June 30, 2003. The May 1999 agreement also made available a $10
million credit line for pre-launch sales and marketing activities. The May
1999 agreement further provided that if Ranexa, which has been submitted to
the United States Food and Drug Administration (FDA) under a New Drug
Application (NDA) for review, were approved, the Company would provide a $10
million milestone payment to CVTX which was to be used to pay off any
outstanding balances on the credit line. The May 1999 agreement also required
the Company to make available an additional line of credit to help fund a
portion of the first year sales and marketing expenses. Under the May 1999
agreement, the Company 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 the Company was to 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 was also
to receive royalties in years six and seven. As of June 30, 2003, the Company
had not made any payments to CVTX under the May 1999 agreement in connection
with the line of credit or milestone arrangement and has not funded
commercialization and marketing activities nor had the Company received any
royalties from CVTX. In July 2003, CVTX and the Company entered into a new
agreement that superceded the prior agreement. Under the terms of the July
2003 agreement, all rights to Ranexa reverted back to CVTX, and CVTX will owe
no royalty payments to the Company. Under the July 2003 agreement, the Company
received 200,000 warrants to purchase shares of CVTX common stock at $32.93 per
share during the five-year term commencing July 9, 2003. CVTX also is
obligated to purchase from the Company, within six months of the approval of
Ranexa, services of at least $10 million in aggregate value or to pay the
Company a lump sum amount equal to 10% of any shortfall from $10 million in
purchased services. The new agreement reduces the annual contingent
commitments discussed below by approximately $22 million per year, and it
reduces the remaining loan commitments discussed in Investments 
Non-Marketable Equity Securities and Loans by $10 million.

9



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Quintiles Transnational Corp. and Subsidiaries

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 June 30, 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. As of June 30, 2003, $30 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 and royalties. 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 June 30, 2003, the Company received
payments totaling approximately $17.6 million, of which approximately $16.6
million was received during the six months ended June 30, 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 a warrant 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 warrant. 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. The
early settlement of the Companys service obligation did not affect the
continuing royalty obligation of SCIO. On April 29, 2003, Johnson & Johnson
consummated its acquisition of SCIO and the Company received $17.5 million for
the warrant that the Company owned (see Derivatives). At June 30, 2003, the
Company had a commercial rights and royalties related asset for the SCIO
agreement of $30.0 million. In August 2003, SCIO made a final payment to the
Company in the amount of $46.1 million under an agreement reached to terminate
the SCIO agreement, including the payment and royalty obligations. This final
payment will reduce the SCIO commercial rights and royalties related balance to zero.
Total royalty payments received were $63.6 million. The Company expects to
report a gain of approximately $16 million in the third quarter of 2003,
related to these events.

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 June 30, 2003. Further, based on
achieving certain milestones, the Company has committed to paying 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

10



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Quintiles Transnational Corp. and Subsidiaries

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 June 30, 2003, the Company has
made $5.7 million available under the line of credit, of which $1.8 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 also agreed to pay 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. The subscription
agreements under which the Company acquired its shares of DSCO common stock
included participation rights to acquire additional shares of DSCO. The
Company exercised its participation rights in two such transactions with DSCO.
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. During June 2003, the Company purchased an
additional 218,059 shares of DSCO common stock along with detachable warrants
to purchase 43,612 shares of DSCO common stock for $1.2 million.

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 in proportion to the revenues earned over the
14 year-life of the license. 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 June 30, 2003,
of $50 million and $65 million, respectively, over the life of the agreement.
Through June 30, 2003, the Company has received payments totaling approximately
$4.6 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

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Quintiles Transnational Corp. and Subsidiaries

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 in proportion to the estimated revenues 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.

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 June 30, 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 $22 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.

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 in proportion to the estimated
revenues 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  advances to
customer. 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.

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Quintiles Transnational Corp. and Subsidiaries

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 return the Company will receive 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 second quarter of 2003. The Company has paid $4.5 million as
of June 30, 2003. The payments are reported in the accompanying statement of
cash flows as an investing activity-acquisition of commercial rights
and royalties. 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. The purchase of the COB common
stock included participation rights to acquire additional shares of COB.
During July 2003, the Company exercised its participation rights and purchased
an additional 56,749 shares of COB for $664,000.

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 paid 5.5 million euros (approximately $5.8 million) as of June 30,
2003. The payments are reported in the accompanying statement of cash flows as
an investing activity  acquisition of intangible assets. The Company has also
provided 600,000 euros in services to the customer under the 2.2 million euros
service component. The Companys service obligation is recorded as a cost of
the distribution rights and is being amortized over the six-year distribution
agreement. The customer will continue to manufacture the product for the six
years of the distribution agreement.

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 was approved in June 2003 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 which
commenced in the second 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 paid $6.0 million as of June 30, 2003. The payments are reported
in the accompanying statement of cash flows as an investing
activity-acquisition of commercial rights and royalties. 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.

13



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Quintiles Transnational Corp. and Subsidiaries

The Company has firm commitments under the arrangements described above to
provide funding of approximately $313.1 million in exchange for various
commercial rights. As of June 30, 2003, the Company has funded approximately
$237.6 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
    
    TotalMilestone payments
    
    $
    6,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,000Sales force commitments
    
    
    15,160
    
    
    
    17,521
    
    
    
    15,949
    
    
    
    5,243
    
    
    
    3,916
    
    
    
    619
    
    
    
    58,408Licensing and
distribution rights
    
    
    4,556
    
    
    
    2,522
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,044$
    25,716
    
    
    $
    23,043
    
    
    $
    16,915
    
    
    $
    5,243
    
    
    $
    3,916
    
    
    $
    619
    
    
    $
    75,452


4. Investments  Marketable Equity Securities

The Company has entered into financial arrangements with various customers and
other parties in which the Company makes payments in return for equity
investments. The equity investments may be subject to certain trading
restrictions including lock-up agreements. The Companys portfolio in such
transactions as of June 30, 2003 is as follows (in thousands, except share
data):

Company
    
    Trading Symbol
    
    Number of Shares
    
    Cost Basis
    
    Fair Market ValueCommon Stock:The Medicines Company
    
    MDCO
    
    
    1,530,320
    
    
    $
    6,672
    
    
    $
    29,857Columbia Laboratories, Inc.
    
    COB
    
    
    1,121,610
    
    
    
    5,500
    
    
    
    12,618Discovery Laboratories, Inc.
    
    DSCO
    
    
    1,276,210
    
    
    
    4,116
    
    
    
    8,193Other
    
    
    
    
    
    
    
    
    
    
    1,463
    
    
    
    2,396Total marketable equity securities
    
    
    
    
    
    
    
    
    
    $
    17,751
    
    
    $
    53,064


In accordance with its policy to continually review declines in fair value of
the marketable equity securities for declines that may be other-than-temporary,
the Company recognized losses in the second quarter of 2003 of $282,000 due to
the impairment of marketable equity securities. No such losses were recognized
in the second quarter of 2002.

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 June 30, 2003 is as follows
(in thousands):

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Quintiles Transnational Corp. and Subsidiaries

Remaining FundingCompany
    
    Cost Basis
    
    CommitmentVenture capital funds
    
    $
    31,297
    
    
    $
    19,052Equity investments (seven companies)
    
    
    10,316
    
    
    
    Convertible loans (three companies)
    
    
    4,879
    
    
    
    2,351Loans (two companies)
    
    
    1,935
    
    
    
    16,677Total non-marketable equity securities and loans
    
    $
    48,427
    
    
    $
    38,080


Below is a table representing managements best estimate as of June 30, 2003 of
the amount and timing of the above remaining funding commitments ($ in
thousands):

2003
    
    2004
    
    TotalVenture capital funds
    
    $
    8,697
    
    
    $
    10,355
    
    
    $
    19,052Convertible loans
    
    
    2,351
    
    
    
    
    
    
    
    2,351Loans
    
    
    1,500
    
    
    
    15,177
    
    
    
    16,677$
    12,548
    
    
    $
    25,532
    
    
    $
    38,080


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 reviews the carrying value of each individual investment at each
balance sheet date to determine whether or not an other-than-temporary decline
in fair value has occurred. The Company employs alternative valuation
techniques including: (1) the review of financial statements including
assessments of liquidity, (2) the review of valuations available to the Company
prepared by independent third parties used in raising capital, (3) the review
of publicly available information including press releases and (4) direct
communications with investees management, as appropriate. If the review
indicates that such a decline in fair value has occurred, the Company adjusts
the carrying value to the estimated fair value of the investment and recognizes
a loss for the amount of the adjustment. The Company recognized $2.5 million
and $400,000 of losses due to such impairments in the six months ended June 30,
2003 and 2002, respectively, relating to non-marketable equity securities and
loans mainly due to declining financial condition of investees.

6. Derivatives

The Company may from time to time acquire derivative instruments, primarily
warrants, of companies in which a current market value is not readily
available. As such, these instruments are included in deposits and other
assets. When acquired, the Company records warrants at their fair value.
Subsequently, warrants are marked to market each period with changes in their
fair values being recognized as investment gains and losses in the accompanying
statement of operations. As a result of subsequent evaluations and completion
of the SCIO acquisition by Johnson & Johnson, Inc., the Company recognized
gains of $11.0 million and $1.1 million on the warrant to acquire 700,000
shares of SCIO during the first and second quarters of 2003, respectively.

15



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Quintiles Transnational Corp. and Subsidiaries

7. 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 $10.1 million and $6.5 million for the three months ended
June 30, 2003 and 2002, respectively, and $20.0 million and $12.4 million for
the six months ended June 30, 2003 and 2002, respectively.

The following is a summary of identifiable intangible assets as of June 30,
2003 (in thousands):

AccumulatedGross Amount
    
    Amortization
    
    Net AmountIdentifiable intangible assets:Software and related assets
    
    $
    156,271
    
    
    $
    99,539
    
    
    $
    56,732Product licensing and distribution rights
    
    
    89,496
    
    
    
    11,329
    
    
    
    78,167$
    245,767
    
    
    $
    110,868
    
    
    $
    134,899


Estimated amortization expense for existing identifiable intangible assets is
targeted to be approximately $38.7 million, $32.1 million, $26.5 million, $18.5
million and $13.7 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 June 30, 2003 (in
thousands):

ProductDevelopment
    
    Commercial Services
    
    ConsolidatedBalance as of December 31, 2002
    
    $
    38,918
    
    
    $
    31,215
    
    
    $
    70,133Impact of foreign currency fluctuations
    
    
    3,140
    
    
    
    868
    
    
    
    4,008Balance as of June 30, 2003
    
    $
    42,058
    
    
    $
    32,083
    
    
    $
    74,141


8. 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 six months ended June
30, 2003.

9. Significant Customers

No customer accounted for 10% of consolidated gross service revenues less
reimbursed service costs for the three or six months ended June 30, 2003. One
customer accounted for 11.3% and 11.9% of consolidated gross service revenues
less reimbursed service costs for the three and six months ended June 30, 2002,
respectively. The revenues were derived from the product development,
commercial services and informatics groups.

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Quintiles Transnational Corp. and Subsidiaries

10. Investment Revenues

The following table is a summary of investment revenues for the three and six
months ended June 30, 2003 and 2002 (in thousands):

Three months ended June 30
    
    Six months ended June 302003
    
    2002
    
    2003
    
    2002Marketable equity and derivative securities:Gross realized gains
    
    $
    13,237
    
    
    $
    6,399
    
    
    $
    32,009
    
    
    $
    11,607Gross realized losses
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    (92
    )Impairment losses
    
    
    (282
    )
    
    
    
    
    
    
    (282
    )
    
    
    Non-marketable equity securities and loans:
    
    
    
    
    
    
    
    
    
    
    Gross realized gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross realized losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment losses
    
    
    (1,648
    )
    
    
    
    
    
    
    (2,468
    )
    
    
    (400
    )$
    11,307
    
    
    $
    6,333
    
    
    $
    29,259
    
    
    $
    11,115


11. 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 the 2002 Plan, approximately 99 positions are to be
eliminated mostly in the Europe and Africa region. As of June 30, 2003, 89
individuals have been terminated.

As of June 30, 2003, the following amounts were recorded for the 2002
restructuring plans (in thousands):

Activity six months ended
June 30, 2003

Balance at
    
    Write-Offs/
    
    Balance atDecember 31, 2002
    
    Payments
    
    June 30, 2003Severance and related costs
    
    $
    2,066
    
    
    $
    (975
    )
    
    $
    1,091Exit costs
    
    
    154
    
    
    
    (18
    )
    
    
    136$
    2,220
    
    
    $
    (993
    )
    
    $
    1,227


During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating

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Quintiles Transnational Corp. and Subsidiaries

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 were to be eliminated and as of June
30, 2003, all individuals which were to be terminated under this plan 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 June 30, 2003, the following amounts were recorded for the 2001
restructuring plans (in thousands):

Activity six months ended
June 30, 2003

Balance at
    
    Write-Offs/
    
    Balance atDecember 31, 2002
    
    Payments
    
    June 30, 2003Severance and related costs
    
    $
    1,306
    
    
    $
    (998
    )
    
    $
    308Exit costs
    
    
    3,381
    
    
    
    (1,102
    )
    
    
    2,279$
    4,687
    
    
    $
    (2,100
    )
    
    $
    2,587


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 June 30, 2003,
all individuals which were to be terminated under this plan have been
terminated. In certain circumstances, international regulations and
restrictions have caused the terminations to extend beyond one year.

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Quintiles Transnational Corp. and Subsidiaries

As of June 30, 2003, the following amounts were recorded for the 2000
restructuring plans (in thousands):

Activity six months ended
June 30, 2003

Balance at
    
    Write-Offs/
    
    Balance atDecember 31, 2002
    
    Payments
    
    June 30, 2003Severance and related costs
    
    $
    117
    
    
    $
    (53
    )
    
    $
    64Exit costs
    
    
    1,443
    
    
    
    (923
    )
    
    
    520$
    1,560
    
    
    $
    (976
    )
    
    $
    584


As a result of the restructuring plans, the Company has approximately 230,000
square feet of abandoned leased facilities as of June 30, 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
    
    $
    2,2842004
    
    
    2,9902005
    
    
    2,3212006
    
    
    2,265Thereafter
    
    
    7,118Gross abandoned lease obligations
    
    
    16,978Less: sublease/restructuring accrual
    
    
    (4,389
    )Total obligation in excess of existing subleases and related
restructuring accrual balances
    
    $
    12,589


12. 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 June 30
    
    Six months ended June 302003
    
    2002
    
    2003
    
    2002Weighted average shares:Basic weighted average shares
    
    
    118,420
    
    
    
    118,352
    
    
    
    118,261
    
    
    
    118,518Effect of dilutive securities:Stock options
    
    
    973
    
    
    
    592
    
    
    
    610
    
    
    
    1,035Diluted weighted average
shares
    
    
    119,393
    
    
    
    118,944
    
    
    
    118,871
    
    
    
    119,553


Options to purchase approximately 19.7 million and 27.0 million shares of the
Companys Common Stock were outstanding during the three and six months ended
June 30, 2003, respectively, but were not included in the computation of
diluted net income per share because the options exercise price was greater
than the average market price of the Companys Common Stock and, therefore, the
effect would be antidilutive.

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Quintiles Transnational Corp. and Subsidiaries

13. Comprehensive Income

The following table represents the Companys comprehensive income for the three
and six months ended
June 30, 2003 and 2002, respectively (in thousands):

Three months ended June 30
    
    Six months ended June 302003
    
    2002
    
    2003
    
    2002Net income
    
    $
    29,597
    
    
    $
    20,626
    
    
    $
    54,753
    
    
    $
    83,546Other comprehensive income (loss):Unrealized gain (loss) on marketable
securities, net of income taxes
    
    
    10,398
    
    
    
    (12,828
    )
    
    
    13,209
    
    
    
    (11,178
    )Reclassification adjustment, net of income taxes
    
    
    (4,780
    )
    
    
    (4,597
    )
    
    
    (9,587
    )
    
    
    (7,750
    )Minimum pension liability, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (3,098
    )
    
    
    Foreign currency adjustment
    
    
    17,416
    
    
    
    32,263
    
    
    
    21,297
    
    
    
    24,447Comprehensive income
    
    $
    52,631
    
    
    $
    35,464
    
    
    $
    76,574
    
    
    $
    89,095


14. Pending Transaction

On April 10, 2003, the Company entered into a merger agreement with 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. It is anticipated that Dr. Gillings and
certain of his affiliates will exchange all or a portion of their equity
interest in the Company for equity securities of Pharma Services. 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 $840 million from Citicorp North America, Inc. and Citigroup Global
Markets Inc. Pharma Services also intends to use approximately $581 million of
the Companys existing cash to fund the transaction. The transaction is
subject to Pharma Services completion of its committed financing and customary
conditions, including regulatory and Company shareholder approvals.

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Quintiles Transnational Corp. and Subsidiaries

15. 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 its results consist 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 determining segment
profitability. Intersegment revenues have been eliminated (in thousands):

Three months ended June 30, 2003PharmaBioProduct development
    
    Commercial services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    251,374
    
    
    $
    127,959
    
    
    $
    
    
    
    $
    
    
    
    $
    379,333Intersegment
    
    
    
    
    
    
    10,893
    
    
    
    
    
    
    
    (10,893
    )
    
    
    Total net services
    
    
    251,374
    
    
    
    138,852
    
    
    
    
    
    
    
    (10,893
    )
    
    
    379,333Reimbursed service costs
    
    
    81,627
    
    
    
    15,170
    
    
    
    
    
    
    
    
    
    
    
    96,797Gross service revenues
    
    
    333,001
    
    
    
    154,022
    
    
    
    
    
    
    
    (10,893
    )
    
    
    476,130Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    32,596
    
    
    
    
    
    
    
    32,596Investment
    
    
    
    
    
    
    
    
    
    
    11,307
    
    
    
    
    
    
    
    11,307Total revenues
    
    $
    333,001
    
    
    $
    154,022
    
    
    $
    43,903
    
    
    $
    (10,893
    )
    
    $
    520,033Contribution (revenues less costs of revenues, excluding depreciation
and amortization expense except as noted below):$
    128,080
    
    
    $
    50,713
    
    
    $
    13,336
    
    
    $
    
    
    
    $
    192,129


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Quintiles Transnational Corp. and Subsidiaries

Three months ended June 30, 2002PharmaBioProduct development
    
    Commercial services
    
    Informatics
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    231,231
    
    
    $
    122,092
    
    
    $
    7,657
    
    
    $
    
    
    
    $
    
    
    
    $
    360,980Intersegment
    
    
    
    
    
    
    12,342
    
    
    
    
    
    
    
    
    
    
    
    (12,342
    )
    
    
    Total net services
    
    
    231,231
    
    
    
    134,434
    
    
    
    7,657
    
    
    
    
    
    
    
    (12,342
    )
    
    
    360,980Reimbursed service costs
    
    
    84,713
    
    
    
    23,187
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    107,919Gross service revenues
    
    
    315,944
    
    
    
    157,621
    
    
    
    7,676
    
    
    
    
    
    
    
    (12,342
    )
    
    
    468,899Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,001
    
    
    
    
    
    
    
    23,001Investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,333
    
    
    
    
    
    
    
    6,333Total revenues
    
    $
    315,944
    
    
    $
    157,621
    
    
    $
    7,676
    
    
    $
    29,334
    
    
    $
    (12,342
    )
    
    $
    498,233Contribution (revenues less costs of revenues, excluding depreciation and
amortization expense except as noted below):$
    115,699
    
    
    $
    49,617
    
    
    $
    3,554
    
    
    $
    2,743
    
    
    $
    
    
    
    $
    171,613


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Quintiles Transnational Corp. and Subsidiaries

Six months ended June 30, 2003PharmaBioProduct development
    
    Commercial services
    
    Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    501,410
    
    
    $
    246,579
    
    
    $
    
    
    
    $
    
    
    
    $
    747,989Intersegment
    
    
    
    
    
    
    18,988
    
    
    
    
    
    
    
    (18,988
    )
    
    
    Total net services
    
    
    501,410
    
    
    
    265,567
    
    
    
    
    
    
    
    (18,988
    )
    
    
    747,989Reimbursed service costs
    
    
    161,783
    
    
    
    29,355
    
    
    
    
    
    
    
    
    
    
    
    191,138Gross service revenues
    
    
    663,193
    
    
    
    294,922
    
    
    
    
    
    
    
    (18,988
    )
    
    
    939,127Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    63,254
    
    
    
    
    
    
    
    63,254Investment
    
    
    
    
    
    
    
    
    
    
    29,259
    
    
    
    
    
    
    
    29,259Total revenues
    
    $
    663,193
    
    
    $
    294,922
    
    
    $
    92,513
    
    
    $
    (18,988
    )
    
    $
    1,031,640Contribution (revenues less costs of revenues, excluding depreciation
and amortization expense except as noted below):$
    254,394
    
    
    $
    95,623
    
    
    $
    32,116
    
    
    $
    
    
    
    $
    382,133


Six months ended June 30, 2002Product development
    
    Commercial services
    
    Informatics
    
    PharmaBio Development
    
    Eliminations
    
    ConsolidatedService revenues:External
    
    $
    461,688
    
    
    $
    258,112
    
    
    $
    20,347
    
    
    $
    
    
    
    $
    
    
    
    $
    740,147Intersegment
    
    
    
    
    
    
    23,554
    
    
    
    
    
    
    
    
    
    
    
    (23,554
    )
    
    
    Total net services
    
    
    461,688
    
    
    
    281,666
    
    
    
    20,347
    
    
    
    
    
    
    
    (23,554
    )
    
    
    740,147Reimbursed service costs
    
    
    153,500
    
    
    
    49,550
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    203,072Gross service revenues
    
    
    615,188
    
    
    
    331,216
    
    
    
    20,369
    
    
    
    
    
    
    
    (23,554
    )
    
    
    943,219Commercial rights and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,195
    
    
    
    
    
    
    
    37,195Investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,115
    
    
    
    
    
    
    
    11,115Total revenues
    
    $
    615,188
    
    
    $
    331,216
    
    
    $
    20,369
    
    
    $
    48,310
    
    
    $
    (23,554
    )
    
    $
    991,529Contribution (revenues less costs of revenues, excluding depreciation and 
amortization expense except as noted below):$
    228,112
    
    
    $
    100,385
    
    
    $
    8,024
    
    
    $
    7,283
    
    
    $
    
    
    
    $
    343,804


Three months ended June 30
    
    Six months ended June 302003
    
    2002
    
    2003
    
    2002Depreciation and amortization expense:Product development
    
    $
    14,427
    
    
    $
    14,692
    
    
    $
    29,374
    
    
    $
    29,114Commercial services
    
    
    5,875
    
    
    
    5,298
    
    
    
    10,866
    
    
    
    10,514Informatics
    
    
    
    
    
    
    1,038
    
    
    
    
    
    
    
    2,559PharmaBio Development (included in contribution)
    
    
    2,595
    
    
    
    716
    
    
    
    5,090
    
    
    
    1,119Corporate
    
    
    203
    
    
    
    250
    
    
    
    413
    
    
    
    480Total depreciation and amortization expense
    
    $
    23,100
    
    
    $
    21,994
    
    
    $
    45,743
    
    
    $
    43,786


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Quintiles Transnational Corp. and Subsidiaries

16. 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. On June 27, 2003, the parties entered into
a settlement memorandum following a mediated settlement conference. The
parties are in the process of preparing final settlement documents, which would
memorialize payments by several defendants to individual study participants or
their representatives. The Company believes that its contribution will be
covered by insurance or, in the alternative, will not represent a material
amount to the Company.

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 class action lawsuit filed on January 26,
2001 and described above 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 (AON) 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 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.

In October 2002, seven purported class action lawsuits were filed in Superior
Court, Durham County, North Carolina by certain of the Companys shareholders
seeking to enjoin the consummation of the initial transaction proposed by
Pharma Services Company (a company controlled 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, a breach of fiduciary
duties by the directors 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

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Quintiles Transnational Corp. and Subsidiaries

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.

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. which provides for payment to the Companys shareholders of $14.50 per
share in cash. The Company expects to hold a special meeting later this year
at which time the shareholders will vote on the proposed transaction. On June
25, 2003, counsel for the parties signed a Memorandum of Understanding, in
which they agreed upon the terms of a settlement of the litigation, which would
include the dismissal with prejudice of all claims against all defendants
including the Company and the Companys Board of Directors. The settlement is
conditional, among other things, on the execution of a formal Stipulation and
Agreement of Compromise, Settlement and Release (the Stipulation of
Settlement), certification of a shareholder class for purposes of the
settlement only, consummation of the merger transaction and final approval of
the settlement by the Court after Notice to the class and a fairness hearing.
The settlement contemplates that plaintiffs lead counsel will apply to the
Court for an award of attorneys fees and costs in an amount not to exceed
$450,000. Any attorneys fees and costs awarded by the Court, up to $450,000,
and costs of identifying and notifying members of the settlement class would be
paid by the Company. No other payments would be required from the Company or
any other party under the terms of the settlement. The parties are currently
finalizing the terms of the Stipulation of Settlement, class notice and related
documents. As contemplated by the Stipulation of Settlement, the plaintiffs
have filed an amended class action complaint to address the proposed merger.
The Company denies any liability alleged in the amended complaint and, in the
event the settlement is not consummated for any reason, the Company intends to
defend these claims vigorously.

On June 13, 2003, ENVOY Corporation (ENVOY) and Federal filed suit against
the Company, in the United States District Court for the Middle District of
Tennessee. One or both plaintiffs in this case have alleged claims for breach
of contract, contractual subrogation, equitable subrogation, and equitable
contribution. Plaintiffs reached settlement in principle, in the amount of $11
million, of the case pending in the same court captioned In Re Envoy
Corporation Securities Litigation, Case No. 3-98-0760 (the Envoy Securities
Litigation). Plaintiffs claim that the Company is responsible for payment of
the settlement amount and associated fees and costs in the Envoy Securities
Litigation based on merger and settlement agreements between WebMD Corporation,
ENVOY and the Company. The Company has filed a motion to dismiss the suit, and
the plaintiffs have filed motions for summary judgment. These motions are
pending before the court. All parties have agreed to a stay of discovery. The
Company believes that the allegations made by ENVOY and Federal are without
merit and intends to defend the case vigorously.

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 for the period in which the ruling occurs.

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Quintiles Transnational Corp. and Subsidiaries

17. 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. The Company
believes the adoption will not have a material impact on its financial position
or results of operations.

In January 2003, the Emerging Issues
Task Force published EITF Issue 00-21, Revenue Arrangements with
Multiple Deliverables, which requires companies to determine whether
an arrangement involving multiple deliverables contains more than one
unit of accounting. In applying EITF Issue 00-21, revenue
arrangements with multiple deliverables should be divided into
separate units of accounting if the deliverables in the arrangement
meet certain criteria. Arrangement consideration should be allocated
among the separate units of accounting based on their relative fair
values. This issue is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The Company believes
the adoption of EITF Issue No. 00-21 will not have a material impact
on its results of operations and/or financial condition.

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 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.

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Quintiles Transnational Corp. and Subsidiaries

Results of Continuing Operations

Three Months Ended June 30, 2003 and 2002

Gross revenues for the second quarter of 2003 were $520.0 million versus $498.2
million for the second 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 June 302003
    
    2002Service revenues
    
    $
    476,130
    
    
    $
    468,899Less: reimbursed service costs
    
    
    96,797
    
    
    
    107,919Net service revenues
    
    
    379,333
    
    
    
    360,980Commercial rights and royalties
    
    
    32,596
    
    
    
    23,001Investments
    
    
    11,307
    
    
    
    6,333Total net revenues
    
    $
    423,236
    
    
    $
    390,314




| |  | Service revenues were $476.1 million for the second quarter of
2003 compared to $468.9 million for the second quarter of 2002.
Service revenues less reimbursed service costs, or net service
revenues, for the second quarter of 2003 were $379.3 million, an
increase of $18.4 million or 5.1% over net service revenues of $361.0
million for the second quarter of 2002. Included in net service
revenues for the second quarter of 2002 was $7.7 million from our
informatics group, which was transferred to a joint venture during May
2002 and, therefore, there were no net service revenues from that
group for the second quarter of 2003. Net service revenues for the
second quarter of 2003 were positively impacted by approximately $26.7
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 $9.4 million or 20.3% to $55.6 million for the second quarter
of 2003 from the second quarter of 2002 and were positively impacted
by $3.5 million due to the effect of foreign currency fluctuations.
Net service revenues increased $10.2 million or 6.5% to $166.6 million
for the second quarter of 2003 from the second quarter of 2002 in the
Europe and Africa region, which was positively impacted by $23.6
million due to the effect of foreign currency fluctuations. The
commercial services group experienced difficult business conditions
with our syndicated sales forces in two of the countries, primarily
the United Kingdom and France. Net service revenues decreased $1.2
million or (0.8%) to $157.1 million for the second quarter of 2003
from the second quarter of 2002 in the Americas region primarily as a
result of a decline in the commercial service revenues in the United
States.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries



| |  | Commercial rights and royalties revenues, which include product
revenues, royalties and commissions, for the second quarter of 2003
were $32.6 million, an increase of $9.6 million over second quarter
2002 commercial rights and royalties revenues of $23.0 million.
Commercial rights and royalties revenues were positively impacted by
approximately $4.3 million due to the effect of foreign currency
fluctuations related to the weakening of the US Dollar relative to the
euro. Commercial rights and royalties revenues for the second quarter
of 2003 were reduced by approximately $339,000 versus $3.7 million for
the second quarter of 2002 for amortization of payments made by us to our customers.
The decrease is a result of the completion of the services portion of
our Scios, Inc., or SCIO, contract during the fourth quarter of 2002.
These payments are considered incentives and are amortized against
revenues over the service period of the contract. The $9.6 million
increase in commercial rights and royalties revenues is primarily the result of (1) the successful launch of our
dermatology products which contributed $14.8 million of revenues
during the second quarter of 2003 versus $3.9 million during the
second quarter of 2002, (2) our contracts with Kos Pharmaceuticals,
Inc., or KOSP, and Columbia Labs, Inc., or COB, which contributed $8.1
million during the second quarter of 2003 versus $4.9 million during
the second quarter of 2002, and (3) contracts in Europe with two large
pharmaceutical customers which contributed approximately $9.0 million
of revenues during the second quarter of 2003 versus $4.8 million
during the second quarter of 2002. These increases were partially
offset by a decrease of approximately $7.7 million of revenues under
our SCIO contract as a result of the completion of the services
portion of the contract during the fourth quarter of 2002 and a
decrease of approximately $1.1 million relating to other miscellaneous
contracts. For the second quarter of 2003, approximately 24.9% of our
commercial rights and royalties revenues was attributable to our
contracts with KOSP and COB, approximately 27.6% was attributable to
our contracts with two large pharmaceutical customers in Europe,
approximately 45.5% was attributable to our suite of dermatology
products and the remaining 2.0% 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 second quarter of 2003 were $11.3 million versus
$6.3 million for the second quarter of 2002. Investment revenues for
the second quarter of 2003 included gains of $12.0 million from the
sale of a portion of our equity investments, primarily in The
Medicines Company, or MDCO. During the second quarter of 2003, we
recognized $1.9 million of impairment losses on investments whose
decline in fair value was considered to be other-than-temporary. No
impairment losses were recognized during the second quarter of 2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries



| |  | Costs of revenues were $348.4 million for the second quarter of 2003 versus
$347.9 million for the second quarter of 2002. Below is a summary of the costs
of revenues (in thousands):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three months ended June 30,2003
    
    2002Reimbursed service costs
    
    $
    96,797
    
    
    $
    107,919Service costs
    
    
    200,540
    
    
    
    192,110Commercial rights and royalties costs
    
    
    30,567
    
    
    
    26,570Investment costs
    
    
    
    
    
    
    21Depreciation and amortization
    
    
    20,505
    
    
    
    21,278$
    348,409
    
    
    $
    347,898




| |  | Reimbursed service costs were $96.8 million and $107.9 million
for the second 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 $200.5 million or 52.9% of net service
revenues versus $192.1 million or 53.2% of net service revenues for
the second quarter of 2003 and 2002, respectively. Service costs
were negatively impacted by approximately $14.0 million from the
effect of foreign currency fluctuations. The 30 basis point
reduction, as a percentage of net service revenues, is primarily a
result of the residual 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 $30.6 million for the second quarter of 2003 versus
$26.6 million for the second 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 $10.9
million and $12.3 million for the second quarter of 2003 and 2002,
respectively.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 $21,000 for the second 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 $20.5
million for the second quarter of 2003 versus $21.3 million for the
second quarter of 2002. This decrease is primarily a result of the
transfer of our informatics group to Verispan.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries

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 $137.2
million or 32.4% of total net revenues for the second quarter of 2003 versus
$125.9 million or 32.3% of total net revenues for the second quarter of 2002.
General and administrative expenses were negatively impacted by approximately
$9.6 million resulting from the effect of foreign currency fluctuations,
primarily the euro and British pound. The negative impact of foreign currency
fluctuations offset a reduction in expenses of approximately $3.6 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, and the accretion of discounts
provided pursuant to commercial rights and royalties assets relating to certain
PharmaBio contracts, net of interest expense incurred on lines of credit, notes
and capital leases, was $4.4 million for the second quarter of 2003 versus $3.4
million for the second quarter of 2002.

Other income was $6.1 million for the second quarter of 2003 versus $2.2
million for the second quarter of 2002. Included in the three months ended
June 30, 2003 were approximately $8.3 million in foreign currency translation
gains which were partially offset by approximately $2.2 million of expenses
related to the special committee of our Board of Directors and its financial
and legal advisors.

Income before income taxes was $44.8 million or 10.6% of total net revenues for
the second quarter of 2003 versus $30.1 million or 7.7% of total net revenues
for the second quarter of 2002.

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

During the second quarter of 2003, we recognized $20,000 of earnings from
equity in unconsolidated affiliates and other which represents our pro rata
share of the net income of unconsolidated affiliates, primarily Verispans net
income, net of a minority interest in a consolidated subsidiary.

Net income was $29.6 million for the second quarter of 2003 versus $20.6
million for the second quarter of 2002.

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Quintiles Transnational Corp. and Subsidiaries

Analysis by Segment:

The following table summarizes the operating activities for our reportable
segments for the second 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 Net2003
    
    2002
    
    Growth %
    
    2003
    
    Revenues
    
    2002
    
    RevenuesProduct development
    
    $
    251.4
    
    
    $
    231.2
    
    
    
    8.7
    %
    
    $
    128.1
    
    
    
    51.0
    %
    
    $
    115.7
    
    
    
    50.0
    %Commercial services
    
    
    138.8
    
    
    
    134.4
    
    
    
    3.3
    
    
    
    50.7
    
    
    
    36.5
    
    
    
    49.6
    
    
    
    36.9PharmaBio Development
    
    
    43.9
    
    
    
    29.3
    
    
    
    49.7
    
    
    
    13.3
    
    
    
    30.4
    
    
    
    2.7
    
    
    
    9.4Informatics
    
    
    
    
    
    
    7.7
    
    
    
    (100.0
    )
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    46.3Eliminations
    
    
    (10.9
    )
    
    
    (12.3
    )
    
    
    (11.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    423.2
    
    
    $
    390.3
    
    
    
    8.4
    %
    
    $
    192.1
    
    
    
    45.4
    %
    
    $
    171.6
    
    
    
    44.0
    %


Net service revenues for the product development group were $251.4 million for
the second quarter of 2003 compared to $231.2 million for the second quarter of
2002. Net service revenues for the second quarter of 2003 were positively
impacted by approximately $16.9 million due to the effect of foreign currency
fluctuations. Net service revenues increased in the Asia Pacific region $ 2.7
million or 11.5% to $26.4 million including a positive impact of approximately
$1.7 million due to the effect of foreign currency fluctuations. Net service
revenues increased $15.6 million or 16.8% to $109.0 million in the Europe and
Africa region primarily as a result of the positive impact of approximately
$14.7 million due to the effect of foreign currency fluctuations. Net service
revenues decreased $1.8 million or (1.6%) to $116.0 million in the Americas
region.

Contribution for the product development group was $128.1 million for the
second quarter of 2003 compared to $115.7 million for the second quarter of
2002. As a percentage of net service revenues, contribution margin was 51.0%
for the second quarter of 2003 compared to 50.0% for the second quarter of
2002. Our product development group experiences slight fluctuations in
contribution as a percent of net service revenues from period to period as a
result of executed contract scope changes and the timing of project expenses
for which revenue is not recognized such as start-up or setup costs.

Net service revenues for the commercial services group were $138.8 million for
the second quarter of 2003 compared to $134.4 million for the second quarter of
2002. Net service revenues for the second quarter of 2003 were positively
impacted by approximately $10.2 million due to the effect of foreign currency
fluctuations. Net service revenues increased in the Asia Pacific region $7.3
million or 36.7% to $27.0 million, which was positively impacted by $1.8
million due to the effect of foreign currency fluctuations. Net service
revenues remained relatively constant, increasing slightly by approximately
$590,000 or 1.0% to $58.5 million in the Europe and Africa region, which was
positively impacted by $8.6 million due to the effect of foreign currency
fluctuations. We experienced difficult business conditions with our syndicated
sales forces in two of the markets, primarily the United Kingdom and France.
Net service revenues decreased $3.4 million or (6.0%) to $53.4 million in the
Americas region representing the continuation of a trend resulting from
reductions in new product launches and increases in the number of drugs losing
patent protection.

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Quintiles Transnational Corp. and Subsidiaries

Contribution for the commercial services group was $50.7 million for the second
quarter of 2003 compared to $49.6 million for the second quarter of 2002. As a
percentage of net service revenues, contribution margin was 36.5% for the
second quarter of 2003 compared to 36.9% for the second quarter of 2002. The
improvement of $1.1 million in contribution was directly related to our
reduction in billable headcount of approximately 11%, as we continued to
migrate from dependency on large primary care sales forces with low margins to
a balanced mix of strategic consulting services and specialty sales forces with
greater margins.

Net revenues for the PharmaBio Development group increased approximately $14.6
million during the second quarter of 2003 as compared to the second quarter of
2002 due to a $9.6 million increase in commercial rights and royalties revenues
and a $5.0 million increase in investment revenues. This group benefited this
quarter from a drug distributor increasing their inventory levels through
purchases of Bioglan products during the quarter. The commercial rights and
royalties costs increased approximately $4.0 million during the same period
primarily as a result of several factors including $4.2 million of costs
associated with the marketing of SolarazeTM and
ADOXATM for the second quarter
of 2003 as compared to $2.9 million for the second quarter of 2002, and an
increase of approximately $1.4 million in expenses relating to our risk sharing
contracts in Europe, including the termination of the contract in Germany
during 2002. These factors were partially offset by a decrease of approximately
$1.4 million in service costs provided by our commercial services group
relating primarily to the completion of the service portion of our contract
with SCIO. Investment costs decreased approximately $21,000 during the second
quarter of 2003 as compared to the second quarter of 2002. The contribution
for this segment increased by $10.6 million from the second quarter of 2002 to
the second quarter of 2003. The commercial rights and royalties revenues (net
of related costs) in the second quarter of 2003 increased the contribution of
this group by approximately $5.6 million when compared to the second quarter of
2002 due to the successful launch of the dermatology products and the
successful performance of our commercial rights and royalties contracts.
Investment revenues (net of related costs) in the second quarter of 2003
increased the contribution of this group by approximately $5.0 million when
compared to the second quarter of 2002.

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

Six Months Ended June 30, 2003 and 2002

Gross revenues for the first six months of 2003 were $1.03 billion versus
$991.5 million for the first six months of 2002. Below is a summary of
revenues (in thousands):

Six months ended June 302003
    
    2002Service revenues
    
    $
    939,127
    
    
    $
    943,219Less: reimbursed service costs
    
    
    191,138
    
    
    
    203,072Net service revenues
    
    
    747,989
    
    
    
    740,147Commercial rights and royalties
    
    
    63,254
    
    
    
    37,195Investments
    
    
    29,259
    
    
    
    11,115Total net revenues
    
    $
    840,502
    
    
    $
    788,457




| |  | Service revenues were $939.1 million for the first six months of
2003 compared to $943.2 million for the first six months of 2002.
Service revenues less reimbursed service costs, or net service
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries



| |  | revenues, for the first six months of 2003 were $748.0 million, an
increase of $7.8 million or 1.1% over net service revenues of $740.1 million for the first six months of
2002. Included in net service revenues for the first six months of
2002 was $20.3 million from our informatics group, which was
transferred to a joint venture during May 2002 and, therefore, there
were no net service revenues from that group for the first six months
of 2003. Net service revenues for the first six months of 2003 were
positively impacted by approximately $54.4 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 $20.8 million or 23.6% to $108.9
million for the first six months of 2003 from the first six months of
2002 and was positively impacted by $8.3 million due to the effect of
foreign currency fluctuations. Net service revenues increased $46.0
million or 15.0% to $352.2 million for the first six months of 2003
from the first six months of 2002 in the Europe and Africa region,
which was positively impacted by $47.4 million due to the effect of
foreign currency fluctuations. The commercial services group
experienced difficult business conditions with our syndicated sales
forces in two markets, primarily the United Kingdom and France. Net
service revenues decreased $59.0 million or (17.0%) to $286.9 million
for the first six months of 2003 from the first six months of 2002 in
the Americas region primarily as a result of the decline in net
revenues from the commercial services group.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Commercial rights and royalties revenues for the first six months
of 2003 were $63.3 million, an increase of $26.1 million over the
first six months of 2002 commercial rights and royalties revenues of
$37.2 million. Commercial rights and royalties revenues were
positively impacted by approximately $8.1 million primarily due to the
effect of foreign currency fluctuations related to the weakening of
the US Dollar relative to the euro. Commercial rights and royalties
revenues for the first six months of 2003 were reduced by
approximately $628,000 versus $7.3 million for the first six months of
2002 for amortization of payments made by us to our customers. The decrease is a
result of the completion of the services portion of our SCIO contract
during the fourth quarter of 2002. These payments are considered
incentives and are amortized against revenues over the service period
of the contract. The $26.1 million increase in commercial rights
and royalties revenues is primarily the result
of (1) our March 2002 acquisition of certain assets of Bioglan Pharma,
Inc., or Bioglan, and its successful launch of dermatology products
which contributed approximately $28.6 million of revenues for the
first six months of 2003 versus $4.0 million for the first six months
of 2002, (2) our contracts with KOSP and COB, which contributed
approximately $14.7 million of revenues for the first six months of
2003 versus $9.9 million for the first six months of 2002, and (3) our
contracts in Europe with two large pharmaceutical customers which
contributed approximately $18.8 million of revenues for the first six
months of 2003 versus $4.8 million for the first six months of 2002.
These increases were partially offset by a reduction in revenue of
approximately $15.0 million as a result of the completion of the
services portion of our SCIO contract during the fourth quarter of
2002 and a $2.3 million decrease in revenues from miscellaneous
contracts. For the first six months of 2003, approximately 23.2% of
our commercial rights and royalties revenues was attributable to our
contracts with KOSP and COB, approximately 29.8% was attributable to
our contracts with two large pharmaceutical customers in Europe,
approximately 45.1% was attributable to our suite of dermatology
products and the remaining 1.9% was attributable to miscellaneous
contracts and activities.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries



| |  | Investment revenues related to our PharmaBio Development
groups financing arrangements for the first six months of 2003 were
$29.3 million versus $11.1 million for the first six months of 2002.
Investment revenues for the first six months of 2003 included a $7.6
million gain from our investment in Triangle Pharmaceuticals, Inc.,
or VIRS, $12.0 million of gains on the sale of equity investments in
MDCO and CVTX, and a $12.1 million gain on the warrants to acquire
700,000 shares of SCIO as a result of the acquisition of SCIO by
Johnson & Johnson, Inc. During the first six months of 2003 and 2002,
we recognized $2.8 million 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 $690.2 million for the first six months of 2003 versus
$690.4 million for the first six months of 2002. Below is a summary of the
costs of revenues (in thousands):

Six months ended June 30,2003
    
    2002Reimbursed service costs
    
    $
    191,138
    
    
    $
    203,072Service costs
    
    
    397,972
    
    
    
    403,626Commercial rights and royalties costs
    
    
    60,397
    
    
    
    40,848Investment costs
    
    
    
    
    
    
    179Depreciation and amortization
    
    
    40,653
    
    
    
    42,667$
    690,160
    
    
    $
    690,392




| |  | Reimbursed service costs were $191.1 million and $203.1 million
for the first six months of 2003 and 2002, respectively.
|- |  | ------------------------------------------------------------------------------------------------------------------------



| |  | Service costs were $398.0 million or 53.2% of net service
revenues versus $403.6 million or 54.5% of net service revenues for
the first six months of 2003 and 2002, respectively. Service costs
were negatively impacted by approximately $28.7 million from the
effect of foreign currency fluctuations. Bonus expense included in
service costs increased approximately $3.2 million in the six months
ended June 30, 2003 as compared to the six months ended June 30, 2002
as a result of our migration to a cash-based incentive program for
our employees. The reduction in service costs is primarily a result
of the residual effect of our process enhancements and cost reduction
efforts.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Commercial rights and royalties costs were $60.4 million for
the first six months of 2003 versus $40.8 million for the first six
months of 2002. These costs include services and products provided by
third parties, as well as services provided by our other service
groups, totaling approximately $19.0 million and $23.6 million for
the first six months of 2003 and 2002, respectively. The six months
ended June 30, 2003 includes six 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 were $179,000 for the first six months of
2002.
|- |  | ----------------------------------------------------------------

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Quintiles Transnational Corp. and Subsidiaries



| |  | Depreciation and amortization decreased to $40.7 million for
the first six months of 2003 versus $42.7 million for the first six
months of 2002. This decrease is primarily a result of the transfer
of our informatics group to Verispan.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General and administrative expenses were $268.2 million or 31.9% of total net
revenues for the first six months of 2003 versus $253.1 million or 32.1% of
total net revenues for the first six months of 2002. General and
administrative expenses increased approximately $15.1 million primarily due to
a $2.8 million increase in expenses associated with changes to our employee
cash-based incentive program and the negative impact of approximately $19.1
million as a result of the effect of foreign currency fluctuations. These
increases offset the reduction of approximately $8.6 million due to the
transfer of our informatics group into the Verispan joint venture.

Net interest income was $8.1 million for the first six months of 2003 versus
$6.7 million for the first six months of 2002.

Other income was $1.6 million for the first six months of 2003 versus $1.1
million for the first six months of 2002. Included in the six months ended
June 30, 2003 were approximately $4.6 million in foreign currency translation
gains and $3.9 million of expenses related to the special committee of our
Board of Directors and its financial and legal advisors.

Income before income taxes was $82.9 million or 9.9% of total net revenues for
the first six months of 2003 versus $55.8 million or 7.1% of total net revenues
for the first six months of 2002.

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

During the first six months of 2003 and 2002, respectively, we recognized
$16,000 and $477,000 of earnings from equity in unconsolidated affiliates and
other which represents our pro rata share of the net income of unconsolidated
affiliates, primarily Verispans net income, net of a 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 $54.8 million for the first six months of 2003 versus $83.5
million for the first six months of

35



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##### 



2002. The net income for the first six months of 2002 included $45.7 million
for the cumulative effect of changing to a different method of recognizing
deferred income taxes.

Analysis by Segment:

The following table summarizes the operating activities for our reportable
segments for first six months 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 Net2003
    
    2002
    
    Growth %
    
    2003
    
    Revenues
    
    2002
    
    RevenuesProduct development
    
    $
    501.4
    
    
    $
    461.7
    
    
    
    8.6
    %
    
    $
    254.4
    
    
    
    50.7
    %
    
    $
    228.1
    
    
    
    49.4
    %Commercial services
    
    
    265.6
    
    
    
    281.7
    
    
    
    (5.7
    )
    
    
    95.6
    
    
    
    36.0
    
    
    
    100.4
    
    
    
    35.6PharmaBio Development
    
    
    92.5
    
    
    
    48.3
    
    
    
    91.5
    
    
    
    32.1
    
    
    
    34.7
    
    
    
    7.3
    
    
    
    15.1Informatics
    
    
    
    
    
    
    20.3
    
    
    
    (100.0
    )
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    39.4Eliminations
    
    
    (19.0
    )
    
    
    (23.6
    )
    
    
    (19.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    840.5
    
    
    $
    788.5
    
    
    
    6.6
    %
    
    $
    382.1
    
    
    
    45.5
    %
    
    $
    343.8
    
    
    
    43.6
    %


Net service revenues for the product development group were $501.4 million for
the first six months of 2003 compared to $461.7 million for the first six
months of 2002. Net service revenues for the first six months of 2003 were
positively impacted by approximately $34.5 million due to the effect of foreign
currency fluctuations. Net service revenues increased in the Asia Pacific
region $9.4 million or 21.2% to $53.7 million including a positive impact of
approximately $4.1 million due to the effect of foreign currency fluctuations.
Net service revenues increased $32.9 million or 18.0% to $215.5 million in the
Europe and Africa region primarily as a result of the positive impact of
approximately $29.9 million due to the effect of foreign currency fluctuations.
Net service revenues decreased $2.6 million or (1.1%) to $232.2 million in the
Americas region primarily as a result of increased competition.

Contribution for the product development group was $254.4 million for the first
six months of 2003 compared to $228.1 million for the first six months of 2002.
As a percentage of net service revenues, contribution margin was 50.7% for the
first six months of 2003 compared to 49.4% for the first six months of 2002.
Our product development group experiences slight fluctuations in contribution
as a percent of net service revenues from period to period as a result of
executed contract scope changes and the timing of project expenses for which
revenue is not recognized such as start-up or setup costs. We believe this
group has realized most of the efficiencies which we originally set out to
achieve from the prior years restructurings.

Net service revenues for the commercial services group were $265.6 million for
the first six months of 2003 compared to $281.7 million for the first six
months of 2002. Net service revenues for the first six months of 2003 were
positively impacted by approximately $20.5 million due to the effect of foreign
currency fluctuations. Net service revenues increased in the Asia Pacific
region $12.2 million or 31.7% to $50.7 million, which was positively impacted
by $4.0 million due to the effect of foreign currency fluctuations. Net
service revenues decreased $1.5 million or (1.3%) to $113.5 million in the
Europe and Africa region, which

36



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Quintiles Transnational Corp. and Subsidiaries

was positively impacted by $16.9 million due to the effect of foreign currency
fluctuations. We experienced difficult business conditions with our syndicated
sales forces in two of the markets, primarily the United Kingdom and France.
Net service revenues decreased $26.7 million or (20.9%) to $101.4 million in
the Americas region representing the continuation of a trend resulting from
reductions in new product launches and increases in the number of drugs losing
patent protection.

Contribution for the commercial services group was $95.6 million for the first
six months of 2003 compared to $100.4 million for the first six months of 2002.
As a percentage of net service revenues, contribution margin was 36.0% for the
first six months of 2003 compared to 35.6% for the first six months of 2002.
The improvement of 40 basis points in contribution margin was directly related
to our reduction in billable headcount of approximately 11%, as we continued to
migrate from dependency on large primary care sales forces with low margins to
a balanced mix of strategic consulting services and specialty sales forces with
greater margins.

Net revenues for the PharmaBio Development group increased approximately $44.2
million during the first six months of 2003 as compared to the first six months
of 2002 due to a $26.1 million increase in commercial rights and royalties
revenues and a $18.1 million increase in investment revenues. This group
benefited the first six months of 2003 from drug distributors increasing their
inventory levels through purchases of Bioglan products. The commercial rights
and royalties costs increased approximately $19.5 million during the same
period primarily as a result of several factors including an approximate $8.3
million of costs associated with the marketing of
SolarazeTM and ADOXATM during
the first six months of 2003 as compared to $2.9 million for the first six
months of 2002, and an increase of approximately $10.4 million of expenses
relating to our risk sharing contracts in Europe, including the 2002
termination of the contract in Germany. These increases were partially offset
by a $4.6 million decrease in service costs provided by our commercial services
group relating primarily to the fourth quarter of 2002 termination of the
services portion of our contract with SCIO. The contribution for this segment
increased by $24.8 million from the first six months of 2002 to 2003. The
commercial rights and royalties revenues (net of related costs) in the first
six months of 2003 increased the contribution of this group by approximately
$6.5 million when compared to the first six months of 2002 due to the
successful launch of the dermatology products and the successful performance of
our commercial rights and royalties contracts. Investment revenues (net of
related costs) in the first six months of 2003 increased the contribution of
this group by approximately $18.3 million when compared to the first six months
of 2002.

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

Liquidity and Capital Resources

Cash and cash equivalents were $754.5 million at June 30, 2003 as compared to
$644.3 million at December 31, 2002.

Cash provided by operations was $64.6 million for the six months ended June 30,
2003 versus $92.4 million for the comparable period of 2002.

37



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Quintiles Transnational Corp. and Subsidiaries

Cash provided by investing activities
was $35.2 million for the six months
ended June 30, 2003 versus cash used in investing activities of $52.5 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 six
months of 2002, the acquisition of certain assets of Bioglan and a $10.0
million capital contribution to Verispan.

Capital asset purchases required an outlay of cash of $24.2 million for the six
months ended June 30, 2003 compared to an outlay of $21.2 million for the same
period in 2002. Included in the six months ended June 30, 2002, is
approximately $666,000 of capital asset purchases by our informatics group
which was transferred to Verispan in May 2002.

Cash used for the acquisition of commercial rights and royalties related assets
was $19.2 million for the six months ended June 30, 2003 as compared to an
outlay of $7.1 million for the comparable period in 2002. The acquisitions for
the six months ended June 30, 2003 included payments of $8.2 million for the
contracts with COB, $6.5 million for the contract with 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 $5.1 million for the six months ended June 30, 2003 compared to an outlay of
$8.3 million for the same period in 2002. Proceeds from the sale of equity
securities and other investments were $53.8 million during the six months ended
June 30, 2003 as compared to $18.5 million for the same period in 2002. The
proceeds received during the six months ended June 30, 2003 included
approximately $22.7 million from the sale of our investment in VIRS (which was
acquired by Gilead Sciences, Inc. in January 2003), approximately $17.5 million
from warrants to acquire SCIO stock (which was acquired by Johnson & Johnson,
Inc. in May 2003), and the sale of other equity investments, including MDCO and
CVTX.

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Quintiles Transnational Corp. and Subsidiaries

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

June 30, 2003
    
    December 31, 2002Trade service accounts receivable, net
    
    $
    127,792
    
    
    $
    129,748Unbilled services
    
    
    120,882
    
    
    
    120,383Unearned income
    
    
    (145,945
    )
    
    
    (141,710
    )Net service receivables outstanding
    
    $
    102,729
    
    
    $
    108,421Number of days of service revenues
outstanding
    
    
    20
    
    
    
    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.

Investments in debt securities were $10.7 million at June 30, 2003 as compared
to $36.7 million at December 31, 2002. Our investments in debt securities
consist primarily of state and municipal securities. The decrease is a result
of the redemption of our investments in debt securities, primarily money funds.

Investments in marketable equity securities decreased $11.9 million to $53.1
million at June 30, 2003 as compared to $64.9 million at December 31, 2002
primarily as a result of sales of equity securities.

Investments in non-marketable equity securities and loans at June 30, 2003 were
$48.4 million, as compared to $46.4 million at December 31, 2002.

Investments in unconsolidated affiliates, primarily Verispan, were $121.1
million at June 30, 2003 and December 31, 2002.

We have available to us a £10.0 million (approximately $16.6 million) unsecured
line of credit and a £1.5 million (approximately $2.5 million) general banking
facility with a U.K. bank. At June 30, 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 2003.

Shareholders equity at June 30, 2003 was $1.680 billion versus $1.598 billion
at December 31, 2002.

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.

The merger agreement with Pharma Services Holding, Inc. 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

39



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Quintiles Transnational Corp. and Subsidiaries

financing and after the merger, assuming its completion, much of our available
cash would be used to service the debt incurred in the merger. The merger
agreement also limits the ability of the Company to undertake a wide range of
transactions outside the ordinary course of business pending completion of the
proposed merger. After completion, the Company expects that debt covenants
will impose new restrictions.

Backlog and Net New Business Reporting

We report backlog, $1.747 billion at June 30, 2003, based on anticipated net
revenue from uncompleted projects that our customers have authorized. Backlog
at June 30, 2003 includes approximately $63 million of backlog related to
services contracted from our service groups, primarily commercial services, in
connection with the strategic alliances forged by our PharmaBio Development
group.

Net new business, which includes anticipated net revenue from contracts that we
entered into during the period and adjusted for contracts which were canceled
during the period, for the six months ended June 30, 2003 was $727 million.
Net new business for our product development and commercial service groups
during this same time was $475 million and $252 million, respectively.

We do not include product revenue or commercial rights-related revenue
(royalties and commissions) in backlog or net new business. Our backlog and
net new business is calculated based upon our estimate of forecasted currency
exchange rates. Annually, we adjust the beginning balance of our backlog to
reflect changes in our forecasted currency exchange rates. Our backlog and net
new business at any time can be affected by:



| |  | the variable size and duration of projects,
|- |  | -------------------------------------------



| |  | the loss or delay of projects, and
|- |  | ----------------------------------



| |  | a change in the scope of work during the course of a project.
|- |  | -------------------------------------------------------------

If customers delay projects, the projects will remain in backlog, but will not
generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues may not be indicative of
the future relationship.

The reporting of revenue backlog and net new business is not authoritatively
prescribed, therefore practices tend to vary among competitors and reported
amounts are not necessarily comparable.

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.

40



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Quintiles Transnational Corp. and Subsidiaries

Changes in aggregate spending, research and development budgets and 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
outsourcing of clinical research and sales and marketing projects, our
operations and financial condition could be materially and adversely affected.
We also believe we have been negatively impacted recently by mergers and other
factors in the pharmaceutical industry, which appear to have slowed decision
making by our customers and delayed certain trials. We believe our
commercialization services have been particularly affected by recent reductions
in new product launches and increases in the number of drugs losing patent
protection. A continuation of these trends would have an ongoing adverse
effect on our business. In addition, U.S. federal and state legislatures and
numerous foreign governments have considered various types of health care
reforms and 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 profitability of 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.

A 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 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

41



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Quintiles Transnational Corp. and Subsidiaries

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 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. In
addition, we may not realize the full benefits of our backlog of contractually
committed services if our customers cancel, delay or

42

Quintiles Transnational Corp. and Subsidiaries

reduce their commitments under their contracts with us. 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
of loss or delay of multiple contracts potentially has 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
transactions 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 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 transaction. 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
these transactions 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 is less than our costs with respect to these
transactions.

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. at the end of
2001, as well as any other product rights we may hold in the future, 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 such
products cause injury, are found to be unsuitable for their intended purpose or
are 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

43

Quintiles Transnational Corp. and Subsidiaries

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 in
which we have limited experience. 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 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. Our performance also depends on our ability to identify, 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 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.

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, electronic data capture, patient
recruitment and other related 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 or electronic data capture and related services do not
conform to contractual or regulatory standards, trial participants or trial
results 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. However, such claims may still be brought
against us, and it is possible we could be found liable for these types of
losses. For example, we are among the defendants named in a purported class
action by participants in an Alzheimers study seeking to hold us

44

Quintiles Transnational Corp. and Subsidiaries

liable for alleged damages to the participants arising from the study.

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 some 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 controlled substances is subject to regulation by the United
States Drug Enforcement Administration, or the DEA, and 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 to the DEA, the DEA has referred this matter to the United States
Attorneys Office to consider appropriate action, which may include the
assessment of civil fines, or the determination that no further action will be
taken.

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, which could adversely affect our
results of operations and financial condition.

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, 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.

As part of the formation of Verispan, Verispan assumed our obligation under our
settlement agreement with WebMD to indemnify WebMD for losses arising out of or
in connection with the (1) canceled Data Rights Agreement with WebMD, (2) our
data business, which was contributed to the joint venture, (3) the collection,
accumulation, storage or use of data by ENVOY for the purpose of transmitting
or delivering data to us, (4) any actual transmission or delivery by ENVOY of
data to us or (5) violations of law or contract attributable to any of the
events described in (1)  (5) above. These indemnity obligations are 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 former
data business, Verispan may have insufficient resources to satisfy these
obligations or may otherwise default with respect thereto. In addition, WebMD
may seek indemnity from us, and we would have to proceed against Verispan.

45Quintiles Transnational Corp. and SubsidiariesIn 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. ENVOY and its insurance
carrier, Federal, filed a lawsuit in June 2003 against us alleging that we
should be responsible for payment of the settlement amount of $11 million and
related fees and costs in connection with the recent settlement of the class
action lawsuit. Our indemnity 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 aggregate losses
described above.Changes in 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.Failure to comply with existing regulations could result in a loss of revenue.We are subject to a wide range of government regulations and review by a number
of regulatory agencies including the FDA, DEA, Department of Transportation and
others. Any failure on our part to comply with applicable regulations could
materially impact our ability to perform our services. For example,
non-compliance 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. 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. Moreover, from time to time, including the present,
one or more of our customers are investigated by regulatory authorities or
enforcement agencies with respect to regulatory compliance of their clinical
trials and programs. In these situations, we often have provided services to
our customers with respect to the trials and programs being investigated and we
are called upon to respond to requests for information by the authorities and
agencies. There is a risk that either our customers or regulatory authorities
could claim that we performed our services improperly, and if proven, could
subject us to substantial damages, fines or penalties.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;46Quintiles Transnational Corp. and Subsidiaries
 
 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 June 30, 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.We face other risks in connection with our international operations.We have significant operations in foreign countries. As a result, we are
subject to certain risks inherent in conducting business internationally,
including the following:
 
 foreign countries could change regulations or impose currency restrictions
and other restraints;
 
 political changes and economic crises may lead to changes in the
business environment in which we operate; and
 
 international conflict, including terrorist acts, could significantly
impact our financial condition and results of operations.New and proposed laws and regulations regarding confidentiality of patients
information could result in increased risks of liability or increased cost to
us, or could limit our service offerings.The confidentiality and release of patient-specific information are subject to
governmental regulation. Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human
Services has issued regulations mandating heightened privacy and
confidentiality protections. The federal government and state governments have
proposed or adopted additional legislation governing the possession, use and
dissemination of medical record information and other personal health
information. Proposals being considered by state governments may contain
privacy and security protections that are more burdensome than the federal
regulations. In order to comply with these regulations, we may need to
implement new security measures, which may require us to make substantial
expenditures or cause us to limit47Quintiles Transnational Corp. and Subsidiariesthe products and services we offer. In addition, if we violate applicable
laws, regulations or duties relating to the use, privacy or security of health
information, we could be subject to civil or criminal penalty.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 six months ended June 30, 2003, one customer accounted for
approximately 11% of our net service revenues for the six months ended June 30,
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 produce electronic records, which meet the requirements of
FDA regulations, our customers may be adversely affected when they submit the
data concerned to the FDA in support of an application for approval of a
product, which could harm our business. 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 to 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.
We are making steady and documented progress in bringing our critical computer
applications into compliance according to written enhancement plans that have
been reviewed and approved by third party authorities. Lower-priority systems
are, likewise, being reviewed and revalidated. If we are unable to complete
these compliance objectives, 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,
including with respect to our periodic reports.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 in48Quintiles Transnational Corp. and Subsidiariescash 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. As
part of the process for preparing and mailing a proxy statement to our
shareholders regarding the proposed merger, our preliminary proxy statement and
periodic reports are being reviewed by the Division of Corporation Finance of
the SEC. As part of the review, the Division has indicated that it has certain
questions regarding our filings and in a few instances has indicated the view
of the Staff of the Division is inconsistent with our view. While we believe
our positions are correct, some of the issues remain unresolved and could
result in changes to our filings, including our financial statements. Even
though we currently are targeting closing in the third quarter, 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 reach a final settlement or otherwise prevail in the
pending 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 6. Exhibits and Reports on Form 8-K(a) Exhibits31.1*
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.31.2*
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.31.3
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.31.4
    
    Certification Pursuant to Rule 13a-14/15d-14, As
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.32.1*
    
    Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.32.2*
    
    Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.32.3
    
    Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.32.4
    
    Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.


49Quintiles Transnational Corp. and Subsidiaries*
 
 Previously filed with the Quarterly Report on Form 10-Q for the three months
ended June 30, 2003, as filed with the Securities and Exchange Commission on
August 13, 2003.(b) During the three months ended June 30, 2003, the Company filed
or furnished two reports on Form 8-K.The Company filed a Form 8-K, dated April 11, 2003, stating that the
Company issued a press release on April 10, 2003, announcing that it had
entered into an Agreement and Plan of Merger (the Merger Agreement),
dated as of April 10, 2003, with Pharma Services Holding, Inc. and Pharma
Services Acquisition Corp. and briefly describing the terms of the
proposed merger. The Form 8-K also stated that on April 10, 2003,
simultaneously with signing the Merger Agreement, the Company amended its
Amended and Restated Rights Agreement, dated as of November 5, 1999 and
amended and restated as of May 4, 2000 (the Rights Agreement) between
the Company and Wachovia Bank, N.A. (as successor by merger to First Union
National Bank), as Rights Agent, to eliminate the operation and effects of
the Rights Agreement with respect to the execution, delivery and
performance of the Merger Agreement, the public announcement thereof, and
consummation of the merger.The Company furnished a Form 8-K to the Securities and Exchange Commission
dated April 21, 2003, including its press release announcing the Companys
earnings information for the period ended March 31, 2003. This report
shall not be deemed to be incorporated by reference into this Form 10-Q or
filed hereunder for purposes of liability under the Securities Exchange
Act of 1934.No other reports on Form 8-K were filed or furnished during the three
months ended June 30, 2003.50SIGNATURESPursuant 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: | August 26, 2003 |  |  | /s/ DENNIS B.
GILLINGSDennis B. Gillings,
Chairman                                         | 
|     
|Date: | August 26, 2003 |  |  | /s/ PAMELA J.
KIRBYPamela J. Kirby, Chief
Executive Officer                                | 
|     
|Date: | August 26, 2003 |  |  | /s/ JAMES L.
BIERMANJames L. Bierman, Executive
Vice President
and Chief Financial Officer | 

51



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##### 



Quintiles Transnational Corp. and
Subsidiaries

EXHIBIT INDEX

Exhibit
    
    Description31.1*
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.31.2*
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.31.3
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.31.4
    
    Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.32.1*
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.32.2*
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.32.3
    
    Certification Pursuant to 18. U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.32.4
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.


* Previously filed with the Quarterly Report on Form 10-Q for the three months
ended June 30, 2003, as filed with the Securities and Exchange Commission on
August 13, 2003.

52