##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

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



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Quintiles Transnational Corp.

(Exact name of registrant as specified in its
charter)


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

(919) 998-2000

(Registrants telephone number, including
area code)


N/A

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


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

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

The number of shares of Common Stock, $.01 par
value, outstanding as of June 30, 2003 was 118,501,009.



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TABLE OF CONTENTS



|                                  |                                                                                               |                                                                                |  |  |  |  |  | 
|--------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ |  |  |  |  |  | 
|                                  |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                         
|                                  |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                               
|                                  |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                               
|                                  |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2003
|                                  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                  | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                                  | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION       
|                                  | Item 1. Legal Proceedings                                                                    
|                                  | Item 2. Changes in Securities and Use of Proceeds                                            
|                                  | Item 3. Defaults upon Senior Securities -- Not applicable                                    
|                                  | Item 4. Submission of Matters to a Vote of Security Holders -- Not applicable                
|                                  | Item 5. Other Information -- Not applicable                                                  
|                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                       
|EXHIBIT INDEX                    
|Section 302 Certification for CEO
|Section 302 Certification for CFO
|Section 906 Certification for CEO
|Section 906 Certification for CFO



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##### Table of Contents



INDEX

|                                   |  |                                                                                                                                              |    |      |    | 
|---------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                                                              |    | Page
|                                   |  |                                                                                                                                              |    |     
|PART I.  FINANCIAL
    INFORMATION
|                                  
|Item 1.                            |  | Financial Statements (unaudited) Condensed
    consolidated balance sheets  June 30, 2003 and
    December 31, 2002                         |    |      | 2  | 
|                                  
|                                   |  | Condensed consolidated statements of
    operations  Three months ended June 30, 2003 and
    2002; six months ended June 30, 2003 and 2002 |    |      | 3  | 
|                                  
|                                   |  | Condensed consolidated statements of cash
    flows  Six months ended June 30, 2003 and 2002                                                |    |      | 4  | 
|                                  
|                                   |  | Notes to condensed consolidated financial
    statements  June 30, 2003                                                                     |    |      | 5  | 
|                                  
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                    |    |      | 22 | 
|                                  
|Item 3.                            |  | Quantitative and Qualitative Disclosure about
    Market Risk                                                                                |    |      | 40 | 
|                                  
|Item 4.                            |  | Controls and Procedures                                                                                                                      |    |      | 40 | 
|                                  
|PART II.  OTHER
    INFORMATION   
|                                  
|Item 1.                            |  | Legal Proceedings                                                                                                                            |    |      | 41 | 
|                                  
|Item 2.                            |  | Changes in Securities and Use of Proceeds                                                                                                    |    |      | 42 | 
|                                  
|Item 3.                            |  | Defaults upon Senior Securities  Not
    Applicable                                                                                         |    |      | 42 | 
|                                  
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders  Not Applicable                                                                     |    |      | 42 | 
|                                  
|Item 5.                            |  | Other Information  Not Applicable                                                                                                           |    |      | 43 | 
|                                  
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                             |    |      | 43 | 
|                                  
|Signatures                         |  |                                                                                                                                              | 44 |     
|                                  
|Exhibit Index                      |  |                                                                                                                                              | 45 |     

1



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |         |           | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------------ | --------- |  | -------- | ------- | --------- | 
|                                         |                                                                                                                                                                     | June 30,                                   |          | December 31,
|                                         |                                                                                                                                                                     | 2003                                       |          | 2002        
|                                         |                                                                                                                                                                     |                                            |          |             
|                                         |                                                                                                                                                                     | (Unaudited)                                |          | (Note 1)    
|                                         |                                                                                                                                                                     |                                           
|                                         |                                                                                                                                                                     | (In thousands, except share data)         
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         | Cash and cash equivalents                                                                                                                                           |                                            | $        | 754,519      |           |  | $        | 644,284 |          
|                                         | Trade accounts receivable and unbilled services,
    net                                                                                                            |                                            |          | 342,418      |           |  |          | 353,535 |          
|                                         | Investments in debt securities                                                                                                                                      |                                            |          | 593          |           |  |          | 27,218  |          
|                                         | Prepaid expenses                                                                                                                                                    |                                            |          | 34,006       |           |  |          | 22,516  |          
|                                         | Other current assets and receivables                                                                                                                                |                                            |          | 47,295       |           |  |          | 42,654  |          
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total current assets                       |          |              | 1,178,831 |  |          |         | 1,090,207 | 
|                                        
|Property and equipment                   |                                                                                                                                                                     |                                            | 496,257  |              |           |  | 475,543  |        
|Less accumulated depreciation            |                                                                                                                                                                     |                                            | (234,243 | )            |           |  | (213,385 | )      
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     |                                            | 262,014  |              |           |  | 262,158  |        
|Intangibles and other assets:            |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         | Investments in debt securities                                                                                                                                      |                                            |          | 10,101       |           |  |          | 9,453   |          
|                                         | Investments in marketable equity securities                                                                                                                         |                                            |          | 53,064       |           |  |          | 64,926  |          
|                                         | Investments in non-marketable equity securities
    and loans                                                                                                       |                                            |          | 48,427       |           |  |          | 46,449  |          
|                                         | Investments in unconsolidated affiliates                                                                                                                            |                                            |          | 121,135      |           |  |          | 121,101 |          
|                                         | Commercial rights and royalties                                                                                                                                     |                                            |          | 138,389      |           |  |          | 131,536 |          
|                                         | Goodwill                                                                                                                                                            |                                            |          | 74,141       |           |  |          | 70,133  |          
|                                         | Other identifiable intangibles, net                                                                                                                                 |                                            |          | 134,899      |           |  |          | 142,715 |          
|                                         | Deferred income taxes                                                                                                                                               |                                            |          | 171,300      |           |  |          | 174,534 |          
|                                         | Deposits and other assets                                                                                                                                           |                                            |          | 34,616       |           |  |          | 38,871  |          
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     |                                            | 786,072  |              |           |  | 799,718  |        
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total assets                               |          | $            | 2,226,917 |  |          | $       | 2,152,083 | 
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         | Accounts payable and accrued expenses                                                                                                                               |                                            | $        | 239,694      |           |  | $        | 238,269 |          
|                                         | Credit arrangements                                                                                                                                                 |                                            |          | 19,397       |           |  |          | 21,719  |          
|                                         | Unearned income                                                                                                                                                     |                                            |          | 230,340      |           |  |          | 239,606 |          
|                                         | Income taxes payable                                                                                                                                                |                                            |          | 17,528       |           |  |          | 20,067  |          
|                                         | Other current liabilities                                                                                                                                           |                                            |          | 2,589        |           |  |          | 2,073   |          
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total current liabilities                  |          |              | 509,548   |  |          |         | 521,734   | 
|Long-term liabilities:                   |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         | Credit arrangements, less current portion                                                                                                                           |                                            |          | 16,076       |           |  |          | 18,855  |          
|                                         | Other liabilities                                                                                                                                                   |                                            |          | 20,905       |           |  |          | 13,108  |          
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     |                                            | 36,981   |              |           |  | 31,963   |        
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total liabilities                          |          |              | 546,529   |  |          |         | 553,697   | 
|Shareholders 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      |           |  |          | 881,927 |          
|                                         | Retained earnings                                                                                                                                                   |                                            |          | 771,218      |           |  |          | 716,465 |          
|                                         | Accumulated other comprehensive income (loss)                                                                                                                       |                                            |          | 21,815       |           |  |          | (6      | )        
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total shareholders equity                 |          |              | 1,680,388 |  |          |         | 1,598,386 | 
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        
|                                         |                                                                                                                                                                     | Total liabilities and shareholders equity |          | $            | 2,226,917 |  |          | $       | 2,152,083 | 
|                                         |                                                                                                                                                                     |                                            |          |              |           |  |          |        

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

2



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


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

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

3



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


Unaudited


|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                  |                                                                                                                                        |                 
|                                                                                                  |                                                                                                                                        | Six Months Ended
|                                                                                                  |                                                                                                                                        | June 30,        
|                                                                                                  |                                                                                                                                        |                 
|                                                                                                  |                                                                                                                                        | 2003             |         | 2002   
|                                                                                                  |                                                                                                                                        |                  |         |        
|                                                                                                  |                                                                                                                                        |                 
|                                                                                                  |                                                                                                                                        | (In thousands)  
|Operating activities                                                                              |                                                                                                                                        |                  |         |         |   |   |         |        
|                                                                                                  | Net income                                                                                                                             |                  | $       | 54,753  |   |   | $       | 83,546  |  
|                                                                                                  | Cumulative effect on prior years (to
    December 31, 2001) of changing to a different method of
    recognizing deferred income taxes |                  |         |        |   |   |         | (45,659 | )
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        
|                                                                                                  | Income from operations                                                                                                                 |                  |         | 54,753  |   |   |         | 37,887  |  
|Adjustments to reconcile income from operations
    to net cash provided by operating activities: |                                                                                                                                        |                  |         |         |   |   |         |        
|                                                                                                  | Depreciation and amortization                                                                                                          |                  |         | 45,743  |   |   |         | 43,787  |  
|                                                                                                  | Restructuring 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                                                                                             |                  |         | (4,616  | ) |   |         | 40,259  |  
|                                                                                                  | Other                                                                                                                                  |                  |         | (1,268  | ) |   |         | 531     |  
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        
|Net cash provided by operating activities                                                         |                                                                                                                                        |                  | 63,468  |         |   |   | 92,423  |        
|                                                                                                 
|Investing activities                                                                              |                                                                                                                                        |                  |         |         |   |   |         |        
|Acquisition of property and equipment                                                             |                                                                                                                                        |                  | (24,206 | )       |   |   | (21,186 | )      
|Acquisition of businesses, net of cash acquired                                                   |                                                                                                                                        |                  |        |         |   |   | (25,450 | )      
|Acquisition of commercial rights                                                                  |                                                                                                                                        |                  | (18,104 | )       |   |   | (7,080  | )      
|Proceeds from disposition of property and
    equipment                                           |                                                                                                                                        |                  | 4,151   |         |   |   | 1,674   |        
|Proceeds 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  |         |   |   | 18,540  |        
|Advances to unconsolidated affiliates                                                             |                                                                                                                                        |                  |        |         |   |   | (10,000 | )      
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        
|Net cash provided by (used in) investing
    activities                                           |                                                                                                                                        |                  | 36,371  |         |   |   | (52,451 | )      
|                                                                                                 
|Financing activities                                                                              |                                                                                                                                        |                  |         |         |   |   |         |        
|Principal payments on credit arrangements, net                                                    |                                                                                                                                        |                  | (9,579  | )       |   |   | (5,725  | )      
|Issuance of common stock, net                                                                     |                                                                                                                                        |                  | 5,079   |         |   |   | 6,828   |        
|Repurchase 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  |         |   |   | 11,082  |        
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        
|Increase in cash and cash equivalents                                                             |                                                                                                                                        |                  | 110,235 |         |   |   | 26,913  |        
|Cash and cash equivalents at beginning of period                                                  |                                                                                                                                        |                  | 644,284 |         |   |   | 565,063 |        
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        
|Cash and cash equivalents at end of period                                                        |                                                                                                                                        | $                | 754,519 |         |   | $ | 591,976 |        
|                                                                                                  |                                                                                                                                        |                  |         |         |   |   |         |        

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

4



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##### Table of Contents



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 Options 
|                                      |  | Three Months  
|                                      |  | Ended June 30,
|                                      |  |               
|                                      |  | 2003           |      | 2002
|                                      |  |                |      |     
|Expected 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 |  

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).

5



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 |        | 2002
|                                                                               |  |                             |        |                           |  |      |        |     
|Net income as reported                                                         |  | $                           | 29,597 |                           |  | $    | 20,626 |      |  | $ | 54,753 |   |  | $ | 83,546 |  
|Less: 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 |   |  | $ | 75,677 |  
|                                                                               |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Basic net income per share:                                                    |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|As reported                                                                    |  | $                           | 0.25   |                           |  | $    | 0.17   |      |  | $ | 0.46   |   |  | $ | 0.70   |  
|Pro forma                                                                      |  |                             | 0.22   |                           |  |      | 0.14   |      |  |   | 0.40   |   |  |   | 0.64   |  
|                                                                               |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Effect 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   |   |  | $ | 0.70   |  
|Pro forma                                                                      |  |                             | 0.22   |                           |  |      | 0.14   |      |  |   | 0.40   |   |  |   | 0.63   |  
|                                                                               |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Effect of pro forma adjustment                                                 |  | $                           | (0.03  | )                         |  | $    | (0.03  | )    |  | $ | (0.06  | ) |  | $ | (0.07  | )
|                                                                               |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  

3.     Accounts
Receivable and Unbilled Services

Accounts receivable and unbilled services consist
of the following (in thousands):

|                                |                   |          |         |              |  |   |         |         | 
|------------------------------- | ----------------- | -------- | ------- | ------------ |  | - | ------- | ------- | 
|                                |                   | June 30, |         | December 31,
|                                |                   | 2003     |         | 2002        
|                                |                   |          |         |             
|Trade:                          |                   |          |         |              |  |   |         |        
|                                | Billed            |          | $       | 228,173      |  |   | $       | 240,295 | 
|                                | Unbilled services |          |         | 119,819      |  |   |         | 118,501 | 
|                                |                   |          |         |              |  |   |         |        
|                                |                   |          | 347,992 |              |  |   | 358,796 |        
|Allowance for doubtful accounts |                   |          | (5,574  | )            |  |   | (5,261  | )      
|                                |                   |          |         |              |  |   |         |        
|                                |                   | $        | 342,418 |              |  | $ | 353,535 |        
|                                |                   |          |         |              |  |   |         |        

The Company has approximately $97.7 million
and $107.4 million of billed accounts receivable
outstanding at June 30, 2003 and December 31, 2002,
respectively, which represents contractual billings with a
corresponding amount in unearned income on the accompanying
balance sheet.

4.     Commercial
Rights and Royalties

Commercial rights and royalty assets consist of
the following (in thousands):

|                     |  |          |         |              |  |   |         | 
|-------------------- |  | -------- | ------- | ------------ |  | - | ------- | 
|                     |  | June 30, |         | December 31,
|                     |  | 2003     |         | 2002        
|                     |  |          |         |             
|SCIO                 |  | $        | 29,958  |              |  | $ | 40,661  | 
|KOSP                 |  |          | 26,628  |              |  |   | 17,602  | 
|COB (Womens Health) |  |          | 5,713   |              |  |   | 3,273   | 
|COB (StriantTM)      |  |          | 6,090   |              |  |   |        | 
|LLY                  |  |          | 70,000  |              |  |   | 70,000  | 
|                     |  |          |         |              |  |   |         | 
|Total                |  | $        | 138,389 |              |  | $ | 131,536 | 
|                     |  |          |         |              |  |   |         | 

6



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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. The $30 million in payments are
included in the net present value calculation, which serves as
the basis for revenue to be recognized over the service period.
As of 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. 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.

7



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 asset
related to 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 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,
AIROZINTM, in the United States and Canada. Under the
terms of the agreement, the Company will provide
commercialization services for AIROZINTM 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 AIROZINTM over five years with a
$6 million limit per year. Following product launch, the
Company will receive royalties based on the net sales of
AIROZINTM. 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 SolarazeTM 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

8



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

percentage of net sales of SolarazeTM.
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 SolarazeTM
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 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 revenues earned 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. Revenues under these agreements will be recognized as
they are earned and costs expensed as incurred.

In July 2002, the Company entered into an
agreement with Eli Lilly and Company (LLY) to
support LLY in its commercialization efforts for
CymbaltaTM in the United States. LLY has submitted a
NDA for CymbaltaTM, 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 CymbaltaTM 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,

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and is not refundable in the event the FDA does
not grant final approval for CymbaltaTM. 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 CymbaltaTM by LLY or
sublicense of CymbaltaTM to third parties, if any.
The $110 million in payments will be capitalized and
amortized ratably as a reduction of revenue over the five-year
service period. The sales force costs will be expensed as
incurred. The payments are reported in the accompanying
statement of cash flows as an investing activity 
acquisition of commercial rights. In return for the P1 position
for CymbaltaTM and the marketing and milestone
payments, LLY will pay to the Company 8.25% of U.S.
CymbaltaTM 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 CymbaltaTM 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 CymbaltaTM based on
concerns over LLYs manufacturing processes and facilities.

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: ProchieveTM 8%,
ProchieveTM 4%, Advantage-S® and
RepHreshTM. 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. 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 commercial rights. 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
StriantTM testosterone buccal bioadhesive product in
the United States. COB has submitted an NDA for
StriantTM, 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 StriantTM 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
StriantTM and are

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. 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.

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 |  | Total
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Milestone payments                |  | $    | 6,000  |      |  | $    | 3,000  |      |  | $    |       |            |  | $     |      |  |  | $ |      |  |  | $ |    |  |  | $ | 9,000  | 
|Sales force commitments           |  |      | 15,160 |      |  |      | 17,521 |      |  |      | 15,949 |            |  |       | 5,243 |  |  |   | 3,916 |  |  |   | 619 |  |  |   | 58,408 | 
|Licensing and distribution rights |  |      | 4,556  |      |  |      | 2,522  |      |  |      | 966    |            |  |       |      |  |  |   |      |  |  |   |    |  |  |   | 8,044  | 
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |       |  |  |   |       |  |  |   |     |  |  |   |        | 
|                                  |  | $    | 25,716 |      |  | $    | 23,043 |      |  | $    | 16,915 |            |  | $     | 5,243 |  |  | $ | 3,916 |  |  | $ | 619 |  |  | $ | 75,452 | 
|                                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |       |  |  |   |       |  |  |   |     |  |  |   |        | 

5.     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):

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

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     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):

|                                     |                                                  |            |        |                   |  |   |        |        | 
|------------------------------------ | ------------------------------------------------ | ---------- | ------ | ----------------- |  | - | ------ | ------ | 
|                                     |                                                  |            |        | Remaining Funding
|Company                              |                                                  | Cost Basis |        | Commitment       
|                                     |                                                  |            |        |                  
|Venture capital funds                |                                                  | $          | 31,297 |                   |  | $ | 19,052 |       
|Equity investments (seven companies) |                                                  |            | 10,316 |                   |  |   |       |       
|Convertible loans (three companies)  |                                                  |            | 4,879  |                   |  |   | 2,351  |       
|Loans (two companies)                |                                                  |            | 1,935  |                   |  |   | 16,677 |       
|                                     |                                                  |            |        |                   |  |   |        |       
|                                     | Total 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 |  | Total
|                      |  |      |        |      |  |      
|Venture capital funds |  | $    | 8,697  |      |  | $     | 10,355 |  |  | $ | 19,052 | 
|Convertible loans     |  |      | 2,351  |      |  |       |       |  |  |   | 2,351  | 
|Loans                 |  |      | 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.

7.     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

12



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$1.1 million on the warrant to acquire
700,000 shares of SCIO during the first and second quarters of
2003, respectively.

8.     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):

|                                |                                           |              |         |              |  |            |         |        |  |   |         |        | 
|------------------------------- | ----------------------------------------- | ------------ | ------- | ------------ |  | ---------- | ------- | ------ |  | - | ------- | ------ | 
|                                |                                           |              |         | Accumulated  |  |           
|                                |                                           | Gross Amount |         | Amortization |  | Net Amount
|                                |                                           |              |         |              |  |           
|Identifiable intangible assets: |                                           |              |         |              |  |            |         |        |  |   |         |       
|                                | Software and related assets               |              | $       | 156,271      |  |            | $       | 99,539 |  |   | $       | 56,732 | 
|                                | Product 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):

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

9.     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.

10.     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.

13



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     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 |        | Six Months Ended
|                                             |                       | June 30,           |        | June 30,        
|                                             |                       |                    |        |                 
|                                             |                       | 2003               |        | 2002             |   | 2003 |       | 2002 
|                                             |                       |                    |        |                  |   |      |       |      
|Marketable equity and derivative securities: |                       |                    |        |                  |   |      |       |       |   |   |        |        |   |   |        |       
|                                             | Gross realized gains  |                    | $      | 13,237           |   |      | $     | 6,399 |   |   | $      | 32,009 |   |   | $      | 11,607 |  
|                                             | Gross 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 |       
|                                             |                       |                    |        |                  |   |      |       |       |   |   |        |        |   |   |        |       

12.     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 at   
|                            |  | December 31, 2002 |       | Payments    |  | June 30, 2003
|                            |  |                   |       |             |  |              
|Severance and related costs |  | $                 | 2,066 |             |  | $             | (975 | ) |  | $ | 1,091 | 
|Exit 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
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.

14



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 at   
|                            |  | December 31, 2002 |       | Payments    |  | June 30, 2003
|                            |  |                   |       |             |  |              
|Severance and related costs |  | $                 | 1,306 |             |  | $             | (998   | ) |  | $ | 308   | 
|Exit 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.

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 at   
|                            |  | December 31, 2002 |       | Payments    |  | June 30, 2003
|                            |  |                   |       |             |  |              
|Severance and related costs |  | $                 | 117   |             |  | $             | (53  | ) |  | $ | 64  | 
|Exit costs                  |  |                   | 1,443 |             |  |               | (923 | ) |  |   | 520 | 
|                            |  |                   |       |             |  |               |      |   |  |   |     | 
|                            |  | $                 | 1,560 |             |  | $             | (976 | ) |  | $ | 584 | 
|                            |  |                   |       |             |  |               |      |   |  |   |     | 

15



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##### Table of Contents



QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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                                                                                            |  | $ | 2,284  |  
|2004                                                                                            |  |   | 2,990  |  
|2005                                                                                            |  |   | 2,321  |  
|2006                                                                                            |  |   | 2,265  |  
|Thereafter                                                                                      |  |   | 7,118  |  
|                                                                                                |  |   |        |  
|Gross abandoned lease obligations                                                               |  |   | 16,978 |  
|Less: sublease/restructuring accrual                                                            |  |   | (4,389 | )
|                                                                                                |  |   |        |  
|Total obligation in excess of existing subleases
    and related restructuring accrual balances |  | $ | 12,589 |  
|                                                                                                |  |   |        |  

13.     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 |  | Six Months Ended
|                         |                                 | June 30,           |  | June 30,        
|                         |                                 |                    |  |                 
|                         |                                 | 2003               |  | 2002             |  | 2003 |  | 2002   
|                         |                                 |                    |  |                  |  |      |  |        
|Weighted average shares: |                                 |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                         | Basic weighted average shares   |                    |  | 118,420          |  |      |  | 118,352 |  |  |  | 118,261 |  |  |  | 118,518 | 
|                         | Effect of dilutive securities:  |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |         | 
|                         | Stock options                   |                    |  | 973              |  |      |  | 592     |  |  |  | 610     |  |  |  | 1,035   | 
|                         |                                 |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                         | Diluted 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.

16



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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     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 |        | Six Months Ended
|                                   |                                                                          | June 30,           |        | June 30,        
|                                   |                                                                          |                    |        |                 
|                                   |                                                                          | 2003               |        | 2002             |   | 2003 |        | 2002   
|                                   |                                                                          |                    |        |                  |   |      |        |        
|Net income                         |                                                                          | $                  | 29,597 |                  |   | $    | 20,626 |         |   | $ | 54,753 |        |   | $ | 83,546 |        
|Other 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 |   |   |        | 24,447  |  
|                                   |                                                                          |                    |        |                  |   |      |        |         |   |   |        |        |   |   |        |        
|Comprehensive income               |                                                                          | $                  | 52,631 |                  |   | $    | 35,464 |         |   | $ | 76,574 |        |   | $ | 89,095 |        
|                                   |                                                                          |                    |        |                  |   |      |        |         |   |   |        |        |   |   |        |        

15.     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.

16.     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

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(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, 2003

|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |         | 
|------------------------------- | ------------------------ | ----------- | ------- | ---------- |  | ----------- | ------- | ------------ |  | ------------ | ------ | ------ |  |  | ------- | ------- | - |  | ------- | ------- | 
|                                |                          | Product     |         | Commercial |  | PharmaBio   |         |              |  |             
|                                |                          | Development |         | Services   |  | Development |         | Eliminations |  | Consolidated
|                                |                          |             |         |            |  |             |         |              |  |             
|Service revenues:               |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |        
|                                | External                 |             | $       | 251,374    |  |             | $       | 127,959      |  |              | $      |       |  |  | $       |        |   |  | $       | 379,333 | 
|                                | Intersegment             |             |         |           |  |             |         | 10,893       |  |              |        |       |  |  |         | (10,893 | ) |  |         |        | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |        
|                                | Total net services       |             |         | 251,374    |  |             |         | 138,852      |  |              |        |       |  |  |         | (10,893 | ) |  |         | 379,333 | 
|                                | Reimbursed service costs |             |         | 81,627     |  |             |         | 15,170       |  |              |        |       |  |  |         |        |   |  |         | 96,797  | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |        
|Gross service revenues          |                          |             | 333,001 |            |  |             | 154,022 |              |  |              |       |        |  |  | (10,893 | )       |   |  | 476,130 |        
|Commercial rights and royalties |                          |             |        |            |  |             |        |              |  |              | 32,596 |        |  |  |        |         |   |  | 32,596  |        
|Investment                      |                          |             |        |            |  |             |        |              |  |              | 11,307 |        |  |  |        |         |   |  | 11,307  |        
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |        
|                                | Total revenues           |             | $       | 333,001    |  |             | $       | 154,022      |  |              | $      | 43,903 |  |  | $       | (10,893 | ) |  | $       | 520,033 | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |        

Contribution (revenues less costs of revenues,
excluding depreciation and amortization expense except as noted
below):

| |  |   |         |  |  |   |        |  |  |   |        |  |  |   |   |  |  |   |         | 
| |  | - | ------- |  |  | - | ------ |  |  | - | ------ |  |  | - | - |  |  | - | ------- | 
| |  | $ | 128,080 |  |  | $ | 50,713 |  |  | $ | 13,336 |  |  | $ |  |  |  | $ | 192,129 | 
| |  |   |         |  |  |   |        |  |  |   |        |  |  |   |   |  |  |   |         | 

Three Months Ended June 30, 2002

|                                |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |         | 
|------------------------------- | ------------------------ | ----------- | ------- | ---------- |  | ----------- | ------- | ----------- |  | ------------ | ----- | ------------ |  |  | ------ | ------ |  |  | ------- | ------- | - |  | ------- | ------- | 
|                                |                          | Product     |         | Commercial |  |             |         | PharmaBio   |  |              |       |             
|                                |                          | Development |         | Services   |  | Informatics |         | Development |  | Eliminations |       | Consolidated
|                                |                          |             |         |            |  |             |         |             |  |              |       |             
|Service revenues:               |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | External                 |             | $       | 231,231    |  |             | $       | 122,092     |  |              | $     | 7,657        |  |  | $      |       |  |  | $       |        |   |  | $       | 360,980 | 
|                                | Intersegment             |             |         |           |  |             |         | 12,342      |  |              |       |             |  |  |        |       |  |  |         | (12,342 | ) |  |         |        | 
|                                |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | Total net services       |             |         | 231,231    |  |             |         | 134,434     |  |              |       | 7,657        |  |  |        |       |  |  |         | (12,342 | ) |  |         | 360,980 | 
|                                | Reimbursed service costs |             |         | 84,713     |  |             |         | 23,187      |  |              |       | 19           |  |  |        |       |  |  |         |        |   |  |         | 107,919 | 
|                                |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |        
|Gross service revenues          |                          |             | 315,944 |            |  |             | 157,621 |             |  |              | 7,676 |              |  |  |       |        |  |  | (12,342 | )       |   |  | 468,899 |        
|Commercial rights and royalties |                          |             |        |            |  |             |        |             |  |              |      |              |  |  | 23,001 |        |  |  |        |         |   |  | 23,001  |        
|Investment                      |                          |             |        |            |  |             |        |             |  |              |      |              |  |  | 6,333  |        |  |  |        |         |   |  | 6,333   |        
|                                |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | Total revenues           |             | $       | 315,944    |  |             | $       | 157,621     |  |              | $     | 7,676        |  |  | $      | 29,334 |  |  | $       | (12,342 | ) |  | $       | 498,233 | 
|                                |                          |             |         |            |  |             |         |             |  |              |       |              |  |  |        |        |  |  |         |         |   |  |         |        

Contribution (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


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Six Months Ended June 30, 2003

|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |           | 
|------------------------------- | ------------------------ | ----------- | ------- | ---------- |  | ----------- | ------- | ------------ |  | ------------ | ------ | ------ |  |  | ------- | ------- | - |  | ------- | --------- | 
|                                |                          | Product     |         | Commercial |  | PharmaBio   |         |              |  |             
|                                |                          | Development |         | Services   |  | Development |         | Eliminations |  | Consolidated
|                                |                          |             |         |            |  |             |         |              |  |             
|Service revenues:               |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |          
|                                | External                 |             | $       | 501,410    |  |             | $       | 246,579      |  |              | $      |       |  |  | $       |        |   |  | $       | 747,989   | 
|                                | Intersegment             |             |         |           |  |             |         | 18,988       |  |              |        |       |  |  |         | (18,988 | ) |  |         |          | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |          
|                                | Total net services       |             |         | 501,410    |  |             |         | 265,567      |  |              |        |       |  |  |         | (18,988 | ) |  |         | 747,989   | 
|                                | Reimbursed service costs |             |         | 161,783    |  |             |         | 29,355       |  |              |        |       |  |  |         |        |   |  |         | 191,138   | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |          
|Gross service revenues          |                          |             | 663,193 |            |  |             | 294,922 |              |  |              |       |        |  |  | (18,988 | )       |   |  | 939,127 |          
|Commercial rights and royalties |                          |             |        |            |  |             |        |              |  |              | 63,254 |        |  |  |        |         |   |  | 63,254  |          
|Investment                      |                          |             |        |            |  |             |        |              |  |              | 29,259 |        |  |  |        |         |   |  | 29,259  |          
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |          
|                                | Total revenues           |             | $       | 663,193    |  |             | $       | 294,922      |  |              | $      | 92,513 |  |  | $       | (18,988 | ) |  | $       | 1,031,640 | 
|                                |                          |             |         |            |  |             |         |              |  |              |        |        |  |  |         |         |   |  |         |          

Contribution (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, 2002

|                                |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |         | 
|------------------------------- | ------------------------ | ----------- | ------- | ---------- |  | ----------- | ------- | ----------- |  | ------------ | ------ | ------------ |  |  | ------ | ------ |  |  | ------- | ------- | - |  | ------- | ------- | 
|                                |                          | Product     |         | Commercial |  |             |         | PharmaBio   |  |              |        |             
|                                |                          | Development |         | Services   |  | Informatics |         | Development |  | Eliminations |        | Consolidated
|                                |                          |             |         |            |  |             |         |             |  |              |        |             
|Service revenues:               |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | External                 |             | $       | 461,688    |  |             | $       | 258,112     |  |              | $      | 20,347       |  |  | $      |       |  |  | $       |        |   |  | $       | 740,147 | 
|                                | Intersegment             |             |         |           |  |             |         | 23,554      |  |              |        |             |  |  |        |       |  |  |         | (23,554 | ) |  |         |        | 
|                                |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | Total net services       |             |         | 461,688    |  |             |         | 281,666     |  |              |        | 20,347       |  |  |        |       |  |  |         | (23,554 | ) |  |         | 740,147 | 
|                                | Reimbursed service costs |             |         | 153,500    |  |             |         | 49,550      |  |              |        | 22           |  |  |        |       |  |  |         |        |   |  |         | 203,072 | 
|                                |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |        
|Gross service revenues          |                          |             | 615,188 |            |  |             | 331,216 |             |  |              | 20,369 |              |  |  |       |        |  |  | (23,554 | )       |   |  | 943,219 |        
|Commercial rights and royalties |                          |             |        |            |  |             |        |             |  |              |       |              |  |  | 37,195 |        |  |  |        |         |   |  | 37,195  |        
|Investment                      |                          |             |        |            |  |             |        |             |  |              |       |              |  |  | 11,115 |        |  |  |        |         |   |  | 11,115  |        
|                                |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |        
|                                | Total revenues           |             | $       | 615,188    |  |             | $       | 331,216     |  |              | $      | 20,369       |  |  | $      | 48,310 |  |  | $       | (23,554 | ) |  | $       | 991,529 | 
|                                |                          |             |         |            |  |             |         |             |  |              |        |              |  |  |        |        |  |  |         |         |   |  |         |        

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

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     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 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

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QUINTILES TRANSNATIONAL CORP. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

18.     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.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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.

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 30,          
|                                |  |                   
|                                |  | 2003               |         | 2002
|                                |  |                    |         |     
|Service revenues                |  | $                  | 476,130 |      |  | $ | 468,899 | 
|Less: reimbursed service costs  |  |                    | 96,797  |      |  |   | 107,919 | 
|                                |  |                    |         |      |  |   |         | 
|Net service revenues            |  |                    | 379,333 |      |  |   | 360,980 | 
|Commercial rights and royalties |  |                    | 32,596  |      |  |   | 23,001  | 
|Investments                     |  |                    | 11,307  |      |  |   | 6,333   | 
|                                |  |                    |         |      |  |   |         | 
|Total 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | 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 the 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. The $9.6 million increase 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 Scios, Inc., or 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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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               |         | 2002
|                                      |  |                    |         |     
|Reimbursed service costs              |  | $                  | 96,797  |      |  | $ | 107,919 | 
|Service costs                         |  |                    | 200,540 |      |  |   | 192,110 | 
|Commercial rights and royalties costs |  |                    | 30,567  |      |  |   | 26,570  | 
|Investment costs                      |  |                    |        |      |  |   | 21      | 
|Depreciation 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.                                                                                                                                                                                                                                                         

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

24



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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.



| |                     
| | --------------------
| | 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 Net
|                      |  | 2003               |       | 2002         |  | Growth % |       | 2003     |  | Revenues |        | 2002     |  | Revenues
|                      |  |                    |       |              |  |          |       |          |  |          |        |          |  |         
|Product 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  |  |  |  | 36.9 |  
|PharmaBio Development |  |                    | 43.9  |              |  |          | 29.3  |          |  |          | 49.7   |          |  |          | 13.3  |  |  |  | 30.4 |   |  |   | 2.7   |  |  |  | 9.4  |  
|Informatics           |  |                    |      |              |  |          | 7.7   |          |  |          | (100.0 | )        |  |          |      |  |  |  |     |   |  |   | 3.6   |  |  |  | 46.3 |  
|Eliminations          |  |                    | (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 product
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

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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.


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 30,
|                                |  |               
|                                |  | 2003           |         | 2002
|                                |  |                |         |     
|Service revenues                |  | $              | 939,127 |      |  | $ | 943,219 | 
|Less: reimbursed service costs  |  |                | 191,138 |      |  |   | 203,072 | 
|                                |  |                |         |      |  |   |         | 
|Net service revenues            |  |                | 747,989 |      |  |   | 740,147 | 
|Commercial rights and royalties |  |                | 63,254  |      |  |   | 37,195  | 
|Investments                     |  |                | 29,259  |      |  |   | 11,115  | 
|                                |  |                |         |      |  |   |         | 
|Total net revenues              |  | $              | 840,502 |      |  | $ | 788,457 | 
|                                |  |                |         |      |  |   |         | 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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. The $26.1 million increase 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.
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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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           |         | 2002
|                                      |  |                |         |     
|Reimbursed service costs              |  | $              | 191,138 |      |  | $ | 203,072 | 
|Service costs                         |  |                | 397,972 |      |  |   | 403,626 | 
|Commercial rights and royalties costs |  |                | 60,397  |      |  |   | 40,848  | 
|Investment costs                      |  |                |        |      |  |   | 179     | 
|Depreciation 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | 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.

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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 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).

|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |          |       |  |  |  |      |   |  |   |       |  |  |  |      |  
|--------------------- |  | ------------------ | ----- | ------------ |  | -------- | ----- | ---- |  | -------- | ------ | ---- |  | -------- | ----- |  |  |  | ---- | - |  | - | ----- |  |  |  | ---- | -
|                      |  |                    |       |              |  |          |       |     
|                      |  |                    |       | Contribution
|                      |  | Total Net Revenues |       |             
|                      |  |                    |       |              |  | % of Net |       |      |  | % of Net
|                      |  | 2003               |       | 2002         |  | Growth % |       | 2003 |  | Revenues |        | 2002 |  | Revenues
|                      |  |                    |       |              |  |          |       |      |  |          |        |      |  |         
|Product 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 |  |  |  | 35.6 |  
|PharmaBio Development |  |                    | 92.5  |              |  |          | 48.3  |      |  |          | 91.5   |      |  |          | 32.1  |  |  |  | 34.7 |   |  |   | 7.3   |  |  |  | 15.1 |  
|Informatics           |  |                    |      |              |  |          | 20.3  |      |  |          | (100.0 | )    |  |          |      |  |  |  |     |   |  |   | 8.0   |  |  |  | 39.4 |  
|Eliminations          |  |                    | (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.

29



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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 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.

30



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Cash provided by operations was
$63.5 million for the six months ended June 30, 2003
versus $92.4 million for the comparable period of 2002.

Cash provided by investing activities was
$36.4 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 was $18.1 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
$7.1 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.

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

|                                               |  |               |          |                   |  |   |          |  
|---------------------------------------------- |  | ------------- | -------- | ----------------- |  | - | -------- | -
|                                               |  | June 30, 2003 |          | December 31, 2002
|                                               |  |               |          |                  
|Trade service accounts receivable, net         |  | $             | 212,179  |                   |  | $ | 227,636  |  
|Unbilled services                              |  |               | 120,882  |                   |  |   | 120,383  |  
|Unearned income                                |  |               | (230,332 | )                 |  |   | (239,598 | )
|                                               |  |               |          |                   |  |   |          |  
|Net service receivables outstanding            |  | $             | 102,729  |                   |  | $ | 108,421  |  
|                                               |  |               |          |                   |  |   |          |  
|Number 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.

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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
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.

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##### Table of Contents



Risk Factors

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



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in 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 on new drugs, our customers may
reduce their research and development spending, which could
reduce the business they outsource to us. We cannot predict the
likelihood of any of these events or the effects they would have
on our business, results of operations or financial condition.



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

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 if our

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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 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.

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| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | 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
SolarazeTM 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
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
SolarazeTM, we are unable to directly monitor quality
control in the manufacturing and distribution processes.

Our plans to market and sell
SolarazeTM 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.

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| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | 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 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.

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

We maintain insurance designed to cover ordinary
risks associated with our operations and our ordinary
indemnification obligations. This insurance might not be
adequate coverage or may be contested by our carriers. For
example, our insurance carrier, to whom we paid premiums to
cover risks associated with our product development services,
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.

In addition, we remain subject to other indemnity
obligations to WebMD, including for losses arising out of the
settlement agreement itself or out of the sale of ENVOY to
WebMD. In particular, we could be liable for losses which may
arise in connection with a class action lawsuit filed against
ENVOY prior to its purchase by us and subsequent sale to WebMD.
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

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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;
|
| |  | 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

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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 limit the 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 in cash and, in certain circumstances, we could
be required to pay Pharma Services a termination fee of
$52 million, as well as

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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 3. | Quantitative and Qualitative Disclosure
    about Market Risk

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






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

The Companys management, with the
participation of the Companys Chairman (principal
executive officer) and Chief Financial Officer, has evaluated
the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period
covered by this Form 10-Q. Based on such evaluation, the
Companys Chairman and Chief Financial Officer concluded
that, as of the end of the period covered by Form 10-Q, the
Companys disclosure controls and procedures provide
reasonable assurances that the information required to be
disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time period required by the United States
Securities and Exchange Commissions rules and forms. There
have been no changes in the Companys internal controls
over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the period covered by this Form 10-Q that have
materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial
reporting.

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PART II.     OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

On January 26, 2001, a purported class
action lawsuit was filed in the State Court of Richmond County,
Georgia, naming Novartis Pharmaceuticals Corp., Pharmed Inc.,
Debra Brown, Bruce I. Diamond and Quintiles Laboratories
Limited, one of our subsidiaries, on behalf of
185 Alzheimers patients who participated in drug
studies involving an experimental drug manufactured by defendant
Novartis and their surviving spouses. The complaint alleges
claims for breach of fiduciary duty, civil conspiracy, unjust
enrichment, misrepresentation, Georgia RICO violations,
infliction of emotional distress, battery, negligence and loss
of consortium as to class member spouses. The complaint seeks
unspecified damages, plus costs and expenses, including
attorneys fees and experts fees. 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. We believe that our contribution will
be covered by insurance or, in the alternative, will not
represent a material amount to us.

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

In October 2002, seven purported class action
lawsuits were filed in Superior Court, Durham County, North
Carolina by certain of our 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 of our outstanding shares
for $11.25 per share in cash. All of the lawsuits were
subsequently transferred to the North Carolina Business Court.
The lawsuits name as defendants Dr. Gillings, other members
of our Board of Directors, our company and, in some cases,
Pharma Services Company. The complaints allege, among other
things, 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 our Board of Directors announced its
rejection of the proposal by Pharma Services Company and its
intention to investigate strategic alternatives available to us
for purposes of enhancing shareholder value, including the
possibility of a sale of our company and alternatives that would
keep us independent and publicly owned. On January 6, 2003,
the North Carolina Business Court entered a Case Management
Order consolidating all seven lawsuits for all purposes and
staying the lawsuits until March 29, 2003 or until we
provide notice of a change-of-control transaction.

On March 28, 2003, the Court entered an
Order Maintaining the Status Quo, which continued its prior Case
Management Order in all respects until the earlier of a date
selected by the Court or until we provide the notice
contemplated by the Case Management Order. On April 10,
2003, our Board of Directors approved a merger agreement with
Pharma Services Holding, Inc. which provides for payment to our
shareholders of $14.50 per share in cash. We expect 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

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dismissal with prejudice of all claims against
all defendants including us and our directors. The settlement is
conditional, among other things, on the execution of a formal
Stipulation and Agreement of Compromise Settlement and Release,
or 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 us. No other payments would be
required from us or any other party under the terms of the
settlement. The parties are currently finalizing the terms of
the Stipulation and 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. We deny any alleged liability in
the amended complaint and, in the event the settlement is not
consummated for any reason, we intend to defend these claims
vigorously.


On June 13, 2003, ENVOY Corporation, or
ENVOY, and Federal filed suit against us, 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. Plaintiffs claim
that we are 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, ENVOY
and us. We have 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. We believe that the allegations made by
ENVOY and Federal are without merit and intend to defend the
case vigorously.

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






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

During the three months ended June 30, 2003,
options to purchase 4,000 shares of our common stock were
exercised at an average exercise price of $4.3175 per share in
reliance on Rule 701 under the Securities Act of 1933. We
granted such options prior to becoming subject to the
requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, pursuant to our Non-qualified
Employee Incentive Stock Option Plan.






|        |                                                     
|------- | ----------------------------------------------------
|Item 3. | Defaults upon Senior
    Securities  Not applicable






|        |                                                                         
|------- | ------------------------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders  Not applicable

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|        |                                       
|------- | --------------------------------------
|Item 5. | Other Information  Not
    applicable








|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

| |      |  |  |                                                                                                                                
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, As Adopted Pursuant to Section 302 of
    The Sarbanes-Oxley Act of 2002.
| | 31.2 |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, 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.

(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.

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SIGNATURES

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



| |                               | 
| | ----------------------------- | 
| | QUINTILES TRANSNATIONAL CORP. | 
| | Registrant                    | 

|      |  |                 |  |                                                                                                                                              
|----- |  | --------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|     
|Date: |  | August 12, 2003 |  | /s/ DENNIS B. GILLINGS
    -------------------------------------
    Dennis B. Gillings, Chairman                                            
|     
|Date: |  | August 12, 2003 |  | /s/ PAMELA J. KIRBY
    -------------------------------------
    Pamela J. Kirby, Chief Executive Officer                                   
|     
|Date: |  | August 12, 2003 |  | /s/ JAMES L. BIERMAN
    -------------------------------------
    James L. Bierman, Executive Vice
    President and Chief Financial Officer

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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    | Description
|        |    |            
|        | 31 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, As Adopted Pursuant to Section 302 of
    The Sarbanes-Oxley Act of 2002.
|        | 31 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, 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.

45