Quintiles Transnational 10K/A 2002 Annual report (amended)

FORM 10-K/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 2

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 000-23520

QUINTILES TRANSNATIONAL CORP.

(Exact name of registrant as specified in its charter)


North Carolina (State of incorporation)		56-1714315 (I.R.S. Employer Identification Number)

4709 Creekstone Drive, Suite 200 Durham, North Carolina (Address of principal executive office)		27703-8411 (Zip Code)

Registrant’s telephone number, including area code: (919) 998-2000

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share (and Rights Attached Thereto)
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ]

The aggregate market value of the registrant’s Common Stock at March 31, 2003 held by those persons deemed by the registrant to be non-affiliates was approximately $1,344,254,791.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x No o

The aggregate market value of the registrant’s Common Stock at June 28, 2002 held by those persons deemed by the registrant to be non-affiliates was approximately $1,344,280,396.

As of March 31, 2003 (the latest practicable date), there were 118,283,920 shares of the registrant’s Common Stock, $.01 par value per share, outstanding.

EXPLANATORY NOTE

Quintiles Transnational Corp. is filing this amendment to its Annual Report on Form 10-K for the year ended December 31, 2002, which was originally filed on February 24, 2003 and amended on April 29, 2003. This report clarifies or expands certain disclosures pertaining primarily to the Company’s revenue recognition policy in its Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, certain balance sheet items have been reclassified. Specifically, the Company is no longer grossing up its balance sheet for amounts representing accounts receivable billed to customers in accordance with contract terms for services that have not yet been rendered. Also, the Company is presenting separately from commercial rights and royalties on its balance sheet certain accounts receivable and advances to customers. The revisions had no effect on previously reported net income (loss), shareholders’ equity or net income (loss) per share. This report continues to be presented as of the date of the original filing, and the Company has not updated the disclosure in this report to a later date. All information in this report and the original filing, as amended, is subject to updating and supplementing as provided in the Company’s periodic reports filed with the Securities and Exchange Commission.

QUINTILES TRANSNATIONAL CORP.

Form 10-K Annual Report

INDEX


		Page

PART II
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation		4
	Item 8. Financial Statements and Supplementary Data		33
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K		78

PART II


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

Quintiles Transnational Corp. helps improve healthcare worldwide by providing a broad range of professional services, information and partnering solutions to the pharmaceutical, biotechnology and healthcare industries. Based on industry analyst reports, we are the largest company in the pharmaceutical outsourcing services industry as ranked by 2002 revenues. The revenues of the second largest company were approximately $1.1 billion less than our 2002 revenues.

In May 2002, we completed the formation of our previously announced healthcare informatics joint venture, Verispan, with McKesson, which is designed to leverage the operational strengths of the healthcare information businesses of each company. We are equal co-owners of a majority of the equity of Verispan with McKesson. Verispan has licensed data products to McKesson and us for use in our core businesses. Under the license arrangement, we continue to have access to Verispan’s commercially available market information and products, at no further cost to us, to enhance our service delivery to and partnering with our customers.

On October 14, 2002, we announced that Pharma Services Company, a newly formed company owned by our Chairman of the Board and Founder, made a non-binding proposal to acquire all of our outstanding shares for a cash price of $11.25 per share. In response to the proposal, our Board of Directors established a special committee of independent directors to act on our behalf with respect to the proposal or alternatives in the context of evaluating what is in our best interest and the best interest of our shareholders. On November 11, 2002, the special committee 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 April 10, 2003, following the unanimous recommendation of the special committee, our Board of Directors approved a merger transaction with Pharma Services Holding, Inc., or Pharma Services, for our public shareholders to receive $14.50 per share in cash. Pharma Services was founded by Dennis B. Gillings, Ph.D., the Company’s Chairman of the Board and Founder, and One Equity Partners, LLC, the private equity arm of Bank One Corporation. Dr. Gillings and certain of his affiliates will retain their equity interest in the Company. In addition, in order to finance the transaction, Pharma Services has received an equity commitment of $415.7 million from One Equity Partners, LLC and debt commitments totaling $875 million from Citicorp North America, Inc. and Citigroup Global Markets Inc. Pharma Services also intends to use approximately $586 million of the Company’s existing cash to fund the transaction. The transaction, which is anticipated to be completed later this year, is subject to Pharma Services’ completion of its committed financing and customary conditions, including regulatory and shareholder approvals.

Results of Operations

We adopted Emerging Issues Task Force Issue 01-14 on January 1, 2002, as required. This new accounting guidance requires us to report reimbursed service costs as part of service revenues. Our reimbursed service costs include such items as payments to investigators and travel expenses for our clinical monitors and sales representatives. Historically, we have not reported these reimbursed service costs as service revenues since we do not earn a profit on these costs. In accordance with this new accounting guidance, we have reclassified reimbursed service costs to service revenues for all periods presented. However, it was impracticable to identify and reclassify certain prior period commercialization reimbursed service costs and, accordingly, historical results have not been restated for these costs. These commercialization reimbursed service costs totaled approximately $60.4 million for the year ended December 31, 2002.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Gross revenues for the year ended December 31, 2002 were $1.99 billion versus $1.88 billion for the year ended December 31, 2001. Gross revenues include service revenues, revenues from commercial rights and royalties and revenues from investments. Net revenues exclude 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):


	2002		2001

Service revenues	$	1,868,324	$	1,857,509
Less: reimbursed service costs		399,650		263,429

Net service revenues		1,468,674		1,594,080
Commercial rights and royalties		110,381		25,792
Investments		13,704		611

Total net revenues	$	1,592,759	$	1,620,483

•

Service revenues were $1.87 billion for 2002 compared to $1.86 billion for 2001. Service revenues less reimbursed service costs, or net service revenues, for 2002 were $1.47 billion, a decrease of $125.4 million or (7.9%) over net service revenues of $1.59 billion in 2001. Included in net service revenues for 2002 was $20.3 million from our informatics group as compared to $58.2 million from that group for 2001. Our informatics group was transferred to a joint venture during May 2002, therefore revenues for this group are not included in our net service revenues since the date of transfer. Net service revenues for 2002 were positively impacted by approximately $15.2 million due to the effect of foreign currency fluctuations. The positive foreign currency fluctuation due to the weakening of the US Dollar relative to the euro and the British pound was partially offset by the strengthening of the US Dollar relative to the South African Rand and the Japanese yen. Net service revenues increased in the Asia Pacific region $29.4 million or 18.0% to $193.2 million, which was negatively impacted by $2.2 million due to the effect of foreign currency fluctuations. Net service revenues increased $67.9 million or 11.5% to $658.7 million in the Europe and Africa region, which was positively impacted by $18.2 million due to the effect of foreign currency fluctuations. Net service revenues decreased $222.7 million or (26.5%) to $616.8 million in the Americas region primarily as a result of the decline in the commercial services group revenues.

	•		Commercial rights and royalties revenues, which include product revenues, royalties and commissions, for 2002 were $110.4 million, an increase of $84.6 million over 2001 commercial rights and royalties revenues of $25.8 million. Commercial rights and royalties revenues were positively impacted by approximately $3.8 million due to the effect of foreign currency fluctuations related to the weakening of the US Dollar relative to the euro. These revenues include products for which we have acquired certain commercial rights, such as the dermatology products, Solaraze™ and ADOXA™. Commercial rights and royalties revenues for 2002 were reduced by approximately $19.8 million versus $8.1 million for 2001 for amortization of payments made by us to our customers. The 2001 amount reflects the contract becoming operational in the third quarter of 2001. These payments are considered incentives and are amortized against revenues over the service period of the contract. The $84.6 million increase in commercial rights and royalties revenues is primarily the result of (1) our 2002 acquisition of certain assets of Bioglan Pharma, Inc., and its suite of dermatology products, which contributed approximately $22.4 million of 2002 revenues, (2) a new risk sharing contract in Europe with a large pharmaceutical customer which contributed approximately $18.9 million of 2002 revenues, and (3) our contracts with Scios Inc. and Kos Pharmaceuticals, Inc., which contributed $61.3 million of 2002 revenues versus $12.9 million of 2001 revenues. These increases were partially offset by a decrease of approximately $5.1 million in the revenues attributable to miscellaneous contracts and activities. For the year ended December 31, 2002, approximately 55.5% of our commercial rights and royalties revenues was attributable to the contracts with Scios and Kos, approximately 17.2% was attributable to the risk sharing contract in Europe, approximately 20.3% was attributable to the suite of dermatology products and the remaining 7.0% was attributable to miscellaneous contracts and activities. In December 2002, we agreed to permit Scios to hire the sales force we had previously provided under contract to them, effective December 31, 2002 in return for (1) Scios reimbursing us for the operating profit that we would have earned between December 31, 2002 and the first date on which Scios would have been permitted to hire the sales force under the contract terms and (2) advancing from May 31, 2003 to December 31, 2002, our ability to exercise the remaining unexercisable warrants. The early settlement of our service obligation resulted in an accelerated recognition of revenues of approximately $9.3 million in the fourth quarter of 2002.

	•		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 2002 were $13.7 million versus $611,000 for 2001. Included in 2002 and 2001 are $4.3 million and $14.0 million, respectively, of impairment losses on investments whose decline in fair value was considered to be other than temporary.

Costs of revenues were $1.37 billion for 2002 versus $1.32 billion in 2001. Below is a summary of these costs (in thousands):


	2002		2001

Reimbursed service costs	$	399,650	$	263,429
Service costs		775,447		931,029
Commercial rights and royalties costs		106,146		26,800
Investment costs		320		1,914
Depreciation and amortization		86,148		95,095

	$	1,367,711	$	1,318,267

	•		Reimbursed service costs were $399.7 million and $263.4 million for 2002 and 2001, respectively. It was impracticable to identify and reclassify certain commercialization reimbursed service costs, and accordingly, the 2001 results have not been restated for these costs. These commercialization reimbursed service costs totaled approximately $60.4 million for 2002.

	•		Service costs, which include compensation and benefits for billable employees, and certain other expenses directly related to service contracts, were $775.4 million or 52.8% of 2002 net service revenues versus $931.0 million or 58.4% of 2001 net service revenues. This reduction is primarily a result of the continued effect of our process enhancements and cost reduction efforts.

	•		Commercial rights and royalties costs, which include compensation and related benefits for employees, amortization of commercial rights, infrastructure costs of the PharmaBio Development group and other expenses directly related to commercial rights and royalties, were $106.1 million for 2002 versus $26.8 million for 2001. These costs include services and products provided by third parties, as well as services provided by our other service groups totaling approximately $54.5 million for 2002 and $12.9 million for 2001. The year 2002 also includes costs to launch and market Solaraze™ and ADOXA™ and expenses relating to the risk sharing contract in Europe.

	•		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 $320,000 in 2002 versus $1.9 million in 2001.

	•		Depreciation and amortization, which include depreciation of our property and equipment and amortization of our definite-lived intangible assets except commercial rights, decreased to $86.1 million for 2002 versus $95.1 million for 2001. This decrease is primarily due to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which requires that all goodwill and indefinite-lived intangible assets no longer be amortized but reviewed at least annually for impairment. In addition, depreciation expense decreased $2.9 million as a result of the transfer of our informatics group to Verispan. During 2002, we completed the goodwill transitional impairment test as of January 1, 2002, as required, and the annual impairment test as of July 31, 2002, in which no goodwill impairment was deemed necessary at either date.

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 $508.1 million or 31.9% of total net revenues in 2002 versus $520.7 million or 32.1% of total net revenues in 2001. General and administrative expenses decreased $12.6 million primarily due to realization of the benefits from our restructurings, including efficiencies created through the implementation of our shared service centers, and the deployment of our Internet initiative products into day-to-day operations resulting in our research and development expenses decreasing to $2.1 million in 2002 from $18.1 million in 2001. These decreases were partially offset by increases in Japan and Europe primarily due to the effect of foreign currency fluctuations.

Net interest income, which represents interest income received from bank balances and investments in debt securities net of interest expense incurred on lines of credit, notes and capital leases, was $14.2 million in 2002 versus $16.7 million in 2001. Although we had an increase in our investable funds during 2002, we experienced a decrease in interest income due to a decline in interest rates.

Other expense was $7.1 million in 2002 versus $489,000 in 2001. The increase is a result of several factors, including the effects of foreign currency translations, disposals of assets and transaction costs. Included in the 2002 transaction costs are approximately $3.4 million of expenses relating to the activities of the special committee of our Board of Directors and its financial and legal advisors, and approximately $2.7 million of expenses associated with the formation of the Verispan joint venture.

In 2001, we recognized a $325.6 million impairment on our investment in WebMD Corporation, or WebMD, common stock. This included a $334.0 million write-down in the third quarter of 2001 of our cost basis in our investment in WebMD whose decline in fair value was considered to be other than temporary. In the fourth quarter of 2001 we recognized an $8.5 million gain on our investment in WebMD as a result of the sale of all 35 million shares of WebMD common stock to WebMD.

During 2001, we recognized $83.2 million of income from the settlement of litigation between WebMD and us. We received $185.0 million in cash for all 35 million shares of WebMD common stock we owned and to resolve the remaining disputes. Also as part of the settlement, WebMD surrendered the warrant to purchase 10 million shares of our common stock.

In 2001 we announced a strategic plan that has been implemented across each service line and geographic area of our business which we believe will allow us to meet the changing needs of our customers and to increase our opportunity for growth by committing ourselves to innovation, quality and efficiency. In connection with this plan, we recognized $54.2 million of restructuring charges in 2001 which included approximately $1.1 million relating to a 2000 restructuring plan. In 2002, we revised our estimates of the restructuring plan which we adopted during 2001. This review resulted in a reduction of $9.1 million in our accruals, including $5.7 million in severance payments and $3.4 million in exit costs. However, also during 2002, we recognized $9.1 million of restructuring charges as a result of the continued implementation of the strategic plan we announced during 2001. This restructuring charge included revisions to the 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.

During 2001, we recognized a $27.1 million charge to write-off goodwill and other operating assets primarily relating to goodwill recorded in four separate acquisitions in our commercial services segment and personal computers including desktops and laptops that were no longer in service. The goodwill was deemed impaired and written-off due to changing business conditions and strategic

direction.

Income before income taxes was $123.7 million or 7.8% of total net revenues for 2002 versus a loss before income taxes of $262.5 million for 2001.

The effective income tax rate was 33.5% for 2002 versus (33.0%) for 2001. Since we conduct operations on a global basis, our effective income tax rate may vary. See “Income Taxes.”

During 2002, we recognized $569,000 of losses from equity in unconsolidated affiliates and other which represents our pro rata share of net losses of unconsolidated affiliates, primarily Verispan’s net loss since its formation in May 2002, net of minority interest in a consolidated subsidiary.

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

Because the original acquisition of ENVOY Corporation, or ENVOY, our electronic data interchange unit, qualified as a tax-free reorganization, our tax basis in the acquisition is allowed to be determined by substituting the tax basis of the previous shareholders of ENVOY. However, when we sold ENVOY to WebMD Corporation during 2000, the tax basis of the previous shareholders was not available to us since ENVOY had been a publicly traded corporation at the time of the original acquisition. Therefore, we had to estimate our tax basis in ENVOY by reviewing financial statements, tax returns and other public documents which were available to us at that time. We used the estimated tax basis to calculate the extraordinary gain on the sale of ENVOY, net of income taxes, as reported in our 2000 financial statements. In September 2001, we received the results of a tax basis study completed by our external tax advisors, which was prepared so that we could prepare and file our 2000 U.S. Corporate income tax return. Based on this study, we adjusted the estimate of our tax basis in ENVOY, resulting in an approximate $142.0 million reduction in the income taxes. This change in estimate resulted in an increase for the same amount in the extraordinary gain on the sale of ENVOY.

Net income was $127.3 million for 2002 versus a net loss of $33.8 million for 2001.

Analysis by Segment:

During the first quarter of 2002, we transferred the portion of the operations of our Late Phase, primarily Phase IV, clinical group that was in the commercial services group to the product development group in order to consolidate the operational and business development activities. All historical information presented has been revised to reflect this change.

The following table summarizes the operating activities for our reportable segments for the years ended December 31, 2002 and 2001, 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
	2002			2001			Growth %			2002		Revenues			2001			Revenues

Product development	$	944.9		$	913.9			3.4	%	$	477.5		50.5	%	$	438.4			48.0	%
Commercial services		558.0			634.9			(12.1	)		207.7		37.2			197.5			31.1
PharmaBio Development		124.1			26.4			370.0			17.6		14.2			(2.3	)		(8.8	)
Informatics		20.3			58.2			(65.0	)		8.0		39.4			27.2			46.7
Eliminations		(54.5	)		(12.9	)		—			—		—			—			—

	$	1,592.8		$	1,620.5			(1.7	%)	$	710.8		44.6	%	$	660.7			40.8	%

Net service revenues for the product development group were $944.9 million for 2002 compared to $913.9 million for 2001. Net services revenues for 2002 were positively impacted by approximately $6.7 million due to the effect of foreign currency fluctuations. Net service revenues increased in the Asia Pacific region $21.2 million or 27.5% to $98.2 million including a negative impact of approximately $1.3 million due to the effect of foreign currency fluctuations. Net service revenues increased $18.8 million or 5.2% to $380.0 million in the Europe and Africa region, which was positively impacted by $8.4 million due to the effect of foreign currency fluctuations. Net service revenues decreased $9.0 million or (1.9%) to $466.6 million in the Americas region primarily as a result of increased competition.

Contribution for the product development group was $477.5 million for 2002 compared to $438.4 million for 2001. As a percentage of net service revenues, contribution margin was 50.5% for 2002 compared to 48.0% for 2001. Although billable headcount remained relatively constant for the product development group, billable headcount decreased approximately 3% in the clinical development, or CDS, line of business while billable headcount increased approximately 11% in the early development and laboratory services, or EDLS, line of business. Service costs in our EDLS line of business tend to be proportional to net revenues. The improvement of $39.1 million and 250 basis points in contribution margin was directly related to our reduction in billable headcount in CDS, as well as the realignment of our billable headcount in CDS from higher cost countries such as the United States to lower cost countries, such as South Africa.

Net service revenues for the commercial services group were $558.0 million for 2002 compared to $634.9 million for 2001. Net service revenues for 2002 were positively impacted by approximately $8.7 million due to the effect of foreign currency fluctuations. Net service revenues increased in the Asia Pacific region $7.7 million or 9.9% to $84.9 million, which was negatively impacted by $935,000 due to the effect of foreign currency fluctuations. Net service revenues increased $15.7 million or 7.1% to $236.5 million in the Europe and Africa region, which was positively impacted by $10.0 million due to the effect of foreign currency fluctuations. Net service revenues decreased $100.2 million or (29.8%) to $236.6 million in the Americas region primarily as a result of a reduction in new product launches and an increase in the number of drugs losing patent protection.

Contribution for the commercial services group was $207.7 million for 2002 compared to $197.5 million for 2001. As a percentage of net service revenues, contribution margin was 37.2% for 2002

compared to 31.1% for 2001. The improvement of $10.3 million and 610 basis points in contribution margin was directly related to our reduction in billable headcount of approximately 22.2%, as we migrated from being dependent 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 $97.7 million during 2002 as compared to 2001 due to the $84.6 million increase in commercial rights and royalties revenues and the $13.1 million increase in investment revenues. The commercial rights and royalties costs increased approximately $79.3 million during the same period primarily as a result of several factors including an approximate $41.6 million increase in service costs provided by our commercial services group relating primarily to our contracts with Scios and Kos, $9.3 million of costs associated with the launch and marketing of Solaraze™ and ADOXA™ and $25.8 million of expenses relating to our risk sharing contracts in Europe. The investment costs decreased approximately $1.6 million during 2002 as compared to 2001. The contribution for this segment increased by $19.9 million from 2001 to 2002. The commercial rights and royalties revenues (net of related costs) increased the contribution of this group by approximately $5.2 million when compared to 2001 due to the successful launch of the dermatology products and the successful performance of our commercial rights and royalties contracts. The investment revenues (net of related costs) increased the contribution of this group by approximately $14.7 million when compared to 2001.

Net revenues, service costs and contribution for the informatics group decreased approximately $37.9 million, $18.7 million and $19.2 million, respectively, during 2002 as compared to 2001. These decreases are primarily due to the transfer of this group into the joint venture in May 2002; therefore, the 2002 results include only five months of revenues and service costs for the informatics group.

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

Gross revenues for the year ended December 31, 2001 were $1.88 billion versus $1.87 billion for the year ended December 31, 2000. Gross revenues include service revenues, revenues from commercial rights and royalties and investment revenues. Net revenues exclude 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):


	2001		2000

Service revenues	$	1,857,509	$	1,860,316
Less: reimbursed service costs		263,429		210,588

Net service revenues		1,594,080		1,649,728
Commercial rights and royalties		25,792		10,182
Investments		611		579

Total net revenues	$	1,620,483	$	1,660,489

	•		Service revenues were $1.86 billion for 2001 compared to $1.86 billion for 2000. Net service revenues for 2001 were $1.59 billion, a decrease of $55.6 million or (3.4%) over net service revenues of $1.65 billion in 2000. However, there was a negative impact of approximately $49.0 million due to the effect of foreign currency fluctuations related to the strengthening of the US Dollar relative to the euro, other European currencies and the Japanese yen combined with the effects of the devaluation of several currencies including the South African Rand. Net service revenues for the commercial services group decreased $113.6 million or (15.2%) as a result of large contracts that were terminated or converted in-house by our customers instead of being renewed. The decrease was partially offset by an increase of approximately $11.7 million from our Phase I development services and an increase of approximately $76.6 million from our clinical development services, primarily Phase II and III services. Net service revenues increased in the Asia Pacific region $44.0 million or 36.7% to $163.8 million but decreased $116.7 million or (12.2%) to $839.5 million in the Americas region primarily resulting from the decline in the commercial services segment. Net service revenues in the Europe and Africa region increased $20.3 million or 3.5% to $601.8 million.

	•		Commercial rights and royalties revenues, which include product revenues, royalties and commissions, for 2001 were $25.8 million, an increase of $15.6 million over 2000 commercial rights and royalties revenues of $10.2 million. The increase was primarily attributable to the contract with Scios becoming operational by the third quarter of 2001 contributing approximately $12.9 million of the 2001 revenues.

	•		Investment revenues related to our PharmaBio Development group’s financing arrangements, which include gains and losses from the sale of equity investments and impairments from other than temporary declines in the fair values of our direct and indirect investments, for 2001 were $611,000 versus $579,000 for 2000. Included in 2001 and 2000 are $14.0 million and $5.5 million, respectively, of impairment losses on investments whose decline in fair value was considered to be other than temporary.

Costs of revenues were $1.32 billion for 2001 versus $1.30 billion in 2000. Below is a summary of these costs (in thousands):


	2001		2000

Reimbursed service costs	$	263,429	$	210,588
Service costs		931,029		986,343
Commercial rights and royalties costs		26,800		9,441
Investment costs		1,914		—
Depreciation and amortization		95,095		91,242

	$	1,318,267	$	1,297,614

	•		Reimbursed service costs were $263.4 million and $210.6 million for 2001 and 2000, respectively.

	•		Service costs, which include compensation and benefits for billable employees, and certain other expenses directly related to service contracts, were $931.0 million or 58.4% of 2001 net service revenues versus $986.3 million or 59.8% of 2000 net service revenues. This reduction is primarily a result of the continued effect of our process enhancements and cost reduction efforts.

	•		Commercial rights and royalties costs, which include compensation and related benefits for employees, amortization of commercial rights, infrastructure costs of the PharmaBio Development group and other expenses directly related to commercial rights and royalties, were $26.8 million for 2001 versus $9.4 million for 2000. These costs include services and products provided by third parties, as well as services provided by our other service groups totaling approximately $12.9 million for 2001.

	•		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 $1.9 million in 2001, the initial year of the group’s operations.

	•		Depreciation and amortization, which include depreciation of our property and equipment and amortization of our definite-lived intangible assets except commercial rights, increased to $95.1 million for 2001 versus $91.2 million for 2000. Depreciation expense increased $4.2 million due to the increase in our capitalized asset base while amortization expense decreased $300,000 primarily as a result of the write-off of goodwill.

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 $520.7 million or 32.1% of total net revenues in 2001 versus $565.1 million or 34.0% of total net revenues in 2000. General and administrative expenses decreased primarily due to the effects of reductions relating to our restructuring activities including a decrease of approximately $15.4 million in the spending for our Internet initiative. These reductions were partially offset by an increase in costs of approximately $7.8 million associated with the continued implementation of our shared service center initiative and approximately $9.0 million associated with the realignment of our business development strategy.

Net interest income, which represents interest income received from bank balances and

investments in debt securities, net of interest expense incurred on lines of credit, notes and capital leases, was $16.7 million in 2001 versus $15.9 million in 2000.

Other expense was $489,000 in 2001 versus other income of $725,000 in 2000.

In 2001, we recognized a $325.6 million impairment on our investment in WebMD common stock. This included a $334.0 million write-down in the third quarter of 2001 of our cost basis in our investment in WebMD due to an other than temporary decline in its fair value and an $8.5 million gain on our investment in WebMD as a result of the sale of all 35 million shares of WebMD common stock to WebMD.

In response to a change in demand for our services, we announced restructuring plans during 2000, resulting in a $58.6 million restructuring charge. This consisted of $33.2 million related to severance payments, $11.3 million related to asset impairment write-offs and $14.0 million in exit costs. As of December 31, 2001, all affected individuals, approximately 990 positions, had been notified of their termination and approximately $1.5 million remained to be spent.

During the third quarter of 2001, we announced a strategic plan that has been implemented across each service line and geographic area of our business to meet the changing needs of our customers and to increase our opportunity for growth by committing ourselves to innovation, quality and efficiency.

In connection with the plan, we recognized $54.2 million of restructuring charges that included approximately $1.1 million relating to a 2000 restructuring plan. The restructuring charges consisted of $33.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.9 million of exit costs. As part of these restructurings, approximately 1,040 positions were eliminated. As of December 31, 2001, 755 individuals had been notified of their termination of which 485 had been paid and were no longer employed by us.

During 2001, we recognized a $27.1 million charge to write-off goodwill and other operating assets primarily relating to goodwill recorded in four separate acquisitions in our commercial services group and personal computers including desktops and laptops that were no longer in service. The goodwill was deemed impaired and written-off due to changing business conditions and strategic direction.

During 2000, we recognized a $17.3 million loss on the disposal of our general toxicology operations in Ledbury, Herefordshire, UK.

Loss before income taxes was $262.5 million for 2001 versus $51.0 million for 2000.

The effective income tax rate was (33.0%) for 2001 and 2000, respectively. Since we conduct operations on a global basis, our effective income tax rate may vary. See “Income Taxes.”

During 2000, we completed the sale of ENVOY to WebMD. The results of ENVOY, $16.8 million in 2000, are included in our consolidated statement of operations as a discontinued operation. The results of ENVOY do not include any interest expense, management fee or transaction costs

allocated by us.

We received $400 million in cash and 35 million shares of WebMD common stock in exchange for our entire interest in ENVOY and a warrant to acquire 10 million shares of our common stock at $40 per share, exercisable for four years. We recorded an extraordinary gain on the sale of $436.3 million, net of income taxes of $184.7 million. During 2001, we completed a tax basis study for ENVOY. As a result of this study, our tax basis in ENVOY was determined which resulted in an approximate $142.0 million reduction in the income taxes provided on the sale of ENVOY.

Net loss was $33.8 million for 2001 versus a net income of $418.9 million for 2000.

Analysis by Segment:

The following table summarizes the operating activities for our reportable segments for the years ended December 31, 2001 and 2000, 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
	2001			2000		Growth %			2001			Revenues			2000		Revenues

Product development	$	913.9		$	841.5		8.6	%	$	438.4			48.0	%	$	382.6		45.5	%
Commercial services		634.9			748.5		(15.2	)		197.4			31.1			247.6		33.1
PharmaBio Development		26.4			10.8		145.4			(2.3	)		(8.8	)		1.3		12.3
Informatics		58.2			59.7		(2.6	)		27.2			46.7			33.2		55.7
Eliminations		(12.9	)		—		—			—			—			—		—

	$	1,620.5		$	1,660.5		(3.4	%)	$	660.7			40.8	%	$	664.7		40.0	%

Net service revenues for the product development group were $913.9 million for 2001 compared to $841.5 million for 2000. Net service revenues for 2001 were negatively impacted by approximately $30.1 million due to the effect of foreign currency fluctuations. Net service revenues increased in the Asia Pacific region $25.6 million or 49.8% to $77.0 million including a negative impact of approximately $8.7 million due to the effect of foreign currency fluctuations. Net service revenues increased $31.5 million or 9.5% to $361.3 million in the Europe and Africa region including a negative impact of approximately $20.7 million due to the effect of foreign currency fluctuations. Net service revenues increased $15.3 million or 3.3% to $475.7 million in the Americas region. Our product development group experienced growth in our Phase I and clinical development services, primarily Phase II and III services.

Contribution for the product development group was $438.4 million for 2001 compared to $382.6 million for 2000. As a percentage of net service revenues, contribution margin was 48.0% for 2001 compared to 45.5% for 2000. Our product development benefited during 2001 from process

enhancements and cost reduction efforts in the American and European operations.

Net service revenues for the commercial services group were $634.9 million for 2001 compared to $748.5 million for 2000. Net service revenues for 2001 were negatively impacted by approximately $20.0 million due to the effect of foreign currency fluctuations. Net service revenues increased in the Asia Pacific region $18.8 million or 32.1% to $77.2 million including a negative impact of approximately $8.7 million due to the effect of foreign currency fluctuations. Net service revenues decreased $17.0 million or (7.2%) to $237.8 million in the Europe and Africa region including a negative impact of approximately $11.3 million due to the effect of foreign currency fluctuations. Net service revenues decreased $115.1 million or (25.5%) to $336.5 million in the Americas region primarily as the effect of large contracts being converted in-house or terminated by our customers instead of being renewed.

Contribution for the commercial services group was $197.4 million for 2001 compared to $247.6 million for 2000. As a percentage of net service revenues, contribution margin was 31.1% for 2001 compared to 33.1% for 2000. The contribution for our commercial services group decreased as a direct result of the reduction in service revenues. In addition, the contribution was negatively impacted by the effects of a collection issue with a non-pharmaceutical customer receivable during 2001.

Net revenues for the PharmaBio Development group increased $15.6 million during 2001 as compared to 2000 due to an increase in the commercial rights and royalties revenues. Investment revenues remained relatively constant increasing slightly by $32,000 to $611,000 in 2001. This group benefited during 2001 from the SCIOS contract becoming operational during the third quarter of 2001 contributing approximately $12.9 million to the 2001 net revenues. The commercial rights and royalties costs increased $17.4 million during 2001 to $26.8 million. Included in the 2001 commercial rights and royalties costs is approximately $12.9 million in service costs provided by our commercial services group in connection with the SCIOS contract. The PharmaBio Development group’s initial year of operation was 2001.

Net revenues and contribution for the informatics group decreased approximately $1.5 million and $6.0 million, respectively, during 2001 as compared to 2000. These decreases are primarily due to the effects of the strategic plan and related restructuring, the costs associated with developing new data products and a decrease in new business as a result of the dispute with WebMD and concerns regarding our continuing ability to receive data from WebMD.

Liquidity and Capital Resources

Cash and cash equivalents were $644.3 million at December 31, 2002 as compared to $565.1 million at December 31, 2001.

Cash flows provided by operations were $246.5 million in 2002 versus $247.4 million and $10.5 million in 2001 and 2000, respectively. Increasing cash flows from operations in 2001 was $63.2 million related to the settlement of the litigation with WebMD and $56.2 million for income tax refunds.

Cash flows used in investing activities in 2002 were $152.3 million and $16.4 million in 2001, versus $270.4 million of cash flows provided by investing activities in 2000. Investing activities consisted primarily of the acquisition of commercial rights, capital asset purchases and acquisition of businesses and purchases and sales of investments.

Capital asset purchases required cash outlays of $40.2 million, $134.0 million and $108.8 million in 2002, 2001 and 2000, respectively. Capital asset purchases by our informatics group was $666,000 in

2002 versus $10.0 million and $7.0 million in 2001 and 2000, respectively. The decrease in 2002 was due, in part, to the transfer of this group to Verispan. The $134.0 million capital asset purchases in 2001 included the final payment of $58 million in connection with our 1999 acquisition of Aventis S.A.’s Drug Innovation and Approval Facility, $19.9 million for the implementation of the shared service centers and $5.7 million for our informatics group’s data center. Capital asset purchases in 2000 included $25.2 million for the implementation of the shared service centers and $8.0 million for the purchase of our training academy in Japan.

During 2002, cash used to acquire commercial rights and royalties related assets was $88.3 million versus $36.7 million during 2001. The 2002 acquisitions included $70.0 million of advances to a customer representing payments under our agreement with Eli Lilly and Company. Also in 2002, we acquired certain assets of Bioglan Pharma, Inc., including its management team and sales force and approximately $1.6 million in cash, for approximately $27.9 million. In 2001, we acquired the rights to market for 14 years in the United States, Canada and Mexico SkyePharma’s Solaraze™, a treatment of actinic keratosis, for $26.7 million.

In 2001, we jointly announced with WebMD the settlement of litigation between the companies and the resolution of our disputes. As part of the settlement, WebMD paid us $185.0 million in cash for all 35 million shares of WebMD common stock we held and to resolve the remaining disputes. The proceeds were allocated as follows: $63.2 million related to the settlement of litigation was reported as cash flows provided by operations and $121.8 million related to the sale of WebMD common stock was reported as cash flows from investing activities. We will also receive an additional payment from WebMD if, on or before June 30, 2004, WebMD is acquired for a price greater than $4.00 per share or its ENVOY subsidiary is acquired for a price greater than $500 million. Also as part of the settlement, WebMD surrendered the warrant it held to purchase 10 million shares of our common stock.

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


	December 31, 2002			December 31, 2001

Trade accounts receivable, net	$	129,748		$	164,971
Unbilled services		120,383			166,754
Unearned income		(141,710	)		(111,837	)

Net service receivables outstanding	$	108,421		$	219,888

Number of days of service revenues outstanding		21			43

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 $36.7 million at December 31, 2002 versus $37.0 million at December 31, 2001. Our investments in debt securities consist primarily of U.S. Government Securities, which are callable by the issuer, at par, and money funds.

Investments in marketable equity securities at December 31, 2002 were $64.9 million, a decrease of $13.1 million, as compared to $78.0 million at December 31, 2001. This decrease is due to the sale of equity investments. In accordance with our policy to continually review declines in fair value of our marketable equity securities for declines that may be other than temporary, we recorded a loss of approximately $335,000 in 2002 to establish a new cost basis for certain investments.

Investments in non-marketable equity securities and loans at December 31, 2002 were $46.4 million, an increase of $8.9 million, as compared to $37.6 million at December 31, 2001. In accordance with our policy to review the carrying values of our non-marketable equity securities and loans if the facts and circumstances suggest that a potential impairment, representing an other than temporary decline in fair value, may have occurred, we recorded a loss of approximately $4.0 million in 2002 to establish a new cost basis for certain investments.

In 2002, we completed the formation of our healthcare informatics joint venture, Verispan. We contributed the net assets of our informatics group and funded $10.0 million to Verispan. Accordingly, we have recorded our investment in Verispan, which is approximately $120.7 million at December 31, 2002, as an investment in unconsolidated affiliates.

We have available to us a £10.0 million (approximately $16.0 million) unsecured line of credit with a U.K. bank and a £1.5 million (approximately $2.4 million) general bank facility with the same U.K. bank. At December 31, 2002 and 2001, 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 from time to time until March 1, 2002. In February 2002, the Board extended this authorization until March 1, 2003. During the first half of 2002, we entered into agreements to repurchase approximately 1.6 million shares for an aggregate price of $22.2 million. We did not enter into any agreements to repurchase our common stock during the second half of 2002. During 2001, we entered into agreements to repurchase approximately 1.7 million shares for an aggregate price of $27.5 million. Shareholders’ equity increased $143.3 million to $1.60 billion at December 31, 2002 from $1.46 billion at December 31, 2001.

Below is a summary of our future payment commitments by year under contractual obligations as of December 31, 2002 (in thousands):


	2003		2004		2005		2006		2007		Thereafter		Total

Long-term debt	$	3,347	$	2,179	$	1,957	$	1,702	$	941	$	1,431	$	11,557
Obligations held under capital leases		19,301		7,330		1,213		617		482		1,433		30,376
Operating leases		62,443		39,776		26,548		22,078		18,970		72,191		242,006
Service agreement		20,000		20,000		20,000		20,000		20,000		15,007		115,007
PharmaBio funding commitments in various commercial rights and royalties		46,828		18,695		15,520		9,914		3,834		—		94,791
PharmaBio funding commitments in non-marketable equity securities and loans		32,344		10,144		—		—		—		—		42,488

	$	184,263	$	98,124	$	65,238	$	54,311	$	44,227	$	90,062	$	536,225

We have also additional future PharmaBio funding 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 of these commitments, they are not included in the commitment amounts above. If all of these contingencies were satisfied over approximately the same time period, then we estimate 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.

We have entered into financial arrangements with customers in which a portion of our net revenue and operating income will be based on the performance of a specific product. These arrangements typically involve funding, either by direct investment or in the form of a loan, which we commit to provide to our customers. Any securities we may acquire as a result of our investment or upon conversion of the loan may not be readily marketable, and we will bear the risk of carrying these investments for an indefinite period of time. The customer may apply this funding to certain pre-launch sales and marketing activities or it may represent payment for a royalty stream relating to a specific product. We intend to continue to pursue these types of strategic arrangements, and we are actively seeking additional opportunities to create alliances with our customers.

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 proposed merger described in the “Overview” 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.

Critical Accounting Policies

As we believe these policies require difficult, subjective and complex judgments, we have identified the following critical accounting policies which we use in the preparation of our financial statements.

Revenue Recognition

We recognize revenue for service contracts based upon (1) the ratio of outputs or performance obligations completed to the total contractual outputs or performance obligations to be provided for fixed-fee contracts, (2) contractual per diem or hourly rate basis as work is performed for fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. We do not recognize revenue with respect to start-up activities associated with contracts, which include contract and scope negotiation, feasibility analysis and conflict of interest review. We expense these costs as incurred. We estimate the total expected revenues, costs, profitability, duration of the contract and outputs for each contract to evaluate for anticipated losses. If anticipated losses result from this evaluation, we recognize the loss in earnings in the period identified. These estimates are reviewed periodically and, if any of these estimates change then an adjustment for the anticipated loss is recorded. These adjustments could have a material effect on our results of operations.

Certain of our commercial rights and royalty contracts provide for us to receive minimum guaranteed payments. These contracts often contain provisions requiring us to make payments to the customer and to receive payments from the customer. We account for the contracts as single element contracts. We recognize revenue over the related service period of the contract based on the present value of the guaranteed payments. As revenues are recognized and payments are made between the customer and us, we record an asset, which represents the obligation owed to us by the customer. Milestone payments, which we make to the customer, are amortized as a reduction to revenue over the service period of the contract. We also impute interest on the asset balance and record interest income as the contract progresses. We will fully realize the asset balance when we receive the guaranteed minimum level of cash flows. We recognize revenues in excess of the guaranteed minimums as the products are sold. The inherent subjectivity of determining the present values of the guaranteed payments could have a significant impact on the revenues recognized in any period.

We recognize product revenues upon shipment when title passes to the customer. Revenues are net of allowances for estimated returns, rebates and discounts. We are obligated to accept from customers the return of products that are nearing or have reached their expiration date. We also monitor product ordering patterns, actual returns and analyze wholesale inventory levels to estimate potential product return rates. When we lack a sufficient historical basis to estimate return rates, we recognize revenues and the related cost of revenues when we receive end-user prescription data from third-party providers. Although we believe the product return allowances are adequate, if actual product returns exceed our estimates our results of operations could be adversely affected.

Accounts Receivable and Unbilled Services

Accounts receivable represents amounts billed to customers. Revenues recognized in excess of billings are classified as unbilled services. The realization of these amounts is based on the customer’s willingness and ability to pay us. We have an allowance for doubtful accounts based on management’s estimate of probable incurred losses resulting from a customer failing to pay us. If any of these estimates change or actual results differs from expected results, then an adjustment is recorded in the period in which they become reasonably estimable. These adjustments could have a material effect on our results of operations.

Marketable Debt and Equity Investments

We have investments in debt securities and investments in marketable equity securities. Periodically, we review our investments for declines in fair value that we believe may be other than temporary. When we identify such a decline in fair value we record a loss through earnings to establish a new cost basis for the investment. In addition, we may experience future material declines in the fair value of our investments which would require us to record additional losses. These adjustments could have a material adverse effect on our results of operations.

Non-Marketable Equity Investments and Loans

We have investments in non-marketable equity securities and loans. These arrangements typically involve funding, either by direct investment or in the form of a loan, which we commit to provide. Any securities we may acquire as a result of our investment or upon conversion of the loan may not be readily marketable, and we will bear the risk of carrying these investments for an indefinite period of time. We may not be able to recover our cost of the investment or loan at any time in the future, and we could experience an impairment in the carrying value of these investments, which would require us to record additional losses, which could have a material adverse effect on our results of operations.

Income Taxes

We have undistributed earnings of our foreign subsidiaries. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. Federal and State income taxes have been provided. If those earnings were distributed, we would be subject to both U.S. income taxes and withholding taxes payable to the various countries. Any resulting income tax obligations could materially adversely affect our results of operations.

Certain items of income and expense are not recognized on our income tax returns and financial statements in the same year, which creates timing differences. The income tax effect of these timing differences results in (1) deferred income tax assets that create a reduction in future income taxes and (2) deferred income tax liabilities that create an increase in future income taxes. Recognition of deferred income tax assets is based on management’s belief that it is more likely than not that the income tax benefit associated with certain temporary differences, income tax operating loss and capital loss carry forwards and income tax credits, will be realized. We record a valuation allowance to reduce our deferred income tax assets for those deferred income tax items for which it is more likely than not that realization will not occur. We determine the amount of the valuation allowance based, in part, on our assessment of future taxable income and in light of our ongoing prudent and feasible income tax strategies. If our estimate of future taxable income or tax strategies change at any time in the future, we would be required to record an additional income tax provision; recording such a provision could have a material adverse effect on our results of operations.

Foreign Currencies

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 the risk of translating revenues and expenses of foreign operations into U.S. dollars, known as translation risk, and the risk that we incur expenses in a currency other than that in which the contract revenues are paid, known as transaction risk. Gains and losses on foreign currency transactions are reported in results of operations, while translation adjustments are reported as a component of accumulated other comprehensive income within shareholders’ equity. If certain balances owed by our foreign subsidiaries are deemed to be not of a long-term investment nature, then the translation effect related to those balances would not be classified as translation adjustments but rather transaction adjustments, which could have a material effect on our results of operations.

Long-Lived Assets

Realization of identifiable tangible and intangible assets in which we have invested is exposed to a changing regulatory and competitive market. Examples include investments we have made in certain product related rights such as marketing and distribution rights and investments made to develop an Internet platform for our product development and commercialization services. The realization of these assets could be affected by technological changes, approval by the FDA, and proposed and final laws and regulations, such as regulations governing individually identifiable health information or FDA requirements for use of electronic records and/or electronic signatures.

Periodically, we review the carrying values of property and equipment if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, we will reduce carrying values to estimated fair value. The inherent subjectivity of our estimates of future cash flows could have a significant impact on our analysis. Any future write-offs of long-lived assets could have a material adverse effect on our financial condition or results of operations.

Goodwill and Identifiable Intangible Assets

Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition. The recoverability of the excess of the cost over the fair value of the net assets acquired, known as goodwill, is evaluated annually for impairment or if and when events or circumstances indicate a possible impairment. During 2002, we completed the goodwill transitional impairment test as of January 1, 2002, as required, and the annual impairment test as of July 31, 2002, in which no goodwill impairment was deemed necessary at either date. Goodwill and indefinite-lived intangible assets are not amortized. Other identifiable intangible assets are amortized over their estimated useful lives. The inherent subjectivity of applying a market comparables approach to valuing our assets and liabilities could have a significant impact on our analysis. Any future impairment could have a material adverse effect on our financial condition or results of operations.

Employee Stock Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued to Employees”, or APB 25, and related interpretations in accounting for our employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, or SFAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. If we accounted for stock options under SFAS 123, we would have recorded additional compensation expense for the stock option grants to employees. If we are unable to or decide not to continue to account for stock options under APB 25, our financial results would be materially adversely affected to the extent of the additional compensation expense we would have to recognize, which could change significantly from period to period based on several factors including the number of stock options granted and fluctuations of our stock price and/or interest rates.

Backlog Reporting

We report revenue backlog based on anticipated net revenue from uncompleted projects that our customers have authorized. We report only service-related revenue as backlog, and we do not include product revenue or commercial rights-related revenue (royalties and commissions) in backlog. Our backlog 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 at anytime 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 is not authoritatively prescribed, therefore practices tend to vary among competitors and reported amounts are not necessarily comparable.

Inflation

We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition.

Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates and other relevant market rate or price changes. In the ordinary course of business, we are exposed to various market risks, including changes in foreign currency exchange rates, interest rates and equity price changes, and we regularly evaluate our exposure to such changes. Our overall risk management strategy seeks to balance the magnitude of the exposure and the cost and availability of appropriate financial instruments. From time to time, we have utilized forward exchange contracts to manage our foreign currency exchange rate risk. The following analyses present the sensitivity of our financial instruments to hypothetical changes in interest and foreign currency exchange rates that are reasonably possible over a one-year period.

Foreign Currency Exchange Rates

Approximately 56.4%, 49.7% and 44.0% of our total net revenue for the years ended December 31, 2002, 2001, and 2000, respectively, was derived from our operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly-inflationary. Our financial statements are denominated in U.S. dollars, and accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. Accumulated currency translation adjustments recorded as a separate component (reduction) of shareholders’ equity were ($18.4) million at December 31, 2002 as compared to ($60.6) million at December 31, 2001.

We may be subject to foreign currency transaction risk when our service contracts are denominated in a currency other than the currency in which we earn fees or incur expenses related to such contracts. At December 31, 2002, our most significant foreign currency exchange rate exposures were in the British pound, Japanese yen and the euro. We limit our foreign currency transaction risk through exchange rate fluctuation provisions stated in our contracts with customers, or we may hedge our transaction risk with foreign currency exchange contracts or options. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2002 or 2001.

Interest Rates

At December 31, 2002, our investment in debt securities portfolio consists primarily of U.S. Government securities, of which most are callable by the issuer at par, and money funds. The portfolio is primarily classified as available-for-sale and therefore these investments are recorded at fair value in the financial statements. These securities are exposed to market price risk which also takes into account interest rate risk. As of December 31, 2002, the fair value of the investment portfolio was $36.7 million, based on quoted market prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted market price is approximately $3.7 million.

Equity Prices

At December 31, 2002, we had investments in marketable equity securities. These investments are classified as available-for-sale and are recorded at fair value in the financial statements. These securities are subject to equity price risk. As of December 31, 2002, the fair value of these investments was $64.9 million, based on quoted equity prices. The potential loss in fair value resulting from a hypothetical decrease of 10% in quoted equity price is approximately $6.5 million.

Recently Issued Accounting Standards

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requiring companies to record certain exit costs activities when legally obligated instead of when an exit plan is adopted. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002; therefore, the adoption of SFAS No. 146 did not have a material impact on our results of operations and/or financial position.

In January 2003, the EITF published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying this EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the impact the adoption of this issue will have on our results of operations and/or financial position.

From time to time the Staff of the United States Securities and Exchange Commission communicates its interpretations of accounting rules and regulations. The manner by which these views are communicated varies by topic. While these communications represent the views of the Staff, they do not carry the authority of law or regulation. Nonetheless, the practical effect of these communications is that changes in the Staff’s views from time to time can impact the accounting and reporting policies of public companies, like ours.

Risk Factors

In addition to the other information provided in this Annual Report on Form 10-K, you should consider the following factors carefully in evaluating our business and us. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impair our business operations. If any of the following risks occur, our business, financial condition, or results of operations could be materially adversely affected.

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

Economic factors and industry trends that affect our primary customers, pharmaceutical and biotechnology companies, also affect our business. For example, the practice of many companies in these industries has been to hire outside organizations like us to conduct large clinical research and sales and marketing projects. This practice grew substantially during the 1990’s and we benefited from this trend. Some industry commentators believe that the rate of growth of outsourcing will tend to decrease. If these industries reduce their tendency to outsource those projects, our operations, financial condition and growth rate could be materially and adversely affected. Recently, we also believe we have been negatively impacted by mergers and other factors in the pharmaceutical industry, which appear to have slowed decision making by our customers and delayed certain trials. A continuation of these trends would have an ongoing adverse effect on our business. In addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future regulatory cost

containment efforts limit the profits which can be derived on new drugs, our customers may reduce their research and development spending, which could reduce the business they outsource to us. We cannot predict the likelihood of any of these events or the effects they would have on our business, results of operations or financial condition.

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

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

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

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

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

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

•

its ability to obtain continuous access to de-identified healthcare data from third parties in sufficient quantities to support its informatics products;

•		its ability to process and use the volume of data received from a variety of data providers;

•		its ability to attract customers, besides Quintiles and McKesson, to purchase its products and services;

•		the risk of changes in healthcare information privacy laws and regulations that could create a risk of liability, increase the cost of Verispan’s business or limit its service offerings;

•		the risk that industry regulation may restrict Verispan’s ability to analyze and disseminate pharmaceutical and healthcare data; and

•		the risk that it will not be able to effectively and cost-efficiently replace services previously provided to the contributed businesses by the former parent corporations.

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

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

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

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

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

As part of our PharmaBio Development business strategy, we enter into arrangements with customers in which we take on some of the risk of the potential success or failure of the customer’s product. These transactions may include making a strategic investment in a customer, providing financing to a customer, or acquiring an interest in the revenues from a customer’s product. For example, we may build or provide a sales organization for a biotechnology customer to commercialize a new product in exchange for a share in the revenues of the product. We anticipate that in the early periods of many of these relationships, our expenses will exceed revenues from these arrangements, particularly where we are providing a sales force for the product at our own cost. Aggregate royalty or other payments made to us under these arrangements may not be adequate to offset our total expenditure in providing a sales force or in making milestone or marketing payments to our customers. We must

carefully analyze and select the customers and products with which we are willing to structure our risk-based deals. Products underlying our commercial rights strategies may not complete clinical trials, receive FDA approval or achieve the level of market acceptance or consumer demand that we expect, in which case we might not be able to earn a profit or recoup our investment with regard to a particular arrangement. In addition, the timing of regulatory approval and product launch and the achievement of other milestones are generally beyond our control and can affect our actual return from these investments. The potential negative effect to us could increase depending on the nature and timing of our investments and the length of time before it becomes apparent that the product will not achieve commercial success. Our financial results would be adversely affected if our customers or their products do not achieve the level of success that we anticipate and/or our return or payment from the product investment or financing is less than our costs of performance, investment or financing.

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

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

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

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

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

Our success substantially depends on the performance, contributions and expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our Chairman, and Pamela J. Kirby, Ph.D., our Chief Executive Officer. Our performance also depends on our ability to attract and retain qualified management and professional, scientific and technical operating staff, as well as our ability to recruit qualified representatives for our contract sales services. The departure of Dr. Gillings, Dr. Kirby, or any

key executive, or our inability to continue to attract and retain qualified personnel could have a material adverse effect on our business, results of operations or financial condition.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

to us.

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

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

	•		enhance our existing services;

	•		introduce new services on a timely and cost-effective basis to meet evolving customer requirements;

	•		integrate new services with existing services;

	•		achieve market acceptance for new services; and

	•		respond to emerging industry standards and other technological changes.

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

We derive a large portion of our net revenue from international operations. Our financial statements are denominated in U.S. dollars; thus, factors associated with international operations, including changes in foreign currency exchange rates and any trends associated with the transition to the euro, 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 December 31, 2002. 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 may be adversely affected by customer concentration.

We have one customer that accounted for approximately 11% of our net service revenues for the year ended December 31, 2002 due, in part, to the effect of a long term contract that is set to expire as of the end of 2003. These revenues resulted from services provided by the product development and commercial services groups. If this customer or any large customer decreases or terminates its relationship with us, our business, results of operations or financial condition could be materially adversely affected.

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

If we were unable to submit electronic records to the United States Food and Drug Administration, also referred to as the FDA, which meet the requirements of FDA regulations, this may adversely affect our customers when they submit the data concerned to the FDA in support of an

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

Our proposed transaction with Pharma Services is subject to uncertainties.

Our proposed transaction with Pharma Services is subject to customary conditions, including regulatory and shareholder approval, and Pharma Services’ completion of its committed financing. If any of the conditions to closing are not satisfied or waived, the proposed transaction would not be completed and our public shareholders would not receive $14.50 per share in cash. In addition, the merger agreement relating to the proposed transaction can be terminated prior to completion of the transaction under certain circumstances, including where we receive an acquisition proposal from a third party that our board believes is more favorable to our shareholders than the Pharma Services transaction (after following specific procedures described in our merger agreement with Pharma Services). If the merger agreement is terminated, the proposed transaction would not be completed, our public shareholders would not receive $14.50 per share in cash and, in certain circumstances, we could be required to pay Pharma Services a termination fee of $52 million, as well as reimburse its costs, fees and expenses up to $5 million. If the merger is not completed, our common stock would continue to trade on the Nasdaq National Market, however, the value of our stock could decline substantially below the $14.50 per share consideration in the merger. We are currently targeting to close the proposed transaction, assuming the satisfaction or waiver of all conditions, in the third quarter of 2003. The closing of the proposed transaction could be delayed beyond the third quarter of 2003 due to many factors, including factors beyond the control of either party. In addition, we may not prevail in pending litigation regarding Pharma Services’ 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS


		Year Ended December 31,

		2002			2001			2000

		(in thousands, except per share data)
Gross revenues		$	1,992,409		$	1,883,912		$	1,871,077
Costs, expenses and other:
	Costs of revenues		1,367,711			1,318,267			1,297,614
	General and administrative		508,103			520,680			565,137
	Interest income		(16,739	)		(19,844	)		(20,703	)
	Interest expense		2,551			3,172			4,842
	Other expense (income), net		7,123			489			(725	)
	Impairment on investment in WebMD common stock		—			325,553			—
	Settlement of litigation		—			(83,200	)		—
	Restructuring charges		—			54,169			58,592
	Write-off of goodwill and other assets		—			27,122			—
	Disposal of business		—			—			17,325

			1,868,749			2,146,408			1,922,082

Income (loss) before income taxes			123,660			(262,496	)		(51,005	)
Income tax expense (benefit)			41,427			(86,623	)		(16,831	)

Income (loss) before equity in losses of unconsolidated affiliates and other			82,233			(175,873	)		(34,174	)
Equity in losses of unconsolidated affiliates and other			(569	)		—			—

Income (loss) from continuing operations			81,664			(175,873	)		(34,174	)
Income from discontinued operation			—			—			16,770
Extraordinary gain from sale of discontinued operation, net of income taxes			—			142,030			436,327
Cumulative effect on prior years (to December 31, 2001) of changing to a different method of recognizing deferred income taxes			45,659			—			—

Net income (loss)		$	127,323		$	(33,843	)	$	418,923

Basic net income (loss) per share:
	Income (loss) from continuing operations	$	0.69		$	(1.49	)	$	(0.29	)
	Income from discontinued operation		—			—			0.14
	Extraordinary gain from sale of discontinued operation		—			1.20			3.76
	Cumulative effect of change in accounting principle		0.39			—			—

	Basic net income (loss) per share	$	1.08		$	(0.29	)	$	3.61

Diluted net income (loss) per share:
	Income (loss) from continuing operations	$	0.69		$	(1.49	)	$	(0.29	)
	Income from discontinued operation		—			—			0.14
	Extraordinary gain from sale of discontinued operation		—			1.20			3.76
	Cumulative effect of change in accounting principle		0.39			—			—

	Diluted net income (loss) per share	$	1.07		$	(0.29	)	$	3.61

Shares used in computing net income (loss) per share:
	Basic		118,135			118,223			115,968
	Diluted		118,458			118,223			115,968

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

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


				December 31,

				2002			2001

				(in thousands, except share data)
			Assets
Current assets:
	Cash and cash equivalents			$	644,284		$	565,063
	Trade accounts receivable and unbilled services, net				255,647			333,008
	Investments in debt securities				27,218			27,489
	Prepaid expenses				22,516			28,085
	Other receivables				17,185			19,630
	Other current assets				25,469			12,517

		Total current assets			992,319			985,792
Property and equipment:
	Land, buildings and leasehold improvements				202,465			192,290
	Equipment				190,312			200,012
	Furniture and fixtures				44,094			44,020
	Motor vehicles				38,672			33,597

					475,543			469,919
	Less accumulated depreciation				(213,385	)		(196,144	)

					262,158			273,775
Intangibles and other assets:
	Investments in debt securities				9,453			9,510
	Investments in marketable equity securities				64,926			77,992
	Investments in non-marketable equity securities and loans				46,449			37,590
	Investments in unconsolidated affiliates				121,101			—
	Commercial rights and royalties				1,786			1,943
	Accounts receivable – unbilled				59,750			8,057
	Advances to customer				70,000			—
	Goodwill				70,133			163,651
	Other identifiable intangibles, net				142,715			123,999
	Deferred income taxes				174,534			136,686
	Deposits and other assets				38,871			34,799

					799,718			594,227

		Total Assets		$	2,054,195		$	1,853,794

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

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)


				December 31,

				2002			2001

			Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable			$	57,535		$	54,400
	Accrued expenses				180,734			169,173
	Unearned income				141,718			111,837
	Income taxes payable				20,067			14,073
	Deferred income taxes				—			738
	Current portion of obligations held under capital leases				18,372			13,147
	Current portion of long-term debt				3,347			2,969
	Other current liabilities				2,073			1,903

			Total current liabilities		423,846			368,240
Long-term liabilities:
	Obligations held under capital leases, less current portion				10,645			11,415
	Long-term debt, less current portion				8,210			10,335
	Other liabilities				13,108			8,716

					31,963			30,466

			Total liabilities		455,809			398,706
Commitments and contingencies
Shareholders’ equity:
	Preferred stock, none issued and outstanding at December 31, 2002 and 2001, respectively				—			—
	Common stock and additional paid-in capital, 117,850,597 and 118,623,669 shares issued and outstanding at December 31, 2002 and 2001, respectively				881,927			897,075
	Retained earnings				716,465			589,142
	Accumulated other comprehensive loss				(6	)		(31,129	)

		Total shareholders’ equity			1,598,386			1,455,088

			Total liabilities and shareholders’ equity	$	2,054,195		$	1,853,794

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

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


			Year Ended December 31,

			2002			2001			2000

						(in thousands)
Operating activities:
	Net income (loss)		$	127,323		$	(33,843	)	$	418,923
	Income from discontinued operation, net of income taxes			—			—			(16,770	)
	Extraordinary gain from sale of discontinued operation, net of tax			—			(142,030	)		(436,327	)
	Cumulative effect on prior years (to December 31, 2001) of changing to a different method of recognizing deferred income taxes			(45,659	)		—			—

	Income (loss) from continuing operations			81,664			(175,873	)		(34,174	)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
	Depreciation and amortization			89,824			96,103			92,567
	Restructuring (payments) accrual and write-off of other assets, net			(21,158	)		42,975			25,886
	Loss on disposal of business			—			—			17,325
	Loss on sale of property and equipment, net			2,399			287			190
	Loss (gain) on investments, net			(13,710	)		304,942			(578	)
	Provision for (benefit from) deferred income taxes			2,464			(64,360	)		12,460
	Change in operating assets and liabilities:
		Accounts receivable and unbilled services		63,827			(24,705	)		(31,233	)
		Prepaid expenses and other assets		(5,639	)		6,935			(15,881	)
		Accounts payable and accrued expenses		12,966			19,263			16,429
		Unearned income		26,048			16,203			11,713
		Income taxes payable and other liabilities		7,807			25,139			(84,285	)
	Other			—			447			95

Net cash provided by operating activities				246,492			247,356			10,514
Investing activities:
	Acquisition of property, equipment and software			(40,157	)		(133,983	)		(108,782	)
	Acquisition of businesses, net of cash acquired			(27,968	)		(6,620	)		(15,169	)
	Acquisition of intangible assets			(2,541	)		(26,735	)		—
	Advances to customer			(70,000	)		—			—
	Acquisition of commercial rights and royalties			(15,790	)		(10,000	)		—
	Proceeds from disposition of property and equipment			6,290			7,548			8,591
	Proceeds from disposal of discontinued operation, net of expenses			—			—			390,722
	Purchase of held-to-maturity investments			—			—			(1,296	)
	Maturities of held-to-maturity investments			397			437			465
	Purchase of available-for-sale investments			(1,611	)		—			(2,717	)
	Proceeds from sale of available-for-sale investments			—			71,422			5,296
	Purchase of marketable equity securities			(6,616	)		(22,660	)		(14,379	)
	Proceeds from sale of marketable equity securities			26,853			134,379			3,514
	Purchase of other investments			(11,483	)		(30,247	)		(1,617	)
	Proceeds from other investments			608			103			2,959
	Advances to unconsolidated affiliates			(10,328	)		—			—
	Payment from ESOP, net			—			—			2,857
	Other			—			—			(2	)

Net cash (used in) provided by investing activities				(152,346	)		(16,356	)		270,442

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


		Year Ended December 31,

		2002			2001			2000

					(in thousands)
Financing activities:
	(Decrease) increase in lines of credit, net	$	—		$	(44	)	$	33
	Proceeds from issuance of debt		—			—			11,183
	Repayment of debt		(2,487	)		(3,263	)		(151,653	)
	Principal payments on capital lease obligations		(12,987	)		(10,618	)		(14,419	)
	Issuance of common stock		9,641			48,439			21,748
	Repurchase of common stock		(27,024	)		(22,694	)		(21,883	)
	Dividend from discontinued operation		—			—			17,086

Net cash (used in) provided by financing activities			(32,857	)		11,820			(137,905	)
Effect of foreign currency exchange rate changes on cash			17,932			(7,971	)		(4,490	)

Increase in cash and cash equivalents			79,221			234,849			138,561
Cash and cash equivalents at beginning of year			565,063			330,214			191,653

Cash and cash equivalents at end of year		$	644,284		$	565,063		$	330,214

Supplemental Cash Flow Information:
	Interest paid	$	2,633		$	2,724		$	5,435
	Income taxes paid (refunded), net		19,466			(56,243	)		64,451
Non-cash Investing and Financing Activities:
	Acquisition of property and equipment utilizing capital leases		9,903			14,578			12,948
	Equity impact of mergers, acquisitions and dispositions		—			(20,952	)		82,557
	Transfer of assets to joint venture		112,136			—			—
	Marketable equity securities received from sale of discontinued operation		—			—			447,353
	Unrealized gain (loss) on marketable securities, net of income tax	$	6,026		$	(124,182	)	$	(69,619	)

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

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)


									Accumulated
									Other											Employee Stock
									Comprehensive								Additional			Ownership Plan
			Comprehensive			Retained			Income			Preferred		Common			Paid-In			Loan Guarantee
			Income			Earnings			(Loss)			Stock		Stock			Capital			& Other			Total

Balance, December 31, 1999 (115,118,347 shares)						$	204,062		$	1,677		$	—	$	1,149		$	787,098		$	(2,227	)	$	991,759
Issuance of common stock (2,180,335 shares)							—			—			—		22			21,018			—			21,040
Repurchase of common stock (1,365,500 shares)							—			—			—		(13	)		(21,870	)		—			(21,883	)
Issuance of stock warrants							—			—			—		—			32,300			—			32,300
Issuance of put option							—			—			—		—			925			—			925
Stock option charge in ENVOY sale							—			—			—		—			50,040			—			50,040
Principal payments on ESOP loan							—			—			—		—			—			1,214			1,214
Tax benefit from the exercise of non-qualified stock options							—			—			—		—			6,752			—			6,752
Other equity transactions							—			—			—		—			(1,014	)		1,013			(1	)
Comprehensive income:
	Net income		$	418,923			418,923			—			—		—			—			—			418,923
	Unrealized loss on marketable securities, net of tax			(69,619	)		—			(69,619	)		—		—			—			—			(69,619	)
	Foreign currency adjustments			(26,744	)		—			(26,744	)		—		—			—			—			(26,744	)

Comprehensive income for year ended December 31, 2000				322,560

Balance, December 31, 2000 (115,933,182 shares)							622,985			(94,686	)		—		1,158			875,249			—			1,404,706
Issuance of common stock (4,392,987 shares)							—			—			—		46			48,393			—			48,439
Repurchase of common stock (1,702,500 shares)							—			—			—		(14	)		(22,680	)		—			(22,694	)
Cancellation of stock warrants							—			—			—		—			(20,000	)		—			(20,000	)
Tax benefit from the exercise of non-qualified stock options							—			—			—		—			15,871			—			15,871
Other equity transactions							—			—			—		—			(948	)		—			(948	)
Comprehensive income:
		Net loss		(33,843	)		(33,843	)		—			—		—			—			—			(33,843	)
		Unrealized loss on marketable securities, net of tax		(124,182	)		—			(124,182	)		—		—			—			—			(124,182	)
		Reclassification adjustment, net of tax		206,151			—			206,151			—		—			—			—			206,151
		Foreign currency adjustments		(18,412	)		—			(18,412	)		—		—			—			—			(18,412	)

Comprehensive income for year ended December 31, 2001				29,714

Balance, December 31, 2001 (118,623,669 shares)							589,142			(31,129	)		—		1,190			895,885			—			1,455,088
Issuance of common stock (796,928 shares)							—			—			—		9			9,610			—			9,619
Repurchase of common stock (1,570,000 shares)							—			—			—		(19	)		(27,005	)		—			(27,024	)
Tax benefit from the exercise of non-qualified stock options							—			—			—		—			857			—			857
Other							—			—			—		—			1,400			—			1,400
Comprehensive income:
		Net income		127,323			127,323			—			—		—			—			—			127,323
		Unrealized gain on marketable securities, net of tax		6,026			—			6,026			—		—			—			—			6,026
		Reclassification adjustment, net of tax		(17,097	)		—			(17,097	)		—		—			—			—			(17,097	)
		Foreign currency adjustments		42,194			—			42,194			—		—			—			—			42,194

Comprehensive income for year ended December 31, 2002			$	158,446

Balance, December 31, 2002 (117,850,597 shares)						$	716,465		$	(6	)	$	—	$	1,180		$	880,747		$	—		$	1,598,386

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

QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Quintiles Transnational Corp. (the “Company”) helps improve healthcare worldwide by providing a broad range of professional services, information and partnering solutions to the pharmaceutical, biotechnology and healthcare industries.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Foreign Currencies

Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are recorded at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to equity. Gains and losses on foreign currency transactions are included in other (income) expense.

Foreign Currency Hedging

The Company may use foreign exchange contracts and options to hedge the risk of changes in foreign currency exchange rates associated with contracts in which the expenses for providing services are incurred in one currency and paid for by the customer in another currency. There were no open foreign exchange contracts or options relating to service contracts at December 31, 2002 or 2001.

Cash Equivalents and Investments

The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. The Company does not report in the accompanying balance sheets cash held for customers for investigator payments in the amount of $712,000 and $3.5 million at December 31, 2002 and 2001, respectively, that pursuant to agreements with these customers, remains the property of the customers.

The Company’s investments in debt securities are classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are recorded at amortized cost. Investments classified as available-for-sale are measured at market value and net unrealized gains and losses are recorded as a component of shareholders’ equity until realized. Any gains or losses on sales of debt investments are computed by specific identification.

Investments in marketable equity securities are classified as available-for-sale and measured at market value with net unrealized gains and losses recorded as a component of shareholders’ equity until realized. The market value is based on the closing price as quoted by the respective stock exchange or Nasdaq. In addition, the Company has investments in equity securities of and advances to companies for which there are not readily available market values and for which the Company does not exercise significant influence or control; such investments are accounted for using the cost method. Any gains or losses from the sales of investments or an other than temporary decline in fair value are computed by specific identification.

Derivatives

From time to time the Company may use derivative instruments to manage exposures to equity prices and interest rates. The Company also holds freestanding warrants and other embedded derivatives (conversion options in financing arrangements). Derivatives meeting the criteria established by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, are recorded in the balance sheet at fair value at each balance sheet date utilizing pricing models for non-exchange traded contracts. When the derivative instrument is entered into, the Company designates whether or not the derivative instrument is an effective hedge of an asset, liability or firm commitment which is then classified as either a cash flow hedge or a fair value hedge. If determined to be an effective cash flow hedge, changes in the fair value of the derivative instrument are recorded as a component of accumulated other comprehensive loss until realized. Changes in fair value of effective fair value hedges are recorded in earnings as an offset to the changes in the fair value of the related hedge item. Changes in the fair values of derivative instruments that are not an effective hedge are recognized in earnings. The Company has, and may in the future, enter into derivative contracts (calls or puts, for example) related to its investments in marketable equity securities. While these contracts do not qualify for hedge accounting, the Company utilizes these transactions to mitigate its economic exposure to market price fluctuations.

Billed and Unbilled Services

In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, submission of appropriate billing detail or the achievement of contract milestones, depending on the type of contract. Unbilled services arise when services have been rendered but customers have not been billed.

Long-Lived Assets

Property and equipment are carried at historical cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life or the lease term as follows:


Buildings and leasehold improvements		3 - 50 years
Equipment		3 - 10 years
Furniture and fixtures		5 - 10 years
Motor vehicles		3 - 5 years

Prior to 2002, the excess cost over the fair value of net assets acquired (“goodwill”) had been amortized on a straight-line basis over periods from five to 40 years. Effective January 1, 2002, the Company adopted SFAS No. 142 and no longer amortizes indefinite-lived intangible assets but reviews these assets at least annually for impairment.

In conjunction with the adoption of SFAS No. 142, the Company has reclassified capitalized software and related accumulated amortization to other identifiable intangible assets from property and equipment for all periods presented. Identifiable intangible assets consist primarily of software, which are amortized over the estimated useful life ranging from three to five years. Product licensing and distribution rights are amortized ratably, based on estimated cash flows, over the life of the rights period ranging from five to 15 years.

The carrying values of property, equipment and intangible assets are reviewed if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation and amortization period, the Company will reduce carrying values to estimated fair value.

Revenue Recognition

Many of the Company’s contracts for services are fixed price, with some variable components, and range in duration from a few months to several years. The Company is also party to fee-for-service and unit-of-service contracts. The Company recognizes revenue primarily based upon (1) the ratio of outputs or performance obligations completed to the total contractual outputs or performance obligations to be provided for fixed-fee contracts, (2) contractual per diem or hourly rate basis as work is performed under fee-for-service contracts or (3) completion of units of service for unit-of-service contracts. The Company does not recognize revenue with respect to start-up activities associated with contracts, which include contract and scope negotiation, feasibility analysis and conflict of interest review. The costs for these activities are expensed as incurred.

The Company’s contracts for clinical research services provide for price renegotiation upon scope of work changes. The Company recognizes revenue related to these scope changes when the underlying services are performed according to a binding commitment. Most contracts are terminable upon 15 - 90 days’ notice by the customer. In the event of termination, contracts typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract. Any anticipated losses resulting from contract performance are charged to earnings in the period identified.

In certain of the Company’s commercialization contracts, the Company provides services (i.e., a certain number of sales representatives to detail the customer’s product(s) for a given period) in exchange for a combination of fixed and variable payments. Each of these agreements is a service agreement that represents a single unit of accounting under EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Fixed payments include guaranteed minimum payments and fee-for-service arrangements. The Company recognizes revenue on the fixed payments when the services are provided and the amounts become fixed and determinable. Variable payments are based on a percentage of product sales. The Company refers to the variable payments as royalty payments. The Company recognizes revenue on the royalty payments when the variable components become fixed and determinable, which only occurs upon the sale of the underlying product(s). All of the consideration the Company receives for providing services, whether via a guaranteed minimum payment, fee-for-service payment, or a variable royalty, is earned and recognized as revenue only after the services are provided to the customer.

Certain of the Company’s agreements provide for guaranteed minimum payments to the Company. The Company determines the amount of service revenues to be recognized under these agreements by calculating the present value of the fixed and determinable cash flows over the term of the agreement. Accretion of the resulting discount is imputed on the related asset and recorded as interest income over the contract term. The present value of the fixed and determinable cash flows is recognized

as revenue in proportion to the services performed based on a measurement of outputs. The Company recognizes revenues in excess of the guaranteed minimum when the amounts become fixed and determinable but only after the related services have been provided. The amounts related to the variable components become fixed and determinable only when the actual sales of the related product(s) have occurred and exceed the guaranteed minimum.

As the Company records the revenues it earns under such arrangements, it also records a commercial rights and royalties related asset in the accompanying balance sheet. Cash received by the Company from its customers reduces this asset balance.

The Company treats cash payments to customers under the agreements as incentives to induce the customers to enter into such a service agreement with the Company pursuant to EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer.” These payments are recorded as a commercial rights and royalties related asset in the accompanying balance sheet as long as the Company’s estimated future economic benefits from those customer contracts are expected to exceed the amount of the payments. The related asset is amortized, in proportion to the services performed based on a measurement of outputs, as a reduction of revenue over the service period.

The Company reviews the carrying value of the commercial rights and royalties related asset at each balance sheet date to determine whether or not there has been an impairment. If this review indicates that the carrying value is not recoverable, based on undiscounted cash flows over the remaining contract period, the Company will reduce the carrying value to the resulting estimated fair value. In the event of contract termination by the customer, in each of the Company’s contracts, all amounts paid and/or recorded as a commercial rights and royalties related asset would be legally recoverable by the Company in accordance with the terms of the contract. In the event of termination initiated by the Company, the amounts generally would not be contractually recoverable.

Product revenues are recognized upon shipment when title passes to the customer, net of allowances for estimated returns, rebates and discounts. The Company is obligated to accept from customers the return of products that are nearing or have reached their expiration date. The Company monitors product ordering cycles, actual returns and analyzes wholesale inventory levels to estimate potential product return rates. When the Company lacks a sufficient historical basis to estimate return rates, the Company recognizes revenues and the related cost of revenues when end-user prescription data is received from third-party data providers.

The Company, through its PharmaBio Development group, 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 marketable securities, non-marketable securities or loans. Gains and losses from the sale of equity securities and impairments from other than temporary declines in the fair values of these strategic investments are included in the Company’s gross revenues.

Concentration of Credit Risk

Substantially all revenue for the product development and commercial services groups are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company’s customers. The Company does not require collateral or other securities to support customer receivables. Credit losses have been immaterial and reasonably within management’s expectations. One customer accounted for approximately 11.3%, 10.8% and 10.2% of consolidated net service revenue in 2002, 2001 and 2000, respectively. These revenues were derived from the Company’s product development, commercial services and informatics segments.

Research and Development Costs

Research and development costs relating principally to new software applications and computer technology are charged to expense as incurred. These expenses totaled $2.1 million, $18.1 million and $29.0 million in 2002, 2001 and 2000, respectively.

Although the Company has not entered into agreements to fund the development of a customer’s research and development activity, if the Company were to enter into such an arrangement, the Company would expense the amounts funded by the Company as research and development costs as incurred.

Income Taxes

Income tax expense includes U.S., state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Income tax credits are accounted for as a reduction of income tax expense in the year in which the credits reduce income taxes payable. Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized.

Net Income Per Share

The Company determines basic net income per share by dividing net income by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the assumed conversion or exercise of all convertible securities and issued and unexercised stock options, unless the effects would be anti-dilutive to results from continuing operations. A reconciliation of the number of shares used in computing basic and diluted net income per share is in Note 23.

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 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 2002, 2001 and 2000 was $3.72, $5.57 and $4.93 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	Employee Stock Options									Employee Stock Purchase Plan

	2002			2001			2000			2002			2001			2000

Expected dividend yield		0	%		0	%		0	%		0	%		0	%		0	%
Risk-free interest rate		2.1	%		5.0	%		5.1	%		1.7	%		3.9	%		5.9	%
Expected volatility		40.0	%		40.0	%		40.0	%		40.0	%		40.0	%		40.0	%
Expected life (in years from vesting)		0.85			0.83			0.86			0.25			0.25			0.25

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

The Company’s pro forma information (which includes pro forma stock compensation expense before income taxes related to discontinued operation of approximately $1.5 million in 2000) follows (in thousands, except for net income (loss) per share information):


		Year Ended December 31,

		2002			2001			2000

Net income (loss), as reported		$	127,323		$	(33,843	)	$	418,923
Less: pro forma adjustment for stock-based compensation, net of income tax			(15,957	)		(25,556	)		(37,719	)

Pro forma net income (loss)		$	111,366		$	(59,399	)	$	381,204

Basic net income (loss) per share:
	As reported	$	1.08		$	(0.29	)	$	3.61
	Pro forma		0.94			(0.50	)		3.29

	Effect of pro forma adjustment	$	(0.14	)	$	(0.22	)	$	(0.33	)

Diluted net income (loss) per share:
	As reported	$	1.07		$	(0.29	)	$	3.61
	Pro forma		0.94			(0.50	)		3.29

	Effect of pro forma adjustment	$	(0.13	)	$	(0.22	)	$	(0.33	)

Comprehensive Income

The Company includes foreign currency translation adjustments and unrealized gains and losses on the available-for-sale securities in other comprehensive income. Accumulated other comprehensive loss at December 31, 2002 was $6,000 which consisted of ($18.4) million in foreign currency translation adjustments and $18.4 million in unrealized gains on available-for-sale securities. During 2002 and 2001, the Company reclassified ($17.1) million and $206.1 million, respectively, of net holding (gains) losses to revenues as the related securities were sold or deemed to be impaired.

Recently Adopted Accounting Standards

In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment on Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for Long-Lived Assets to Be Disposed of” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. The Company adopted SFAS No. 144 as required to do so on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company’s results of operations and/or financial position.

Recently Issued Accounting Standards

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requiring companies to record certain exit costs activities when legally obligated instead of when an exit plan is adopted. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002; therefore, the adoption of SFAS No. 146 is not anticipated to have an effect on the Company’s results of operations and/or financial position.

In January 2003, the Emerging Issues Task Force published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the impact the adoption of this issue will have on its results of operations and/or financial position.

REVISIONS TO PRIOR FINANCIAL STATEMENTS

Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform with the 2002 financial statement presentation. These reclassifications had no effect on previously reported net income (loss), shareholders’ equity or net income (loss) per share.

The Company adopted EITF Issue 01-14 (“EITF 01-14”), “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” which required companies to report reimbursed costs as part of gross revenues. As such, the Company reclassified reimbursed service costs for 2002 and, to the extent determinable, for 2001 and 2000. These reimbursed service costs totaled $399.7 million, $263.4 million and $210.6 million in 2002, 2001 and 2000, respectively. However, it was impracticable to identify and reclassify certain prior period commercialization reimbursed service costs and, accordingly, historical results have not been restated for these costs. These commercialization reimbursed service costs totaled approximately $60.4 million for the year ended December 31, 2002.

ACCOUNTS RECEIVABLE AND UNBILLED SERVICES

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


		DECEMBER 31,

		2002			2001

Trade:
	Billed	$	142,407		$	177,760
	Unbilled services		118,501			166,712

			260,908			344,472
Allowance for doubtful accounts			(5,261	)		(11,464	)

		$	255,647		$	333,008

The decrease in allowance for doubtful accounts is the result of the write-offs of certain accounts receivables.

Substantially all of the Company’s trade accounts receivable and unbilled services are due from companies in the pharmaceutical, biotechnology, medical device and healthcare industries and are a result of contract research, sales, marketing, healthcare consulting and health information management services provided by the Company on a global basis. The percentage of accounts receivable and unbilled services by region is as follows:


				DECEMBER 31,

REGION				2002			2001

Americas:
	United States				40	%		45	%
	Other				2			3

			Americas		42			48
Europe and Africa:
		United Kingdom			35			33
		Other			15			10

			Europe and Africa		50			43
Asia – Pacific					8			9

					100	%		100	%

COMMERCIAL RIGHTS AND ROYALTIES

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


	December 31,

	2002		2001

Commercial rights and royalties	$	1,786	$	1,943
Accounts receivable - unbilled		59,750		8,057
Advances to customer		70,000		—

Total commercial rights and royalties related assets	$	131,536	$	10,000

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™ (formerly known as Ranolazine) for angina in the United States and Canada. Under the terms of this agreement, the Company purchased 1,043,705 shares of CVTX’s common stock for $5 million of which the Company owns 126,705 shares as of December 31, 2002, and has made available a $10 million credit line for pre-launch sales and marketing activities. If Ranexa™, which has been submitted to the United States Food and Drug Administration (“FDA”) under a New Drug Application (“NDA”) for review, is approved, the Company will provide a $10 million milestone payment to CVTX which will be used to pay off any outstanding balances on the credit line. The Company will also make available an additional line of credit to help fund a portion of the first year sales and marketing expenses. Additionally, the Company has committed to provide a minimum of approximately $14.4 million per year of commercialization services and to fund a minimum of $7.8 million per year of marketing activities, for a period of five years. In return it will receive payment for services rendered by the Company in year one and royalties based on the net sales of Ranexa™ in years two through five subject to a cap not to exceed 300% of funding by the Company in any year or over the life of the contract. In addition, the Company will also receive royalties in years six and seven.

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 December 31, 2002, the Company has capitalized 251.8 million philippino pesos (approximately $4.6 million) related to the cost of acquiring these commercial rights, and is amortizing these costs over five years. Under the terms of the agreement, the customer has the option to reacquire the rights to the four products from the Company after seven years for a price to be determined at the exercise date.

In January 2001, the Company entered into an agreement with Scios Inc. (“SCIO”) to market Natrecor® for acute congestive heart failure in the United States and Canada. Under the terms of the agreement, the Company agreed to provide $30 million in funding over a two and one-half year period for sales and marketing activities following product launch. As of December 31, 2002, $23.5 million has been paid by the Company. The payments are reported in the accompanying statement of cash flows as an investing activity – acquisition of commercial rights and royalties. In addition to receiving payments on a fee for service basis for providing commercialization services, the Company will receive royalties based on net sales of the product from 2002 through 2008. The royalty payments are subject to minimum and maximum amounts of $50 million and $65 million, respectively, over the life of the agreement. 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 Company continues to be entitled to receive future royalty payments under the contract. The commercial rights and royalties related asset accounts receivable-unbilled of approximately $40.7 million will be reduced as the Company receives future royalty payments.

In June 2001, the Company entered into an agreement with Pilot Therapeutics, Inc. (“PLTT”) to commercialize a natural therapy for asthma, AIROZIN™, in the United States and Canada. Under the terms of the agreement, the Company will provide commercialization services for AIROZIN™ and a milestone-based $6 million line of credit which is convertible into PLTT’s common stock, of which $4 million was funded by the Company as of December 31, 2002. Further, based on achieving certain milestones, the Company has committed to funding 50% of sales and marketing activities for AIROZIN™ over five years with a $6 million limit per year. Following product launch, the Company will receive royalties based on the net sales of AIROZIN™. The royalty percentage will vary to allow the Company to achieve a minimum rate of return.

In December 2001, the Company entered into an agreement with Discovery Laboratories, Inc. (“DSCO”) to commercialize, in the United States, DSCO’s humanized lung surfactant, Surfaxin®, which is currently in Phase III studies. Under the terms of the agreement, the Company acquired 791,905 shares of DSCO’s common stock and a warrant to purchase 357,143 shares of DSCO’s common stock at $3.48 per share for a total of $3 million, and has agreed to make available a line of credit up to $10 million for pre-launch commercialization services as certain milestones are achieved by DSCO. As of December 31, 2002, the Company has made $5.7 million available under the line of credit, of which $1.4 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. During November 2002, the Company purchased an additional 266,246 shares of DSCO common stock along with detachable warrants to purchase 119,811 shares of DSCO common stock for $517,000.

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

In January 2002, the Company entered into an agreement with Kos Pharmaceuticals, Inc. (“KOSP”) to commercialize, in the United States, KOSP’s treatments for cholesterol disorders, Advicor® and Niaspan®. Advicor® was launched in January 2002 and Niaspan® is also on the market. Under the terms of the agreement, the Company will provide, at its own expense, a dedicated sales force of 150 cardiovascular-trained representatives who, in combination with KOSP’s sales force of 300 representatives, will commercialize Advicor® and Niaspan® for two years. In return, the Company also 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 of $45 million and $75 million, respectively, over the life of the agreement.

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 ADOXA™ 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 estimated revenues over the lives of these products. Under certain of the contracts acquired, the Company has commitments to pay royalties based on a percentage of net sales of the acquired product rights.

During the second quarter of 2002, the Company finalized the arrangements under its previously announced letter of intent with a large pharmaceutical customer to market pharmaceutical products in Belgium, Germany and Italy. The Company will provide, at its own expense, sales and marketing resources over the five-year life of the agreement. As of December 31, 2002, the Company estimates the cost of its minimum obligation over the remaining contract life to be approximately $44 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. Either party may cancel the contract at six-month intervals in the event that sales are not above certain levels specified. Subsequent to December 31, 2002, the Company exercised its rights to terminate the contract in Germany. The termination reduces the Company’s minimum remaining obligation from $44 million to $25 million.

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

write-off any payments made through that date, unless the FDA had failed to grant approval for Cymbalta™ based on concerns over LLY’s manufacturing processes and facilities.

In July 2002, the Company entered into an agreement with Columbia Laboratories, Inc. (“COB”) to commercialize, in the United States, the following women’s health products: Prochieve™ 8%, Prochieve™ 4%, Advantage-S® and RepHresh™. Under the terms of the agreement, the Company purchased 1,121,610 shares of COB common stock for $5.5 million. The Company will also pay to COB four quarterly payments of $1.125 million each commencing 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 first quarter of 2003. The Company has paid $2.25 million as of December 31, 2002. The payments are reported in the accompanying statement of cash flows as an investing activity – acquisition of commercial rights and royalties. The aggregate royalties are subject to a contractual minimum of $8.0 million and a maximum of $12.0 million. In addition, the Company will provide to COB, at COB’s expense on a fee-for-service basis, a sales force to commercialize the products.

In December 2002, the Company entered into an agreement with a large pharmaceutical customer to market two products in Belgium. Under the terms of an asset purchase agreement, the Company will have the rights to one product in Belgium in exchange for payments of 5.5 million euros (approximately $5.7 million). The customer will continue to manufacture the product through 2005. Under the terms of a distribution agreement, the Company will have the rights to market the other product in Belgium for a period of six years in exchange for payments of 6.9 million euros (approximately $7.2 million). The Company has funded 2.5 million euros (approximately $2.6 million) as of December 31, 2002. The payments are reported in the accompanying statement of cash flows as an investing activity – acquisition of intangible assets. The customer will continue to manufacture the product for the six years of the distribution agreement. The Company has accrued approximately $10.0 million for the remaining payments as of December 31, 2002.

The Company has firm commitments under the above arrangements to provide funding of approximately $304.0 million in exchange for various commercial rights. As of December 31, 2002, the Company has funded approximately $209.2 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		Total

Milestone payments	$	8,710	$	—	$	—	$	—	$	—	$	8,710
Sales force commitments		29,050		16,002		14,277		9,914		3,834		73,077
Licensing and distribution rights		9,068		2,693		1,243		—		—		13,004

	$	46,828	$	18,695	$	15,520	$	9,914	$	3,834	$	94,791

INVESTMENTS - DEBT SECURITIES

The following is a summary as of December 31, 2002 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):


				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		MARKET
		COST		GAINS		LOSSES		VALUE

HELD-TO-MATURITY SECURITIES:
State Securities –
	Maturing in one year or less	$	576	$	—	$	—	$	576
	Maturing in over five years		5,315		—		—		5,315

		$	5,891	$	—	$	—	$	5,891


			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			MARKET
	COST		GAINS		LOSSES			VALUE

AVAILABLE-FOR-SALE SECURITIES:
Money Funds	$	27,186		—		(544	)	$	26,642
Other		5,476		—		(1,338	)		4,138

	$	32,662	$	—	$	(1,882	)	$	30,780

The following is a summary as of December 31, 2001 of held-to-maturity securities and available-for-sale securities by contractual maturity where applicable (in thousands):


				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		MARKET
		COST		GAINS		LOSSES		VALUE

HELD-TO-MATURITY SECURITIES:
State Securities —
	Maturing in one year or less	$	591	$	—	$	—	$	591
	Maturing in over five years		6,016		—		—		6,016

		$	6,607	$	—	$	—	$	6,607


			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			MARKET
	COST		GAINS		LOSSES			VALUE

AVAILABLE-FOR-SALE SECURITIES:
Money Funds	$	27,186	$	—	$	(288	)	$	26,898
Other		3,494		—		—			3,494

	$	30,680	$	—	$	(288	)	$	30,392

The net after-tax adjustment to unrealized holding gains (losses) on available-for-sale debt securities included as a separate component of shareholders’ equity was ($1.0) million, $668,000 and ($18.4) million in 2002, 2001 and 2000, respectively.

INVESTMENTS – MARKETABLE EQUITY SECURITIES

The Company has entered into financial arrangements with various customers and other parties in which the Company provides funding in the form of an equity investment. The equity investments may be subject to certain trading restrictions including “lock-up” agreements. The Company’s portfolio in such transactions as of December 31, 2002 is as follows (in thousands except share data):


				Estimated
	Trading	Number of		Beneficial					Fair Market
Company	Symbol	Shares		Ownership % (1)			Cost Basis		Value

Common Stock:
Triangle Pharmaceuticals Inc.	VIRS		3,775,000		4.9	%	$	15,029	$	22,424
The Medicines Company	MDCO		2,062,520		5.2	%		8,992		33,042
CV Therapeutics, Inc.	CVTX		126,705		0.5	%		617		2,309
Columbia Laboratories, Inc.	COB		1,121,610		3.2	%		5,500		3,769
Other								3,327		3,382

Total Marketable Equity Securities							$	33,465	$	64,926

The Company’s portfolio in such transactions as of December 31, 2001 is as follows (in thousands except share data):


				Estimated
	Trading	Number of		Beneficial					Fair Market
Company	Symbol	Shares		Ownership % (1)			Cost Basis		Value

Common Stock:
Triangle Pharmaceuticals Inc.	VIRS		3,775,000		4.9	%	$	15,029	$	15,138
The Medicines Company	MDCO		1,896,245		6.3	%		8,462		21,977
CV Therapeutics, Inc.	CVTX		681,705		2.6	%		3,320		35,463
Other								4,740		5,414

Total Marketable Equity Securities							$	31,551	$	77,992

(1)

The estimated beneficial ownership percentage calculation is based upon the issuer’s filings with the United States Securities and Exchange Commission. The beneficial ownership percentage is subject to change due to the Company’s transactions in these investments and changes in the issuer’s capitalization.

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

The Company recognized $14.1 million, $22.9 million and $3.3 million of gains from the sale of marketable equity securities during 2002, 2001 and 2000, respectively. The Company recognized $66,000 in losses from the sale of marketable equity securities during 2002. Gross unrealized gains totaled $31.5 million as of December 31, 2002 and $46.4 million as of December 31, 2001 from investments in marketable equity securities. The net after-tax adjustment to unrealized holding gains (losses) on marketable equity securities included as a separate component of shareholders’ equity was ($10.1) million, $81.3 million and ($51.2) million in 2002, 2001 and 2000 respectively. 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 also recognized losses due to the impairment of marketable equity securities of $335,000, $338.8 million and $5.5 million in 2002, 2001 and 2000, respectively. Included in the 2001 amount is $334.0 million relating to the Company’s investment in WebMD common stock.

In 2000, the Company sold its electronic data interchange unit, ENVOY Corporation, to WebMD Corporation (“WebMD”). As part of the consideration received in the sale, the Company received 35 million shares of WebMD common stock. In 2001, WebMD paid the Company $185 million in cash for all of the 35 million shares of WebMD common stock and in settlement of the disputes.

During December 2002, Gilead Sciences, Inc. (“Gilead”) commenced a tender offer for Triangle Pharmaceuticals, Inc. (“VIRS”) at $6.00 per share. Prior to December 31, 2002, the Company agreed to tender its shares in VIRS to Gilead under this tender offer. The Company expects to receive the proceeds related to this transaction during the first quarter of 2003.

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 December 31, 2002 is as follows (in thousands):


			Remaining Funding
Company	Cost Basis		Commitment

Venture capital funds	$	27,405	$	22,945
Equity investments (eight companies)		11,961		—
Convertible loans (five companies)		5,576		2,447
Loans (two companies)		1,507		17,096

Total non-marketable equity securities and loans	$	46,449	$	42,488

The Company’s portfolio in such transactions as of December 31, 2001 is as follows (in thousands):


Company	Cost Basis

Venture capital funds	$	19,702
Equity investments (seven companies)		10,547
Convertible loans (five companies)		7,341
Loans (two companies)		—

Total non-marketable equity securities and loans	$	37,590

Included in the venture capital funds is $7.7 million and $5.9 million at December 31, 2002 and 2001, respectively which are managed by A.M. Pappas & Associates, LLC whose chief executive officer is a member of the Company’s Board of Directors. The Company also has remaining commitments to these funds totaling $7.7 million as of December 31, 2002.

Below is a table representing management’s best estimate as of December 31, 2002 of the amount and timing of the above remaining funding commitments (in thousands):


	2003		2004		Total

Venture capital funds	$	16,897	$	6,048	$	22,945
Convertible loans		2,447		—		2,447
Loans		13,000		4,096		17,096

	$	32,344	$	10,144	$	42,488

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 $4.0 million and $9.2 million of losses due to such impairments in 2002 and 2001, respectively, relating to non-marketable equity securities and loans mainly due to declining financial condition of investees.

DERIVATIVES

As of December 31, 2002, the Company had the following derivative positions in securities of other issuers: (1) conversion option positions that are embedded in financing arrangements and (2) freestanding warrants to purchase shares of common stock.

As of December 31, 2002 and 2001, the Company had funded five convertible loans with a carrying value of approximately $5.6 million and $7.3 million, respectively. Loans that are convertible into an equity interest have an embedded option contract because the value of the equity interest is based on the market price of another entity’s common stock and thus is not clearly and closely related to the value of the interest-bearing note. The Company has not accounted for these embedded conversion features as mark-to-market derivatives because the terms of conversion do not allow for cash settlement and the Company believes that the equity interest delivered upon conversion would not be readily convertible to cash since these entities are privately held or have limited liquidity and trading of their equity interest.

As of December 31, 2002 and 2001, the Company has several freestanding warrants to purchase common stock of various customers and other third parties. These freestanding warrants primarily were acquired as part of the financial arrangements with such customers and third parties. No quoted price is available for the Company’s freestanding warrants to purchase shares of common stock. The Company uses various valuation techniques including the present value of estimated expected future cash flows, option-pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying asset, strike price, time to expiration of the option, estimated price volatility of the underlying asset over the life of the option and restrictions on the transferability or ability to exercise the option. As of January 1, 2001, the Company’s derivative instruments included two warrants to purchase an aggregate of 282,385 shares of common stock of The Medicines Company (NASDAQ: MDCO). The Company estimated the fair value of these derivative instruments to be insignificant at January 1, 2001 and December 31, 2001 because the Company concluded that the implicit restrictions on exercisability and transferability impaired the value of the warrants. The most significant of these restrictions were eliminated in January 2002. In March 2002, the Company exercised the MDCO warrants under its cashless exercise option and received 162,976 shares of MDCO common stock. At December 31, 2002, the Company held warrants from various contracts valued at $5.8 million which are included in the accompanying balance sheet as deposits and other assets. During 2002, the Company recognized investment revenues of $535,000 related to changes in the fair values of the warrants.

The Company had exchange-traded option contracts with a fair value as of December 31, 2001 of approximately $1.3 million. These contracts expired in January 2002 and April 2002. There were no

open exchange-traded option contracts at December 31, 2002. During 2002 and 2001, the Company recorded a $3.4 million gain and a $1.9 million loss, respectively, in earnings related to changes in the fair value of put and call option contracts.

INVESTMENT REVENUES

The following table is a summary of investment revenues for the years ended December 31, 2002, 2001, and 2000 (in thousands):


		2002			2001			2000

Marketable equity and derivative securities:
	Gross realized gains	$	18,093		$	14,394		$	3,270
	Gross realized losses		(92	)		(1,954	)		—
	Impairment losses		(335	)		(6,066	)		(5,466	)
Non-marketable equity securities and loans:
	Gross realized gains		—			2,197			2,775
	Gross realized losses		—			(34	)		—
	Impairment losses		(3,962	)		(7,926	)		—

		$	13,704		$	611		$	579

10.

INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND OTHER

In January 2002, the Company acquired an equity interest in a sales and marketing organization in France for approximately $328,000. The Company’s pro rata share of earnings is included in the accompanying statement of operations as losses of unconsolidated affiliates and other. The Company owns approximately 41.0% at December 31, 2002.

In May 2002, the Company and McKesson Corporation (“McKesson”) completed the formation of a previously announced healthcare informatics joint venture named Verispan, L.L.C. (“Verispan”). The Company and McKesson are equal co-owners of a majority of the equity of Verispan. The Company contributed the net assets of its informatics group having a historical cost basis of approximately $112.1 million (including approximately $101.7 million of basis in excess of the book value of the identifiable net assets) and funded $10 million to Verispan. The net assets contributed to Verispan primarily consisted of accounts receivable, prepaid expense, property and equipment, trade accounts payable, accrued expenses, unearned income, including the basis in excess of the book value of the identifiable net assets. Verispan licenses data products to the Company and McKesson for use in their respective core businesses. Under the license arrangement, the Company continues to have access to Verispan’s commercially available products to enhance their service to and partnering with the Company’s customers.

The Company accounts for its investment in Verispan under the equity method of accounting; therefore, the Company’s pro rata share of Verispan’s earnings, since the date of formation, is included in equity in losses of unconsolidated affiliates and other. As of December 31, 2002, the Company owns approximately 45% of Verispan. The Company’s ownership percentage may change from period to period to the extent new equity partners are admitted to the joint venture. The Company has recorded its investment in Verispan, approximately $120.7 million at December 31, 2002, as an investment in unconsolidated affiliates.

In October 2002, the Company acquired a controlling interest in Health Research Solutions Pty Ltd (“HRS”) and, accordingly, the results of operations for HRS and the assets and liabilities of HRS are included in the results of operations and assets and liabilities of the Company. The Company has recorded the minority interest’s pro rata share (approximately 33.33% at December 31, 2002) of HRS’ earnings in the accompanying statement of operations as equity in losses of unconsolidated affiliates and

other.

11.

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 $29.3 million, $14.1 million and $12.8 million for 2002, 2001 and 2000, respectively. The following is a summary of identifiable intangible assets (in thousands):


		As of December 31, 2002						As of December 31, 2001

		Gross		Accumulated		Net		Gross		Accumulated		Net
		Amount		Amortization		Amount		Amount		Amortization		Amount

Identifiable intangible assets:
	Software and related assets	$	150,713	$	83,974	$	66,739	$	156,806	$	63,938	$	92,868
	Product licensing and distribution rights		81,889		5,913		75,976		33,475		2,344		31,131

		$	232,602	$	89,887	$	142,715	$	190,281	$	66,282	$	123,999

Estimated amortization expense for existing identifiable intangible assets is targeted to be approximately $34.6 million, $28.5 million, $22.6 million, $14.6 million and $9.9 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.

In conjunction with the adoption of SFAS No. 142, the Company completed the required transitional impairment test as of January 1, 2002 and the annual impairment test as of July 31, 2002 and no goodwill impairment was deemed necessary. The following is a summary of goodwill by segment for 2002 (in thousands):


	Product		Commercial
	development		services		Informatics			Consolidated

Balance as of December 31, 2001	$	31,746	$	30,168	$	101,737		$	163,651
Add: acquisition		2,937		—		—			2,937
Less: reclass to investments in unconsolidated affiliates		—		—		(101,737	)		(101,737	)
Impact of foreign currency fluctuations		4,235		1,047		—			5,282

Balance as of December 31, 2002	$	38,918	$	31,215	$	—		$	70,133

The following is a summary of goodwill by segment for 2001 (in thousands):


		Product			Commercial
		development			services			Informatics			Consolidated

Balance as of December 31, 2000		$	30,664		$	48,836		$	105,481		$	184,981
Add: acquisition			5,754			—			—			5,754
Less: impairment			—			(16,120	)		—			(16,120	)
	amortization		(2,324	)		(1,713	)		(3,728	)		(7,765	)
Impact of foreign currency fluctuations			(2,348	)		(835	)		(16	)		(3,199	)

Balance as of December 31, 2001		$	31,746		$	30,168		$	101,737		$	163,651

The decrease in goodwill during 2002 is primarily a result of the formation of the Verispan joint venture. During 2001, the Company recognized a $16.1 million charge to write-off goodwill recorded in four separate acquisitions in the commercial services segment. The goodwill was deemed impaired due to changing business conditions and strategic direction.

Through December 2001, goodwill was amortized on a straight-line basis over periods from five to 40 years. Effective January 1, 2002, the Company adopted SFAS No. 142 and no longer amortizes goodwill. The following is a summary of reported net (loss) income and net (loss) income per share, adjusted to exclude goodwill amortization expense (in thousands, except per share amounts):


		Year Ended December 31,

		2001			2000

Net (loss) income		$	(33,843	)	$	418,923
Add: goodwill amortization			7,765			7,901
Less: income tax benefit			(2,562	)		(2,607	)

Adjusted net (loss) income		$	(28,640	)	$	424,217

Adjusted net (loss) income per share:
	Basic	$	(0.24	)	$	3.66
	Diluted		(0.24	)		3.66

12.

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):


	December 31,

	2002		2001

Compensation and payroll taxes	$	77,354	$	63,458
Restructuring		8,467		30,737
Other		94,913		74,978

	$	180,734	$	169,173

13.

CREDIT ARRANGEMENTS

The following is a summary of the credit facilities available to the Company at December 31, 2002:


Facility		Interest Rates

£10.0 million (approximately $16.0 million) unsecured line of credit		Base (4.0% at December 31, 2002) plus 0.75%

£1.5 million (approximately $2.4 million) general banking facility with the same U.K. bank used for the issuance of guarantees		1% per annum fee for each guarantee issued

The Company did not have any outstanding balances on these facilities at December 31, 2002 and 2001.

Long-term debt and obligations consist of the following (in thousands):


		December 31,

		2002			2001

Missouri tax incentive bonds due October 2009 (6.7% annual interest rate)		$	4,288		$	4,755
Other notes payable			7,269			8,549

			11,557			13,304
	Less: current portion		( 3,347	)		(2,969	)

		$	8,210		$	10,335

Other notes payable include various notes payables, primarily in foreign currencies, with interest rates ranging between 1.875% and 7.5%.

Maturities of long-term debt and obligations at December 31, 2002 are as follows (in thousands):


2003	$	3,347
2004		2,179
2005		1,957
2006		1,702
2007		941
Thereafter		1,431

	$	11,557

The fair value of the Company’s long-term debt approximates its carrying value.

14.

LEASES

The Company leases certain office space and equipment under operating leases. The leases expire at various dates through 2074 with options to cancel certain leases at five-year increments. Annual rental expenses under these agreements were approximately $75.9 million, $76.3 million and $73.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company leases certain assets, primarily vehicles, under capital leases. Capital lease amortization is included with costs of revenues and accumulated depreciation in the accompanying financial statements.

The following is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2002 (in thousands):


	CAPITAL LEASES			OPERATING LEASES

2003	$	19,301		$	62,443
2004		7,330			39,776
2005		1,213			26,548
2006		617			22,078
2007		482			18,970
Thereafter		1,433			72,191

Total minimum lease payments		30,376		$	242,006

Amounts representing interest		(1,359	)

Present value of net minimum payments		29,017
Current portion		(18,372	)

Long-term capital lease obligations	$	10,645

15.

COMMITMENTS AND CONTINGENCIES

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

On January 22, 2002, Federal Insurance Company (“Federal”) and Chubb Custom Insurance Company (“Chubb”) filed suit against the Company, Quintiles Pacific, Inc. and Quintiles Laboratories Limited, two of the Company’s subsidiaries, in the United States District Court for the Northern District of Georgia. In the suit, Chubb, the Company’s primary commercial general liability carrier, and Federal, the Company’s excess liability carrier, seek to rescind the policies issued to the Company for coverage years 2000-2001 and 2001-2002 based on an alleged misrepresentation by the Company on the policy application. Alternatively, Chubb and Federal seek a declaratory judgment that there is no coverage under the policies for some or all of the claims asserted against the Company and its subsidiaries in the litigation described in the prior paragraph and, if one or more of such claims is determined to be covered, Chubb and Federal request an allocation of the defense costs between the claims they contend are covered and non-covered claims. The Company has filed an answer with counterclaims against Federal and Chubb in response to their complaint. Additionally, the Company has amended its pleadings to add AON Risk Services as a counterclaim defendant, as an alternative to the Company’s position that Federal and Chubb are liable under the policies. 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 shareholders seeking to enjoin the consummation of a transaction proposed by Pharma Services Company, a newly formed company wholly owned by Dennis B. Gillings, Ph.D., to acquire all the Company’s outstanding shares for $11.25 per share in cash. All of the lawsuits were

subsequently transferred to the North Carolina Business Court. The lawsuits name as defendants Dr. Gillings, other members of the Company’s Board of Directors, the Company and, in some cases Pharma Services Company. The complaints allege, among other things, that the directors breached their fiduciary duties with respect to the proposal. The complaints seek to enjoin the transaction proposed by Pharma Services Company, and the plaintiffs seek to recover damages. On November 11, 2002, a special committee of the Company’s Board of Directors announced its rejection of the proposal by Pharma Services Company and its intention to investigate strategic alternatives available to the Company for purposes of enhancing shareholder value, including the possibility of a sale of the Company and alternatives that would keep the Company independent and publicly owned. On January 6, 2003, the North Carolina Business Court entered a Case Management Order consolidating all seven lawsuits for all purposes and staying the lawsuits until March 29, 2003 or until the Company provides notice of a change-of-control transaction involving the Company. Based upon its preliminary review, the Company believes the lawsuits are without merit and intends to defend them vigorously.

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

The Company entered into a seven-year service agreement in 2001 with a third party vendor to provide fully integrated information technology infrastructure services in the United States and Europe to the Company. The Company can terminate this agreement with six months notice and a penalty, which is based upon a sliding scale. The Company’s annual commitment under this service agreement is approximately $20.0 million.

16.

SHAREHOLDERS’ EQUITY

The Company is authorized to issue 25 million shares of preferred stock, $.01 per share par value. At December 31, 2002, 500 million common shares of $.01 par value were authorized.

In March 2001, the Board of Directors authorized the Company to repurchase up to $100 million of the Company’s Common Stock from time to time until March 2002. During 2001, the Company entered into agreements to repurchase 1,702,500 shares of its Common Stock for an aggregate price of approximately $27.5 million. On February 7, 2002, the Board of Directors extended this authorization until March 1, 2003. During 2002, the Company entered into agreements to repurchase 1,570,000 shares of its Common Stock for an aggregate price of approximately $22.2 million.

In February 2000, the Board of Directors authorized the Company to repurchase up to $200 million of the Company’s Common Stock from time to time until February 2001. The authorization expired in February 2001. During 2000, the Company repurchased 1,365,500 shares of its Common Stock for an aggregate price of approximately $21.9 million.

To enhance its stock repurchase program, the Company sold put options during 2000 to an independent third party. These put options entitled the holder to sell a total of 500,000 shares of the Company’s Common Stock to the Company on January 2, 2001 at $13.7125 per share. The put options expired unexercised in accordance with their terms on January 2, 2001. The transaction has been recorded as a component of shareholders’ equity.

In November 1999, the Board of Directors declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of the Company’s Common Stock. Each Right, if

activated, entitles the holder to purchase one one-thousandth of a share of the Company’s Series A Preferred Stock at a purchase price of $150, subject to adjustment in certain circumstances. Each one one-thousandth of a preferred share will have the same voting and dividend rights as a share of the Company’s Common Stock. The Rights become exercisable 10 business days after (1) any person or group announces it has acquired or obtained the right to acquire 15% or more of the outstanding shares of the Company’s Common Stock or (2) commencement of a tender offer or exchange offer for more than 15% of the Company’s Common Stock, subject to limited exceptions. In the event that any party should acquire more than 15% of the Company’s Common Stock without the Board’s approval, the Rights entitle all other shareholders to purchase shares of the Company’s Common Stock at a substantial discount. In addition, if the Company engages in certain types of mergers or business combinations after a group or person acquires 15% or more of the Company’s Common Stock, the Rights entitle all other shareholders to purchase common stock of the acquirer at a substantial discount. The Rights expire on November 15, 2009, unless redeemed earlier at the discretion of the Company at the redemption price of $0.0001 per Right.

17.

LOSS ON DISPOSAL

In June 2000, the Company completed the sale of its general toxicology operations in Ledbury, Herefordshire, United Kingdom. This facility contributed less than one percent of consolidated net revenue and was included in the product development segment. In connection with the sale, the Company recognized a $17.3 million loss on disposal.

18.

DISCONTINUED OPERATION

On May 26, 2000, the Company completed the sale of its electronic data interchange unit, ENVOY, to Healtheon/WebMD Corp., which subsequently changed its name to WebMD. Prior to the sale, ENVOY transferred its informatics subsidiary, Synergy Health Care, Inc., to the Company. The Company received $400 million in cash and 35 million shares of WebMD common stock in exchange for its entire interest in ENVOY and a warrant to acquire 10 million shares of the Company’s Common Stock at $40 per share, exercisable for four years. The Company recorded an extraordinary gain on the sale of $436.3 million, net of taxes of $184.7 million.

Because the original acquisition of ENVOY qualified as a tax-free organization, the Company’s tax basis in the acquisition is allowed to be determined by substituting the tax basis of the previous shareholders of ENVOY. However, when the Company sold ENVOY to WebMD during 2000, the tax basis of the previous shareholders was not available to the Company since ENVOY had been a publicly traded corporation at the time of the original acquisition. Therefore, the Company had to estimate its tax basis in ENVOY by reviewing financial statements, tax returns and other public documents which were available to the Company at that time. The Company used the estimated tax basis to calculate the extraordinary gain on the sale of ENVOY, net of income taxes. In September 2001, the Company received the results of a tax basis study completed by its external tax advisors, which was prepared so that the Company could prepare and file its 2000 U.S. Corporate income tax return. Based on this study, the Company adjusted its estimate of its tax basis in ENVOY, resulting in an approximate $142.0 million reduction in income taxes. This change in estimate resulted in an increase for the same amount in the extraordinary gain on the sale of ENVOY.

The Company retained exclusive rights to de-identified ENVOY transaction data and certain other de-identified data available from WebMD, subject to limited exceptions. The Company agreed to share with WebMD a royalty derived from sales of products using the licensed data. The Company formed a strategic alliance with WebMD to develop a web-based suite of integrated products and services for the pharmaceutical industry and may provide funding for development of the products. As a result of the settlement of litigation between the Company and WebMD, the Company continued to receive data from WebMD only through February 28, 2002. In addition, as part of the settlement, the

contracts with WebMD were terminated, which among other things, absolved the Company from any obligation to fund WebMD to develop a web-based suite of integrated products and services. Also, the outstanding warrant to purchase up to 10 million shares of the Company’s Common Stock, at $40 per share, held by WebMD, was cancelled. The Company recorded an $83.2 million gain from the settlement of litigation during 2001.

On March 30, 1999, the Company acquired ENVOY in exchange for 28,465,160 shares of the Company’s Common Stock. Outstanding ENVOY options became options to acquire 3,914,583 shares of the Company’s Common Stock (“Exchanged Options”). On May 26, 2000, employees of ENVOY held 3,312,200 options to acquire Company Common Stock as a result of the Exchanged Options and ENVOY employees’ participation in Company stock option plans. In connection with the sale of ENVOY, all of the options outstanding immediately vested and became exercisable over a three-year term. Subsequently, 2,516,062 of the outstanding options were cancelled and issued with new terms to certain ENVOY employees (“ENVOY Options”). This transaction resulted in a charge of $50.0 million, based on the fair value of the options at the date of grant, which reduced the extraordinary gain from sale of discontinued operation. The ENVOY Options have an exercise price of $6.84, vested immediately, have a term of three years and are automatically exercised if the market price of the Company’s Common Stock reaches $23.34. As of December 31, 2001, all of the stock options had been exercised.

The results of ENVOY through the date of closing have been reported separately as a discontinued operation in the Consolidated Statement of Operations. The results of the discontinued operation do not reflect any interest expense, management fee or transaction costs allocated by the Company.

The following is a summary of income from operations for ENVOY through the date of closing (in thousands):


	YEAR ENDED DECEMBER 31, 2000

Net revenue	$	99,041

Income before income taxes	$	27,121
Income taxes		10,351

Net income	$	16,770

19.

CHANGE IN ACCOUNTING FOR DEFERRED INCOME TAXES

Effective January 1, 2002, the Company changed its method for calculating deferred income taxes related to its multi-jurisdictional tax transactions. Under the prior method, the Company followed an incremental approach to measuring the deferred income tax benefit of its multi-jurisdictional transactions, whereby it 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. As of December 31, 2001, the Company had deferred income tax assets of $72.7 million and a related valuation allowance of $45.7 million pursuant to the application of this prior accounting policy.

The new methodology of accounting for deferred income taxes incorporates a strict jurisdictional view of SFAS No. 109, “Accounting for Income Taxes,” and assumes that the Company recorded deferred income taxes only for the future income tax impact of book and tax basis differences created as

a result of multi-jurisdictional transactions. The Company believes that 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. This new approach ignores (i.e. in determining the amount of any recorded valuation allowance) the fact that future “incremental” income taxes may be paid in a separate tax jurisdiction as a result of the interplay among foreign and U.S. income tax statutes and accordingly may subject the Company to risk of increasing future income tax rates. After the accounting change, related deferred income tax assets on January 1, 2002 were $72.7 million and no valuation allowance was required because it is more likely than not that there would be sufficient future taxable income on the U.S. federal income tax return to realize the benefit of future deductions of that amount which primarily represents deductible goodwill resulting from tax elections made at the time of the Company’s acquisition of Innovex Limited in November 1996. At December 31, 2002, the balance of the related deferred income tax assets was $65.4 million.

In order to effect the change to this method of accounting as of January 1, 2002, the Company recorded a cumulative effect adjustment of $45.7 million representing the reversal of the valuation allowance related to deferred income taxes on these multi-jurisdictional income tax transactions. The change in accounting had no pro forma impact on the Company’s income in any prior quarterly or annual period.

20.

BUSINESS COMBINATIONS

In October 2002, the Company acquired, for approximately $1.8 million in cash, a controlling interest in HRS, a privately held Australian company specializing in multi-national late-phase clinical research. Under the purchase method of accounting, the results of HRS are included in the Company’s results of operations as of the acquisition date and the assets and liabilities of HRS were recorded at their respective fair values. In connection with the acquisition of HRS, the Company recorded $2.7 million of goodwill. The acquisition did not have a material impact on the financial position or results of operations for the Company.

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 ADOXA™ 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 resulted in total intangible assets of $29.3 million. The acquisition did not have a material impact on the financial position or results of operations for the Company.

During the first quarter of 2001, the Company acquired OEC, SA, a Switzerland-based company that provides drug safety services to the pharmaceutical industry, and Ungerer Laboratory, a laboratory based in Pretoria, South Africa specializing in microbiology, molecular biology and hematology. These transactions were accounted for as purchases with an aggregate purchase price of approximately $7.1 million. These acquisitions did not have a material impact on the financial position or results of operations for the Company.

21.

RESTRUCTURING

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 joint venture.

Also during the second quarter of 2002, the Company recognized $9.1 million of restructuring charges as a result of the continued implementation of the strategic plan announced during 2001. This restructuring charge included revisions to 2001 and 2000 restructuring plans of approximately $2.5 million and $1.9 million, respectively, due to a revision in the estimates for the exit costs relating to the abandoned leased facilities. In addition, the adopted follow-on restructuring plan (“2002 Plan”) consisted of $4.3 million related to severance payments, $310,000 related to exit costs and $112,000 of asset write-offs. As part of this plan, approximately 99 positions are to be eliminated mostly in the Europe and Africa region. As of December 31, 2002, 78 individuals have been terminated.

As of December 31, 2002, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2002


	Balance at		2002		2002 Plan Write-Offs/			Balance at
	December 31, 2001		Plan Accrual		Payments			December 31, 2002

Severance and related costs	$	—	$	4,241	$	(2,175	)	$	2,066
Exit costs		—		310		(156	)		154
Asset write-offs		—		112		(112	)		—

	$	—	$	4,663	$	(2,443	)	$	2,220

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

During the third quarter of 2001, the Company recognized a $50.9 million restructuring charge (“2001 B Plan”). In addition, the Company recognized a restructuring charge of approximately $1.1 million as a revision of an estimate to a 2000 restructuring plan. The restructuring charge consisted of $31.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.7 million of exit costs. As part of this restructuring, approximately 1,000 positions worldwide will be eliminated and as of December 31, 2002, 882 individuals have been terminated. In certain circumstances, international regulations and restrictions have caused the terminations to extend beyond one year. Positions have been eliminated in each of the segments.

As of December 31, 2002, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2002


	2001 B Plan
	Balance at		Revisions to			2001 B Plan			Balance at
	December 31, 2001		2001 B Plan			Payment			December 31, 2002

Severance and related costs	$	19,323	$	(5,725	)	$	(12,292	)	$	1,306
Exit costs		8,806		(875	)		(4,550	)		3,381

	$	28,129	$	(6,600	)	$	(16,842	)	$	4,687

As of December 31, 2001, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2001


	2001 A Plan		2001 B Plan		Total		2001 A Plan			2001 B Plan Write-			Balance at
	Accrual		Accrual		Accrual		Payments			offs/Payments			December 31, 2001

Severance and related costs	$	1,970	$	31,134	$	33,104	$	(1,970	)	$	(11,811	)	$	19,323
Asset impairment write-offs		—		8,237		8,237		—			(8,237	)		—
Exit Costs		176		11,567		11,743		(176	)		(2,761	)		8,806

	$	2,146	$	50,938	$	53,084	$	(2,146	)	$	(22,809	)	$	28,129

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 December 31, 2002, 145 individuals have been terminated. In certain circumstances, international regulations and restrictions have caused the terminations to extend beyond one year.

As of December 31, 2002, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2002


			Revisions to		Revisions to							Follow-
	Balance at		January 2000		Follow-On		Revised		January 2000			On Plan			Balance at
	December 31, 2001		Plan		Plan		Accrual		Plan Payments			Payments			December 31, 2002

Severance and related costs	$	894	$	—	$	—	$	894	$	(476	)	$	(301	)	$	117
Exit costs		1,714		644		1,293		3,651		(1,208	)		(1,000	)		1,443

	$	2,608	$	644	$	1,293	$	4,545	$	(1,684	)	$	(1,301	)	$	1,560

As of December 31, 2001, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2001


	Balance at		Revisions to		Revised		January 2000			2000 Follow-On			Balance at
	December 31, 2000		January 2000 Plan		Accrual		Plan Payments			Plan Payments			December 31, 2001

Severance and related costs	$	8,867	$	—	$	8,867	$	(3,530	)	$	(4,443	)	$	894
Exit costs		5,788		1,085		6,873		(4,351	)		(808	)		1,714

	$	14,655	$	1,085	$	15,740	$	(7,881	)	$	(5,251	)	$	2,608

As of December 31, 2000, the following amounts were recorded (in thousands):

Activity Twelve Months Ended December 31, 2000


	January		Revisions to			2000				January 2000
	2000 Plan		January 2000			Follow-		Revised		Plan Write-			2000 Follow-On			Balance at
	Accrual		Plan			On Plan		Accrual		offs/Payments			Plan Payments			December 31, 2000

Severance and related costs	$	33,228	$	(6,321	)	$	5,833	$	32,740	$	(23,136	)	$	(737	)	$	8,867
Asset impairment write-offs		11,315		—			—		11,315		(11,315	)		—			—
Exit costs		14,049		(632	)		1,309		14,726		(8,938	)		—			5,788

	$	58,592	$	(6,953	)	$	7,142	$	58,781	$	(43,389	)	$	(737	)	$	14,655

As a result of the restructuring plans, the Company has approximately 284,000 square feet of abandoned leased facilities as of December 31, 2002. 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	$	5,587
2004		3,516
2005		2,764
2006		2,707
2007		7,545

Gross abandoned lease obligations		22,119
Less: sublease/restructuring accrual		(10,147	)

Total obligation in excess of existing subleases and related restructuring accrual balances	$	11,972

22.

INCOME TAXES

The components of income tax expense (benefit) attributable to continuing operations are as follows (in thousands):


		Year Ended December 31,

		2002			2001			2000

Current:
	Federal	$	15,732		$	13,130		$	(46,052	)
	State		7,117			1,196			2,248
	Foreign		18,258			17,617			15,752

			41,107			31,943			(28,052	)

Deferred expense (benefit):
	Federal and state		11,014			(109,228	)		24,213
	Foreign		(10,694	)		(9,338	)		(12,992	)

			320			(118,566	)		11,221

		$	41,427		$	(86,623	)	$	(16,831	)

Income tax expense (benefit) attributable to continuing operations for 2000 excludes income tax expense from the Company’s discontinued operation.

The Company has allocated directly to additional paid-in capital approximately $857,000 in 2002, $15.9 million in 2001 and $6.8 million in 2000 related to the tax benefit from non-qualified stock options exercised.

The differences between the Company’s consolidated income tax expense (benefit) attributable to continuing operations and the expense (benefit) computed at the 35% U.S. statutory income tax rate were as follows (in thousands):


	Year Ended December 31,

	2002			2001			2000

Federal income tax provision (benefit) at statutory rate	$	43,281		$	(91,874	)	$	(17,852	)
State and local income taxes, net of federal benefit (detriment)		1,764			(1,407	)		(1,787	)
Non-deductible expenses and transaction costs		—			6,337			—
Foreign earnings taxed at different rates		(4,656	)		(3,208	)		(8,833	)
Losses not utilized		—			911			12,725
Other		1,038			2,618			(1,084	)

	$	41,427		$	(86,623	)	$	(16,831	)

Income (loss) before income taxes from foreign operations was approximately $33.0 million, $14.9 million, and ($40.3) million for the years 2002, 2001, and 2000, respectively. Income (loss) from foreign operations was approximately $59.6 million, $41.2 million, and ($11.6) million for the years 2002, 2001 and 2000, respectively. The difference between income from operations and income (loss) before income taxes is due primarily to intercompany charges which eliminate in consolidation for financial statement purposes but, in some cases, do not eliminate for tax purposes. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $180.7 million at December 31, 2002. Those earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various countries.

The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below (in thousands):


		December 31,

		2002			2001

Deferred income tax liabilities:
	Depreciation and amortization	$	—		$	(31,176	)
	Prepaid expenses		(5,804	)		(6,330	)
	Unrealized gain on equity investments		(6,670	)		(12,082	)
	Deferred revenue and other		(12,540	)		(7,388	)
	Other		(7,699	)		(15,054	)

Total deferred income tax liabilities			(32,713	)		(72,030	)
Deferred income tax assets:
	Depreciation and amortization		16,323			—
	Net operating and capital loss carryforwards		120,721			173,034
	Accrued expenses and unearned income		26,043			21,644
	Goodwill, net of amortization		65,397			72,719
	Other		11,882			8,067

			240,366			275,464
Valuation allowance for deferred income tax assets			(19,366	)		(65,025	)

Total deferred income tax assets			221,000			210,439

Net deferred income tax assets		$	188,287		$	138,409

The decrease in the Company’s valuation allowance for deferred income tax assets to $19.4 million at December 31, 2002 from $65.0 million at December 31, 2001 is due to a change in the accounting method for deferred income taxes. This change in accounting method is explained in Note 19.

The Company’s deferred income tax expense (benefit) attributable to continuing operations results from the following (in thousands):


		Year Ended December 31,

		2002			2001			2000

Excess (deficiency) of income tax over financial reporting:
	Depreciation and amortization	$	(40,145	)	$	3,731		$	16,905
	Net operating and capital loss carryforwards		52,309			(113,129	)		(29,880	)
	Valuation allowance increase (decrease)		—			911			7,890
	Accrued expenses and unearned income		(4,377	)		(1,888	)		(4,379	)
	Prepaid expenses		(526	)		(628	)		919
	Deferred revenue		5,153			(4,037	)		12,050
	Other items, net		(12,094	)		(3,526	)		7,716

		$	320		$	(118,566	)	$	11,221

The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for 100% of capital expenditures on certain assets under the Inland Revenue Service guidelines. For 2002, 2001 and 2000, these allowances were $1.4 million, $7.8 million and $15.1 million, respectively, which helped to generate net operating loss carryforwards of $19.4 million to be used to offset taxable income in that country. Assuming the U.K. subsidiaries continue to invest in qualified capital expenditures at an adequate level, the portion of the deferred income tax liability relating to the U.K. subsidiaries may be deferred indefinitely. The Company recognizes a deferred income tax benefit for foreign generated operating losses at the time of the loss when the Company believes it is more likely than not that the benefit will be realized. The Company has net operating loss and capital loss carryforwards of approximately $150.6 million in various entities within the United Kingdom which have no expiration date and has over $42.6 million of net operating loss carryforwards from various foreign jurisdictions which have different expiration periods. In addition, the Company has approximately $219.1 million of U.S. state operating loss carryforwards which expire through 2022 and has approximately $1.5 million of U.S. federal operating loss carryforwards which begin to expire in 2005. The Company also has a U.S. capital loss carryforward of approximately $130.8 million which expires in 2007. The Company evaluates its deferred income tax assets for realization based upon the more likely than not criteria prescribed in SFAS No. 109, “Accounting for Income Taxes.” Based upon current estimates, management believes it is more likely than not that the Company’s deferred income tax assets, after the effect of the recorded valuation allowance, will be realizable. The ultimate realization of deferred income tax assets is dependent upon the Company generating future taxable income and capital gains in sufficient amounts within the applicable carryforward period. Actual results could differ materially from management’s estimates.

23.

WEIGHTED AVERAGE SHARES OUTSTANDING

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


			Year Ended December 31,

			2002		2001		2000

Weighted average shares:
	Basic weighted average shares			118,135		118,223		115,968
	Effect of dilutive securities:
		Stock options		323		—		—

	Diluted weighted average shares			118,458		118,223		115,968

The effect of options to purchase 29.2 million shares of the Company’s common stock were outstanding during 2002 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 common shares and, therefore, the effect would be antidilutive.

The effect of options outstanding during 2001 and 2000 were not included in the computation of diluted net income (loss) per share because the effect on loss from continuing operations would have been antidilutive.

Warrants to purchase 10 million shares of common stock were outstanding from May 2000 until October 2001, but were not included in the computation of diluted net income (loss) per share because the effect on loss from continuing operations would have been antidilutive.

24.

EMPLOYEE BENEFIT PLANS

The Company has numerous employee benefit plans, which cover substantially all eligible employees in the countries where the plans are offered. Contributions are primarily discretionary, except in some countries where contributions are contractually required. Plans include defined contribution plans funded by Company stock in Australia, Belgium, Canada and Singapore; defined contribution plans in Austria, Belgium, Germany, Holland, Hungary, Israel, Netherlands, Poland, Sweden and Great Britain; profit sharing schemes in Canada and France; and defined benefit plans in Germany, Japan, Sweden and the U.K. The defined benefit plan in Germany is an unfunded plan, which is provided for in the balance sheet. The Approved Profit Sharing Schemes in the U.K. and Ireland are no longer funded. These plans were previously funded with Company stock. Final distributions cannot occur until 2004. In addition, the Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees.

Effective May 1, 1999, the Company merged, for administrative purposes only, its employee stock ownership plan (the “ESOP”) and 401(k) plan (the “401(k)”). The eligibility requirements and benefits offered to employees under each plan were not affected by the merger.

The ESOP expense recognized is equal to the cost of the shares allocated to plan participants and the interest expense on the leveraged loans for the year. In 2000, ESOP expense totaled $6.2 million. No shares were allocated to the Plan in either 2002 or 2001; therefore, there was no expense in those years. As of December 31, 2002, 2001 and 2000, 1,315,380, 1,511,476 and 1,667,449 shares, respectively, were allocated to participants. There are no unallocated shares held in suspense as of December 31, 2002. All ESOP shares are considered outstanding for income per share calculations.

Under the 401(k), the Company matches employee deferrals at varying percentages, set at the discretion of the Board of Directors. For the years ended December 31, 2002, 2001 and 2000, the

Company expensed $7.2 million, $9.5 million and $5.1 million, respectively, as matching contributions.

Participating employees in the Company’s employee stock purchase plan (the “Purchase Plan”) have the option to purchase shares at 85% of the lower of the closing price per share of common stock on the first or last day of the calendar quarter. The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. During 2002, 2001 and 2000, 351,695, 382,968 and 663,531 shares, respectively, were purchased under the Purchase Plan. At December 31, 2002, 957,573 shares were available for issuance under the Purchase Plan.

The Company has stock option plans to provide incentives to eligible employees, officers and directors in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock. The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. Options, particularly those assumed or exchanged as a result of acquisitions, have various vesting schedules and terms. The majority of options granted under the Company’s stock option plans typically vest 25% per year over four years and expire 10 years from the date of grant.

As the Company has done in prior years, the Company reimburses its Chairman for business-related travel services he provides for himself and other Company employees with the use of his own airplane. For 2002, these reimbursements totaled approximately $2.8 million which includes the granting of stock options with a Black-Scholes value of $1.4 million.

Stock option activity during the periods indicated is as follows:


		Number of			Weighted-Average
		Options			Exercise Price

Outstanding at December 31, 1999			17,884,480		$	27.59
	Granted		15,340,516			14.78
	Exercised		(508,412	)		9.24
	Canceled		(5,558,403	)		21.98

Outstanding at December 31, 2000			27,158,181			21.80
	Granted		8,399,811			18.40
	Exercised		(2,514,514	)		12.88
	Canceled		(3,158,609	)		22.89

Outstanding at December 31, 2001			29,884,869			21.44
	Granted		7,311,605			12.78
	Exercised		(444,783	)		11.26
	Canceled		(3,094,059	)		21.47

Outstanding at December 31, 2002			33,657,632		$	19.69

Selected information regarding stock options as of December 31, 2002 follows:


OPTIONS OUTSTANDING							OPTIONS EXERCISABLE

Number of			Weighted-Average		Weighted-Average		Number of		Weighted-Average
Options	Exercise Price Range		Exercise Price		Remaining Life		Options		Exercise Price

6,093,006	$	1.04 - $13.09	$	11.01		8.83		898,722	$	8.52
7,609,190	$	13.13 - $13.44		13.44		7.13		5,560,202		13.44
6,979,255	$	13.50 - $17.75		15.62		8.19		2,881,341		15.17
6,982,677	$	17.80 - $25.25		20.81		6.84		5,056,913		20.71
5,993,504	$	25.44 - $56.25		39.90		4.97		5,503,179		40.17

33,657,632			$	19.69		7.21		19,900,357	$	22.71

25.

OPERATIONS BY GEOGRAPHIC LOCATION

The table below presents the Company’s operations by geographical location. The Company attributes revenues to geographical locations based upon (1) customer service activities, (2) operational management, (3) business development activities and (4) customer contract coordination. Investment revenues are included in the United States data. The Company’s operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals (in thousands):


				2002			2001		2000

Revenues:
	Americas:
		United States		$	694,809		$	815,204	$	930,495
		Other			43,033			39,710		28,710

			Americas		737,842			854,914		959,205
	Europe and Africa:
		United Kingdom			344,392			330,087		348,267
		Other			317,367			271,730		233,231

			Europe and Africa		661,759			601,817		581,498
	Asia-Pacific				193,158			163,752		119,786

					1,592,759			1,620,483		1,660,489
Reimbursed service costs					399,650			263,429		210,588

				$	1,992,409		$	1,883,912	$	1,871,077

Property, equipment and software, net:
	Americas:
		United States		$	165,628		$	203,685	$	222,727
		Other			1,729			1,856		2,067

			Americas		167,357			205,541		224,794
	Europe and Africa:
		United Kingdom			127,390			125,702		133,025
		Other			15,969	��		13,640		16,911

			Europe and Africa		143,359			139,342		149,936
	Asia-Pacific				17,186			17,423		17,230

				$	327,902		$	362,306	$	391,960

26.

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, which became a reportable segment in 2002. The informatics group was transferred to a joint venture in May 2002. Management has distinguished these segments based on the normal operations of the Company. The product development group is primarily responsible for all phases of clinical research and outcomes research consulting. The commercial services group is primarily responsible for sales force deployment and strategic marketing services. Before being transferred to the joint venture, the informatics group was primarily responsible for providing market research solutions and strategic analysis to support healthcare decisions. The PharmaBio Development group is primarily responsible for facilitating non-traditional customer alliances and consists primarily of product revenues, royalties and commissions and investment revenues relating to the financial arrangements with customers and other third parties. During 2002, the Late Phase, primarily Phase IV, operations previously included in the commercial services group were reclassified to the product development group in order to consolidate the operational and business development activities. These changes are reflected in all periods presented. The Company does not include general and administrative expenses, depreciation and amortization except amortization of commercial rights, interest (income) expense, other (income) expense and income tax expense (benefit) in segment profitability. Intersegment revenues have been eliminated. (in thousands):

Year Ended December 31, 2002


			Product		Commercial				PharmaBio
			development		services		Informatics		Development		Eliminations			Consolidated

Service revenues:
	External		$	944,861	$	503,466	$	20,347	$	—	$	—		$	1,468,674
	Intersegment			—		54,548		—		—		(54,548	)		—

	Total net services			944,861		558,014		20,347		—		(54,548	)		1,468,674
	Reimbursed service costs			312,669		86,959		22		—		—			399,650

Gross service revenues				1,257,530		644,973		20,369		—		(54,548	)		1,868,324
Commercial rights and royalties				—		—		—		110,381		—			110,381
Investment				—		—		—		13,704		—			13,704

		Total revenues	$	1,257,530	$	644,973	$	20,369	$	124,085	$	(54,548	)	$	1,992,409

Contribution (revenues less costs of revenues excluding depreciation and amortization shown below):
			$	477,492	$	207,711	$	8,024	$	17,620	$	—		$	710,847

Year Ended December 31, 2001


			Product		Commercial				PharmaBio
			development		services		Informatics		Development			Eliminations			Consolidated

Service revenues:
	External		$	913,947	$	621,964	$	58,169	$	—		$	—		$	1,594,080
	Intersegment			—		12,900		—		—			(12,900	)		—

	Total net services			913,947		634,864		58,169		—			(12,900	)		1,594,080
	Reimbursed service costs			234,481		28,743		205		—			—			263,429

Gross service revenues				1,148,428		663,607		58,374		—			(12,900	)		1,857,509
Commercial rights and royalties				—		—		—		25,792			—			25,792
Investment				—		—		—		611			—			611

		Total revenues	$	1,148,428	$	663,607	$	58,374	$	26,403		$	(12,900	)	$	1,883,912

Contribution (revenues less costs of revenues excluding depreciation and amortization shown below):
			$	438,426	$	197,452	$	27,173	$	(2,311	)	$	—		$	660,740

Year Ended December 31, 2000


				Product		Commercial				PharmaBio
				development		services		Informatics		Development		Eliminations		Consolidated

Service revenues:
	External			$	841,525	$	748,494	$	59,709	$	—	$	—	$	1,649,728
	Intersegment				—		—		—		—		—		—

	Total net services				841,525		748,494		59,709		—		—		1,649,728
		Reimbursed service costs			191,092		19,471		25		—		—		210,588

Gross service revenues					1,032,617		767,965		59,734		—		—		1,860,316
Commercial rights and royalties					—		—		—		10,182		—		10,182
Investment					—		—		—		579		—		579

			Total revenues	$	1,032,617	$	767,965	$	59,734	$	10,761	$	—	$	1,871,077

Contribution (revenues less costs of revenues excluding depreciation and amortization shown below):
				$	382,611	$	247,535	$	33,239	$	1,320	$	—	$	664,705


		2002		2001		2000

Total Assets:
	Product development	$	716,033	$	680,221	$	651,347
	Commercial services		384,814		229,190		282,492
	PharmaBio Development		315,633		164,111		131,498
	Informatics		—		124,057		141,420
	Corporate		637,715		656,215		660,665

		$	2,054,195	$	1,853,794	$	1,867,422

Expenditures to acquire long-lived assets:
	Product development	$	34,402	$	109,031	$	72,146
	Commercial services		4,656		12,520		26,939
	PharmaBio Development		247		—		—
	Informatics		666		9,962		6,964
	Corporate		186		2,470		2,733

		$	40,157	$	133,983	$	108,782

Depreciation and amortization expense:
	Product development	$	60,710	$	60,255	$	53,959
	Commercial services		21,926		23,823		27,782
	Informatics		2,559		10,031		8,464
	Corporate		953		986		1,037

Depreciation and amortization excluded from contribution			86,148		95,095		91,242
	PharmaBio Development		3,676		1,008		1,325

Total depreciation and amortization		$	89,824	$	96,103	$	92,567

27.

QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations (in thousands, except per share amounts):


		YEAR ENDED DECEMBER 31, 2002

		FIRST		FIRST		SECOND		THIRD		FOURTH
		QUARTER		QUARTER		QUARTER		QUARTER		QUARTER

		As Reported		As Restated

Gross revenues		$	493,296	$	493,296	$	498,233	$	490,965	$	509,915
Income from continuing operations before income taxes			25,762		25,762		30,074		33,798		34,026
Income (loss) from continuing operations			17,261		17,261		20,626		21,179		22,598
Cumulative effect on prior years (to December 31, 2001) of changing to a different method of recognizing deferred income			—		45,659		—		—		—
Net income		$	17,261	$	62,920	$	20,626	$	21,179	$	22,598

Basic net income per share:
	Income from continuing operations	$	0.15	$	0.15	$	0.17	$	0.18	$	0.19
	Cumulative effect of change in accounting principle		—		0.38		—		—		—

	Basic net income per share	$	0.15	$	0.53	$	0.17	$	0.18	$	0.19

Diluted net income per share:
	Income from continuing operations	$	0.14	$	0.14	$	0.17	$	0.18	$	0.19
	Cumulative effect of change in accounting principle		—		0.38		—		—		—

	Diluted net income per share	$	0.14	$	0.52	$	0.17	$	0.18	$	0.19

Range of stock prices				$	14.680-19.300	$	11.300-17.700	$	8.350-12.457	$	7.650-12.360

As discussed in Note 19, the Company changed its method for calculating deferred income taxes related to multi-jurisdictional tax transactions effective January 1, 2002.


		YEAR ENDED DECEMBER 31, 2001

		FIRST		SECOND		THIRD			FOURTH
		QUARTER		QUARTER		QUARTER			QUARTER

Gross revenues		$	464,141	$	471,718	$	464,683		$	483,370
Income (loss) from continuing operations before income taxes			11,628		14,438		(398,605	)		110,043
Income (loss) from continuing operations			7,791		9,674		(265,911	)		72,573
Extraordinary gain from sale of discontinued operation, net of taxes			—		—		142,030			—
Net income (loss)		$	7,791	$	9,674	$	(123,881	)	$	72,573

Basic net income (loss) per share:
	Income (loss) from continuing operations	$	0.07	$	0.08	$	(2.22	)	$	0.61
	Extraordinary gain from sale of discontinued operation		—		—		1.19			—
	Basic net income (loss) per share	$	0.07	$	0.08	$	(1.03	)	$	0.61

Diluted net income (loss) per share:
	Income (loss) from continuing operations	$	0.06	$	0.08	$	(2.22	)	$	0.60
	Extraordinary gain from sale of discontinued operation		—		—		1.19			—

	Diluted net income (loss) per share	$	0.06	$	0.08	$	(1.03	)	$	0.60

Range of stock prices		$	14.688-22.875	$	15.000–26.050	$	12.450-25.500		$	13.610-18.900

Report of Independent Accountants

The Board of Directors and Shareholders of Quintiles Transnational Corp.

In our opinion, the accompanying consolidated balance sheet as of December 31, 2002 and the related consolidated statements of operations, of cash flows, and of shareholders’ equity present fairly, in all material respects, the financial position of Quintiles Transnational Corp. and subsidiaries at December 31, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of Quintiles Transnational Corp. as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, before the revisions described in Note 2, 11 and 26, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 23, 2002, except with respect to the matters discussed in Note 23, as to which the date is March 22, 2002*.

As discussed in Note 19 to the financial statements, the Company changed its method for recording the benefit of international, multi-jurisdictional tax strategies on January 1, 2002.

As discussed in Note 11 to the financial statements, the Company changed its method of accounting for goodwill upon the adoption of the accounting guidance of Statement of Financial Accounting Standards No. 142 on January 1, 2002.

As discussed above, the financial statements of Quintiles Transnational Corp. and subsidiaries as of December 31, 2001, and for each of two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Notes 2 and 26, these financial statements have been restated to reflect the adoption of Emerging Issues Task Force 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” and the change in the composition of the Company’s reportable segments, respectively. As described in Note 11, these financial statements have also been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. We audited the adjustments described in Notes 2 and 26 that were applied to revise the 2001 and 2000 financial statements. We also audited the transitional disclosures described in Note 11. In our opinion, such adjustments are appropriate and have been properly applied and the transitional disclosures for 2001 and 2000 in Note 11 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such adjustments and disclosure and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.

/s/PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 29, 2003

*This reference refers to Note 23 on Form 10-K for the year ended December 31, 2001.

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with our filing on Form 10-K for the fiscal year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K. For further discussion, see Exhibit 23.02 to this Form 10-K of which this report forms a part. The financial statements to which this report relates have been revised as discussed in Note 2. These changes are not covered by the copy of the report of Arthur Andersen LLP and were audited by PricewaterhouseCoopers LLP as described in their report.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Quintiles Transnational Corp.:

We have audited the accompanying consolidated balance sheets of Quintiles Transnational Corp. (a North Carolina corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quintiles Transnational Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Raleigh, North Carolina,
January 23, 2002, except with respect to
the matters discussed in Note 23, as to
which the date is March 22, 2002*

*This reference refers to Note 23 on Form 10-K for the year ended December 31, 2001.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this Annual Report on Form 10-K, as amended.


Financial Statements	Form 10-K Page

Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000		33
Consolidated Balance Sheets as of December 31, 2002 and 2001		34
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000		36
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000		38
Notes to Consolidated Financial Statements		39
Report of Independent Public Accountants, PricewaterhouseCoopers LLP, dated January 29, 2003		76
Report of Independent Public Accountants, Arthur Andersen LLP, dated January 23, 2002 (previously issued and not reissued)		77

(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements.

(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.


Exhibit		Description

3.01(1)		Amended and Restated Articles of Incorporation, as amended

3.02(2)		Amended and Restated Bylaws, as amended

4.01		Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01)

4.02		Amended and Restated Bylaws, as amended (see Exhibit 3.02)

4.03(3)		Specimen certificate for Common Stock, $0.01 par value per share

4.04(4)		Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock


Exhibit		Description

10.01(5)(6)		Employment Agreement, dated March 13, 2001, by and between Dr. Pamela J. Kirby and Quintiles Transnational Corp.

10.02(5)(7)		Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.03(5)(8)		Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.04(5)(9)		Second Amendment to Contract of Employment, dated April 1, 2002, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.05(5)(8)		Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp.

10.06(5)(8)		Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp.

10.07(5)(8)		Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp.

10.08(5)(9)		Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on January 1, 2001

10.09(5)(8)		Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated

10.10(5)(9)		Quintiles Transnational Corp. Nonqualified Stock Option Plan, amended January 1, 2001

10.11*		Quintiles Transnational Corp. 2002 Stock Option Plan

10.12*		Quintiles Transnational Corp. Special Bonus Plan

10.13(10)		Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company

10.14(11)		Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc.

10.15(12)		Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and QFinance, Inc.

10.16(13)		Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation.


Exhibit		Description

10.17(9)		Master Services Agreement dated as of January 1, 2001 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. [Note: Certain confidential portions of this exhibit have been omitted as indicated in the exhibit with an asterisk (*), and filed with the Securities and Exchange Commission.]

10.18(5)		Amendment to Executive Employment Agreement, dated March 31, 2003, by and between James L. Bierman and Quintiles Transnational Corp.

16.01(14)		Letter regarding change in the Company’s certifying accountant dated May 17, 2002

18.01*		Letter regarding change in accounting principle

21*		Subsidiaries

23.01*		Consent of PricewaterhouseCoopers LLP, dated February 21, 2003

23.02*		Information Regarding the Consent of Arthur Andersen LLP

23.03		Consent of PricewaterhouseCoopers LLP

24.01*		Power of Attorney (included on the signature page hereto)

31.01		Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

31.02		Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

32.01		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

32.02		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

99.01*		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

99.02*		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

99.03**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 dated April 29, 2003. Furnished in accordance with the Commission’s guidance published in SEC Rel. No. 34-47551. This exhibit shall not be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934.

99.04**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 dated April 29, 2003. Furnished in accordance with the Commission’s guidance published in SEC Rel. No. 34-47551. This exhibit shall not be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934.

	*		Previously filed with the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on February 24, 2003.

	**		Previously filed with Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on April 29, 2003.

	(1)		Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission on November 15, 1999, and incorporated herein by reference.

	(2)		Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference.

	(3)		Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference.

	(4)		Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference.

	(5)		Executive compensation plans and arrangements

	(6)		Exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2001, as filed with the Securities and Exchange Commission on May 15, 2001, and incorporated herein by reference.

	(7)		Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference.

	(8)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference.

	(9)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 22, 2002, and incorporated herein by reference.

	(10)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference.

	(11)		Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference.

	(12)		Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the

			Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference.

	(13)		Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 1, 2001, and incorporated herein by reference.

	(14)		Exhibit to our Current Report on Form 8-K dated May 17, 2002, as filed with the Securities and Exchange Commission on May 22, 2002, and incorporated herein by reference.

(b)

Reports on Form 8-K.

We furnished the following four Current Reports on Form 8-K between October 1, 2002 and December 31, 2002:

On October 15, 2002, we furnished a Current Report on Form 8-K attaching a press release announcing that an entity wholly owned by Dennis Gillings, our Chairman of the Board and Founder, had made a non-binding proposal to acquire all of our outstanding shares. The Current Report on Form 8-K dated October 15, 2002 was furnished pursuant to Regulation FD. This report shall not be deemed to be incorporated by reference into this Form 10-K or filed hereunder for purposes of liability under the Securities Exchange Act of 1934.

On October 17, 2002, we furnished a Current Report on Form 8-K reporting the commencement of several purported class action lawsuits seeking to enjoin the consummation of the transaction contemplated by the non-binding proposal made by Pharma Services Company, a newly formed company wholly owned by Dennis B. Gillings, Ph.D., to acquire all of our outstanding shares for $11.25 per share in cash. The Current Report on Form 8-K dated October 17, 2002 was furnished pursuant to Regulation FD. This report shall not be deemed to be incorporated by reference into this Form 10-K or filed hereunder for purposes of liability under the Securities Exchange Act of 1934.

On October 28, 2002, we furnished a Current Report on Form 8-K attaching a press release updating the activities of the Special Committee of our Board of Directors and identifying the members of the Special Committee. The Current Report on Form 8-K dated October 28, 2002 was furnished pursuant to Regulation FD. This report shall not be deemed to be incorporated by reference into this Form 10-K or filed hereunder for purposes of liability under the Securities Exchange Act of 1934.

On November 12, 2002, we furnished a Current Report on Form 8-K attaching a press release in which the Special Committee of our Board of Directors announced that it had rejected the proposal by Pharma Services Company, an entity wholly owned by Dennis B. Gillings, Ph.D., our Chairman of the Board and Founder, to acquire all of our outstanding shares. The Current Report on Form 8-K dated November 12, 2002 was furnished pursuant to Regulation FD. This report shall not be deemed to be incorporated by reference into this Form 10-K or filed hereunder for purposes of liability under the Securities Exchange Act of 1934.

(c)

Exhibits Required by this Form 10-K.

See (a)(3) above.

(d)

Financial Statements and Schedules.

See (a)(2) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Durham, North Carolina, on the 26th day of August, 2003.


		QUINTILES TRANSNATIONAL CORP.

		By:		/s/ Dennis B. Gillings

				Dennis B. Gillings, Ph.D.
				Chairman of the Board of Directors

EXHIBIT INDEX


Exhibit		Description

3.01(1)		Amended and Restated Articles of Incorporation, as amended

3.02(2)		Amended and Restated Bylaws, as amended

4.01		Amended and Restated Articles of Incorporation, as amended (see Exhibit 3.01)

4.02		Amended and Restated Bylaws, as amended (see Exhibit 3.02)

4.03(3)		Specimen certificate for Common Stock, $0.01 par value per share

4.04(4)		Amended and Restated Rights Agreement, dated as of November 5, 1999 and amended and restated as of May 4, 2000 between Quintiles Transnational Corp. and First Union National Bank, including form of Articles of Amendment of Amended and Restated Articles of Incorporation, form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock

10.01(5)(6)		Employment Agreement, dated March 13, 2001, by and between Dr. Pamela J. Kirby and Quintiles Transnational Corp.

10.02(5)(7)		Employment Agreement, dated February 22, 1994, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.03(5)(8)		Amendment to Contract of Employment, dated October 26, 1999, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.04(5)(9)		Second Amendment to Contract of Employment, dated April 1, 2002, by and between Dr. Dennis B. Gillings and Quintiles Transnational Corp.

10.05(5)(8)		Executive Employment Agreement, dated June 16, 1998, by and between James L. Bierman and Quintiles Transnational Corp.

10.06(5)(8)		Executive Employment Agreement, dated December 3, 1998, by and between John S. Russell and Quintiles Transnational Corp.

10.07(5)(8)		Amendment to Executive Employment Agreement, dated October 26, 1999, by and between John S. Russell and Quintiles Transnational Corp.

10.08(5)(9)		Quintiles Transnational Corp. Equity Compensation Plan, as amended and restated on January 1, 2001

10.09(5)(8)		Quintiles Transnational Corp. Elective Deferred Compensation Plan, as amended and restated

10.10(5)(9)		Quintiles Transnational Corp. Nonqualified Stock Option Plan, amended January 1, 2001

10.11*		Quintiles Transnational Corp. 2002 Stock Option Plan


Exhibit		Description

10.12*		Quintiles Transnational Corp. Special Bonus Plan

10.13(10)		Underlease, dated November 28, 1997, by and between PDFM Limited and Quintiles (UK) Limited and guaranteed by the Company

10.14(11)		Agreement for the Provision of Research Services and Purchase of Business Assets, dated as of January 1, 1999, between Hoescht Marion Roussel, Inc. and Quintiles, Inc.

10.15(12)		Agreement and Plan of Merger, dated as of January 22, 2000, among Quintiles Transnational Corp., Healtheon/WebMD Corporation, Pine Merger Corp., Envoy Corp. and QFinance, Inc.

10.16(13)		Settlement Agreement, dated October 12, 2001, between Quintiles Transnational Corp. and WebMD Corporation.

10.17(9)		Master Services Agreement dated as of January 1, 2001 between Quintiles Transnational Corp. and A.M. Pappas & Associates, LLC. [Note: Certain confidential portions of this exhibit have been omitted as indicated in the exhibit with an asterisk (*), and filed with the Securities and Exchange Commission.]

10.18(5)		Amendment to Executive Employment Agreement, dated March 31, 2003, by and between James L. Bierman and Quintiles Transnational Corp.

16.01(14)		Letter regarding change in the Company’s certifying accountant dated May 17, 2002

18.01*		Letter regarding change in accounting principle

21*		Subsidiaries

23.01*		Consent of PricewaterhouseCoopers LLP, dated February 21, 2003

23.02*		Information Regarding the Consent of Arthur Andersen LLP

23.03		Consent of PricewaterhouseCoopers LLP

24.01*		Power of Attorney (included on the signature page hereto)

31.01		Certification Pursuant to Rule 13a-14/15d-14,, As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

31.02		Certification Pursuant to Rule 13a-14/15d-14, As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

32.01		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

32.02		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

99.01*		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002


Exhibit		Description

99.02*		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

99.03**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 dated April 29, 2003. Furnished in accordance with the Commission’s guidance published in SEC Rel. No. 34-47551. This exhibit shall not be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934.

99.04**		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 dated April 29, 2003. Furnished in accordance with the Commission’s guidance published in SEC Rel. No. 34-47551. This exhibit shall not be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934.

	*		Previously filed with the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on February 24, 2003.

	**		Previously filed with Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on April 29, 2003.

	(1)		Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 1999, as filed with the Securities and Exchange Commission on November 15, 1999, and incorporated herein by reference.

	(2)		Exhibit to our Current Report on Form 8-K dated November 5, 1999, as filed with the Securities and Exchange Commission on November 5, 1999 and incorporated herein by reference.

	(3)		Exhibit to our Registration Statement on Form S-8 as filed with the Securities and Exchange Commission (File No. 333-92987) effective December 17, 1999, and incorporated herein by reference.

	(4)		Exhibit to our Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-23520), as filed with the Securities and Exchange Commission on May 10, 2000, and incorporated herein by reference.

	(5)		Executive compensation plans and arrangements

	(6)		Exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2001, as filed with the Securities and Exchange Commission on May 15, 2001, and incorporated herein by reference.

	(7)		Exhibit to our Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission (File No. 33-75766) effective April 20, 1994, and incorporated herein by reference.

	(8)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000, and incorporated herein by reference.

	(9)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 22, 2002, and incorporated herein by reference.

	(10)		Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 30, 1998, and incorporated herein by reference.

	(11)		Exhibit to our Current Report on Form 8-K dated March 3, 1999, as filed with the Securities and Exchange Commission on March 3, 1999, and incorporated herein by reference.

	(12)		Exhibit to our Current Report on Form 8-K, dated January 25, 2000, as filed with the Securities and Exchange Commission on January 25, 2000, and incorporated herein by reference.

	(13)		Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 1, 2001, and incorporated herein by reference.

	(14)		Exhibit to our Current Report on Form 8-K dated May 17, 2002, as filed with the Securities and Exchange Commission on May 22, 2002, and incorporated herein by reference.

Quintiles Transnational (QTRN) Inactive 10-K/A2002 FY Annual report (amended)