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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the fiscal year ended December 31, 2002

Commission file number 000-23520

Registrant’s telephone number, including area code:

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

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

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

     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 þ    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. o

     The aggregate market value of the registrant’s Common Stock at January 31, 2003 held by those persons deemed by the registrant to be non-affiliates was approximately $1,403,887,942.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ    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 $1,326,362,282.

     As of January 31, 2003 (the latest practicable date), there were 118,011,642 shares of the registrant’s Common Stock, $.01 par value per share, outstanding.

Documents Incorporated by Reference

     Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.

QUINTILES TRANSNATIONAL CORP.

FORM 10-K ANNUAL REPORT

INDEX

PART I

      Information set forth in this Annual Report on Form 10-K contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” or “target” or the negative thereof or other variations thereof or comparable terminology.

      We caution you that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including without limitation, uncertainties arising in connection with the process of our Board of Director’s special committee, including the possibility that our operations may be adversely affected by the impact of the process on our employees or customers, that transactions recommended by our Board of Directors following the special committee process will not be approved or completed, that litigation may continue, and that, in the case of a sale of our company, investors might no longer be able to freely trade our shares on the public market. Uncertainty pending the outcome of the special committee’s process, as well as the result of that process, could impact our results of operations and financial condition in ways that we are not able to predict. Additional uncertainties that could cause our actual operating results to differ materially from those in the forward looking statement include the risk that the market for our products and services will not grow as we expect, the risk that our PharmaBio Development transactions will not generate revenues, profits or return on investment at the rate or levels we expect or that royalty revenues under our PharmaBio Development arrangements may not be adequate to offset our upfront and on-going expenses in providing sales and marketing services or in making milestone and marketing payments, our ability to distribute backlog among project management groups and match demand to resources, our actual operating performance, variation in the actual savings and operating improvements resulting from previous restructurings, our ability to maintain large customer contracts or to enter into new contracts, changes in trends in the pharmaceutical industry, the ability to operate successfully a new line of business, the risk that Verispan, our joint venture with McKesson Corporation relating to the informatics business, will not be successful, and liability risks associated with our business which could result in losses or indemnity to others not covered by insurance. See “Risk Factors” below for additional factors that could cause actual results to differ.

Item 1.     Business

General

      We are a market leader in providing a full range of integrated product development and commercial development solutions to the pharmaceutical, biotechnology and medical device industries. We also provide market research solutions and strategic analyses to support healthcare decisions and healthcare policy consulting to governments and other organizations worldwide. Supported by our extensive information technology capabilities, we provide a broad range of contract services to help our customers reduce the length of time from the beginning of development to peak sales of a new drug or medical device.

      Our product development group is one of the largest contract research organizations, or CROs, globally, with particular strength in Phase II and Phase III clinical trials, but with a presence in each phase of the drug development life cycle and major geographic region. Our commercial services group is one of the largest contract sales organizations, or CSOs, and the only one with the ability to provide these services worldwide. We serve customers’ needs by offering a suite of services that carries their products from the preclinical phase all the way through to post-launch. Our PharmaBio Development group allows us to leverage our CSO and CRO expertise in combination with our financial resources to partner with customers in specialty pharmaceutical or co-promotion roles. We

      We were founded in 1982 by Dr. Dennis Gillings to offer biostatistics and data management services to the pharmaceutical industry. We have continued over time to expand the scope of our services and geographic presence to support the needs of our customers on a worldwide basis. As part of this strategy, we completed approximately 39 acquisitions over the past seven years to expand or strengthen our services. While our acquisition rate has slowed in recent years, with six completed over the past three years, we have focused our efforts on reorganizing our operating units, creating new ways of marketing and selling our services and moving our informatics business to a joint venture. In addition, through the formation of our PharmaBio Development group in 2000, we have begun to pursue strategic alliances with our customers which pair the services of our commercial services and product development groups with funding support for our customers. As part of our normal course of business, we also evaluate opportunities to acquire specific products and/or marketing rights to products.

      Over the past two years, we have implemented a global strategic plan that we believe will allow us to meet the changing needs of our customers and increase our opportunity for growth. Our strategy is built on the following initiatives:

	•	Implementing strategic alliances. Through our PharmaBio Development group, we are pursuing strategic alliances with customers in which we combine the services of our commercial services and product development groups with funding support for our customers. In appropriate circumstances, we may also acquire the rights to receive royalties or commissions based on sales of the customer’s product.
	•	Leveraging technology and information. We are focusing on leveraging our technology to increase the value of our services to our customers and to increase our own efficiency. For example, our commercial services group is using our iQLearning Network to deliver Internet based programs such as eCME and E-detailing products to supplement office visits and allow us to reach doctors who are not easily accessed. At the same time, we are able to leverage our recruitment services across the iQLearning Network to drive down our costs. Our product development group is focusing on gaining operating efficiency in data management by eliminating duplicate offices and shifting capabilities to low-cost, high quality regions and eventually through the use of secure Internet links.
	•	Realigning business development. We are moving towards a business development strategy which focuses on specific customers to acquire a better understanding of the whole of that customer’s needs. We may achieve this understanding by acquiring some of the customer’s infrastructure, bringing along with it a relationship with the customer. In other cases, we may expand existing customer relationships into preferred provider relationships, such as by forming long-term clinical development alliances designed to enable the customer to boost efficiencies in its drug development programs.
	•	Hiring and retaining quality employees. Our employees are our business, and we are dedicated to strengthening and stabilizing our workforce.
	•	Creating efficiencies through shared service centers and near real-time human resources management. We believe we can create operational efficiencies by centralizing our finance and human resources functions in professional services centers that we established regionally in the United States and Europe.

Services

      We provide globally integrated contract research, sales, marketing and healthcare policy consulting and health information management services to the worldwide pharmaceutical, biotechnology, medical device and healthcare industries. We currently operate in three reportable segments: product development, commercial services, and PharmaBio Development. Our product

      We currently provide our customers with a continuum of services which span our three segments. We believe that the broad scope of our services allows us to help our customers rapidly assess the viability of a growing number of new drugs, cost-effectively accelerate development of the most promising drugs, launch new drugs to the market quickly and evaluate their impact on healthcare. The following discussion describes our service offerings in greater detail.

Product Development Offerings

      Our largest business segment, the product development group, competes in the CRO industry. Our product development group provides a wide range of products and services to customers in the pharmaceutical, biotechnology, and medical device industries. The group offers global expertise in drug development from early compound analysis through regulatory submission. Our capabilities span preclinical and toxicology testing and all phases of clinical testing. Our product development segment is divided into two groups: Early Development and Laboratory Services, which focuses on early stage pharmaceutical development and laboratory services for the later phases, and Clinical Development Services, which specializes in later stage clinical trials.

      Preclinical services. Our preclinical unit provides customers with a wide array of early development services. These services are designed to produce the data required to identify, quantify and evaluate the risks to humans resulting from the manufacture or use of pharmaceutical and biotechnology products. Such services include general toxicology, carcinogenicity testing, pathology, efficacy and safety pharmacology, bioanalytical chemistry, drug metabolism and pharmacokinetics. During 2001, we opened a safety pharmacology unit in Kansas City, Missouri. The development of this capability in the United States during 2002, in combination with our Edinburgh, Scotland unit has allowed us to provide full service safety pharmacology to our U.S. customers while further strengthening our global position.

      Formulation, manufacturing and packaging services. We offer services in the design, development, analytical testing and commercial manufacture of pharmaceutical dose forms. We provide study medications for preclinical and clinical studies along with necessary good manufacturing practice, or GMP, chemistry, manufacturing and controls, or CMC, and regulatory documentation. In 2002, we began construction of a new GMP sterile clinical supplies manufacturing facility in Kansas City, Missouri. Medications for use in clinical (both pre- and post-marketing) studies are packaged, labeled and distributed globally. These services can expedite the drug development process because clinical trials are often postponed by delays in the manufacture of study drug materials.

      Phase I services. Phase I clinical trials involve testing a new drug on a limited number of healthy individuals. Our Phase I services include dose ranging, bioavailability/bioequivalence

      Centralized clinical trial laboratories. Our centralized laboratories provide globally integrated clinical laboratory services to support all phases of clinical trials with facilities in the United States, Europe, South Africa and Singapore. Services include the provision of protocol-specific study materials, customized lab report design and specimen archival and management for study sponsors. In addition to providing comprehensive safety and efficacy testing for clinical trials, our centralized laboratories allow for global standardization of clinical testing, database development and electronic data transfer and provide direct electronic integration of laboratory data into safety and efficacy reports for new drug application, or NDA, submissions.

      Clinical trial services. We offer comprehensive clinical trial services throughout the lifecycle of a product. In addition to Phase I through III studies, which are the basis for obtaining initial regulatory approval for drugs and medical devices, we provide expertise in the development and execution of Phase IIIb and IV studies, which includes drug safety, regulatory affairs, clinical trial supplies, central laboratory services, quality assurance, health economics, data management and biostatistics. On a global basis, our employees are aligned with key customers to provide a full-range of management and scientific services tailored to their specific requirements.

      We coordinate our offerings through a customer-centric project management structure. We have over 200 project managers with Phase II-IV drug development and medical device experience spanning the therapeutic areas of the central nervous system, cardiovascular, oncology, infectious, allergic and respiratory diseases as well as within therapeutic areas of endocrinological, gastroenterological, genitourinary, musculoskeletal diseases, and stroke, with respect to clinical trials. Other specialized offerings include development services in neonatal, pediatric and adolescent care. Our project management processes and training are based on the Project Management Institute standard. Because of our global presence and ability to coordinate clinical staff to service customers on an international basis, we are experienced in managing trials involving several thousand patients at hundreds of sites concurrently in the Americas, Europe, the Asia-Pacific region and South Africa.

      We provide our customers with one or more of the following core clinical trial services:

	Study design. We assist our customers in preparing the study protocol and designing case report forms, or CRFs. The study protocol defines the medical issues to be examined, the number of patients required to produce statistically valid results, the period of time over which they must be tracked, the frequency and dosage of drug administration and the study procedures. A study’s success often depends on the protocol’s ability to predict the requirements of the applicable regulatory authorities and to meet the commercial needs for a successful launch.
	Investigator recruitment. During clinical trials, the drug is administered to patients by physicians, referred to as investigators, at hospitals, clinics or other sites. We have access to several thousand investigators who have conducted our clinical trials worldwide.
	Patient recruitment. We assist our customers in recruiting patients to participate in clinical trials through investigator relationships, media advertising, use of web-based techniques and other methods. We also help to ensure patients are retained for the duration of the studies.
	Study monitoring. We provide study monitoring services which include investigational site initiation, patient enrollment assistance, and data collection and clarification. Site visits help to assure the quality of the data, which are gathered according to good clinical practice, or GCP, and International Conference on Harmonization, or ICH, regulations and guidelines, and to meet the sponsors’ and regulatory agencies’ requirements according to the study protocol.
	Clinical data management and biostatistical services. We have extensive experience in the creation and statistical analysis of scientific databases for all phases of the drug development

	process. These databases include customized databases to meet customer-specific formats, integrated databases to support NDA submissions and databases in accordance with ICH guidelines.

      Regulatory affairs services. We provide comprehensive medical and regulatory services for our pharmaceutical and biotechnology customers. Our medical services include medical oversight of studies, review and interpretation of adverse experiences, medical writing of reports and study protocols and strategic planning of drug development programs. Regulatory services for product registration include regulatory strategy design, document preparation, publishing, consultation and liaison with various regulatory agencies. Our regulatory affairs professionals help to define the steps necessary to obtain registration as quickly as possible. We are able to provide such services in numerous countries to meet our customers’ needs to launch products in multiple countries simultaneously.

      Late phase clinical studies. Designed to build physician awareness, develop marketing messages, drive product usage, and deepen customers’ understanding of physician practices and product-adoption patterns, our late phase clinical services include consulting customers on Phase IIIb and Phase IV clinical trials, clinical experience trials, and patient registries. We provide post-marketing safety surveillance programs and measure treatment satisfaction and quality of life to help accelerate the commercialization process. This group also offers specialized reimbursement support services and patient assistance programs to facilitate coverage and payment for treatment, utilizing our proprietary new technologies. In 2002, we integrated our Quintiles Late Phase services into our product development line of business to bridge clinical development and product commercialization.

      Medical device services. We offer medical device services similar to our offerings for the development and introduction of pharmaceutical products. Our core medical device services include identification of regulatory requirements in targeted markets; global clinical study design, planning, management and monitoring, including data management and statistical analysis of report preparations; preparation of regulatory filings and compliance with regulatory requirements for market access and long range planning for product launches, including pricing strategies.

Commercial Services Offerings

      We provide our customers a comprehensive range of specialized pre-launch, launch, and post-launch fee-for-service contract sales and strategic marketing services. Our commercial services group includes our Quintiles Integrated Strategic Services business and our Commercialization business. By expanding the traditional paradigm of “commercialization” beyond contract sales to encompass contract marketing and other services, our commercial services group has enhanced our competitive position. This group delivers integrated strategic and tactical solutions in sales and marketing across the product life cycle for pharmaceutical, biotechnology, and medical device companies as well as for other entities across the healthcare spectrum. In the United States, the integration of core services through our iQLearning.com web portal provides physicians with a broad range of educational resources and services available 24 hours a day, seven days a week. In addition, we provide strategic health and human services consulting for customers including hospitals, long-term care facilities, foundations, managed care organizations, employers, the military and federal and state governments.

      We entered the contract sales organization industry in 1996 when we acquired Innovex, a U.K.-based company with global operations, and grew the business organically as well as through acquisitions. We continue to operate our CSO business under the Innovex brand. We have specialist therapeutic expertise in the areas of cardiovascular, central nervous system, gastrointestinal, women’s health, endocrinology, allergy-respiratory, anti-infectives, and oncology.

      Strategic marketing services. Our expert consultants support pharmaceutical, biotechnology and medical device product commercialization through a continuum of services. We begin in the

      Healthcare policy research and consulting. Our management consulting services focus on improving the quality, availability and cost-effectiveness of healthcare in the highly regulated and rapidly changing healthcare industry. These services include corporate strategic planning and management, program and policy development, financial and cost-effectiveness analyses, evaluation design, microsimulation modeling and data analysis. They represent the core competencies of The Lewin Group, an internationally recognized management consulting firm with more than three decades of experience solving problems for organizations in the public, non-profit and private sectors.

      Regulatory and compliance consulting. We supply regulatory and compliance consulting services to the pharmaceutical and biotechnology, medical device development and manufacturing industries. Services include global regulatory consulting, quality systems and engineering and validation. We assist companies in preparing for the United States Food and Drug Administration, or the FDA, interactions, including inspections and resolution of enforcement actions; complying with current GMP, GCP and Quality Systems regulations; meeting process and software validation requirements; and bringing new medical devices to market.

      Strategic medical communications. Our strategic medical communications group offers a range of pre-launch, launch, and post-launch services, beginning in the early stages of product development and continuing until the product reaches peak penetration. Services include communications strategies and planning, product positioning and branding, opinion leader development, faculty training, symposia, continuing medical education programs, promotional programs, sponsored publications, new media-based programs, patient education and clinical experience programs (e.g., patient starter programs and compliance programs). As early as Phase I and Phase II clinical trials, we can begin to disseminate scientific information and develop and present educational forums to help gain opinion leader support for a new drug.

      Our customized sales and marketing services are designed to accelerate the commercial success of pharmaceutical, biotechnology, veterinary and other health-related products.

      Contract sales. Highly skilled, web-integrated primary care, specialty, and innovative promotional alternative sales teams provide our customers with a flexible resource which is able to respond quickly and effectively to a changing marketplace at a variable cost to the customer. We provide our customers with a variety of staffing options, including direct hire, flexible work arrangement, leave of absence, and “strike force” arrangements (in which a team is deployed to a particular territory to capitalize on a market niche opportunity). We use a proprietary review process and a variety of techniques, including our extensive computerized databases and candidate referrals, to recruit candidates for our contract sales teams. Our training and development services integrate traditional and web-based services. Our contract sales unit helps our customers design or revamp their existing sales programs to meet marketplace demands.

      Customers may contract for dedicated or syndicated sales teams. When dedicated teams are deployed, we take on a primary management role or a supporting role to the customer’s field management, depending on the customer’s needs. In certain circumstances, dedicated teams may be

      Marketing services. We provide customized product marketing services for pharmaceutical and biotechnology companies designed to influence the decisions of patients and physicians and accelerate the acceptance of drugs into treatment guidelines and formularies. We assess markets, conduct research, develop strategies and tactics, assist in discussions with regulatory bodies, identify distribution channels and coordinate vendors in every region of the country. Our industry experts, with experience in many therapeutic areas, can provide marketing insight into a wide range of geographic markets while working to optimize commercial success.

      Internet-based sales and marketing services. Innovex e-Health Solutions Group, launched in October 2001, provides Internet-based sales and marketing services for the pharmaceutical, biotechnology and medical device industries. The group’s first product, iQLearning.com, was launched in January 2002. iQLearning.com is an Internet service portal that further expands our range of healthcare information resources and services to physicians in the United States and currently has a membership of more than 90,000 United States physicians. The group’s second and third products were launched in August 2002. The eOP product is an online process for identifying key opinion leaders within designated specialty areas utilizing the iQLearning service portal. Our third product is the iQBroadband program, which leverages the iQLearning service portal to provide state-of-the-art live net meeting software and high speed Internet connectivity for live sales presentations, speaker training meetings and web-based symposia. The group also brought the full capability of the iQLearning service portal to Innovex in the fourth quarter of 2002 by delivering online training and messaging to a contract sales force.

      In the United Kingdom, in partnership with Synigence Plc, we have developed a number of services which utilize web enabled technology to support the pharmaceutical industry’s marketing programs. These include both live and virtual e-detailing. Innovex UK in collaboration with Synigence Plc can now gain access to a significant number of primary care physicians within the United Kingdom via a secured network system.

      Health management services. We also provide teams of healthcare professionals, including nurses, pharmacists and physicians, who are dedicated to assisting customers with disease-management issues. Our health management services offer customized clinical solutions to bridge the gap between the clinical and commercial phases of product development and to provide expertise across a broad range of pre-launch, launch and post-launch opportunities. We believe that our clinical and promotional expertise, commercial orientation and international experience enable us to tailor these programs to meet the diverse needs of the global pharmaceutical industry across a wide range of disciplines and local market conditions.

      Training. In various countries around the world we offer industry specific training to professionals working in retail pharmacy, manufacture, distribution, regulatory, sales and marketing. The training in many instances is outcomes based, covers both knowledge and skills, and may be delivered via the Internet or email, as well as hard copy.

PharmaBio Development Offerings

      Our PharmaBio Development group works with our other service groups to enter into strategic transactions that we believe will position us to explore new opportunities and areas for potential growth. PharmaBio Development has entered into a series of similarly structured transactions that typically involve providing funding to the customer, either through direct payments or loans. In some cases, the loans are convertible into capital stock of the customer. We also may invest in the customer’s capital stock, and sometimes we receive warrants to purchase shares of our customer’s capital stock. This funding may be used by the customer to help pay for the services provided by us through our product development or commercial services groups. In addition, the customer may agree to pay us royalties or commissions based on sales of the customer’s product. At the end of

      PharmaBio Development works within the following targeted investment models:

	•	Risk-Based Commercialization. Risk-based commercialization investments include transactions in which PharmaBio Development funds some or all of a customer’s cost for Innovex’s commercialization services in exchange for product royalty rights. In such transactions, we receive from our customers the right to royalties on the sales of the products covered by the agreements. Our compensation for the sales force may be reflected in the royalties we receive, or it may be in addition to such royalties on a fee-for-service basis. We use a variety of contract structures in our risk-based commercialization transactions. Certain transactions may include contractual minimum and/or maximum royalty amounts. In other instances, we may have no guaranteed minimum royalty. Regardless of the structure, we always seek to earn financial returns commensurate with the risks of the transaction. In addition to providing superior operational excellence, we believe that the key factors in the success of such transactions are sound marketing and scientific research on the products, solid financial due diligence on our partners, and sound contracting.
	•	Specialty Pharmaceutical Products. PharmaBio Development also acquires the rights to market pharmaceutical products. We arrange for the manufacture of, and directly market, a number of dermatology compounds, including SolarazeTM and ADOXATM, through our Bioglan Pharmaceuticals Company subsidiary. PharmaBio Development also has acquired the rights to several other products in Europe, via licensing or distribution agreements, which involve a variety of up-front or ongoing payments to the licensors. In these arrangements, third parties manufacture the products for us and Innovex sells the products. In all of these instances, PharmaBio Development recognizes the revenues from the sales of these pharmaceutical products.
		From time to time our PharmaBio Development group evaluates the purchase or license of marketing rights to other products. Any such investments we may make likely will not represent a commitment to a particular therapeutic area; rather, under this model, we will rely on our due diligence to confirm that the purchase of the rights to a single product can be successfully marketed without the strength and support of an integrated therapeutic capability.
	•	Strategic Investments. PharmaBio Development makes a variety of strategic investments, including direct investments in both marketable and non-marketable equities, debt, and indirect investments through such vehicles as venture capital funds. In some cases, PharmaBio Development makes investments in connection with risk-based commercialization agreements, such as its arrangements with Columbia Laboratories, Inc. and Discovery Laboratories, Inc. In other instances PharmaBio Development may make its investments as independent transactions. As of December 31, 2002, PharmaBio Development had a total of $111 million in such investments, including $65 million of investments in marketable equities and $46 million of

		investments in non-marketable equity securities and loans. PharmaBio Development actively manages this portfolio, and makes trading decisions as well as investments.
	•	Risk-Based Development Services. In such transactions, PharmaBio Development would fund some or all of the clinical development services costs on behalf of a partner in exchange for royalty rights in the product. We have not consummated any risk-based development transactions.

     Recent Strategic Alliances

      PharmaBio Development entered into the following transactions during 2002.

	•	In January 2002, we entered into an agreement with Kos Pharmaceuticals, Inc. to commercialize in the United States Kos’s treatments for cholesterol disorders, Advicor® and Niaspan®. We provide a dedicated sales force at our own expense who, in combination with Kos’s sales force, will commercialize Advicor® and Niaspan® for two years. In return, we received warrants to purchase shares of Kos’s common stock at an agreed price. We will receive commissions, subject to a minimum and maximum amount over the life of the agreement, based on net sales of the product from 2002 through 2006.
	•	During the second quarter of 2002, we finalized an agreement with a large pharmaceutical customer to market pharmaceutical products in Belgium, Germany and Italy. We will provide, at our own expense, sales and marketing resources over the five-year life of the agreement, in return for which the customer will pay us royalties on product sales in excess of certain baselines. Subsequent to December 31, 2002, we exercised our rights to terminate this contract in Germany.
	•	In July 2002, we entered into an agreement with Eli Lilly and Company to support its commercialization efforts for CymbaltaTM in the United States. In return for providing sales representatives and making marketing and milestone payments to Lilly, we will receive a percentage of sales over the five-year service period followed by a royalty over the subsequent three years.
	•	In July 2002, we entered into an agreement with Columbia Laboratories, Inc. to assist them in the U.S. commercialization of the following women’s health products: ProchieveTM 8%, ProchieveTM4%, Advantage-S® and RepHreshTM. Under the terms of the agreement, we purchased shares of Columbia common stock. We also will pay Columbia four quarterly payments, which commenced in the third quarter of 2002, in exchange for royalties on the sales of the four Columbia products for a five-year period beginning in the first quarter of 2003. In addition we will provide to Columbia, at Columbia’s expense on a fee-for-service basis, a sales force to commercialize the products.
	•	In December 2002, we entered into an agreement with a large pharmaceutical customer to market two products in Belgium. Under the terms of the agreement, we acquired the marketing and distribution rights to one of the products and entered into a distribution agreement for the other product.

      We review many candidates for strategic alliances under our PharmaBio Development business models, and in addition to the transactions already under way, we are continually evaluating new strategic possibilities, including opportunities to acquire rights to market additional pharmaceutical products, and we may enter into additional transactions in the future.

Informatics Offerings

      Prior to May 2002, we had a fourth segment, consisting of our informatics services. Our informatics group provided a broad range of knowledge-rich products and services for use by the pharmaceutical, biotechnology, and medical and surgical device industries, and healthcare provid-

      In May 2002, we completed the formation of our healthcare informatics joint venture, Verispan, with McKesson. The joint venture 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 with a portion of the equity in Verispan owned or to be issued to key providers of de-identified healthcare data in exchange for the data. We contributed the net assets of our informatics group and funded $10 million to Verispan.

      Several major data providers have contracted to provide de-identified prescription or medical data to the joint venture. Verispan has licensed its data products to McKesson and us for use in our respective 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 service to and partnering with our customers.

Customers and Marketing

      We coordinate our business development efforts across our service offerings through integrated business development functions, which direct the activities of business development personnel in each of our U.S. locations, as well as other key locations throughout Europe, Asia-Pacific, Canada and Latin America.

      For the year ended December 31, 2002, approximately 43.1% of our net service revenue from external customers was attributed to operations in the United States and 56.9% to operations outside the United States. Please refer to the notes to our consolidated financial statements included in Item 8 of this Form 10-K for further details regarding our foreign and domestic operations. Approximately 42.5%, 41.1%, and 36.4% of our net revenue was attributed to our clinical development services in 2002, 2001 and 2000, respectively; approximately 25.8%, 32.6% and 37.7% of our net revenue was attributed to our commercialization services in 2002, 2001 and 2000, respectively; and approximately 17.3%, 15.4% and 14.3% of our net revenue was attributed to our early development and laboratory services in 2002, 2001 and 2000 respectively. Neither our integrated strategic services, our commercial rights and royalties, nor our informatics services accounted for more than 10% of our net revenue in any of these years. ENVOY, our former electronic data interchange unit, is accounted for as a discontinued operation as a result of its sale to WebMD in May 2000; therefore, the results of ENVOY through the date of sale are not included in our net revenue and are reported separately.

      In the past, we have derived, and may in the future derive, a significant portion of our service revenue from a relatively limited number of major projects or customers. As pharmaceutical companies continue to outsource large projects and studies to fewer full-service providers, the concentration of business could increase. We may experience concentration in 2003 and in future years. Aventis S.A. accounted for approximately 11%, 11% and 10% of our consolidated net service revenue in 2002, 2001 and 2000, respectively.

Competition

      The market for our product development services is highly competitive, and we compete against traditional CROs and the in-house research and development departments of pharmaceutical companies, as well as universities and teaching hospitals. Among the traditional CROs, there are several hundred small, limited-service providers, several medium-sized firms, and only a few full-service companies with global capabilities. Consolidation among CROs likely will result in greater competition among the larger contract research providers for customers and acquisition candidates.

	•	previous experience,
	•	medical and scientific experience in specific therapeutic areas,
	•	the quality of contract research,
	•	speed to completion,
	•	the ability to organize and manage large-scale trials on a global basis,
	•	the ability to manage large and complex medical databases,
	•	the ability to provide statistical and regulatory services,
	•	the ability to recruit investigators,
	•	the ability to integrate information technology with systems to improve the efficiency of contract research,
	•	an international presence with strategically located facilities and
	•	financial viability and price.

      In our commercial services, we compete against the in-house sales and marketing departments of pharmaceutical companies and other contract sales organizations in each country in which we operate. We also compete against national consulting firms offering healthcare consulting and medical communications services, including boutique firms specializing in the healthcare industry and the healthcare departments of large firms. Our primary CSO competitors in the United States include Ventiv Health and Professional Detailing, Inc. Outside of the United States, we typically compete against single country or regionally-focused commercial service providers. The primary competitive factors affecting commercial services are the proven ability to quickly assemble, train and manage large qualified sales forces to handle broad scale launches of new drugs and price. Competitive factors affecting healthcare consulting and medical communications services include experience, reputation and price.

      Because our PharmaBio Development group custom tailors its risk-based service solutions to meet our customers’ financial and strategic needs, it is more difficult to assess its potential competitors. Theoretically, a financing party could choose to fund such risk-based commercialization or development efforts, as does PharmaBio Development. However, such a group would have to contract with third parties for the provision of services. We are aware that several commercial service firms, such as Ventiv Health and Professional Detailing, Inc., have entered into risk-based commercialization transactions. Our PharmaBio Development group has a large number of competitors for specialty pharmaceutical products. The key competitive factors for PharmaBio Development include access to capital, the quality of the services provided by our other business units in connection with PharmaBio Development’s transactions, and the ability to perform detailed and accurate scientific, strategic, and financial due diligence prior to completing transactions.

      Competitors for our informatics services included IMS Health Incorporated and NDC.

      Notwithstanding all these competitive factors, we believe that the synergies arising from integrating product development services with commercial services, supported by global operations and information technology differentiate us from our competitors.

Employees

      As of January 31, 2003, we had approximately 15,548 full-time equivalent employees, comprised of approximately 5,422 in the Americas, 8,114 in Europe and Africa and 2,012 in the Asia-Pacific region. As of January 31, 2003, our product development group had 8,696 full-time equivalent employees, our commercial services group had 6,180 full-time equivalent employees, and

Backlog and Net New Business Reporting

      We report backlog based on anticipated net revenue from uncompleted projects which have been authorized by the customer, through a written contract or otherwise. Once work begins on a project, net revenue is recognized over the duration of the project. Using this method of reporting backlog, at December 31, 2002, backlog was approximately $1.7 billion, as compared to approximately $2.0 billion at December 31, 2001. The backlog at December 31, 2002 includes approximately $87 million of backlog related to services contracted from our service groups, primarily commercialization, in connection with the strategic alliances forged by our PharmaBio Development group. Backlog does not include any product revenues, royalties and commissions related to our commercial rights.

      Net new business, which is anticipated net revenue from contracts which we entered into during the period and adjusted for contracts which were cancelled during the period, for the twelve months ended December 31, 2002 was $1.2 billion, including $79 million of internal service contracts. Net new business for our product development and commercial services groups during this same period was $795 million and $451 million, respectively.

      We believe that backlog may not be a consistent indicator of future results because it can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be terminated by the customer or delayed by regulatory authorities. Moreover, the scope of work can change during the course of a project. If our product revenues, royalties and commissions related to our commercial rights increase, an increasing proportion of our revenues will not be reflected in our reported backlog.

Potential Liability

      In conjunction with our product development services, we contract with physicians to serve as investigators in conducting clinical trials to test new drugs on human volunteers. 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. Although we do not believe we are legally accountable for the medical care rendered by third party investigators, it is possible that we could be held liable for the claims and expenses 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. In addition, as a result of our Phase I clinical trial facilities, we could be liable for the general risks associated with a Phase I facility including, but 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 could be held liable for errors or omissions in connection with the services we perform through each of our service groups. For example, we could be held liable for errors or omissions or breach of contract if one of our labs inaccurately reports or fails to report lab results. We believe that some of our risks are reduced by one or more of the following: (1) indemnification provisions and provisions seeking to limit or exclude liability contained in our contracts with customers and investigators, (2) insurance maintained by customers and investigators and by us and (3) various regulatory requirements, including the use of institutional review boards and the procurement of each participant’s informed consent to participate in the study. The contractual indemnifications generally do not fully protect us against certain of our own actions such as negligence. Contractual arrangements are subject to negotiation with customers and the terms and scope of any indemnification or limitation or exclusion of liability may vary from customer to customer and from trial to trial. Additionally, financial performance of these indemnities is not secured. Therefore, we bear the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations. We maintain professional liability insurance that covers worldwide territories in which we currently do business and includes drug safety issues as well as data processing errors and omissions. We could be materially and adversely

      Our efforts to acquire the rights to commercialize and sell pharmaceutical products also expose us to potential liabilities typically associated with pharmaceutical companies. For example, we could face product liability claims in the event users of any of the products we market or distribute now, or in the future, experience negative reactions or adverse side effects or in the event any of these products 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. 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^TM, we are unable to directly monitor quality control in the manufacturing and distribution processes.

Government Regulation

      Our preclinical, laboratory and clinical trial supply services are subject to various regulatory requirements designed to ensure the quality and integrity of the data or products of these services. The industry standard for conducting preclinical laboratory testing is embodied in the good laboratory practice, or GLP, regulations. The requirements for facilities engaging in clinical trial supplies preparation, labeling and distribution are set forth in the current good manufacturing practices, or cGMP, regulations. GLP and cGMP regulations have been mandated by the FDA and the Department of Health in the United Kingdom, and adopted by similar regulatory authorities in other countries. GLP and cGMP stipulate requirements for facilities, equipment, supplies and personnel engaged in the conduct of studies to which these regulations apply. The regulations require adherence to written, standardized procedures during the conduct of studies and the recording, reporting and retention of study data and records. To help assure compliance, we have established quality assurance programs at our preclinical, laboratory and clinical trial supply facilities which monitor ongoing compliance with GLP and cGMP regulations by auditing study data and conducting regular inspections of testing procedures. Our clinical laboratory services, to the extent they are carried out in the United States, are subject to the requirements of the Clinical Laboratory Improvement Amendments of 1988.

      GCP regulations and guidelines contain the industry standard for the conduct of clinical research and development studies. The FDA and many other regulatory authorities require that study results and data submitted to such authorities be based on studies conducted in accordance with GCP provisions. These provisions include:

	•	complying with specific regulations governing the selection of qualified investigators,
	•	obtaining specific written commitments from the investigators,
	•	ensuring the protection of human subjects by verifying that Institutional Review Board or independent Ethics Committee approval and patient informed consent are obtained,
	•	instructing investigators to maintain records and reports,
	•	verifying drug or device accountability,

	•	reporting of adverse events,
	•	adequate monitoring of the study for compliance with GCP requirements and
	•	permitting appropriate regulatory authorities access to data for their review.

      Records for clinical studies must be maintained for specified periods for inspection by the FDA and other regulators. Significant non-compliance with GCP requirements can result in the disqualification of data collected during the clinical trial. We are also obligated to comply with regulations issued by national and supra-national regulators such as FDA and the European Medicines Evaluation Agency, or EMEA. By way of example, these regulations include FDA’s regulations on electronic records and signatures (21 CFR Part 11) which set out requirements for data in electronic format supporting any submissions made to FDA and EMEA’s Note For Guidance “Good Clinical Practice for Trials on Medicinal Products in the European Community.”

      We write our standard operating procedures related to clinical studies in accordance with regulations and guidelines appropriate to the region where they will be used, thus helping to ensure compliance with GCP. Within Europe, we perform our work subject to the European Community Note for Guidance “Good Clinical Practice for Trials on Medicinal Products in the European Community.” Studies to be submitted to the EMEA must meet the requirements of the ICH — GCP. In addition, FDA regulations and guidelines serve as a basis for our North American standard operating procedures. Our offices in the Asia-Pacific region have developed standard operating procedures in accordance with their local requirements and in harmony with our North American and European operations.

      Our commercial services are subject to detailed and comprehensive regulation in each geographic market in which we operate. Such regulation relates, among other things, to the distribution of drug samples, the qualifications of sales representatives and the use of healthcare professionals in sales functions. In the United States our commercial services are subject to the Prescription Drug Marketing Act, or PDMA, with regard to the distribution of drug samples. In the United Kingdom, they are subject to the Association of the British Pharmaceutical Industry Code of Practice for the Pharmaceutical Industry, which prescribes, among other things, an examination that must be passed by sales representatives within two years of their taking up employment. We follow similar regulations which are in effect in the other countries where we offer commercial services.

      Our United States laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as the safety and health of laboratory employees. All of our U.S. laboratories are subject to applicable federal and state laws and regulations relating to the storage and disposal of all laboratory specimens including the regulations of the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Transportation, the National Fire Protection Agency and the Resource Conservation and Recovery Act. The use of controlled substances in testing for drugs of abuse is regulated by the United States Drug Enforcement Administration, or the DEA. For example, accounting for drug samples that contain controlled substances is subject to regulation by the DEA. Some of our facilities have been audited by the DEA. In one case, the DEA indicated that it found that we miscounted certain drugs. While no final 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. The regulations of the United States Department of Transportation, the Public Health Service and the Postal Service apply to the surface and air transportation of laboratory specimens. Our laboratories also are subject to International Air Transport Association regulations, which govern international shipments of laboratory specimens. Furthermore, when the materials are sent to a foreign country, the transportation of such materials becomes subject to the laws, rules and regulations of such foreign country. Our laboratories outside the United States are subject to applicable national laws governing matters such as licensing, the handling and disposal of medical specimens, hazardous waste and radioactive materials, as well as the health and safety of laboratory employees.

      In addition to its comprehensive regulation of safety in the workplace, the United States Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals, and transmission of blood-borne and airborne pathogens. Furthermore, certain employees receive initial and periodic training to ensure compliance with applicable hazardous materials regulations and health and safety guidelines. Although we believe that we are currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

      Our disease management and healthcare information management services relate to the diagnosis and treatment of disease and are, therefore, subject to substantial governmental regulation. In addition, the confidentiality of patient-specific information and the circumstances under which such patient-specific records may be released for inclusion in our databases or used in other aspects of our business are heavily regulated. Legislation has been proposed at both the state and federal levels that may require us to implement security measures that could involve substantial expenditures or limit our ability to offer some of our products and services.

      The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires the use of standard transactions, privacy and security standards and other administrative simplification provisions and instructs the Secretary of Health and Human Services, or HHS, to promulgate regulations implementing these standards in the United States. Final rules requiring standardized electronic transactions of health information were published by the Secretary in August 2000. The initial compliance deadline was October 16, 2002, but a covered entity may file for an extension until October 16, 2003.

      On December 28, 2000, the Secretary issued the final rule on Standards for Privacy of Individually Identifiable Health Information to implement the privacy requirements for HIPAA. These regulations, as amended on August 14, 2002, generally (1) impose standards for covered entities transmitting or maintaining protected data in an electronic, paper or oral form with respect to the rights of individuals who are the subject of protected health information; and (2) establish procedures for (a) the exercise of those individuals’ rights, (b) the uses and disclosure of protected health information by the covered entity, and (c) the methods permissible for de-identification of health information. The effective date of the final rule was April 14, 2001 and, unless properly extended by Congress or the current Administration, the compliance date is April 14, 2003. The final regulation for the HIPAA security standards is to be issued in the Federal Register on February 20, 2003.

      We are not a “covered entity” under the HIPAA Standards for Privacy of Individually Identifiable Health Information (also known as the HIPAA Privacy Rule). We do receive identifiable health information from various sources, including from investigators on research studies who are covered entities or who are employed by covered entities. In order for covered entities to disclose identifiable health information to us for research purposes, there must be an applicable permission under the HIPAA Privacy Rule. Depending on the facts, the possible permissions include where a patient signs an authorization; an institutional review board waives the authorization requirement; the review of the information is conducted under specific conditions preparatory to research or with respect to decedents; or the information is stripped of direct identifiers and is disclosed to us pursuant to a limited use agreement. Covered entities may also provide “deidentified” health information to us. We are engaged in ongoing communications with HIPAA covered entities from whom we receive identifiable health information with respect to coordination of disclosure of such information to us and the covered entities’ compliance with the HIPAA Privacy Rule. Based on our communications with our investigators and other covered entities from whom we receive identifiable health information, we believe that we will continue to be able to obtain such information, consistent with requirements of the Privacy Rule. However, if the covered entities do not understand the

      The impact of such legislation and regulations relating to identifiable health information in the United States cannot be predicted. Other countries have or are in the process of putting privacy laws into place. For instance, the European Data Protection Directive applies standards for the protection of all personal data, not just health information, in the European Union (EU) and requires the EU member states to enact national laws implementing this Directive. Such legislation or regulations could materially affect our business.

Available Information

      We maintain a Web site at the address www.quintiles.com. We are not including the information contained on our Web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our Web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. We did not file any such reports, or amendments thereto, between November 14, 2002 and December 31, 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

      Set forth below is certain information with respect to each of our executive officers who serve in such capacities as of the filing date of this Form 10-K. There are no family relationships between any of our directors or executive officers.

      Dennis B. Gillings, Ph.D. founded the Company in 1982 and has served as Chairman of the Board of Directors since its inception and as Chief Executive Officer from its inception until April 2001.

      Pamela J. Kirby, Ph.D. became the Company’s Chief Executive Officer in April 2001. Previously, she served as Head of Global Strategic Marketing and Business Development department of the Pharmaceuticals Division of F. Hoffmann-La Roche Ltd. in Basel, Switzerland. Dr. Kirby served from 1996 until 1998 as global commercial director with British Biotech plc, a drug development company. Dr. Kirby is a director of Smith & Nephew, plc.

      James L. Bierman was appointed Chief Financial Officer in February 2000. Mr. Bierman joined the Company in June 1998 as Senior Vice President of Corporate Development and had global responsibility for all mergers, acquisitions, strategic investments, and joint ventures. Prior to joining the Company, Mr. Bierman spent 22 years with Arthur Andersen LLP, working with a diversified base of companies solving complex business problems, whether operational, financial, or accounting-related in nature.

      John S. Russell serves as Executive Vice President and General Counsel and Head Global Human Resources. He also serves as the Corporate Secretary and directs the Company’s government relations. Mr. Russell joined the Company in 1998 after 12 years in private practice as a partner in the Raleigh office of the Moore and Van Allen law firm, where he was head of the Corporate Practice group.

Item 2.     Properties

      As of January 31, 2003 we had approximately 109 offices located in 48 countries. Our executive headquarters is located adjacent to Research Triangle Park, North Carolina. We maintain substantial offices serving our product development group in Durham, North Carolina; Kansas City, Missouri; Smyrna, Georgia; Bracknell, England; Irene, South Africa; Tokyo, Japan; and Singapore. We also maintain substantial offices serving our commercial services group in Parsippany, New Jersey; Falls Church, Virginia; Hawthorne, New York; Marlow, England, and Tokyo, Japan. We own facilities that serve our product development group in Lenexa, Kansas; Kansas City, Missouri; Riccarton, Scotland; Bathgate, Scotland; Glasgow, Scotland; Livingston, Scotland; Freiburg, Germany; and Pretoria, South Africa. We also own a facility in Gotenba City, Japan, which is subject to a mortgage, that serves our product development and commercial services groups. All of our other offices are leased. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed.

Item 3.     Legal Proceedings

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

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

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

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

      Not applicable.

PART II

Market Prices

      Our common stock is traded on The Nasdaq Stock Market under the symbol “QTRN.” The following table shows, for the periods indicated, the high and low sale prices per share on The Nasdaq Stock Market, based on published financial sources.

      As of February 18, 2003, there were approximately 30,000 beneficial owners of our common stock, including 2,159 holders of record.

Dividend Policies

      We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future, and we intend to retain future earnings for the development and expansion of our business.

Recent Sales of Unregistered Securities

      During the three months ended December 31, 2002, options to purchase 6,000 shares of our common stock were exercised at an average exercise price of $4.3175 per share in reliance on Rule 701 under the Securities Act of 1933. We granted such options prior to becoming subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to our Non-qualified Employee Incentive Stock Option Plan.

      The selected Consolidated Statement of Operations Data set forth below for each of the years in the three-year period ended December 31, 2002 and the Consolidated Balance Sheet Data set forth below as of December 31, 2002 and 2001 are derived from our audited consolidated financial statements and notes thereto as included elsewhere herein. The selected Consolidated Statement of Operations Data set forth below for the years ended December 31, 1999 and 1998, and the Consolidated Balance Sheet Data set forth below as of December 31, 2000, 1999 and 1998 are derived from our consolidated financial statements not included herein. During 2000, we completed the sale of our electronic data interchange unit, ENVOY Corporation, and as such the results of ENVOY, for all periods presented, have been reported separately as a discontinued operation in the consolidated financial statements. The selected consolidated financial data presented below should be read in conjunction with our audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

	(1) Working capital of discontinued operation was $36.0 million in 1999 and $42.4 million in 1998.

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 over $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. Uncertainty pending the outcome of the special committee’s process, as well as the result of that process, could impact our results of operations and financial condition in ways that we are not able to predict.

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.

      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 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. Using a constant exchange rate for each period, net service revenues decreased $140.6 million or (8.8%). 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™. Also included are royalties or commissions on product sales that we receive in exchange for providing commercial or product development services. The $84.6 million increase is primarily the result of our acquisition of certain assets of Bioglan Pharma, Inc., and its suite of dermatology products, a new risk sharing contract in Europe with a large pharmaceutical customer and our contracts with Scios Inc. and Kos Pharmaceuticals, Inc. 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. 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.
	•	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):

	•	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. Excluding the restructuring charge, the write-off of goodwill and other assets, the income from the settlement of litigation with WebMD, and the

      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.

      During 2001, we completed a tax basis study for ENVOY Corporation, our electronic data interchange unit we sold to WebMD Corporation during 2000. 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 income was $127.3 million for 2002 versus a net loss of $33.8 million for 2001. Excluding the restructuring charge, the write-off of goodwill and other assets, the income from the settlement of litigation with WebMD, the cumulative effect of changing to a different method of recognizing deferred income taxes and the extraordinary gain from the sale of discontinued operation, net income was $81.7 million for 2002 versus $41.0 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

      The product development group’s financial performance improvement was a result of several factors, including an increase in revenues and the continued improvement in contribution margin due to greater efficiency and improved contract management.

      The commercial services group’s financial performance was negatively impacted by difficult business conditions for large fee-for-service contracts in the United States. The impact of the revenue decline was offset by the effects of our cost management efforts.

      The PharmaBio Development group’s increase in net revenues, which consist of commercial rights and royalties and investments, was primarily the result of our acquisition of certain assets of Bioglan Pharma, Inc. and its suite of dermatology products, the risk sharing contracts in Europe, our contracts with Scios Inc. and Kos Pharmaceuticals, Inc. and the rollover of the Scios sales force effective December 31, 2002. The investment revenues (net of related costs) increased the contribution of this group by approximately $14.7 million when compared to 2001. This group’s contribution margin was negatively impacted by the costs associated with the launch and marketing of Solaraze™ and ADOXA™ and expenses relating to the risk sharing contracts in Europe. The commercial services provided to PharmaBio Development by our commercial services group increased approximately $41.6 million.

      The informatics group’s performance was impacted by the pending transfer of this group into the joint venture. This was completed in May 2002; therefore, the 2002 results include only five months of revenues and contribution for the informatics group.

      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):

	•	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 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; therefore, using a constant exchange rate for each period, net service revenues decreased $6.7 million or (0.4%). 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 which was operational by the third quarter of 2001.
	•	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):

	•	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.

      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 it held to purchase 10 million shares of our common stock.

      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. Excluding the restructuring charges, the write-off of goodwill and other assets, the loss on the disposal of a business, the income from the settlement of litigation with WebMD, and the impairment on investment in WebMD, income before income taxes was $61.1 million or 3.8% of total net revenue in 2001 versus $24.9 million or 1.5% of total net revenue in 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. Excluding the restructuring charge, the write-off of goodwill and other assets, the income from the settlement of litigation with WebMD, the income from discontinued operation, and the extraordinary gain from the sale of discontinued operation, net income was $41.0 million for 2001 versus $16.7 million for 2000.

     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, 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).

      The product development group’s financial performance improvement was a result of several factors, including process enhancements and cost reduction efforts in the American and European operations, growth in our Phase I and clinical development services, primarily Phase II and III services, and an improvement in the quality of our contracts.

      The commercial services group’s financial performance was negatively impacted by several factors, including the effects of large contracts converted in-house or terminated by our customers

      The PharmaBio Development group’s increase in net revenues, which consist of commercial rights and royalties and investments, was primarily the result of the Scios contract becoming operational in the third quarter of 2001.

      The informatics group’s financial performance was impacted by several factors, including 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.

Operating Basis Results

      When evaluating our financial performance based on an analysis of continuing operations, we exclude certain items that we believe are outside our normal operations. These items include restructuring charges, write-off of goodwill and other assets, disposal of a business and WebMD related transactions which include: gain from the settlement of litigation including the sale of WebMD common stock, and the impairment of investment in WebMD common stock.

      Below is a summary of our operating basis results and our reconciliation to reported amounts (stated in thousands):

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 for the acquisition of commercial rights were $88.3 million versus $26.7 million for 2001. The 2002 commercial rights included $70.0 million in 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):

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):

      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

      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 and 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 special committee of our Board of Directors has indicated it is investigating strategic alternatives available to us for purposes of enhancing shareholder value. The actions of the special committee could impact our liquidity in ways we are unable to predict.

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.

      We recognize revenue for service contracts based upon (1) percentage of completion (utilizing input or output measures as appropriate) for fixed price 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. The percentage of completion method requires us to estimate total expected revenue, costs, profitability, duration of the contract and outputs. These estimates are reviewed periodically and, 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.

      Certain of our commercial rights and royalty contracts provide for us to receive minimum guaranteed payments. These contracts usually contain multiple elements which include payments being made to the customer, as well as payments being received by us from the customer. We account for the contracts as a single contract taking into account the net cash flows we receive. We recognize revenue over the related service period of the contract based on the net 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

      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 represents amounts billed to customers. Revenues recognized in excess of billings are classified as unbilled services, while billings in excess of revenue recognized are classified as unearned income. 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.

      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.

      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.

      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

      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.

      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.

      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.

      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.

      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.