10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2004

OR

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

For the transition period from              to             

Commission file number 0-27570

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)

North Carolina	56-1640186
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
3151 South Seventeenth Street
Wilmington, North Carolina	28412
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (910) 251-0081

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $0.10 per share

(Title of class)

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

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 to this Form 10-K.  x

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

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1.55 billion as of June 30, 2004, based on the closing price of the Common Stock on that date on the Nasdaq National Market System. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such person might be deemed to be an affiliate. This determination of affiliate status might not be conclusive for other purposes.

As of February 15, 2005, there were 56,754,305 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders (certain parts as indicated in Part III).

TABLE OF CONTENTS

		Page
Part I
	Item 1. Business	1
	Item 2. Properties	26
	Item 3. Legal Proceedings	26
	Item 4. Submission of Matters to a Vote of Security Holders	26
	Executive Officers	27
Part II.
	Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
	Item 6. Selected Financial Data	28
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation	30
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	47
	Item 8. Financial Statements and Supplementary Data	48
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
	Item 9A. Controls and Procedures	49
	Item 9B. Other Information	50
Part III.
	Item 10. Directors and Executive Officers of the Registrant	52
	Item 11. Executive Compensation	52
	Item 12. Security Ownership of Certain Beneficial Owners and Management	53
	Item 13. Certain Relationships and Related Transactions	53
	Item 14. Principal Accountant Fees and Services	53
Part IV.
	Item 15. Exhibits and Financial Statement Schedules	54

PART I

Statements in this Report that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current view with respect to future events and financial performance, but are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in our other SEC filings, and including, in particular, the factors discussed in Item 1 under the heading “Factors that Might Affect our Business or Stock Price.”

Item 1. Business

Overview

We are a leading global provider of drug discovery and development services and products to pharmaceutical, biotechnology and medical device companies. Our corporate mission is to help clients maximize the return on their research and development investments. We offer broad therapeutic expertise, advanced technologies and extensive resources for drug discovery and drug and device development. In addition to providing discovery through post-market services, we also offer our clients compound partnering opportunities.

We have been in the drug development business for more than 19 years. Our development services include preclinical programs and Phase I to Phase IV clinical development services. We have extensive clinical trial experience across a multitude of therapeutic areas and various parts of the world, including regional, national and global studies. In addition, for drugs that have received approval for market use, we also offer post-market support services such as product launch services, patient compliance programs, disease registry programs, and medical communications programs for consumer and healthcare providers on product use and adverse events.

With more than 6,600 professionals worldwide, we have provided services to 41 of the top 50 pharmaceutical companies in the world as ranked by 2003 healthcare research and development spending, in addition to our work with leading biotechnology and medical device companies. We believe that we are one of the world’s largest providers of drug development services to pharmaceutical, biotechnology and medical device companies based on 2004 annual net revenues generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our discovery services business in 1997. After restructuring the Discovery Sciences segment in 2003 and 2004, this business now primarily focuses on preclinical evaluations of anticancer therapies and compound partnering arrangements associated with the development and commercialization of potential drug products. We have developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients’ research and evaluate the development and commercial potential for compounds at various stages of development. In February 2005, we completed the acquisition of a biomarker business. The acquisition will expand our business by adding biomarker discovery and patient sample analysis capability to the collection of services offered by us.

We believe that our integrated drug discovery and development services offer our clients a way to identify and develop successful drugs more quickly and cost effectively. We also use our proprietary informatics technology to support our development services. In addition, because we are positioned globally, we are able to accommodate the multinational drug discovery and development needs of our customers. As a result of having these core areas of expertise in discovery and development, we can provide integrated services across the entire drug development spectrum.

Industry Overview

Discovering and developing new drugs is an extremely expensive and time-consuming process. In May 2003, the Tufts Center for the Study of Drug Development released a study that estimates the total cost to develop a new prescription drug increased from approximately $231 million in 1987 to approximately $897 million in 2000. In addition, it takes between 10 and 15 years to develop a new prescription drug and obtain approval to market it in the United States.

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The drug development services industry provides independent product development services to the pharmaceutical, biotechnology and medical device industries. This industry has evolved from providing limited clinical trial services in the 1970s to a full-service industry today characterized by broader relationships with customers and by service offerings that encompass the entire drug development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analysis, regulatory consulting, clinical laboratory and diagnostic services, product registration support and post-marketing support.

Over the past 20 years, technological advances, as well as the emergence of the biotechnology industry, have dramatically changed the drug discovery process. New and improved technologies have evolved such as ultra high-throughput screening, new in vitro and in vivo preclinical profiling techniques, and the revolution in genetic-based drug research commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen against targets much more quickly with literally millions of chemical compounds. This process should produce many more molecules having the ability to affect biological activity. These molecules then need to be tested quickly and economically to determine their viability as potentially safe and effective drug candidates. Moreover, many industry participants, including pharmaceutical, biotechnology and contract research companies, have broadened their efforts to collaborate technically and financially to optimize their drug pipelines.

The Drug Discovery and Development Process

Drug discovery and development is the process of creating drugs for the treatment of human disease. The drug discovery process aims to generate safe and effective drug candidates, while the drug development process involves the testing of these drug candidates for safety and efficacy in animals and humans and to meet the FDA regulatory requirements.

The Drug Discovery Process

Targets. Historically, scientists have used classical cellular and molecular biology techniques to map biological pathways in cells to provide a cellular basis for understanding disease processes. Based on this information, scientists are now using a set of technologies called genomics to pinpoint genes responsible for cellular disease functions. Once genes are identified, they are tested in cellular assays or animals to identify which genes seem to have a causal link between cellular function and occurrence of disease. The preferred genes encode proteins that are used as drug targets in chemical screens.

Screening. After identifying a potential drug target, researchers develop tests, or assays, in which chemicals are screened for their ability to alter the functional activity of the target. Thousands of chemicals can be quickly screened when these assays are incorporated into high-throughput screening processes. Assays can produce chemicals that interact with a drug target known as “hits.” Hits that have good potency and selectivity are called “leads” and are then tested for their potential as drug candidates.

Lead Generation. Scientists now design compound libraries to provide a starting point to identify leads in the drug discovery process and to better understand the biochemistry and therapeutic relevance of targets. High quality libraries contain compounds of known purity, structure and weight, and also have diverse structural variations. Once a hit is identified in a functional assay, the compound is profiled for drug characteristics such as solubility, metabolism, stability and feasibility for commercial production.

Lead Optimization. The process of “lead optimization” involves refining the chemical structure of a lead to improve its drug characteristics, with the goal of producing a preclinical drug candidate. Lead optimization typically combines empirical and rational drug design. In empirical design procedures, large numbers of related compounds are screened for selected chemical characteristics. In rational drug design, chemicals are optimized based on the three-dimensional structure of the target. A lead that has been optimized to meet particular drug candidate criteria and is ready for toxicity testing is called a preclinical candidate.

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Process Research and Development. Compounds created for screening in lead generation and lead optimization are made in relatively small, milligram quantities. Before a drug candidate can be taken into preclinical and clinical trials, larger quantities must be produced. The goal of process research is to improve the ease with which compounds can be produced in these larger quantities, typically by minimizing the number of production steps, and to determine how to reduce the time and cost of production. Process development refers to the production scale-up and further refinement required for clinical trials and commercial manufacturing.

The Drug Development Process

The drug development process consists of two stages: preclinical and clinical. In the preclinical stage, the new drug is tested in vitro, or in a test tube, and in vivo, or in animals, generally over a one- to three-year period. The following discussion describes the role of the Food and Drug Administration, or FDA, in the drug development process in the United States. Similar regulatory processes exist in other countries.

Prior to commencing human clinical trials in the United States, a company must file with the FDA an investigational new drug, or IND, application containing details for at least one study protocol and outlines of other planned studies. The company must provide available manufacturing data, preclinical data, information about any use of the drug in humans for other purposes and a detailed plan for the proposed clinical trials. The design of these trials, also referred to as the study protocols, is essential to the success of the drug development effort. The protocols must correctly anticipate the nature of the data to be generated and results that the FDA will require before approving the drug. If the FDA does not comment within 30 days after an IND filing, human clinical trials may begin.

The clinical stage is the most time-consuming and expensive part of the drug development process. The drug undergoes a series of tests in humans, including healthy volunteers as well as patients with the targeted disease or condition.

Human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy. These trials are usually grouped into the following three phases, with multiple trials generally conducted within each phase:

• Phase I trials involve testing the drug on a limited number of healthy individuals, typically 20 to 80 persons, to determine the drug’s basic safety data, including tolerance, absorption, metabolism and excretion. This phase lasts an average of six months to one year.

• Phase II trials involve testing a small number of volunteer patients, typically 100 to 200 persons, who suffer from the targeted disease or condition, to determine the drug’s effectiveness and how different doses work. This phase lasts an average of one to two years.

• Phase III trials involve testing large numbers of patients, typically several hundred to several thousand persons, to verify efficacy on a large scale, as well as long-term safety. These trials involve numerous sites and generally last two to three years.

After the successful completion of all three clinical phases, a company submits to the FDA a new drug application, or NDA, or a product license application, or PLA, requesting that the drug be approved for marketing. The NDA or PLA is a comprehensive, multi-volume filing that includes, among other things, the results of all preclinical and clinical studies. The FDA’s review can last from a few months to several years, depending on the drug and the disease state that is being treated. Drugs that successfully complete this review may be marketed in the United States. As a condition to its approval of a drug, the FDA might require additional clinical trials following receipt of approval, in order to monitor long-term risks and benefits, to study different dosage levels or to evaluate different safety and efficacy parameters in target populations. In recent years, the FDA has increased its reliance on these trials, known as Phase IIIb and Phase IV trials, which allow new drugs that show early promise to reach patients without the delay typically associated with the conventional review process.

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Trends Affecting the Drug Discovery and Development Industry

The drug discovery and development services industry has been and will continue to be affected by, among others, the following trends:

Rapid Technological Change and Increased Data. Scientific and technological advancements are rapidly changing the drug discovery and development processes. The technology to understand gene function, known as functional genomics, is dramatically increasing the number of identified potential drug targets within the human body. Pharmaceuticals on the market today target fewer than an estimated 500 human gene products. With an estimated 30,000 or so human protein-coding genes, there exists an enormous untapped pool of targets for therapeutic intervention. This proliferation of targets increases the need for companies to use state-of-the-art technologies to effectively validate and optimize promising targets and lead candidates. Industry participants are also looking to applications such as biomarker technology to save development time and costs, as well as enable more precise diagnosis and personalized treatment of disease. These technologies and the human expertise necessary to manage and keep up with them are costly.

Changes in the Regulatory Environment. The drug research and development process is heavily regulated by the FDA and its Center for Drug Evaluation and Research, or CDER. The war on terror, the AIDS epidemic and the 2004 influenza vaccine shortage in the United States have elevated the FDA’s focus on research in the areas of bio-terrorism and vaccine development. In addition, recent product safety concerns, such as the cardiovascular risks identified as being related to COX 2 inhibitors, and drug importation issues have placed the FDA and other regulatory agencies under increased scrutiny. As a result of these and other events, drug safety and related issues are under intense review by Congress, and the FDA recently announced that it will establish a new independent Drug Safety Oversight Board to oversee the management of drug safety issues within CDER and to monitor medicines once they are on the market. These events are likely to cause significant changes to the regulatory environment for the drug development process and could have a lasting and pronounced impact on the drug discovery and development industry.

Increase in Potential New Drug Candidates. The increase in potential new drug candidates resulting from the genomics revolution has caused a bottleneck in the drug development industry, particularly in the early stages of drug development. While research and development spending and the number of drug candidates are increasing, the time and cost required to develop a new drug candidate also has increased. Many pharmaceutical and biotechnology companies do not have the internal resources to pursue development of all of these new drug candidates on their own. Consequently, these companies are looking to the drug discovery and development services industry for cost-effective, innovative and rapid means of developing new drugs.

Declining Research & Development Productivity. While the total number of compounds in clinical development has increased in the last several years, thereby increasing the aggregate spending on research and development programs associated with new drug candidates, the number of novel new drugs approved for marketing has remained relatively flat or even declined. This declining productivity in part reflects efforts by pharmaceutical companies to more effectively screen compounds in early stages of development and to extend the value of existing products by pursuing new indications, over-the-counter versions and alternative delivery technologies. Pharmaceutical and biotechnology companies have responded by focusing on efforts to improve clinical success rates and to lower clinical study costs. Furthermore, many clients have also responded to the productivity challenge by increasing their focus on licensing and risk-sharing arrangements to improve new drug pipelines and gain financing for future development and marketing programs.

Biotechnology Industry Growth. The United States biotechnology industry has grown rapidly over the last 10 years. This industry is generating significant numbers of new drug candidates that will require development and regulatory approval. Many of these new drug candidates are now moving into clinical development, but many biotechnology companies do not have the necessary staff, operating procedures, experience or expertise to conduct clinical trials on their own. Because of the time and cost involved, these companies often do not have the inclination to develop their own staff in this area.

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Need for Large Scale Global Support. More pharmaceutical and biotechnology companies are filing drug registration packages simultaneously in several major jurisdictions, rather than following the traditional practice of filing sequentially. The studies to support these registration packages frequently include a combination of multinational and domestic trials. This trend puts an emphasis on global experience and coordination throughout the development process, including the collection, analysis, integration and reporting of clinical trial data.

Cost Pressures of Introducing New Drugs. Market forces and governmental initiatives place significant pressure on pharmaceutical and biotechnology companies to reduce drug prices. In addition, increased competition as a result of patent expiration, market acceptance of generic drugs, and governmental and private managed care organization efforts to reduce healthcare costs have added to drug pricing pressures. The industry is responding by consolidating, streamlining operations, decentralizing the internal discovery and development process and minimizing fixed costs. In addition, increased pressures to differentiate products and justify drug pricing are resulting in growth in healthcare economics services with respect to drugs under development and those already on the market. Consequently, pharmaceutical and biotechnology companies are attempting to increase the speed of new drug discovery and development. By identifying possible lead compounds and eliminating others from the discovery process as early as possible, these types of companies can focus their research and development efforts more efficiently. Turning drug discovery and development processes over to third parties also minimizes fixed costs.

The PPD Solution

We address the needs of the pharmaceutical, biotechnology and medical device industries for drug discovery and development by providing integrated services to help our clients maximize the return on their research and development investments. We believe that our application of innovative technologies, therapeutic expertise and commitment to quality throughout our integrated drug discovery and development services and products offers our clients a way to identify and develop successful drugs and devices more quickly and cost effectively. We have obtained significant drug development expertise from over 19 years of operation. Starting in 1997, we expanded our services to include drug discovery services to help our clients reduce drug discovery time and minimize unproductive compound development. More recently, we have also expanded into the medical device industry. We use our proprietary informatics technology to support our discovery and development services. Finally, because we are positioned globally, we are able to accommodate the multinational discovery and development needs of our customers.

Our Strategy

Our corporate mission is to help clients maximize the return on their research and development investments. The key parts of our strategy to accomplish this mission include the following:

• Continue to build upon our core competencies. We are an established company led by professionals with significant discovery and development experience in major pharmaceutical, biotechnology and medical device companies bringing successful products to market throughout the world. This experience and expertise constitute our core operational strengths. Our effective performance in development services has made us, we believe, one of the largest providers of those services globally. We are continually building our competencies by seeking to hire the best professionals in key markets around the world.

• Continue to provide a broad range of integrated drug discovery and development services and products. We offer a broad range of integrated services and products that are designed to address our clients’ needs from preclinical through post-market. By integrating extensive discovery and development services and products across our customers’ product life cycles, we believe we can more effectively serve existing clients and attract new customers. We believe that our range of discovery and development services and products is one of the most extensive available from a single company.

• Continue to incorporate advanced technologies into our service offerings. We believe that optimizing the use of advanced technologies can improve quality while creating efficiencies in cost and accelerating the discovery and development processes. We have broad experience in the use of technology in drug

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discovery and development services. We offer our clients a wide range of technology-based services and products using a mixture of commercially available third-party systems and internally developed software to help expedite the discovery and development processes for both drugs and devices. As new technologies develop, we equip and train our employees to make use of the innovations. We also plan to continue to leverage and build strategic technology relationships.

• Continue to pursue collaborative drug development relationships. We plan to continue to selectively seek opportunities to develop earlier stage compounds based on our risk-sharing model. These types of arrangements could provide us with opportunities to receive up-front license fees, milestone payments and royalties on sales of drugs successfully developed and commercialized. We also periodically evaluate in-licensing opportunities from companies and academic institutions seeking outlets for the continued development of their discoveries. In addition, we intend to selectively pursue out-licensing arrangements, which might also involve us providing discovery and development services for the continued development of the potential drug candidate.

• Continue to develop intellectual property rights. We believe that one of the keys to our long-term performance is the development of our intellectual property rights in a variety of areas, including proprietary clinical development processes, tools and software, as well as rights to the compounds and methods of use developed from risk-sharing arrangements.

• Continue strategic global expansion to meet client needs. We currently have operations in the Americas, Europe, Africa, the Middle East, Asia and the Pacific Rim, which we believe position us to meet our clients’ multinational needs. We intend to further expand globally when we deem it appropriate to meet our existing and prospective clients’ demands.

• Continue to pursue strategic acquisitions and investments. We will continue to actively seek strategic acquisitions and investments, both within and complementary to our current service and product lines. Our criteria for acquisitions and investments include complementary client lists, ability to increase market share within and across clients, complementary therapeutic area and service segment strengths, strategic geographic capabilities, particular process expertise and complementary services, products or technologies.

Our Services

We provide services designed to increase efficiency, reduce time and save costs through our global infrastructure, integrated research and development technologies and experience, and customer-focused communications. We operate in two segments: Discovery Sciences and Development. See our consolidated statements of operations included elsewhere in this report for segment information regarding revenues and see Note 16 to the Notes to Consolidated Financial Statements for segment information regarding total assets and a measure of profit or loss.

Our Discovery Sciences Group

Our Discovery Sciences Group focuses on the discovery research segment of the pharmaceutical research and development outsourcing market.

Preclinical Biology. Our preclinical biology group integrates pharmacology, metabolism, pharmacokinetic and toxicology expertise to provide preclinical program design and project management services. We provide a broad range of preclinical services and products including:

• preclinical program design;

• specialized preclinical oncology research models;

• toxicology consulting;

• laboratory services; and

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• technical writing and regulatory submissions.

Once a potential drug candidate is identified, we offer services and products that enable our customers to decide whether to advance the drug candidate into a preclinical program both faster and with a greater probability of success. Our experts can provide full preclinical development services and integrate other development services internally.

We offer preclinical consulting as well as a full range of preclinical efficacy, pharmacokinetic, pharmacodynamic and mechanism models for anticancer therapeutic candidates. Our experienced preclinical oncology staff design and perform the studies needed to identify, profile and optimize lead compounds.

Supported by our board-certified toxicologists, we develop and implement preclinical toxicology programs. To support the clinical development program, we write the toxicology study protocols, identify qualified good laboratory practice, or GLP, testing facilities, manage the placement and conduct of studies, and prepare and review pharmacology, toxicology, absorption and metabolism data for regulatory submissions.

We provide non-GLP bioanalytical services in our laboratory located in Middleton, Wisconsin. Our bioanalytical laboratory analyzes biological fluid samples from preclinical animal studies and conducts in vitro discovery/early development experiments to test potential drug candidates.

Our technical writers prepare pharmacology and toxicology summaries for regulatory submissions and work with regulatory authorities to develop preclinical plans. We offer a full range of regulatory support services, including document submission, preparation and review of all preclinical regulatory submissions required by regulatory agencies and facilitation of meetings with regulatory agencies to ensure successful outcomes.

Compound Partnering Programs. With increased capacity to screen and develop early lead compounds and candidates, pharmaceutical companies now find themselves without the capacity to develop all of these compounds and take them to market within a reasonable time. Many biotechnology companies have promising drug development candidates but lack the financial resources or the infrastructure to further develop them. These situations provide attractive opportunities for us to use our extensive experience in strategic, global drug development to selectively in-license and develop compounds or jointly develop drug candidates in collaborative arrangements. Our compound collaborative efforts have created a pipeline of products that leverage our resources, create new opportunities for growth, and share the risks and rewards of drug development.

In 1998, as part of a development collaboration with Eli Lilly & Company, we acquired an exclusive license to develop and commercialize the compound dapoxetine for genitourinary indications, including premature ejaculation, or PE. We developed the compound through Phase II proof-of-concept and, in January 2001, out-licensed it to ALZA Corporation, which was subsequently acquired by Johnson & Johnson. Under the terms of the agreement, we granted ALZA worldwide rights to develop and commercialize dapoxetine, and ALZA is responsible for all clinical, regulatory, manufacturing, sales and marketing costs associated with the compound. In exchange, we received an up-front payment and are entitled to receive further payments if regulatory milestones are achieved. In addition, we are entitled to receive royalty payments based on sales of dapoxetine, as well as milestone payments when specified sales levels are reached. In December 2003, we acquired Lilly’s patents and remaining rights to develop and commercialize dapoxetine in the field of genitourinary disorders in return for a cash payment of $65.0 million. We also agreed to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800 million. In December 2004, ALZA submitted a new drug application, or NDA, to the FDA for dapoxetine. The FDA accepted the NDA for filing in February 2005. If approved by the FDA, dapoxetine would be the first prescription treatment designed specifically to treat PE and will be marketed in the U.S. by Ortho-McNeil Pharmaceutical, Inc.

In 2002, we licensed from Bayer AG the worldwide rights to undertake additional Phase II clinical studies on the compound implitapide for treatment of arteriosclerosis, elevated triglycerides, pancreatitis and hyperlipidemia. In connection with our studies, we have access to Bayer’s existing information from previously conducted preclinical studies and Phase II clinical trials, as well as regulatory filings to conduct clinical trials in the United States, Europe and South Africa. We have initiated Phase II proof-of-concept clinical trials for different kinds of elevated cholesterol and triglyceride indications. Following completion of the Phase II proof-of-concept

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study, Bayer has the right to terminate its license with us and assume further development of the compound. If Bayer elects to assume development, then Bayer must reimburse our Phase II costs and pay us milestone payments and royalties to be agreed upon by the parties.

In 2003, we made an equity investment in Chemokine Therapeutics Corp., then a privately held biotechnology company, to continue development of a proprietary peptide that might be useful as a blood recovery therapeutic agent. We worked closely with Chemokine to scale up the product under good manufacturing practice, or GMP, and to conduct the GLP toxicology studies necessary to advance the program to the clinic. In the second half of 2004, Chemokine initiated a study in healthy volunteers that we understand will be completed in the first half of 2005. Chemokine also granted PPD an exclusive option to license the peptide and the right to first negotiate a license to other Chemokine peptides. In December 2004, Chemokine completed an initial public offering of its common stock in Canada.

In November 2003, we made an equity investment in Syrrx, Inc., a privately held drug discovery company, and entered into a collaboration agreement to develop Syrrx’s orally active dipeptidyl peptidase IV, or DPP IV, inhibitors to treat type 2 diabetes and other major human diseases. Syrrx has multiple lead candidates for preclinical developments, three of which were investigated in GLP toxicology programs. In October 2004, we filed an IND for the first DPP IV inhibitor. We initiated the Phase I study in the end of October and this inhibitor is now in Phase Ib, which is when the drug is first administered to subjects suffering from the indication. We currently anticipate starting Phase II trials in April 2005. We filed an IND for a second DPP IV inhibitor in late December 2004 and a Phase I study for this second DPP IV inhibitor is scheduled to begin in April 2005. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx. At this time, we do not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.

Our Development Group

We have designed our various global services to be flexible and integrated in order to assist our clients in optimizing their research and development spending through the clinical stages of the development process. We provide a broad range of development services, either individually or as an integrated package, to meet clients’ needs.

Phase I Clinical Testing. We are one of the industry’s largest Phase I trial providers, with clinical testing services currently conducted in a 220-bed unit in Austin, Texas. To accommodate the growing demand for our Phase I services, we leased new facilities in Austin and are constructing a new 300-bed Phase I unit. We anticipate moving our Phase I operations to the new unit in April 2005. Our professional physician and nursing staff administers general Phase I safety tests, special population studies, and bioavailability and bioequivalence testing. Bioavailability and bioequivalence testing involves administration of test compounds and obtaining biological fluids sequentially over time to measure absorption, distribution, metabolism and excretion of the drug. Special population studies might involve the elderly, women or patients with specific diagnoses, such as renal failure or asymptomatic HIV. Our Austin, Texas operations also include a dental research clinic to evaluate the safety and effectiveness of new analgesic compounds in molar extraction models. We manage our Phase I services to maximize scheduling flexibility and efficiency. These services can also be integrated with our other services that we provide, such as bioanalytical, data management, pharmacokinetic and biostatistical services.

Laboratory Services. We offer the following laboratory services to the pharmaceutical and device industries:

Austin Central Lab: Austin central lab is located in our Phase I unit and supports the Phase I operations in Austin. This laboratory performs clinical chemistry assays on volunteer specimens to ensure that each subject qualifies for the study and is not adversely affected by a drug. The laboratory will be relocating with our Phase I unit in April 2005. Having our laboratory in the same facility as the volunteers speeds our response time to assess unexpected outcomes. This laboratory also serves as a central laboratory for small to medium size Phase II through IV multicenter studies.

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MRL International: We provide global specialty central laboratory services for large clinical trials through our MRL laboratories in Highland Heights, Kentucky and Brussels, Belgium. Our specialty central laboratories provide highly standardized efficacy and safety testing services for pharmaceutical companies engaged in clinical drug development as well as U.S. government (National Institutes of Health) funded clinical trials. We are one of the largest specialty central laboratory providers for Phase I through IV global studies involving agents used in cholesterol, endocrine, metabolic and cardiovascular clinical research.

Bioanalytical Lab: We provide bioanalytical services through GLP-compliant laboratories in Richmond, Virginia and Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid samples from animal and human clinical studies. The latter studies include those conducted by our Phase I unit as well as those conducted on behalf of our clients from Phase I through Phase IV for drug and metabolite content and concentration. We currently have over 1,500 validated assays available for our clients’ use in conducting laboratory analyses, qualifying us for a wide range of assignments. Our laboratories also process fluid samples for preclinical studies. Our bioanalytical methods include gas chromatography/mass spectrometry (GC/MS), liquid chromatography/mass spectrometry (LC/MS), high performance liquid chromatography (HPLC), gas chromatography (GC), radioimmunoassay (RIA) and enzyme-linked immunosorbent assay (ELISA). Support services include facilities for handling HIV-positive samples, data management for pharmacokinetic studies from multi-center trials and sample/data archiving.

GMP Lab: We provide product analysis laboratory services through our GMP-compliant laboratory in Middleton, Wisconsin. Our product analysis services include inhalation, biopharmaceutics, dissolution and stability studies. These studies are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for marketing. These evaluations must be carried out from preclinical testing through Phase IV and the resulting data maintained over the commercial life of a product. New formulations, as well as generics and prescription products going to over-the counter status, such that they no longer require physician prescription for consumer use, all require the same set of studies as the original dosage form.

We are one of a few full service companies able to offer our clients the advantages of bioanalytical, product analysis and specialty central laboratory services, as well as Phase I clinical testing.

Phases II through IV Clinical Trial Management. The core of our development business is a comprehensive package of services for Phases II through IV clinical trials, which together with our other services, allows us to offer our clients an integrated package of clinical management services. We have significant clinical trials experience in the areas of:

General Areas of Expertise	Specific Areas of Expertise
Analgesia	Acute and chronic pain
Cardiovascular disease	Hypertension, angina pectoris, stroke, peripheral arterial disease
Central nervous disease	Schizophrenia, depression, epilepsy, chronic pain, anxiety, obsessive-compulsive disorders, panic disorders, insomnia, multiple sclerosis
Critical care	Sepsis, ARDS (acute respiratory distress syndrome)
Dermatology	Wound healing, acne, hair loss, psoriasis
Gastroenterology	Duodenal ulcer, gastric ulcer, gastro-esophogeal reflux disease, H.pylori, nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease, irritable bowel disease
Genitourinary	Incontinence, sexual dysfunction
HIV/AIDS	Primary disease and treatment/prophylaxis of opportunistic infections
Infectious disease	Pneumonia, sinusitis, ear infections, swimmer’s ear, chronic bronchitis, urinary tract infection, skin and soft tissue infection, vaginal infections, thrush, athlete’s foot, ringworm, fungal blood infections, and childhood and adult vaccines
Metabolic/endocrine disease	Diabetes, growth hormone
Oncology	Prostate, colorectal, breast, lung and other cancers
Pulmonary/allergy	Asthma, allergic rhinitis
Rheumatology	Rheumatoid arthritis, osteoarthritis, lupus
Urology	Sexual dysfunction, urinary incontinence and overactive bladder
Virology	Herpes simplex, chronic hepatitis B, chronic hepatitis C, genital herpes, respiratory syncytial virus and influenza
Women’s health	Osteoporosis, hormone replacement therapy

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We conduct clinical trials through a project team. A project manager supervises all aspects of the conduct of the clinical trial, while our clinical research associates are in the field monitoring the trial at the various investigational sites. Within this project-oriented structure, we can manage every aspect of the clinical trial in Phases II through IV of the drug development process. The services that we offer to initiate clinical trials include protocol development, case report form design, feasibility studies, investigator selection, recruitment and training, site initiation and monitoring, accelerated patient enrollment, development of training materials for investigators and training of clients’ staff.

We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and serve as a tool for controlling and enhancing the quality of our clinical trials. All of our standard operating procedures are in compliance with good clinical practices, or GCP, requirements and the International Conference on Harmonization, or ICH, standards. The FDA has adopted these standards in their guidance documents and, more recently, the members of the European community and Japan have codified these standards into their clinical research regulations. We compile, analyze, interpret and submit data generated during clinical trials in report form to the FDA or other relevant regulatory agencies for purposes of obtaining regulatory approval. We provide consulting on the conduct of clinical trials for simultaneous regulatory submissions to multiple countries.

We provide our clients with one or more of the following Phase II through IV clinical trial management services using parallel processing to accelerate the development process:

Study Design. We serve our clients in the critical area of study design by applying our experience in the preparation of study protocols and case report forms.

Investigator Recruitment. During clinical trials, physicians, who are also referred to as investigators, at hospitals, clinics or other locations, supervise administration of the drug to patients. We recruit investigators who contract with us to participate in clinical trials. We are continually looking for new investigator sites, particularly those that complement our primary therapeutic areas.

Study Monitoring. We provide study-monitoring services, which include investigative site initiation, patient enrollment assistance and data collection through subsequent site visits. We have monitored many clinical trials, including a number of very large studies. For example, we are engaged in a project with the National Institutes of Health, begun in 1990, which has had approximately 60 protocols open at any given time. This project has involved approximately 1,000 investigational sites and greater than 110,000 enrolled patients and has generated greater than 400 protocols and more than 6,000 pharmacy, regulatory and operational audits at the sites.

Clinical Data Management and Biostatistical Analysis. We provide clients with assistance in areas such as sample size determination, case report form design and production, database design and construction, fax-based monitoring and electronic data capture. We also provide statistical analysis and summaries, including interim and final analyses, data safety, monitoring board summaries and presentations, NDA preparation, electronic production and presentations and defense services to regulatory authorities.

Medical Writing and Regulatory Services. We provide planning services for product development, including preclinical review, consulting and clinical protocol development. These activities are complemented by report writing, program management and regulatory services designed to reduce overall development time.

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Market-Development Support. We provide custom-designed market development programs for pharmaceutical, biotechnology and medical device clients. Developed with pharmaceutical and biotechnology client feedback, in 2003 we created a dedicated team of clinical, marketing and health outcomes experts to help companies with pre-launch (Phase II through III) and post-market (Phase IIIb through IV) programs to develop markets for new products and extend market value of existing products. The portfolio of services we offer in this area includes health outcomes, large-volume late stage trials, medical communications, consumer health and online marketing and education.

Applying advanced technologies and experience, we combine health outcomes, such as epidemiology, psychometrics and economics, with clinical research to measure and compare risks, benefits and economic and quality-of-life impacts of drug therapies. The resulting data is used to help demonstrate the value of the product and provide insight on needs to optimize user acceptance upon product launch. We also provide late stage trials, such as Phase IIIb through IV studies, which can produce valuable safety and efficacy data analysis and provide information for the product marketing promotion. Our medical communications services include post-market observational studies, registries and compliance and persistency programs, which can optimize real-world outcomes and indicate ways to help enhance proper use of the drug by the physician and patient. We also provide consumer health programs, which can provide product life extension through over-the-counter programs. Our online marketing and education services provide our clients with proprietary Web sites for disseminating medical information, online market research and product marketing services for a variety of clinical specialties.

Device Testing. Through our acquisition of Eminent Research Systems in 2003, we expanded our service offerings to support clinical trials for the medical device industry, especially in the cardiovascular area. Our device services include study design, regulatory consulting, global trial management, data management, biostatistics and documentation development. Using PPD GlobalView, a Web-based proprietary software product Eminent developed, we have a leading position for long-term registries of permanent implantable cardiovascular devices.

eClinical Initiatives. Our eClinical initiatives offer efficiencies, enhanced quality and improved communications with our clients. In 2004, we piloted a customized project progression and resource management tool, which helps project managers provide efficient and cost-effective study management with quality deliverables. We also implemented a new clinical trial management system, providing Web-based, real-time access to study data from anywhere in the world. We plan to expand use of this system into our Phase IV studies in 2005. We also continue to expand PPD DirectConnect^™ Web portals, which are now supporting over 250 client studies with over 3,350 users across 72 pharmaceutical, biotechnology, clinical laboratory and government clients. We continue to expand our Oracle^® clinical data management system, including introduction of Oracle clinical’s remote data capture, or RDC, system and a core electronic data capture, or EDC, team to leverage our EDC experience across project teams. In 2004, we expanded our use of a Web-based document management system supporting our data management, safety and clinical operations businesses. This system enables us to flexibly resource project teams worldwide.

Informatics. Our informatics division, known as CSS Informatics, delivers specialized software products and technical consulting services to support many aspects of the pharmaceutical research and development process, including drug discovery, clinical trials, regulatory review and pharmacovigilance. Our informatics clients include international and domestic pharmaceutical and biotechnology companies and government agencies, including the FDA. Our current informatics software products include:

• PPD Patient Profiles, which streamlines patient data review and provides graphical displays of complex research data;

• TableTrans®, which automates data transformation and integration;

• eLoader, which streamlines and automates loading of external data into Oracle Clinical^™;

• CAVS (Computer Aided Validation System), which streamlines the test development and execution process; and

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• OC2SDS, which converts trial data to submission-ready data sets that follow standards recently adopted by the FDA.

A primary focus of our informatics division is to provide consulting services to help pharmaceutical, biotechnology and medical device companies assess and resolve clinical data management and safety system challenges, such as integrating and customizing systems, migrating clinical and safety data, providing computer systems validation services that include compliance evaluation and updating or replacing legacy systems to meet regulatory guidance. We provide expertise on the Oracle Pharmaceutical Application suite and the PhaseForward suite of products with a full range of support services including installation, training, validation, technical support and custom development.

Clients and Marketing

We provide a broad range of discovery and development services and products to help pharmaceutical, biotechnology and medical device companies develop compounds, drugs and devices, as well as the markets in which they plan to sell products that gain approval.

Client Identification and Mix

Our Development Group provides Phase I to Phase IV clinical development and market support services. We market these services in the Americas, Asia, Europe, Africa, the Middle East and the Pacific Rim. We believe that the key differentiators that help us win development business from pharmaceutical and biotechnology companies include our global infrastructure, quality-driven execution based on ongoing training, quality assurance and control practices, and cross-functional groups with dedicated therapeutic expertise. Through our medical device development group, we offer clinical trial services and regulatory expertise to device companies, including a number of the leading cardiovascular device manufacturers and pharmaceutical companies developing adjunct therapies. In addition, our market development services combine clinical, marketing and health outcomes expertise to help pharmaceutical, biotechnology and device companies develop markets for new products and extend market value for existing products. We believe that these services help our clients maximize the life cycle of their products.

For the year ended December 31, 2004, 82.9% of our Development Group’s net revenues were attributable to clinical services and 17.1% to laboratory services. From a geographic perspective, 72.5% of our Development Group’s net revenues in 2004 were derived from the United States with the remaining amount coming primarily from Europe. For additional information on our geographic distribution, see Note 17 to the Notes to Consolidated Financial Statements included elsewhere in this report.

Our Discovery Sciences Group offers services and technologies to select drug candidates for clinical evaluation. This preclinical-focused group primarily provides services to clients in the pharmaceutical and biotechnology industries. In addition, we perform research on compounds that we own or license and through our compound risk-sharing collaborative relationships. Our Discovery Sciences Group revenues have all been generated in the United States.

For the year ended December 31, 2004, total net revenue for all of our services were derived from various industries approximately as follows:

Source	Percentage of Net Revenue
Pharmaceutical	65.2	%
Biotechnology and other	32.3	%
Government	2.5	%

For the purposes of classifying net revenue, we define pharmaceutical to include companies with the majority of their research and development related to chemical entities and biotechnology to include companies with the majority of their research and development related to biologically engineered compounds. Other includes companies primarily focused upon medical devices, diagnostics and generic formulations. We refer to the Standard Industry Classification, or SIC, codes for publicly traded companies to determine their classification.

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Concentration of business among large customers is not uncommon in our industry. We believe that our diverse client mix, in which no single client in 2004 accounted for more than 10% of our net revenues, limits our exposure to significant risks associated with industry consolidation and major product cancellations. However, we have experienced higher concentration in the past and might experience it in the future. Approximately 36% of our 2004 net revenues were derived from clients headquartered outside the United States, in particular in Europe and Japan. Approximately 27.6% of our 2004 net revenues were generated from services provided by our employees located in countries outside the United States. See Note 17 to the Notes to Consolidated Financial Statements included elsewhere in this report for the breakdown of this revenue.

Marketing Strategy

With a primary focus on large pharmaceutical companies, we promote our discovery services through a dedicated sales team, localized scientist-to-scientist communications and our centralized corporate marketing efforts. In addition, we believe that much of the preclinical oncology work we gain is derived from positive word-of-mouth communications in the industry.

For our development services and products other than informatics and specialty central lab services, we use centralized corporate marketing to support the efforts of dedicated business development staff calling on pharmaceutical, biotechnology and device companies. Our sales teams focus on client segments and service areas. In addition, while the service area representatives call on particular buying groups within a given pharmaceutical client, sales account managers are responsible for coordinating outsourcing across our service areas for each client. To further facilitate cross-functional sales, worldwide business development staff for development services and products across our company report to the same executive. The informatics division uses technology expert communications and localized marketing efforts, and our specialty central lab division applies core operation staff communicating with potential clients and networking.

The top 25 publicly traded pharmaceutical companies ranked by research and development expenses in 2003 accounted for 87% of research and development spending in 2003, so we concentrate on these companies. The top 50 publicly traded biotechnology companies accounted for almost 91% of the biotechnology research and development expenditures in 2003. To appropriately focus our sales and marketing efforts among biotechnology companies, we consider additional factors such as the stage of a drug’s development and the financial stability of a company’s business.

Our business development personnel consult with potential pharmaceutical and biotechnology clients early in the project consideration stage in order to determine their requirements. Along with the appropriate operational, technical or scientific personnel, our business development representatives invest significant time to determine the optimal means to design and execute the potential client’s program requirements. As an example, recommendations we make to a potential client with respect to a drug development study design and implementation are an integral part of our bid proposal process and an important aspect of the integrated services we offer. We believe our preliminary efforts relating to the evaluation of a proposed clinical protocol and implementation plan enhance the opportunity for accelerated initiation and overall success of the trial.

Our core global marketing and corporate communications activities are primarily Web-based. Our initiatives include online advertising and directory listings on predominant industry Web sources; interactive Web-based education and information programs, including Web conferences and Webcasts; direct e-mail campaigns and electronic newsletters. In late 2004, working with client, media and analyst feedback, we evolved our Web site for improved navigation and use and added new search optimization tools to help drive traffic to the site. In addition, we integrate client presentations and sales materials, global speakers’ bureau, media relations, corporate materials and marketing at professional trade shows to reinforce key messages and selling points. We encourage and sponsor the participation of our personnel in a variety of professional endeavors, including the presentation of papers at national and international professional trade meetings and the publication of scientific articles in medical and pharmaceutical journals. Through these presentations, publications and additional promotion via our corporate Web site, we seek to advance and promote our reputation for professional excellence.

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Backlog

Our backlog consists of anticipated net revenue from letters of intent, verbal commitments and contracts that either have not started but are anticipated to begin in the near future, or are in process and have not been completed. Amounts included in backlog represent future revenue and exclude revenue that has been recognized previously in our statement of operations. Net revenue is defined as professional fee income, or gross revenue, less fees and associated reimbursements. Once contracted work begins, net revenue is recognized over the life of the contract. Our backlog was $1.29 billion in net revenues at December 31, 2004, compared to $1.12 billion in net revenues at December 31, 2003.

We believe that our backlog as of any date is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the labor increases and decreases that occur at the beginning and end of each study. Additionally, contracts relating to our clinical development business generally are subject to early termination by the client, and clinical trials can be delayed or canceled for many reasons, including unexpected test results. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is finalized. For these reasons, we might not fully realize our entire backlog as net revenue.

Intellectual Property

We believe that patents, trademarks, copyrights and other proprietary rights are important to our business. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position.

We actively seek patent protection both in the United States and abroad. As of December 31, 2004, we owned or co-owned 11 issued U.S. patents and 23 pending U.S. patent applications. Our issued U.S. patents primarily relate to our proprietary anti-tumor compounds, dapoxetine compound and methods of use, and HIV drug target gene sequences. Our pending U.S. patent applications primarily relate to proprietary genomic and genetic information, chemical compounds, clinical development business methods and software. We have filed or plan to file applications in other countries corresponding to most of our U.S. applications. As of December 31, 2004, we had eight granted and 52 pending foreign filings, including eight pending Patent Cooperation Treaty, or PCT, filings.

We also have obtained licenses to other patents from academic institutions and pharmaceutical companies. As of December 31, 2004, we had exclusive license rights to seven issued U.S. patents and 54 pending U.S. patent applications, as well as corresponding foreign filings.

Pursuant to the terms of the Uruguay Round Agreements Act, patents issued from applications filed on or after June 8, 1995, have a term of 20 years from the date of filing, irrespective of how long it takes for the patent to issue. Because patent applications in the pharmaceutical industry often take a long time to issue, this method of patent term calculation can result in a shorter period of patent protection afforded to us compared to the prior method of term calculation (17 years from the date of issue). Under the Drug Price Competition and Patent Term Restoration Act of 1984 and the Generic Animal Drug and Patent Term Restoration Act of 1988, a patent that claims a product, use or method of manufacture covering drugs may be extended for up to five years to compensate the patent holder for a portion of the time required for FDA review. However, we might not be able to take advantage of the patent term extension provisions of this law.

In addition, we rely on trade secrets and continuing technological innovation, which we try to protect with reasonable business procedures for maintaining trade secrets, including confidentiality agreements with our collaborators, employees and consultants. We also have numerous trademark registration applications pending in the United States and other jurisdictions throughout the world.

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Employees

At December 31, 2004, we employed approximately 6,600 professionals, of whom approximately 6,150 were in the Development Group, approximately 50 were in the Discovery Sciences Group and the remainder served in corporate operations functions. Of our staff, approximately 550 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 925 hold other masters or other postgraduate degrees. None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.

We believe that our success is based on the quality and dedication of our employees. We strive to hire the best available people in terms of ability, experience, attitude and fit with our performance philosophy and standard operating procedures. We train new employees extensively, and we believe that we are an industry leader in the thoroughness of our training programs. In addition, we encourage our employees to continually grow and broaden their skills through internal and external training programs.

Available Information

Our Web address is www.ppdi.com. We make available free of charge through our Web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Competition

The drug and medical device development outsourcing industry consists of hundreds of smaller, limited-service providers and a number of full-service global development companies. The industry continues to experience consolidation and, in recent years, a group of large, full-service competitors has emerged. In 2004, consolidation continued with the merger of PharmaNet, Inc. into SFBC International, Inc. and the merger of Inveresk Research Group, Inc. into Charles River Laboratories International, Inc. In addition, PRA International, Inc. completed an initial public offering in 2004. This trend of industry consolidation, along with other changes and the emergence of new entrants, continues to generate intense competition for clients and acquisition candidates. Additional business combinations by competitors or clients could have a significant impact on the competitive landscape of the drug development outsourcing industry.

Our Development Group and Discovery Sciences Group compete principally on the basis of reputation, scientific and technical expertise, experience and qualifications of professional staff, and the ability to deliver timely, high quality services and products to our clients. In addition to competing with a number of other global, full-service companies, our Development Group also competes against some medium-sized companies, in-house research and development departments of pharmaceutical and biotechnology companies, as well as universities and teaching hospitals. Newer, smaller entities with specialty focuses, such as those aligned to a specific disease or therapeutic area, compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that could adversely affect our operating results.

Providers of outsourced drug and medical device development services and products compete on the basis of a number of factors, including reputation for on-time quality performance, expertise and experience in specific therapeutic areas, scope of service offerings, price, strengths in various geographic markets, technological expertise and systems, data management capabilities for time savings with data integrity, ability to acquire, process, analyze and report data in a time-saving accurate manner, ability to manage large-scale clinical trials both domestically and internationally and expertise and experience in healthcare economics. Although there can be no assurance that we will continue to do so, we believe that we compete favorably in these areas.

As a general matter, the drug development services industry is not capital-intensive and the financial costs of entry into the industry are relatively low. Despite recent consolidation, this industry remains highly fragmented,

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with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few barriers to entry for smaller, limited-service providers, we believe there are significant barriers to becoming a global provider offering a broad range of services and products. These barriers include:

• the cost and experience necessary to develop broad therapeutic expertise;

• the ability to manage large, complex clinical trials;

• the ability to deliver high quality services consistently for large drug development projects;

• the experience to prepare regulatory submissions throughout the world; and

• the infrastructure and knowledge to respond to the global needs of clients.

For specialty areas such as drug information and medical communications, informatics, analytical laboratory services and specialty central laboratory services, our Development Group competes in a market that has a myriad of niche providers. For the most part, these niche providers offer specialty services and products with a focus on a specific geographic region, a particular service or function and/or a specific stage or phase of drug development. By contrast, we provide our services on a global basis across functional areas.

The outsourced preclinical research industry consists of a number of large providers and numerous smaller niche companies. Our Discovery Sciences Group faces significant competition from these companies, as well as competition from research teams funded internally by pharmaceutical and biotechnology companies. Our compound risk-sharing initiatives seek to help our clients maximize the return on their research and development investments by sharing development costs and risks as well as future revenue streams from successful product launches. Many of these clients search for a collaborative partner through a competitive bidding process, which can include pharmaceutical, biotechnology and discovery platform and services companies, as well as venture capital firms and financial institutions. As such, there is significant competition for these opportunities, and our success will depend on our ability to identify and competitively bid for risk-sharing programs that are likely to be productive.

Government Regulation

Our clients are subject to extensive regulations by government agencies. Consequently, the services we provide for these clients must comply with relevant laws and regulations.

Prior to commencing human clinical trials in the United States, a company developing a new drug must file an IND with the FDA. The IND must include information about animal toxicity and distribution studies, manufacturing and control data, stability data and a detailed plan, or study protocol, for the proposed clinical trial of the drug or biologic in humans. If the FDA does not object within 30 days after the IND is filed, human clinical trials may begin. The study protocol must be reviewed and approved by the institutional review board, or IRB, in each institution in which a study is conducted and the IRB may impose additional requirements on the way in which the study is conducted in its institution.

Human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy along with safety in the target population. The trials are generally conducted in three phases, which sometimes overlap, although the FDA may require a fourth phase as a condition of approval. After the successful completion of the first three clinical phases, a company requests approval for marketing its product by submitting a NDA. The NDA is a comprehensive, multi-volume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will be manufactured and tested, additional stability data and proposed labeling. The FDA’s review can last from six months to many years, with the average review lasting 14 months. Once the NDA is approved, the product may be marketed in the United States subject to any conditions imposed by the FDA.

Laboratories such as ours that provide information included in IND applications and NDAs must conform to regulatory requirements that are designed to ensure the quality and integrity of the testing process. For example, our bioanalytical laboratories in Richmond, Virginia, and Middleton, Wisconsin, follow the FDA’s GLP regulations. These regulations have also been adopted by the Ministry of Health in the United Kingdom and by similar regulatory

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authorities in other countries. Our product analysis lab in Middleton, Wisconsin, follows the FDA’s cGMP regulations. Both GLP and cGMP regulations require standardization procedures for all equipment, processes and analytical tests, for recording and reporting data, and for retaining appropriate records. To help ensure compliance with these regulations, we have established quality assurance at our laboratory facilities to audit test data and conduct regular inspections of testing procedures and our laboratory facilities.

In addition, laboratories that analyze human blood or other biological samples for the diagnosis and treatment of study subjects must comply with the Clinical Laboratory Improvement Act, or CLIA. CLIA requires laboratories to meet staffing, proficiency and quality standards. The laboratory in our Austin, Texas, facility and our specialty central laboratory located in Kentucky are CLIA-certified. Both of these laboratories and our specialty central clinical laboratory in Europe are accredited by the College of American Pathologists.

The industry standard for the conduct of clinical research is embodied in the FDA’s regulations for IRBs, investigators and sponsor/monitors, which collectively are termed the good clinical practices, or GCP, by industry, and the GCP guidelines issued by ICH, which have been agreed upon by industry and regulatory representatives from the United States, European Union and Japan. Our global standard operating procedures are written in accordance with all FDA and ICH requirements. This enables our work to be conducted locally, regionally and globally to standards that meet all currently applicable regulatory requirements.

In the past several years, both the United States and foreign governments have become more concerned about the disclosure of confidential personal data. The European Union, or EU, prohibits the disclosure of personal confidential information, including medical information, to any entity that does not comply with certain security safeguards. Companies in the United States can satisfy these requirements by filing for safe harbor status according to a self-certification procedure agreed to by the EU and the United States. We have registered for and obtained safe harbor status.

The Department of Health and Human Services has promulgated final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which governs the disclosure of confidential medical information in the United States. The Privacy Rule, which governs disclosure of confidential information, was effective beginning April 14, 2001, and all companies subject to the Privacy Rule were required to comply with its provisions on or before April 14, 2003. We have had a global privacy policy in place since January 2001, which includes a designated privacy officer, and we believe that we comply with the current EU and HIPAA requirements. Nevertheless, we will continue to monitor our compliance with these regulations and will take appropriate steps to ensure compliance with these and other privacy regulations.

We are also subject to regulations enforced by the following agencies:

• Occupational Safety and Health Administration,

• Nuclear Regulatory Commission,

• Environmental Protection Agency,

• Department of Transportation,

• International Civil Aviation Organization,

• Drug Enforcement Administration, and

• other related international, federal, state and local regulations that govern the use, handling, disposal, packaging, shipment, and receipt of: certain drugs or unknown compounds, chemicals and chemical waste, toxic substances, bloodborne pathogens and bloodborne pathogen waste; and radioactive materials and radioactive waste.

In order to comply with these regulations, we have provided procedures, necessary equipment, and ongoing training for our employees involved in these activities. To date, we have had no citations or fines from the above agencies.

The failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. Furthermore, the issuance of a notice of finding by a governmental authority against either us or our clients, based upon a material violation by us of any applicable regulation, could materially and adversely affect our business.

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Factors that Might Affect our Business or Stock Price

Risks Related to Our Discovery and Development Businesses

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

Industry trends and economic factors that affect our clients and collaboration partners, pharmaceutical, biotechnology and medical device companies, also affect our business. For example, the practice of many companies in these industries has been to hire companies like us to conduct large development projects. If these industries reduce their tendency to outsource those projects, our operations, financial condition and growth rate could be materially and adversely affected. In the past several years, mergers and other factors in the pharmaceutical industry appear to have slowed decision-making by pharmaceutical companies and delayed drug development projects. Continuation or increases in these trends could have an adverse effect on our business. In addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future regulatory cost-containment efforts limit the profits that can be derived on new drugs, our customers might reduce their drug discovery and development spending, which could reduce our revenue.

Our revenue depends on a small number of industries and clients.

We provide services and products to the pharmaceutical, biotechnology and medical device industries and our revenue is highly dependent on expenditures by clients in these industries. Accordingly, our operations could be materially adversely affected by the current trend toward consolidation in these industries or other factors resulting in a decrease in the number of our potential customers. For example, if the number of our potential customers declines even further, they might be able to negotiate price discounts or other terms for our services and products that are less favorable to us than has historically been the case. We have experienced customer concentration in the past and are likely to in the future. The loss of business from a significant client could have a material adverse effect on our results of operations.

The majority of our customers’ contracts can be terminated upon short notice.

Most of our contracts for discovery and development services are terminable by the client upon 30 to 90 days’ notice. Clients terminate or delay their contracts for a variety of reasons, including but not limited to:

• products being tested fail to satisfy safety requirements;

• products have undesired clinical results;

• the client decides to forego a particular study;

• inability to enroll enough patients in the study;

• inability to recruit enough investigators; or

• production problems cause shortages of the drug.

The loss or delay of a large contract or multiple smaller contracts could adversely affect our operating results.

We might not be able to recruit and retain the experienced personnel we need to compete in the drug discovery and development industry.

Our future success depends on our ability to attract, retain and motivate highly skilled personnel.

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Management

Our future success depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, develop business, manage our operations and maintain a cohesive and stable environment. For example, we rely on the services of Fredric N. Eshelman, Pharm.D., our chief executive officer. Although we have employment agreements with Dr. Eshelman and other executives, they are generally only for one year and do not assure that Dr. Eshelman or any other executive with whom we have an employment agreement will remain with us. We do not have employment agreements with all of our key personnel.

Healthcare Providers

Our ability to maintain, expand or renew existing business with our customers and to get business from new customers, particularly in the drug development sector, depends on our ability to hire and retain healthcare providers with the skills necessary to keep pace with continuing changes in drug development technologies. Competition for experienced healthcare providers is intense. We compete with pharmaceutical and biotechnology companies, including our customers and collaborators, other contract research companies and academic and research institutions, to recruit healthcare providers.

Scientists

Our ability to maintain, expand or renew existing business with our customers and to get business from new customers in both the drug development as well as the drug discovery areas also depends on our ability to hire and retain scientists with the skills necessary to keep pace with continuing changes in drug discovery and development technologies. We face the same risks and challenges in attracting and retaining experienced scientists as we do with healthcare providers.

Our inability to hire additional qualified personnel might also require an increase in the workload for both existing and new personnel. We might not be successful in attracting new healthcare providers, scientists or management or in retaining or motivating our existing personnel. The shortage of experienced healthcare providers and scientists, or other factors, might lead to increased recruiting, relocation and compensation costs for these professionals, which might exceed our expectations. These increased costs might reduce our profit margins or make hiring new healthcare providers or scientists impracticable. If we are unable to attract and retain any of these personnel, our ability to execute our business plan will be adversely affected.

Our future success depends on our ability to keep pace with rapid technological changes that could make our services and products less competitive or obsolete.

The biotechnology, pharmaceutical and medical device industries generally and drug discovery and development more specifically are subject to increasingly rapid technological changes, such as the genomics revolution. Our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenues and financial condition, would be materially and adversely affected.

Any failure by us to comply with existing regulations would harm our reputation and operating results.

Any failure on our part to comply with existing regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This would harm our reputation, our prospects for future work and our operating results. For example, if we were to fail to verify that informed consent is obtained from patient participants in connection with a particular clinical trial, the data collected from that trial could be disqualified and we might be required to redo the trial at no further cost to our customer, but at a substantial cost to us. Furthermore, the issuance of a notice from the FDA based on a finding of a material violation by us of good clinical practice, good laboratory practice or good manufacturing practice requirements would materially and adversely affect us.

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Proposed and future legislation or regulations might increase the cost of our business or limit our service or product offerings.

Federal or state authorities might adopt healthcare legislation or regulations that are more burdensome than existing regulations. For example, recent product safety concerns and the creation of the Drug Safety Oversight Board could change the FDA product approval procedures. These changes in regulation could increase our expenses or limit our ability to offer some of our services or products. For example, the confidentiality of patient-specific information and the circumstances under which it may be released for inclusion in our databases or used in other aspects of our business are subject to substantial government regulation. Additional legislation or regulation governing the possession, use and dissemination of medical record information and other personal health information might require us to implement new security measures that require substantial expenditures or limit our ability to offer some of our services and products. These regulations might also increase costs by creating new privacy requirements for our informatics business and mandating additional privacy procedures for our clinical research business.

We might lose business opportunities as a result of healthcare reform.

Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with healthcare providers and drug companies. Healthcare reform could reduce demand for our services and products, including potential drug candidates that are being developed by us or with others under our risk-sharing agreements, and, as a result, our revenue. In the last several years, the United States Congress has reviewed several comprehensive health care reform proposals. The proposals are intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures. The United States Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Any such legislation could cause our discovery and development customers to spend less on research and development. If this were to occur, we would have fewer business opportunities for our development and discovery service business, which could reduce our earnings, and the development of particular compounds might be discontinued. Similarly, pending or future healthcare reform proposals outside the United States could negatively impact our revenues from our international operations.

The drug discovery and development services industry is highly competitive.

The drug discovery and development services industry is highly competitive. We often compete for business not only with other drug discovery and development companies, but also with internal discovery and development departments within our clients, who are often large pharmaceutical and biotechnology companies with greater resources than ours. We also compete with universities and teaching hospitals. If we do not compete successfully, our business will suffer. The industry is highly fragmented, with numerous smaller specialized companies and a handful of full-service companies with global capabilities. Increased competition might lead to price and other forms of competition that might adversely affect our operating results. As a result of competitive pressures, our industry has been consolidating. This trend is likely to produce more competition among the larger companies for both clients and acquisition candidates. In addition, there are few barriers to entry for smaller specialized companies considering entering the industry. Because of their size and focus, these companies might compete effectively against larger companies such as us, which could have a material adverse impact on our business.

Our business has experienced substantial expansion in the past and we must properly manage that expansion.

Our business has expanded substantially in the past. Rapid expansion could strain our operational, human and financial resources. If we fail to properly manage our expansion, our results of operations and financial condition might be hurt. In order to manage expansion, we must:

• continue to improve our operating, administrative and information systems;

• accurately predict our future personnel and resource needs to meet our commitments;

• track the progress of ongoing projects; and

• attract and retain qualified management, sales, professional, scientific and technical operating personnel.

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In addition, we have numerous business groups, subsidiaries and divisions. If we cannot properly manage these groups, subsidiaries or divisions, it will disrupt our operations.

We will face additional risks in expanding our foreign operations, as we learned from past expansions including the acquisitions of companies in Belgium and Singapore in 2002. Specifically, we might find it difficult to:

• assimilate differences in foreign business practices;

• hire and retain qualified personnel; and

• overcome language and cultural barriers.

Future acquisitions or investments could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our business.

We anticipate that a portion of any future growth of our business might be accomplished by acquiring existing businesses, products or technologies. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses and to retain their customers. In addition, we might not be able to identify suitable acquisition opportunities or obtain any necessary financing on acceptable terms. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction. Any future acquisition could involve other risks, including the assumption of additional liabilities and expenses, issuances of potentially dilutive equity securities or interest-bearing debt, transaction costs, reduction in our stock price as a result of any of these or because of market reaction to a transaction, and diversion of management’s attention from other business concerns.

We have made and plan to continue to make investments in other companies. In many cases, there is no public market for the securities of these companies and we might not be able to sell these securities on terms acceptable to us, if at all. In addition, if these companies encounter financial difficulties, we might lose all or part of our investment. For example, in 2003 and 2004 we recorded impairments of equity investments, net, totaling $10.1 million and $2.0 million, respectively, to write down the carrying value of our investments for other than temporary declines in value. See Note 6 to the Notes to Consolidated Financial Statements included elsewhere in this report for a more detailed discussion of these impairments.

The fixed price nature of our development contracts could hurt our operating results.

The majority of our contracts for the provision of development services are at fixed prices. As a result, variations in the timing and progress of large contracts can materially affect results. In addition, we bear the risk of cost overruns unless the scope of activity is revised from the contract specifications and we are able to negotiate a contract modification with the customer shifting the cost overrun to the customer. If we fail to adequately price our contracts, or if we experience significant cost overruns, our operating results could be materially adversely affected. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future, which would have a material adverse impact on our operating results.

Our business exposes us to potential liability for personal injury claims that could affect our financial condition.

Our business involves the testing of new drugs and medical devices on human volunteers and, if marketing approval is received for any of our drug candidates, their use by patients. This exposes us to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of a drug or device. Many of these volunteers and patients are already seriously ill and are at risk of further illness or death. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim that is outside the scope of indemnification agreements we have with clients and collaborative partners, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable insurance. We might also not be able to get adequate insurance for these risks at reasonable rates in the future.

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Our business uses biological and hazardous materials, which could injure people or violate laws, resulting in liability that could hurt our financial condition and business.

Our drug discovery and development activities involve the controlled use of potentially harmful biological materials, as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our ability to pay. Any contamination or injury could also damage our reputation, which is critical to getting new business. In addition, we are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.

If we are unable to attract suitable willing investigators and volunteers for our clinical trials, our development business might suffer.

The clinical research studies we run in our Development Group rely upon the ready accessibility and willing participation of physician investigators and volunteer subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial. Volunteer subjects generally include people from the communities in which the studies are conducted, including our Phase I clinic in Austin, Texas, which to date has provided a substantial pool of potential subjects for research studies. Our clinical research development business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis.

Our business is subject to international economic, currency, political and other risks that could negatively affect our revenue and results of operations.

Because we provide our discovery and development services worldwide, our business is subject to risks associated with doing business internationally. Our revenue from our non-U.S. operations represented approximately 27.6% of our total revenues for the year ended December 31, 2004. We anticipate that revenue from international operations will grow in the future. Accordingly, our future results could be harmed by a variety of factors, including:

• changes in foreign currency exchange rates, which could result in foreign currency losses;

• changes in a specific country’s or region’s political or economic conditions,

• potential negative consequences from changes in tax laws affecting our ability to expatriate profits;

• difficulty in staffing and managing widespread operations, including risks of violations of local laws or the U.S. Foreign Corrupt Practices Act by employees overseas; and

• unfavorable labor regulations, including specifically those applicable to our European operations.

For example, in 2004 our operating income was negatively impacted by approximately $4.9 million, net, due to the effect of the weakening of the U.S. dollar relative to the euro, British pound and Brazilian real. Although we attempt to manage this risk through provisions in our contracts with our customers and other methods, including foreign currency hedging contracts, we might not be able to eliminate or manage these risks and our operating income could be materially and adversely affected by a further decline in the value of the U.S. dollar.

Our inability to adequately protect our intellectual property rights could hurt our business.

Our success will depend in part on our ability to protect the proprietary software, compositions, processes and other technologies we develop during the drug development process. In addition, one of our business strategies is to in-license and/or out-license rights to drug candidates and enter into collaborations with pharmaceutical and biotechnology companies for the development of drug candidates. Any inability to protect our intellectual property rights could materially and adversely affect our business.

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Any patents that we own or license might not provide valuable protection in the future for the covered technology or products. Our patent applications might never result in the issuance of a patent. Competitors might develop similar products or methods that are not covered by our issued patent claims. In addition, an issued patent might be narrowed or invalidated by a court upon challenge. The value of an issued patent could also be diminished if a patent is issued to a competitor that blocks our ability to use our patented technology. If blocked, we might be forced to stop using some or all of the technology or to license technology from third parties on unfavorable terms.

In addition to patent protection, we also rely on copyright, trademark and trade secret protection. In an effort to maintain the confidentiality and ownership of our intellectual property, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. These agreements and other procedures, however, might not provide us with adequate protection against improper use or disclosure of confidential information. Also, there might not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, from time to time we hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements might conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all confidential information of previous employers, both the company and these individuals might be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others might independently develop substantially equivalent proprietary information or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques might inhibit or limit our ability to exclude competitors from the market and to execute our business strategies.

The drug discovery and development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Because we provide many different services and products in this industry and have rights to compounds, we face potential patent infringement suits by companies that have patents for similar products and methods used in business or other suits alleging infringement of their intellectual property rights. In addition to the possibility of having to defend an infringement claim asserted against us, in order to protect or enforce our intellectual property rights, we might have to initiate legal proceedings against third parties. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management’s attention from other business concerns, whether we win or lose. The cost of this kind of litigation could affect our profitability. Further, if we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.

We have only limited experience in the drug discovery business, and our prospects for success in this business remain uncertain and are dependent on third parties with whom we collaborate.

It takes many years for a drug discovery business like ours to generate revenue and income. We established our drug discovery group in 1997 and have only limited experience with these activities and might not be successful in our drug discovery efforts. Generating revenue and income from our drug discovery business will depend on our ability to:

• develop products internally or obtain rights to them from others on favorable terms;

• successfully complete laboratory testing and human studies;

• obtain and maintain intellectual property rights to these products;

• obtain and maintain regulatory approvals related to the efficacy and safety of these products; and

• enter into arrangements with third parties to manufacture products on our behalf and to provide sales and marketing functions.

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Since 1997, we have entered into collaborative agreements to develop and commercialize drugs with others. Our ability to succeed in our drug discovery business will depend on successfully executing existing and any new arrangements we enter into for the development and commercialization of a drug candidate. The third parties that we collaborate with might not perform their obligations as expected or they might breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, parties collaborating with us might elect not to develop the product candidates or not to devote sufficient resources to the development, manufacture, marketing or sale of these product candidates. If the parties to our collaborative agreements do not fulfill their obligations, elect not to develop a candidate or fail to devote sufficient resources to it, we could be materially and adversely affected.

We are dependent on third parties for certain essential business functions for our risk-sharing arrangements, and failures of these third party providers could materially adversely affect our business, financial condition and results of operations.

We and some of our collaborative partners are dependent on third parties for certain functions associated with the development and commercialization of our potential drug candidates, including manufacturing and marketing and sales. Our dependence on third parties for these services might adversely affect us and our ability to develop and commercialize a drug candidate on a timely and competitive basis. If we or our collaborative partners are unable to retain or replace third-party providers of required services on commercially acceptable terms, our potential drug candidates might not be developed and commercialized as planned, if at all. If we encounter delays or failures by these third parties to perform, we might have to seek alternative sources of supply, lose sales or abandon a drug candidate, and our business, financial condition and results of operations could be materially and adversely affected.

We might not be able to obtain government approval for our product candidates.

The development and commercialization of pharmaceutical products are subject to extensive governmental regulation in the United States and foreign countries. Government approvals are required to develop, market and sell the potential drug candidates we are developing alone or with others under our risk-sharing arrangements. Obtaining government approval to develop, market and sell drug candidates is time-consuming and expensive, and the clinical trial results for a particular drug candidate might not satisfy required government approvals. In addition, governmental approvals might not be received in a timely manner, if at all, and we and our collaborative partners might not be able to meet other regulatory requirements for our products. Even if we are successful in obtaining all required approvals to market and sell a drug candidate, post-marketing requirements and the failure to comply with other regulations could result in suspension or limitation of government approvals.

In connection with drug discovery activities outside the United States, we and our collaborators will be subject to foreign regulatory requirements governing the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical products. These requirements vary from country to country. Even if approval has been obtained for a product in the United States, approvals in foreign countries must be obtained prior to marketing the product in those countries. The approval process in foreign countries may be more or less rigorous from country to country and the time required for approval may be longer or shorter than that required in the United States. Clinical studies conducted outside of any particular country may not be accepted by that country and the approval of a pharmaceutical product in one country does not assure that the product will be approved in another country.

We might incur substantial expense to develop products that are never successfully developed and commercialized.

We have incurred and expect to continue to incur substantial research and development and other expenses in connection with our compound partnering agreements. We anticipate that these expenses will exceed our prior research and development expenses, with the possible exception of our $65.0 million payment to Eli Lilly and Company in 2003. The potential drug candidates to which we devote resources might never be successfully developed or commercialized by us or our collaborative partners for numerous reasons, including:

• preclinical and clinical trial results;

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• delays in manufacturing, or the inability to manufacture product for use in clinical trials or for sale following regulatory approval, if any;

• competitive products with superior safety and efficacy profiles;

• patent conflicts or unenforceable intellectual property rights;

• failures or delays in obtaining regulatory approvals;

• demand for the particular product; and

• other factors that could make the product uneconomical.

Incurring significant expenses for a potential drug candidate that is not successfully developed and/or commercialized, could have a material adverse effect on our business, financial condition, results of operations and prospects, because we would not receive the anticipated milestone, royalty or other payments and rights.

Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.

We depend on our customers, investigators, collaboration partners, our own laboratories and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks and natural disasters, such as hurricanes or ice storms, could still disrupt our operations or those of our customers, investigators and collaboration partners, which would also affect us. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us or our customers, investigators or collaboration partners could have a significant negative impact on our operations.

Our development operations might be affected if there was a disruption to the air travel system.

Our specialty central laboratories and some of our other discovery and development services rely heavily on air travel for transport of clinical trial kits and other materials and people and disruption to the air travel system could have a material adverse effect on our development business. While we have developed contingency plans for a variety of events that could disrupt or limit available air transportation, these plans might not be effective or sufficient to avert such a material adverse effect.

Because our stock price is volatile, our stock price could experience substantial declines.

The market price of our common stock has historically experienced and might continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. The stock market, and in particular pharmaceutical and biotechnology companies, has also experienced significant decreases in value in the past. This volatility and market decline have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and might adversely affect the price of our common stock.

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Item 2. Properties

As of February 15, 2005, we had 61 offices located in 28 countries on six continents. All locations relate to our Development Group, and the Morrisville, North Carolina and Menlo Park, California locations also house our Discovery Sciences Group. Our principal executive offices are located in Wilmington, North Carolina. We own and operate four facilities, including a building in Leicester, England, a building in Kersewell, Scotland, a laboratory building in Brussels, Belgium and a building in Durham, North Carolina. We lease all our other facilities. We also own land in Wilmington, North Carolina where we plan to construct a new corporate headquarters facility we intend to occupy in late 2006. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. The locations, approximate square footage and lease expiration dates of our operating facilities comprising more than 10,000 square feet as of February 15, 2005 were as follows:

Location	Approximate Square Footage	Lease Expiration Dates
Austin, Texas	311,000	4/18/05 - 12/31/14
Morrisville, North Carolina	250,000	8/31/09 - 1/23/15
Wilmington, North Carolina	217,000	11/30/06 - 8/31/09
Middleton, Wisconsin	140,000	7/31/10 - 11/30/11
Menlo Park, California	88,000	6/1/12
Richmond, Virginia	79,000	8/31/09 - 8/31/14
Highland Heights, Kentucky	72,000	12/31/14
Granta Park, United Kingdom	48,000	6/25/19
Blue Bell, Pennsylvania	43,000	8/31/10
Sao Paulo, Brazil	32,000	9/5/05 – 9/5/15
Brussels, Belgium	28,000	9/30/08
San Diego, California	28,000	3/31/10
Munich, Germany	20,000	11/30/08
Madrid, Spain	17,000	8/01/07
Maisons Alfort, France	17,000	11/09/10
Hamilton, New Jersey	16,000	5/31/07
Columbia, Maryland	15,000	7/31/08
Milan, Italy	12,000	3/31/06
New Hope, Minnesota	12,000	6/30/05
Warsaw, Poland	12,000	9/30/07
Karlsruhe, Germany	11,000	1/15/14
Johannesburg, South Africa	11,000	1/31/06

Item 3. Legal Proceedings

In the normal course of business, we are a party to various claims and legal proceedings. Although the ultimate outcome of these matters is not yet determined, after consultation with legal counsel we do not believe that the resolution of these matters will have a material effect upon our financial condition or results of operations in any interim or annual period.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

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Executive Officers

The following table contains information concerning our executive officers as of February 15, 2005:

Name	Age	Position(s)
Fredric N. Eshelman., Pharm.D.	56	Vice Chairman, Chief Executive Officer
Fred B. Davenport, Jr.	53	President, Assistant Secretary
Paul S. Covington, M.D.	48	Executive Vice President – Development
Linda Baddour	46	Chief Financial Officer, Treasurer, Assistant Secretary
Colin Shannon	45	Executive Vice President – Global Clinical Operations
Francis J. Casieri	62	Senior Vice President – Global Business Development

Fredric N. Eshelman, Pharm.D., has served as Chief Executive Officer and as a director since July 1990, and as Vice Chairman of the Board of Directors since 1993. Dr. Eshelman founded our company’s predecessor in 1985 and served as its Chief Executive Officer until 1989. Prior to rejoining us in 1990, Dr. Eshelman served as Senior Vice President, Development and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc.

Fred B. Davenport, Jr. is our President and Assistant Secretary. Mr. Davenport joined us as General Counsel in December 1996. In January 2001, Mr. Davenport was promoted to Executive Vice President and to President in January 2002. Prior to his employment by us, Mr. Davenport was a partner in the Wilmington, North Carolina law firm of Murchison, Taylor, and Gibson, L.L.P., which he joined in 1977. Mr. Davenport was also a member of the faculty of the University of North Carolina at Wilmington’s Cameron School of Business Administration from 1982 to 1991.

Paul S. Covington, M.D. is our Executive Vice President – Development. Dr. Covington joined us in September 1991 as a Medical Director. He was promoted from Senior Vice President to his current position in January 2002. He is board certified in internal medicine and licensed in North Carolina and Alabama. Prior to joining us, Dr. Covington was in private practice in Clanton, Alabama from 1985 to 1990 where he served as Chief of Staff and Director of Critical Care and Cardiopulmonary for the local hospital. From 1991 to 1992, he was Medical Director for the Birmingham site of Future Healthcare Research Centers.

Linda Baddour is our Chief Financial Officer, Treasurer, and Assistant Secretary. Ms. Baddour joined us in December 1995. Ms. Baddour was promoted to Chief Accounting Officer in 1997 and to Chief Financial Officer in 2002. Prior to her employment by us, Ms. Baddour was the Controller for Cooperative Bank from 1980 to 1995. Ms. Baddour is a Certified Public Accountant.

Colin Shannon is our Executive Vice President – Global Clinical Operations. Mr. Shannon joined us in 1995. He has served in numerous management positions, including Chief Operating Officer, Europe and Chief Financial and Administration Officer, Europe. Prior to his employment by us, Mr. Shannon spent more than 15 years in a variety of financial and accounting positions in the utility and multimedia industries.

Francis J. Casieri is our Senior Vice President – Global Business Development. Mr. Casieri has served as our Senior Vice President – Global Business Development since August 2004. Mr. Casieri also served in this same role from January 2000 to April 2002. Mr. Casieri rejoined us in September 2003 as General Manager – Account Management following a year and a half sabbatical.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded under the symbol “PPDI” and is quoted on the Nasdaq National Market System. The following table sets forth the high and low prices for shares of our common stock, as reported by the National Association of Securities Dealers, Inc., for the periods indicated. These prices are based on quotations between dealers, which do not reflect retail mark-up, mark-down or commissions.

	2003				2004
	High		Low		High		Low
First Quarter	$	32.24	$	21.76	$	31.88	$	26.73
Second Quarter	$	30.55	$	23.96	$	33.34	$	27.40
Third Quarter	$	29.40	$	22.30	$	37.19	$	29.54
Fourth Quarter	$	31.41	$	23.76	$	44.13	$	35.42

As of February 15, 2005, there were approximately 30,600 holders of our common stock.

We have never declared or paid any cash dividends as a public company. Furthermore, we have no plans to pay cash dividends to our shareholders and, for the foreseeable future, intend to retain all of our earnings for use in continuing to develop our business. The declaration of dividends is within the discretion of our Board of Directors and is dependent upon our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by the Board of Directors.

Item 6. Selected Financial Data

The following table represents selected historical consolidated financial data. The statement of operations data for the years ended December 31, 2002, 2003 and 2004 and balance sheet data at December 31, 2003 and 2004 are derived from our audited consolidated financial statements included elsewhere in this report. The statement of operations data for the year ended December 31, 2000 and 2001, and the balance sheet data at December 31, 2000, 2001 and 2002 are derived from audited consolidated financial statements not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to the financial statements included elsewhere in this report.

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Consolidated Statement of Operations Data (in thousands, except per share data):

	Year Ended December 31,
	2000		2001		2002 (1)			2003 (1)			2004
Net revenues	$	372,650	$	460,633	$	608,657		$	726,983		$	841,256
Operating expenses (2)		329,103		388,041		500,212			651,963			690,704
Gain on sale of assets (3)		—		—		—			(5,738	)		(82	)
Restructuring charges (4)		—		—		—			1,917			2,619
		329,103		388,041		500,212			648,142			693,241
Income from operations		43,547		72,592		108,445			78,841			148,015
Impairment of equity investments, net (5)		—		—		(33,787	)		(10,078	)		(2,000	)
Other income, net		7,284		5,414		3,989			2,482			3,830
Income before provision for income taxes		50,831		78,006		78,647			71,245			149,845
Provision for income taxes		18,521		28,747		38,645			24,935			50,957
Income before equity in net loss of investee		32,310		49,259		40,002			46,310			98,888
Equity in net loss of investee, net of income taxes		—		92		105			—			—
Net income	$	32,310	$	49,167	$	39,897		$	46,310		$	98,888
Net income per common share:
Basic	$	0.65	$	0.95	$	0.73		$	0.83		$	1.75
Diluted	$	0.64	$	0.94	$	0.72		$	0.82		$	1.74
Weighted average number of common shares outstanding:
Basic		49,930		51,689		54,710			55,774			56,348
Dilutive effect of stock options		424		805		633			512			556
Diluted		50,354		52,494		55,343			56,286			56,904

Consolidated Balance Sheet Data (in thousands):

	As of December 31,
	2000		2001		2002		2003		2004
Cash and cash equivalents and short-term investments	$	76,411	$	143,173	$	181,224	$	110,102	$	249,368
Working capital (6)		106,903		152,829		187,696		156,602		257,103
Total assets		344,915		465,400		692,120		779,181		975,201
Long-term debt and capital lease obligations, including current portion		1,967		3,074		8,406		7,662		6,970
Shareholders’ equity		233,943		302,635		440,337		512,521		635,310

(1) For 2002 and 2003, results of operations for acquisitions which occurred during the year are included in our consolidated results of operations as of and since the effective date of the acquisitions. For further details, see Note 2 to Notes to Consolidated Financial Statements.

(2) For 2003, operating expenses include a $65.0 million cash payment to Eli Lilly & Company to acquire Lilly’s rights to dapoxetine.

(3) For 2003, gain on sale of assets related to the restructuring of our Discovery Sciences Group. For further details, see Note 1 to Notes to Consolidated Financial Statements.

(4) For 2003 and 2004, restructuring charges related to the restructuring of our Discovery Sciences Group. For further details, see Note 1 to Notes to Consolidated Financial Statements.

(5) For 2002, 2003 and 2004, impairment of equity investments, net includes charges to earnings for other than temporary declines in the fair market value of our investment. For further details, see Note 6 to Notes to Consolidated Financial Statements.

(6) Working capital equals current assets minus current liabilities.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the consolidated financial statements and accompanying notes. In this discussion, the words “PPD”, “we”, “our” and “us” refer to Pharmaceutical Product Development, Inc., together with its subsidiaries where appropriate.

Forward-looking Statements

This Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “intend”, “potential” or “continue”, or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual events or results might differ materially due to a number of factors, including those listed in “Potential Volatility of Quarterly Operating Results and Stock Price” and in “Part I Item 1. Business – Factors that Might Affect our Business or Stock Price”. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Executive Overview

Because our revenues are dependent on a relatively small number of industries and clients, we closely monitor the market for our services. For a discussion of the trends affecting our market, see “Item 1. Business—Trends Affecting the Drug Discovery and Development Industry”. Our new business authorizations for the first two quarters of 2003 were lower than we expected. In response, we refocused our business development and operational efforts to increase new business authorizations. We believe that those efforts, together with a stronger market for CRO services in the second half of 2003 and in 2004, resulted in increased new authorizations for those periods.

While we cannot predict the demand for CRO services in 2005, we believe the overall historical market drivers for our industry are intact. To grow authorizations in 2005, we plan to focus on our business development efforts, including increasing the percentage of successful proposals, and the delivery of timely, high quality services to our clients. We continue to believe there are several specific opportunities for growth in 2005. We currently conduct a significant amount of government-sponsored research and plan to continue our efforts to win new opportunities in this market. Our Latin American and European Phase II through IV units had an excellent year in 2004 and we believe there are opportunities for continued growth in these areas. We have also experienced an increase in the demand for our Phase I services and are expanding our Phase I clinic in Austin, Texas to 300 beds to enhance our ability to service large, complex studies. This expansion should be completed in April 2005. In 2004, the demand for our bioanalytical and GMP services increased and we have expanded our GMP laboratory facilities and invested in new equipment to meet this increased demand. Finally, we also believe the demand for our post-marketing development services will continue to grow and we will also seek to expand our medical device services.

We review various metrics, including period-to-period growth in backlog, new authorizations, cancellation rates, revenue, margins and earnings, to evaluate our financial performance. In 2004, we had record new authorizations of $1.2 billion, an increase of 13.5% over 2003. The cancellation rate for 2004 was 22% compared to 24% in 2003. On a net basis, authorizations were up 17% in 2004 compared to 2003. Backlog grew 15% from $1.1 billion as of December 31, 2003 to $1.3 billion as of December 31, 2004. Backlog by client type as of December 31, 2004 was 58% pharmaceutical, 28% biotech and 14% government/other. Backlog by client type as of December 31, 2003 was 64% pharmaceutical, 23% biotech and 13% government/other. This change in the composition of our backlog from 2003 to 2004 reflects an increase in new authorizations from biotech clients. Net revenue by client type for the year ended December 31, 2004 was 65% pharmaceutical, 25% biotech and 10% government/other. Top therapeutic areas by net revenue for the year ended December 31, 2004 were oncology, anti-infective/anti-viral, central nervous system, circulatory/cardiovascular and endocrine/metabolic. For a detailed discussion of our revenue, margins, earnings and other financial results for the year ended December 31, 2004, see “Results of Operations – Year Ended December 31, 2004 versus Year Ended December 31, 2003” below.

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Capital expenditures for the year ended December 31, 2004 totaled approximately $48.6 million. The majority of the capital expenditures were for software, computer hardware, the expansion of our Phase I unit, and new equipment for our bioanalytical and GMP labs. We bought new liquid chromatography/mass spectrometry instruments in 2004, bringing our total to 53. In addition to investing in our growing business, we are also focused on improving the efficiency of our operations by streamlining training matrices and clinical procedural documents, decreasing the number of documents needed for study initiation, centralizing regulatory document collection and rolling out a new clinical trial management system.

With respect to our Discovery Sciences segment, our compound collaboration arrangements allow us to leverage our resources and global drug development expertise to create new opportunities for growth and to share the risks and potential rewards of drug development. In 2003, in addition to furthering existing collaborations with ALZA Corporation, a subsidiary of Johnson & Johnson, and Bayer AG, we entered into new collaborations with Syrrx and Chemokine Therapeutics. For a discussion of these compound partnering arrangements, see “Item 1. Business – Our Services – Our Discovery Sciences Group – Compound Partnering Programs” above. One of our primary goals in the discovery business at the beginning of 2004 was to end the year with four drug candidates in clinical development, and we delivered on that objective.

In September 2004, we filed an investigational new drug application for one Syrrx DPP IV inhibitor and started the Phase I trial for that inhibitor in late October 2004. This inhibitor is now in Phase Ib, which is when the drug is first administered to subjects suffering from the indication. We currently anticipate starting Phase II trials in April 2005. In December 2004, we filed an investigational new drug application for a second DPP IV inhibitor and a Phase I study for this second DPP IV inhibitor is scheduled to begin in April 2005. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. At this time, we do not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.

In addition, ALZA Corporation submitted an NDA for dapoxetine in December 2004. The FDA accepted the dapoxetine NDA for filing in February 2005. As a result of these arrangements and the progression of our pipeline, we expect to incur significant R&D expense during 2005. Furthermore, in addition to progressing our existing collaborations, we will continue to evaluate opportunities for new collaborations and investments that we believe will help us achieve our mid- to long-term growth objectives.

In February 2005, we completed the acquisition of substantially all of the assets of SurroMed, Inc.’s biomarker business. The acquired business consists of services and technologies that support drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The new business is part of our Discovery Sciences segment and will expand our discovery business by adding biomarker discovery and patient sample analysis to the collection of services offered by us.

Acquisitions

In 2002, we completed four acquisitions. For details regarding these acquisitions, see Note 2 to the Notes to Consolidated Financial Statements.

In July 2003, PPD acquired Eminent Research Systems, a clinical research organization specializing in medical device development, and Clinsights, a company affiliated with Eminent through common ownership that provides a range of post-market services to medical device and related pharmaceutical companies and operates proprietary web sites for the dissemination of medical information, online research and product marketing. As a result, Eminent and Clinsights are now part of the Development segment of PPD. Their results of operations are included in our consolidated results of operations as of and since July 18, 2003, the effective date of the acquisitions. PPD acquired Eminent and Clinsights for total consideration of $23.5 million in cash. Under the terms of the merger agreement, the original aggregate purchase price of $25.0 million was reduced by $1.5 million in the first quarter of 2004 as a result of an adjustment to the purchase price based on Eminent’s closing balance sheet.

We accounted for all of the acquisitions in 2002 and 2003 under the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on estimated fair values of the assets and liabilities. The results of operations are included in our consolidated results of operations as of and since the effective dates of the acquisitions. For further details regarding these acquisitions, see Note 2 to the Notes to Consolidated Financial Statements.

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Investments

In March 2004, PPD loaned Oriel Therapeutics $0.9 million in the form of debt that is convertible into Oriel Therapeutics’ Series B preferred stock at $2.00 per share. The loan is secured by a first lien on Oriel’s assets. In January 2004, we purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. At that time, we also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In September 2004, we entered into a royalty stream purchase agreement with Accentia. Under the terms of that agreement, we paid Accentia a one-time cash payment of $2.5 million for the right to receive royalties on future sales of antifungal products for the treatment of chronic sinusitis. The royalties under this agreement equal 6% of the net sales of antifungal products sold prior to FDA approval and 7% of the net sales of these products sold after FDA approval, if FDA approval is obtained. In January 2005, PPD exercised the Class A warrant of Accentia for the purchase of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to us upon conversion of 5.0 million shares of the Series E convertible preferred stock held by us.

As a result of management’s quarterly evaluations of our equity investments, during 2004 we recorded a charge to earnings of $2.0 million for an other than temporary decline in the fair market value of our investment in Chemokine Therapeutics Corp. See Note 6 to the Notes to Consolidated Financial Statements for a more detailed discussion of these investments.

Restructuring Charges and Gain on Sale of Assets

In 2004, we recorded a $2.6 million restructuring charge associated with exiting our chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on sale of assets used in our chemistry services of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease which will end in 2015.

In July 2003, we announced the restructuring of our Discovery Sciences Group. In connection with this restructuring, we consolidated our Discovery Sciences operations into our Morrisville, North Carolina and Middleton, Wisconsin facilities, and discontinued offering functional genomics services in Menlo Park, California. In the third quarter, we incurred, recorded and paid a charge to earnings of $1.9 million for this restructuring. Restructuring charges included $0.9 million for one-time termination benefits, $0.7 million for facility charges and $0.3 million for other related charges.

As a part of the 2003 restructuring, we purchased 4.4 million shares of SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash and $12.0 million in tangible assets and intellectual property from our Menlo Park operations. The value of the tangible assets and intellectual property was based on an independent appraisal. We recorded a gain on sale of assets of $5.7 million as a result of this transaction. The majority of the remaining tangible assets of the restructured operations were transferred to our CRO Phase II through IV division and the remaining Discovery Sciences operations.

New Business Authorizations and Backlog

New business authorizations, which are sales of our services, are reflected in backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to quarter, and contracts generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the years ended December 31, 2002, 2003 and 2004 were $1,002.5 million, $1,068.2 million and $1,212.4 million, respectively.

Our backlog consists of new business authorizations for which the work has not started but is anticipated to begin in the near future, and contracts in process that have not been completed. As of December 31, 2004, the remaining duration of the contracts in our backlog ranged from one month to 114 months with an average duration of 27.6 months. Amounts included in backlog represent future revenue and exclude revenue that we have previously recognized. Once work begins on a project included in backlog, net revenue is recognized over the life of the contract. However, there can be no assurance that our backlog will ever be recognized as revenue. Our backlog as of December 31, 2002, 2003 and 2004 was $974.4 million, $1,120.2 million and $1,292.8 million, respectively.

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Results of Operations

Revenue Recognition

We record revenue from fixed-price contracts on a proportional performance basis in our Development Group. To measure performance on a given date, we compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized. For time-and-materials contracts in both our Development Group and Discovery Sciences Group, we recognize revenues as hours are worked, multiplied by the applicable hourly rate. For our Phase I and laboratory businesses, we recognize revenues from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price.

In connection with the management of multi-site clinical trials, we pay, on behalf of our customers, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. As required by EITF 01-14, amounts paid by us as a principal for out-of-pocket costs are included in direct costs as reimbursable out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of operations, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the years ended December 31, 2002, 2003 and 2004, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $157.5, $172.5 and $226.9 million, respectively.

Most of the contracts for our Development Group can be terminated by our clients either immediately or after a specified period following notice by the client. These contracts typically require payment to us of expenses to wind down a study, fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation does not generally require a significant adjustment upon cancellation. If we determine that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made.

The Discovery Sciences Group also generates revenue from time to time in the form of milestone payments in connection with licensing of compounds. Milestone payments are only recognized as revenue if the specified milestone is achieved and accepted by the customer, payment received and continued performance of future research and development services related to that milestone are not required.

Recording of Expenses

We generally record our operating expenses among the following categories:

• direct costs;

• research and development;

• selling, general and administrative;

• depreciation; and

• amortization.

Direct costs consist of appropriate amounts necessary to carry out the revenue and earnings process, and include direct labor and related benefit charges, other costs directly related to contracts, an allocation of facility and information technology costs, and reimbursable out-of-pocket expenses. Direct costs, as a percentage of net revenues, tend to and are expected to fluctuate from one period to another as a result of changes in labor utilization and the mix of service offerings involved in the hundreds of studies being conducted during any period of time.

Research and development, or R&D, expenses consist primarily of patent expenses, labor and related benefit charges associated with personnel performing internal research and development work, supplies associated with this work, consulting services and an allocation of facility and information technology costs.

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Selling, general and administrative, or SG&A, expenses consist primarily of administrative payroll and related benefit charges, sales, advertising and promotional expenses, recruiting and relocation expenses, administrative travel, an allocation of facility and information technology costs, and costs related to operational employees performing administrative tasks.

Depreciation expenses consist of depreciation costs recorded on a straight-line method, based on estimated useful lives of 40 to 50 years for buildings, five years for laboratory equipment, two to five years for software, computers and related equipment and five to ten years for furniture and equipment, except for airplanes, which we depreciate over 30 years. We depreciate leasehold improvements over the shorter of the life of the relevant lease or the useful life of the improvement. We depreciate property under capital leases over the life of the lease or the service life, whichever is shorter.

Amortization expenses consist of amortization costs recorded on intangible assets on a straight-line method over the life of the intangible assets.

Year Ended December 31, 2004 Versus Year Ended December 31, 2003

The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2004 compared to the full year of 2003.

(dollars in thousands)	Year Ended December 31,						$ Inc (Dec)			% Inc (Dec)
	2004			2003
Net revenue:
Development	$	759,629		$	654,019		$	105,610		16.15	%
Discovery sciences		14,311			15,479			(1,168	)	-7.55	%
Reimbursed out-of-pockets		67,316			57,485			9,831		17.10	%
Total net revenue		841,256			726,983			114,273		15.72	%
Direct costs:
Development		376,439			316,942			59,497		18.77	%
Discovery sciences		5,491			7,741			(2,250	)	-29.07	%
Reimbursable out-of-pocket expenses		67,316			57,485			9,831		17.10	%
Total direct costs		449,246			382,168			67,078		17.55	%
Research and development expenses		15,852			74,941			(59,089	)	-78.85	%
Selling, general and administrative expenses		195,752			166,253			29,499		17.74	%
Depreciation		28,609			26,968			1,641		6.08	%
Amortization		1,245			1,633			(388	)	-23.76	%
Gain on sale of assets		(82	)		(5,738	)		5,656		-98.57	%
Restructuring charges		2,619			1,917			702		36.62	%
Operating income		148,015			78,841			69,174		87.74	%
Impairment of equity investments, net		(2,000	)		(10,078	)		8,078		-80.15	%
Interest and other income (expense), net		3,830			2,482			1,348		54.31	%
Income before taxes		149,845			71,245			78,600		110.32	%
Provision for income taxes		50,957			24,935			26,022		104.36	%
Net income	$	98,888		$	46,310		$	52,578		113.53	%
Net income per diluted share	$	1.74		$	0.82		$	0.92		111.22	%

Total net revenue increased $114.3 million to $841.3 million in 2004. The increase in total net revenue resulted primarily from an increase in our Development Group revenues. The Development Group’s operations

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generated net revenue of $759.6 million, which accounted for 90.3% of total net revenue for 2004. The 16.2% increase in the Development Group’s net revenue was primarily attributable to an increase in the level of global CRO Phase II through IV services we provided in 2004 as compared to 2003. Net revenue for the Development Group also increased by approximately $4.5 million due to the effect of the weakening of the U.S. dollar relative to the euro and the British pound based on 2004 revenue translated at the average exchange rates in 2003.

The Discovery Sciences Group generated net revenue of $14.3 million in 2004, a decrease of $1.2 million from 2003. The decrease in the Discovery Sciences net revenue was mainly attributable to the reduction in net revenue from chemistry services, which we stopped offering in the first quarter of 2004. In both 2003 and 2004, we received a $5.0 million dapoxetine milestone payment from ALZA. ALZA submitted an NDA for dapoxetine in December 2004. The FDA accepted this NDA for filing in February 2005. As a result, we are entitled to receive a one-time milestone payment of $10.0 million from ALZA within 30 days of the FDA’s acceptance of the NDA.

Total direct costs increased $67.1 million to $449.2 million in 2004 primarily as the result of an increase in the Development Group direct costs. Development Group direct costs increased $59.5 million to $376.4 million in 2004. The primary reason for this increase was an increase in personnel costs of $40.3 million. Personnel costs increased due to hiring additional employees in our global CRO Phase II through IV division, increased incentive compensation accruals and increased costs in our foreign operations due to the weakening of the U.S. dollar. In 2003, incentive compensation accruals were lower than our normal accrual levels as a result of our financial and operating performance in that period. The remaining $19.2 million of this increase in Development direct costs primarily consisted of increased facility costs related to the increase in personnel and increased subcontractor costs to support increased revenues.

Discovery Sciences direct costs decreased $2.2 million to $5.5 million in 2004. The higher costs in 2003 related primarily to a $2.5 million milestone payment for dapoxetine to Eli Lilly & Company that did not occur again in 2004 because we acquired the dapoxetine patents from Lilly in December 2003.

Gross margin from the Development segment was 50.4% in 2004 compared to 51.5% in 2003. The majority of this decrease was attributable to increased incentive compensation accruals and increased costs in our foreign operations due to the weakening of the U.S. dollar. The remaining variance relates to expected fluctuations from one period to another as a result of changes in labor utilization and the mix of service offerings involved in the hundreds of studies conducted during any period of time.

Research and development, or R&D, expenses decreased $59.1 million to $15.9 million in 2004. In the fourth quarter of 2003, we acquired from Eli Lilly & Company the patents for the compound dapoxetine for development in the field of genitourinary disorders. PPD paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800 million. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine was still in development and had not been approved for sale in any country. Excluding that payment, R&D expenses increased $5.9 million in 2004 compared to 2003 as a result of increased spending in connection with our existing compound partnering arrangements. The increased spending on compound partnering arrangements was offset by the decrease in functional genomics and chemistry R&D expense as we ceased providing the services in the third quarter of 2003 and first quarter of 2004, respectively. In 2003, R&D expenses for our functional genomics and chemistry services operations totaled $7.0 million. We expect to incur significant R&D expenses in 2005 in connection with our existing compound partnering arrangements.

Selling, general and administrative, or SG&A, expenses increased $29.5 million to $195.8 million in 2004. As a percentage of total net revenue, SG&A expenses increased slightly to 23.3% in 2004 compared to 22.9% in 2003. The increase in SG&A expenses includes additional personnel costs of $21.6 million. Personnel costs increased by $5.7 million, due to increased incentive compensation accruals and $4.4 million related the to foreign currency translation effect of the weakening U.S. dollar mentioned previously. The remaining $11.5 million increase in personnel costs related to training costs for new personnel, higher levels of operations infrastructure to manage direct personnel and changes in utilization levels. The increase in SG&A costs also includes an increase of $2.4 million for recruiting costs due to an increase in the number of new hires in 2004 compared to 2003 and an increase of $2.3 million in accounting and auditing fees due to new regulatory requirements.

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Depreciation expense increased $1.6 million to $28.6 million in 2004. The increase was related to the depreciation of the property and equipment we acquired to accommodate our growth. Capital expenditures were $48.6 million in 2004. Capital expenditures primarily included additional spending in the Development Group on software, computer hardware, and additional scientific equipment for our Phase I and Lab units and a $5.0 million purchase of land in connection with our plans to construct a new corporate headquarters building in Wilmington, North Carolina.

Amortization expense decreased $0.4 million to $1.2 million in 2004 as a result of the decrease of $0.7 million in amortization expense for our intangible backlog related to the acquisition of MRL in 2002 becoming fully amortized in the first quarter of 2004. This was offset by an increase in amortization of $0.3 million related to the license agreement and royalty rights agreement in the Discovery Sciences Group that were placed into service during the second quarter of 2003 and the third quarter of 2004.

Operating income increased $69.2 million to $148.0 million in 2004. As a percentage of net revenue, operating income increased to 17.6% of net revenue in 2004 from 10.8% in 2003. Operating income in 2003 includes the $65.0 million payment to Lilly and a $1.9 million charge related to the restructuring of the Discovery Sciences Group offset by a $5.7 million gain on the sale of assets. The aggregate impact of these items was a $61.2 million reduction in operating income for 2003. Operating income in 2004 includes a $2.6 million restructuring charge associated with exiting our chemistry facility in Research Triangle Park, North Carolina. Operating income in 2004 was also negatively impacted by approximately $7.6 million due to the effect of the U.S. dollar weakening relative to the euro, the British pound and the Brazilian real. During 2004, we recorded a foreign currency hedging gain of $2.7 million, resulting in a net impact to operating income of $4.9 million attributable to foreign currency transactions. Although these currency movements increased net revenue in the aggregate, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated to the U.S. dollar.

During 2004, we recorded a charge to earnings for an other than temporary decline in the fair market value of our investment in Chemokine Therapeutics Corp. of $2.0 million. We deemed our investment in Chemokine to be impaired as a result of the issuance of shares to new investors at a lower valuation than our original investment.

During 2003, we recorded charges to earnings for other than temporary declines in the fair market value of our investments in SLIL Biomedical of $4.7 million, Spotlight Health of $3.9 million, Signature Bioscience (formerly Primecyte) of $0.2 million and BioDelivery Sciences of $1.4 million. We determined that SLIL and Signature Bioscience were impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies. We recorded the write-down of our investment in Spotlight Health primarily based on its historical and projected financial performance and issuance of shares to a new investor at a lower valuation. BioDelivery Sciences is a publicly traded company, so we based the write-down of our investment in that company on the closing price of its securities as of December 31, 2003. Although these securities had traded above cost for short periods of time throughout 2003, we believe that due to the uncertainty of BioDelivery Sciences’ strategic direction, the decline in value was other than temporary and therefore we recorded the charge to earnings. Prior to the third quarter of 2003, we recorded market fluctuations through other comprehensive income.

Our provision for income taxes increased $26.0 million to $51.0 million in 2004. Our effective income tax rate for 2004 was 34.0% compared to 35.0% for 2003. During the second quarter of 2004, our effective tax rate was positively impacted by a $3.7 million tax benefit for a decrease in a valuation allowance for capital loss carryforwards that we expect to be able to utilize. The remaining difference in our effective rates for 2003 and 2004 is also due to the change in the geographic distribution of our pretax earnings among locations with varying tax rates.

Net income of $98.9 million in 2004 represents an increase of $52.6 million from $46.3 million in 2003. Net income per diluted share of $1.74 in 2004 represents an increase from $0.82 net income per diluted share in 2003. Net income for 2003 includes a charge of $10.1 million for impairment of equity investments. This charge, together with the payment to Lilly of $65.0 million and the restructuring charges of $1.9 million offset by the gain on sale of assets of $5.7 million, resulted in an aggregate impact of $44.8 million on 2003 net income, net of tax. Net income per diluted share of $0.82 in 2003 includes an aggregate impact of $0.80 earnings per share, net of tax, for the items mentioned above.

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Year Ended December 31, 2003 Versus Year Ended December 31, 2002

The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2003 compared to the full year of 2002.

(dollars in thousands)	Year Ended December 31,						$ Inc (Dec)			% Inc (Dec)
	2003			2002
Net revenue:
Development	$	654,019		$	545,139		$	108,880		19.97	%
Discovery sciences		15,479			17,510			(2,031	)	-11.60	%
Reimbursed out-of-pockets		57,485			46,008			11,477		24.95	%
Total net revenue		726,983			608,657			118,326		19.44	%
Direct costs:
Development		316,942			261,169			55,773		21.36	%
Discovery sciences		7,741			7,831			(90	)	-1.15	%
Reimbursable out-of-pocket expenses		57,485			46,008			11,477		24.95	%
Total direct costs		382,168			315,008			67,160		21.32	%
Research and development expenses		74,941			10,540			64,401		611.02	%
Selling, general and administrative expenses		166,253			150,607			15,646		10.39	%
Depreciation		26,968			23,189			3,779		16.30	%
Amortization		1,633			1,042			591		56.72	%
Gain on sale of assets		(5,738	)		(174	)		(5,564	)	3197.7	%
Restructuring charges		1,917			—			1,917
Operating income		78,841			108,445			(29,604	)	-27.30	%
Impairment of equity investments, net		(10,078	)		(33,787	)		23,709		-70.17	%
Interest and other income (expense), net		2,482			3,989			(1,507	)	-37.78	%
Income before taxes		71,245			78,647			(7,402	)	-9.41	%
Provision for income taxes		24,935			38,645			(13,710	)	-35.48	%
Income before equity in net loss of investee		46,310			40,002			6,308		15.77	%
Equity in net loss of investee		—			105			(105	)
Net income	$	46,310		$	39,897		$	6,413		16.07	%
Net income per diluted share	$	0.82		$	0.72		$	0.10		13.89	%

Total net revenue increased $118.3 million to $727.0 million in 2003. The increase in total net revenue resulted primarily from an increase in our Development Group revenues. The Development Group’s operations generated net revenue of $654.0 million, which accounted for 90.0% of total net revenue for 2003. The 20.0% increase in the Development Group’s net revenue was primarily attributable to an increase in the amount of global CRO Phase II through IV services we provided in 2003 as compared to 2002. Net revenue for the Development Group also increased by approximately $5.6 million due to the effect of the weakening of the U.S. dollar relative to the euro and the British pound during 2003.

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The Discovery Sciences Group generated net revenue of $15.5 million in 2003, a decrease of $2.0 million from 2002. The decrease in the Discovery Sciences net revenue was mainly attributable to a reduction in net revenue from functional genomics and chemistry services of $7.4 million and $2.0 million, respectively, due to fewer contracts for those services in 2003. We discontinued functional genomics and chemistry services in the third quarter of 2003 and the first quarter of 2004, respectively. The decreases in 2003 Discovery Sciences net revenue were partially offset by a milestone payment of $5.0 million that we earned under our sublicense agreement with ALZA as a result of the initiation of Phase III clinical trials of dapoxetine, and by an increase of $3.0 million in net revenue associated with our preclinical oncology operation. In early January 2004, we amended our sublicense agreement with ALZA. Under the terms of the amendment, ALZA made a cash payment to us of $5.0 million in the first quarter of 2004.

Total direct costs increased $67.2 million to $382.2 million in 2003. Development Group direct costs increased $55.8 million to $316.9 million in 2003. This increase resulted primarily from increased personnel costs of $32.2 million due to hiring additional employees in our global CRO Phase II through IV division and to annual salary increases. Development Group direct costs increased as a percentage of related net revenue from 47.9% in 2002 to 48.5% in 2003. Direct costs, as a percentage of net revenues, have and are expected to fluctuate from one period to another as a result of changes in labor utilization and the mix of service offerings involved in the hundreds of studies conducted during any period of time.

Discovery Sciences direct costs decreased $0.09 million to $7.7 million in 2003. This decrease resulted from a decline in direct costs of $3.5 million related to our functional genomics services and chemistry services due in each case to fewer contracts being performed in those areas in 2003. We will not be generating any direct costs from functional genomics or chemistry services in the future because we discontinued offering these services in the third quarter of 2003 and the first quarter of 2004, respectively. These decreases were partially offset by increases in direct costs of $2.5 million for a milestone payment to Lilly on dapoxetine and of $1.5 million associated with our preclinical oncology operations.

R&D expenses increased $64.4 million to $74.9 million in 2003. In the fourth quarter of 2003, we acquired from Eli Lilly the patents for the compound dapoxetine for development in the field of genitourinary disorders. We paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual sales of dapoxetine, if any, in excess of $800 million. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine was still in development and had not been approved for sale in any country. Excluding that payment, R&D expenses decreased $0.6 million in 2003 compared to 2002 due to discontinuing our functional genomics services.

SG&A expenses increased $15.6 million to $166.3 million in 2003. The increase was primarily attributable to additional personnel costs of $14.0 million attributable to administrative tasks that are not directly related to client projects, such as training costs. This was partially offset by a decrease in recruitment agency fees of $1.6 million. As a percentage of net revenue, SG&A expenses decreased to 22.9% in 2003 from 24.7% for 2002. This decrease is primarily attributable to the increase in net revenue and leveraging our SG&A expenses.

Depreciation expense increased $3.8 million to $27.0 million in 2003. The increase was related to the depreciation of the property and equipment we acquired to accommodate our growth. Capital expenditures were $31.7 million in 2003. Capital expenditures primarily included additional spending in the Development Group to enhance and expand our information technology capacity.

Amortization expense increased $0.6 million to $1.6 million in 2003, due to the amortization expense for a license agreement in the Discovery Sciences Group that was placed into service during 2003.

Operating income decreased to $78.8 million in 2003. As a percentage of net revenue, operating income decreased to 10.8% of net revenue in 2003 from 17.8% in 2002. Operating income in 2003 includes the $65.0 million payment to Lilly and a $1.9 million charge related to the restructuring of the Discovery Sciences Group offset by a $5.7 million gain on the sale of assets. The aggregate impact of these items was a $61.2 million reduction in operating income for 2003. Operating income was also negatively impacted by approximately $6.7 million due to the effect of the weakening of the U.S. dollar relative to the euro and the British pound, partially offset by the strengthening of the U.S. dollar relative to the Brazilian real during 2003. Although these currency movements

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increased net revenue in the aggregate, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated to the U.S. dollar.

During 2003, we recorded charges to earnings for other than temporary declines in the fair market value of our investments in SLIL Biomedical of $4.7 million, Spotlight Health of $3.9 million, Signature Bioscience (formerly Primecyte) of $0.2 million and BioDelivery Sciences of $1.4 million. We determined that SLIL and Signature Bioscience were impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies. We recorded the write-down of our investment in Spotlight Health primarily based on its historical and projected financial performance and issuance of shares to a new investor at a lower valuation. BioDelivery Sciences is a publicly traded company, and we based the write-down of that investment on the closing price of its securities as of December 31, 2003. Although these securities had traded above cost for short periods of time throughout 2003, we believe that due to the uncertainty of BioDelivery Sciences’ strategic direction, the decline in value as of each of these periods was other than temporary and therefore we recorded the charges to earnings. Prior to the third quarter of 2003, we recorded market fluctuations through other comprehensive income.

In 2002, we recorded charges to earnings for other than temporary declines in the fair market value of our investment in Gallery Systems of $1.5 million and our investment in Intrabiotics Pharmaceuticals of approximately $0.3 million. We also recorded a $32.0 million write-down of the carrying value of our investment in DNA Sciences for an other than temporary decline in value in 2002. At the time of the write-down, we deemed our investment in DNA Sciences to be impaired as a result of historical and projected performance, cash needs and an independent valuation of the market value of DNA Sciences. DNA Sciences subsequently filed for bankruptcy and we no longer have any ownership interest in that entity.

Our provision for income taxes decreased $7.4 million to $24.9 million in 2003 from $38.6 million in 2002. Our effective tax rate decreased to 35.0% in 2003 compared to 49.1% in 2002. The decrease in income tax expense and rate in 2003 was due to the impact on income of acquiring the patents for the compound dapoxetine and the change in geographic distribution of pretax earnings among locations with varying tax rates. Our effective rate was higher in 2002 due to a large increase in our valuation allowance. During 2003 and 2002, we recorded impairments of equity investments of $10.1 million and $33.8 million, respectively. Because of the uncertainty about whether we could use the loss related to these impairments during the carryforward period, we recorded a valuation allowance of $1.2 million in 2003 and $11.1 million in 2002, thus providing a tax benefit of only $3.0 and $2.3 million related to the impairments in the provision for income taxes in those years.

Net income of $46.3 million in 2003 represents an increase of $6.4 million from $39.9 million in 2002. Net income for 2003 includes a charge of $10.1 million for impairment of equity investments, net. This charge, together with the payment to Lilly of $65.0 million and the restructuring charges of $1.9 million offset by the gain on sale of assets of $5.7 million, resulted in an aggregate impact of $44.8 million on net income, net of tax. Net income per diluted share of $0.82 in 2003 represents an increase from $0.72 net income per diluted share in 2002. Net income per diluted share of $0.82 in 2003 includes an aggregate impact of $0.80 earnings per share, net of tax, for the items mentioned above. Net income per diluted share of $0.72 for 2002 includes a $0.57 charge for the impairment of our equity investments and the related tax benefit.

Liquidity and Capital Resources

As of December 31, 2004, we had $144.3 million of cash and cash equivalents and $105.0 million of short-term investments. Our expected primary cash needs on both a short- and long-term basis are for capital expenditures, expansion of services, possible acquisitions, geographic expansion, working capital and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, leasing arrangements, borrowings and sales of our stock. Our cash and cash equivalents are invested in financial instruments that are rated A or better by Standard & Poor’s or Moody’s and earn interest at market rates.

In 2004, our operating activities provided $179.3 million in cash as compared to $13.6 million last year. The increase in cash flow from operations is primarily due to a $78.4 million increase in income before provision for

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income taxes and an increase in cash related to changes in operating assets and liabilities of $31.7 million as compared to a decrease of $43.4 million in 2003. In 2003, income from operations was negatively impacted as a result of the $65.0 million one-time payment to Lilly in 2003 to acquire the patents to the dapoxetine compound. In addition, cash flow from operations was positively impacted by a $23.0 million decrease in the net growth of receivables due to improved collections of receivables and a $23.0 million increase in unearned income due to a different mix of contract terms in 2004. In 2004, net income of $98.9 million, depreciation and amortization of $29.9 million, a decrease of $12.9 million in deferred income tax as a result primarily of a decrease in depreciation and amortization timing differences of $10.0 million, an increase of $27.8 million in accounts payable and other accrued expenses as a result of increased employee related accruals of $14.6 million, such as incentive compensation accruals and accrued salary due to the increase in employees, and an increase of $13.2 million in other accruals, such as subcontractor accruals and volume discount accruals, related to increased revenue and an increase of $24.7 million in unearned income were partially offset by an increase of $16.1 million in receivables due to increased revenue.

In 2004, we used $110.6 million in cash related to investing activities. The net cash used for net purchases of available-for-sale investments of $55.6 million, purchases of investments of $5.7 million, purchase of royalty rights agreement of $2.5 million and capital expenditures of $48.6 million were partially offset by the $1.5 million of proceeds from a refund of a portion of the purchase price associated with the acquisition of Eminent Research Systems in 2003. We expect our capital expenditures in 2005 will range from approximately $45.0 to $50.0 million, excluding our purchase of a corporate airplane for $30.5 million in February 2005 and the construction of the new corporate headquarters building in Wilmington, North Carolina. Construction of the corporate headquarters building is discussed below. The majority of these anticipated capital expenditures will relate to information technology enhancement and expansion.

In 2004, our financing activities provided $11.0 million in cash. Net proceeds from stock option exercises and purchases under our employee stock purchase plan totaling $12.1 million were partially offset by $0.4 million in repayments of long-term debt and $0.8 million in repayments of capital lease obligations.

Working capital as of December 31, 2004 was $257.1 million, compared to $156.6 million at December 31, 2003. The increase in working capital was due primarily to the increase in cash of $83.7 million, increase in short-term investments of $55.6 million and the increase in accounts receivable of $19.4 million which were partially offset by the increase in payables to investigators of $11.7 million, an increase in other accrued expenses of $38.0 million, and an increase in unearned income of $28.5 million. The number of days’ revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as DSO, were 40.0 and 42.1 days as of December 31, 2004 and December 31, 2003, respectively. DSO is calculated by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the period presented. Over the past three years, our year-to-date DSO has fluctuated between 30.8 days and 42.2 days. We expect DSO will fluctuate in the future depending on the mix of contracts performed within a quarter, the level of investigator advances and unearned income, and our success in collecting receivables.

We maintain a defined benefit pension plan for certain employees and former employees in the United Kingdom. This pension plan was closed to new participants as of December 31, 2002. The projected benefit obligation for the benefit plan at December 31, 2004 and December 31, 2003, as determined in accordance with SFAS No. 87, “Employers Accounting for Pensions”, was $35.7 million and $28.4 million, respectively, and the value of the plan assets was $25.4 million and $19.0 million, respectively. As a result, the plan was under-funded by $10.4 million in 2004 and by $9.4 million in 2003, net of December contributions of $0.2 million for 2004 and 2003. It is likely that the amount of our contributions to the plan could increase in future years. The amount of contributions to the plan for the years ended December 31, 2004 and 2003 were $2.0 million and $2.2 million, respectively. We expect the pension cost to be recognized in our financial statements will decrease slightly from the $2.3 million in 2004 to approximately $1.9 million in 2005. The expense to be recognized in future periods could increase depending upon the change in fair market value of the plan assets and change in the projected benefit obligation.

A decrease in the market value of plan assets and/or declines in interest rates are likely to cause the amount of the under-funded status to increase. After completion of the actuarial valuations in 2005 we could be required to record an additional reduction to shareholders’ equity. We recorded an increase to shareholders’ equity in 2004 of $0.5 million and a reduction to shareholders’ equity of $0.7 million in 2003. Given the impact that the discount rate

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and stock market performance have on the projected benefit obligation and market value of plan assets, future changes in either one of these may significantly reduce or increase the amount of our pension plan under-funding. However, we do not believe the under-funded status of the pension plan will materially affect our results of operations, financial position or cash flows.

In July 2004, we renewed our $50.0 million revolving credit facility with Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. Borrowings under this credit facility are available to provide working capital and for general corporate purposes. As of December 31, 2004, there was no amount outstanding under this credit facility. However, the aggregate amount we are able to borrow has been reduced by $0.8 million due to outstanding letters of credit issued under this facility. This credit facility is currently scheduled to expire in June 2005, at which time any outstanding balance would be due.

In April 2000, we made an investment in Spotlight Health, Inc. We entered into an agreement with Spotlight Health and Bank of America, N.A. to guarantee a $2.0 million revolving line of credit provided to Spotlight Health by Bank of America. Indebtedness under the line of credit is unsecured and subject to traditional covenants relating to financial ratios. This credit facility is scheduled to expire on June 30, 2005, at which time any outstanding balance would be due. As of December 31, 2004, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, we have recorded a liability in the amount of $0.2 million for the estimated fair value of the obligation we have assumed under this guarantee. We review the financial statements of Spotlight Health on a quarterly basis to determine if it has sufficient financial resources to continue operations. Future events and circumstances might adversely affect Spotlight Health’s financial condition and Spotlight Health might not be in the position to repay the facility, in which case Bank of America may attempt to collect against us on our guarantee.

In September 2003, we entered into agreements with SurroMed pursuant to which we committed to pay for biomarker discovery services from SurroMed in the amounts of $2.0 million, $2.0 million, $1.0 million and $1.0 million for the years ended December 31, 2004, 2005, 2006 and 2007, respectively, and to serve as a non-exclusive representative to market and sell additional SurroMed biomarker discovery services. In February 2005, we acquired substantially all of SurroMed’s assets related to its biomarker business and terminated these agreements and the associated purchase commitments.

In November 2003, we entered into a collaboration agreement with Syrrx to jointly develop and commercialize Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. Under the terms of the agreement, we are obligated to provide preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. PPD and Syrrx have agreed to share equally the costs of Phase III development. In addition, we agreed to make milestone payments up to an aggregate amount equal to $17.5 million to Syrrx for each collaboration product upon the occurrence of certain clinical and regulatory events. In September 2004, we filed an investigational new drug application for one Syrrx DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, we paid Syrrx a milestone payment of $2.5 million as a result of the commencement of the Phase I studies. The remaining milestone payments will be expensed when the event triggering payment of the milestone occurs. In the event we are successful in obtaining approval to market a drug product under the collaboration with Syrrx, Syrrx and PPD will share equally the profits from drug sales. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. We own $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, we do not anticipate realizing a loss on this investment. At this time, we do not know what impact, if any, this acquisition will have on our DPP IV collaboration with Syrrx.

In April 2003, we made an equity investment in Chemokine Therapeutics Corp. In connection with this investment, Chemokine granted us an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. If we choose to exercise this option, we will be obligated to pay the one-time license fee plus the costs for future development work on the peptide. Chemokine also granted us the right to first negotiate a license to other peptides. Chemokine completed an initial public offering of its common stock in Canada in December 2004.

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In November 2003, we became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately-held companies in the life sciences, healthcare and technology industries. Under the terms of our agreements with the Pappas Fund, we committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of our aggregate capital commitment, and no more than two-thirds of our commitment could be called prior to May 2005. As such, we anticipate that our aggregate investment will be made through a series of future capital calls over the next several years. The first capital call was made in January 2005 at which time we invested $75,000. The second capital call is due in March 2005, at which time we will invest an additional $90,000. Our capital commitment will expire in May 2009.

In January 2005, we acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which we plan to construct a new headquarters building. The new facility will be approximately 400,000 square feet and is expected to be completed in November 2006. At that time, we will begin consolidating our Wilmington operations into the new building. The total cost for the construction and up-fit of the new building is expected to be in the range of $80.0 million to $100.0 million. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont Shipping Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America, N.A. This loan will mature in January 2006 and is secured by a lien on substantially all of Almont’s assets, including a tract of land containing approximately 30.0 acres adjacent to the 7.5 acre tract we acquired. This loan is also secured by a guarantee from us. Almont’s obligation to reimburse us in the event we are required to pay any sums to Bank of America under the guarantee is also secured by a lien on substantially all of Almont’s assets. As a part of this transaction, Almont granted us an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per acre. The option will expire on January 31, 2007.

In February 2005, we acquired a Dassault Falcon 900EX aircraft for $30.5 million. We intend to use the aircraft for corporate purposes. We financed the acquisition from available cash.

In January 2004, we purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. We also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In January 2005, we exercised the Class A warrant for the purchase of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. The Class B warrant will expire on the earlier of January 7, 2006 or the effective date of a registration statement for the public sale of Accentia common stock in a qualifying initial public offering. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to us upon conversion of 5.0 million shares of the Series E convertible preferred stock held by us.

The American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. We have not previously recorded a U.S. tax liability on such revenues since we intended to permanently reinvest them in our foreign operations. No provision is being made in 2004 relating to this matter because we are currently evaluating the effect of the new Act on our plan for these previously undistributed foreign earnings. We expect to complete this evaluation by the end of June 2005. The income tax effect of repatriating these earnings is not estimable at this time.

Under most of our agreements for Development Group services, we agree to indemnify and defend the sponsor against third party claims based on our negligence or willful misconduct. Any successful claims could have a material adverse effect on our financial condition, results of operations and future prospects.

We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations for the next 12 months. From time to time, we evaluate potential acquisitions, investments and other growth opportunities that might require additional external financing, and we

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might seek funds from public or private issuances of equity or debt securities. While we believe we have sufficient liquidity to fund our operations for the next 12 months, our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, personal injury, environmental or intellectual property claims, as well as other factors described under “Item 1. Business - Factors that Might Affect our Business or Stock Price”, in this Item 7 under the subheadings “Potential Volatility of Quarterly Operating Results and Stock Price” and “Critical Accounting Policies and Estimates,” and under “Item 7A - Quantitative and Qualitative Disclosures about Market Risk”.

Contractual Obligations

As of December 31, 2004, future minimum payments for all contractual obligations for years subsequent to December 31, 2004 are as follows (in thousands):

	2005			2006 - 2007			2008 - 2009			2010 and thereafter			Total
Long-term debt, including interest payments	$	750		$	1,500		$	1,500		$	5,503		$	9,253
Services purchase commitments (1)		2,000			2,000			—			—			4,000
Operating leases		33,633			56,004			46,629			81,287			217,553
Less: sublease income (1)		(2,498	)		(6,431	)		(6,576	)		(10,820	)		(26,325	)
Total	$	33,885		$	53,073		$	41,553		$	75,970		$	204,481

⁽¹⁾ In February 2005, we acquired substantially all of SurroMed’s assets related to its biomarker business. As part of that acquisition, we terminated our agreement with SurroMed to pay for biomarker discovery services through December 31, 2007 and we also terminated a sublease to SurroMed with payment obligations totaling $11.1 million.

As noted above, we became a limited partner in a venture capital fund in November 2003. Under the terms of our agreements with that fund, we committed to invest up to an aggregate of approximately $2.5 million in the fund. PPD anticipates that its aggregate investment will be made through a series of future capital calls over the next several years. Also, in November 2003, we entered into a collaboration agreement with Syrrx. Under the terms of the agreement, we are obligated to fund the majority of preclinical and clinical development costs through Phase IIb development of each collaboration and will share Phase III costs equally with Syrrx. In addition, in connection with our investment in Chemokine, Chemokine granted us an exclusive option to license a proprietary peptide for $1.5 million. If we choose to exercise this option, we will be obligated to pay the costs for future development work on the peptide. We also have a long-term liability on our balance sheet regarding the underfunding of our U.K. pension plan for $9.9 million. We do not know when or if this will be funded since this liability will change based on the performance of the investments of the plan and changes in the benefit obligations.

Off-balance Sheet Arrangements

We have guaranteed a $2.0 million line of credit from Bank of America to Spotlight Health. For a description of the guarantee and the line of credit, see “Liquidity and Capital Resources” above. In addition, in January 2005, we guaranteed an $8.0 million loan from Bank of America to Almont Shipping Company in connection with the purchase of property from Almont. For a description of the guarantee, see Note 19 to Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with the Finance and Audit Committee of our Board of Directors.

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Revenue Recognition

The majority of our revenues are recorded from fixed-price contracts on a proportional performance basis. To measure performance on a given date, we compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Direct costs are primarily comprised of labor and overhead related to the delivery of services. Each month we accumulate costs on each project and compare them to the total current estimated costs to determine the percentage-of-completion. We then multiply this percentage by the contract value to determine the amount of revenue that can be recognized. Each month we review the total current estimated costs on each project to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each project. As the work progresses, we might decide original estimates were incorrect due to, among other things, revisions in the scope of work or patient enrollment rate, and a contract modification might be negotiated with the customer to cover additional costs. If a contract modification is not agreed to, we could bear the risk of cost overruns. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. Should our estimated costs on fixed price contracts prove to be low, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future. A hypothetical increase to total estimated remaining project cost by 1% for open projects accounted for under the proportional performance method as of December 31, 2004 would have resulted in a cumulative reduction in revenue of approximately $2.0 million.

In our Discovery Science Group, we generate revenue from time to time in the form of milestone payments. Milestone payments are only recognized as revenues if the specified milestone is achieved and accepted by the customer, payment is received and continued performance of future research and development services related to that milestone are not required. Future potential milestone payments under various discovery contracts might never be received if the milestones are not achieved.

Allowance for Doubtful Accounts

Included in “Accounts receivable and unbilled services, net” on our consolidated balance sheets is an allowance for doubtful accounts. Generally, before we do business with a new client, we perform a credit check. We also review our accounts receivable aging on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes the specific uncollectible accounts and an estimate of losses based on historical loss experience. After all attempts to collect the receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of December 31, 2004 was adequate to cover uncollectible balances. However, actual write-offs might exceed the recorded reserve.

Cost Basis Investments

Most of our cost basis investments consist of equity investments in private entities for which fair values are not readily determinable. Therefore, we record these investments under the cost method of accounting. Many of our investments are in relatively early stage life sciences or biotechnology companies that do not have established products or proven technologies and some do not have material revenue, if any. Therefore, these investments might be worth less than we paid for them, and they are subject to write-down for impairment. We assess our investment portfolio on a quarterly basis for impairment; however for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. This quarterly review includes an evaluation of, among other things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events. Given the nature of these companies, our assessments of value are highly subjective.

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Tax Valuation Allowance

Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from net operating losses, tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109, “Accounting for Income Taxes”, also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for assumptions utilized, including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.

Based on estimates of future taxable profits and losses in certain foreign tax jurisdictions, we determined that a valuation allowance of $0.6 million was required for specific foreign tax loss carryforwards as of December 31, 2004. If these estimates prove inaccurate, a change in the valuation allowance, up or down, could be required in the future. We also recorded a total valuation allowance of $7.7 million related to the impairment of certain equity investments. The valuation was determined based on the uncertainty regarding our ability to generate sufficient capital gains to utilize both realized and unrealized capital losses during the loss carryforward period. A change in any of the investees’ financial health and/or stock price, or a change in our ability to utilize a potential capital loss, could require a change of valuation allowance in the future.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. If indicators of impairment are present, we would evaluate the carrying value of property and equipment in relation to estimates of future undiscounted cash flows. These undiscounted cash flows and fair values are based on judgments and assumptions. Additionally, we test goodwill for impairment on at least an annual basis by comparing the underlying reporting units’ goodwill to their estimated fair value. These tests for impairment of goodwill involve the use of estimates related to the fair market value of the reporting unit with which the goodwill is associated, and are inherently subjective.

Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. Revised Statement No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. We have adopted the disclosure requirements of this statement.

In December 2003, the FASB issued revised FIN 46, “Consolidation of Variable Interest Entities”. This revised interpretation is effective for all entities as of the first reporting period that ends after March 15, 2004. We have no investment in or contractual or other business relationship with a variable interest entity and, therefore, the adoption of this interpretation did not have any impact on our consolidated financial position or results of operations.

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In November 2003, during discussions on Emerging Issues Task Force, or EITF, 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the EITF reached a consensus that requires quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In September 2004, FASB Staff Position EITF 03-1-1 was issued to delay the effective date for the measurement and recognition guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. We have adopted the disclosure requirements of EITF 03-01. Such adoption did not have a material impact on our financial position or results of operations.

In October 2004, the EITF finalized its consensuses on EITF 04-01, “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The consensuses in EITF 04-01 provide guidance on how to account for the settlement of a preexisting relationship and how it affects the accounting of the business combination. EITF 04-01 is effective for business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The adoption of this statement did not have a material impact on our financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the fair value on the date of grant of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123 (Revised) is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. We are currently evaluating the impact of the adoption of this statement on our financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29”. SFAS No. 153 replaces the exception from fair value measurement included in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe adoption of this statement will have a material impact on our financial statements.

Taxes

Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pretax earnings among locations with varying tax rates. Our profits are also impacted by changes in the tax rates of the various taxing jurisdictions. In particular, as the geographic mix of our pre-tax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period.

Inflation

Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition.

Potential Liability and Insurance

Drug development services involve the testing of new drugs on human volunteers pursuant to a study protocol. This testing exposes us to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of the new drug. Many of these patients are already seriously ill and are at risk of further illness or death. We attempt to manage our risk of liability for personal injury or death to patients from administration of products under study through measures such as stringent operating procedures, contractual indemnification provisions with clients and insurance. We monitor clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating

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procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and to serve as a tool for controlling and enhancing the quality of drug development services. The contractual indemnifications generally do not protect us against our own actions, such as gross negligence. We currently maintain professional liability insurance coverage with limits we believe are adequate and appropriate.

Potential Volatility of Quarterly Operating Results and Stock Price

Our quarterly and annual operating results have fluctuated in the past, and we expect that they will continue to fluctuate in the future. Factors that could cause these fluctuations to occur include:

• the timing of our Discovery Sciences Group milestone payments or other revenue;

• the timing and amount of costs associated with R&D and compound collaborations;

• exchange rate fluctuations between periods;

• our dependence on a small number of industries and clients;

• the timing of the initiation, progress or cancellation of significant projects;

• the timing and level of new business authorizations;

• the mix of products and services sold in a particular period;

• pricing pressure in the market for our services;

• our ability to recruit and retain experienced personnel;

• rapid technological change;

• the timing and amount of start-up costs incurred in connection with the introduction of new products and services;

• the timing and extent of new government regulations;

• intellectual property risks;

• impairment of investments or intangible assets;

• the timing of the opening of new offices;

• the timing of other internal expansion costs; and

• the timing and amount of costs associated with integrating acquisitions.

Delays and terminations of trials are often the result of actions taken by our customers or regulatory authorities, and are not typically controllable by us. Because a large percentage of our operating costs are relatively fixed while revenue is subject to fluctuation, variations in the timing and progress of large contracts can materially affect our quarterly operating results. We believe that comparisons of our quarterly financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Fluctuations in quarterly results or other factors beyond our control could affect the market price of our common stock. These factors include changes in earnings estimates by analysts, market conditions in our industry, announcements by competitors, changes in pharmaceutical, biotechnology and medical device industries, general economic conditions, and differences in assumptions used as compared to actual results. Any effect on our common stock could be unrelated to our longer-term operating performance.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign currency risk by virtue of our international operations. Approximately 20.3%, 23.2% and 27.6% of our net revenues for the years ended December 31, 2002, 2003 and 2004, respectively, were derived from operations outside the United States. Funds generated by each subsidiary are generally reinvested in the country where they are earned. Our operations in the United Kingdom generated more than 27.8% of our net revenue from international operations during 2004. Accordingly, we are exposed to adverse movements in the pound sterling and other foreign currencies.

The vast majority of our contracts are entered into by our United States or United Kingdom subsidiaries. The contracts entered into by the United States subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our United Kingdom subsidiaries are generally denominated in pounds sterling, U.S.

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dollars or euros, but the majority of these contracts are in U.S. dollars. As a result of the weakening of the U.S. dollar relative to the euro and pound sterling during 2003, in January 2004 we began engaging in hedging activities in an effort to manage our potential foreign exchange exposure.

We do have some currency risk resulting from the passage of time between the invoicing of customers under contracts and the ultimate collection of customer payments against those invoices. If a contract is denominated in a currency other than the subsidiary’s local currency, we recognize a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared and payment from the customer is received will result in our receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. If exchange rates were to increase or decrease by 10% in the future, we do not expect this would have a material effect on our financial statements.

Our strategy for management of currency risk relies primarily on conducting our operations in a country’s currency, intercompany foreign currency denominated loans and may, from time to time, involve use of currency derivatives, primarily forward exchange contracts, to reduce our exposure to currency fluctuations. As of December 31, 2004, we had open foreign exchange derivative contracts with a face amount totaling $47.7 million to buy the local currencies of our foreign subsidiaries. The estimated fair value of the foreign currency derivative portfolio was $0.7 million recorded as a component of prepaid expenses and other current assets and $59,000 recorded as a component of other accrued expenses. The potential loss resulting from a hypothetical weakening of the U.S. dollar relative to the pound sterling and euro of 10% would have been approximately $6.7 million for the year ended December 31, 2004 based on 2004 revenues and the costs related to the United Kingdom. Because our foreign currency hedging activities would partially offset these potential losses, we do not expect that a 10% change in exchange rates in the future would have a material effect on our financial statements.

Changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of foreign subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The process by which we translate each foreign subsidiary’s financial results to U.S. dollars is as follows:

• we translate income statement accounts at average exchange rates for the period;

• we translate balance sheet assets and liability accounts at end of period exchange rates; and

• we translate equity accounts at historical exchange rates.

Translation of the balance sheet in this manner affects shareholders’ equity through the cumulative translation adjustment account. This account exists only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet, stated in U.S. dollars, in balance. Translation adjustments are reported with accumulated other comprehensive income (loss) as a separate component of shareholders’ equity. To date, cumulative translation adjustments have not been material to our consolidated financial position. However, future translation adjustments could materially and adversely affect our financial position.

Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of or from within any country in which we conduct operations. Although we perform services for clients located in a number of foreign jurisdictions, we have not experienced any difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition.

We are exposed to changes in interest rates on our cash equivalents and amounts outstanding under notes payable and lines of credit. We invest our cash and cash equivalents in financial instruments with interest rates based on financial market conditions. We do not expect that a 10% change in interest rates in the future would have a material effect on our financial statements.

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Item 8. Financial Statements and Supplementary Data

The information called for by this Item is set forth herein commencing on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.

A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met and must reflect the fact that there are resource constraints that require management to consider the benefits of internal controls relative to their costs. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error and all fraud.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control– Integrated Framework. Based on our assessment, we believe that, as of December 31, 2004, our internal control over financial reporting was effective based on those criteria. Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on our assessment of our internal control over financial reporting, which appears below.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North Carolina

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Pharmaceutical Product Development, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established

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in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 4, 2005 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Raleigh, North Carolina

March 4, 2005

Item 9B. Other information

On March 1, 2005, the Company amended its compensatory arrangement for non-employee directors to provide that the annual restricted stock grants to non-employee directors will vest ninety percent on the first anniversary of the grant, five percent on the second anniversary and five percent on the third anniversary. A copy of the amended and restated non-employee director compensatory arrangement is attached to this report as Exhibit 10.209.

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On March 1, 2005, in response to the FASB Statement No. 123(R), “Share-Based Payment”, the Company amended its Employee Stock Purchase Plan to provide that the price per share of the common stock offered to participants under the plan shall equal 95% of the fair market value of a share of common stock on the last day of each offering period. Previously, the price equaled 85% of the lower of the price on the first day and the last day of the offering period. FASB Statement 123(R) provides that this lower discount does not have to be reflected as compensation expense on our statements of income. A copy of the Amended and Restated Employee Stock Purchase Plan is attached to this report as Exhibit 10.86.

In December 2004, the Compensation Committee of our Board of Directors approved an increase in the annual base salary for Linda Baddour, our Chief Financial Officer, from $222,600 to $275,000. Ms. Baddour’s base salary was increased to be more competitive in the current market and to compensate her for substantial additional duties she assumed in 2004. The salary increase was effective January 1, 2005. In addition, on March 1, 2005, the Compensation Committee approved cash bonuses for the Company’s “Named Executive Officers,” as will be listed in our proxy statement for our 2005 annual meeting of shareholders. Based on Company and individual performance in 2004, the Committee approved the following bonuses: Chief Executive Officer Fred Eshelman, $600,000; President Fred Davenport, $225,000; Executive Vice President - Development Paul Covington, $160,000; Chief Financial Officer Linda Baddour, $150,000; and Executive Vice President - Global Clinical Operations Colin Shannon, $125,000. In addition, Senior Vice President - Global Business Development Frank Casieri will receive a discretionary cash bonus of $50,000 based on Company and individual performance in 2004.

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PART III

Certain information required by Part III is omitted from this report because the Registrant intends to file a definitive proxy statement for its 2005 Annual Meeting of Shareholders to be held on May 18, 2005 (the “Proxy Statement”) within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below.

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 of Form 10-K concerning the Registrant’s executive officers is set forth under the heading “Executive Officers” located at the end of Part I of this Form 10-K.

The Board of Directors has determined that the members of the Finance and Audit Committee are independent as defined in Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards. The Board of Directors has also determined that Mr. Frederick Frank is an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K.

Our Board of Directors has adopted a code of conduct that applies to all of our directors and employees. Our Board has also adopted a separate code of ethics for our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller, or persons performing similar functions. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Pharmaceutical Product Development, Inc., 3151 South 17^th Street, Wilmington, NC 28412, Attn: General Counsel.

The other information required by Item 10 of Form 10-K is incorporated by reference to the information under the headings “Proposal No. 1 - Election of Directors” and “Other Information-Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Item 11. Executive Compensation

The information required by Item 11 of Form 10-K is incorporated by reference to the information under the heading “Other Information – Executive Compensation Tables,” “—Director Compensation,” “—Employment and Severance Agreements,” and “—Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the indicated information as of December 31, 2004 with respect to our equity compensation plans:

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	(b) Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders	4,345,562	$	31.39	4,498,102	(1)
Equity Compensation Plans Not Approved by Security Holders	0		0	0
Total	4,345,562	$	31.39	4,498,102	(1)

(1) This includes 3,931,773 shares of stock available for issuance under our 1995 Equity Compensation Plan and 566,329 shares available for issuance under our Employee Stock Purchase Plan.

The other information required by Item 12 of Form 10-K is incorporated by reference to the information under the heading “Other Information – Principal Shareholders” in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

None.

Item 14. Principal Accountant Fees and Services

The information required by Item 14 of Form 10-K is incorporated by reference to the information under the heading “Other Information – Report of the Finance & Audit Committee” and “– Fees Paid to the Independent Auditors” in the Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Financial Statements

Our consolidated financial statements filed as part of this report are listed in the attached Index to Consolidated Financial Statements. There are no schedules to our consolidated financial statements.

(b) Exhibits

Exhibit Number	Description	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
2.1	—Plan of Merger to Merge PPD Subsidiary, Inc. with and into Pharmaceutical Product Development Clinical Research Unit, Inc. (“PPD-CRU”).	S-1	1/24/96	2.1
2.2	—Plan of Merger to Merge PPD-Europe, Inc. (“PPD Europe”) with and into the Registrant.	S-1	1/24/96	2.2
2.3	—Agreement and Plan of Reorganization, dated as of June 20, 1996, among the Registrant, Wilmington Merger Corp. and Applied Bioscience International Inc.	S-4	7/16/96	2.3
2.4	—Stock and Asset Master Purchase Agreement by and among Huntingdon International Holdings plc, Huntingdon Life Sciences Inc., Applied Bioscience International Inc. and Pharmaco LSR International Inc., dated as of November 1, 1995, incorporated by reference to Exhibit 2 to Applied Bioscience International Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 1996.	S-4	7/16/96	2.4
2.5	—Stock Purchase Agreement among Applied Bioscience International Inc., PPD UK Holdings Limited and Environ Holdings Inc. for the acquisition of all the capital stock of APBI Environmental Sciences Group, Inc., Environmental Assessment Group Limited and Environ International Limited, dated January 31, 1999.	S-4	7/16/96	2.5
2.8	—Agreement and Plan of Reorganization dated January 28, 2002, by and among Pharmaceutical Product Development, Inc., Subsidiary No. 8, LLC and Medical Research Laboratories International, Inc.	8-K	2/19/02	2.8
2.9	—Share Purchase Agreement among Pharmaceutical Product Development, Inc., PPD UK Holdings Limited, Evan A. Stein, M.D., Ph.D. and MRL Select Ltd. Co.	8-K	2/19/02	2.9
2.10	—Asset Purchase Agreement dated January 14, 2005 relating to the purchase of the biomarker business from SurroMed, Inc.	8-K	2/7/05	99.1
3.1	—Restated Articles of Incorporation.	S-4	7/16/96	3.1
3.2	—Amended and Restated Bylaws.	S-4	7/16/96	3.2
10.35	—Lease, dated January 26, 1994, by and between Michael James Lawton, Jeffrey William Ware, Prudential Nominees Limited and Gabbay Group Limited.	S-1	1/24/96	10.35
10.39	—Lease Agreement, dated as of October 25, 1995, by and between PPD-CRU and Perimeter Park West Associates Limited Partnership.	S-1	1/24/96	10.39
10.55	—Lease made January 23, 1996 between PPD-CRU and Western Center Properties, Inc.	S-1	1/24/96	10.55
10.59	—First Amendment dated May 20, 1999 to Lease Agreement, dated October 25, 1995, between PPD Development and Perimeter Park West Associates Limited Partnership.	S-4	7/16/96	10.59

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Exhibit Number	Description	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.60	—First, Second and Third Amendments to Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership.	S-4	7/16/96	10.60
10.61	—Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership.	S-4/A	8/20/96	10.61
10.71	—Lease Agreement by and between ABI (TX) QRS 12-11, Inc. and Pharmaco LSR International Inc., incorporated by reference to Exhibit 10.43 to Applied Bioscience International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1995.	10-K	3/26/97	10.71
10.86	—Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan, dated March 1, 2005.	10-K			X
10.87	—Amendment to Employee Stock Purchase Plan, dated June 21, 1997.	10-Q	8/14/97	10.87
10.88	—Amendment to Stock Option Plan for Non-Employee Directors, dated May 15, 1997.	10-Q	8/14/97	10.88
10.90	—Employment Agreement, effective July 1, 1997, between Pharmaceutical Product Development, Inc. and Fredric N. Eshelman.	10-Q	11/13/97	10.90
10.93	—Lease Agreement dated July 9, 1997, between Weeks Realty, Inc. and PPD Pharmaco, Inc.	10-Q	11/13/97	10.93
10.110	—Amendment to Employee Stock Purchase Plan, dated March 2, 1998.	10-K	3/27/98	10.110
10.114	—Lease Agreement dated June 26, 1998 between Weeks Realty Limited Partnership and PPD Pharmaco, Inc.	10-Q	8/13/98	10.114
10.116	—First Amendment to Lease Agreement dated September 28, 1998, between PPD Pharmaco, Inc. and Weeks Realty, Inc.	10-Q	11/13/98	10.116
10.117	—Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited Partnership.	10-Q	11/13/98	10.117
10.118	—Lease Agreement dated December 16, 1998 between PPD Pharmaco, Inc. and Weeks Realty Limited Partnership.	10-K	3/4/99	10.118
10.119	—Employment Agreement dated January 1, 1999 between Pharmaceutical Product Development, Inc. and David R. Williams.	10-K	3/4/99	10.119
10.124	—Stock Purchase Agreement dated February 1, 1999 between PPGx, Inc. and Pharmaceutical Product Development, Inc.	10-K	3/4/99	10.124
10.131	—Amendment, dated April 14, 1999, to Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited Partnership.	10-Q	8/13/99	10.131
10.132	—Amendment, dated April 14, 1999, to Lease Agreement dated March 25, 1996 between PPD and BBC Family Limited Partnership.	10-Q	8/13/99	10.132
10.133	—Fourth Amendment, dated July 6, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.	10-Q	11/15/99	10.133
10.145	—Third Amendment to Employee Stock Purchase Plan, dated June 21, 1997.	10-Q	8/11/00	10.145
10.158	—Deferred Compensation Plan dated February 1, 2001.	10-K	3/13/01	10.158
10.162	—Severance Agreement dated January 1, 2001, between Pharmaceutical Product Development, Inc. and various individuals.	10-K			X

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Exhibit Number	Description	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.164	—First Amendment, dated January 28, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.	10-K	3/13/01	10.164
10.165	—Second Amendment, dated June 26, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.	10-K	3/13/01	10.165
10.166	—Third Amendment, dated February 18, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.	10-K	3/13/01	10.166
10.167	—First Amendment, dated February 28, 2000, to Lease Agreement dated December 16, 1998 between PPD Development, Inc. and Duke-Weeks Realty, L.P.	10-K	3/13/01	10.167
10.170	—Employment Agreement dated July 9, 2001 between Pharmaceutical Product Development, Inc. and Brainard Judd Hartman.	10-Q	8/1/01	10.170
10.176	—Employment Agreement dated January 15, 2002, between Pharmaceutical Product Development, Inc. and Fred B. Davenport, Jr.	10-K	2/20/02	10.176
10.177	—Employment Agreement dated January 15, 2002, between Pharmaceutical Product Development, Inc. and Paul S. Covington.	10-K	2/20/02	10.177
10.181	—Employment Agreement dated May 16, 2002, between Pharmaceutical Product Development, Inc. and Linda Baddour.	10-Q	8/13/02	10.181
10.182	—Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard Staub.	10-Q	8/13/02	10.182
10.183	—Termination Agreement dated April 30, 2002, between PPD Development, LLC and Francis J. Casieri.	10-Q	8/13/02	10.183
10.186	—Loan Agreement dated July 25, 2002 between Pharmaceutical Product Development, Inc. and Bank of America, N.A.	10-Q	8/13/02	10.186
10.187	—Deferred Compensation Plan for Directors dated June 15, 2002.	10-Q	8/13/02	10.187
10.188	—Lease Agreement dated October 12, 1994 between Evan A. Stein, M.D., Ph.D. and Medical Research Laboratories.	10-Q	8/13/02	10.188
10.189	—Lease Agreement dated July 1, 2001 between Brandywine Grande C,L.P. and PPD Development, LLC.	10-Q	8/13/02	10.189
10.190	—Amended and Restated Deferred Compensation Plan dated July 1, 2002.	10-Q	11/13/02	10.190
10.191	—Second Amendment, dated October 1, 2002, to Lease Agreement dated June 26, 1998 between PPD Development, Inc. (formerly PPD Pharmaco, Inc.) and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.).	10-Q	11/13/02	10.191
10.192	—Fifth Amendment, dated October 1, 2002, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.).	10-Q	11/13/02	10.192

56

Exhibit Number	Description	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
10.193	—Second Amendment, dated October 1, 2002, to Lease Agreement dated December 16, 1998 between PPD Development, Inc. and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.).	10-Q	11/13/02	10.193
10.194	—First Amendment, dated June 1, 2002, to Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard Staub.	10-Q	11/13/02	10.194
10.197	—First Amendment to Loan Agreement dated July 1, 2003, between Pharmaceutical Product Development, Inc. and Bank of America, N.A.	10-Q	8/6/03	10.197
10.198	—Second Amendment, dated January 1, 2003, to Employment Agreement dated May 1, 2002, between PPD Development, LP and W. Richard Staub.	10-Q	8/6/03	10.198
10.199	—Loan Agreement dated July 1, 2003, by and among Spotlight Health, Inc., Pharmaceutical Product Development, Inc. and Bank of America, N.A.	10-Q	8/6/03	10.199
10.200	—Pharmaceutical Product Development, Inc. Equity Compensation Plan as amended and restated effective May 14, 2003.	Proxy	3/28/03	10.200
10.201^	—Termination and License Agreement dated as of December 18, 2003 by and among Eli Lilly and Company, Pharmaceutical Product Development, Inc., GenuPro, Inc. and APBI Holdings, LLC.	10-K	2/19/04	10.201
10.202^	—License Agreement dated January 2, 2001 by and among Pharmaceutical Product Development, Inc., GenuPro, Inc. and ALZA Corporation.	10-K	2/19/04	10.202
10.203^	—Amendment No. 1 to License Agreement dated as of December 26, 2003 by and among Pharmaceutical Product Development, Inc., GenuPro, Inc. and ALZA Corporation.	10-K	2/19/04	10.203
10.204^	—Collaboration Agreement dated as of November 19, 2003 by and between Syrrx, Inc, Development Partners, LLC and Pharmaceutical Product Development, Inc.	10-K	2/19/04	10.204
10.205	—Termination Agreement dated June 25, 2004, between PPD Development, LP and W. Richard Staub.	10-Q	8/3/04	10.205
10.206	—Second Amendment to Loan Agreement dated July 1, 2004, between Pharmaceutical Product Development, Inc. and Bank of America, N.A.	10-Q	8/3/04	10.206
10.207	—First Amendment dated July 1, 2004, to Loan Agreement by and among Spotlight Health, Inc., Pharmaceutical Product Development, Inc. and Bank of America, N.A.	10-Q	11/3/04	10.207
10.208	—Employment Agreement dated July 16, 2004, between PPD Development, LP and Colin Shannon.	10-Q	11/3/04	10.208
10.209	—Non-Employee Director Compensation, Amended and Restated March 1, 2005	10-K			X
10.210	—Amended and Restated Employment Agreement dated January 14, 2005 between PPD Development, LP and Francis J. Casieri	8-K	1/21/05	10.210
10.211	—Aircraft Purchase Agreement dated February 2, 2005 relating to the purchase of an aircraft from Krispy Kreme Doughnut Corporation.	8-K	2/7/05	99.1
10.212	—Lease agreement dated June 18, 2004, between Met Center Partners-6, Ltd. And PPD Development, LP				X

57

Exhibit Number	Description	Registrant’s Form	Dated	Exhibit Number	Filed Herewith
21	—Subsidiaries of the Registrant.				X
23.1	—Consent of Deloitte & Touche LLP				X
31.1	—Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).				X
31.2	—Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).				X
32.1	—Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.				X
32.2	—Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.				X
	Exhibit 10.162 has been updated to include Edward J. Murray, to reflect amendments to Linda Baddour’s severance, to delete David R. Williams and to add welfare benefit information.

^ Confidential treatment requested for portions of this exhibit.

58

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004	F-3
Consolidated Balance Sheets as of December 31, 2003 and 2004	F-4
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2002, 2003 and 2004	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004	F-6
Notes to Consolidated Financial Statements	F-7

F-1

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North Carolina

We have audited the accompanying consolidated balance sheets of Pharmaceutical Product Development, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pharmaceutical Product Development, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

/s/ DELOITTE & TOUCHE LLP

Raleigh, North Carolina

March 4, 2005

F-2

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands, except per share data)

	2002			2003			2004
Development revenues	$	545,139		$	654,019		$	759,629
Discovery sciences revenues		17,510			15,479			14,311
Reimbursed out-of-pockets		46,008			57,485			67,316
Net revenues		608,657			726,983			841,256
Direct costs - Development		261,169			316,942			376,439
Direct costs - Discovery sciences		7,831			7,741			5,491
Reimbursable out-of-pocket expenses		46,008			57,485			67,316
Research and development expenses		10,540			74,941			15,852
Selling, general and administrative expenses		150,607			166,253			195,752
Depreciation		23,189			26,968			28,609
Amortization		1,042			1,633			1,245
Gain on sale of assets		(174	)		(5,738	)		(82	)
Restructuring charges		—			1,917			2,619
		500,212			648,142			693,241
Operating income		108,445			78,841			148,015
Interest:
Income		2,887			2,257			2,517
Expense		(689	)		(769	)		(516	)
Interest income, net		2,198			1,488			2,001
Impairment of equity investments, net		(33,787	)		(10,078	)		(2,000	)
Other income, net		1,791			994			1,829
Income before provision for income taxes		78,647			71,245			149,845
Provision for income taxes		38,645			24,935			50,957
Income before equity in net loss of investee		40,002			46,310			98,888
Equity in net loss of investee, net of income taxes		105			—			—
Net income	$	39,897		$	46,310		$	98,888
Net income per common share:
Basic	$	0.73		$	0.83		$	1.75
Diluted	$	0.72		$	0.82		$	1.74
Weighted average number of common shares outstanding:
Basic		54,710			55,774			56,348
Dilutive effect of stock options		633			512			556
Diluted		55,343			56,286			56,904

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

F-3

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2003 AND 2004

(in thousands, except share data)

	2003		2004
Assets
Current assets
Cash and cash equivalents	$	60,677	$	144,348
Short-term investments		49,425		105,020
Accounts receivable and unbilled services, net		245,700		265,067
Income tax receivable		253		6,321
Investigator advances		13,660		15,251
Prepaid expenses and other current assets		19,192		28,189
Deferred tax asset		12,441		10,867
Total current assets		401,348		575,063
Property and equipment, net		112,143		136,501
Goodwill		178,076		179,781
Investments		61,371		66,658
Intangible assets		2,007		3,895
Other assets		841		929
Long-term deferred tax asset		23,395		12,374
Total assets	$	779,181	$	975,201
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	15,243	$	12,863
Payables to investigators		31,976		43,726
Accrued income taxes		7,672		5,118
Other accrued expenses		63,749		101,714
Deferred tax liability		74		770
Unearned income		124,651		153,170
Current maturities of long-term debt and capital lease obligations		1,381		599
Total current liabilities		244,746		317,960
Long-term debt and capital lease obligations, less current maturities		6,281		6,371
Deferred rent and other		5,461		5,267
Accrued additional pension liability		9,859		9,923
Long-term deferred tax liability		313		370
Total liabilities		266,660		339,891
Commitments and contingencies (Notes 8 and 13)
Shareholders’ equity
Common stock, $0.10 par value, 95,000,000 shares authorized; 56,050,036 and 56,618,201 shares issued and outstanding, respectively		5,605		5,662
Paid-in capital		278,057		293,200
Retained earnings		226,381		325,269
Accumulated other comprehensive income		2,478		11,179
Total shareholders’ equity		512,521		635,310
Total liabilities and shareholders’ equity	$	779,181	$	975,201

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

F-4

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands)

	Common Shares		Par Value			Paid-in Capital			Retained Earnings		Deferred Compensation			Accumulated Other Comprehensive Loss			Total			Comprehensive Income
Balance January 1, 2002	51,930		$	5,193		$	164,162		$	140,174	$	(966	)	$	(5,928	)	$	302,635
Net income										39,897								39,897		$	39,897
Other comprehensive income (loss):
Translation adjustments															4,935			4,935			4,935
Minimum pension liability, net of tax of $(2,372)															(5,533	)		(5,533	)		(5,533	)
Unrealized loss on investment, net of tax of $0															(1,939	)		(1,939	)		(1,939	)
Comprehensive income																				$	37,360
Issuance of common shares for exercise of stock options and employee stock purchase plan	461			46			7,478											7,524
Issuance of shares in connection with acquisitions	3,060			306			90,339											90,645
Income tax benefit from exercise of stock options							1,870											1,870
Deferred stock compensation forfeited	(15	)		(1	)		(349	)				350						—
Shareholder contribution							54											54
Amortization of stock compensation												249						249
Balance December 31, 2002	55,436			5,544			263,554			180,071		(367	)		(8,465	)		440,337
Net income										46,310								46,310		$	46,310
Other comprehensive income (loss):
Translation adjustments															9,691			9,691			9,691
Minimum pension liability, net of tax of $(326)															(687	)		(687	)		(687	)
Reclassification adjustment for investment loss included in net income, net of tax of $0															1,939			1,939			1,939
Comprehensive income																				$	57,253
Issuance of common shares for exercise of stock options and employee stock purchase plan	614			61			9,643											9,704
Income tax benefit from exercise of stock options							4,860											4,860
Amortization of stock compensation												367						367
Balance December 31, 2003	56,050			5,605			278,057			226,381		0			2,478			512,521
Net income										98,888								98,888		$	98,888
Other comprehensive income (loss):
Translation adjustments															6,205			6,205			6,205
Minimum pension liability, net of tax of $200															467			467			467
Change in fair value on hedging transaction, net of tax of $997															2,296			2,296			2,296
Reclassification adjustment for hedging results included in direct costs, net of tax of $(807)															(1,883	)		(1,883	)		(1,883	)
Unrealized gain on investment, net of tax of $0															1,616			1,616			1,616
Comprehensive income																				$	107,589
Issuance of common shares for exercise of stock options and employee stock purchase plan	568			57			12,088											12,145
Income tax benefit from exercise of stock options							3,055											3,055
Balance December 31, 2004	56,618		$	5,662		$	293,200		$	325,269	$	0		$	11,179		$	635,310

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

F-5

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands)

	2002			2003			2004
Cash flows from operating activities:
Net income	$	39,897		$	46,310		$	98,888
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of investments		33,787			10,159			2,000
Restructuring charges		—			1,917			2,619
Depreciation and amortization		24,231			28,601			29,854
Stock compensation amortization		249			367			—
Provision for doubtful accounts		342			284			1,188
Equity in net loss of investee		119			—			—
Gain on sale of assets and investments		(174	)		(5,738	)		(82	)
(Benefit) provision for deferred income taxes		(1,565	)		(25,265	)		12,949
Loss on disposition of property and equipment		60			295			205
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable and unbilled services, net		(51,295	)		(39,256	)		(16,138	)
Prepaid expenses and investigator advances		(3,213	)		(11,722	)		(9,437	)
Current income taxes		3,998			(305	)		(5,934	)
Other assets		15			158			(72	)
Accounts payable, other accrued expenses and deferred rent		16,519			(5,341	)		27,834
Payable to investigators		12,657			11,330			10,748
Unearned income		30,165			1,781			24,652
Net cash provided by operating activities		105,792			13,575			179,274
Cash flows from investing activities:
Purchases of property and equipment		(34,496	)		(31,693	)		(48,583	)
Proceeds from sale of property and equipment		114			274			319
Acquisition of intangible assets		(2,000	)		—			(2,500	)
Purchases of available-for-sale investments		(164,934	)		(1,232,313	)		(976,993	)
Maturities and sales of available-for-sale investments		206,954			1,215,713			921,398
Cash received from repayment of note receivable		17,000			500			—
Purchases of investments		(8,793	)		(40,457	)		(5,671	)
Cash (paid) refunded related to businesses acquired, net of cash acquired		(50,579	)		(25,873	)		1,450
Net cash used in investing activities		(36,734	)		(113,849	)		(110,580	)
Cash flows from financing activities:
Principal repayments on long-term debt		(166	)		(973	)		(353	)
Proceeds from long-term debt		1,464			—			—
Repayment of capital lease obligations		(2,741	)		(1,766	)		(830	)
Proceeds from exercise of stock options and employee stock purchase plan		7,524			9,704			12,145
Net cash provided by financing activities		6,081			6,965			10,962
Effect of exchange rate changes on cash and cash equivalents		4,932			5,587			4,015
Net increase (decrease) in cash and cash equivalents		80,071			(87,722	)		83,671
Cash and cash equivalents, beginning of the year		68,328			148,399			60,677
Cash and cash equivalents, end of the year	$	148,399		$	60,677		$	144,348

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

F-6

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies:

Nature of Business

Pharmaceutical Product Development, Inc. and its subsidiaries (collectively the “Company”) provide a broad range of research and development and consulting services in the development and discovery sciences segments. In the development segment, the Company provides services, which include preclinical programs and Phase I to Phase IV clinical development. In addition, for drugs that have received approval for market use, the Company also offers post-market support services such as product launch services, patient compliance programs, disease registry programs and medical communications programs for consumer and healthcare providers on product use and adverse events. The discovery sciences services include preclinical evaluations of anticancer therapies and compound partnering arrangements associated with the development and commercialization of potential drug products. The Company provides services to clients in the pharmaceutical, biotechnology and medical device industries and to the United States government and other industries. The Company markets its development services primarily in the United States and Europe. The Company’s discovery sciences revenues have all been generated in the United States.

Principles of Consolidation

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

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. Revised Statement No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted the disclosure requirements of this statement.

In December 2003, the FASB issued revised FIN 46, “Consolidation of Variable Interest Entities”. This revised interpretation is effective for all entities as of the first reporting period that ends after March 15, 2004. The Company has no investment in or contractual or other business relationship with a variable interest entity and, therefore, the adoption of this interpretation did not have any impact on its consolidated financial position or results of operations.

In November 2003, during discussions on Emerging Issues Task Force, or EITF, 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the EITF reached a consensus that requires quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In September 2004, FASB Staff Position EITF Issue 03-1-1 was issued to delay the effective date for the measurement and recognition guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The Company has adopted the disclosure requirements of EITF 03-01. Such adoption did not have a material impact on the Company’s financial position or results of operations.

In October 2004, the EITF finalized its consensuses on EITF 04-01, “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The consensuses in EITF 04-01 provide guidance on how to account for the settlement of a preexisting relationship and how it affects the accounting of the business combination. EITF 04-01 is effective for business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The adoption of this statement did not have a material impact on the Company’s financial statements.

F-7

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Recent Accounting Pronouncements (continued)

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the fair value on the date of grant of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123 (Revised) is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of the adoption of this statement on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29”. SFAS No. 153 replaces the exception from fair value measurement included in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe adoption of this statement will have a material impact on the Company’s financial statements.

Revenue Recognition

The Company records revenue from fixed-price contracts on a proportional performance basis in its Development Group. To measure performance on a given date, the Company compares direct costs incurred through that date to estimated total contract direct costs. The Company believes this is the best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized. For time-and-material contracts in both Development Group and Discovery Sciences Group, the Company recognizes revenues as hours are worked, multiplied by the applicable hourly rate. For the Company’s Phase I and laboratory businesses, the Company recognizes revenues from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price.

In connection with the management of multi-site clinical trials, the Company pays, on behalf of its customers, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. The clients reimburse the Company for these costs. As required by EITF 01-14, amounts paid by the Company as a principal for out-of-pocket costs are included in direct costs as reimbursable out-of-pocket expenses and the reimbursements the Company receives as a principal are reported as reimbursed out-of-pocket revenue. In the statements of operations, the Company combines amounts paid by the Company as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, the Company receives as an agent. During the years ended December 31, 2002, 2003 and 2004, fees paid to investigators and other fees the Company paid as an agent and the associated reimbursements were approximately $157.5 million, $172.5 million and $226.9 million, respectively.

Most of the contracts for the Development Group can be terminated by the Company’s clients either immediately or after a specified period following notice by the client. These contracts typically require payment to the Company of expenses to wind down a study, fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that the Company could have been earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation does not generally require a significant adjustment upon cancellation. If the Company determines that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made.

F-8

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Revenue Recognition (continued)

The Discovery Sciences Group also generates revenue from time to time in the form of milestone payments in connection with licensing of compounds. Milestone payments are only recognized as revenue if the specified milestone is achieved and accepted by the customer, payment is received and continued performance of future research and development services related to that milestone are not required.

Cash and Cash Equivalents

Cash and cash equivalents consist of unrestricted cash accounts that are not subject to withdrawal restrictions or penalties and all highly liquid investments rated A or better by Standard & Poor’s or Moody’s and that have a maturity of three months or less at the date of purchase.

Supplemental cash flow information consisted of the following:

	Year Ended December 31,
(in thousands)	2002		2003		2004
Cash paid for interest	$	734	$	784	$	527
Cash paid for income taxes, net	$	36,314	$	44,950	$	45,743

Payables to Investigators and Investigator Advances

Billings and payments to investigators are based on predetermined contractual agreements that can differ from the accrual of the related costs. Investigator costs are recognized based upon the status of the work completed as a percentage of the total procedures required under the contract or based on patient enrollment over the term of the contract. Payments made in excess of the accrued costs are classified as investigator advances and accrued costs in excess of amounts paid are classified as payables to investigators in the consolidated balance sheets.

Inventory

Inventories, which consist principally of laboratory supplies, are valued at the lower of cost (first-in, first-out method) or market. Inventories totaling $2.0 million and $2.2 million as of December 31, 2003 and 2004, respectively, were included in prepaid expenses and other current assets.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method, based on estimated useful lives of 40 to 50 years for buildings, five years for laboratory equipment, two to five years for software, computers and related equipment and five to ten years for furniture and equipment, except for the airplanes which are being depreciated over 30 years. Leasehold improvements are depreciated over the shorter of the respective lives of the leases or the useful lives of the improvements. Property under capital leases is depreciated over the life of the lease or the service life, whichever is shorter.

Internal Use Software

The Company accounts for internal use software in accordance with the provisions of AICPA Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, which requires certain direct costs and interest costs that are incurred during the application stage of development to be capitalized and amortized over the useful life of the software.

F-9

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Goodwill

The excess of the purchase price of a business acquired over the fair value of net tangible assets, identifiable intangible assets and acquired in-process research and development costs at the date of the acquisition has been assigned to goodwill. In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, goodwill is evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired.

Realizability of Carrying Value of Long-Lived Assets

The Company reviews the recoverability of long-lived and finite-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate an impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. No impairments of long-lived assets were recorded in 2002 and 2003. In 2004, the Company recorded an impairment of property and equipment of approximately $0.5 million related to the restructuring charge associated with exiting the chemistry facility in Research Triangle Park, North Carolina.

Short-term Investments

The Company has short-term investments in Auction Rate Securities, or ARS. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. The Company’s short-term investments are classified as available-for-sale securities due to management’s intent regarding these securities. As of December 31, 2003 and 2004, there were no unrealized gains or losses associated with these investments and the adjusted fair market value equaled the adjusted cost. ARS, totaling $49.4 million as of December 31, 2003 which were previously recorded as cash and cash equivalents due to their liquidity and pricing reset feature, have been included in short-term investments in the accompanying financial statements. Prior period information was reclassified to conform to the current year presentation. This change in classification had no effect on total current assets, total assets, net income or cash flows from operating activities of the Company.

Investments

The Company has equity investments in publicly traded entities. Investments in publicly traded entities are classified as available-for-sale securities and are measured at market value. The Company records net unrealized gains or losses associated with investments in publicly traded entities as a component of shareholders’ equity until they are realized or an other-than-temporary decline has occurred. The market value of the Company’s equity investments in publicly traded entities is based on the closing price as quoted by the applicable stock exchange or association at the end of the reporting period. As of December 31, 2004, gross unrealized gains were $1.6 million and gross unrealized losses were $0. As of December 31, 2003, there were no unrealized gains or losses. The Company’s equity investments are classified as long-term assets due to management’s intent to hold these securities for more than 12 months.

F-10

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Investments (continued)

The Company also has investments in privately held entities in the form of equity and convertible debt instruments that are not publicly traded and for which fair values are not readily determinable. The Company records all of its investments in private entities under the cost method of accounting. The Company assesses the net realizable value of these entities on a quarterly basis to determine if there has been a decline in the fair value of these entities, and if so, if the decline is other than temporary. This quarterly review includes an evaluation of, among other things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events. The Company’s investments consist of equity investments in private entities for which fair values are not readily determinable. The Company assesses its investment portfolio on a quarterly basis for impairment; however for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment.

Unbilled Services and Unearned Income

In general, prerequisites for billings are established by contractual provisions, including predetermined payment schedules, the achievement of contract milestones or submission of appropriate billing detail. Unbilled services arise when services have been rendered but clients have not been billed. Conversely, unearned income represents amounts billed in excess of revenue recognized.

Income Taxes

Income taxes are computed using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactment of changes in tax law or rates. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recorded.

Concentration of Credit Risk

Statement of Financial Accounting Standards No. 105, “Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk”, requires disclosure of information about financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk. Financial instruments that subject the Company to concentrations of credit risk consist principally of accounts receivable and cash equivalents.

The Company’s clients are primarily pharmaceutical and biotechnology companies. No single client accounted for more than 10% of the Company’s net revenue in 2002, 2003 or 2004. Concentrations of credit risk with respect to accounts receivable are limited to a degree due to the large number of clients comprising the Company’s client base. The Company performs ongoing credit evaluations of clients’ financial condition and, generally, does not require collateral. The Company maintains reserves for potential credit losses and these losses, in the aggregate, have historically not exceeded estimates.

The Company’s cash equivalents consist principally of commercial paper. Bank deposits exceed the FDIC insurance limit. Based on the nature of the financial instruments and/or historical realization of these financial instruments, the Company believes they bear minimal credit risk.

F-11

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Comprehensive Income

The Company has elected to present comprehensive income and its components in the Statements of Shareholders’ Equity. The components of comprehensive income (loss) are net income and all other non-owner changes in equity.

The balances in accumulated other comprehensive (loss) income were as follows:

	December 31,
(in thousands)	2003			2004
Translation adjustment	$	8,698		$	14,903
Minimum pension liability, net of tax		(6,220	)		(5,753	)
Fair value of hedging transaction, net of tax		—			413
Unrealized loss on investment		—			1,616
Total	$	2,478		$	11,179

Foreign Currency Translations and Transactions

Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange at each reporting date. Income and expenses are translated at the average rates of exchange prevailing during the month in which a transaction occurs. Gains or losses from translating foreign currency financial statements are recorded in other comprehensive income. The cumulative translation adjustment included in other comprehensive income for the years ended December 31, 2002, 2003 and 2004 totaled $4.9 million, $9.7 million and $6.2 million, respectively. Foreign currency transaction gains and losses are not material and are included in other income, net.

Earnings Per Share

The computation of basic income per share information is based on the weighted average number of common shares outstanding during the year. The computation of diluted income per share information is based on the weighted average number of common shares outstanding during the year plus the effects of any dilutive common stock equivalents. Excluded from the calculation of earnings per diluted share were 387,999; 743,715 and 252,546 shares during 2002, 2003 and 2004, respectively, because they were antidilutive.

Stock-Based Compensation

The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), which states that, for fixed plans, no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company’s common stock on the grant date. If stock options are granted with an exercise price below the estimated fair value of the Company’s common stock at the grant date, the difference between the fair value of the Company’s common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense over the vesting period of the stock option.

F-12

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Stock-Based Compensation (continued)

The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123”, which requires compensation expense to be disclosed in the notes based on the fair value of the options granted at the date of the grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method required by SFAS No. 123, the Company’s net income and diluted net income per common share would have been the pro forma amounts indicated below.

	Year Ended December 31,
(in thousands, except per share data)	2002			2003			2004
Net income, as reported	$	39,897		$	46,310		$	98,888
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6,216	)		(4,900	)		(7,204	)
Pro forma net income	$	33,681		$	41,410		$	91,684
Net income per share:
Basic – as reported	$	0.73		$	0.83		$	1.75
Basic – pro forma	$	0.62		$	0.74		$	1.63
Diluted – as reported	$	0.72		$	0.82		$	1.74
Diluted – pro forma	$	0.61		$	0.74		$	1.61

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year Ended December 31,
	2002		2003		2004
Weighted-average fair value of options granted	$	13.53	$	9.96	$	15.72
Expected lives (years)		5.00		5.00		5.00
Dividend yield (%)		0.00		0.00		0.00
Risk-free interest rate (%)		2.78		3.25		3.63
Expected volatility (%)		57.47		41.22		53.99

All options granted during the years ended December 31, 2002, 2003 and 2004 were granted with an exercise price equal to the fair value of the Company’s common stock at the grant date. The estimated pro forma amounts include the compensation cost for the Company’s Employee Stock Purchase Plan based on the fair value of the contributions made under this plan, consistent with the method of SFAS No. 123.

Advertising Costs

Advertising costs are charged to operations as incurred. Advertising costs were approximately $1.0 million, $0.9 million and $0.8 million for the years ended December 31, 2002, 2003 and 2004, respectively.

F-13

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

1. Summary of Operations and Significant Accounting Policies (continued):

Research and Development Costs

Research and development costs are charged to operations as incurred. Research and development costs are listed as a separate line item on the Company’s consolidated statements of operations. In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company for $65.0 million the patents for the compound dapoxetine. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine is still in development and has not been approved for sale in any country.

Restructuring Charges and Gain on Sale of Assets

In 2004, the Company recorded a $2.6 million restructuring charge associated with exiting the Company’s chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on sale of assets used in the chemistry services of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease which will end in 2015. During 2004, lease payments and termination costs of $1.4 million were paid. At December 31, 2004, the Company had recorded the remaining restructuring liability of $1.2 million, including deferred rent of approximately $0.5 million, in the consolidated balance sheet as a component of other accrued expenses and deferred rent and other. During 2004, the loss on sale of assets was a non-cash item and was charged to expense during the year.

In July 2003, the Company announced the restructuring of its Discovery Sciences segment. In connection with this restructuring, the Company consolidated its Discovery Sciences operations into its Morrisville, North Carolina and Middleton, Wisconsin facilities, and discontinued offering functional genomics services in Menlo Park, California. In the third quarter, the Company incurred, recorded and paid a charge to earnings of 2003 of $1.9 million for this restructuring. Restructuring charges included $0.9 million for one-time termination benefits, $0.7 million for facility charges and $0.3 million for other related charges.

As a part of the 2003 restructuring, the Company purchased 4.4 million shares of SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash and $12.0 million in tangible assets and intellectual property from the Company’s Menlo Park operations. The value of the tangible assets and intellectual property was based on an independent appraisal. The Company recorded a gain on sale of assets of $5.7 million as a result of this transaction. The majority of the remaining tangible assets of the restructured operations were transferred to the CRO Phase II through IV division and the remaining Discovery Sciences operations.

Reclassifications

The Company has reclassified certain 2002 and 2003 financial statement amounts to conform to the 2004 financial statement presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-14

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

2. Acquisitions:

In February 2002, the Company acquired 100% of the outstanding common stock of Medical Research Laboratories International, Inc., or MRL U.S., and Medical Research Laboratories International, BVBA, or MRL Belgium, collectively, MRL. MRL is part of the Development segment of the Company. MRL U.S. operates a specialty central laboratory in Highland Heights, Kentucky, near Cincinnati, Ohio and MRL Belgium operates a central laboratory in Brussels, Belgium. MRL provides highly standardized efficacy and safety testing services for pharmaceutical companies engaged in clinical drug development and is one of the largest central laboratory providers for Phase I-IV global studies involving agents used in cholesterol, endocrine, metabolic and cardiovascular clinical research. The results of operations are included in the Company’s consolidated results of operations as of and since February 19, 2002, the effective date of the acquisition. The Company acquired MRL for total consideration of $113.1 million, including $39.0 million in cash, $73.5 million in the Company’s common stock (then approximately 2.6 million unregistered shares) and direct acquisition costs of $0.6 million for legal, appraisal and accounting fees.

In April 2002, the Company acquired Piedmont Research Center II, Inc, or PRC, a cancer research laboratory based in Morrisville, North Carolina that performs preclinical evaluations of anti-cancer therapies. The research facility serves national and international pharmaceutical and biotechnology companies. PRC is part of the Discovery Sciences segment of the Company. The results of operations are included in the Company’s consolidated results of operations as of and since April 1, 2002, the effective date of the acquisition. The Company acquired PRC for total consideration of $19.6 million, including $2.4 million in cash, $17.1 million in the Company’s common stock (then 0.5 million unregistered shares) and direct acquisition costs of $0.1 million for legal and accounting fees.

In June 2002, the Company acquired Complete Software Solutions, Inc., or CSS, a technical consulting firm offering implementation, validation and training services as well as specialized software for pharmaceutical and biotechnology industries. CSS is part of the Development segment of the Company. The results of operations are included in the Company’s consolidated results of operations as of and since June 12, 2002, the effective date of the acquisition. The Company acquired CSS for total consideration of $16.8 million in cash.

In June 2002, the Company acquired ProPharma Pte Ltd, an Asian-based clinical research organization with experience in managing pan-Asian clinical trials. ProPharma is part of the Development segment of the Company. The results of operations are included in the Company’s consolidated results of operations as of and since June 27, 2002, the effective date of the acquisition. The Company acquired ProPharma for total consideration of $3.0 million in cash. In addition, the Company paid $1.4 million as additional purchase price in the second quarter of 2003. This additional and final purchase price payment was based on the financial performance of ProPharma for the twelve-month period ended March 31, 2003.

In July 2003, the Company acquired Eminent Research Systems, Inc., a clinical research organization specializing in medical device development, and Clinsights, Inc., a company affiliated with Eminent through common ownership that provides a range of post-market services to medical device and related pharmaceutical companies and operates proprietary web sites for the dissemination of medical information, online research and product marketing. As a result, Eminent and Clinsights are now part of the Development segment of the Company. Their results of operations are included in the Company’s consolidated results of operations as of and since July 18, 2003, the effective date of the acquisitions. The Company acquired Eminent and Clinsights for total consideration of $23.5 million in cash. Under the terms of the merger agreement, the original aggregate purchase price of $25.0 million was reduced by $1.5 million in the first quarter of 2004 as a result of an adjustment to the purchase price based on Eminent’s closing balance sheet.

These acquisitions were accounted for using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on the estimated fair values of the assets and liabilities. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated balance sheet as of the effective date of the acquisitions.

F-15

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

2. Acquisitions (continued):

The total purchase price for the 2003 acquisitions was allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

(in thousands)	Eminent			Clinsights			Total
Condensed balance sheet:
Current assets	$	677		$	1,346		$	2,023
Property and equipment, net		436			226			662
Non-current assets		32			25			57
Deferred tax asset		1,184			1,093			2,277
Current liabilities		(4,946	)		(732	)		(5,678	)
Value of intangible assets:
Backlog and customer relationship		383			250			633
Goodwill		14,541			9,042			23,583
Total	$	12,307		$	11,250		$	23,557

Purchase price allocations have been finalized for these acquisitions. Goodwill related to Eminent and Clinsights is not expected to be deductible for tax purposes.

The unaudited pro forma results from operations for the Company assuming the 2002 and 2003 acquisitions were consummated as of January 1, 2002 and 2003 were as follows:

	Year Ended December 31,
(in thousands, except per share data)	2002		2003
Total revenue	$	624,772	$	729,741
Net income	$	41,008	$	44,961
Net income per share:
Basic	$	0.75	$	0.81
Diluted	$	0.74	$	0.80

The above amounts are based upon certain assumptions and estimates. The Company believes these assumptions and estimates are reasonable, but they do not reflect any benefit from economies that might be achieved from combined operations. Pro forma adjustments were made to interest income and income tax, decreasing net income by $583,000 and $574,000 for the twelve-month periods ended December 31, 2002 and 2003, respectively. These adjustments are reflected in the above table. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the period indicated or of future results of operations of the combined companies.

3. Accounts Receivable and Unbilled Services:

Accounts receivable and unbilled services consisted of the following:

	December 31,
(in thousands)	2003			2004
Trade:
Billed	$	151,525		$	183,765
Unbilled		97,134			85,404
Reserve for doubtful accounts		(2,959	)		(4,102	)
	$	245,700		$	265,067

F-16

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

3. Accounts Receivable and Unbilled Services (continued):

The Company had 21.2% and 23.1% of its accounts receivable and unbilled services in locations outside the United States as of December 31, 2003 and 2004, respectively. Operations in the United Kingdom comprised 75.7% and 81.0% of this balance as of December 31, 2003 and 2004, respectively.

Change in reserve for doubtful accounts consisted of the following:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Balance at beginning of year	$	2,881		$	3,621		$	2,959
Additions charged to costs and expenses		342			284			1,188
Deductions		(402	)		(1,283	)		(45	)
Acquisitions		800			337			—
Balance at end of year	$	3,621		$	2,959		$	4,102

4. Property and Equipment:

Property and equipment, stated at cost, consisted of the following:

	December 31,
(in thousands)	2003			2004
Land	$	2,322		$	7,392
Buildings and leasehold improvements		41,482			45,493
Construction in progress		12,939			21,649
Furniture and equipment		95,280			99,778
Computer equipment and software		65,116			86,367
		217,139			260,679
Less accumulated depreciation and amortization		(104,996	)		(124,178	)
	$	112,143		$	136,501

Property and equipment under capital leases, stated at cost, consisted of the following:

(in thousands)	December 31, 2003
Buildings and leasehold improvements	$	1,577
Computer equipment and software		3,318
		4,895
Less accumulated depreciation and amortization		(3,827	)
	$	1,068

As of December 31, 2004, the Company no longer had any property or equipment under capital leases.

F-17

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

5. Goodwill and Intangible Assets:

Changes in the carrying amount of goodwill for the twelve months ended December 31, 2003 and 2004, by operating segment, were as follows:

(in thousands)	Development			Discovery		Total
Balance as of January 1, 2003	$	126,936		$	20,472	$	147,408
Goodwill recorded during the period for prior year acquisitions		1,550			143		1,693
Goodwill recorded during the period for current year acquisitions		24,282			—		24,282
Translation adjustments		4,693			—		4,693
Balance as of December 31, 2003		157,461			20,615		178,076
Change in goodwill recorded during the period for prior year acquisitions (finalization of purchase price adjustments)		(699	)		—		(699	)
Translation adjustments		2,404			—		2,404
Balance as of December 31, 2004	$	159,166		$	20,615	$	179,781

Information regarding the Company’s other intangible assets follows:

	As of December 31, 2003						As of December 31, 2004
(in thousands)	Carrying Amount		Accumulated Amortization		Net		Carrying Amount		Accumulated Amortization		Net
Backlog and customer relationship	$	2,100	$	1,969	$	131	$	2,733	$	2,381	$	352
Patents		280		236		44		280		271		9
License and royalty agreements		2,500		668		1,832		5,000		1,466		3,534
Total	$	4,880	$	2,873	$	2,007	$	8,013	$	4,118	$	3,895

The Company amortizes all intangible assets on a straight-line basis, based on estimated useful lives of two to five years for backlog and customer relationship, five years for patents and three to ten years for license and royalty agreements. The weighted average amortization period for backlog is 2.1 years, patents is 5.0 years, license and royalty agreements is approximately 5.1 years and all intangibles collectively is approximately 3.4 years.

Amortization expense for the twelve months ended December 31, 2002, 2003 and 2004 was $1.0 million, $1.6 million and $1.2 million, respectively. Estimated amortization expense for the next five years is as follows:

(in thousands)
2005	$	1,113
2006		606
2007		369
2008		335
2009		299

F-18

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

6. Short-term Investments and Investments:

Short-term investments, which are composed of available-for-sale securities, and Investments consisted of the following:

	December 31,
(in thousands)	2003		2004
Short-term investments:
Preferred stock	$	19,725	$	48,225
State and municipal securities		29,700		51,850
Other debt securities		—		4,945
Total short-term investments	$	49,425	$	105,020
Cost basis investments:
Investment in Surromed, Inc.	$	29,007	$	29,007
Investment in Syrrx, Inc.		25,000		25,000
Investment in Accentia Biopharmaceuticals, Inc.		—		4,771
Investment in Spotlight Health, Inc.		1,230		1,230
Investment in Oriel Therapeutics, Inc.		900		1,800
Investment in Chemokine Therapeutics Corp.		2,700		—
Other equity investments		250		250
Total cost basis investments		59,087		62,058
Marketable equity securities:
Investment in BioDelivery Sciences International, Inc.		2,284		2,850
Investment in Chemokine Therapeutics Corp.		—		1,750
Total marketable equity securities		2,284		4,600
Total investments	$	61,371	$	66,658

The gross realized gains on available-for-sale securities were $31,000 in 2002, $0.6 million in 2003 and $0.6 million in 2004 determined on a specific identification basis.

The Company’s available-for-sale securities are composed of ARS. ARS generally have long-term stated maturities; the issuer is not required to redeem the security until 20 to 30 years after issuance. These securities, however, have certain economic characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate the security without incurring losses from changes in market value. The estimated fair value of available-for-sale securities, excluding the preferred stock, at December 31, 2004, by contractual maturity, were as follows:

(in thousands)
Due in 1 year or less	$	5,945
Due in 1-5 years		1,800
Due in 5-10 years		3,000
Due after 10 years		46,050
	$	56,795

F-19

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

6. Short-term Investments and Investments (continued):

The Company assesses its investment portfolio on a quarterly basis to determine whether declines in the market value of marketable securities or the net realizable value of cost basis investments are other than temporary. This quarterly review includes an evaluation of, among other things, the market condition of the overall industry of the investee, historical and projected financial performance, expected cash needs and recent funding events.

During 2004, the Company recorded a charge to earnings of $2.0 million for an other than temporary decline in the fair market value of its investment in Chemokine Therapeutics Corp. The write-down of Chemokine was recorded based primarily on its individual historical and projected financial performance and completed or anticipated issuances of shares to new investors at lower valuations than the Company’s recorded value.

During 2003, the Company recorded charges to earnings for other than temporary declines in the fair market value of its investment in BioDelivery Sciences International of $1.4 million, Spotlight Health, Inc. of $3.9 million, SLIL Biomedical Corp. of $4.7 million and Signature Bioscience, Inc. (formerly Primecyte, Inc.) of $0.2 million. The write-down of BioDelivery Sciences was based on a decrease in the publicly quoted market price that management believes was other-than-temporary due to the uncertainty of BioDelivery Sciences’ strategic direction. The write-down of the Company’s investment in Spotlight Health was recorded based primarily on its historical and projected financial performance and the issuance of shares to a new investor at a lower valuation. SLIL and Primecyte were deemed to be impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies.

During 2002, the Company recorded a charge to earnings for other than temporary declines in the fair market value of its investments in DNA Sciences of approximately $32.0 million, Gallery Systems of $1.5 million and Intrabiotics Pharmaceuticals of approximately $0.3 million. The investment in DNA Sciences was deemed to be impaired as a result of adverse events experienced by DNA Sciences during the first quarter of 2002. Gallery Systems and Intrabiotics Pharmaceuticals were deemed to be impaired primarily as a result of the market condition of their respective industries, historical and projected performance and expected cash needs of the individual companies.

In September 2003, the Company purchased 4.4 million shares of SurroMed, Inc. Series F convertible preferred stock in exchange for $12.0 million in cash and $12.0 million in tangible assets and intellectual property from the Company’s Menlo Park, California operation. Including the 1.0 million shares of SurroMed’s Series E convertible preferred stock that the Company purchased in April 2002 for $5.0 million, the Company owned approximately 13.6% of SurroMed’s outstanding capital stock as of December 31, 2004. SurroMed is a privately held company that provides biomarker solutions to pharmaceutical and biotechnology companies using proprietary, integrated bioanalysis technologies that detect biological markers and compounds to enable precise diagnosis and personalized treatment of disease. In addition to its biomarker business, SurroMed is developing a protein therapeutic and various nano-technologies for life science and other applications. In February 2005, the Company acquired substantially all of SurroMed, Inc.’s assets related to its biomarker business. Under the terms of the purchase agreement, in exchange for the assets of SurroMed’s biomarker business, the Company surrendered for cancellation its shares of SurroMed preferred stock. For additional discussion regarding the acquisition, see Note 19.

F-20

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

6. Short-term Investments and Investments (continued):

In November 2003, the Company purchased 4.8 million shares of Syrrx, Inc. Series F convertible preferred stock in exchange for $25.0 million. The Company owned approximately 12.1% of Syrrx’s outstanding capital stock as of December 31, 2004. The Company signed an agreement to jointly develop and commercialize Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. The Company will provide preclinical and clinical development resources and expertise for the collaboration and will fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. In addition, the Company will make milestone payments to Syrrx upon the occurrence of certain clinical and regulatory events. Syrrx is a privately held drug discovery company with a focus on drug targets that have been validated in human clinical trials. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. The Company owns $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, the Company does not anticipate realizing a loss on this investment.

In January 2004, the Company purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. The Company owned approximately 6.9% of the outstanding capital stock of Accentia as of December 31, 2004. Accentia’s Series E convertible preferred stock pays a dividend based on a percentage of net sales of certain Accentia products. The Company received dividends in excess of Accentia’s earnings in 2004 and thus recorded these as a reduction of cost of the investment in Accentia. The Company also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In January 2005, the Company exercised the Class A warrant for the purchase of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. The Class B warrant will expire on the earlier of January 7, 2006 or the effective date of a registration statement for the public sale of Accentia common stock in a qualifying initial public offering. Accentia is a privately-held, specialty biopharmaceutical company that focuses on commercializing targeted therapeutics in the respiratory, oncology and critical care areas. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of its common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to the Company upon conversion of 5.0 million shares of the Series E convertible preferred stock held by the Company.

In April 2000, the Company purchased 1.0 million shares of Spotlight Health Series C convertible preferred stock for $5.0 million. As of December 31, 2004, the Company owned approximately 5.4% of Spotlight’s outstanding capital stock. The Company entered into an agreement with Spotlight Health and Bank of America, N.A. to guarantee a $2.0 million revolving line of credit provided to Spotlight Health by Bank of America. As of December 31, 2004, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies” and as clarified by FASB Interpretation No. 45, the Company has recorded in 2003 a liability in the amount of $0.2 million for the fair value of the obligation the Company has assumed under this guarantee. The Company reviews the financial statements of Spotlight Health on a quarterly basis to determine if they have sufficient financial resources to continue operations.

Future events and circumstances might adversely affect Spotlight Health’s financial condition and Spotlight Health might not be in the position to repay the facility, in which case Bank of America might attempt to collect against the Company on this guaranty.

F-21

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

6. Short-term Investments and Investments (continued):

In December 2002, the Company purchased 150,000 shares of Oriel Therapeutics, Inc. Series A convertible preferred stock for $150,000. The Company also received, as part of the purchase, a warrant to purchase an equal number of shares of stock offered by Oriel Therapeutics in its next round of financing at a discount. In April 2003, the Company exercised these warrants to purchase 150,000 shares of Oriel Therapeutics Series B convertible preferred stock for $200,000. At the same time, the Company also purchased an additional 255,000 shares of Oriel’s Series B convertible preferred stock for $500,000. In March 2004, the Company loaned Oriel $900,000 in the form of debt that is convertible into Oriel Therapeutics’ Series B preferred stock at $2.00 per share. The loan is secured by a first lien on Oriel’s assets. The Company owned approximately 13.5% in Oriel Therapeutics’ outstanding common stock as of December 31, 2004. Oriel is a privately held company pursuing the development of technology to improve drug delivery in the treatment of respiratory and pulmonary diseases.

In April 2003, the Company purchased 2.0 million shares of Chemokine Therapeutics Corp. Series A convertible preferred stock for $2.7 million, which represented approximately a 6.4% interest in the outstanding stock of Chemokine as of December 31, 2004. In December 2004, Chemokine completed an initial public offering, IPO, of its common stock in Canada. Chemokine’s common stock trades publicly on the Toronto Stock Exchange. In connection with the IPO, the Company received warrants to purchase 500,000 shares of common stock at the IPO price. These warrants will expire in December 2007. Chemokine focuses on the development of peptide and small molecule therapeutics that are agonists or antagonists of chemokine activity. Chemokines are small proteins that recruit cells to local sites of infection and might be useful as either blood recovery or anti-metastasis agents.

In June 2002, the Company purchased approximately 0.7 million units of BioDelivery Sciences International, Inc. for $3.6 million. Each unit consisted of one share of common stock and one warrant for common stock. The Company’s ownership of common stock of BioDelivery Sciences International represented an ownership interest of approximately 9.7% in BioDelivery Sciences International’s outstanding common stock as of December 31, 2004. BioDelivery Sciences International is a publicly traded company that is developing and seeking to commercialize a drug delivery technology designed for a potentially broad base of pharmaceuticals, vaccines and over-the-counter drugs.

7. Other Accrued Expenses:

Other accrued expenses consisted of the following:

	December 31,
(in thousands)	2003		2004
Accrued salaries, wages, benefits and related costs	$	44,603	$	59,170
Other		19,146		42,544
	$	63,749	$	101,714

8. Long-Term Debt, Line of Credit and Lease Obligations:

Long-Term Debt

Long-term debt consisted of the following:

	December 31,
(in thousands)	2003			2004
Capital leases at interest rates up to 10.4%	$	836		$	—
Fair value of guarantee		200			200
Note at interest rate of 5.26%		6,626			6,770
		7,662			6,970
Less: current maturities		(1,381	)		(599	)
	$	6,281		$	6,371

F-22

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

8. Long-Term Debt, Line of Credit and Lease Obligations (continued):

Long-Term Debt (continued)

The Company assumed a note payable in the acquisition of MRL Belgium. This note relates to the laboratory building in Brussels, Belgium that the Company owns as a result of that acquisition. This note matures during April 2017. For the years subsequent to December 31, 2004, annual principal maturities of long-term debt outstanding are as follows:

(in thousands)
2005	$	399
2006		421
2007		444
2008		468
2009 and thereafter		5,038
Total	$	6,770

Line of Credit

In July 2004, the Company renewed its $50.0 million revolving credit facility with Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. Borrowings under this credit facility are available to provide working capital and for general corporate purposes. As of December 31, 2004, there was no amount outstanding under this credit facility. However, the aggregate amount the Company is able to borrow has been reduced by $0.8 million due to outstanding letters of credit issued under this facility. This credit facility is currently scheduled to expire in June 2005, at which time any outstanding balance would be due.

Lease Obligations

The Company is obligated under noncancellable operating leases expiring at various dates through 2019 relating to its operating facilities and certain equipment. Rental expense for all operating leases, net of sublease income of $0.8 million, $1.0 million and $2.1 million, was $25.8 million, $28.8 million and $30.3 million for the years ended December 31, 2002, 2003 and 2004, respectively.

The Company completed a sale-leaseback transaction involving real estate in Austin, Texas, in November 1995. Total gross proceeds in the transaction were $12.0 million, resulting in a pre-tax gain of approximately $2.1 million. The gain, which has been deferred, is classified as deferred rent and other in the accompanying consolidated balance sheets and is being amortized as a reduction of rent expense on a straight-line basis over the 15-year lease term. The facilities are leased to the Company with all responsibility of operations and maintenance residing with the Company.

Certain facility leases provide for concessions by the landlords, including payments for leasehold improvements and free rent periods. These concessions have been reflected as deferred rent and other in the accompanying consolidated financial statements. The Company is recording rent expense on a straight-line basis for these leases.

F-23

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

8. Long-Term Debt, Line of Credit and Lease Obligations (continued):

Lease Obligations (continued)

Future minimum payments for all lease obligations for years subsequent to December 31, 2004 are as follows:

(in thousands)	Operating leases
2005	$	33,633
2006		30,640
2007		25,364
2008		24,174
2009		22,455
2010 and thereafter		81,287
		217,553
Less: sublease income		(26,325	)
	$	191,228

9. Accounting for Derivative Instruments and Hedging Activities

In January 2004, the Company entering into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. Changes in the fair value of the effective portion of these outstanding forward and option contracts are recognized in accumulated other comprehensive income, or OCI. These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur.

Changes in the ineffective portion of a derivative instrument are recognized in earnings in the current period. Effectiveness for forward cash flow hedge contracts is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. The fair market value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. Ineffectiveness in 2004 was not significant.

The Company has significant international revenues and purchase transactions and related receivables and payables denominated in non-functional currencies at the Company’s foreign subsidiaries. As a result, the Company purchased currency option and forward contracts as cash flow hedges to reduce or eliminate certain foreign currency exposures that can be identified and quantified. Pursuant to its foreign exchange risk hedging policy, the Company may hedge anticipated and recorded transactions and the related receivables and payables denominated in non-functional currencies using forward foreign exchange rate contracts and foreign currency options. Foreign currency derivatives are used only to meet the Company’s objective of minimizing the variability in the Company’s operating results arising from foreign currency exchange rate movements. The Company does not enter into derivative financial instruments for speculative or trading purposes. Hedging contracts are measured at fair value using dealer quotes and mature within twelve-months from their inception.

The Company’s hedging contracts are primarily intended to protect against the impact of changes in the value of the U.S. dollar against other currencies and its impact on operating results. Accordingly, for forecasted transactions, non-U.S. dollar functional subsidiaries incurring expenses in foreign currencies hedge U.S. dollar revenue contracts. OCI associated with hedges of foreign currency revenue is reclassified into revenue upon recognition of the forecasted transaction in the statement of operations. All values reported in OCI at December 31, 2004 will be reclassified to earnings within twelve-months. At December 31, 2004, the face amount of the foreign exchange contracts designated as cash flow hedges was $21.0 million.

F-24

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

9. Accounting for Derivative Instruments and Hedging Activities (continued):

The Company also enters into foreign currency forward contracts to hedge against changes in the fair value of monetary assets and liabilities denominated in a non-functional currency. These derivative instruments are not designated as hedging instruments; therefore, changes in the fair value of these contracts are recognized immediately in other income, net as an offset to the changes in the fair value of the monetary assets or liabilities being hedged. At December 31, 2004, the face amount of these contracts was $26.7 million.

At December 31, 2004, the fair value of the Company’s foreign currency derivative portfolio was $702,000 recorded as a component of prepaid expenses and other current assets and $59,000 recorded as a component of other accrued expenses.

10. Stock Plans:

Restricted Stock

In January 2001, the Company awarded 60,000 shares of restricted stock with a fair value of $1.4 million to members of the senior management team. This restricted stock was subject to three-year cliff vesting. Compensation was expensed on a straight-line basis over the three-year vesting period. During 2002, 15,000 shares with a value of $349,000 were forfeited due to terminations of employment prior to the expiration of the three-year cliff vesting period. All remaining shares vested in January 2004.

Equity Compensation Plan

The Company has an equity compensation plan (the “Plan”) under which the Company may grant stock options to its employees and directors. As of December 31, 2004, there were 3.9 million shares of common stock available for grant. The exercise price of each option granted is equal to the market price of the Company’s common stock on the date of grant and the maximum exercise term of each option granted does not exceed 10 years. Options are granted upon approval of the Compensation Committee of the Board of Directors and vest over various periods, as determined by the Compensation Committee at the date of the grant. The majority of the Company’s options vest ratably over a period of three or four years.

A summary of the status of the Plan at December 31, 2002, 2003 and 2004, and changes during the years, is presented below and includes common stock options of the Company:

	2002				2003				2004
(shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	2,253		$	13.94	2,458		$	18.22	2,503		$	21.31
Granted	710			28.89	651			28.71	2,323			39.99
Exercised	(291	)		11.55	(398	)		12.08	(376	)		18.40
Forfeited	(214	)		17.86	(208	)		26.47	(104	)		27.38
Outstanding at end of year	2,458		$	18.22	2,503		$	21.31	4,346		$	31.39
Options exercisable at end of year	1,403		$	12.83	1,501		$	16.51	1,620		$	19.75

F-25

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

10. Stock Plans (continued):

Equity Compensation Plan (continued)

The following table summarizes information about the Plan’s stock options at December 31, 2004:

(shares in thousands)	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/04	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at 12/31/04	Weighted Average Exercise Price
$  1.96 - $12.76	456	3.7 years	$	7.53	456	$	7.53
$12.77 - $21.26	346	4.8 years	$	16.69	341	$	16.64
$21.27 - $29.76	618	7.5 years	$	26.15	416	$	25.38
$29.77 - $38.27	1,110	8.5 years	$	30.79	407	$	30.27
$38.28 - $42.52	1,816	9.9 years	$	42.34	—	$	—
	4,346	8.1 years	$	31.39	1,620	$	19.75

Employee Stock Purchase Plan

The Board of Directors has reserved shares of the Company’s common stock for issuance under the Employee Stock Purchase Plan (the “ESPP”). As of December 31, 2004, there were 0.6 million shares of common stock available for issuance. The ESPP has two six-month offering periods (each an “Offering Period”) annually, beginning January 1 and July 1, respectively. Eligible employees can elect to make deductions from 1% to 15% of their compensation during each payroll period of an Offering Period. Special limitations apply to eligible employees who own 5% or more of the outstanding common stock of the Company. None of the contributions made by eligible employees to purchase the Company’s common stock under the ESPP are tax deductible to the employees. Beginning on July 1, 2005, at the end of an Offering Period, the total payroll deductions by an eligible employee for that Offering Period will be used to purchase common stock of the Company at a price equal to 95% of the reported closing price of the Company’s common stock on the last day of the offering period. Prior to July 1, 2005, the purchase price was 85% of the lesser of (a) the reported closing price of the Company’s common stock for the first day of the Offering Period, or (b) the reported closing price of the common stock for the last day of the Offering Period. Only 300,000 shares are available for purchase during each of the Offering Periods.

Employees eligible to participate in the ESPP include employees of the Company and most of its operating subsidiaries, except those employees who customarily work less than 20 hours per week or five months in a year. Because the eligible employee determines both participation in and contributions to the ESPP, it is not possible to determine the benefits and amounts that would be received by an eligible participant or group of participants in the future.

During 2004, $5.7 million was contributed to the ESPP and 229,000 shares were issued. The compensation costs for the ESPP as determined based on the fair value of the contributions under the ESPP, consistent with the method of SFAS No. 123, was $0.8 million, $0.8 million and $1.2 million and is reflected in the pro forma net income and basic and diluted net income per share for 2002, 2003 and 2004, respectively, as disclosed in Note 1.

F-26

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

11. Income Taxes:

The components of income before provision for income taxes were as follows:

	Year Ended December 31,
(in thousands)	2002		2003		2004
Domestic	$	57,288	$	50,632	$	125,817
Foreign		21,359		20,613		24,028
Income from continuing operations	$	78,647	$	71,245	$	149,845

The components of the provision for income taxes were as follows:

	Year Ended December 31,
(in thousands)	2002		2003			2004
State income taxes:
Current	$	3,914	$	7,364		$	4,837
Deferred		1,776		(4,925	)		2,347
Federal income taxes:
Current		23,579		40,531			28,595
Deferred		3,385		(22,808	)		11,201
Foreign income taxes:
Current		5,539		3,799			4,551
Deferred		452		974			(574	)
Provision for income taxes	$	38,645	$	24,935		$	50,957

Taxes computed at the statutory U.S. federal income tax rate of 35% are reconciled to the provision for income taxes as follows:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Effective tax rate		49.2	%		35.0	%		34.0	%
Statutory rate of 35%	$	27,526		$	24,936		$	52,446
State taxes, net of federal benefit		1,980			1,635			4,127
Nontaxable income net of nondeductible expenses		(318	)		(1,010	)		(2,214	)
Change in valuation allowance		11,063			1,166			(4,028	)
Impact of international operations		(901	)		(1,004	)		(989	)
Other		(705	)		(788	)		1,615
Provision for income taxes	$	38,645		$	24,935		$	50,957

Components of the current deferred tax asset were as follows:

	December 31,
(in thousands)	2003			2004
Future benefit of net operating losses	$	1,003		$	932
Reserve for doubtful accounts		1,316			1,806
Accrued expenses		4,236			6,447
Unearned income		6,400			2,239
Valuation allowance		(514	)		(557	)
Total current deferred tax asset	$	12,441		$	10,867

F-27

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

11. Income Taxes (continued):

The current deferred tax liability of $74,000 and $770,000 as of December 31, 2003 and 2004, respectively, relates to various expenses deducted for tax purposes, not book purposes.

Components of the long-term deferred tax asset were as follows:

	December 31,
(in thousands)	2003			2004
Other depreciation and amortization	$	(9,527	)	$	(14,326	)
Patent depreciation		25,641			20,485
Deferred rent		1,811			1,945
Deferred compensation		747			669
Investment basis differences		17,348			4,725
Capital loss carryforward		—			5,929
Valuation allowance		(12,430	)		(7,720	)
Future benefit of net operating losses		1,526			1,494
Other		(1,721	)		(827	)
Total long-term deferred tax asset	$	23,395		$	12,374

Components of the long-term deferred tax liability were as follows:

(in thousands)	2003			2004
Other depreciation and amortization	$	3,271		$	3,347
Pension		(2,958	)		(2,977	)
Total long-term deferred tax liability	$	313		$	370

The Company has recorded a deferred tax asset for foreign net operating losses that are subject to either five-year, fifteen-year or indefinite carryforward periods. Management has recorded a valuation allowance against these assets for amounts which it does not believe are more likely than not to be utilized.

The Company also recorded a deferred tax asset related to U.S. net operating losses received in an acquisition in 2003. Although the net operating losses are subject to annual limitation under IRC Section 382, management expects all losses to be utilized during the twenty-year carryforward period that is available. In addition, a deferred tax asset was established for capital losses recognized on the Company’s 2003 U.S. tax return and unrealized capital losses. The realized capital loss is eligible to be carried back two years and forward five years. Management has recorded a valuation allowance for the portion of the realized and unrealized capital losses that it does not believe are more likely than not to be utilized.

As of December 31, 2004, the Company had liabilities of $5.2 million for certain unsettled matters in connection with tax positions taken in the Company’s tax returns that include interpretations of applicable income tax laws and regulations. Such amounts are based on management’s expectation regarding the ultimate tax treatment and outcome of these matters. The Company believes it is unlikely that the resolution of these matters will have a material adverse effect on the Company’s financial position or results of operations.

The Company’s total valuation allowance relates to the foreign net operating losses and realized and unrealized capital losses. In 2003, the valuation allowance increased by $1.2 million as a result of a $1.3 million valuation allowance on capital loss carryforward assets, offset by a release of valuation allowance of $123,000 on the foreign operating loss carryforward assets. In 2004, the valuation allowance decreased by $4.7 million as a result of managements’ analysis of the capital loss carryforward assets utilized or expected to be utilized offset by a $43,000 increase in the valuation allowance on foreign operating loss carryforward assets. During 2004, $0.6 million of the $4.7 million change in valuation allowance was recorded as a component of accumulated other comprehensive income and is not reflected in the calculation of the Company’s effective tax rate.

F-28

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

11. Income Taxes (continued):

The Company records current and deferred income tax expense related to its foreign operations to the extent those earnings are taxable. Historically, no provision has been made for the additional taxes that would result from the distribution of earnings of foreign subsidiaries because those earnings were expected to be invested permanently. The American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. The Company has not previously recorded a U.S. tax liability on such revenues since we intended to permanently reinvest them in our foreign operations. No provision is being made in 2004 relating to this matter because the Company is currently evaluating the effect of the new Act on its plan for these previously undistributed foreign earnings. The Company expects to complete this evaluation by the end of June 2005. The cumulative amount of undistributed retained earnings of foreign subsidiaries for which no provision has been made was $29.7 million and $50.4 million as of December 31, 2003 and 2004, respectively. The income tax effect of repatriating these earnings is not estimable at this time.

12. Employee Savings and Pension Plans:

Savings Plan

The Company provides a 401(k) Retirement Savings Plan to its U.S. employees. The Company matches 50% of an employee’s savings up to 6% of pay and these contributions vest ratably over a four-year period. Company matching contributions, net of forfeitures, for all employees for each of the three years ended December 31, 2002, 2003 and 2004 were $4.1 million, $4.3 million and $4.8 million, respectively.

Non-Qualified Deferred Compensation Plan

The Company provides non-qualified, unfunded deferred compensation plans, which permits certain highly paid executive employees, employed in the U.S., and members of the Board of Directors the opportunity to defer current income for future financial and retirement needs. An eligible employee participant may defer up to 25% of their base salary and/or a portion of their annual bonus on a pre-tax basis. Board of Directors participants may defer up to 100% of their annual retainer and up to 100% of meeting fees on a pre-tax basis. Employee participants also have the opportunity to defer gains on stock options and restricted stock, while the Board of Director participants have the opportunity to defer stock option gains. Amounts deferred each quarter will earn interest based upon the three month London Interbank Offered Rate, or LIBOR, plus 1.5%. In addition, the plan offers a number of account distribution options providing flexibility for financial and retirement planning.

Deferred compensation will be paid to a participant on the earliest to occur of termination, retirement, death, disability or a “Change of Control.” Employee participants can elect to receive their accounts in the form of a single lump sum payment or, if they retire from the Company after age 55 with ten years of service, in semi-annual installments for five, ten or fifteen years. If they terminate employment prior to attaining age 55 and ten years of service, the Company has the right to make a lump sum payout to the participant of the balance in their accounts, without regard to the payment date or form of payment they elected. Board of Directors participants can elect to receive their account balances, with respect to each year of deferral, in the form of a single lump sum payment or in ten semi-annual installments upon the occurrence of each payment event. At December 31, 2003 and 2004, the Company recorded the deferred compensation liability of $804,000 and $932,000, respectively, in the consolidated balance sheet as a component of other accrued expenses.

F-29

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

12. Employee Savings and Pension Plans (continued):

Pension Plans

Pension costs are determined under the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and related disclosures are determined under the provisions of Statement of Financial Accounting Standards No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and other Postretirement Benefits”.

The Company has a separate contributory defined benefit plan for its qualifying United Kingdom employees employed by the Company’s U.K. subsidiaries. This pension plan was closed to new participants as of December 31, 2002. The benefits for the U.K. Plan are based primarily on years of service and pensionable salary at retirement. Plan assets consist principally of investments managed in a mixed fund.

Following closure of the above plan to new participants, the Company set up a new defined contribution plan for qualifying U.K. employees employed by the Company’s U.K. subsidiaries. The employees can contribute between 3% and 6% of their annual compensation and the Company matches those contributions with 5% to 8% of the employees’ annual compensation. Company contributions for the year ended December 31, 2003 and 2004 were $59,000 and $182,000, respectively.

The Company uses a November 30 measurement date for its plan.

Pension costs for the U.K. Plan included the following components:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Service cost benefits earned during the year	$	1,085		$	943		$	1,307
Interest cost on projected benefit obligation		1,045			1,354			1,838
Expected return on plan assets		(848	)		(1,132	)		(1,537	)
Net amortization and deferral		53			457			643
Net periodic pension cost	$	1,335		$	1,622		$	2,251

Weighted average assumptions used to determine benefit obligation at end of year were as follows:

	2002		2003		2004
Discount rate	6.2	%	6.1	%	6.0	%
Rate of compensation increase	4.0	%	4.4	%	4.5	%

F-30

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

12. Employee Savings and Pension Plans (continued):

Pension Plans (continued)

Weighted average assumptions used to determine net periodic pension cost for years ending December 31 were as follows:

	2002		2003		2004
Discount rate	6.5	%	6.2	%	6.1	%
Rate of compensation increase	4.0	%	4.0	%	4.4	%
Long-term rate of return on plan assets	5.5	%	7.2	%	7.1	%

To develop the expected long-term rate of return on assets assumption, the Company considered future expectations for yields on investments weighted in accordance with the asset allocation of the pension scheme’s invested funds.

The change in benefit obligation, change in plan assets, funded status and amounts recognized for the defined benefit plan were as follows:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Change in benefit obligations:
Benefit of obligation at beginning of year	$	14,768		$	19,793		$	28,351
Service cost		732			943			1,307
Interest cost		1,045			1,354			1,838
Participant contributions		353			770			894
Net actuarial loss		3,066			3,899			1,698
Benefits paid		(1,730	)		(570	)		(455	)
Foreign currency translation adjustment		1,559			2,162			2,106
Benefit obligation at end of year	$	19,793		$	28,351		$	35,739
Change in plan assets:
Fair value of plan assets at beginning of year	$	14,212		$	13,286		$	18,991
Actual asset return		(2,036	)		1,806			2,485
Employer contributions		988			2,243			2,038
Plan participants’ contributions		353			770			894
Benefits and expenses paid		(1,730	)		(570	)		(455	)
Foreign currency translation adjustment		1,499			1,456			1,410
Fair value of plan assets at end of year	$	13,286		$	18,991		$	25,363
Funded status:
Funded status	$	(6,365	)	$	(9,196	)	$	(10,219	)
Unrecognized transition asset		(31	)		(20	)		(6	)
Unrecognized net actuarial loss		8,361			12,031			13,019
Prepaid pension costs	$	1,965		$	2,815		$	2,794

F-31

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

12. Employee Savings and Pension Plans (continued):

Pension Plans (continued)

Amounts recognized in statement of financial position were as follows:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Prepaid pension costs	$	1,965		$	2,815		$	2,794
Accrued pension liability		(7,905	)		(9,859	)		(9,923	)
Accumulated other comprehensive income		7,905			9,859			9,923
Net amount recognized	$	1,965		$	2,815		$	2,794

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were as follows:

	Year Ended December 31,
(in thousands)	2002		2003		2004
Projected benefit obligation	$	19,793	$	28,351	$	35,739
Accumulated benefit obligation	$	19,266	$	26,199	$	32,650
Fair value of plan assets	$	13,286	$	18,991	$	25,363

The accumulated benefit obligation exceeds the fair value of plan assets. The Company recognized an additional minimum liability in accordance with the provisions of paragraphs 36 and 37 of SFAS No. 87 in the amounts of $7,905,000, $1,954,000 and $64,000 at December 31, 2002, 2003, and 2004, respectively.

Plan Assets

The Company’s pension plan weighted-average allocations by asset category are as follows:

	As of November 30,
	2003		2004
Asset Category
Equity securities	82	%	82	%
Debt securities	17	%	17	%
Cash and net current assets	1	%	1	%
Total	100	%	100	%

The plan assets are managed by an independent third party which track the return on a benchmark portfolio matching the above strategic asset allocation. The trustees have determined based on advice from our financial advisors the above mix of asset types in order to meet the investment objectives of the pension plan.

Expected Cash Flows

The Company expects to contribute $1.9 million to fund its pension plan during 2005. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

(in thousands)
Expected benefit payments for fiscal year ending:
2005	$	480
2006		499
2007		556
2008		652
2009		787
Next 5 years		4,279

F-32

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

13. Commitments and Contingencies:

The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services, and ownership of property. These policies provide coverage for a variety of potential losses, including, without limitation, loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range from $0.25 million to $0.5 million.

The Company is self-insured for health insurance for employees located within the United States. The Company maintains stop-loss insurance on a “claims made” basis for expenses in excess of $0.25 million per member per year. As of December 31, 2003 and December 31, 2004, the Company maintained a reserve of approximately $3.7 million and $3.6 million, respectively, included in other accrued expenses on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.

In September 2003, the Company entered into agreements with SurroMed, Inc. pursuant to which the Company committed to pay for biomarker discovery services from SurroMed for $2.0 million, $2.0 million, $1.0 million and $1.0 million during the years ended December 31, 2004, 2005, 2006 and 2007, respectively. As of December 31, 2004, the Company had paid SurroMed $1.5 million for biomarker discovery services pursuant to that agreement. In February 2005, the Company acquired substantially all of SurroMed’s assets related to its biomarker business. In connection with this acquisition, the biomarker discovery services agreement, together with the associated purchase commitments, were terminated.

The Company signed an agreement to jointly develop and commercialize Syrrx-designed human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. The Company is obligated to provide preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. The Company and Syrrx have agreed to share equally the costs of Phase III development. In addition, the Company agreed to make milestone payments up to $17.5 million to Syrrx for each collaboration product upon the occurrence of certain clinical and regulatory events. In September 2004, the Company filed an investigational new drug application for one Syrrx DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, the Company expensed the first milestone payment to Syrrx of $2.5 million as a result of the commencement of the Phase I studies. The remaining milestone payments will be expensed when the event triggering payment of the milestone occurs. In the event the Company is successful in obtaining approval to market a drug product under the collaboration with Syrrx, the Company and Syrrx will share equally the profits from drug sales. In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx. At this time, the Company does not know what impact, if any, this acquisition will have on the DPP IV collaboration with Syrrx.

In April 2003, the Company made an equity investment in Chemokine Therapeutics Corp. In connection with this investment, Chemokine granted the Company an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. If the Company chooses to exercise this option, it will be obligated to pay the license fee plus the costs for future development work on the peptide. Chemokine also granted the Company the right to first negotiate a license to other peptides.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. Under the terms of the agreements with the Pappas Fund, the Company committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of the Company’s aggregate capital commitment and no more than two-thirds of the Company’s commitment could be called prior to May 2005. As such, the Company anticipates that its aggregate investment will be made through a series of future capital calls over the next several years. The first capital call was made in January 2005 at which time the Company invested $75,000. The second capital call is due in March 2005, at which time the Company will invest an additional $90,000. The Company’s capital commitment will expire in May 2009.

F-33

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

13. Commitments and Contingencies (continued):

In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company the patents for the compound dapoxetine for development in the field of genitourinary disorders. This compound is currently licensed to ALZA Corporation, a subsidiary of Johnson & Johnson, and is being developed for premature ejaculation. Under the terms of the agreement with Lilly, the Company paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual net sales of dapoxetine in excess of $800 million. Dapoxetine has not been approved for sale in the United States or any foreign country.

Under most of the agreements for Development Group services, the Company agrees to indemnify and defend the sponsor against third-party claims based on the Company’s negligence or willful misconduct. Any successful claims could have a material adverse effect on the Company’s financial condition, results of operations and future prospects.

In the normal course of business, the Company is a party to various claims and legal proceedings. The Company is in litigation with a client that is claiming the Company breached its contract and committed tortious acts in conducting a clinical trial. That former client is claiming that it does not owe us the remaining amounts due under the contract and is seeking other damages from the Company’s alleged breach of contract and tortious acts. The Company records a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of these matters is currently not determinable, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company’s financial condition, results of operations or cash flows for an interim or annual period.

14. Related Party Transactions:

The Company leases its Highland Heights, Kentucky building under an operating lease with a shareholder of the Company. Rent paid to this shareholder for the years ended December 31, 2003 and 2004 totaled $651,000 and $652,000, respectively. This lease was renewed on January 1, 2005 and will expire on December 31, 2014. This lease is included in the future minimum payments for all lease obligations included in Note 8.

15. Fair Value of Financial Instruments:

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Accounts Receivable, Accounts Payable and Accrued Liabilities

The carrying amount approximates fair value because of the short maturity of these items.

Long-Term Debt

The Company believes the carrying value approximates the fair value on December 31, 2003 and 2004.

Investments

The Company’s investment in BioDelivery Sciences International and Chemokine are recorded at $2,850,000 and $1,750,000 at December 31, 2004, respectively. BioDelivery Sciences International and Chemokine are publicly traded companies. The Company records a gain or loss related to these investments at the end of each quarter based on the closing price of these investments at the end of each period. For further information on investments see Note 6.

F-34

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

15. Fair Value of Financial Instruments (continued):

Derivative Instruments

The Company’s derivative financial instruments are recorded at a fair value. As of December 31, 2004, the Company’s derivative portfolio had a favorable position of $702,000 recorded as a component of prepaid expenses and other current assets and an unfavorable position of $59,000 recorded as a component of other accrued expenses.

Letters of Credit

From time to time, the Company uses letters of credit to back certain guarantees and insurance policies. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. As of December 31, 2004, the Company has four letters of credit outstanding for a total of $0.8 million related to its insurance policies and travel department.

16. Business Segment Data:

Revenues by principal business segment are separately stated in the consolidated financial statements. Income (loss) from operations, depreciation and amortization, identifiable assets and capital expenditures by principal business segment were as follows:

	Year Ended December 31,
(in thousands)	2002			2003			2004
Income (loss) from operations:
Development	$	117,405		$	150,444		$	160,546
Discovery sciences		(8,960	)		(71,603	)		(12,531	)
Total	$	108,445		$	78,841		$	148,015
Depreciation and amortization:
Development	$	21,546		$	25,647		$	28,276
Discovery sciences		2,685			2,954			1,578
Total	$	24,231		$	28,601		$	29,854
Identifiable assets:
Development	$	637,660		$	688,604		$	879,123
Discovery sciences		54,460			90,577			96,078
Total	$	692,120		$	779,181		$	975,201
Capital expenditures:
Development	$	30,602		$	30,584		$	48,315
Discovery sciences		5,894			1,109			268
Total	$	36,496		$	31,693		$	48,583

F-35

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

17. Operations by Geographic Area:

Geographic information for net revenue and operating income by country is determined by the location where the services are provided for the client. Geographic information for identifiable assets by country is determined by the physical location of the assets.

The following table presents information about the Company’s operations by geographic area:

	Year Ended December 31,
(in thousands)	2002		2003		2004
Net revenue:
United States	$	484,954	$	558,456	$	609,248
U.K.		47,004		52,902		64,396
Other (a)		76,699		115,625		167,612
Total	$	608,657	$	726,983	$	841,256
Operating income:
United States	$	85,130	$	49,289	$	106,705
U.K.		7,998		8,273		9,704
Other (a)		15,317		21,279		31,606
Total	$	108,445	$	78,841	$	148,015
Identifiable assets:
United States	$	578,146	$	628,422	$	753,379
U.K.		56,652		70,681		124,076
Other (a)		57,322		80,078		97,746
Total	$	692,120	$	779,181	$	975,201

(a) Principally consists of operations in 35 countries, 11 of which are located in Europe, none of which comprises more than 8% of net revenue, operating income or identifiable assets.

F-36

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

18. Quarterly Financial Data (unaudited):

(in thousands, except per share data)
2003	First		Second		Third		Fourth			Total
Net revenue	$	169,877	$	184,970	$	179,515	$	192,621		$	726,983
Operating income (loss)		32,410		34,180		38,599		(26,348	)*		78,841
Net income (loss)		21,167		16,840		24,825		(16,522	)*		46,310
Net income (loss) per common share:
Basic	$	0.38	$	0.30	$	0.44	$	(0.30	)	$	0.83
Diluted	$	0.38	$	0.30	$	0.44	$	(0.30	)	$	0.82
2004
Net revenue	$	195,280	$	200,536	$	215,824	$	229,616		$	841,256
Operating income		38,494		32,234		38,053		39,234			148,015
Net income		24,764		23,314		24,990		25,820			98,888
Net income per common share:
Basic	$	0.44	$	0.41	$	0.44	$	0.46		$	1.75
Diluted	$	0.44	$	0.41	$	0.44	$	0.45		$	1.74

* In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company for $65.0 million the patents for the compound dapoxetine. The $65.0 million payment to Lilly was recorded to research and development expenses because dapoxetine is still in development and has not been approved for sale in any country.

19. Subsequent Events:

Acquisition of Biomarker Business

In February 2005, the Company completed its acquisition of substantially all of the assets of SurroMed, Inc.’s biomarker business. The assets acquired by the Company consist of equipment, fixtures, leasehold improvements, intellectual property and contracts related to SurroMed’s biomarker business. The acquired biomarker business consists of services and technologies of SurroMed that support drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The acquisition will expand the Company’s business by adding biomarker discovery and patient sample analysis capability to the collection of services offered by the Company. In exchange for the assets of SurroMed’s biomarker business, the Company surrendered to SurroMed for cancellation all of its shares of preferred stock of SurroMed. As additional consideration for the acquisition, the Company assumed approximately $3.4 million of SurroMed liabilities under capital leases and certain additional operating liabilities, and agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan. This biomarker business will be part of the Discovery Sciences segment of the Company.

As part of the Company’s investment in SurroMed in 2003, the Company entered into agreements with SurroMed to purchase biomarker discovery services from SurroMed for $6.0 million over a period of four years and to serve as a non-exclusive representative to market and sell additional SurroMed biomarker discovery services. These agreements were cancelled upon the closing of the acquisition.

Airplane Acquisition

In February 2005, the Company acquired a Dassault Falcon 900EX aircraft for $30.5 million in cash. The Company intends to use the aircraft for corporate purposes. The Company financed the acquisition from available cash.

F-37

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

19. Subsequent Events (continued):

Land Purchase

In January 2005, the Company acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which the Company plans to construct a new headquarters building. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont Shipping Company, refinanced certain existing liens on the property with the proceeds of an $8.0 million loan from Bank of America, N.A. This loan will mature in January 2006 and is secured by a lien on substantially all of Almont’s assets, including a tract of land containing approximately 30.0 acres adjacent to the 7.5 acre tract the Company acquired. This loan is also secured by a guarantee from the Company. Almont’s obligation to reimburse the Company in the event the Company is required to pay any sums to Bank of America under the guarantee is also secured by a lien on substantially all of Almont’s assets. As a part of this transaction, Almont granted the Company an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per acre. The option will expire on January 31, 2007.

Syrrx Acquisition by Takeda

In February 2005, Takeda Pharmaceutical Company Limited announced that it entered into an agreement to acquire 100% of the equity of Syrrx, Inc. The Company owns $25.0 million in preferred stock of Syrrx. If Takeda completes the acquisition of Syrrx, based on the terms of the merger agreement, the Company does not anticipate realizing a loss on this investment.

Dapoxetine milestone

In December 2004, ALZA submitted a new drug application, or NDA, for dapoxetine. The FDA accepted the NDA for filing in February 2005. As a result, the Company is entitled to receive a one-time milestone payment of $10.0 million from ALZA within 30 days of the FDA’s acceptance of the NDA.

F-38

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Date: February 28, 2005	By:	/s/ Fredric N. Eshelman, Pharm.D.
	Name:	Fredric N. Eshelman, Pharm.D.
	Title:	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Fredric N. Eshelman, Pharm.D. Fredric N. Eshelman, Pharm.D.	Chief Executive Officer and Director (Principal Executive Officer)	February 28, 2005
/s/ Linda Baddour Linda Baddour	Chief Financial Officer (Principal Financial and Accounting Officer)	February 28, 2005
/s/ Stuart Bondurant, M.D. Stuart Bondurant, M.D.	Director	February 28, 2005
/s/ Marye Anne Fox, Ph.D. Marye Anne Fox, Ph.D.	Director	February 28, 2005
/s/ Frederick Frank Frederick Frank	Director	February 28, 2005
/s/ David L. Grange David L. Grange	Director	February 28, 2005
/s/ Catherine M. Klema Catherine M. Klema	Director	February 28, 2005
/s/ Terry Magnuson, Ph.D. Terry Magnuson, Ph.D.	Director	February 28, 2005
/s/ Ernest Mario, Ph.D. Ernest Mario, Ph.D.	Director	February 28, 2005
/s/ John A. McNeill, Jr. John A. McNeill, Jr.	Director	February 28, 2005

S-1

EX-10.86

Exhibit 10.86

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

EMPLOYEE STOCK PURCHASE PLAN

THIS INSTRUMENT is executed as of the 1^st day of March, 2005 by PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (the “Company”).

Statement of Purpose

The Company sponsors the Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan (the “Plan”) in order to provide eligible employees with the opportunity to purchase shares of the common stock of the Company and to thereby share in the continued growth and success of the Company. The Company is hereby amending and restating the Plan effective with the Offering Period under the Plan commencing July 1, 2005 to (i) incorporate the provisions of prior amendments into a single document, (ii) change the method for determining the purchase price of shares under the Plan to cause the Plan to be treated as a noncompensatory plan under the Financial Accounting Standards Board Statement No. 123(R) Share-Based Payment, as revised in 2004, and (iii) otherwise meet current needs.

NOW, THEREFORE, for the purposes aforesaid, the Company hereby amends and restates the Plan effective with the Offering Period under the Plan commencing July 1, 2005 to consist of the following Articles I through VIII:

ARTICLE I

NAME, PURPOSE, CONSTRUCTION AND DEFINITIONS

Section 1.1. Name. The Plan shall be known as the “Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan.”

Section 1.2. Purpose. The purpose of the Plan is to provide Participants in the Plan with an opportunity to purchase Common Stock in the Company through payroll deductions and other contributions, thereby encouraging Participants to share in the economic growth and success of the Company through stock ownership.

Section 1.3. Construction. Article, Section and paragraph headings have been inserted in the Plan for convenience of reference only and are to be ignored in any construction of the provisions hereof. If any provision of the Plan shall be invalid or unenforceable the remaining

provisions shall nevertheless be valid, enforceable and fully effective. It is the intent that the Plan shall at all times constitute an “employee stock purchase plan” within the meaning of Section 423(b) of the Code, and the Plan shall be construed and interpreted to remain such. The Plan shall be construed, administered, regulated and governed by the laws of the United States to the extent applicable, and to the extent such laws are not applicable, by the laws of the State of North Carolina.

Section 1.4. Definitions. Whenever used in the Plan, unless the context clearly indicates otherwise, the following terms shall have the following meanings:

(a) Beneficiary, with respect to a Participant, means such Participant’s “Beneficiary” under the group term life insurance plan maintained by the Company.

(b) Board or Board of Directors means the Board of Directors of the Company or any Committee or Committees of said Board of Directors of the Company to which, and to the extent, said Board of Directors of the Company has delegated some or all of its power, authority, duties or responsibilities with respect to the Plan.

(c) Code means the Internal Revenue Code of 1986, as the same may be amended from time to time, and references thereto shall include the valid Treasury regulations issued thereunder.

(d) Committee means the “Committee” as defined under the Retirement Savings Plan which is responsible for the administration of the Plan in accordance with Article VI hereof.

(e) Common Stock means shares of the $0.10 par value common stock of the Company and any other stock or securities resulting from the adjustment thereof or substitution therefor as described in Section 3.4.

(f) Company means Pharmaceutical Product Development, Inc., a North Carolina corporation.

(g) Compensation means “Contribution Compensation” as defined under the Retirement Savings Plan, except that Compensation under the Plan shall not be limited by Section 401(a)(17) of the Code.

(h) Effective Date means July 1, 1997.

(i) Employee means a person employed by the Company. In addition, the employees of the Company’s subsidiaries which the Company designates in its sole and exclusive discretion as participating subsidiaries for purposes of this Plan shall also be considered Employees for purposes of this Plan.

2

(j) Fair Market Value, with respect to a share of Common Stock from time to time, means (i) if the Common Stock is traded on the National Market System, the closing price of the Common Stock for the applicable date, as published in the NASDAQ National Market Issues report in the Eastern Edition of The Wall Street Journal, (ii) if the Common Stock is not traded on the National Market System but such Common Stock is listed on a national securities exchange, the mean between the highest price and the lowest price at which the Common Stock shall have been sold regular way on a national securities exchange on the applicable date during an Offering Period or, if there are no sales on said date, then on the next preceding date on which there were sales of Common Stock, (iii) if the Common Stock is not traded on the National Market System or listed on a national securities exchange, the mean between the bid and asked prices last reported by the National Association of Securities Dealers, Inc. for the over-the-counter market on the applicable date during an Offering Period or, if no bid and asked prices are reported on said date, then on the next preceding date on which there were such quotations, or (iv) if the Common Stock is not traded on the National Market System or listed on a national securities exchange and quotations for the Common Stock are not reported by the National Association of Securities Dealers, Inc., the fair market value determined by the Committee on the basis of available prices for the Common Stock or in such manner as the Committee shall agree.

(k) Offering means the offering of shares of Common Stock to Participants pursuant to this Plan that occurs on each Offering Date.

(l) Offering Date means July 1, 1997 and each succeeding January 1 and July 1.

(m) Offering Period means the period from an Offering Date through the immediately succeeding Offering Date.

(n) Participant means an Employee who has become a Participant pursuant to Section 2.2 of the Plan.

(o) Plan means the Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan, as set forth herein, together with any and all amendments thereto.

3

(p) Retirement Savings Plan means The Pharmaceutical Product Development, Inc. Retirement Savings Plan as in effect from time to time.

(q) Stock Purchase Account, with respect to a Participant, means the account established on the books and records of the Company for such Participant representing the payroll deductions credited to such account in accordance with the provisions of the Plan.

ARTICLE II

PARTICIPATION

Section 2.1. General. No person shall become a Participant unless or until such person is or becomes an Employee and upon or following satisfaction of the eligibility requirement set forth in the Plan. In addition, in no event shall any person be eligible to participate in the Plan before the Effective Date.

Section 2.2. Participation Requirements.

(a) Eligibility Requirement. An Employee shall satisfy the eligibility requirement for the Plan on the date the Employee is first employed by the Company, subject to the provisions of Section 2.2(c) below.

(b) Commencement of Participation. Each person who satisfies the eligibility requirement of Section 2.2(a) on or before the Effective Date shall become a Participant in the Plan:

(1) on the Offering Date coinciding with the Effective Date, if such person is an Employee on such Offering Date; or

(2) if such person is not an Employee on such Offering Date, then on the first Offering Date coinciding with or next following the date (if any) on which such person again becomes an Employee after the Effective Date.

Each person who satisfies the eligibility requirement of Section 2.2(a) after the Effective Date shall become a Participant in the Plan:

(1) on the first Offering Date after such person satisfies the eligibility requirement, if such person is an Employee on such Offering Date; or

(2) if such person is not an Employee on such Offering Date, then on the first Offering Date coinciding with or next following the date (if any) on which such person again becomes an Employee.

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(c) Exclusions. Notwithstanding any provision of the Plan to the contrary, in no event shall the following persons be eligible to participate in the Plan:

(1) Any Employee whose customary employment with the Company is twenty (20) hours or less per week; or

(2) Any Employee whose customary employment with the Company is for not more than five (5) months in any calendar year.

Section 2.3. Eligibility of Former Participants. If a person terminates employment with the Company after becoming a Participant and subsequently resumes employment with the Company, such person shall again become a Participant on the Offering Date coinciding with or next following such resumption of employment with the Company without having to satisfy again the eligibility requirement of Section 2.2(a).

ARTICLE III

OFFERING OF COMMON STOCK

Section 3.1. Reservation of Common Stock. The Board of Directors has reserved one million two-hundred fifty thousand (1,250,000) shares of Common Stock for the Plan, subject to adjustment in accordance with Section 3.4. The aggregate number of shares of Common Stock which may be purchased under the Plan by Participants shall not exceed one million two-hundred fifty thousand (1,250,000) shares, subject to adjustment in accordance with Section 3.4.

Section 3.2. Offering of Common Stock.

(a) General. Subject to Section 3.2(b), each Participant in the Plan on an Offering Date shall be entitled to purchase shares of Common Stock on the last day of the Offering Period beginning with such Offering Date with the amounts deducted from such Participant’s Compensation or otherwise contributed during such Offering Period pursuant to Article IV. The purchase price for such shares of Common Stock shall be determined under Section 3.3.

(b) Limitations. Notwithstanding Section 3.2(a), the maximum number of shares of Common Stock a Participant may purchase pursuant to an Offering under Section 3.2(a) shall be subject to the following limitations:

(1) If as of the Offering Date for such Offering such Participant owns (including stock which such Participant is considered to own under Section 425(d) of the Code) stock (including the Common Stock such Participant would be entitled to purchase pursuant to an Offering) possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, then the maximum number of shares of Common Stock such Participant may purchase pursuant to such Offering

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shall be reduced so that the number of shares of Common Stock such Participant may purchase pursuant to such Offering when added to the number of shares of stock of the Company such Participant owns (including stock which such Participant is considered to own under Section 425(d) of the Code) (excluding the Common Stock such Participant would be entitled to purchase pursuant to such Offering) is less than five percent (5%) of the total combined voting power or value of all classes of stock of the Company; and

(2) If such Participant could acquire within the same calendar year as an Offering shares of stock of the Company under all “employee stock ownership plans” within the meaning of Section 423(b) of the Code sponsored by the Company (including the Common Stock such Participant would be entitled to purchase pursuant to such Offering) having a total fair market value (determined as of the date of such Offering) which exceeds Twenty-Five Thousand Dollars ($25,000), then the maximum number of shares such Participant may purchase pursuant to such Offering shall be reduced so that such total fair market value does not exceed Twenty-Five Thousand Dollars ($25,000).

(3) In no event may the total number of shares of Common Stock that may be purchased by Participants for any Offering Period exceed the lesser of (A) an amount that the Board of Directors may, in its sole and exclusive discretion, establish from time to time or (B) the total remaining shares available pursuant to Section 3.1. In the event that the total number of shares of Common Stock to be purchased for an Offering Period would otherwise exceed the limit set forth in the preceding sentence, the Committee shall first reduce shares to be purchased by non-payroll deduction additional cash contributions for such Offering Period proportionately among all Participants who have made such additional cash contributions; and if such limit would still be exceeded, the Committee shall then reduce shares to be purchased by payroll deductions for such Offering Period proportionately among all Participants who have made such payroll deductions.

Section 3.3. Determination of Purchase Price for Offered Common Stock. The purchase price per share of the shares of Common Stock offered to Participants pursuant to an Offering shall be equal to ninety-five percent (95%) of the Fair Market Value of a share of Common Stock as of the last day of the Offering Period for such Offering; provided, however, that in no event shall the purchase price be less than the par value of a share of Common Stock.

Section 3.4. Effect of Certain Transactions. The number of shares of Common Stock reserved for the Plan pursuant to Section 3.1 and the determination under Section 3.3 of the purchase price per share of the shares of Common Stock offered to Participants pursuant to an Offering shall be appropriately adjusted to reflect any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, a consolidation of shares, the payment of a stock dividend or any other capital adjustment affecting the number of issued shares of Common Stock. In the event that the outstanding shares of Common Stock shall be

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changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another corporation, whether through reorganization, recapitalization, merger, consolidation or otherwise, then there shall be substituted for each share of Common Stock reserved for issuance under the Plan but not yet purchased by Participants, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged.

ARTICLE IV

PAYROLL DEDUCTIONS

Section 4.1. Payroll Deduction Elections. A Participant in the Plan (or a person who will become a Participant in the Plan on the next Offering Date if such person is an Employee on such Offering Date) who wishes to purchase shares of Common Stock to be offered to such Participant on the next Offering Date shall elect to have the Company deduct from the Compensation payable to such Participant during the Offering Period beginning on such Offering Date any amount between one percent (1%) and fifteen percent (15%) of such Participant’s Compensation, in whole multiples of one percent (1%). Such election shall be made by delivering to the Committee during the forty-five (45) day period preceding such Offering Date a written direction to make such deductions. Such election shall become effective as of the first day of such Participant’s first pay period that begins on or after such Offering Date and shall remain effective for each successive pay period until changed or terminated pursuant to this Article IV. In addition, at any time during an Offering Period, a Participant may make additional contributions from the Participant’s own funds towards the purchase of Common Stock under the Plan for such Offering Period. Such additional contributions must be made in cash or its equivalent under procedures established from time to time by the Committee. Notwithstanding the foregoing, (i) for the Offering Period beginning on January 1, 1998, the maximum amount of such additional contributions that may be made by any Participant shall not exceed five thousand dollars ($5,000) and (ii) no such additional contributions shall be permitted for Offering Periods beginning on or after July 1, 1998.

Section 4.2. Election to Increase or Decrease Payroll Deductions. Subject to Section 4.5, a Participant who has a payroll deduction election in effect under Section 4.1 may prospectively increase or decrease during an Offering Period the percentage amount of the deductions being made by the Company from such Participant’s

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Compensation (including a decrease to zero (0)) by delivering to the Committee a written direction to make such change. Such change shall become effective as soon as practical after the Committee’s receipt of such written direction and shall remain in effect until changed or terminated pursuant to this Article IV.

Section 4.3. Termination of Election Upon Termination of Employment. The termination of employment of a Participant with the Company for any reason shall automatically terminate the election (if any) of such Participant to have amounts deducted from such Participant’s Compensation pursuant to this Article IV that is then in effect. Such termination shall be effective immediately following the pay period during which such termination of employment occurs, but shall not affect the deduction from Compensation for that pay period.

Section 4.4. Change or Termination Not Retroactively Effective. Neither the change nor the termination of any election to have amounts deducted from Compensation under this Article IV shall increase, decrease or otherwise affect the deduction from the Compensation of a Participant for any pay period ending prior to the effective date of such change or termination.

Section 4.5. Form, Timing and Frequency of Elections. Any written direction by any Participant with respect to any deductions from Compensation pursuant to this Article IV shall be on a form furnished by the Committee for such purpose and shall be made by such Participant’s completing, signing and filing such form with the Committee in the manner prescribed from time to time by the Committee. A Participant shall be permitted to increase or decrease the percentage amount of the deductions being made by the Company from such Participant’s Compensation only once during an Offering Period; provided, however, a Participant may terminate the deductions being made by the Company from such Participant’s Compensation at any time during an Offering Period notwithstanding any prior change in the amount of such Participant’s Compensation deductions during such Offering Period.

ARTICLE V

STOCK PURCHASE ACCOUNTS AND PURCHASE OF COMMON STOCK

Section 5.1. Stock Purchase Accounts. A Stock Purchase Account shall be established and maintained on the books and records of the Company for each Participant. Amounts deducted from a Participant’s Compensation or otherwise contributed by the Participant pursuant to Article IV shall be credited to such Participant’s Stock Purchase Account. No interest or other increment shall accrue or be payable to any Participant with respect to any amounts credited to

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such Stock Purchase Accounts. All amounts credited to such Stock Purchase Accounts shall be withdrawn, paid or applied toward the purchase of Common Stock pursuant to the provisions of this Article V.

Section 5.2. Purchase of Common Stock.

(a) General. As of the last day of each Offering Period, the amount to the credit of a Participant in such Participant’s Stock Purchase Account shall be used to purchase from the Company on such Participant’s behalf the largest number of whole and fractional shares of Common Stock which can be purchased at the price determined under Section 3.3 with the amount then credited to such Participant’s Stock Purchase Account subject to the limitations set forth in Article III on the maximum number of shares of Common Stock such Participant may purchase. As of such date, such Participant’s Stock Purchase Account shall be charged with the aggregate purchase price of the shares of Common Stock purchased on such Participant’s behalf.

(b) Issuance of Common Stock. The shares of Common Stock purchased for a Participant on the last day of an Offering Period shall be deemed to have been issued by the Company for all purposes as of the close of business on such date. Prior to such date, none of the rights and privileges of a shareholder of the Company shall exist with respect to such shares of Common Stock. As soon as practicable after such date, the Company shall issue and deliver, or shall cause its stock transfer agent to issue and deliver, a certificate for the number of shares of Common Stock purchased for a Participant on such date, which such certificate shall be issued in the Participant’s name.

(c) Insufficient Common Stock Available. If as of the last day of any Offering Period, the aggregate Stock Purchase Accounts available for the purchase of shares of Common Stock pursuant to Section 5.2(a) would purchase a number of shares of Common Stock in excess of the number of shares of Common Stock then available for purchase under the Plan, (i) the number of shares of Common Stock which would otherwise be purchased for each Participant on such date shall be reduced proportionately to the extent necessary to eliminate such excess, (ii) the remaining balance to the credit of each Participant in each such Participant’s Stock Purchase Account shall be distributed to each such Participant and (iii) the Plan shall terminate automatically upon the distribution of the remaining balance in such Stock Purchase Accounts.

Section 5.3. Withdrawal From Plan Prior to Purchase of Common Stock. In the event (i) a Participant terminates employment with the Company for any reason during an Offering

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Period, or (ii) a Participant terminates deductions from such Participant’s Compensation pursuant to Article IV during an Offering Period and such Participant elects to withdraw in writing from the Plan, then the entire amount to the credit of such Participant in such Participant’s Stock Purchase Account shall be distributed to such Participant (or if such Participant is deceased, to such Participant’s Beneficiary) as soon as administratively practicable after such termination of employment or withdrawal (as the case may be). If a Participant terminates deductions from such Participant’s Compensation pursuant to Article IV during an Offering Period but such Participant does not elect to withdraw in writing from the Plan, the amount to the credit of such Participant in such Participant’s Stock Purchase Account shall be used to purchase shares of Common Stock for such Participant as of the last day of such Offering Period to the extent provided in Section 5.2(a) and the remaining balance in such Participant’s Stock Purchase Account shall be distributed to such Participant as soon as administratively practicable. Notwithstanding the preceding sentence, if a Participant terminates deductions from such Participant’s Compensation pursuant to Article IV during an Offering Period and the amount to the credit of such Participant in such Participant’s Stock Purchase Account upon such termination of Compensation deductions does not exceed One Hundred Dollars ($100.00), then such Participant shall be deemed to have withdrawn from the Plan upon such termination of Compensation deductions for purposes of this Section 5.3.

ARTICLE VI

COMMITTEE

Section 6.1. Organization of Committee. The Committee for purposes of the Plan shall be the “Committee” as defined under the Retirement Savings Plan. The Committee may appoint such agents, who need not be members of the Committee, as it may deem necessary for the effective performance of its duties, and may delegate to such agents such powers and duties, whether administerial or discretionary, as the Committee may deem expedient or appropriate. The Committee shall act by majority vote and may adopt such bylaws, rules and regulations as it deems desirable for the conduct of its affairs.

Section 6.2. Powers of Committee. The Committee shall administer the Plan. The Committee shall have all powers necessary to enable it to carry out its duties under the Plan properly. Not in limitation of the foregoing, the Committee shall have the power to construe and interpret the Plan and to determine all questions that shall arise thereunder. It shall decide all

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questions relating to eligibility to participate in the Plan and to purchase Common Stock under the Plan. The Committee shall have such other and further specified duties, powers, authority and discretion as are elsewhere in the Plan either expressly or by necessary implication conferred upon it. The decision of the Committee upon all matters within the scope of its authority shall be final and conclusive on all persons, except to the extent otherwise provided by law.

Section 6.3. Expenses of Committee. The reasonable expenses of the Committee incurred by the Committee in the performance of its duties under the Plan, including without limitation reasonable counsel fees and the expenses of other agents, shall be paid by the Company.

Section 6.4. Indemnification of Committee. To the extent permitted by applicable law, the Company shall indemnify and hold harmless each member of the Committee from and against any and all liability, claims, demands, costs and expenses (including the costs and expenses of attorneys incurred in connection with the investigation or defense of claims) in any manner connected with or arising out of any actions or inactions in connection with the administration of the Plan except for such actions or inactions which are not in good faith or which constitute willful misconduct.

ARTICLE VII

AMENDMENT AND TERMINATION

Section 7.1. Amendment of Plan. The Company expressly reserve the right, at any time and from time to time, to amend in whole or in part any of the terms and provisions of the Plan for whatever reason(s) the Company may deem appropriate. The Company shall require shareholder approval of any such amendment to the extent the Company determines that shareholder approval is required by applicable law.

Section 7.2. Termination of Plan. The Company expressly reserves the right, at any time and for whatever reason it deems appropriate, to terminate the Plan. Upon any termination of the Plan, the entire amount credited to the Stock Purchase Account of each Participant shall be distributed to each such Participant.

Section 7.3. Effective Date and Procedure for Amendment or Termination. Any amendment to the Plan or termination of the Plan may be retroactive to the extent not prohibited by applicable law. Any amendment to the Plan or termination of the Plan shall be made by the Company by resolution of the Board of Directors and shall not require the approval or consent of any Participant or Beneficiary in order to be effective.

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ARTICLE VIII

MISCELLANEOUS

Section 8.1. Transferability of Rights. To the extent permitted by law, rights to purchase shares of Common Stock are exercisable only by the Participant to whom such rights are granted and are not transferable by such Participant other than by will or the laws of descent and distribution.

Section 8.2. No Employment Rights. Participation in the Plan shall not give any employee of the Company any right to remain in the employ of the Company or upon termination of employment, any right or interest in the Plan except as expressly provided herein.

Section 8.3. Compliance with Law. No shares of Common Stock shall be issued under the Plan prior to compliance by the Company to the satisfaction of its counsel with any applicable laws.

Section 8.4. Repurchase of Common Stock. The Company shall not be required to repurchase from any Participant any shares of Common Stock which such Participant acquires under this Plan.

IN WITNESS WHEREOF, the Company have caused this Instrument to be executed by its duly authorized officer as of the day and year first above written.

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
By:	/s/ Fred N. Eshelman
Name:	Fred N. Eshelman
Title:	Chief Executive Officer

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EX-10.162

Exhibit 10.162

Employee	Section 2.01 Base Salary and Bonus Multiplier	Section 2.03 Welfare Benefit Period
Fredric N. Eshelman	3.0	2 years
Fred B. Davenport, Jr.	2.5	2 years
Linda Baddour	2.5	2 years
Paul S. Covington	2.5	1 year
Colin Shannon	2.0	1 year
Brainard Judd Hartman	1.0	1 year
Kim V. Greene	1.0	1 year
Edward J. Murray	1.0	1 year

SEVERANCE AGREEMENT

THIS AGREEMENT, effective the 1st day of January, 2001, by and between Pharmaceutical Product Development, Inc. and its subsidiaries and affiliates (collectively, “PPD”) and                      (“Employee”).

WHEREAS, Employee is a valued employee of PPD and in order to induce Employee to remain in the employ of PPD, PPD desires to provide the severance benefits hereinafter described in the event of a “Change in Control”, as hereinafter defined, of PPD.

NOW, THEREFORE, it is agreed as follows:

1. Definitions

1.01 “AFR” means the interest rate determined under Section 1274 of the Code.

1.02 “Base Amount” shall have the meaning set forth and shall be determined as provided in Section 280G of the Code.

1.03 “Change in Control” means (i) a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), provided that such a Change in Control shall be deemed to have occurred if any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of PPD representing 50% or more of the combined voting power of PPD’s then outstanding securities; (ii) a sale of substantially all of the assets of PPD; or (iii) a liquidation of PPD.

1.04 “Constructive Termination” means a termination of Employee’s employment by PPD during the Covered Period initiated by Employee after (i) a substantial diminution or alteration in the duties of Employee, (ii) a reduction by PPD in Employee’s base salary in effect on the date of the Change in Control, or (iii) the relocation of Employee’s primary work location to a location that is more than twenty-five (25) miles from Employee’s primary work location prior to the Change in Control. Constructive Termination specifically does not include termination of Employee by reason of death, Disability or retirement at or after age 65. Employee shall give PPD written notice of a Constructive Termination, which notice shall provide a brief description of the circumstances which Employee asserts gives rise to a right of Constructive Termination, and PPD shall have ten (10) days from receipt of said notice within which to remedy said circumstances.

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1.05 “Covered Payment” means the amounts and benefits paid to Employee pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Employee by PPD.

1.06 “Covered Period” means the time period commencing on the date of and coincident with a Change of Control and ending one year thereafter.

1.07 “Disability” means the inability of Employee to perform his assigned duties for PPD for a period of three (3) months due to Employee’s physical or mental illness as determined by a reputable medical doctor.

1.08 “Excess Parachute Payment” shall have the meaning set forth and shall be determined as provided in Section 280G of the Code.

1.09 “Excise Tax” shall mean the tax imposed under Section 4999 of the Code on an Excess Parachute Payment.

1.10 “Executive Consultant” shall mean the executive compensation or comparable consultant used from time to time by PPD in designing its compensation program for executive and senior management employees of PPD; provided, however, that in its sole discretion PPD may at any time designate its independent auditors as its Executive Consultant for the purpose of performing any calculations required under Section 2.05 of this Agreement.

1.11 “Final Determination” means a final determination by a court of competent jurisdiction or a proceeding of the Internal Revenue Service or its successor agency.

1.12 “First Period” means the twelve-month period ending on the Termination Date.

1.13 “Internal Revenue Code” means the Internal Revenue Code of 1986 as heretofore or hereafter amended, and any successor code. References in this agreement to specific sections of the Code shall also include any successor sections.

1.14 “Parachute Payments” shall have the meaning set forth and shall be determined as provided in Section 280G of the Code.

1.15 “Payment Cap” means the maximum amount which may be paid to Employee under the terms of this Agreement without subjecting Employee to the Excise Tax.

1.16 “Payment Date” means the date thirty (30) days following the Termination Date.

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1.17 “Stock Awards” means Employee’s outstanding awards of PPD non-qualified stock options or restricted stock as of the Termination Date.

1.18 “Termination for Cause” means (i) an act or acts involving fraud, embezzlement or theft from PPD, (ii) Employee’s willful and repeated failure to follow directions of the Board of Directors that continues for at least ten (10) days following written notice of the Board of Directors of such failure to follow directions, or (iii) termination for cause as defined in and made pursuant to a then effective employment agreement, if any, between Employee and PPD.

1.19 “Termination Date” means the date on which Employee’s employment is terminated such that Employee is entitled to the compensation and benefits provided for in Section 2 of this Agreement.

2. Compensation Upon Change of Control. If during the Covered Period (i) PPD terminates Employee’s employment for reason other than Termination for Cause or (ii) Employee’s employment is terminated by reason of Constructive Termination, Employee shall be entitled to the following compensation and benefits:

2.01 Base Salary and Bonus. PPD shall pay Employee an amount equal to                      times the sum of Employee’s (i) base salary for the First Period (determined as if Employee was employed for the entire First Period if employed for less than the First Period) and (ii) the greater of (x) Employee’s target bonus under the PPD incentive cash bonus plan in which Employee is eligible to participate immediately prior to the Termination Date or (y) the average of the cash bonuses received in the First Period and in the twelve-month period immediately preceding the First Period, said amount to be paid on the Payment Date.

2.02 Unpaid and Deferred Compensation. PPD shall pay Employee any bonus or deferred compensation (whether in the form of cash, stock or otherwise) accrued but unpaid as of the Termination Date, said sum to be paid on the Payment Date.

2.03 Benefits. For a period of                      after the Termination Date, PPD shall continue to pay for and provide welfare benefits which Employee was receiving immediately prior to the Termination Date, including life insurance, health, medical, dental, vision and wellness, accidental death and dismemberment and disability benefits; provided, however, that PPD’s obligations under this clause shall terminate from the date that Employee first becomes eligible after the Termination Date for similar coverage under another employer’s plan.

2.04 Stock Awards. Notwithstanding anything to the contrary in any agreement for Stock Awards, (i) all unvested shares underlying Stock Awards granted more than six months prior to the Termination Date shall become fully vested as of the Termination Date, and (ii) Employee shall continue to be treated under each award agreement evidencing a Stock Award as if Employee was an employee of PPD until the

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first to occur of (x) the third anniversary of the Termination Date, or (y) the expiration of the exercise period provided for therein; provided, however, in the event of Employee’s death or his disability (as disability is defined in the award agreement) after the Termination Date, the time for exercise after death or such disability prescribed in the award agreement shall apply. The provisions of this Section 2.04 shall also apply to any and all substitute awards for nonqualified stock options and restricted stock granted to Employee in exchange for Stock Awards to which this section applies.

2.05 Limitation on Payments.

a. Application of Section 2.05. If a Covered Payment hereunder would be an Excess Parachute Payment and would thereby subject Employee to the Excise Tax, the provisions of this Section 2.05 shall apply to determine the amounts payable to Employee pursuant to this Agreement.

b. Calculation of Benefits. At least fifteen (15) days prior to the Payment Date, PPD shall notify Employee of the aggregate present value of all amounts and benefits to which Employee would be entitled under this Agreement and any other plan, program or arrangement with PPD as of the Termination Date, together with the projected maximum payments, determined as of such Date of Termination, that could be paid without Employee being subject to the Excise Tax.

c. Imposition of Payment Cap. If (i) the aggregate value of all amounts and benefits to which Employee would be entitled under this Agreement and any other plan, program or arrangement with PPD exceeds the amount which can be paid to Employee without Employee incurring an Excise Tax and (ii) Employee would receive a greater net after-tax amount (taking into account all applicable taxes payable by Employee, including an Excise Tax) by applying the limitation contained in this Section 2.05(c), then the amounts otherwise payable to Employee under this Section 2 shall be reduced to an amount equal to the Payment Cap. If Employee receives reduced payments and benefits hereunder, Employee shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that Employee will receive in connection with the application of the Payment Cap.

d. Application of Code Section 280G. The Executive Consultant shall determine whether any part of the Covered Payment will be subject to the Excise Tax and the amount of such Excise Tax. For purposes of such determination, the Executive Consultant shall take into consideration and be guided by the following:

(i) such Covered Payment will be treated as Parachute Payments and all Parachute Payments in excess of the Base Amount shall be treated as subject to the Excise Tax, unless and except to the extent that in the good faith judgment of the Executive Consultant, PPD has a reasonable basis to conclude that such Covered Payment, in whole or in part, either do not constitute Parachute Payments or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G of the Code) in excess of the Base Amount, or such Parachute Payments are otherwise not subject to the Excise Tax, and

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(ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Executive Consultant in accordance with the principles of Section 280G of the Code.

(e) Applicable Tax Rates. For purposes of determining whether Employee would receive a greater net after-tax benefit if the amounts payable under this Agreement are reduced in accordance with Section 2.05(c), Employee shall be deemed to pay:

(i) federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and

(ii) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year;

provided, however, that Employee may request that such determination be made based on Employee’s individual tax circumstances, which shall govern such determination so long as Employee provides to the Executive Consultant such information and documents as the Executive Consultant shall reasonably request to determine such individual circumstances.

(f) Adjustments in Respect to Payment Cap.

(i) If Employee receives reduced payments and benefits under Section 2.05 or if Section 2.05 is determined not to be applicable to Employee because the Executive Consultant concludes that Employee is not subject to any Excise Tax, and it is established pursuant to a Final Determination that, notwithstanding the good faith of Employee and PPD in applying the terms of this Agreement, the aggregate Parachute Payments paid to Employee or for Employee’s benefit are in an amount that would result in Employee being subject to an Excise Tax and Employee would still be subject to the Payment Cap under the provisions of Section 2.05(c), then the amount in excess of the Payment Cap shall be deemed for all purposes to be a loan to Employee made on the date of the receipt of such excess payment, which Employee shall have an obligation to repay to PPD on demand, together with interest at the AFR, from the date of the payment hereunder to the date of repayment by Employee.

(ii) If Section 2.05 is not applied to reduce Employee’s entitlements under this Section 2 because the Executive Consultant determines that Employee would not receive a greater net after-tax benefit by applying Section 2.05 and it

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is established pursuant to a Final Determination that, notwithstanding the good faith of Employee and PPD in applying the terms of this Agreement, Employee would have received a greater net after-tax benefit by subjecting Employee’s payments and benefits hereunder to the Payment Cap, then the aggregate Parachute Payments paid to Employee or for Employee’s benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Employee made on the date of receipt of such excess payments, which Employee shall have an obligation to repay to PPD on demand, together with interest at the AFR, from the date of payment hereunder to the date of repayment by Employee.

(iii) If Employee receives reduced payments and benefits by reason of this Section 2.05 and it is established pursuant to a Final Determination that Employee could have received a greater amount without exceeding the Payment Cap, then PPD shall promptly thereafter pay Employee the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the AFR, from the original payment due date to the date of actual payment by PPD.

3. Miscellaneous.

3.01 Successor-in-Interest. PPD will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of PPD, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that PPD would be required to perform it if no succession had taken place.

3.02 Binding Effect. This Agreement shall inure to the benefit of and be enforceable by Employee’s personal or legal representatives, executives, administrators, successors, heirs, distributees, devisees and legatees.

3.03 Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be given (i) by certified mail, return receipt requested, postage prepaid, (ii) by personal delivery or (iii) by recognized overnight carrier, and shall be deemed received when actually received. Notices shall be addressed as follows:

If to PPD:	Pharmaceutical Product Development, Inc.
	3151 South 17th Street
	Wilmington, North Carolina 28412
	Attention: Chief Executive Officer
If to Employee:

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Either party hereto may change the notice address by giving notice thereof in the manner provided for herein.

3.04 Waiver. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any provision or condition of this Agreement to be performed by such other party shall be deemed a subsequent waiver of the same or similar provisions or conditions.

3.05 Entire Agreement. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this agreement, and this Agreement supersedes and replaces in its entirety all prior agreements and representations, expressed, implied, oral or otherwise, made by PPD to or with Employee, including but not limited to that certain Severance Agreement dated                      between PPD and Employee.

3.06 Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of North Carolina.

3.07 Unenforceability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

3.08 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

3.09 Headings. Headings used in this Agreement are for convenience only and shall not be used to construe or interpret this Agreement.

3.10 Enforcement by Employee. All legal expenses incurred by Employee in the successful enforcement of any of the terms of this Agreement shall be paid by PPD.

IN WITNESS WHEREOF, the parties have executed this Agreement effective the date first hereinabove set forth.

Pharmaceutical Product Development, Inc.	Employee
By:
Name:	Name:
Title:

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EX-10.209

Exhibit 10.209

Non-Employee Director Compensation

Effective January 1, 2005

Amended and Restated March 1, 2005

1. $40,000 annual retainer, payable quarterly after each regularly scheduled meeting of directors.

2. $1,000 for each Board of Directors meeting attended.

3. $1,000 for attendance of the annual shareholders meeting.

4. Committees.

a. Finance and Audit Committee: $2,500 for each committee meeting attended (committee chairman will also be paid a $10,000 annual retainer).

b. All other committees: $1,000 for each committee meeting attended ($1,500 to each committee chairman attending).

5. $500, in the discretion of the Chairman of the Board of Directors, for each telephonic board or committee meeting in which a director participates.

6. Grant of nonqualified options to purchase common stock having a value of $65,000. The options will be issued on the date of a director’s election or reelection to the Board of Directors and will be fully vested upon issuance. The option exercise price will equal the fair market value of the common stock on the date of grant.

7. Grant of restricted stock having a value of $65,000. The restricted stock will be issued on the first business day of each calendar year, will vest ninety percent on the first anniversary of the grant, five percent on the second anniversary and five percent on the third anniversary, and will not be transferable until a director’s departure from the board.

EX-10.212

EXHIBIT 10.212

LEASE AGREEMENT

Between

MET CENTER PARTNERS-6, LTD.

as Landlord

and

PPD DEVELOPMENT, LP

as Tenant

Met Center, Building Ten

Austin, Texas

INDUSTRIAL/WAREHOUSE LEASE AGREEMENT

This Lease Agreement (this “Lease”) is made as of the Effective Date set forth below, by and between MET CENTER PARTNERS-6, LTD., a Texas limited partnership (“Landlord”) and PPD DEVELOPMENT, LP, a Texas limited partnership (“Tenant”). The performance of the Tenant’s obligations under this Lease is guaranteed by PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (“Guarantor”).

ARTICLE I

DEFINED TERMS

For purposes of this Lease, the following terms shall have the meanings set forth below (although other terms may be defined throughout the Lease):

1.1 Effective Date: The date of the last of Landlord or Tenant to sign this Lease as provided below.

1.2 Landlord: Met Center Partners-6, Ltd.

Landlord’s Address: 611 W. 15^th Street, Austin, Texas 78701

1.3 Tenant: PPD Development, LP

Tenant’s Address: 3151 South 17^th Street, Wilmington, North Carolina 28412

1.4 Estimated Commencement Date: November 15, 2004, subject to extension as hereinafter provided.

1.5 Commencement Date: The Commencement Date shall be the earlier of (i) sixty (60) days after the date on which the Leased Premises are Ready For Occupancy, or (ii) the date Tenant occupies any portion of the Leased Premises for the conduct of its business activities (not including Tenant’s early possession under Section 2.2 solely to complete the construction and installation of the Tenant’s Improvements under the Work Letter), or (iii) January 1, 2005. If Tenant elects to add the Expansion Space to the Leased Premises as provided in Exhibit C attached hereto, the Lease amendment addressing such expansion will identify the commencement date applicable to such Expansion Space in accordance with the provisions of Exhibit C. Landlord shall complete its work in the Building by not later than October 1, 2004 so that Tenant’s work (“Tenant’s Work”) can make the Leased Premises Ready for Occupancy by not later than January 1, 2005; any delay in the completion of Landlord’s work on the Building shall, if it causes delay in Tenant’s Work, delay the Commencement Date by an equivalent period.

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1.6 Estimated Substantial Completion Date: November 15, 2004, subject to extension as hereinafter provided.

1.7 Ready For Occupancy. The term “Ready for Occupancy” shall mean date of the Substantial Completion of the Tenant Improvements in accordance with the Plans and Specifications and the Work Letter, with the exception of the completion of minor punch list items that do not interfere with Tenant’s occupancy and use of the Leased Premises for the Permitted Use (as defined below). If for any reason a dispute arises as to the date the Leased Premises were Ready For Occupancy, a certificate mutually agreed to by the respective architects for the parties certifying the date on which the Leased Premises were Ready For Occupancy shall be conclusive and binding upon the parties hereto.

1.8 Substantial Completion: The term “Substantial Completion” shall mean that the Tenant Improvements have been completed substantially in accordance with the Plans and Specifications (except where approved changes are made) and that any necessary approvals have been issued for the Building and a temporary or permanent certificate of occupancy has been issued by the City of Austin for the Leased Premises.

1.9 Expiration Date: The date which is one hundred twenty (120) months after the Commencement Date, unless extended as provided herein and subject to earlier termination as provided herein.

1.10 The Property and the Building: The Property is Lot 5-A, Block B, RESUBDIVISION OF LOT 5 BLOCK B METRO CENTER SECTION 6, a subdivision in the City of Austin, Travis County, Texas, according to the map or plat thereof recorded under Document No. 200000316 in the Official Public Records of Travis County, Texas, and the Building is “Building Ten” located on the Property, containing approximately 345,600 gross square feet, as shown on the site plan attached hereto as Exhibit A. Some of the parking required for the Building as reflected on Exhibit A-1 will be located on real property adjacent to the Property (the “Additional Land”). Landlord intends to resubdivide the Property and the Additional Land so that both parcels are combined for a single lot and at that time Landlord and Tenant agree to execute a document reflecting such single lot as the new legal description of the Property for purposes of this Lease.

1.11 The Leased Premises: Approximately 128,941 gross square feet of space constituting the space within the Building as shown on Exhibit B attached hereto. As part of the approval of the Plans and Specifications for the Tenant Improvements, the architects for the parties shall mutually

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confirm the approximate number of gross square feet of space constituting the Leased Premises (using the same standards used by Landlord’s architect to determine the 345,600 gross square feet in the Building), which number as so determined and confirmed shall be the gross square feet within the Leased Premises for all purposes in this Lease. Such determination will be reflected in an amendment to this Lease to be executed by Landlord and Tenant promptly after the approval of the Plans and Specifications for the Tenant Improvements (the “First Amendment”).

1.12 Lease Term: A period of time equal to one hundred twenty (120) months after the Commencement Date, subject to renewal and extension and earlier termination as provided herein.

1.13 The Project: Met Center, a mixed-use commercial development in Austin, Texas, of which the Property is a part.

1.14 Tenant’s Guarantor: Pharmaceutical Product Development, Inc., a North Carolina corporation.

1.15 Tenant’s Broker: Equis Corporation

1.16 Landlord’s Broker: Altantis Properties

1.17 Security Deposit: NONE

1.18 Parking Spaces for Tenant: 645 parking spaces within the parking lot as reflected on Exhibit A-1 based on 128,941 gross square feet in the Leased Premises. Such parking spaces shall be on an unreserved basis; provided Landlord shall use its good faith, reasonable efforts to obtain an agreement with the existing tenants in the Building for an allocation of the parking spaces, or a portion of such parking spaces, on a reserved basis among Tenant and the other tenants in the Building. The exact number of total parking spaces provided hereunder shall be adjusted, if necessary, to be equal to one parking space per 200 gross square feet contained in the Leased Premises, as determined in accordance with Section 1.11 above, and which number of parking spaces shall be confirmed as part of the First Amendment. If Tenant concludes in good faith that it needs additional parking, at Tenant’s request and Landlord’s expense, Landlord will re-stripe the parking areas reserved for Tenant and not reserved for Tenant to accommodate compact cars, if permitted by local ordinances, to increase the total number of spaces available and thereby to adjust the ratio of parking spaces allocated to Tenant to not less than one space per 200 gross square feet of space in the Leased Premises. Landlord will make reasonable efforts to enforce Tenant’s parking rights as set forth in Section 4.15 hereof. Moreover, if Tenant exercises its rights to expand the Leased Premises, Landlord shall allocate more parking spaces in the

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same parking lot, or adjacent thereto, as may be necessary to preserve the above ratios of reserved and non-reserved parking spaces, as applicable.

1.19 Additional Provisions: See Exhibit C for additional lease provisions.

1.20 Base Rent: The Base Rent for the initial Lease Term shall be as follows:

The Base Rent for the first five (5) years of the Term of this Lease shall be $1,178,520.74 per year (being $9.14 multiplied by the approximate number of gross square feet of the Leased Premises), payable in monthly installments of $98,210.06 each; and

The Base Rent for the second five (5) years of the Term of this Lease shall be $1,355,169.91 per year (being $10.51 multiplied by the approximate number of gross square feet of the Leased Premises), payable in monthly installments of $112,930.83 each.

The exact amount of the Base Rent shall be adjusted, if necessary, based on the number of gross square feet contained within the Leased Premises as determined in accordance with Section 1.11, and which Base Rent shall be confirmed as part of the First Amendment.

1.21 Tenant’s Additional Rent: Tenant’s Additional Rent shall be an annual amount equal to Tenant’s Proportionate Share of the annual Operating Costs of the Building, the Common Areas, and the Property (as defined in Section 3.1), exclusive of costs that are attributable to the Leased Premises and for which Tenant is responsible under the terms and conditions of this Lease.

1.22 Tenant’s Forecast Additional Rent: As defined in Section 3.1(b).

1.23 Lease Year: The twelve (12) month period beginning January 1 and ending December 31 of the applicable calendar year.

1.24 Tenant’s Proportionate Share: Tenant’s Proportionate Share shall be 37.31% (being the approximate number of gross square feet in the Leased Premises divided by the total of the 345,600 approximate gross square feet in the Building). The exact amount of Tenant’s Proportionate Share shall be adjusted, if necessary, based on the number of gross square feet contained within the Leased Premises as determined in accordance with Section 1.11, and which exact amount of Tenant’s Proportionate Share shall be confirmed as part of the First Amendment. In addition, as noted above, Tenant’s Proportionate Share shall be adjusted as appropriate if Tenant exercises its expansion options set forth in Exhibit C attached hereto.

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1.25 Work Letter: Attached hereto as Exhibit D and incorporated herein by reference for all purposes.

1.26 Tenant Improvement Allowance. An amount equal to $25.00 multiplied by the approximate number of gross square feet in the Leased Premises as confirmed as provided in Section 1.11, and which amount of the Tenant Improvement Allowance shall be confirmed as part of the First Amendment, payable in accordance with the Work Letter. The Tenant Improvement Allowance may be used by Tenant in accordance with the terms and conditions outlined in the Work Letter, including to pay Tenant’s engineering and architectural expenses associated with such work.

1.27 Plans and Specifications: The Tenant Improvement Plans to be agreed to by Landlord and Tenant and to be attached as Exhibit E to this Lease as provided in the Work Letter.

ARTICLE II

LEASE GRANT AND TERM

2.1 Lease Grant. Landlord, in consideration of the rent to be paid and the other covenants and agreements to be performed by Tenant and upon the terms hereinafter stated, does hereby agree as of the Effective Date to lease, demise and let unto Tenant the Leased Premises with rental obligations beginning as of the Commencement Date and ending on the last day of the Lease Term unless sooner terminated as herein provided.

2.2 Early Possession. Provided that Tenant obtains and delivers to Landlord certificates of the insurance called for in Article 6, Landlord shall permit Tenant (without charge or rent payment) and its employees, agents, contractors and suppliers to enter the Leased Premises prior to the Commencement Date to construct and install the Tenant Improvements (including wiring, connections, fixtures, equipment and furnishings) in accordance with Exhibit D and Exhibit E, and to otherwise prepare the Leased Premises for Tenant’s occupancy, in accordance with the terms of this Lease. Tenant and each other person or firm who or which enters the Leased Premises on behalf of Tenant before the Commencement Date shall conduct itself so as to not unreasonably interfere with Landlord and the other tenants within the Building or their respective employees, agents, and contractors. Any prior entry on behalf of Tenant (except for Landlord or Landlord’s employees, agents and contractors) shall be under all of the terms of this Lease (other than the obligation to pay Base Rent and Additional Rent) and shall be at Tenant’s sole risk. EXCEPT TO THE EXTENT SOLELY ATTRIBUTABLE TO THE FAULT OF LANDLORD OR LANDLORD’S RELATED PARTIES (AS HEREINAFTER DEFINED), LANDLORD SHALL NOT BE LIABLE IN ANY WAY FOR AND TENANT HEREBY INDEMNIFIES AND HOLDS HARMLESS

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LANDLORD AND LANDLORD’S RELATED PARTIES (AS HEREINAFTER DEFINED) FROM AND AGAINST ALL DAMAGE, LOSSES, LIABILITIES, CLAIMS, AND CAUSES OF ACTION (INCLUDING DAMAGE TO ANY PERSONAL PROPERTY THAT TENANT MAY BRING INTO, OR ANY WORK THAT TENANT MAY PERFORM IN, THE LEASED PREMISES) AS A RESULT OF EARLY POSSESSION BY TENANT. HOWEVER, TENANT SHALL NOT BE REQUIRED TO PAY ANY UTILITY CHARGES INCURRED BY TENANT DURING EARLY POSSESSION FOR THE LIMITED PURPOSES IDENTIFIED IN THIS SECTION 2.2.

ARTICLE III

RENT

3.1 Rent Payments.

(a) Commencing on the Commencement Date and continuing thereafter throughout the full Lease Term, Tenant, in consideration of this Lease, hereby agrees to pay to Landlord (or as Landlord may direct) the Base Rent and, if applicable, Tenant’s Additional Rent. The Base Rent together with any Tenant’s Additional Rent (in the form of Tenant’s Forecast Additional Rent, as hereinafter defined) shall be due and payable, in advance, in twelve (12) equal installments on the first day of each calendar month during the Lease Term, and Tenant’s Additional Rent shall be adjusted at the end of each Lease Year in accordance with subsection (b) below.

(b) For the first Lease Year, prior to the Commencement Date, and prior to the beginning of each Lease Year thereafter, Landlord will present to Tenant, a statement of Landlord’s reasonable estimate of Tenant’s Additional Rent for the ensuing Lease Year (“Tenant’s Forecast Additional Rent”). If Landlord does not present such Tenant’s Forecast Additional Rent to Tenant within ninety (90) days after the commencement of any Lease Year, Tenant’s Forecast Additional Rent shall be the same estimate as for the preceding Lease Year. If Landlord delivers Tenant’s Forecast Additional Rent to Tenant within ninety (90) days after the commencement of any lease year, Tenant will pay to Landlord within thirty (30) days thereafter the difference between the updated Tenant’s Forecast Additional Rent for the then current Lease Year and the amount of Tenant’s Additional Rent already paid to date for such Lease Year, and thereafter shall pay Tenant’s Additional Rent due based on the updated Tenant’s Forecast Additional Rent. Within ninety (90) days after the end of each Lease Year, Landlord shall provide Tenant a statement showing the actual Operating Costs for such prior Lease Year (calculated in accordance with Section 3.1 hereof) and a reconciliation statement prepared by Landlord comparing Tenant’s Forecast Additional Rent for such Lease Year with Tenant’s Additional Rent actually due for such Lease Year (calculated in accordance with Section 1.21 hereof). In the event that Tenant’s Forecast Additional Rent exceeds Tenant’s Additional Rent for said Lease Year, Landlord shall, at Landlord’s option, either (i) pay Tenant an amount equal to such excess, or (ii) if enough months remain in the Lease Term, credit the amount of such excess against the next due installments of Tenant’s Forecast Additional Rent. In the event that the Tenant’s Additional Rent exceeds Tenant’s Forecast Additional Rent for said Lease Year, Tenant

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shall pay Landlord, within thirty (30) days of receipt of the statement, an amount equal to such difference. For the year of termination of the Lease, Landlord shall prepare a statement comparing Tenant’s Forecast Additional Rent with Tenant’s Additional Rent to the date of Lease termination, and Landlord shall pay Tenant, or Tenant shall pay Landlord, as the case may be, the difference within thirty (30) days after Landlord provides such statement. The calculation described above shall be made as soon as possible after the termination of this Lease, Landlord and Tenant hereby agreeing that the provisions relating to said calculation shall survive the termination of this Lease.

(c) Upon not less than two (2) business days prior written notice to Landlord, Tenant or its designated agent shall have the opportunity to examine, during Landlord’s normal business hours and at Landlord’s business office or the office of Landlord’s property manager, the accounting records with respect to the Operating Costs for specified Lease Years (not to exceed the immediately preceding four (4) Lease Years), and Tenant shall have the right to cause an audit of such records to be performed at Tenant’s initial cost and expense, and Landlord shall reasonably cooperate with Tenant in providing information needed for such audit. Once the audit is concluded, Tenant shall provide Landlord with a copy of the results of such audit upon Tenant’s receipt thereof. In the event such audit reveals that any statement for Tenant’s Additional Rent was overstated by more than five percent (5%), then Landlord shall pay (or reimburse Tenant for) the cost of such audit. If, based on such audit of the actual Operating Costs, it is determined that either party owes the other any amount, such party shall pay the sum due to the other party within thirty (30) days, with interest thereon at eight percent (8%) per annum calculated from the date that amount was overpaid or underpaid, as the case may be.

(d) For purposes of this Lease and this Section 3.1, the term “Operating Costs” shall mean, subject to the exclusions in subsection (f) below, the aggregate of all expenses, costs and disbursements of every kind and character which Landlord actually pays because of or in connection with (A) the ownership, cleaning, repair, operation, security and other maintenance in connection with the Building and the Property, including without limitation the parking and the other Common Areas, and (B) furnishing the services required of Landlord under this Lease (but in either event expressly excluding those costs for which Tenant is responsible attributable to the Leased Premises in accordance with the terms and conditions of this Lease):

(i) All taxes, assessments, use and occupancy taxes, excises, levies, license and permit fees and other governmental charges or impositions, general or special, ordinary or extraordinary, of any kind whatsoever, whether federal, state, county, or municipal, and whether they be by taxing districts or authorities presently taxing the Property or by others, subsequently created or otherwise, attributable to the ownership, maintenance, operation and security of the Building and the Property and furnishing the services required of Landlord under this Lease. If at any time during this Lease there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or an assessment, levy or charge specifically measured by or

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based, upon such rents from the Leased Premises, or the Building or the Property, then all such taxes, levies or charges, or part thereof so measured or based shall be deemed to be included within the term “taxes” for purposes hereof. Notwithstanding the foregoing, the term “taxes” does not include Landlord’s federal or state gross or net income taxes, franchise or VAT taxes, capital or stock transfer taxes, inheritance, succession, gift, excise or estate taxes;

(ii) Landlord’s gross cost of all casualty, liability and any other insurance applicable to the Building or the Property, and Landlord’s personal property used in connection therewith; provided however, if such insurance is provided in the form of master policies, then an equitable portion of the premiums therefore to the extent attributable to the Property only shall be included herein;

(iii) The cost of all utilities and services used on or at the Building or the Property, including but not limited to water, gas, heat, light, power, telephone, sewage, sprinkler charges, together with any taxes, penalties, surcharge or the like and any maintenance charge for such utilities that are not separately metered to and payable directly by Tenant or another tenant in the Building;

(iv) The Common Area costs, including: (1) the cost of maintenance and/or landscaping (including the cost of maintaining and replacing landscaping of the Property), and (2) the cost of operating, maintaining and repairing the parking (subject to the exception in clause (f)(xvii) below as to a prospective parking garage) and any other property, improvements, facilities or services (including without limitation utilities and insurance therefor) provided for the use and benefit of Tenant or the common use and benefit of Tenant and other tenants in the Building;

(v) The cost of repairs, replacements, cleaning and general maintenance (a) undertaken by Landlord under this Lease (other than with respect to the Leased Premises, to the extent of the responsibility of Tenant under the terms and conditions of this Lease, or the premises of other tenants), or (b) undertaken by Landlord in its reasonable discretion on the Property or the Building other than (1) repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, or (2) repairs or alterations attributable solely to other tenants in the Building. In the event of the repair or replacement of a capital improvement, such repair or replacement costs shall be amortized over the estimated useful life of such capital improvement, on a straight line basis as determined in accordance with generally accepted accounting principles, consistently applied (“GAAP”), as an Operating Cost;

(vi) The amortization of the cost of all capital improvements which are made to the Building or on the Property for the purpose of reducing Operating Costs or which may be required by governmental authority or are required to comply with any statutes, rules, regulations or other directives hereafter promulgated by any

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governmental authority. Such costs shall be amortized on a straight line basis in accordance with GAAP over the reasonable useful life of such capital improvement, which in no event shall extend beyond the reasonable useful life of the Building;

(vii) The management fee incurred by Landlord for the management of the Building and the Property, it being expressly understood and agreed that Landlord (or an Affiliate of Landlord, as the term Affiliate is defined in Section 4.8(b) below) shall be entitled to manage the Building and the Property and collect a management fee therefor equal to five percent (5%) of the total base rentals for the Building (the “Management Fee”). Landlord represents to Tenant that it charges no other tenant in the Project a lower management fee as a percentage of base rentals;

(viii) Wages, salaries or other compensation or benefits for any employees of Landlord or Landlord’s manager whose services are performed solely with respect to the Building; and

(ix) Any costs or expenses allocable to the Property in accordance with that certain Declaration of Covenants, Conditions and Restrictions of Met Center subdivision filed of record in Travis County, Texas, as same may be amended from time to time (the “Declaration”). Landlord represents and warrants that the allocation of costs and expenses under the Declaration shall not be materially altered, to the extent any such alteration is within the reasonable control of Landlord and/or its Affiliates (as such term is defined in Section 4.8(b)).

If at any time less than ninety-five percent (95%) of the Building is occupied, the actual Operating Costs shall be allocated as if at least ninety-five percent (95%) of the gross square footage in the Building had been occupied.

(e) Landlord agrees to competitively bid each of the Operating Costs that are within Landlord’s control and that may be reasonably competitively bid to no less than three (3) independent contractors or vendors.

(f) The following shall be excluded from the term (and the calculation of) “Operating Costs” for purposes of this Lease:

(i) All utilities separately metered to the Leased Premises or to other tenants in the Building;

(ii) All costs and expenses, for which Tenant is solely responsible under this Lease or for which another tenant should be solely responsible, or which are specifically incurred for the benefit of or charged to a tenant of the Building;

(iii) Marketing costs, advertising costs, leasing commissions, brokerage fees, rent abatements, tenant allowances and inducements, and other costs and

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expenses, including attorneys’ fees, incurred in connection with negotiations with prospective tenants or in connection with disputes or enforcement actions with tenants or third parties (other than contest of ad valorem taxes), or make-ready expenses, alterations or finish-out expenses incurred in connection with securing tenants for the Building;

(iv) Amounts charged by an Affiliate or other party related to Landlord for services, material, labor or equipment with respect to the Building or the Property in excess of the competitive costs for comparable services, materials, labor or equipment if same were to have been acquired from an independent party in a negotiated arms-length transaction;

(v) Payments of principal, interest, points, fees, penalties or other charges in connection with (a) any mortgage, loan or other financing (including any refinancing) of the Project, the Property or the Building other than those specifically related to capital improvements described in Section 3.1(d)(vi) and (b) any ground lease affecting the Property;

(vi) Wages, salaries or other compensation or benefits for any officers of Landlord or Landlord’s manager, or other overhead or general administrative expense of Landlord or Landlord’s manager in excess of the Management Fee;

(vii) Except as otherwise provided in Section 3.1(d)(v) and (vi), the cost of capital repairs or improvements made on or to the Leased Premises, the Building or the Property or which may be required by any governmental authority or are required to comply with any statutes, rules, regulations or other directives promulgated by any governmental authority after the Effective Date of this Lease;

(viii) Any expense for which Landlord is entitled to receive reimbursement, credit or abatement from tenants, insurers or other third parties;

(ix) Depreciation and amortization of the Building or equipment other than those related to capital improvements described in Section 3.1(d)(v) and (vi);

(x) Artwork in the Building;

(xi) Any factor for profit or mark-up on actual costs;

(xii) Any labor, management, service, equipment, supply, fuel costs or other expenses except to the extent fairly attributable to and incurred for the benefit of the Property in accordance with the Declaration, provided that for clarification, no charge for labor involving the supervision or management of the Property shall be charged as an Operating Cost other than the Management Fee;

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(xiii) Fines or penalties imposed upon Landlord by reason of violations of governmental rules, regulations or laws, or damages or indemnity obligations incurred by Landlord by reason of legal proceedings or agreements to which Landlord is a party;

(xiv) Amounts that Landlord is required to refund or credit to Tenant (or any other tenant) under this Lease or any other contract;

(xv) Amounts that Landlord is entitled to recover under insurance or indemnity contracts;

(xvi) Amounts for which Landlord is entitled to receive credit, reimbursement, refund, rebate or discount by third parties, including from taxing authorities;

(xvii) The expenses of building and equipping any parking garage ancillary to the Building or Property, if Landlord chooses to build same; and

(xviii) Any expense that would not be considered a normal maintenance or operating expense under GAAP.

(g) Concurrently with the execution of this Lease, Tenant has paid to Landlord a sum equal to the first full month’s Base Rent. If the term of this Lease as described above commences on other than the first day of a calendar month, then the Base Rent for such month shall be prorated for such month, and Tenant shall pay such pro rata portion on the first day of the month immediately following the Commencement Date as the second month’s rent. If the term of this Lease terminates on other than the last day of a calendar month, then the Base Rent and Tenant’s Forecast Additional Rent shall be prorated for such month and if such amount is overpaid Landlord shall make an appropriate refund within thirty (30) days after the termination of this Lease.

(h) Except as expressly set forth in the Lease, Tenant shall pay all rent and other sums of money as the same shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided in this Lease, without demand (unless notice is expressly required by the provisions of this Lease), setoff or counterclaim, and such payment obligation shall be unconditional and independent of any other covenant or condition imposed on either Landlord or Tenant, whether under this Lease, at law or in equity. Tenant’s obligations to pay rent and all other sums owing by Tenant to Landlord under this Lease, and any financial obligations of Landlord to Tenant, shall survive any expiration or termination of this Lease.

(i) Tenant shall promptly apply and pay for all public utilities rendered or furnished to the Leased Premises from and after the Commencement Date of this Lease, which may include but are not limited to natural gas, electricity, cable, electronic communications, water, sanitary and storm sewer, heat, light, power, telephone, trash removal, janitorial and other utilities and services used on or at the Leased Premises,

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for all “tap in” or connection fees with respect to electricity and deposits required in connection with all public utilities, as well as any taxes, penalties, surcharges or the like pertaining to the Tenant’s use and occupancy of the Leased Premises and any maintenance charge for utilities. All utility services required by Tenant for its Permitted Use (as defined below) of the Leased Premises shall be separately metered to the Leased Premises. Without limiting the generality of the foregoing, Tenant shall be responsible for making all arrangements for, and shall pay all costs and fees directly to the providers of, water, wastewater, electricity, telephone, telecommunications and trash removal services for the Leased Premises. Tenant shall further make arrangements for, and shall obtain at Tenant’s sole cost and expense, all janitorial services for the Leased Premises. Tenant shall pay also all costs caused by Tenant introducing pollutants or solids other than ordinary human waste into the sanitary sewer system, including permits, fees and charges levied by any governmental subdivision for any such pollutants or solids.

(j) Should Tenant at any time fail or omit to do any act or thing provided under this Lease to be done by Tenant and Tenant has failed to cure such default within any time period provided in this Lease, Landlord may, in its sole discretion, do or cause to be done such act or thing, at Tenant’s sole cost and expense. All monies reasonably paid or incurred by Landlord pursuant to the provisions of this subsection (k) shall be deemed to be additional rent owed by Tenant to Landlord which shall be due and payable within thirty (30) days after written notice given by Landlord to Tenant.

(k) In the event any monthly installment of Base Rent or Tenant’s Forecast Additional Rent or any other payment required by Tenant hereunder is not paid within ten (10) days after it is due and payable as set forth in this Lease, Tenant covenants and agrees to pay as additional rent a late charge equal $750 (the “Late Charge”). Except as otherwise provided, all rent and other sums of whatever nature owed by Tenant to Landlord under this Lease, including any Late Charge, shall bear interest from the date due until paid at the rate of twelve percent (12%) per annum (hereafter, the “Default Rate”). In no event shall the aggregate of the Late Charge, plus any other amounts paid in connection with the transactions evidenced hereby which would under applicable law constitute “interest”, ever exceed the maximum amount of interest which, under applicable law could be lawfully charged to Tenant hereunder. Landlord and Tenant specifically intend and agree to limit contractually the interest payable hereunder to not more than the amount determined at the maximum lawful non-usurious rate of interest (if any) which under applicable law is permitted to be charged from time to time (the “Maximum Rate”). Therefore, none of the terms of this Lease shall ever be construed to create a contract to pay interest at a rate in excess of the Maximum Rate, and the provisions of this subparagraph (j) shall control all other provisions of this Lease.

3.2 Security Deposit. Intentionally deleted.

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ARTICLE IV

TENANT’S DUTIES AND OBLIGATIONS

4.1 Use.

(a) The Leased Premises are to be used and occupied by Tenant (and its permitted assignees and subtenants) solely for the purpose of pharmaceutical research and development, including conducting clinical drug trials (including overnight stays by clinical trial participants), office, data processing and other lawful activities incidental to the foregoing, including specifically a fully equipped private cafeteria or food service kitchen as an accessory use solely to serve or cater food for Tenant’s employees, contractors, clinical trial subjects, invitees and guests (the “Permitted Use”), and for no other use or purpose without the prior written consent of Landlord. Tenant shall, at Tenant’s cost and expense, obtain all permits and approvals required for the conduct of Tenant’s permitted activities within the Leased Premises, and Landlord agrees to cooperate and assist Tenant in obtaining such permits and approvals. Landlord represents and warrants to Tenant that the Property is appropriately zoned for the Permitted Use, and Landlord shall secure all permits or approvals necessary for the conduct of Landlord’s work in the Building and for the occupancy of the Building (other than with respect to (i) the Leased Premises, (ii) Tenant’s Work and (iii) Tenant’s Permitted Use).

(b) Tenant agrees to perform, observe and comply fully with Landlord’s rules and regulations (the “Rules and Regulations”) applicable to all tenants of the Building pertaining to the management, care and safety of the Common Areas of the Property, including but not limited to parking areas, landscaped areas, walkways, hallways and other facilities provided for the common use and convenience of occupants of the Property and, upon written notice thereof to Tenant, any changes, amendments, or additions thereto as from time to time shall be reasonably established and deemed advisable by Landlord so long as such changes do not materially affect Tenant’s rights hereunder or increase the Operating Costs. Notice of the Rules and Regulations shall be posted or given to Tenant. Landlord shall use commercially reasonable efforts to enforce the Rules and Regulations equally as to all other tenants; provided, Landlord shall not have any liability to Tenant for any failure of any other tenant or tenants of the Property to comply with the Rules and Regulations provided that Landlord makes commercially reasonable efforts to enforce same. In the event of any conflict between the Rules and Regulations and the provisions of this Lease, the provisions of this Lease shall prevail. Outside storage, including without limitation tractors, trailers and similar heavy equipment vehicles, is prohibited without Landlord’s prior written consent; provided that, at Tenant’s sole cost and expense, Tenant may construct an outside storage facility comprised of a material to be approved by Landlord, of not more than 500 square feet in the area cross-hatched on Schedule C-3 attached to Exhibit C, for the purpose of storing tools and implements, machinery, and another outbuilding of similar size in the same location for the purpose of storing Hazardous Substances and Materials (as defined in Sections 4.19 and 4.20, and including bodily fluids) pending periodic removal of such Hazardous Substances and/or Materials by a contractor authorized to handle and dispose of such materials. In all circumstances, such

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Hazardous Substances and/or Materials shall be maintained, stored, transferred, and removed from the Property in accordance with Section 14 below. Notwithstanding the foregoing, Tenant’s right to construct such outside storage facilities and modifications necessary for such facilities shall be subject to (1) Tenant obtaining any and all necessary permits and approvals, at Tenant’s sole cost and expense, for such facilities, including but not limited to any necessary revision or correction of the site plan for the Property, and (2) with respect to the facility for the temporary storage of Hazardous Substances and/or Materials, the approval of the plan and specifications for the construction of such facility by an environmental consultant acting on behalf of Landlord.

(c) Tenant also agrees to perform, observe and comply fully in all material respects with the terms and conditions of the Declaration to the extent applicable to the Premises and Tenant’s use thereof. Landlord shall promptly furnish to Tenant a copy of any amendments to the Declaration after the Effective Date, and Landlord shall not execute any amendment of the Declaration that would materially impair Tenant’s rights under this Lease.

(d) Tenant, at its sole expense, shall comply with all governmental laws, ordinances and regulations applicable to Tenant’s use of the Leased Premises, including but not limited to the Occupational Safety and Health Act, and regulating Hazardous Substances (as defined in Section 4.19) and Hazardous Materials (as defined in Section 4.20) and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances in the Leased Premises or arising from Tenant’s use thereof. Tenant shall obtain and maintain all permits and approvals required for Tenant’s business and the use of the Leased Premises as provided herein. Without limiting the generality of the foregoing, Tenant shall be responsible for compliance of the Tenant Improvements, and any improvements made by Tenant in accordance with the provisions of this Lease, with the requirements of the Americans With Disabilities Act of 1990 (“ADA”), OSHA, and any similar state and municipal laws, ordinances or regulations as of the Commencement Date and thereafter. Landlord shall be responsible for compliance of the Building and the Property (excluding the interior of the Leased Premises, however), with the requirements of ADA, OSHA and any similar state and municipal laws, ordinances or regulations throughout the term of this Lease.

(e) Tenant shall not permit any objectionable or noxious odors, smoke, dust, loud noise or vibrations to emanate from the Leased Premises, nor take any other action which would constitute a nuisance or would unreasonably disturb, interfere with or endanger Landlord or any other tenants of the Property. Tenant shall not take any action which would unreasonably interfere with the rights of other persons to use the Property, shall cooperate with Landlord and other tenants in the use of any Common Areas, and shall not obstruct the Common Areas or permit such obstruction by those under its control. Tenant further agrees not to cause any effluent other than normal sewage and waste to be discharged into the sewer system and to comply with all

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applicable laws, regulations and ordinances with respect to wastewater and sewage disposal (including without limitation provision for filters, grease traps or other requirements of the City of Austin for disposal of waste products or other emissions from the Leased Premises). To the extent subject to Landlord’s control, Landlord shall not cause any noxious odors, smoke, dust, loud noise or vibrations to interfere with Tenant’s use of the Leased Premises, nor take any other action that would constitute a nuisance or would unreasonably disturb, interfere with or endanger Tenant or its agents, invitees, or guests.

(f) Tenant shall not permit the Leased Premises to be used for any purpose or in any manner that would (i) void the insurance thereon, (ii) materially increase the insurance risk or cost thereof, or (iii) cause the disallowance of any sprinkler credits, including but not limited to use of the Leased Premises for the receipt, storage or handling of any product, material or merchandise that is explosive or highly flammable; provided that Tenant may retain in appropriate enclosed containers and in safe locations, small amounts of reasonable and customary cleaning fluids and lubricants. If any material increase in the cost of any insurance on the Leased Premises or the Property is caused by Tenant’s use of the Leased Premises or because Tenant prematurely vacates the Leased Premises (except as the result of condemnation, fire or other casualty or during periods of construction or repairs as provided in this Lease), then Tenant shall pay the amount of such increase to Landlord immediately after notice thereof. An increase of five percent (5%) or more in the cost of insurance shall be deemed material for purposes of this provision.

4.2 Acceptance of the Leased Premises. By Tenant’s taking possession of the Leased Premises, Tenant acknowledges that (a) it has inspected the Leased Premises and accepts the Leased Premises as suitable for the purposes for which same are leased, (b) it accepts the Leased Premises and all related improvements and appurtenances and each and every part thereof as being in good and satisfactory condition, subject to any punch list items with respect to Landlord’s work, any latent defects, and Landlord’s maintenance and repair obligations hereunder, (c) as between Landlord and Tenant, Landlord maintains all responsibility for any latent defects in the Leased Premises and appurtenances and in all other parts of the Property and all related improvements and appurtenances, (d) no representations or warranties, express or implied, as to the condition or repair of the Leased Premises or the habitability, fitness or suitability of the Leased Premises for Tenant’s intended use nor promises to alter, remodel or improve the Leased Premises have been made by Landlord (except as set forth in this Lease or as is imposed by law), and (e) the Leased Premises are subject to all laws, ordinances and governmental regulations and orders and all matters affecting title to the Property; provided that Landlord represents and warrants that it has good and indefeasible title to the Property, and authority to grant this Lease. Tenant shall be responsible for obtaining and maintaining all security with respect to the interior of the Leased Premises, whether by the use of devices, security guard personnel or otherwise. Tenant acknowledges and agrees that Landlord shall have no liability to Tenant or its employees, agents, contractors or invitees for the implementation or exercise of, or for the failure to implement or exercise, any security measures with

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respect to the interior of the Leased Premises, the Building or the Property. Landlord represents and warrants to the best of its actual knowledge and belief that the structural elements, foundation, exterior walls, exterior doors and windows, elevators (excluding those installed by Tenant), stairways (excluding those installed by Tenant), roof, and systems of the Building (excluding the systems installed in the Leased Premises by Tenant) are free of any latent or patent defects; that the Building complies in all material respects with applicable codes, statutes and regulations; that Tenant’s Permitted Use will not conflict with any applicable easements, covenants or restrictions; and that the Building is zoned LI — Light Industrial.

4.3 Tenant Repairs and Maintenance.

(a) Tenant agrees that it will not damage the Leased Premises, the Building or the Property (provided that modifications and improvements to the Leased Premises conducted in accordance with approved plans and specifications shall not be deemed damage), and will pay, as additional rent upon demand by Landlord, the reasonable cost of the repair or replacement of any damage or injury done to the Building, the Property, or any part thereof, and the fixtures, equipment or personal property located therein or thereon, caused in whole or in part by the negligent acts or omissions or intentional acts of Tenant or Tenant’s agents, employees, contractors, invitees, visitors or permitted subtenants in excess of any insurance proceeds actually received by Landlord with respect to such damage or injury. Except for maintenance and repairs expressly required of Landlord pursuant this Lease, Tenant agrees, at its sole cost and expense, and subject to ordinary wear and tear, (i) to keep the interior of the Leased Premises, including but not limited to ventilation systems, the heating and air conditioning systems, plumbing fixtures, light fixtures, bulbs and tubes, fire sprinkler system, dock bumpers, trash pickup and removal, pest control and extermination, interior walls, ceilings, millwork, paneling and other finish work, floor and floor coverings, and Tenant’s equipment, facilities, furniture and Trade Fixtures, in a neat, clean, properly serviced, safe and secure condition, and in good order, repair and condition (including necessary painting and decorating), and shall be solely responsible for obtaining and causing to be performed all janitorial services within the Leased Premises as required to comply with Tenant’s use of the Leased Premises and its obligations hereunder, (ii) to keep all glass installed by Tenant, all internal doors, the surface of interior walls, and all store fronts to the Leased Premises clean and in good condition and immediately replace any glass installed by Tenant in the Leased Premises which may be damaged or broken; (iii) to make promptly all repairs, alterations, additions or replacements to the Leased Premises, and Tenant’s equipment, facilities or Trade Fixtures therein, that may be required by any law or ordinance or any order or regulation of any public authority as a result of Tenant’s use or occupancy of the Leased Premises or activities or business therein including repairs, alterations, additions or replacements required due to changes in the requirements of the ADA and any similar state and municipal laws, ordinances or regulations after the Commencement Date of this Lease, (iv) to keep the Leased Premises equipped with all safety appliances required because of such use or occupancy, (v) to procure, maintain and furnish any licenses and permits required for any such use or occupancy or activities or business therein, (vi) to comply

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with the laws, ordinances, orders and regulations of all governmental authorities having jurisdiction over the Leased Premises or Tenant, and its use or occupancy of, or activities or business in the Leased Premises; and (vii) in accordance with the same standard of repair that would apply to Landlord under Section 5.3, to keep and maintain all changes made by Tenant to the structural components of the Building and/or changes made by Tenant to the Building systems, including without limitation, the stairwells and/or elevators for the exclusive use of Tenant, in good order, repair and condition or as may be otherwise required by any law or ordinance or any order or regulation of any public authority applicable thereto. Landlord shall comply with all laws, regulations and ordinances applicable to the Property and the Common Areas of the Building, and shall secure all required permits for Landlord’s work in the Building and maintain a certificate of occupancy for the Building (exclusive of the Leased Premises and the premises of other tenants).

(b) A party’s obligation to repair shall include the obligation to replace when necessary, regardless of whether the benefit of such replacement extends beyond the Lease Term. Replacement and repair of the Building and/or the Leased Premises (excluding Tenant’s personal property) shall be with new items or materials of a quality equal to or better than those originally employed, and shall be performed in accordance with the then existing federal, state and local laws, statutes, regulations, ordinances, permits, orders, decrees, guidelines and rules pertaining thereto. All contractors, workmen, artisans and other persons which or who Tenant proposes to retain to perform work in the Leased Premises pursuant to this Section 4.3 shall be competent in their respective crafts and licensed by the State of Texas, where required, and all such work shall comply with Section 4.7 hereof. In addition to the maintenance and repair obligations of Tenant otherwise expressly set forth in this Lease, Tenant is also obligated to perform, at Tenant’s own cost and expense and risk, all other maintenance and repairs within the Leased Premises necessary or appropriate to cause the Leased Premises to be suitable for Tenant’s Permitted Use.

(c) If Tenant fails to make such repairs or replacements within twenty (20) days after notice from Landlord (or if the repairs or replacements are of such nature that they cannot be completed within said 20-day period, Tenant fails to commence such repairs and replacements within twenty (20) days after notice from Landlord and thereafter continuously and in good faith diligently prosecutes the completion of such repairs and replacements as promptly as reasonably possible), Landlord may, at its option, make such repairs or replacements, and Tenant shall repay the reasonable cost thereof (plus a charge of fifteen percent (15%) to cover Landlord’s administrative and supervisory costs) to Landlord upon demand, provided that Tenant may examine receipts and invoices for the expenditures.

(d) Tenant further agrees not to commit or allow any waste to be committed on any portion of the Property, and at the termination of this Lease, by lapse of time or otherwise, Tenant shall deliver up said Leased Premises to Landlord in as good condition as at the Commencement Date, ordinary wear and tear and damages or destruction caused by fire or other insured casualty or Landlord’s negligence or willful

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misconduct excepted. If Landlord causes damage to the Lease Premises by reason of negligence or willful misconduct, or by reason of a breach of its duty to maintain the Building under this Lease, Landlord shall promptly repair or restore such damage. Unless otherwise expressly stipulated herein, Landlord shall not be required to make any improvements of any kind or character on or to the Property, or any portion thereof, during the term of this Lease, but shall make such repairs as may be required for normal maintenance operations and such additional maintenance as maybe necessary to maintain the Property and the Building in a first-class manner excluding damages caused by Tenant, its agents, employees, invitees or visitors.

4.4 Surrender of Leased Premises. Tenant shall immediately surrender possession of the Leased Premises and deliver the Leased Premises to Landlord in as good repair and condition as at the commencement of Tenant’s occupancy, reasonable wear and tear and damages or destruction caused by fire or other insured casualty or by Landlord’s negligence or willful misconduct excepted, and shall deliver to Landlord all keys to the Leased Premises. All furniture and trade fixtures of Tenant not removed at the expiration of the Term of this Lease, or within twenty (20) days after the earlier termination of this Lease (except in the event of the termination of this Lease as the result of fire or other casualty or condemnation, then within thirty (30) days after such termination), shall thereupon be conclusively presumed to have been abandoned by Tenant and Landlord may, at its option, take over the possession of such property and declare same to be the property of Landlord by written notice thereof to Tenant and/or Landlord may dispose of same, in either case without any liability to Tenant.

4.5 Indemnity and Hold Harmless Provisions.

(a) Except as expressly provided herein, Landlord shall not be liable or responsible to Tenant for any loss or damage to any property or person (i) occasioned by theft, act of God, terrorist act, riot, strike, insurrection, war, governmental edict or requisition or act of a governmental authority, or (ii) arising by reason of repair, alteration or maintenance of any part of the Building, or the failure to make any such repairs unless the manner of conducting such repairs, alterations or maintenance (or the failure to perform same) would otherwise constitute an event of default hereunder after satisfaction of any applicable notice and cure periods or is covered by the indemnity provisions contained herein. It is the intention of the parties that each party will be responsible for damage caused by the negligence or willful misconduct of such party or those over whom it has the ability to exercise control. Tenant therefore waives all claims against Landlord for damages to persons or property (including related expenses, including but not limited to attorney’s fees) arising for any reason in or on the Leased Premises, the Building or the Property other than claims, actions, proceedings, damages, fines, and expenses (including reasonable attorney’s fees) to the extent resulting or arising from the intentional acts, willful misconduct or negligence of Landlord or Landlord’s Related Parties (as defined below), or a breach of this Agreement by Landlord, as to which Landlord agrees to defend, save harmless and indemnify Tenant and Tenant’s permitted subtenants or assignees, and Tenant’s agents, employees, contractors, licensees or invitees (“Tenant’s Related Parties”). Neither Landlord nor Landlord’s agents, employees, officers, directors, shareholders, partners, members, venturers, beneficiaries, mortgagees, agents or representatives (collectively,

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“Landlord’s Related Parties”) shall be liable for, and Tenant shall indemnify and save harmless Landlord and Landlord’s Related Parties of and from all fines, legal proceedings and actions, claims, demands, losses, costs, damages, expenses (including but not limited to reasonable attorney’s fees) to the extent resulting or arising from any and all injuries to or death of any person or damage to or loss of any property, caused by, resulting from or resulting or arising from (i) any breach, violation or non-performance of any condition of this Lease by Tenant or Tenant’s Related Parties, (ii) the use or occupancy of the Leased Premises, the Property or Common Areas by Tenant or Tenant’s Related Parties, (iii) any act or omission in the face of a duty to act, or negligence of Tenant or Tenant’s Related Parties in or about the Leased Premises, the Property or the Common Areas including any act of Tenant or Tenant’s Related Parties that is in violation of any law, ordinance, regulation or similar requirement by any governmental authority, (iv) transactions and conduct of the business of the Tenant or Tenant’s Related Parties, or (v) any other matter attributable to the conduct of or conditions caused by Tenant or Tenant’s Related Parties. The provisions of this section shall survive the expiration or earlier termination of this Lease.

(b) Landlord waives all claims against Tenant for damages to persons or property (including related expenses, including but not limited to attorney’s fees) arising for any reason in or on the Leased Premises, the Building or the Property other than claims, actions, proceedings, damages, fines and expenses (including reasonable attorney’s fees) to the extent resulting or arising from the intentional acts, willful misconduct or negligence of Tenant or Tenant’s Related Parties or a breach of this Agreement by Tenant, as to which Tenant agrees to defend, save harmless and indemnify Landlord and Landlord’s Related Parties. Neither Tenant nor Tenant’s Related Parties shall be liable for, and Landlord shall indemnify and save harmless Tenant and Tenant’s Related Parties of and from all fines, legal proceedings and actions, claims, demands, losses, costs, damages, and expenses (including but not limited to reasonable attorney’s fees) to the extent resulting or arising from any and all injuries to or death of any person or damage to or loss of any property, caused by, resulting or arising from (i) any breach, violation or non-performance of any condition of this Lease by Landlord or Landlord’s Related Parties, (ii) the use or occupancy of the Property or Common Areas by Landlord or Landlord’s Related Parties, (iii) any act or omission in the face of a duty to act or negligence or Landlord or Landlord’s Related Parties in or about the Leased Premises, the Building, the Property or the Common Areas including any act of Landlord or Landlord’s Related Parties which is in violation of any law, ordinance, regulation or similar requirement by any governmental authority, (iv) transactions and conduct of the business of the Landlord or Landlord’s Related Parties, (v) any other matter attributable to the conduct of or conditions caused by Landlord or Landlord’s Related Parties. The provisions of this section shall survive the expiration or earlier termination of this Lease.

(c) If any action or proceeding should be brought against Landlord in connection with any liability or claim covered by Tenant’s indemnity above, Tenant, on notice from Landlord, shall defend such action or proceeding, at Tenant’s expense, by or through attorneys reasonably satisfactory to Landlord. Notwithstanding anything in this Lease to the contrary, without affecting the rights of Tenant to recovery of actual, direct damages, under no circumstances shall Landlord be liable to Tenant or to

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Tenant’s Related Parties for any consequential, incidental, indirect, punitive, exemplary or special damages or lost profits (collectively, “Consequential Damages”) resulting from any cause whatsoever, whether arising in contract, warranty, tort (including negligence), strict liability, indemnity or otherwise. It is expressly agreed that no failure by Landlord to fulfill any condition hereof shall constitute a failure of essential purpose entitling Tenant to Consequential Damages. The provisions of this section shall expressly survive the termination of this Lease.

(d) If any action or proceeding should be brought against Tenant in connection with any liability or claim covered by Landlord’s indemnity above, Landlord, on notice from Tenant, shall defend such action or proceeding, at Landlord’s expense, by or through attorneys reasonably satisfactory to Tenant. Notwithstanding anything in this Lease to the contrary, without affecting the rights of Landlord to recovery of actual, direct damages, under no circumstances shall Tenant be liable to Landlord or to Landlord’s Related Parties for any Consequential Damages resulting from any cause whatsoever, whether arising in contract, warranty, tort (including negligence), strict liability, indemnity or otherwise. It is expressly agreed that no failure by Tenant to fulfill any condition hereof shall constitute a failure of essential purpose entitling Landlord to Consequential Damages. The provisions of this section shall expressly survive the termination of this Lease.

(e) Except to the extent directly attributable to Landlord’s gross negligence or intentional misconduct, neither Landlord nor any of Landlord’s Related Parties shall be liable in any event for personal injury or loss to Tenant’s property caused by fire, steam, oil leaking, escaping or flowing in the Leased Premises, flood, water leaks, rain, hail, ice, snow, smoke, lightning, wind, explosion, interruption of utilities, the breakage, leakage, obstruction or other defects of equipment, pipes, sprinklers, wires, appliances, plumbing, air conditioning and heating system or lighting fixtures, or other occurrences. Landlord strongly recommends that Tenant secure Tenant’s own insurance in excess of amounts required elsewhere in this Lease to protect against the above occurrences if Tenant desires additional coverage for such risks. Tenant shall give prompt notice to Landlord of any accidents involving persons or property. Furthermore, except to the extent directly attributable to Landlord’s gross negligence or intentional misconduct, neither Landlord nor any of Landlord’s Related Parties shall be responsible for lost or stolen personal property, equipment, money, or jewelry from the Leased Premises or from the Common Areas, regardless of whether such loss occurs where the area is locked against entry. Neither Landlord nor any of Landlord’s Related Parties shall be liable to Tenant or Tenant’s Related Parties for any damages or losses to property or injury to persons caused by any other lessees in the Property or for any damage or losses caused by theft, burglary, assault, vandalism or other crimes. Landlord strongly recommends that Tenant provide its own security systems and services within the Leased Premises, and secure Tenant’s own insurance in amounts required elsewhere in this Lease to protect against the above occurrences if Tenant desires additional protection or coverage for such risks. Each party shall give the other party prompt notice of any criminal or suspicious conduct within or about the Leased Premises, the Property or the Common Areas and/or any personal injury or property damage caused thereby. Landlord may, but shall not be obligated to, enter into agreements with third parties for the provision, monitoring, maintenance and repair of any courtesy patrols or

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similar services or fire protection systems and equipment. Absent gross negligence or intentional misconduct, Landlord shall not be responsible for the adequacy of lighting or any security measures in Building, the Common Areas (including the parking areas), the Property and/or the Project, and Tenant assumes sole responsibility for the adequacy of lighting and security within the Leased Premises.

4.6 Mechanic’s Liens. Tenant shall not have the right to allow and will not permit any mechanic’s or materialman’s lien or liens to be placed upon the Leased Premises or improvements thereon or the Property during the term hereof caused by or resulting from any work performed, materials furnished or obligations incurred by or at the request of Tenant and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials that would give rise to the filing of any mechanic’s, materialman’s, or other liens against the interest of Landlord in the Property or the Leased Premises. However, Tenant shall not be responsible for any lien filed by reason of work commissioned or materials incorporated by or at the direction of Landlord or any other tenant of the Property, or for the removal of same. In the case of the filing of any lien on the interest of Landlord or Tenant in the Leased Premises or the Property, Tenant shall cause the same to be discharged of record or adequately bonded against in accordance with Sections 53.171-175 of the Texas Property Code within thirty (30) days after the filing of same. If Tenant shall fail to discharge or so bond against such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding after twenty (20) days prior written notice to Tenant. Any amount reasonably paid by Landlord for any of the aforesaid purposes, or for the satisfaction of any other lien not caused or claimed to be caused by Landlord or another tenant, together with all reasonable legal and other expenses of Landlord in defending any such action or procuring the discharge of such lien, shall be paid by Tenant to Landlord upon demand.

4.7 Alterations, Additions and Improvements. Subject to the provisions of Exhibit D, and except as provided below, Tenant covenants and agrees not to make or allow to be made any alterations or improvements to or in the Building or to any of the Building systems outside of the Leased Premises, or to any structural elements within the Leased Premises, without first obtaining the written consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed if such alterations or improvements are consistent with and beneficial to the Tenant’s Permitted Use of the Leased Premises. Tenant may make non-structural alterations within the Leased Premises without Landlord’s prior written consent, except as otherwise required in Exhibit D for the initial Tenant Work, and in Exhibit C for initial tenant improvements in any Expansion Space. Any alterations, physical additions or improvements when made to or in the Leased Premises by Tenant, whether temporary or permanent in character (other than Trade Fixtures), shall be deemed a part of the Property and at once become

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the property of Landlord and shall be surrendered to Landlord upon the termination of this Lease by lapse of time or otherwise, or, at Landlord’s option, shall be removed by Tenant and Tenant shall repair any damage caused or associated with such removal upon the expiration or earlier termination of the term of this Lease; provided, however, this clause shall not apply to Trade Fixtures. All structural alterations, improvements and additions in and to the Leased Premises and all alterations or physical additions to the exterior of the Building or any of the Building systems requested or performed by Tenant shall be in accordance with plans and specifications which have been previously submitted to Landlord and approved in writing by Landlord. Except as provided in Exhibit D, any alterations within the Leased Premises shall be performed at Tenant’s expense. Any structural, exterior or Building systems work approved by Landlord shall be accomplished by Tenant utilizing licensed contractors and subcontractors. All work performed by Tenant and its contractors and subcontractors shall be subject to the following conditions: (a) Tenant shall maintain public liability insurance in amounts not less than $1,000,000 per occurrence and $2,000,000 aggregate, insuring Tenant and Landlord against any liability that may arise on account of such construction and Tenant shall maintain workman’s compensation insurance covering all persons employed by Tenant and will require its contractors and subcontractors to maintain workman’s compensation insurance in connection with such work and with respect to whom death or bodily injury claims could be asserted against Tenant and/or Landlord or their respective property; (c) such construction shall not unreasonably interfere with the use by other lessees of their demised premises in the Property or Landlord’s activities with respect to the Property; (d) a certificate of insurance for each contractor and subcontractor must be submitted to the Landlord for approval, including without limitation, the type and amount of the insurance coverage, prior to commencement of construction; (e) Tenant shall use reasonable efforts to insure that all Tenant’s contractors and subcontractors will be cooperative with Property personnel and comply with all Property Rules and Regulations; (f) all construction shall be done in a good and workmanlike manner utilizing high quality materials, and any structural, exterior or Building system work approved by Landlord shall be pursuant to plans approved in advance by Landlord (except as otherwise provided in this Lease), and such work shall be certified by Tenant’s architect to have been constructed in accordance with the Tenant’s plans, and such certification shall be provided to Landlord; (g) lien releases from each contractor and subcontractor must be submitted to the Landlord within thirty (30) days after completion; and (h) all construction shall comply with all applicable governmental laws, rules and regulations, including procuring all necessary permits and approvals prior to the commencement of any such work. Tenant shall notify Landlord in writing of the completion of the approved changes or alterations. Landlord (or its authorized representative) shall have the right at any time to inspect such changes or alterations for workmanship and compliance with the previously approved plans and specifications, and Tenant shall promptly correct all material deviations or defects discovered in such changes or alterations.

The term “Trade Fixtures” shall mean any and all items of property used by Tenant in, upon or about the Leased Premises for the carrying on of its business and which may or may not be annexed to the realty by Tenant but in any event can be

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removed without any material injury whatsoever to the Leased Premises, the Building or the Property, including but not limited to furniture, furnishings, decorations, equipment, shelves, bins, machinery and equipment (including the emergency stand-by battery system and portable generator as herein provided); provided, however, that the term Trade Fixtures shall not include any permanent leasehold improvements, including but not limited to any floor, wall or ceiling coverings (excluding throw rugs), any interior walls or floor-to-ceiling partitions or partitions permanently attached to the structure, any lighting fixtures, track lights or any property a part of any electrical, plumbing or mechanical system, notwithstanding that the same may have been installed in, upon or about the Leased Premises by or for Tenant. Notwithstanding anything in this Section 4.7 to the contrary, Tenant, at its own cost and expense, may erect such Trade Fixtures in or about the Leased Premises as it desires provided that (a) such Trade Fixtures do not overload or damage the Leased Premises, or have any adverse effect on any Building systems, (b) such items may be removed without material injury to the Leased Premises, and (c) the construction, erection or installation thereof complies with all applicable governmental statutes, rules and regulations. Tenant shall have the right to remove (provided Tenant is not then in default under this Lease), or Landlord (in any event) shall have the right to require the removal of, at the termination or expiration of this Lease such Trade Fixtures installed by Tenant (other than replacements for any such items originally installed by Landlord); provided, such removal is made prior to the expiration of the Term of this Lease or within twenty (20) days after the earlier termination of this Lease (except in the event of the termination of this Lease as the result of fire or other casualty or condemnation, then within thirty (30) days after such termination); and provided, further that Tenant shall repair any damage caused by such removal and restore the Leased Premises to its original condition, reasonable wear and tear excepted. To the extent any Trade Fixtures are not removed from the Leased Premises as provided above, Landlord shall have the rights provided in Section 4.4.

4.8 Assignment and Subletting.

(a) Except as expressly provided herein, Tenant shall not assign this Lease or sublet all or part of the Leased Premises or any part thereof or mortgage, pledge or hypothecate or otherwise encumber this Lease, or any interest in this Lease or the Leased Premises, or permit the use or occupancy of all or part of the Leased Premises by any person or persons other than Tenant, without the prior express written permission of Landlord, which shall not be unreasonably withheld, conditioned or delayed. In the event of a permitted assignment or sublease, or if Landlord consents in writing to an assignment of this Lease or sublease of all or part of the Leased Premises, or any such other transaction, (i) Tenant and Guarantor will remain fully and primarily liable for the performance of all of the covenants, duties, and obligations hereunder including, without limitation, the obligation to pay all rent and other sums herein provided to be paid, (ii) Landlord may require that Tenant pay to Landlord a reasonable

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sum as attorney’s or other fees (not to exceed $1,500.00) arising incident to such transaction and that the assignee or subtenant pay Landlord a reasonable sum incurred by Landlord in moving the assignee or subtenant in and out of the Leased Premises should Landlord be requested and elect to provide such assistance; however, Landlord is under no obligation to provide such assistance; and (iii) upon the occurrence of an event of default if all or any part of the Leased Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or provided by law, may, at its option, collect directly from the assignee or sublessee all rents becoming due to Tenant by reason of the assignment or sublease. Any collection directly by Landlord from the assignee or sublessee shall not be construed to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease or a waiver of this Section 4.8. Consent by Landlord to one transfer or assignment shall not operate as a consent to any subsequent transfer or assignment by Tenant. Any change in the majority ownership or beneficial ownership of Tenant or any acquisition by a control group of majority ownership of the publicly held equity in Guarantor, or a merger, consolidation, dissolution, liquidation or similar transaction involving Tenant or Guarantor in which Tenant or Guarantor, as the case may be, is not the surviving entity, or any transaction or series of transactions resulting in a change of the control of Tenant, or the sale of greater than fifty percent (50%) of Tenant’s or Guarantor’s assets, shall constitute an assignment for purposes of this Lease, and Tenant shall notify Landlord in writing of any such proposed transaction as soon as reasonably possible given the constraints on selective disclosure of material events by a publicly-traded company.

(b) Notwithstanding anything herein to the contrary, Tenant shall at all times during the Lease Term have the right, without having to obtain Landlord’s prior consent or approval, to assign its interest in this Lease and/or to sublet all or any portion of the Leased Premises to (i) any Affiliate (as defined below) of Tenant or Tenant’s parent, (ii) to any successor entities or persons by virtue of conversion, merger, consolidation, liquidation, reorganization or other operation of law; or (iii) to the purchaser (or an Affiliate of the purchaser) of substantially all of the assets of Tenant, or the portion of the business conducted by Tenant at the Leased Premises; provided the tangible net worth of the entity resulting from such merger or acquisition immediately after such merger or acquisition is equal to or greater than the tangible net worth of Tenant as of the Commencement Date of this Lease, and provided further that in the event of any of the assignments described in (i), (ii) and (iii) immediately above, Guarantor shall remain fully and primarily liable for the performance of all of the covenants, duties, obligations hereunder including, without limitation, the obligation to pay all rent and other sums herein provided to be paid. As used in this Lease, the Lease term “Affiliate”, as to either party, shall mean (1) any person or entity controlling, controlled by or under common control with such party, or (2) any person or entity controlling, controlled by or under common control with such party’s parent or any subsidiary of any tier of such party’s parent. For purposes of this Lease, Zydeco Development Corporation shall be deemed to be an Affiliate of Landlord. Moreover, notwithstanding subsection (a) above, Tenant may, without Landlord’s prior consent, allow the temporary occupancy of space within the Leased Premises by research subjects engaged in clinical studies, including

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overnight stays continuing during the pendency of those clinical trials, and may allow use of space within the Leased Premises by health care professionals and assistants as needed to support such clinical studies.

4.9 Subordination. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, or other lien presently existing or hereafter placed with Landlord’s consent upon or constituting a lien or charge upon the Property or the improvements situated thereon and any renewals, modifications, consolidations, participation, replacements and extensions thereof. Tenant agrees that any such mortgagee and/or beneficiary of any deed of trust or other lien (“Landlord’s Mortgagee”) and/or Landlord shall have the right at any time to subordinate such mortgage, deed of trust, or other lien to this Lease. Tenant agrees upon demand to execute such instruments, releases or documents as may be required by Landlord’s Mortgagee for the purpose of subjecting and subordinating this Lease to the lien of any such mortgage, deed of trust or other lien, provided the terms thereof are substantially the same as those contained in the Subordination, Non-Disturbance and Attornment Agreement attached hereto as Exhibit F.

4.10 Notice to Landlord and Landlord’s Mortgagee; Right to Cure. In the event of any act, omission or breach of any provision of this Lease by Landlord which would give Tenant the right to damages from Landlord or any other right hereunder, at law or in equity, Tenant shall not sue for such damages or take any other action (excluding exigent circumstances, where immediate action is necessary to protect valuable property or safety) until (i) Tenant shall have given written notice of such act, omission or breach to Landlord and Landlord’s Mortgagee (if Tenant has been provided with the name and current address of same), if any, and (ii) at least thirty (30) days to remedy such act, omission or breach shall have elapsed following the giving of such notice, and Landlord, its agents, employees or the Landlord’s Mortgagee shall be entitled to enter upon the Leased Premises and do therein whatever may be reasonably necessary to remedy such act, omission or breach during such cure period to forestall any such action by Tenant.

4.11 Estoppel Certificate. Tenant and Landlord will, at any time and from time to time, upon not less than twenty (20) days’ prior request by the other party, execute, acknowledge, and deliver to the other party a statement in writing provided by the other party certifying to the other party or any present or prospective purchaser or mortgagee, or to comply with any audit, that (i) this Lease is the entire agreement between the parties and is unmodified and in full force and effect (or, if there have been modifications that this Lease is in full effect as modified, and setting forth such modifications), (ii) the date through which the rent has been paid, (iii) that Tenant has unconditionally accepted the Leased Premises, or stating any reservations, (iv) the term of this Lease, including any applicable extensions or renewals, (v) the current amount of monthly Base Rent and Additional Rent, (vi) the present Landlord and Tenant, (vii) the next date on which a rent payment will be due and owing, (viii) either stating that to the knowledge of the signer of such certificate that no default is known to exist hereunder or specifying each such default of which the signer may then have knowledge, and (ix) stating such other factual circumstances as may be reasonably requested, provided that

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such instrument shall not be drafted to modify or impair any right existing under the Lease in favor of the signatory. It is intended that any such statement by the party executing such statement may be relied upon by the auditors, and prospective and actual lenders and investors of the other party and by any prospective purchaser or mortgagee of the Property or by any prospective purchaser of Tenant’s business or assets, as the case may be. If the party receiving such request does not respond within such twenty-day period, such silence shall be conclusively deemed to have confirmed and approved all of the items, certifications and representations contained in the estoppel certificate provided by the requesting party to the extent the estoppel certificate is consistent with the foregoing provisions, and the requesting party and such present or prospective purchaser of mortgagee shall be entitled to rely upon such certificate provided by the requesting party as if the party receiving such request had executed such certificate. However, the parties will not request that estoppel certificates be signed for purposes of any litigation between them.

4.12 Use Tax; Taxes on Tenant’s Property; Tax Protests. Notwithstanding any other provision herein, Tenant shall pay as and when they become due and before the same become delinquent any and all taxes, charges and fees imposed upon Tenant, its assets or its business in connection with the use and occupancy of the Leased Premises. This includes any charges that constitute or are imposed in connection with licenses needed by Tenant, or any franchise, sales or excise taxes, and any taxes (other than income taxes) measured by the amount of rents paid under this Lease. Tenant shall be liable for all taxes levied or assessed against Tenant’s Trade Fixtures or other personal property in the Leased Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord’s property and if Landlord elects or is required to pay the same or if the assessed value of Landlord’s property is increased by inclusion of Tenant’s Trade Fixtures or other personal property in the Leased Premises and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder. Nothing herein shall diminish Tenant’s right to contest in accordance with lawful tax procedures, any tax or assessment imposed on its own personal property.

Section 41.413 of the Texas Property Tax Code gives Tenant the right to protest before the appropriate appraisal review board a determination of the appraised value of the Leased Premises and requires Landlord to deliver to Tenant a notice of any determination of the appraised value of the Leased Premises. Provided Tenant received the notice of appraised value from Landlord at least twenty (20) days prior to the date by which a protest of such value must be filed, Tenant agrees to give Landlord at least ten (10) days prior notice before Tenant files any such protest with appropriate governmental authorities, during which ten-day period Landlord may exercise its right to file such a protest. Tenant further agrees that if it files a protest in accordance with the conditions of Section 41.413 of the Texas Property Tax Code, Tenant shall be solely responsible for, and shall pay, all costs of its protest. If either Landlord or Tenant protests a determination of the appraised value of the Leased Premises, the party so protesting such valuation shall keep the other party advised as to the status, progress and results of such protest.

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4.13 Intentionally Deleted.

4.14 Common Areas. All areas of the Property designated by Landlord from time to time for the common use of all tenants and occupants of the Property, including but not limited to parking areas, sidewalks, landscaping, curbs, loading areas, private streets and alleys on the Property, lighting facilities, and other exterior areas and improvements provided by Landlord for the common use of all tenants and occupants of the Building (the “Common Areas”) shall be subject to Landlord’s sole management and control and shall be operated and maintained in such manner as Landlord, in its reasonable discretion, shall determine. Landlord reserves the right to change from time to time the dimensions and location of the Common Areas as well as the location, dimensions, identity and type of any building other than the Building and to construct additional buildings or additional stories on existing buildings other than the Building or other improvements in and to the Property, and to eliminate buildings other than the Building, provided that Landlord shall not (i) materially interfere with access to the Building and the Leased Premises; (ii) significantly impair Tenant’s views to the open space surrounding the Building; (iii) adversely affect parking rights under the Lease; (iv) eliminate Common Areas needed by Tenant for the use and enjoyment of the Leased Premises; or (v) alter the character of the Building as a first class building. Tenant shall have the nonexclusive right and license to use the Common Areas as constituted from time to time, as well as the Common Areas as defined in the Declaration, such use to be in common with Landlord, other tenants and occupants of the Property and other persons permitted by Landlord to use the Common Areas. Notwithstanding anything herein to the contrary, Landlord hereby agrees that the costs of maintaining the Common Areas shall be reasonable and commensurate with those of other buildings in the area.

4.15 Parking and Road Use. Tenant is granted the license and right to use, for the benefit of Tenant, and Tenant’s Related Parties, the number of parking spaces as provided in Section 1.18 on the Property outside the Leased Premises subject to reasonable regulation by Landlord. Some of the parking spaces are on a reserved basis and are located as reflected on the Parking Lot Layout attached hereto as Exhibit A-1, and the balance of the parking spaces are on a non-reserved basis as located within the parking lot as reflected on Exhibit A-1. All reserved parking shall be only in marked areas and any parking along any roads by Tenant or Tenant’s Related Parties shall be upon the express condition that all roads must be kept clear for through traffic of all vehicles, including but not limited to tractor trailers, and Tenant and Tenant’s Related Parties shall not park in any reserved parking designated for other tenants in the Building. Landlord shall not be responsible for enforcing Tenant’s parking rights against any third parties but shall create an enforcement mechanism by the placement of signs or marking of spaces, the issuance of parking permits or stickers, and, at Tenant’s expense and liability, providing Tenant with the right to cause improperly parked vehicles to be removed in accordance with all applicable laws, ordinances and governmental regulations.

4.16 [Intentionally omitted.]

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4.17 Signage.

(a) The design, size, location and quantity of any signage Tenant desires for the Leased Premises shall be subject to the mutual approval of Landlord and Tenant. Such signage may include lobby signage, directory signage, building façade signage and Tenant directional signage. It is expressly agreed that Tenant shall have the right to have prominent exterior signage, up to and including, renaming the Building, subject to Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.

(b) Tenant shall repair, paint and/or replace the facia surface to which its signs are attached upon Tenant’s vacating the Leased Premises or the removal or alteration of the signage, as necessary to repair any damage. In connection with the installation and maintenance of Tenant’s signage, Tenant shall not, without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed, (i) make any changes to the exterior of the Leased Premises (other than the erection of the signage), or (ii) install any exterior lights, decorations, balloons, flags, pennants or banners.

(c) All of Tenant’s signs shall comply with all applicable ordinances, rules and regulations of the City of Austin, and Tenant shall be solely responsible, at Tenant’s cost and expense, to obtain all permits required for any such signs.

(d) It is further agreed that Tenant, at its sole cost and expense, shall be allowed (subject to all applicable restrictions, ordinances or regulations) to install a directional or identification monument sign, the design of which shall be subject to the reasonable approval of Landlord, at the corner of U.S. Highway 183 South and Riverside Drive in such location as is mutually agreed upon by Tenant and Landlord. Tenant shall further be allowed, at Tenant’s sole cost and expense and subject to all applicable restrictions, ordinances or regulations, to such other directional signs, the design of which shall be subject to the reasonable approval of Landlord, within the Project at such locations as Landlord and Tenant may mutually agree so long as such signs shall be located on property owned by Landlord or its Affiliates. It is further agreed that in the event Landlord or one of its Affiliates construct tenant identification signage at the entrance of the Project on State Highway 71/Ben White Boulevard and Riverside Drive, Tenant shall have the right to have tenant identification signage thereon, with the prominence thereof being proportionate to the other tenants based on the relative square footages of their respective occupied spaces in the Project.

4.18 Attorney’s Fees and Expenses. Notwithstanding anything contained herein to the contrary, in the event either Tenant or Landlord brings suit for a default in the performance of any of the terms, covenants, agreements or conditions contained in this Lease Agreement, or any part thereof, in addition to the remedies to which the parties may otherwise be entitled, the prevailing party shall be entitled to recover reasonable attorneys and expert witness fees, expenses, and court costs incurred in connection therewith. Whenever this Lease Agreement requires the payment of any attorney’s fees or other expenses to enforce any obligation or to cure any default on the part of either party, the requirement shall be construed to mean reasonable attorney’s fees or reasonable expenses in relation to the matter (taking into account the urgency with which it must be accomplished), as the case may be.

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4.19 Hazardous Substances. Tenant shall not cause or permit any Hazardous Substances (as defined below) to be used, stored, generated or disposed of on or in the Leased Premises by Tenant, its agents, employees, contractors or invitees in violation of applicable law. The term “Hazardous Substance” means any substance that is toxic, ignitable, reactive or corrosive, the use or disposal of which is restricted, regulated or penalized by any federal, state or local statute, ordinance, regulation or other law of a governmental or quasi-governmental authority relating to pollution or protection of the environment or the regulation or storage of such materials. The term “Hazardous Substance” includes any and all materials or substances that are defined as: “hazardous waste”, “extremely hazardous waste” or a “hazardous substance” pursuant to state, federal or local governmental law. The term “Hazardous Substance” includes but is not limited to asbestos, polychlorobiphenyls (“PCBs”) and petroleum. Without limitation of the foregoing, if Tenant causes or permits the presence of any Hazardous Substances on the Leased Premises, the Property or the Project which results in contamination, Tenant shall promptly, at its sole expense, take any and all necessary actions to return the Leased Premises, the Property or the Project to the condition existing prior to the presence of any such Hazardous Substances on the Leased Premises, the Property or the Project. Tenant shall first obtain Landlord’s written approval for any remedial action. The provisions of this Section 4.19 shall be in addition to any other obligations and liabilities Tenant may have to Landlord at law or in equity and shall survive the transactions contemplated herein and shall survive the termination of this Lease. Landlord warrants to Tenant that there are no Hazardous Substances on the Property or in the Leased Premises as of the Effective Date. Landlord shall be responsible for the removal of, and shall indemnify, hold harmless and defend Tenant from and against any claims, suits, losses, damages and expenses resulting from the presence of, any Hazardous Substances on the Property or in the Building or the Leased Premises prior to the Effective Date of this Lease or that are hereafter brought into the Building or the Leased Premises or onto the Property by Landlord (or its Affiliates or their respective agents or contractors). Notwithstanding the foregoing, Tenant may maintain (i) cleaning, printing, lubricating and similar fluids, solvents and materials normally and commonly used in general office and similar situations, and (ii) pharmacological and other substances and materials, including sharps, permitted or produced in connection with the conduct of clinical trials approved by the U.S. Food and Drug Administration, as are necessary for Tenant’s Permitted Use of the Leased Premises; provided that any such use of Hazardous Substances is conducted in accordance with applicable federal, state and local laws, ordinances and regulations, Tenant maintains all such materials in proper containers designed to avoid leakage or contamination, and Tenant obtains and maintains all governmental permits and approvals that may be required for the possession, storage or use of same.

4.20 Hazardous Materials. Tenant shall not cause or permit any Hazardous Materials (as defined below) to be brought upon, kept or used in or about the Property or the Leased Premises by Tenant, its agents, employees, contractors or invitees;

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provided, notwithstanding the foregoing, Tenant may maintain (i) cleaning, printing, lubricating and similar fluids, solvents, and materials normally and commonly used in general office and similar situations, and (ii) pharmacological and incidental substances and materials, including sharps, permitted or produced in connection with clinical trials approved by the U.S. Food and Drug Administration, as are necessary for Tenant’s Permitted Use of the Leased Premises; provided that any such use of Hazardous Materials is conducted in accordance with applicable federal, state and local laws, ordinances and regulations, Tenant maintains all such materials in proper containers designed to avoid leakage or contamination, and Tenant obtains and maintains all governmental permits and approvals that may be required for the possession, storage or use of same. Any Hazardous Materials permitted on the Property or the Leased Premises as provided herein, and all containers therefor, shall be used, kept, stored and disposed of in a manner that complies with all federal, state and local laws and regulations applicable to such Hazardous Materials. Title to Hazardous Materials will remain and be stored or disposed of solely in Tenant’s name. Tenant shall not release, discharge, leak, or emit or permit to be released, discharged, leaked or emitted, any material into the atmosphere, ground, ground water, surface water, storm or sanitary sewer system or any body of water, any Hazardous Materials or any other material (as is reasonably determined by Landlord or any governmental authority) which may pollute or contaminate the same or may adversely affect (a) the health, welfare and safety of persons, whether located on the Property or the Leased Premises or elsewhere, or (b) the condition, use or enjoyment of the Leased Premises, or any other real or personal property. The term “Hazardous Materials” shall mean (a) any “hazardous waste” as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any “hazardous substance” as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any oil, petroleum products or their by-products; and (d) any pollutant, contaminant, toxic or other waste which is restricted, prohibited or penalized by any federal, state or local governmental authority. Tenant hereby agrees that it shall be fully liable for all cost and expense related to the use, storage and disposal of Hazardous Materials kept on the Leased Premises or used in Tenant’s operations, and Tenant shall provide Landlord with immediate written notice of any violation or potential violation of the provisions of this Section 4.20. Landlord represents that as of the Effective Date there are no Hazardous Materials that Landlord (or its Affiliates or their respective agents or contractors) has brought onto the Property. Landlord shall be responsible for the removal of, and shall indemnify, hold harmless and defend Tenant from and against any claims, suits, losses, damages, and expenses asserted against Tenant or resulting from the presence of, any Hazardous Materials on the Property or in the Building or the Leased Premises prior to the Effective Date or that are thereafter brought into the Building or the Leased Premises or onto the Property by Landlord or its Affiliates or their respective agents or contractors.

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ARTICLE V

LANDLORD’S DUTIES AND OBLIGATIONS

5.1 Quiet Enjoyment. Provided Tenant has performed all of the terms and conditions of this Lease, including payment of rent, to be performed by Tenant, Landlord shall not interfere with the peaceable and quiet enjoyment of the Leased Premises and the Building, including the Common Areas, by Tenant during the term of this Lease, subject to the terms and conditions of this Lease.

5.2 Utilities. Landlord shall not change or relocate the points of supply of such services so that water, sewer, electricity, communication facilities and other utilities available to Tenant will remain available for continued connection to the Leased Premises. Landlord shall also make available electric lighting and service for Common Areas in a reasonable and safe manner. The obligation of Landlord hereunder to make available such utilities and electric service, cable, and electronic communications shall be subject to the rules and regulations of the supplier of such utilities and/or any municipal or other governmental authority regulating the business of providing such utility and electric service. Tenant shall pay for all water, gas, heat, light, electricity, cable, electronic communications, power, telephone, sewer and other utilities and services used on or at the Leased Premises, together with any deposits, taxes, penalties, surcharges or the like pertaining to Tenant’s use of the Leased Premises and any maintenance charges for utilities. Water and electric service for the Leased Premises shall be separately metered. Except to the extent provided in this Section 5.2, no slow-down, fluctuation, interruption, inadequacy, malfunction, failure, stoppage with respect to utilities from any cause shall constitute an eviction, actual or constructive, or disturbance of Tenant’s use and possession of the Leased Premises or the Property or a breach by Landlord of any of its obligations hereunder or render Landlord liable for damages or entitle Tenant to be relieved from any of its obligations hereunder (including the obligation to pay rent); provided, however, to the extent any such interruption, failure or stoppage substantially interferes with the Permitted Use or otherwise renders the Leased Premises untenantable for seven (7) or more consecutive days, the Base Rent shall be abated from the beginning of such seven-day period until such reliable service is restored. It is further agreed that if the interruption, failure or stoppage renders the Leased Premises untenantable, and either (i) is caused by the gross negligence or willful misconduct of Landlord, and continues for a period of twenty (20) consecutive days, or (ii) is not caused by the gross negligence or willful misconduct of Landlord, and continues for a period of forty (40) consecutive days, then in either such event, Tenant shall be entitled to terminate this Lease by giving written notice to Landlord at any time prior to the date such service is restored to the extent necessary to allow Tenant’s continuous use of the Leased Premises for the Permitted Use. Subject to the foregoing, Landlord does not warrant that any of the utilities made available to the Leased Premises for service to be provided by the utility suppliers will be free of interruptions occasioned by causes beyond Landlord’s reasonable control, but Landlord shall exercise reasonable diligence to attempt to have such services that are disrupted restored to the extent within its reasonable control.

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5.3 Maintenance and Repairs by Landlord. Landlord will, at its sole cost and expense, maintain in good repair the Building and the Property, including the Common Areas (including the parking areas), the roof, foundation, exterior walls and Building skin, doors and stairwells outside of the Leased Premises, perimeter glass and glass external to the Leased Premises, exterior systems and the structural soundness of the Building, damage from casualty, reasonable wear and tear excepted (provided, the exception for reasonable wear and tear shall not be construed to diminish Landlord’s obligation to maintain the Building and the Property in good repair) and excepting the maintenance of changes by the Tenant to the structural components of the Building and the Building systems, which are to be maintained and repaired by Tenant as provided in Section 4.3(a) above. Notwithstanding the foregoing, if damages are caused by the negligent or willful acts or omissions of Tenant, or Tenant’s Related Parties, Tenant will repay the cost of such repair to Landlord upon demand, and repairs necessitated by fire or other casualty, or by taking pursuant to Condemnation (as defined below) shall be required only to the extent provided in Sections 6.4 and 6.5 below. Neither Landlord nor any of Landlord’s Related Parties shall be liable or responsible to Tenant, or Tenant’s Related Parties for any loss or damage occasioned by or for any damage or inconvenience which may arise through repair or alteration of any part of the Property or failure to make such repairs, except to the extent provided in Section 4.5 above. Landlord shall not be responsible for maintaining the Leased Premises, including doors, hardware or glass within the Leased Premises, or any store fronts to the Leased Premises or any signs for the Leased Premises. The repair and maintenance of such items are the responsibility of Tenant under this Lease. The term “foundation” as used herein shall not include loading docks that are within the Leased Premises. Landlord shall not be liable to Tenant for any damage to Tenant’s property or business caused by water leakage from the roof at the locations of penetrations made by Tenant in the roof in connection with Tenant’s Work, or from water lines, sprinkler system or heating and cooling equipment located in and/or servicing the Leased Premises. Unless otherwise expressly provided in this Lease, Landlord shall not be required to maintain, or make any repairs to, the Leased Premises. Landlord’s maintenance obligation shall not include Tenant’s signs, the repair and maintenance of which are the responsibility of Tenant, or janitorial service for the Leased Premises, which is the sole responsibility of Tenant.

5.4 No Implied Waiver. The failure of either party to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power, or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or forbearance to redress any violation of this Lease or the Rules and Regulations for the Property shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. No express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by Landlord of any rent or by either party of any other payment with or without knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach unless expressly waived in writing, and no waiver by either party of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by the party against whom such waiver is urged.

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5.5 Access by Landlord. Landlord, its agents and employees shall have the right, upon and subject to the provisions hereof, to enter any portion of the Leased Premises upon reasonable notice and at reasonable hours to examine the condition of the Leased Premises, to make any repairs or alterations required to be made by Landlord hereunder, to perform any duties or enforce any rights of Landlord expressly provided for under this Lease, or during the last six (6) months of the term of this Lease, to show the Leased Premises to prospective purchasers, mortgagees or tenants. However, Landlord shall not exercise this right in such a manner as to unreasonably interfere with Tenant’s Permitted Use or quiet enjoyment of the Leased Premises, and under no circumstances or conditions shall Landlord handle, examine, discard or destroy any electronic, documentary or clinical materials of Tenant or its clients in the Leased Premises. TENANT HAS ADVISED LANDLORD THAT TENANT’S WORK INVOLVES HIGHLY CONTROLLED CLINICAL TRIALS OF NEW DRUG APPLICATIONS FOR PHARMACEUTICAL CLIENTS PURSUANT TO CONFIDENTIAL PROTOCOLS SUBJECT TO FEDERAL LAWS AND REGULATIONS AND CONTRACTUAL COMMITMENTS PROVIDING FOR STRICT CHAIN OF CUSTODY PROCEDURES; AND IN EXERCISING ITS RIGHTS OF ENTRY UNDER THIS LEASE LANDLORD SHALL EXERCISE GOOD FAITH EFFORTS TO (i) PRESERVE CONFIDENTIALITY AS TO ANY DOCUMENTARY OR ELECTRONIC INFORMATION OBSERVED BY LANDLORD OR ITS AGENTS IN THE LEASED PREMISES, (ii) AVOID INTERFERING WITH, DESTROYING OR ALTERING SUCH INFORMATION OR MATERIALS RELATED TO CLINICAL TRIALS, AND (iii) AVOID SUCH DISRUPTIVE ACTIONS AS WOULD BE LIKELY TO CAUSE TENANT TO VIOLATE ITS LEGAL AND CONTRACTUAL OBLIGATIONS TO CLIENTS. Tenant shall be entitled to accompany Landlord, its agents, employees and third parties during any such entry of the Leased Premises. In addition, during the last six (6) months of the term of this Lease, Landlord shall have the right to erect a suitable sign on the Property stating that the Leased Premises are available for lease. Landlord shall at all times retain a key with which to unlock all of the doors in, upon or about the Leased Premises. Tenant shall not change Landlord’s lock system without Landlord’s express written consent, or in any other manner prohibit Landlord from entering the Leased Premises in accordance with the provisions of this Lease. Notwithstanding anything to the contrary herein, Landlord shall have the right at any and all times to enter the Leased Premises without prior notice to Tenant by any reasonable means in the event of an emergency without liability therefore (excluding Landlord’s gross negligence or willful misconduct); provided, Landlord shall use its best efforts (i) to give Tenant notice of such emergency entry as promptly as reasonably practicable and (ii) to minimize damage to the Leased Premises and Tenant’s property. Tenant shall notify Landlord in writing at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Landlord for a joint inspection of the Leased Premises at least two (2) days prior to vacating. Notwithstanding anything contained herein to the contrary, all actions of Landlord or its agents pursuant to this Section 5.5 shall be taken in such manner and at such times as to not unreasonably interfere with Tenant’s use and enjoyment of the Leased Premises.

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ARTICLE VI

INSURANCE, DAMAGE AND CONDEMNATION

6.1 Insurance by Landlord. Landlord shall maintain in effect at all times during the Lease Term, fire, casualty and extended coverage insurance on the Building, including the Tenant Improvements when completed, in such amounts as Landlord shall deem reasonable in its sole discretion but in no event less than the replacement cost of the Building, including the permanent improvements and fixtures, with a solvent and reputable carrier. Landlord shall furnish to Tenant a certificate of insurance (i) confirming the effectiveness of such insurance in accordance herewith, (ii) reflecting the renewal of such policy at least ten (10) days prior to the expiration of such policy, and (iii) reflecting any modification to such policy, provided that such policy shall not be modified in a manner inconsistent with the requirements of this Section. There shall be no endorsement or modification of the Landlord’s insurance policy to exclude the negligence of Tenant. Attached to the certificate of insurance shall be the waiver of subrogation and any other endorsements that may be required herein, or relevant portions of the policy setting forth such matters. Payment for losses under any such insurance policies shall be made solely to Landlord, subject, however, to the rights of the holder of any first lien mortgage or deed of trust which may now or hereafter encumber the Property. If the annual premiums to be paid by Landlord shall materially exceed the standard rates solely because of Tenant’s operations or any act or omission of Tenant, Tenant shall promptly pay the excess amount of the premium to Landlord upon written demand and proof of the increase. An increase of five percent (5%) in the annual premiums shall be deemed material. Landlord shall not be obligated in any way or manner to insure any personal property of Tenant, and Tenant shall have no right in or claim to the proceeds of any policy of insurance maintained by Landlord.

6.2 Insurance by Tenant. Tenant shall, at all times during the term of this Lease, at its own expense, maintain a policy or policies of insurance with premiums paid on a timely basis, issued by and binding upon a reputable solvent insurance company, insuring all of Tenant’s personal property located in the Leased Premises against loss or damage by fire, explosion, vandalism, malicious mischief, or other standard insurable hazards and contingencies for the full insurable value thereof (subject to standard exclusions and Tenant’s customary deductibles), and insuring Tenant against business interruption in an amount sufficient to insure the payment of Base Rent for a period of one year. Tenant shall also maintain a policy or policies of comprehensive commercial general liability insurance which provide coverage to include personal injury, bodily injury, broad form property damage, operations hazard, owner’s protection coverage and contractual liability with the premiums thereon paid on a timely basis, issued by and binding upon a solvent and reputable insurance company, such insurance to provide an aggregate limit as to the Property of not less than Three Million and No/100 Dollars ($3,000,000.00) per occurrence. Tenant may fulfill its obligations to provide insurance as required herein by an umbrella or blanket policy or policies, covering the various

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liabilities of Tenant and its Affiliates, so long as the general aggregate limit of such policy or policies will apply separately at least to the extent of $3,000,000 for the Tenant’s liabilities under this Lease. Tenant shall also be required to maintain workmen’s compensation and employee’s liability insurance in such amounts as required by law. The amount of the deductibles under any policy may be such amount as Tenant deems appropriate in accordance with Tenant’s corporate policy, provided the amount of the deductible of the underlying policy is commercially reasonable, and in all events, Tenant shall be solely responsible for any damages caused by Tenant, Tenant’s Related Parties, or any another persons over whom Tenant has control, that are not covered by the insurance as a result of such deductible.

Tenant’s liability and property damage insurance policies (a) shall name Landlord as additional insured and in connection with this Lease (except for the workers’ compensation policy, which instead shall include a waiver of subrogation endorsement in favor of Landlord, if available), and (b) shall provide that said insurance shall not be canceled, modified or amended unless ten (10) days prior written notice has been given to Landlord. Tenant shall deliver to Landlord insurance certificates with respect to the insurance required hereunder (and naming Landlord as additional insured as required above) on or before the Commencement Date (or Tenant’s earlier access to the Leased Premises), shall maintain such certificates at all times, and shall deliver to Landlord certificates of the renewal or replacement of such policies at least ten (10) days prior to each renewal, expiration or cancellation of such insurance. All such policies shall be primary with respect to the Leased Premises, over any other insurance maintained by Landlord. There shall be no endorsement or modification of the insurance policy to make it excess over other available insurance, or if the insurance policy states that it is excess or prorata, the policy shall be endorsed to be primary insurance with respect to the Landlord as additional insured with respect to all coverages applicable to the Leased Premises. There shall be no endorsement or modification of the policy to exclude the negligence of the additional insured. Attached to the certificates of insurance shall be the additional insured endorsement, waiver of subrogation, insured contract coverages and other endorsements required herein, or relevant portions of the policy setting forth coverages. Upon written request, the parties shall exchange copies of each policy required in this Lease.

In the event that either party fails to take out or maintain any policy required to be maintained by such party hereunder, such failure shall be a defense to any claim asserted by such party against the other party by reason of any loss sustained by such party that would have been covered by such policy, NOTWITHSTANDING THAT SUCH LOSS MAY HAVE BEEN PROXIMATELY CAUSED SOLELY BY THE NEGLIGENCE OF THE OTHER PARTY, ITS CONTRACTORS, OR ANY OF ITS RELATED PARTIES. If Tenant does not procure insurance as required, Landlord may, upon advance written notice to Tenant, cause the insurance to be issued and Tenant shall pay to Landlord the premium for such insurance within ten (10) days of Landlord’s demand, plus interest at the Default Rate from the date of demand until repaid by Tenant. The parties further agree that, notwithstanding anything to the contrary contained in this lease, neither party shall make claim against the other for damages attributable to any claim that is subject to insurance under the policies required hereunder to cover such party, to the extent of the coverage of such policies.

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6.3 Waiver of Subrogation. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, licensees, invitees and employees, for any and all loss of, or damage to, any of its property by reason of fire, the elements, or any other causes which are insured against or required to be insured against under the terms of the fire and extended coverage insurance or liability policies required under this Lease, regardless of cause or origin, EXPRESSLY INCLUDING NEGLIGENCE OF THE OTHER PARTY HERETO, ITS AGENTS, OFFICERS, LICENSEES, INVITEES OR EMPLOYEES, provided, the foregoing waiver of subrogation is expressly limited to the extent of the insurance proceeds actually paid under such insurance policies, and covenants that no insurer shall hold any right of subrogation against such other party. Each party to this Lease agrees immediately after execution of this Lease to give written notice of the terms of the mutual waivers contained in this Section 6.3 to each insurance company that has issued to such party policies of fire and extended coverage insurance and to have the insurance policies properly endorsed to provide that the carriers of such policies waive all rights of recovery under subrogation or otherwise against the other party.

6.4 Fire or Other Casualty.

(a) If, during the Term of this Lease, the Leased Premises or any portion of the Property are partially or totally destroyed by fire or other casualty, the following provisions shall apply.

(b) If such damage is not substantial in extent, and can reasonably be restored with diligence within ninety (90) days, Landlord shall proceed to promptly and diligently restore same, and this Lease shall continue in effect, provided that rent shall be equitably abated from the date of damage in accordance with subsection (i) below.

(c) If the damage to the Building exceeds fifty (50) percent of the area of the Leased Premises, either Tenant or Landlord shall have the right to terminate the Lease effective as of the date of the damage, and Tenant shall be granted access for a period of thirty (30) days after notice from the Landlord (at its sole risk and subject to appropriate safety precautions) to remove all of its personal property and Trade Fixtures. Tenant or Landlord shall make an election to terminate within thirty (30) days after the date of the damage by written notice to Landlord or Tenant, as the case may be, and if no such notice is provided within said thirty-day period, neither Landlord or Tenant shall be entitled to terminate the Lease under this subsection (c) due to such damage.

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(d) If (1) neither Tenant nor Landlord elect to terminate the lease as provided in subsection (c) above or (2) the damage to the Building is substantial but does not exceed fifty (50) percent of the Leased Premises, Landlord shall, within thirty (30) days after the date of damage, advise Tenant (i) whether, based on good faith estimates secured by Landlord from its architect and/or contractor, the damage (including any damage to the Tenant Improvements) can be restored within one hundred twenty (120) days of the date of damage, and (ii) whether Landlord elects to restore the damage within such period in accordance with the provisions below. If Landlord (a) fails to so notify Tenant, or (b) notifies Tenant that the damage cannot be restored within one hundred twenty (120) days from the date of damage, then (unless the damage was caused by Tenant’s fault) Tenant may terminate this Lease upon written notice to Landlord within thirty (30) days after receipt of notice from Landlord, and shall surrender the Leased Premises in accordance with Section 4.4 above. If Landlord notifies Tenant within such thirty (30) day period of its conclusion in good faith that the damage to the Building and/or the Leased Premises cannot be restored within one hundred twenty (120) days from the date of damage, or that Landlord cannot secure funding (whether from insurance proceeds or otherwise to complete such restoration) then Landlord may terminate this Lease upon notice to Tenant, and Tenant shall surrender the Leased Premises in accordance with Section 4.4. If Landlord instead timely notifies Tenant that the restoration can be completed within such one hundred twenty (120) days and that Landlord is willing to do so and has the funding necessary to do so, this Lease shall not terminate, provided that Landlord shall thereafter diligently pursue restoration of the Building and the Leased Premises (including Tenant Improvements) so as to achieve completion within not more than one hundred eighty (180) days in accordance with this Section 6.4. If Landlord does not diligently pursue the restoration, or fails to complete the restoration within one hundred eighty (180) days for any reason, Tenant may, upon notice, terminate this Lease.

(e) Notwithstanding the foregoing, if the damage to the Building occurs during the last twelve (12) months of the Lease Term, either party may terminate this Lease.

(f) If there is damage to the Property other than the Building (not attributable to Tenant’s fault), and either such damage or the restoration efforts (i) restrict access to the Building by Tenant or its invitees, (ii) impair their parking rights, or (iii) create a hazard or nuisance for Tenant or its invitees, such that Tenant cannot fully enjoy the Permitted Use in the Leased Premises, Tenant shall receive an equitable abatement of rent while the condition persists, and Landlord shall promptly undertake to resolve such problem(s) so as to enable Tenant to have access to parking, access to the Building, and use of the Leased Premises without hazard or nuisance, and if such problem(s) cannot be resolved within thirty (30) days, Tenant may terminate this Lease by notice to Landlord.

(g) Notwithstanding the foregoing, Tenant shall not have the right to terminate this Lease on account of fire or other casualty if the damage was attributable to its fault or that of its agents, contractors or invitees, and in such event if Landlord’s insurance proceeds are insufficient to cover the full cost of restoration attributable to the damage

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caused by Tenant, Tenant shall be required to pay Landlord the additional cost necessary to restore the damage, including a ten (10) percent administrative fee. By way of clarification, subject to this subsection (g), Tenant shall have no duty to repair the Leased Premises if the Lease is terminated as permitted in this Section 6.4, but the foregoing shall not affect Tenant’s liability with respect to damage attributable to its fault.

(h) If Landlord undertakes to restore the Property or the Building (or any portion thereof) it shall do so as soon as reasonably practicable to substantially the same condition of such improvements prior to the damage, provided that except as required in Section 4.5, Landlord shall not be required to restore or replace any part of Tenant’s Trade Fixtures or other personal property owned or removable by Tenant under the provisions of this Lease or to expend any funds for such reconstruction in excess of insurance proceeds received for such fire or casualty.

(i) Unless the damage was attributable to Tenant’s fault, Tenant’s rent shall be equitably abated from the date of such damage until the restoration is completed in proportion to the extent the utility of the Leased Premises for the Permitted Uses is diminished as a result of the damage and the repairs, taking into consideration any noise, dust, and fumes resulting from the restoration, but Landlord shall not be otherwise liable to Tenant for any noise, inconvenience or injury (including loss of property or injury to business) naturally resulting from the restoration efforts. In addition, if the Leased Premises are destroyed by fire or other casualty not attributable to Tenant’s fault, Tenant shall not be responsible for maintenance or repairs or other costs attributable to the unoccupied portion of the Leased Premises while they are being restored. This provision shall take precedence over any inconsistent provision in any other Section of this Lease.

(j) Tenant shall provide Landlord with prompt written notice of any damage or destruction of any portion of the Leased Premises, provided that Tenant shall not be in default hereof if despite the failure to provide prompt written notice, Landlord has actually secured prompt notice from another source.

(k) Except as expressly provided in Article 6, any insurance carried by Landlord or Tenant against loss of damage to the Property or to the Leased Premises shall be for the sole benefit of the party carrying such insurance. Notwithstanding the above, if the Leased Premises or any part thereof shall be damaged by fire or other casualty resulting from the fault or negligence of Tenant, or its agents, employees, licensees, or invitees and the costs to repair and restore the Leased Premises exceed the amount of the insurance proceeds actually received by Landlord with respect to such fire or other casualty, then the Base Rent shall continue without abatement to be paid by Tenant or by any applicable insurance, and Tenant shall repay the cost of such repairs and restoration in excess of any applicable insurance proceeds. Except as expressly provided in this Section 6.4, no damage or destruction of the Leased Premises by fire or other casualty as contemplated herein shall allow Tenant to terminate the Lease and surrender possession of the Leased Premises or affect Tenant’s liability for the payment of Base Rent, Tenant’s Additional Rent, or any other sum payable by Tenant hereunder, or Tenant’s obligation to perform any other covenant herein contained.

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6.5 Condemnation. If any portion of the Leased Premises or of the Property (including the parking areas) is taken by exercise of the right of eminent domain or governmental appropriation, or sold to any governmental authority in lieu of condemnation, and the effect of such taking or transfer (hereafter, “Condemnation”) is such that it would materially interfere with or impair Tenant’s Permitted Use of or access by Tenant and its invitees to the Leased Premises, this Lease shall terminate as of the date that is thirty (30) days prior to the date fixed by decree or contract for the transfer of physical possession of the Leased Premises (or the property subject to the taking) to the condemning authority.

(a) If less than all of the Property is thus taken or sold, and the Condemnation does not materially interfere with Tenant’s Permitted Use of the Leased Premises nor with parking or access to the Leased Premises by Tenant and its invitees, this Lease shall not be terminated. Instead, the Base Rent payable hereunder shall be equitably reduced (i) in proportion to the reduction in space of the Leased Premises and (ii) taking into account the loss of any parking or Common Areas previously serving the Leased Premises, and Tenant’s Proportionate Share shall be equitably adjusted and recalculated to reflect Tenant’s new share of the gross square footage remaining in the Building. Landlord shall, in such event promptly make all necessary improvements to the Property, the Building and/or the Leased Premises, as appropriate, to enclose and seal the Building and the Leased Premises, and to restore them to a fully functional and usable condition, including restoring the Building exterior and interior in accordance with its original quality and character, and restoring the Tenant Improvements to the Leased Premises, as closely as possible, in accordance with Tenant’s original Plans and Specifications for the Leased Premises, including the installation of fixtures. However, if Landlord concludes in good faith that the proceeds of the Condemnation would be insufficient to effect such restoration, Landlord shall notify Tenant immediately whether or not it elects to proceed with such restoration, and if Landlord elects not to proceed with such restoration, or fails to do so, Tenant may terminate this Lease on ten (10) days notice. If, Landlord concludes in good faith that the restoration cannot be completed within thirty (30) days after the Condemnation takes effect, it shall promptly notify Tenant of such determination, setting forth the period that Landlord reasonably believes it will take to restore the Building and the Leased Premises in accordance with this provision. Tenant shall then have the option of terminating this Lease on ten (10) days notice, exercisable within thirty (30) days after receipt of Landlord’s notice. If Landlord undertakes the restoration, but does not complete such restoration within thirty (30) days (or such longer period as it may have advised Tenant) after the Condemnation takes effect, Tenant may terminate this Lease on ten (10) days notice at any time after the expiration of the period allotted for restoration and prior to the completion of the restoration.

(b) In completing the restoration of the Building and the Leased Premises, Landlord shall not be required to perform work that exceeds the scope of the work done by Landlord in originally constructing the Property and by Tenant in installing the Tenant Improvements in the Leased Premises, nor shall Landlord in any event be required to spend for such work an amount in excess of the amount received by Landlord as compensation or damages (over and above amounts going to Landlord’s Mortgagee) for

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the part of the Property or the Leased Premises so taken, provided that Landlord provides prompt notice to Tenant of such fact in accordance with the preceding paragraph.

(c) In the event of the termination of this Lease in connection with a Condemnation in accordance with this Section 6.5, Landlord shall be entitled to all compensation awarded for or received in connection with such Condemnation, except as provided in Section 6.5(d).

(d) Tenant shall be entitled to an allocation of that portion of the Condemnation award or proceeds attributable to the amount that any Tenant Improvements paid for by Tenant contributed to the fair market value of the real property taken in the Condemnation; and Tenant may apply for and retain any separately stated allocation received from the condemning authority for its moving expenses, loss of goodwill, Trade Fixtures or personal property, subject to the last sentence of this Section 6.5(d). Landlord shall have complete control over decisions regarding the acceptance or rejection of any offer made in Condemnation and shall have complete control over the prosecution of any administrative or judicial proceeding in Condemnation; provided, Tenant shall have the right to participate fully in such proceedings to establish the contributory value of the improvements for which Tenant has paid. Tenant shall further be entitled to prosecute, at its expense, any claim it may have against the condemning authority in such Condemnation proceeding for moving expenses, goodwill, Trade Fixtures and other personal property so long as such claim shall not diminish Landlord’s award or the award of any mortgagee of Landlord and in no event shall such claim be for the value of Tenant’s leasehold.

(e) All awarded compensation allocable to real property that may be paid upon any partial taking (whether permanent or temporary) of the Leased Premises or any part of the Property that does not result in a termination of this Lease shall belong to and be the property of Landlord.

ARTICLE VII

DEFAULT

7.1 Default by Tenant.

(a) The following events shall be deemed to be events of default by Tenant under this Lease (after the giving of any applicable notice and the expiration of any applicable cure period, as provided below):

(i) Tenant shall fail to pay when due any Base Rent, Tenant’s Additional Rent or other sums payable by Tenant hereunder, which failure continues for seven (7) days after written notice to Tenant of such failure, provided Landlord shall not be obligated to give such notice after the second such failure in any period of twelve (12) months, provided that if Tenant thereafter cures such default and does not commit any further default for the next twenty-four (24) months, the foregoing notice and cure period shall again apply.

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(ii) The interest of Tenant under this Lease shall be levied on under execution or any petition shall be filed by or against Tenant or Guarantor to declare Tenant or Guarantor a bankrupt or to delay or reduce the payment of, Tenant’s debts or obligations, or if any petition shall be filed to reorganize or modify Tenant’s or Guarantor’s capital structure in a manner that would delay, reduce or otherwise adversely impact the payment of any obligations hereunder, or if Tenant or Guarantor shall, in a judicial proceeding, be declared insolvent according to law (provided that no such levy, execution, legal process or petition filed against Tenant or Guarantor shall, constitute a breach of this Lease if Tenant or Guarantor shall vigorously contest the same within thirty (30) days from the date of its creation, service, or filing and diligently thereafter).

(iii) Tenant or Guarantor shall make a general assignment for the benefit of creditors.

(iv) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or Guarantor unless Tenant or Guarantor vigorously contests such proceeding and such proceeding is dismissed within ninety (90) days thereafter.

(v) If Tenant is a limited partnership and Tenant shall dissolve, liquidate or otherwise cease to exist as a limited partnership in good standing in the state of its incorporation (except as the result of a conversion into another validly formed limited liability entity succeeding to all the assets of Tenant a part of a reorganization that preserves the operations of Tenant, or as a result of an assignment, merger or consolidation permitted in accordance with the terms of this Lease), or if Tenant is converted into a new entity if Tenant shall thereafter be dissolved or otherwise liquidated except as contemplated in this subsection (v).

(vi) Tenant shall do or permit to be done any act which results in a lien being filed against the Leased Premises or the Property unless Tenant bonds against such lien in accordance with the provisions of Section 4.6 and such lien is not released within thirty (30) days after written notice of such lien to Tenant.

(vii) Tenant shall fail to comply with or to observe any other provision of this Lease, and such failure continues for thirty (30) days after written notice to Tenant, or if such failure is of a nature that the failure cannot be cured within said 30-day period, Tenant fails to commence to cure such failure within said 30-day period and thereafter continuously and in good faith diligently works to complete same as promptly as reasonably possible thereafter.

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(b) Upon the occurrence of any event of default by Tenant specified in this Lease, Landlord, at Landlord’s option, may have any one or more of the following described remedies in addition to all other rights and remedies provided at law or in equity:

(i) Landlord may terminate this Lease and forthwith enter upon and take possession of the Leased Premises, and expel or remove Tenant and any other person who may be occupying the Leased Premises, without being liable for prosecution or any claim of damages therefor, and be entitled to recover forthwith as damages a sum of money equal to the total of (1) the reasonable cost of recovering the Leased Premises (including attorneys’ fees and costs of suit), (2) the unpaid Base Rent, Tenant’s Additional Rent or other sums payable by Tenant hereunder earned or accrued at the time of termination plus interest thereon at the Default Rate from the date of default, (3) the present value (discounted at the rate of eight percent (8%) per annum) of the balance of the Base Rent and estimated Tenant’s Additional Rent (based on the amount thereof for the Lease Year in which the termination occurs) for the remainder of the Lease Term less the present value (discounted at the same rate) of the fair market rent value for the Leased Premises for said period (taking into consideration a fair and reasonable amount of the Operating Costs that a prospective tenant would be required to pay), and (4) any other sum of money and damages owed by Tenant to Landlord;

(ii) Landlord may terminate Tenant’s right of possession (but not the Lease) and may enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying the Leased Premises, by forcible entry or detainer suit or otherwise, without demand or notice of any kind to Tenant and without terminating this Lease and without being liable for prosecution or any claim of damages therefor, except to the extent provided in Section 4.5. To the extent required by Texas law, Landlord shall seek to mitigate its damages by using objectively reasonable efforts to relet the Leased Premises for the account of Tenant, for such rent and upon such terms and conditions as shall be commercially reasonable and Landlord may collect and receive any rents payable by reason of such reletting, and all sums collected through such reletting shall be applied as an offset against Tenant’s obligations hereunder. For the purpose of such reletting Landlord may make any repairs and changes in or to the Leased Premises that may be necessary to relet the Leased Premises. If during the balance of the Lease Term Landlord shall fail to relet the Leased Premises, or if the same are relet and a sufficient sum shall not be realized from such reletting to cover (i) the unpaid rent and other obligations due and unpaid at the time of the reletting and the rent and other obligations due for the balance of the Lease Term, plus interest thereon at the Default Rate, (ii) the cost of recovering possession, (iii) all of the reasonable costs and expenses of repairs, changes and alterations to the Leased Premises necessary to relet the Leased Premises, and (iv) the reasonable expenses of such reletting, then, subject in any event to the last sentence of this subsection 7.1(b)(ii), Tenant shall pay to Landlord upon demand from time to time as damages a sum equal to the amount of the Base Rent and Tenant’s Additional Rent provided in this Lease for the period or periods the Leased Premises are not relet, and if the Leased Premises have been relet, Tenant shall pay the amount of the above described deficiency (the “Deficiency”) for the periods the Leased Premises are relet, as

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applicable. In calculating any Deficiency, any amounts expended under clause (iii) above by the Landlord by way of alterations or other leasehold capital improvements shall be amortized over the term of the lease for such reletting of the Lease Premises on a straight-line basis and only that portion of the amortized cost that is attributable to the unexpired portion of Tenant’s Lease Term shall be included in computing the Deficiency. Moreover, excluding (A) those obligations already due Landlord as of the date Tenant’s possession of the Leased Premises is terminated under this subsection 7.1(b)(ii), (B) those obligations arising under this Lease that are attributable to events, circumstances, actions or omissions existing, occurring or commencing prior to the termination of Tenant’s possession even if not fully manifested or discovered by Landlord until after possession is terminated (such as, by way of illustration but not limitation, environmental damage or other injury to the Building), and (C) attorneys’ fees and related expenses and costs, if any, incurred by Landlord in securing legal enforcement of its rights under this Lease, in no event shall the amount of damages recoverable by Landlord that is attributable to the period after Tenant’s possession is terminated exceed the total amount of Base Rent and Additional Rent that Tenant would have been required to pay through the expiration of the Lease Term had the Tenant’s possession and occupancy continued without termination until such date plus interest on such amounts at the Default Rate. Tenant shall not be entitled to any rents or other payments received by Landlord in connection with such reletting even if such rents and other payments are in excess of the amounts that would otherwise be payable to Landlord under this Lease, but such amounts shall be taken into account in calculating any deficiency. Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this subsection from time to time, and that no delivery or recovery of any portion due Landlord hereunder shall be any defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Landlord, nor shall such reletting be construed as an election on the part of Landlord to terminate this Lease unless a written notice of such intention be given to Tenant by Landlord. Landlord shall not be liable for any failure to relet the Leased Premises or any part thereof or for any failure to collect any rent due upon any such reletting; however, such failure may give rise to a defense to a claim under this provision. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.

(iii) Enter upon the Leased Premises, by force if necessary, without having any civil liability (except as provided in Section 4.5) or criminal liability therefor, and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant covenants and agrees to reimburse Landlord on demand for any expenses which Landlord may reasonably incur in thus affecting compliance with Tenant’s obligations under this Lease together with interest at the Default Rate from the date of the default; and

(iv) Landlord may prevent Tenant from entering the Leased Premises by changing the door locks in accordance with the Texas Property Code. If

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Landlord changes the door locks, Landlord shall place a written notice on the front door of the Leased Premises, stating the name and address or telephone number of an individual or company from which a new key may be obtained by Tenant; provided, however, (1) the new key needs to be provided only during Landlord’s regular business hours and (2) Landlord may condition delivery of the new key upon Tenant’s payment of all rent and other sums then due and/or the curing of any non-monetary default. Costs and expenses reasonably incurred by Landlord in exercise of its right pursuant to this subsection (iv) shall be deemed to be expenditures and damages recoverable from Tenant pursuant to subsections (i)-(iii) above; and

Except for any failure to perform any legal duty to mitigate, no repossession or reentering of the Leased Premises or any part thereof pursuant to this section or otherwise and no reletting of the Leased Premises or any part thereof pursuant to Section 7(b) (ii) shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such repossession of reentering and reletting. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions, or provisions of this Lease, or to a decree compelling performance of any of the other covenants, agreements, conditions, or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Pursuit of any one or more of the remedies set forth in this Section 7.1 shall not preclude pursuit of any one or more of the remedies provided elsewhere in this Lease or provided by law, nor shall pursuit of any remedy hereunder or at law constitute a forfeiture or waiver of any rent or damages accruing to Landlord by reason of the violation of any of the terms, provisions or covenants of this Lease.

7.2 Tenant’s Personal Property. If Landlord repossesses the Leased Premises pursuant to the authority granted in Section 7.1 above, or if Tenant vacates or abandons all or any part of the Leased Premises, then, in addition to Landlord’s rights under Section 7.1(b) hereof, Landlord shall have the right to (a) keep in place (and charge Tenant reasonable rent for such storage thereof) or (c) use or (b) remove and store, at Tenant’s cost and expense, all of the furniture, fixtures and equipment at the Leased Premises, including that which is owned by or leased to Tenant, at all times prior to foreclosure thereon by Landlord or repossession thereof by any lessor thereof or third party having a lien thereon. In addition to Landlord’s other rights hereunder, Landlord may dispose of the stored property, at Tenant’s cost and expense, if Tenant does not claim the property within twenty (20) days after the date the property is stored. Landlord shall provide Tenant with at least twenty (20) days prior written notice of such intended disposition. After notice to Tenant and a reasonable opportunity to make claim to the property, Landlord shall also have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person

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(“Claimant”) who presents to Landlord a copy of any instrument represented by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Landlord to inquire into the authenticity or legality of said instrument. The rights of Landlord under this Section 7.2 shall be in addition to any and all other rights that Landlord has or may hereafter have at law or in equity. Notwithstanding the foregoing, Landlord shall not assert any lien claims or rights of retention (or rights of destruction) as to Tenant’s medical or study subject records, clinical protocols, study reports, study compliance materials, client information or materials, or other clinical study data (whether stored in hard form or electronic media), nor to any biological or pharmacological materials that Tenant is required to maintain pursuant to any study protocol or governmental regulation; and promptly upon written request, and in any event prior to the disposition of Tenant’s property by Landlord as provided above, Tenant shall be entitled (and afforded a reasonable opportunity) to retrieve all such materials, including all of its electronic or computer files.

7.3 Holding Over. In the event that Tenant should continue to hold the Leased Premises after the termination of this Lease, by expiration of time or otherwise, without the written consent of Landlord, such holding over shall constitute and be construed as a tenancy at will only, at a monthly Base Rent equal to 150% of the Base Rent in effect immediately prior to the termination of the Lease, calculated daily based upon a 30-day month, plus the Tenant’s Additional Rent and other sums payable by Tenant hereunder, and subject to the terms, provisions and covenants on the part of Tenant under this Lease. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue, or extend the term of this Lease and no extension of this Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant. Nothing in this Section 7.3 should be construed as giving Tenant the right to hold over beyond the date of the expiration of this Lease nor preclude Landlord from having the right to dispossess or otherwise terminate Tenant’s right of possession. Any tenancy at will is terminable immediately upon notice from Landlord. In the event of a termination of this Lease as the result of fire or other casualty or Condemnation, during the period of thirty (30) days after such termination of this Lease, or in the event of any other termination (during the twenty (20) day period following such termination), Tenant shall not be deemed to be continuing to hold the Leased Premises for purposes of this Section 7.3 as the result of Tenant’s entry into the Leased Premises solely for the purposes of removing Tenant’s personal property, including Trade Fixtures (and repairing any damage caused by such removal) so long as Tenant does not use or occupy the Leased Premises for the conduct of its business or for any other activity.

7.4 Default by Landlord. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it under this Lease unless and until it has failed to commence such performance within thirty (30) days after written notice by Tenant to Landlord specifying such default; provided, however, if the nature of Landlord’s default is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default unless it fails to

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commence such performance within said 30-day period and thereafter continuously and in good faith diligently prosecutes the same to completion as promptly as reasonably possible. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any remedy against Landlord or cause of action by reason thereof. However, Tenant shall not be precluded from taking immediate actions necessary to avoid or minimize the risk of injury to person, or damage to property in exigent circumstances, but shall give Landlord notice thereof as promptly as possible, and shall cooperate with Landlord to the fullest extent reasonably practicable in allowing Landlord to assess and address any such emergency situation. This provision is not intended to relieve Landlord of any legal duty of mitigation arising upon the termination of Tenant’s right of possession under Section 7.1, however; nor shall it be construed to extend Landlord’s period for complying with any deadline imposed with respect to the occurrence of a Fire or other Casualty under Section 6.4 or an event of Condemnation under Section 6.5. Tenant has no right to claim any nature of lien against the Leased Premises or to withhold, deduct from or offset against any rent or other sums to be paid to Landlord, provided that, notwithstanding the foregoing, in the event of the failure of Landlord to cure (or commence to cure) any default in accordance with the provisions hereof, upon not less than ten (10) days prior written notice to Landlord, and if Tenant is not in default under the terms of this Lease, Tenant may elect to perform such obligation on behalf of Landlord. In the event of such election, Tenant shall, as its sole and exclusive remedy, be entitled to a credit and offset against the Base Rent and the Additional Rent otherwise due (but not in excess of twenty-five percent [25%] of such amounts per month until full recoupment is achieved) for the actual, out-of-pocket costs reasonably incurred by Tenant in performing such obligation. Within twenty (20) days after completing such obligation, Tenant shall give written notice to Landlord of the amount of such costs, together with copies of paid receipts, invoices, statements or other evidence of the payment of such costs. It is acknowledged that the inclusion of this provision allowing Tenant a self-help remedy and right of off-set does not waive any right that Tenant may have if Tenant does not elect to exercise the foregoing self-help remedy, in which event Tenant reserves any other right or remedy to which Tenant may otherwise be entitled in the event of an uncured default by Landlord.

7.5 Landlord’s Liability. Notwithstanding anything to the contrary contained in this Lease, but without waiving any remedy provided by Section 7.4, in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed, honored or performed by Landlord, Tenant specifically agrees to look solely to the interest of Landlord in the Property for the recovery of any judgment (or any judicial procedures requiring the payment of money by Landlord) from Landlord, it being agreed that neither Landlord nor any of Landlord’s Related Parties shall ever be personally liable for any such judgment and that no other property or assets of Landlord or any of Landlord’s Related Parties shall be subject to levy, execution, or other procedures for satisfaction of Tenant’s remedies or such judgment. By way of clarification, this provision is solely intended to limit Tenant’s recourse against Landlord (and Landlord’s Related Parties) for monetary claims, but shall not prejudice or limit any other remedy that Tenant may have under this Lease, including Section 7.4 above, with respect to Landlord defaults.

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7.6 Landlord’s Mortgagee. If the Property and/or the Leased Premises are at any time subject to a mortgage and/or mortgage deed of trust, then in any instance in which Tenant gives notice to Landlord alleging default by Landlord hereunder, Tenant will also simultaneously give a copy of such notice to each Landlord’s Mortgagee (provided Landlord or Landlord’s Mortgagee shall have advised Tenant of the name and address of Landlord’s Mortgagee) and Landlord’s Mortgagee shall have the right (but not the obligation) to cure or remedy such default during the period that is permitted to Landlord hereunder, as provided in the Subordination, Non-Disturbance and Attornment Agreement attached hereto as Exhibit F or otherwise executed by Tenant, and Tenant will accept such curative or remedial action taken by Landlord’s Mortgagee with the same effect as if such action had been taken by Landlord.

7.7 Landlord’s Lien. IN ADDITION TO ANY STATUTORY LIEN FOR RENT IN LANDLORD’S FAVOR, LANDLORD SHALL HAVE AND TENANT HEREBY GRANTS TO LANDLORD A CONTINUING SECURITY INTEREST FOR ALL RENTALS AND OTHER SUMS OF MONEY BECOMING DUE HEREUNDER FROM TENANT, UPON ALL GOODS, WARES, EQUIPMENT, FIXTURES, FURNITURE, INVENTORY, ACCOUNTS, CONTRACT RIGHTS, CHATTEL PAPER AND OTHER PERSONAL PROPERTY OF TENANT NOW OR HEREAFTER SITUATED AT, ON OR WITHIN THE REAL PROPERTY DESCRIBED IN EXHIBIT A ATTACHED HERETO, AND SUCH PROPERTY SHALL NOT BE REMOVED THEREFROM WITHOUT THE CONSENT OF LANDLORD UNTIL ALL ARREARAGES IN RENT AS WELL AS ANY AND ALL OTHER SUMS OF MONEY THEN DUE TO LANDLORD HEREUNDER SHALL FIRST HAVE BEEN PAID AND DISCHARGED. IN THE EVENT THAT ANY OF THE FOREGOING DESCRIBED PROPERTY IS REMOVED FROM THE LEASED PREMISES IN VIOLATION OF THIS SECTION, THE SECURITY INTEREST SHALL CONTINUE IN SUCH PROPERTY AND ALL PROCEEDS AND PRODUCTS, REGARDLESS OF LOCATION. PROCEEDS AND PRODUCTS OF COLLATERAL ARE ALSO COVERED. IN THE EVENT OF A DEFAULT UNDER THIS LEASE, LANDLORD SHALL HAVE, IN ADDITION TO ANY OTHER REMEDIES PROVIDED HEREIN OR BY LAW, ALL RIGHTS AND REMEDIES UNDER THE UNIFORM COMMERCIAL CODE, INCLUDING WITHOUT LIMITATION THE RIGHT TO SELL THE PROPERTY DESCRIBED IN THIS SECTION AT PUBLIC OR PRIVATE SALE UPON THE REQUISITE NOTICE TO TENANT. AT LANDLORD’S REQUEST, TENANT HEREBY AGREES TO EXECUTE AND DELIVER TO LANDLORD, OR TENANT ACKNOWLEDGES THAT LANDLORD MAY EXECUTE WITHOUT THE JOINDER OF TENANT, A FINANCING STATEMENT IN FORM SUFFICIENT TO PERFECT THE SECURITY INTERESTS GRANTED HEREIN UNDER THE UNIFORM COMMERCIAL CODE IN FORCE IN THE STATE OF TEXAS AND SUCH OTHER INSTRUMENTS NECESSARY OR DESIRABLE IN LANDLORD’S DISCRETION TO PERFECT THE SECURITY INTEREST HEREBY CREATED. ANY STATUTORY LIEN FOR RENT IS NOT HEREBY WAIVED, THE EXPRESS CONTRACTUAL LIEN HEREIN GRANTED BEING IN ADDITION AND SUPPLEMENTARY THERETO. Notwithstanding the foregoing, however, (A) Tenant shall not be precluded from transferring and otherwise disposing of obsolete or defective goods, or from selling, transferring or replacing any of such personal property in the ordinary course of its business, and routine transfers shall be made free of such lien and security interest, and Landlord shall confirm same in writing as to specific property if reasonably requested by

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Tenant; and (B) Landlord shall not exercise any lien rights (contractual or statutory) as to the data, information, or materials (i) belonging to Tenant’s clients, (ii) generated by Tenant in connection with clinical studies conducted for its clients, (iii) constituting medical or health records of study subjects, or (iv) required by law or regulation to be maintained by Tenant in connection with its clinical trial business, and any official filing reflecting the lien shall contain the foregoing language in this sentence. The lien possessed hereunder shall not be enforced against Tenant’s personal property prior to a default by Tenant, and if such lien is asserted it shall be promptly released in writing by Landlord if Tenant deposits into the registry of a court of competent jurisdiction in Travis County, Texas the full amount of the damages being claimed by Landlord.

7.8 Landlord’s Subordination. Landlord agrees to subordinate its statutory and contractual lien rights and claims against Tenant’s property to (i) security interests granted by Tenant to Tenant’s institutional lenders with respect to Tenant’s Trade Fixtures or other personal property, but not with respect to any fixtures or other improvements that may not be removed from the Leased Premises by Tenant under the terms of this Lease, and (ii) the purchase money security interests of Tenant’s vendors. Upon reasonable request by Tenant or its lender(s), Landlord will from time to time execute an instrument subordinating its liens as provided herein, provided such instrument (i) requires the lender to give Landlord notice of any default under the financing secured by such Trade Fixtures or other personal property if lender desires to proceed against such property, (ii) requires at least two (2) business days prior written notice to Landlord of any entry upon the Leased Premises for purposes of removing said Trade Fixtures or other personal property as a result of a default under such financing, (iii) requires the lender, if it elects to remove said Trade Fixtures or other personal property securing such financing, to do so within thirty (30) days after the termination of Tenant’s right of possession or the termination of this Lease as a result of Tenant’s default or be conclusively deemed to have released its security or other interests in said Trade Fixtures or other personal property; and (iv) requires the lender to repair any damage to the Leased Premises or the Building caused by its removal of said Trade Fixtures or other personal property.

ARTICLE II

MISCELLANEOUS

8.1 Notice. All Base Rent, Tenant’s Additional Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address set forth in Article 1 hereof, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Any notice which is required to be given under the terms of this Lease shall, unless otherwise provided herein, be in writing and shall be either delivered by hand or sent by United States registered or certified mail, postage prepaid, addressed to the intended recipient at the respective addresses set forth on the signature page hereof. A copy of any notice to Landlord shall be sent to Graves, Dougherty, Hearon & Moody P.C., P.O. Box 98, Austin, Texas 78767, Attn: R. Alan Haywood, and a copy of any notice to Tenant shall be sent to Fleckman & McGlynn, 515 Congress Avenue, Austin, Texas 78701, Attn: Steven A. Fleckman. Such addresses may be changed from time to time by either party by giving written notice as provided above. Notice shall be deemed given when delivered (if delivered by hand) or when personal delivery is refused, or three days after the date postmarked (if sent by mail as provided above).

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8.2 Severability. If any provision of this Lease is held unenforceable by a court, it shall not affect the remainder of this Lease, and it is the intention of both parties that in lieu of such unenforceable provision there be substituted an enforceable provision as similar as possible.

8.3 Entire Agreement and Binding Effect. This Lease and any contemporaneous work letter, addenda or exhibits (including plans, specifications and drawings to be exchanged or approved hereunder) constitute the entire agreement between Landlord and Tenant; no prior written or oral promises or representations shall be binding. The provisions of this Lease shall be binding upon and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, successors, and assigns of the parties, but this provision shall in no way alter the restriction herein in connection with assignment and subletting by Tenant.

8.4 Assignment by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, all (but not less than all) of its rights and obligations hereunder, and in such event, no further liability or obligation shall thereafter accrue against Landlord hereunder so long as such assignee has assumed in writing all obligations of Landlord hereunder and provided a copy of such assignment and assumption to Tenant.

8.5 Alterations. This Lease may not be altered, changed, or amended, except by an instrument in writing signed by both parties hereto acting therein by the duly authorized officers of their respective general partners. Neither Landlord’s nor Tenant’s agents and employees have authority to make exceptions, changes or amendments to this Lease except as provided in the immediately preceding sentence.

8.6 No Merger. There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Leased Premises or any interest in such fee estate.

8.7 Force Majeure. Whenever a period of time is herein prescribed for action to be taken by either party, that party shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, acts of God, shortages of labor or material, war, governmental laws, regulations, or any other cause of any kind whatsoever which is beyond the control of that party.

8.8 No Representations. Except as expressly provided herein, neither party nor its Related Parties have made any promise or representation except as herein expressly set forth in the provisions of this Lease and neither party is relying on any representation or warranty made by the other party except as set forth in this Lease.

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8.9 Execution and Approval of Lease. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Leased Premises and this document becomes effective and binding only upon the execution and delivery hereof by Landlord and Tenant.

8.10 Applicable Law. This Lease is declared to be a Texas contract, and all of the terms shall be construed according to the laws of the State of Texas.

8.11 Authority. Both parties warrant that all consents or approvals required of third parties (including but not limited to its board of directors) for the execution, delivery and performance of this Lease and the Guaranty have been obtained and that each party has the right and authority to enter into and perform its covenants contained in this Lease (and that Guarantor has the right and authority to enter into and perform its covenants contained in this Lease) and shall provide proof thereof to the other party prior to the execution of this Lease. Concurrently with the execution of this Lease, each party shall furnish to the other a corporate resolution or other appropriate documentation evidencing the due authorization of such party to enter into this Lease prior to or concurrently with the execution of this Lease, and Tenant shall also provide a corporate resolution or other appropriate documentation evidencing the due authorization of the Guarantor to enter into the Guaranty attached hereto as Exhibit G. Each person executing this Lease on behalf of a party hereby personally represents and warrants that: (a) such party is a duly authorized and existing corporation, limited liability company or limited partnership; (b) such party is qualified to do business in the State of Texas; (c) such party has full right and authority to enter into this Lease; (d) each person signing on behalf of such party is authorized to do so; and (e) the execution and delivery of this Lease by such party will not result in any breach of, or constitute a default under, any mortgage, deed of trust, lease, loan, credit instrument, partnership agreement or other contract or instrument to which such party is a party or by which such party may be bound.

8.12 Landlord and Tenant Consents. Except as otherwise specifically provided herein to the contrary, where the consent, permission or approval shall be required or requested of Landlord or Tenant pursuant to this Lease, the giving of such consent, permission or approval shall not be unreasonably withheld, conditioned or delayed by the party from whom such consent, approval, permission or determination is required or requested.

8.13 Interpretation. The headings appearing in this Lease are intended only for convenience of reference and are not to be considered in construing the provisions of this Lease.

8.14 Recording. This Lease (including any exhibits or riders attached hereto) shall not be recorded and no memorandum hereof shall be recorded without the prior

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written consent of Landlord. Any such memorandum shall be executed in a recordable form approved by Landlord, and shall comply with applicable Texas laws. In no event shall such memorandum set forth the rent or other charges payable by Tenant under this Lease and any such memorandum shall expressly state that it is executed pursuant to the provisions contained in this Lease, and is not intended to vary the terms and conditions of this Lease, and shall provide that Landlord shall be entitled upon the termination of this Lease to execute and caused to be recorded an Affidavit certifying such termination of this Lease.

8.15 Survival. Notwithstanding any provision of this Lease to the contrary, all obligations of either party hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including without limitation all payment obligations with respect to Tenant’s Additional Rent and all obligations with respect to the condition and repair of the Leased Premises. Notwithstanding any provision of this Lease to the contrary, any indemnification by either party under this Lease shall survive and shall not be merged into the termination of this Lease, whether due to the lapse of time, the uncured default by either party or otherwise.

8.16 Non-waiver. All waivers with respect to the provisions of this Lease must be in writing and signed by the party against whom such waiver is urged. No reasonable period of forbearance by a party in seeking to enforce a right or remedy with respect to a specific event of default shall waive such party’s right to invoke such right or to pursue such remedy with respect to such default. Nor shall the failure of either party to declare an event of default or to pursue a remedy for such default in any given circumstance waive such party’s right to declare a default or to pursue any remedy with respect to any similar or dissimilar event of default in any other circumstance. Once a default is declared in writing by a party, in the absence of a written agreement to the contrary, the payment, collection or receipt of rent or any other sum of money, or the performance of any act, shall not be deemed a waiver of such default or of the rights and remedies of the non-defaulting party with respect thereto.

8.17 Broker’s Commissions.

(a) Landlord agrees to pay Tenant’s Broker and Landlord’s Broker a commission in connection with this Lease in accordance with separate agreements between them and will hold Tenant harmless from the obligations under those agreements.

(b) Landlord and Tenant represent to each other that there are no other brokers or real estate agents in connection with this transaction with whom they have respectively dealt. Subject to subsection (a) above, each party agrees to defend, indemnify and hold the other harmless from any cost or claim for commission, fee or other compensation by reason of this transaction made by any agent, broker, entity or person alleging to be acting for or under the indemnifying party or which otherwise arises out of the acts or conduct of the indemnifying party.

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8.18 Ambiguity. Landlord and Tenant hereby agree and acknowledge that this Lease has been fully reviewed and negotiated by both Landlord and Tenant, and that Landlord and Tenant have each had the opportunity to have this Lease reviewed by their respective legal counsel and, accordingly, in the event of any ambiguity herein, Tenant does hereby waive the rule of construction such that ambiguity shall be resolved against the party who prepared the Lease.

8.19 Third Party Rights. Subject to the parties’ agreement to provide periodic subordination agreements and estoppel certificates, nothing herein expressed or implied is intended, or shall be construed, to confer upon or give to any person or entity, other than the parties hereto, any right or remedy under or by reason of this Lease other than Landlord’s Mortgagee with respect to Tenant in accordance with the provisions of this Lease.

8.20 Counterparts. This Lease may be executed in two or more counterparts, and it shall not be necessary that any one of the counterparts be executed by all parties hereto. Each fully and partially executed counterpart shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument.

8.21 Exhibits and Attachments. All exhibits and attachments, riders and addenda referred to in this Lease and the exhibits listed hereinbelow and attached hereto are incorporated into this Lease and made a part hereof for all intents and purposes as if fully set out herein, provided that if there is any inconsistency between the foregoing provisions and an exhibit, such inconsistency shall be resolved by resort to the document that addresses the issue with greater particularity, and if the application of that principle of construction does not resolve the inconsistency, by resort to the language of the foregoing Lease provisions. All capitalized terms used in such documents shall, unless otherwise defined therein, have the same meanings as are set forth herein.

ARTICLE IX

LEASE GUARANTY

The performance of all of the covenants, agreements and obligations of the Tenant under this Lease is guaranteed by Guarantor. The specific obligations of such Guarantor shall be pursuant to Exhibit “G” attached hereto entitled “Lease Guaranty.”

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This Lease has been executed by the parties on the date set forth below their respective signatures to be effective the date the last party signs.

LANDLORD:
MET CENTER PARTNERS-6, LTD.
By:	Met Center-3, Inc., a Texas corporation, General Partner
	By:	/s/ Howard C. Yancy
		Howard C. Yancy, President
Dated: June 10 , 2004
TENANT:
PPD DEVELOPMENT, LP
By:	PPD GP, LLC, a Delaware limited liability company, General Partner
	By:	/s/ Fred B. Davenport, Jr.
	Name:	Fred B. Davenport, Jr.
	Title:	President
Dated: June 18, 2004

EXHIBITS

EXHIBIT A -	Description of the Property and the Building
EXHIBIT A-1 –	Description of Parking Lot Layout
EXHIBIT B -	Description of the Leased Premises
EXHIBIT C -	Additional Provisions
EXHIBIT D -	Work Letter
EXHIBIT E -	Tenant Improvement Plans (to be attached when approved)
EXHIBIT F -	Subordination, Non-Disturbance and Attornment Agreement
EXHIBIT G -	Lease Guaranty

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EXHIBIT A

The Property and The Building

This Exhibit A is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP, as Tenant.

[Copy of Site Plan for Building Ten, Met Center]

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EXHIBIT A-1

Parking Lot Layout

This Exhibit A-1 is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, PPD Development, LP, as Tenant.

[Copy of Parking Lot Layout for Building Ten, Met Center]

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EXHIBIT B

Leased Premises

This Exhibit B is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP, as Tenant.

[Floor Plan and Description of the Leased Premises]

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EXHIBIT C

Additional Provisions

This Exhibit C is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP, as Tenant

1. Renewal Options. Tenant shall have and is hereby granted, the option to renew and extend the term of this Lease for three (3) consecutive periods of five (5) years each; provided Tenant is not in default hereunder at the time each such option is exercised or at the commencement of each such extension term in accordance with the following:

(a) Each extension term shall begin on the expiration of the Lease Term or the current extension term of this Lease, as appropriate. All terms, covenants, and provisions of this Lease (except for the monthly Base Rent) shall apply to each such extension term. If Tenant shall elect to exercise any such option, Tenant shall do so by written notice (the “Renewal Notice”) to Landlord not earlier than nine (9) months and later than six (6) months prior to the expiration of the initial term of this Lease, or then current extension term of this Lease, as appropriate. The monthly Base Rent for each such extension term shall be the greater of (i) the Base Rent in effect at the end of the initial term of this Lease for the first extension term or the Base Rent in effect at the end of the immediately preceding extension term for the second and third extension terms, or (ii) ninety percent (90%) of the Fair Rental Value of the Leased Premises, as defined herein, but not more than one hundred fifteen percent (115%) of the Base Rent in effect at the end of the initial term of this Lease for the first extension term or the Base Rent in effect at the end of the immediately preceding extension term for the second and third extension terms. Landlord agrees that it shall repaint and re-carpet the Leased Premises as promptly as commercially reasonable after the commencement of the first renewal and extension term with substantially the same colors and quality of paint and carpet used for the initial Tenant Improvements (but using Tenant’s color and carpet pattern selections), unless Landlord and Tenant mutually agree otherwise in writing. Except for Landlord’s obligation to repaint and re-carpet the Leased Premises as provided in the immediately preceding sentence with respect to the first extension term, Tenant will accept the Leased Premises in their then existing, “as is” condition as the commencement of each extension term.

(b) Within fifteen (15) days after the date of the Renewal Notice, Landlord shall give Tenant written notice of Landlord’s determination of the Fair Rental Value of the Leased Premises setting forth in reasonable detail the assumptions and data upon which such determination is made, including the factors described in paragraph (d) below. If Tenant disagrees with Landlord’s determination of the Fair Rental Value of the Leased Premises, Tenant shall give Landlord notice of such disagreement, and of Tenant’s determination of the Fair Rental Value of the Leased Premises, within fifteen (15) days after the date of the notice of Landlord’s determination of the Fair Rental

Exhibit C, Page 1

Value. In the event Tenant fails to so give Landlord notice of Tenant’s disagreement with Landlord’s determination of the Fair Rental Value of the Leased Premises, Tenant shall be conclusively deemed to have accepted Landlord’s determination of the Fair Rental Value, and the Base Rent for such extension term shall be established as provided in paragraph (a) above.

(c) If Tenant gives Landlord notice of Tenant’s disagreement with Landlord’s determination of the Fair Rental Value of the Leased Premises as provided in paragraph (b) above, Landlord and Tenant shall in good faith attempt to agree on the Fair Rental Value of the Leased Premises. In the event Landlord and Tenant fail to agree on the Fair Rental Value of the Leased Premises within sixty (60) days after the date of the Renewal Notice, either Landlord or Tenant may require that the Fair Rental Value of the Leased Premises be determined by an appraisal in accordance with paragraphs (e) and (f) below, by giving written notice to the other within sixty-five (65) days after the date of the Renewal Notice. If Landlord and Tenant fail to agree on the Fair Rental Value of the Leased Premises so that the Base Rent for the applicable extension term can be determined in accordance with paragraph (a) above, and neither party notifies the other that it elects to have the Fair Rental Value of the Leased Premises determined by an appraisal as provided in this paragraph (c), then this Lease shall terminate as of the last day of the initial Lease Term, or the first extension term, as applicable.

(d) The term “Fair Rental Value of the Leased Premises” shall mean an amount equal to the number of gross square feet contained within the Leased Premises multiplied by an amount equal to the amount per gross square foot of similar space being leased for a similar renewal term in comparable buildings in the City of Austin, Texas, considering (but without being limited to) the following factors: (i) the aggregate number of gross square feet then leased by Tenant under this Lease; (ii) the length of the applicable extension term; (iii) the effective rental rates taking into consideration tenant inducements, if any, (such as leasehold improvement allowances, rent abatements, and limitation on expenses and costs charged tenants) then being charged for comparable renewals of leases in comparable buildings in the City of Austin, Texas; (iv) the relative efficiency or inefficiency of the floor plans of the Leased Premises compared to the floor plans for similar buildings; (v) the Tenant’s Additional Rent provided under this Lease; (vi) brokerage commissions payable for the renewal of leases for similar space for a term equal to the applicable extension term; and (vii) the leasehold improvements provided in comparable space in similar buildings in the City of Austin, Texas.

(e) In the event either Landlord or Tenant elect to have the Fair Rental Value of the Leased Premises be determined by an appraisal in accordance with paragraph (c) above, the party desiring such appraisal shall give notice to that effect to the other party and simultaneously therewith also shall give notice to the other party of its selection of a qualified appraiser. Within ten (10) days thereafter, the other party shall select a qualified appraiser and shall give notice to the party initiating the appraisal process of the identity of its appraiser. If either party fails to select a qualified appraiser within the time periods provided herein, the appraiser selected by the other party shall

Exhibit C, Page 2

determine the Fair Rental Value of the Leased Premises. Within ten (10) days after selection of the second appraiser, the two (2) appraisers shall select a third qualified and impartial appraiser, who shall determine the Fair Rental Value of the Leased Premises within thirty (30) days after the date of his or her selection. The determination of the Fair Rental Value of the Leased Premises shall be binding upon Landlord and Tenant and shall be used to determine the monthly Base Rent as provided in (a) above. The cost of the third appraiser shall be divided equally between Landlord and Tenant. If the two appraisers cannot agree upon a third appraiser within such ten (10) day period, then either party shall within twenty-four (24) hours give notice to the president of the Travis County Bar Association, or a professional mediator selected by the parties, requesting that s/he select, as soon as possible, but in any event within the next ten (10) days, the third appraiser. To be a qualified appraiser selected hereunder, such appraiser (i) must either be a commercial real estate appraiser who is a member in good standing of the American Institute of Real Estate Appraisers or shall be a commercial real estate broker who holds a Certified Commercial Investment designation from the Commercial Investment Real Estate Institute; (ii) must not be a partner, joint venturer or shareholder with Landlord or Tenant in any partnership, joint venture, trust or corporation, other than a corporation whose shares are publicly traded on a national stock exchange; (iii) must not be a contractor or an employee of Landlord or Tenant or a contractor or an employee of a person or entity that is owned or controlled by Landlord or Tenant or an affiliate of Landlord or Tenant or their lenders; and (iv) must have been actively and continuously engaged for at least ten (10) years immediately preceding his or her selection in commercial real estate appraisal or commercial brokerage activities primarily in the City of Austin, Texas. In the event of the failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in his/her stead, which appointment shall be made in the same manner as hereinbefore provided.

2. Expansion Options.

(a) For the period ending December 31, 2004 (the “Initial Expansion Period”), Tenant shall have the exclusive right to expand into all or a portion of the remainder of the available space within the Building (the “Expansion Space”). If Tenant elects to exercise its option as to less than all of the available space within the Building, the space as to which Tenant may exercise its expansion option must be contiguous to the Leased Premises and the remainder of the available space in the Building as to which Tenant does not exercise its option must, in Landlord’s reasonable judgment, constitute space of a sufficient size and configuration to be reasonably susceptible of being leased to a third party. Tenant shall be entitled to exercise such right to expand the Leased Premises only if Tenant is not in default hereunder at the time such option to expand is exercised as provided below and the expansion shall be effective only if Tenant is not in default hereunder at the commencement date for the lease of the Expansion Space. Tenant shall exercise such right to expand by giving written notice to Landlord at any time prior to the expiration of the Initial Expansion Period, which notice shall include a description of the Expansion Space. If Tenant so timely exercises such expansion option, the lease of the Expansion Space shall be at the same Base Rent per gross square foot and on the same terms and conditions as set forth

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in this Lease, except as otherwise expressly provided herein. Notwithstanding anything contained herein, if the commencement date for such Expansion Space is earlier than December 31, 2004, Tenant shall not be required to pay any rent on such Expansion Space until January 1, 2005.

(b) After the expiration of the Initial Expansion Period and prior to the expiration of eight (8) years after the Effective Date, Tenant shall have a continuing option to expand into available space within the Building; provided that the space as to which Tenant exercises its expansion option must be such that the remainder of any available space within the Building (or other building where the expansion option has been exercised) as to which Tenant does not exercise its option must be contiguous to the Leased Premises, and the remainder of the available space within the Building as to which Tenant does not exercise its option must constitute, in Landlord’s reasonable judgment, space of a sufficient size and configuration to be reasonably susceptible of being leased to a third party. Tenant shall be entitled to exercise such right to expand the Leased Premises only if Tenant is not in default hereunder at the time such option to expand is exercised as provided below and the expansion shall be effective only if Tenant is not in default hereunder at the commencement date for the lease of such Expansion Space. It is further agreed that Tenant’s right to lease such additional contiguous space shall apply only if such space is not leased at the time Tenant gives Landlord notice of Tenant’s exercise of the right to expand the Leased Premises and only if Landlord has not given Tenant the Lease Proposal Notice as to that space as provided in paragraph 3 below. Tenant shall exercise such right to expand by giving written notice to Landlord at least thirty (30) days prior to the proposed commencement date for the lease of such Expansion Space, which notice shall include a description of the Expansion Space. If Tenant so timely exercises such expansion option, the lease of such Expansion Space shall be at the same Base Rent per gross square foot and on the same terms and conditions as set forth in this Lease, except as otherwise expressly provided herein. It is agreed that Tenant’s right to expand the Leased Premises is a continuing right until the expiration of eight (8) years after the Effective Date. Accordingly, it is understood that to the extent Tenant exercises an option to expand the Leased Premises as provided above, Tenant shall continue to have the right to expand the Leased Premises into any available contiguous space within the Building at the time such expansion right is exercised, and in the event any contiguous currently leased space is vacated or otherwise becomes available, including but not limited to, the space currently occupied in the Building by the Texas Department of Parks and Wildlife and the Texas Workers Compensation Commission, Tenant’s right to expand shall apply to such vacated or otherwise available contiguous space.

(c) If Tenant timely exercises a right to expand the Leased Premises under either (a) or (b) above, Landlord and Tenant shall execute an appropriate amendment to this Lease within twenty (20) days after the date of Tenant’s notice to Landlord of the exercise of such expansion right to add the Expansion Space to the Leased Premises. The commencement date for the payment of the Base Rent for such Expansion Space shall be (i) sixty (60) days after the date on which such Expansion Space is Ready For Occupancy, or (ii) the date Tenant occupies any portion of the Expansion Space for the

Exhibit C, Page 4

conduct of its business activities; provided, in no event shall such commencement date be later than six (6) months after the date of Tenant’s notice of the exercise of such expansion right. The expiration date for the lease of the Expansion Space shall be the Expiration Date as provided in this Lease. Tenant shall complete all improvements required or desired by Tenant for its use of the Expansion Space on and subject to the principles of construction contained in the Lease and the Work Letter attached hereto as Exhibit D, and Landlord shall provide a Tenant Improvement Allowance, provided, however, that the amount of the per gross square foot Tenant Improvement Allowance shall be equal to $25.00 multiplied by a fraction, (a) the numerator of which is the number of months from the commencement date for the Expansion Space until the Expiration Date, and (b) the denominator of which is 120; and the procedure and requirements for draws shall be in accordance with that set forth in the Work Letter, as same may be revised for the Expansion Space.

3. Right of First Refusal to Lease Additional Space.

(a) Subject to the terms and provisions of this paragraph, during the Lease Term (including any extension period, as applicable), Tenant shall have a continuing right of first refusal to lease all or any portion of any space within the Building that may from time to time become available for direct lease. If Landlord receives a bona fide third party written proposal, letter of interest, proposed letter of intent or a written offer for the lease of any of such available space that is generally acceptable to Landlord, Landlord shall notify Tenant of such fact (the “Lease Proposal Notice”), which shall include the description of the space proposed to be leased, the material financial terms and material conditions of the proposal, and to the extent then available, a copy of the terms sheet, letter of interest, correspondence, or executed or unexecuted letter of intent or draft agreement reflecting such lease proposal. It is expressly agreed, however, that the foregoing right of first refusal shall not apply to the renewal or extension of any third party leases of space, and that the space covered by a then existing lease shall not be considered to be available for purposes hereof. Notwithstanding the foregoing, as to the space currently leased by the Texas Parks and Wildlife Department, it is agreed that if Landlord intends to submit a proposal to renew such lease beyond the term of its lease (and any renewal periods currently provided in such lease), Landlord shall submit to Tenant, at least sixty (60) days prior to the date Landlord intends to submit such proposal to the Texas Parks and Wildlife Department, a written proposal of the terms of such renewal, which shall be considered a Lease Proposal Notice for the purposes hereof. It is further agreed that if the Texas Parks and Wildlife Department submits a proposal to Landlord to renew and extend its lease beyond the term of its lease (and any renewal periods currently provided in such lease), such proposal shall be considered a Lease Proposal Notice for the purposes hereof.

(b) Tenant shall have a period of ten (10) business days after the date the Lease Proposal Notice is given within which to notify Landlord in writing that Tenant elects to exercise the right granted hereby to lease the available space described in the Lease Proposal Notice at the same rental rate and upon the same terms and conditions set forth in the Lease Proposal Notice; provided the term of the lease of such space

Exhibit C, Page 5

shall expire on the Expiration Date of this Lease. If Tenant fails to so give Landlord timely notice exercising the right of first refusal granted hereby within the required period, Tenant shall be conclusively deemed to have refused to exercise its right of first refusal to lease such space; provided, if such lease is not consummated or if such lease terminates prior to the termination or expiration of the Lease Term, Tenant shall continue to have the right to lease such space as provided herein. In the event that Landlord does not lease such space (i) on the material economic terms provided in the Lease Proposal Notice, or (ii) on terms materially less economically favorable to the proposed tenant than those contained in the Lease Proposal Notice, Tenant shall again have the right of first refusal as to such space before it can be leased to any other tenant (including the same prospective tenant) on terms materially more economically beneficial to such tenant and the above procedures shall again be applied.

(c) If Tenant exercises its right to lease available space in the Building pursuant to the provisions of this paragraph 3, within twenty (20) days after Tenant delivers to Landlord notice of its election, Landlord and Tenant shall enter into a Lease in substantially the same form and with substantially the same terms and provisions as contained in this Lease, except as modified by the terms of the Lease Proposal Notice. Upon the expiration of the Term of this Lease (including any extension period, as applicable), or upon the earlier termination of this Lease or the termination of Tenant’s rights of possession, the option to lease space within the Building granted hereby shall terminate and be of no further force and effect.

Landlord has not heretofore granted, and shall not grant any right of first refusal or option to any party after the Effective Date that takes precedence over the rights granted Tenant in this Exhibit C.

4. Exclusivity. Landlord agrees not to execute any lease with respect to space in the Building or the Project to any third party for the primary purpose of the clinical testing of pharmaceuticals without Tenant’s prior written consent.

5. Governmental Location Incentives. To the extent the same may be available, Landlord shall cooperate with, and/or assist, Tenant, at no material cost or expense to Landlord, obtaining any local or state concessions or incentives offered by such governmental entities with respect to the Leased Premises or the location of Tenant therein. Any such incentives obtained by Tenant shall be retained by Tenant, and any such incentives gained by Landlord shall accrue directly for the benefit of Tenant on a dollar for dollar basis.

6. Outside Recreation and Seating Area. During the Lease Term, Tenant may have exclusive use of the area outside (and in back of) the Building that is cross-hatched on Schedule C-1 attached, for the purpose of maintaining an outside recreation, exercise and seating area (the “Recreation Area”), and at Tenant’s option and sole expense, Tenant shall have the right to build a new detention wall and carve out a part of the hill behind the Building to enlarge the existing flat area for this purpose to the extent allowed by applicable laws, ordinances and regulations and subject to obtaining all necessary governmental approvals, including but not limited to any

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necessary revision or correction to the site plan for the Property, provided that Landlord will cooperate with Tenant (without expense on Landlord’s part) in seeking such revision or correction to the site plan. To the extent allowed by applicable laws, ordinances and regulations, Tenant may install outdoor furniture in such Recreation Area, erect a secure gated fence (of appropriate and durable exterior materials) around the Seating Area, and place a lock on the gate (provided that Landlord shall be furnished with a key to such lock). Tenant, its agents, licensees, invitees and guests may use the Recreation Area for recreation and light meals and snacks. Tenant shall maintain the furniture in the Recreation Area in a clean and attractive condition, and shall keep the Recreation Area free of trash and other debris. Subject to the foregoing, Tenant shall have the right to construct exercise facilities in the Recreation Area, containing such equipment and improvements, including lighting and extensions for utility services, as may be approved by Landlord or covered by Exhibits D and/or E.

7. Bus Stop. It is further agreed that Landlord shall use commercially reasonable efforts to obtain a bus stop in front of the Building; provided, obtaining such bus stop shall not be a condition precedent to the effectiveness of this Lease. Landlord shall have no liability if it is unable to obtain such bus stop, and such failure shall not entitle Tenant to terminate this Lease or alter, modify or affect any of the other provisions hereof in any manner. Tenant shall cooperate fully with Landlord to obtain such bus stop.

8. Telecommunications. Landlord shall provide, at Landlord’s sole cost and expense, conduit to the Building to allow fiber optics and other telecommunication services to be brought, at Tenant’s sole cost and expense, to the Building and the Leased Premises. Tenant shall be responsible for contracting to have telecommunication services provided to the Building and the Leased Premises and Tenant shall be entitled to select such telecommunication services provider as Tenant shall choose. Landlord agrees not to discriminate among telecommunications utilities in granting access to the Building.

9. Right to Purchase the Property. Landlord further grants to Tenant a right of first refusal to purchase the Property, provided Tenant is not in default under the Lease at the time such right of first refusal is exercised or at the closing of the sale and purchase of the Property (provided that if any notice of default has been given Tenant shall be afforded any applicable opportunity under the Lease to effect a cure), as follows:

(a) Landlord shall not sell the Property to a third party during the Term of this Lease (and any renewal and extensions of the Term) without first offering to sell and convey the same to Tenant in accordance with the following:

(i) In the event Landlord determines to sell the Property, Landlord shall give Tenant written notice of such determination (the “Notice of Intent to Sell”), which shall contain the price and the material economic terms and conditions on

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which Landlord intends to attempt to sell the Property. Tenant shall have thirty (30) days after the receipt or delivery of the Notice of Intent to Sell to exercise Tenant’s right to purchase the Property at the price and on the terms and conditions set forth in the Notice of Intent to Sell, or at such other price and on such other material economic terms and conditions as Landlord and Tenant may agree within said 30-day period, by giving written notice to Landlord prior to the expiration of said 30-day period.

(ii) In the event Tenant does not so exercise Tenant’s right to purchase the Property, Landlord shall be entitled to sell the Property to any person or entity at a price of no less than, and on material economic terms and conditions not more economically favorable to the purchaser than, the price and material economic terms and conditions set forth in the Notice of Intent to Sell (or at the price and on the material economic terms and conditions contained in Landlord’s last offer to Tenant, if any such subsequent offer has been made) for a period of one (1) year after the date of the receipt or delivery of the Notice of Intent to Sell. Any such sale shall not be subject to the right of first refusal provided in subparagraph (b) below.

(iii) If Landlord does not enter into a contract for the sale of the Property at a price of no less than, and on terms and conditions not more economically favorable to the purchaser than, the price and material economic terms and conditions set forth in Landlord’s notice to Tenant, or at the price and material economic terms contained in Landlord’s last offer to Tenant, as applicable, within one (1) year after the receipt or delivery of the Notice of Intent to Sell, or if Landlord fails to close the sale of the Property at such price and on such material economic terms and conditions, then Landlord must again comply with the provisions of this subparagraph (a) prior to a sale to a third party.

(iv) If Tenant and Landlord agree on the price, terms and conditions for a sale of the Property to Tenant pursuant to the provisions of this subparagraph (a), and Tenant fails to close the purchase of the Property, the provisions of this paragraph 9 shall have no further force and effect, and Tenant shall have right to purchase the Property under any of the provisions of either this subparagraph (a) or subparagraph (b) below.

(b) Except as otherwise provided in this subparagraph (b), in the event Landlord at any time during the Term of this Lease (and any renewal and extension of the Term) receives an arm’s length and good faith non-binding letter of intent, expression of interest, offer or proposal (“Right of First Refusal Proposal”) from a third party to purchase or acquire the Property that is acceptable to Landlord, Landlord shall not sell and convey the Property without first offering the same to Tenant upon the same price and on the same material economic terms and conditions as contained in the Right of First Refusal Proposal in accordance with the provisions of this subparagraph (b).

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(i) The provisions of this subparagraph (b) shall apply even if Landlord has given the Notice of Intent to Sell as provided in subparagraph (a) above, but Tenant has not given written notice to Landlord of Tenant’s agreement to purchase the Property at the price and on the material economic terms and conditions set forth in the Notice of Intent to Sell, or Landlord and Tenant have not otherwise agreed to the price and material economic terms and conditions for a sale of the Property to Tenant. If during the 1-year period when Landlord is entitled to sell the Property as provided in subparagraph (a) above, Landlord receives what would otherwise be a Right of First Refusal Offer, but at a price equal to or higher than the price or on material economic terms otherwise less favorable to the purchaser than the material economic terms set forth in the Notice of Intent to Sell (or the price and material economic terms and conditions contained in Landlord’s last offer to Tenant, if any such subsequent offer has been made pursuant to the provisions of subparagraph (a) above), the provisions of this subparagraph (b) shall not apply.

(ii) If the provisions of this subparagraph (b) apply, Landlord shall give Tenant written notice (the “Right of First Refusal Notice”) of receipt of such Right of First Refusal Proposal, which notice shall contain the price and the material economic terms and conditions of the Right of First Refusal Proposal, and to the extent then available, a copy of the terms sheet, letter of interest, correspondence, or executed or unexecuted letter of intent or draft agreement reflecting such Right of First Refusal Proposal.

(iii) Tenant shall have thirty (30) days from receipt or delivery of the Right of First Refusal Notice from Landlord to exercise Tenant’s right to purchase the Property at the same price, and on the same material economic terms and conditions set forth in the Right of First Refusal Notice by giving written notice to Landlord within said 30-day period. If Tenant fails to so exercise Tenant’s right to purchase the Property, Landlord shall be entitled to sell the Property in accordance with the Right of First Refusal Notice.

(iv) The right of first refusal granted to Tenant under this subparagraph (b), and the right of Tenant to purchase the Property under subparagraph (a) above shall terminate upon (A) the failure of Tenant to exercise the right of first refusal with respect to the Property and the sale thereof to a third party, or (B) upon the termination or expiration of this Lease, whichever occurs first.

(v) It is expressly agreed that the right of first refusal herein granted shall apply only to a sale and conveyance of the Property to a third party, and shall not apply to (A) any transfer of the Property, or any part thereof, or any interest therein, arising as a result of the dissolution, liquidation, merger or any change in the ownership interest of Landlord or any of the members of Landlord; or (B) any sale or transfer of any interest in the Property between or among the individuals or entities comprising Landlord (or between or among the members of any such entity); or (C) any transfer of any interest in the Property to a trust the

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beneficiaries of which are any of the individuals comprising Landlord and/or the spouse or descendants of such individuals; or (D) any transfer to a corporation, partnership or other entity in which the individuals or entities (or the partners of such entities) comprising Landlord are at least seventy-five percent (75%) of the members; provided that in the event of such transfer or disposition, the right of first refusal herein granted to Tenant shall continue to apply to and be binding upon any such transferee.

(vi) If Tenant timely exercises its right of first refusal as provided herein, and Tenant fails to close the purchase of the Property, all of the provisions of this paragraph 9 shall have no further force and effect, and Tenant shall have right to purchase the Property under any of the provisions of either subparagraph (a) above or this subparagraph (b).

(c) Notwithstanding the terms of a Right of First Refusal Proposal, the closing of the sale and purchase of the Property pursuant to the provisions of (a) or (b) above shall occur within thirty (30) days after the date the Tenant agrees to purchase the Property in accordance with the provisions hereof. At the closing, Landlord shall sell and convey the Property to Tenant by Special Warranty Deed subject generally to all restrictions, easements, leases, reservations and other matters that are either recorded in the Office of the County Clerk of Travis County, Texas, or apparent on the Property, but otherwise free and clear of liens and encumbrances securing loans or liquidated monetary sums other than ad valorem taxes not yet due and payable and any liens or obligations created by the acts of Tenant. The Property shall be sold and accepted by Tenant in its current, “as is, where is” condition without any representations or warranties whatsoever by Landlord, express or implied, as to the condition, fitness, habitability, or compliance with any federal, state or local laws, ordinances or regulations except as expressly set forth in this Lease. Tenant may, at its option and expense, obtain an Owner’s Policy of Title Insurance (unless the Landlord is to pay the cost thereof under the Right of First Refusal Proposal, if applicable). Taxes, rents, and assessments shall be prorated as of the date of the closing, and all other costs and expenses shall be allocated between Landlord and Tenant as is customary for similar transactions in Travis County, Texas. The Base Rent and Tenant’s Additional Rent under the Lease shall be prorated through the date of the closing, this Lease shall terminate as of such closing and the parties shall have no further rights, duties or obligations under this Lease from and after the date of the closing, except those provisions hereof that expressly survive the termination of this Lease.

(d) It is further expressly understood and agreed that this Lease shall continue in full force and effect after, and the landlord tenant relationship shall not be terminated by, the delivery of the notice of Landlord’s intent to sell the Property or the Right of First Refusal Notice. Landlord and Tenant shall continue to be bound by the other provisions of this Lease until the closing of the sale and purchase of the Property in accordance with the terms hereof, or the expiration or earlier termination of this Lease. If an event occurs after the delivery of Landlord’s notice of intent to sell the Property or the Right of First Refusal Notice that would be an event of default by Tenant

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hereunder after notice and the passage of the time provided, if any, to cure and correct such default, Tenant shall have no right to exercise the right it otherwise would have to purchase the Property unless and until such default is cured within the time, if any, provided herein.

10. Name Change. If Landlord changes the name or street address of the Building or the suite number of the Leased Premises, Landlord shall be responsible for all of Tenant’s costs associated with such change. Tenant shall have the right to approve any design changes to the Building or Common Area.

11. Generator. Tenant may install and maintain an electrical generator outside of the Building in the approximate area cross-hatched on Schedule C-2, to provide auxiliary power, as may be needed from time to time during power outages or power shortages, to the extent allowed by applicable laws, ordinances and regulations. Tenant shall be solely responsible for the maintenance of the electrical generator.

12. Prohibited Uses. To the extent within Landlord’s reasonable control or the reasonable control of its Affiliates, Landlord shall not lease or use nor suffer the Project to be used for any of the following uses during the Lease Term: soup kitchens or homeless shelters; blood banks; pawn shops; tattoo or body piercing parlors; pool halls, gaming places or amusement arcades; laundromats; bars or nightclubs; check cashing services; porn, sex or adult materials shops, massage parlors or strip clubs; automobile repair shops; recycling centers; butcher shops or rendering plants; funeral homes, mortuaries, embalming places or crematoria; or abortion clinics.

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EXHIBIT D

This Exhibit D is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP as Tenant.

1. Building Shell. The Building, other than those portions occupied by other tenants, is in shell condition and Landlord represents that it has been constructed substantially in accordance with the plans and specifications described in Schedule 1 attached to this Exhibit D (the “Shell Plans”), except as expressly provided in paragraph 2(m) and 2(n) below. Except as expressly provided in paragraph 2(m) and 2(n) below, the cost of any and all work not specifically delineated in such Shell Plans, or any increase in cost resulting from subsequent changes required to complete the Tenant Improvements (as defined below), shall be the responsibility of, and paid for by Tenant, subject to reimbursement from the Tenant Improvement Allowance as part of the Tenant Improvements Construction Costs as provided below. Tenant shall have access to the Property and the Building as necessary to timely complete the Tenant Improvements subject to the provisions of Section 2.2 of the Lease.

2. Tenant Improvements.

(a) Tenant shall complete all improvements required or desired by Tenant for Tenant’s use of the Leased Premises (collectively, the “Tenant Improvements”) according to the Tenant Improvement Plans (defined below) as provided herein. It is understood that the Tenant Improvements may include, subject to the provisions hereof, the following:

1. The interior improvements within the Leased Premises, including but not limited to clinical labs, administrative offices, dormitories, server room, commercial kitchen, commercial laundry, pharmacy and chemical storage.

2. Tenant may improve for its exclusive use and control, any building stairwells that are internal to the Leased Premises, and may integrate these stairwells into Tenant’s security system(s).

3. Tenant may install an uninterrupted power supply (UPS) system and emergency stand-by battery system, and may use a portable generator (in addition to the external auxiliary generator) during emergencies. Tenant may use reasonably necessary riser space for the connection of these systems to the Leased Premises.

4. As provided below, Tenant shall install generator, chemical storage and platform lift at the rear of the Building, and shall not be charged extra rent or other fee for the use of this area.

Exhibit D, Page 1

5. Tenant shall be entitled to construct antennae and/or satellite dish (the “Antennae”) on that portion of the roof of the Building located immediately above the Leased Premises, and shall not be charged extra rent or other fee by Landlord for the Antennae or use of roof space for the Antennae.

(b) Subject to sections (l), (m) and (n) below, Tenant shall bear the entire cost of the construction of the Tenant Improvements, including, without limitation, all architectural and engineering fees associated with the space planning for the Leased Premises, the design of the Tenant Improvements and preparation of the Tenant Improvement Plans (including any changes to the Shell Plans required therefor) and any changes thereto; all labor, material and equipment costs; additional janitorial services; general tenant signage; permit fees; and taxes and insurance costs related to the construction of the Tenant Improvements to the extent not included in Operating Costs (the “Tenant Improvement Construction Costs”). Landlord shall not charge or be entitled to receive payment of any fee in connection with or during the construction of the Tenant Improvements or Tenant’s move-in, including without limitation any project management, supervision or review fee, or any fee for the use of Building services (such as, but not limited to, loading dock, parking or freight elevators, nor shall Tenant be charged for utilities consumed during construction of the Tenant Improvements).

(c) Landlord shall make available to Tenant, the construction, architectural and engineering information reasonably requested by Tenant’s architect or general contractor. Tenant shall submit to Landlord construction drawings and specifications for the Tenant Improvements (the “Tenant Improvement Plans”) within one hundred twenty (120) days after the Effective Date of this Lease. The Tenant Improvement Plans shall consist of detailed plans and specifications for the construction of the Tenant Improvements in accordance with all applicable governmental laws, codes, rules and regulations, including partition layout, ceiling plan, electrical outlets and switches, telephone outlets, and drawings for any modifications to the mechanical and plumbing systems of the Building. The Tenant Improvement Plans shall specifically include a requirement for expansion joints every twenty (20) feet on all interior walls and above all doorways and other openings. The Tenant Improvement Plans must be approved by Landlord as provided herein.

(d) Within five (5) business days after Landlord’s receipt of the Tenant Improvement Plans, Landlord shall submit to Tenant in writing any requested changes thereto, and Landlord and Tenant shall thereafter work together in good faith to agree upon final Tenant Improvement Plans. Landlord’s approval of the Tenant Improvement Plans shall not be unreasonably delayed or withheld, provided that they comply with all applicable governmental laws, codes, rules and regulations and the provisions of this Lease. Notwithstanding the foregoing, Landlord’s approval of any changes to the Building systems or the exterior or structural components of the Building, including relocation or alteration of stairwells and elevators, shall be subject to Landlord’s approval, and shall be subject to approval by Landlord’s structural engineer. If Landlord’s structural engineer fails to approve any such portion of the Tenant Improvement Plans, the specific reasons for such disapproval shall be provided to Tenant, together with specific drawings and other corrections necessary to correct the

Exhibit D, Page 2

specific reasons for such disapproval. If Tenant modifies the Tenant Improvement Plans to specifically incorporate the drawings and other corrections made by Landlord’s structural engineer, the modifications of the exterior or structural components of the Building shall be deemed to be approved by Landlord. Landlord shall not refuse, without adequate justification, to approve the final Tenant Improvement Plans within thirty (30) days after Landlord’s receipt thereof. In the event Landlord does disapprove the Tenant Improvement Plans, as submitted, the parties shall cooperate fully to achieve a final approved set of plans in conformity with this Work Letter. If, despite good faith efforts, the parties cannot agree on a final approved set of Tenant Improvement Plans Landlord and Tenant shall each have the right to terminate the Lease by notice to the other at such time, and in the event of such termination the first month’s Base Rent shall be promptly returned to Tenant.

(e) No approval by Landlord or Landlord’s architects and/or engineers of the Tenant Improvement Plans or any of Tenant’s drawings, plans and specifications that are prepared in connection with any construction of improvements in the Leased Premises shall in any way be construed or operate as a representation or warranty by Landlord as to the adequacy of such drawings, plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely satisfy any requirement of consent by Landlord under this Lease as to Tenant’s right to construct the improvements in the Leased Premises in accordance with such drawings, plans and specifications.

(f) Upon Landlord’s approval of the Tenant Improvement Plans, Tenant, at Tenant’s expense, shall promptly apply for, and obtain, all permits and approvals required by governmental agencies, and Landlord shall join Tenant in promptly applying for approval (to the extent necessary) by the Association Architectural Control Committee (the “Committee”) under the Declaration and any other restrictive covenants applicable to the construction of the Tenant Improvements (the foregoing collectively referred to as the “Approvals”), and Landlord shall affirmatively request and support such approval by the Committee in Landlord’s capacity as the owner of the Property. It is contemplated that among such other items as may require approval of the Committee, the Approvals shall include approval of the Committee for the following: (i) installation of rooftop equipment and services (within Landlord provided “roof loading zones”); (ii) utilization of the fenced area on southeast of the Property for an outdoor recreation area in accordance with Exhibit C; (iii) installation of an emergency generator outside of the south side of the Building; (iv) installation of a side-loading lift on the south side of the Building to serve Tenant as a loading dock; (v) construction of a CMU building used for Hazardous Materials, Hazardous Substances and bio- wastes; (vi) construction of an additional outdoor storage building for storage of such items as outdoor furniture; and (vii) installation of back-illuminated signage, mounted prominently on the Building that would be visible from Ben White Boulevard. Landlord represents and warrants that it has obtained pre-approval by the Committee as to the preliminary drawings provided by Tenant to Landlord prior to the Effective Date of this Lease for those items described in (i) through (viii) in the immediately preceding sentence. Upon substantial completion of the Tenant Improvements, Tenant shall obtain a permanent certificate of occupancy for the Leased Premises.

Exhibit D, Page 3

(g) Prior to the commencement of construction of any of the Tenant Improvements, Tenant shall (i) furnish Landlord with evidence satisfactory to Landlord that the Approvals have been obtained, (ii) furnish Landlord with evidence that Tenant has obtained and is maintaining (1) All Risk Builder’s Risk Insurance covering the replacement value of the Tenant Improvements and naming Landlord as an additional insured, and (2) the Comprehensive Commercial Liability Insurance policy described in the Lease, and (iii) notify Landlord of the date on which Tenant intends to commence construction of the Tenant Improvements. The construction contemplated by the Tenant Improvement Plans shall be performed by skilled contractors and subcontractors whose names shall be furnished in writing to Landlord in advance. All contractors shall be required to maintain commercial general liability insurance in the amounts of not less than $1 million per occurrence, $2 million aggregate, with reputable companies licensed to provide insurance in Texas. Certificates of insurance for Tenant and its contractors shall be delivered to Landlord before Tenant commences construction of the Tenant Improvements.

(h) The construction of the Tenant Improvements shall be done in a good and workmanlike manner and in accordance with the Tenant Improvement Plans, as approved by Landlord. All material changes to any of the Tenant Improvement Plans must be submitted to Landlord for Landlord’s written approval prior to, and as a condition precedent to, making such change; provided, Landlord shall promptly review the same and shall not unreasonably withhold, delay or condition its approval. All materials used in executing the Tenant Improvement Plans by Tenant shall be new and of good quality for their intended purposes.

(i) The failure of Tenant to complete the Tenant Improvements by the Rent Commencement Date for any reason other than delays caused by the acts of Landlord or Landlord’s Related Parties shall not delay or extend the Rent Commencement Date and the obligations of Landlord and Tenant shall continue in full force and effect and the rent shall not be abated. Any such delays caused by Landlord shall extend the Rent Commencement Date by a period equal to the period of the delay attributable to the acts of Landlord.

(j) Tenant shall have no right, authority or power to bind Landlord or any interest of Landlord in the Project, the Property, the Building, or the Leased Premises for the payment of any claim for labor or materials or for any charge or expense incurred or the erection or construction of the Tenant Improvements, nor to render the Project, the Property, the Building, or the Leased Premises or any part thereof liable for any mechanic’s or materialmen’s lien, and Tenant shall in no way be considered the agent of Landlord in the construction or erection of any of the Tenant Improvements. If any lien is imposed upon any portion of the Property by reason of the construction of the Tenant Improvements, Tenant shall discharge or bond around the same in accordance with the provisions of this Lease.

(k) Tenant and its contractor(s) shall prosecute the construction of the Tenant Improvements in such manner as to minimize interference or inconvenience to the other tenants of the Building, the Property and the Project to the extent reasonably possible. All construction activity and storage of materials shall be confined to the Leased Premises, Tenant’s storage building(s), if already erected, and the associated parking area unless Landlord specifically agrees otherwise in writing. The work site(s) shall be

Exhibit D, Page 4

maintained in a safe and reasonably clean condition at all times during the construction. The construction of the Tenant Improvements shall be conducted so as to avoid damage to part of the Project, the Property, the Common Areas, including all parking and landscaped areas, or the Building, and in the event of any such damage, Tenant shall cause such damage to be fully repaired and restored.

(l) Landlord shall pay Tenant a tenant improvement allowance (the “Tenant Improvement Allowance”) of an amount as provided in Section 1.26 of the Lease, which funds may be applied by Tenant to defray any and all expenses and fees incurred by Tenant in connection with the design, planning, approval and construction of the Tenant Improvements.

(m) In addition to the Tenant Improvement Allowance, Landlord shall complete and pay for the following work in accordance with applicable codes and regulations: (a) installation of 2000 amp, 3 phase, 480 volt electrical service, with transformer and concrete pad, to the exterior perimeter of the Building for access to the Leased Premises; (b) a dumpster and pad for the Leased Premises and fencing around such pad; (c) removal of existing overhead doors on the north elevation, and replacement with glazing system; overhead doors to be provided to Tenant for its installation in the Building on the north elevation; and (d) removal of existing dock levelers, and infill with structural concrete to match existing finish floor elevation.

(n) Landlord shall also pay Tenant, in addition to the Tenant Improvement Allowance, an allowance of $187,000 for furnishing and installation of elevators, and an allowance of $30,000 for furnishing and installation of two (2) separate steel stairs and handrails in the existing floor openings and demising walls with one-hour fire walls taped, floated and painted to deck.

(o) Except for any work required to be accomplished by Landlord as set forth in the Lease, the Shell Plans, or in this Work Letter, all of the work to be accomplished with respect to the Leased Premises, the Building and the Property, including the recreation area and Tenant’s out-buildings, shall be included in the Tenant Improvement Plans, and all of such items shall be completed by Tenant as part of the Tenant Improvements. Notwithstanding anything to the contrary herein, it is specifically agreed that Tenant shall be entitled to use the existing site utilities for construction purposes, and the cost of such utilities shall be borne by Landlord.

(p) The Tenant Improvement Allowance shall be paid to Tenant as follows: within thirty (30) days after the last to occur of (i) Tenant’s delivery to Landlord of an invoice for such payment, along with a detail schedule of the Tenant Improvement Construction Costs certified by an officer of Tenant and signed lien waivers from all contractors and subcontractors providing labor and materials for the Tenant Improvements; (ii) written confirmation from Landlord’s architect that the Tenant Improvements are substantially completed in accordance with the Tenant Improvement Plans; and (iii) delivery to Landlord of a permanent certificate of occupancy.

(q) Notwithstanding anything contained herein to the contrary, Tenant shall not be entitled to receive, and Landlord shall have no obligation to provide, the Tenant Improvement Allowance at any time after a default has occurred unless Tenant cures such default within any time allowed in this Lease for such cure.

Exhibit D, Page 5

(r) THE MECHANICAL, ELECTRICAL AND PLUMBING SYSTEMS FOR THE LEASED PREMISES SHALL BE EXACTLY AS SPECIFIED BY TENANT AS PART OF THE TENANT IMPROVEMENTS TO THE LEASED PREMISES. LANDLORD REPRESENTS THAT TO THE BEST OF THE ACTUAL KNOWLEDGE OF LANDLORD BASED ON THE LETTER FROM LANDLORD’S STRUCTURAL ENGINEER ATTACHED HERETO AS SCHEDULE D-1, THAT THE LOAD LEVELS FOR THE FIRST AND SECOND FLOORS OF THE BUILDING ARE AS SPECIFIED IN LANDLORD’S ENGINEER’S LETTER.

(s) Landlord shall also pay Tenant, in addition to the Tenant Improvement Allowance, an allowance equal to one-half of all costs incurred by Tenant towards improving the fire rating of the Leased Premises over its current level as required by applicable governmental authorities in order to allow Tenant’s Permitted Use under applicable governmental statutes, codes and regulations, provided that such allowance shall be limited in all events to a maximum sum of $100,000.

Exhibit D, Page 6

EXHIBIT E

Tenant Improvement Plans

This Exhibit E is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP as Tenant.

The Tenant Improvement Plans are those certain plans contained in the following index:

[TO BE PREPARED BY TENANT]

Exhibit E, Page 1

EXHIBIT F

Subordination, Non-Disturbance and Attornment Agreement

This Exhibit F is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP as Tenant.

SUBORDINATION, ATTORNMENT,

AND NON-DISTURBANCE AGREEMENT

This Subordination, Attornment and Non-Disturbance Agreement (this “Agreement”) is executed by and among Lender, Borrower and Tenant in connection with the loan from Lender to Borrower evidenced by the Note and secured in part by the Deed of Trust against the Property. Capitalized terms are defined below.

DATE: May     , 2004

LENDER: Coastal Banc ssb, a state savings bank

LENDER’S ADDRESS: 5718 Westheimer, Suite 100, Houston, Texas 77057

BORROWER: Met Center Partners-6, Ltd., a Texas limited partnership

BORROWER’S ADDRESS: 611 West 15^th Street, Austin, Texas 78701

TENANT: PPD Development, LP, a Texas limited partnership

TENANT’S ADDRESS: 3151 South 17^th Street, Wilmington, North Carolina 28412

LEASE: Lease Agreement dated May     , 2004, by and between Borrower, as lessor or landlord, and Tenant, as lessee or tenant, providing for the leasing and occupancy of the Leased Premises.

LEASED PREMISES: Approximately 125,000 square feet of rentable space in the Property, as described in the Lease.

PROPERTY: Met Building Ten in Austin, Travis County, Texas, legally described as follows:

Lot 5-A, Block “B”, of RESUBDIVISION OF LOT 5, BLOCK B, METRO CENTER SECTION 6, a subdivision in Travis County, Texas, according to the map or plat thereof, recorded under Document No. 200000316 of the Official Public Records of Travis County, Texas.

Exhibit F, Page 1

NOTE:

Promissory note dated July 24, 2001, in the principal amount of $3,500,000.00, executed by Borrower, payable to the order of Lender, and secured in part by the Deed of Trust;

Promissory note dated December 18, 2002, in the principal amount of $5,000,000.00, executed by Borrower, payable to the order of Lender, and secured in part by the Deed of Trust; and

Promissory note dated May     , 2004, in the principal amount of $6,643,300.00, executed by Borrower, payable to the order of Lender, and secured in part by the Deed of Trust.

DEED OF TRUST:

The Deed of Trust (Security Agreement, Assignment of Leases and Rents, and Financing Statement) dated July 24, 2001, executed by Borrower for the benefit of Lender, against the Property as security for the Note, and recorded under Document No. 20011122437 of the Official Public Records of Travis County, Texas;

The Second Lien Deed of Trust (Security Agreement, Assignment of Leases and Rents, and Financing Statement) dated December 18, 2002, executed by Borrower for the benefit of Lender, against the Property as security for the Note, and recorded under Document No. 2002245553 of the Official Public Records of Travis County, Texas; and

The Third Lien Deed of Trust (Security Agreement, Assignment of Leases and Rents, and Financing Statement) dated May     , 2004, executed by Borrower for the benefit of Lender, against the Property as security for the Note, and to be recorded in the Official Public Records of Travis County, Texas.

In consideration of the covenants, conditions, provisions and agreements set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Lender and Tenant hereby represent, acknowledge, covenant and agree as follows:

1. Subordination. Subject to Section 2 below, the Lease and the leasehold estate created thereby and all of the Tenant’s rights thereunder shall be and shall at all times remain subject, subordinate and inferior to the Deed of Trust and to all renewals, modifications, consolidations, replacements and extensions thereof.

2. Non-Disturbance. For so long as Tenant faithfully observes and performs the provisions of the Lease, Lender’s rights shall not be exercised in such manner as to disturb Tenant’s right to peaceful possession and quiet enjoyment of the Leased Premises in accordance with the terms of the Lease. Without limiting the foregoing, if (a) a proceeding is brought for the

Exhibit F, Page 2

foreclosure of the Deed of Trust, (b) the Property is sold pursuant to a trustee’s sale under the Deed of Trust, or (c) the Property is conveyed by deed in lieu of foreclosure, then the Lease shall not be terminated, nor shall Tenant’s possession or enjoyment of the Leased Premises be interfered with, and Lender, any successor-in-interest, nominee or purchaser of the Property, as the case may be, shall take title to the Property subject to the terms of the Lease and Tenant’s occupancy and quiet enjoyment of the Leased Premises in accordance with the terms of the Lease shall not be disturbed.

3. Attornment. If (a) a proceeding is brought to foreclose the Deed of Trust, (b) the Property is sold pursuant to a trustee’s sale under the Deed of Trust, or (c) the Property is conveyed by deed in lieu of foreclosure, then Tenant shall attorn to Lender, any successor-in-interest to Lender, and any purchaser of the Property taking title from or through Lender (or the beneficiary under the Deed of Trust), as the case may be, as the landlord under the Lease. Such attornment shall be effective and self-operative without the execution of any further agreement.

4. Acknowledgment and Agreement by Tenant. Tenant acknowledges and agrees that:

(a) In the event of any act or omission by Borrower that would give Tenant the right, either immediately or after the lapse of time, to terminate the Lease or to claim a partial or total eviction, Tenant will not exercise any such right: (i) until Tenant has given written notice of such act or omission to Lender (which may be given concurrently with notice to Borrower); and (ii) until the expiration of any period of time (after such notice has been given to Lender) during which the Borrower would have the right to cure such act or omission under the express terms of the Lease;

(b) In the event Lender notifies Tenant of a default by Borrower under the Deed of Trust, and demands that Tenant pays the rents or other sums due under the Lease to Lender, then Tenant shall honor such demand and pay rents and all other sums due under the Lease directly to Lender or as otherwise required pursuant to such notice, provided that (i) Borrower, by its signature below, hereby consents to this procedure, and (ii) Borrower shall hold Tenant harmless from any claim or expense arising or asserted by reason of Tenant’s compliance in good faith with such notice from Lender;

(c) Tenant shall send a copy of any notice of default under the Lease to Lender at the same time such notice of default is sent to Borrower;

(d) Any right or option that Tenant may possess, or hereafter acquire, to purchase any portion of the Property, or any interest therein, shall be valid, but shall otherwise be exercised subject to the lien and terms of the Deed of Trust; and

(e) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement by Lender.

Exhibit F, Page 3

5. No Obligation of Lender. Lender shall not:

(a) Be liable for any act or omission of Borrower;

(b) Be bound by any rent or additional rent that Tenant might have paid in advance to Borrower for a period in excess of one month; or

(c) Be liable to Tenant for any security deposit that Tenant might have paid to Borrower.

6. Construction Obligations. Lender shall not be liable for or bound by any Construction-Related Obligation of Borrower under the Lease. A “Construction-Related Obligation” means any obligation of Borrower under the Lease to make, pay for, or reimburse Tenant for any alterations, demolition, or other improvements or work at the Leased Premises or the Property. “Construction-Related Obligations” shall not include: (a) reconstruction or repair following fire, casualty or condemnation; or (b) day-to-day maintenance and repairs.

7. Exculpation Provision. Notwithstanding anything to the contrary in this Agreement or the Lease, upon any attornment pursuant to this Agreement the Lease shall be deemed to have been automatically amended to provide that Lender’s obligations and liability under the Lease shall never extend beyond Lender’s interest in the Property, including insurance and condemnation proceeds, the proceeds from any sale or other disposition of the Property by Lender, and sums payable under the Lease (collectively, “Lender’s Interest”). Tenant shall look exclusively to Lender’s Interest for payment or discharge of any obligations of Lender under the Lease. If Tenant obtains any money judgment against Lender with respect to the Lease or the relationship between Lender and Tenant, then Tenant shall look solely to Lender’s Interest to collect such judgment. Tenant shall not collect or attempt to collect any such judgment out of any other assets of Lender.

8. Construction with Lease. This Agreement shall be fully enforceable in accordance with its terms between Lender (and its successors and assigns) and Tenant but shall not be deemed to amend any provision of the Lease.

9. Notices. Any notice, demand or request permitted, required or desired to be given in connection with this Agreement shall be in writing and shall be deemed effective when given in accordance with the notice provision of the Lease, to the intended recipient at its last known address.

10. Time. Time is of the essence in all matters pertaining to the performance of this Agreement.

11. Authority. The parties to this Agreement warrant and represent to one another that they have the power and authority to enter into and perform their respective obligations under this Agreement in the names, titles and capacities herein stated and on behalf of any entities, persons, estates or firms represented or purported to be represented by such person, and that all formal requirements necessary or required by any state and/or federal law or private agreement in order for the parties to enter into and perform their respective obligations under this Agreement have been fully complied with.

Exhibit F, Page 4

12. Entire Agreement. This Agreement represents the entire agreement between Lender and Tenant regarding the subject matter dealt with herein, and it may not be modified, amended or discharged except by written amendment executed by the party against whom enforcement of such modification, amendment or discharge is sought.

13. Successors and Assigns. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns; provided, however, that in the event of a bona fide assignment or transfer of the interest of Lender, all obligations and liabilities shall be the responsibility of Lender’s transferee, and further provided that the obligations and commitments of Tenant under this Agreement shall be automatically transferred to the extent of any permitted assignment or transfer of the Tenant’s interest in the Lease.

14. GOVERNING LAW. THE TERMS, PROVISIONS AND CONDITIONS OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

15. Attorney’s Fees. Should any legal proceeding be commenced by any party hereto or its representative against another party with respect to this Agreement, the prevailing party or parties shall be entitled, in addition to any other relief awarded, to recover its reasonable attorneys’ fees and costs incurred in such proceeding, as determined by the tribunal.

16. Severability. If any provision of this Agreement shall, for any reason, be held to be violative of any applicable law, and so much of this Agreement is held to be unenforceable, then the invalidity of such specific provision shall not be held to invalidate any other provision of this Agreement, all of which other provisions shall remain in full force and effect.

17. Headings; Construction. The headings contained in this Agreement are for reference purposes only and shall not modify or affect this Agreement in any manner whatsoever. Wherever required by this context, any gender shall include any other gender, the singular shall include the plural, and the plural shall include the singular.

[SIGNATURES ON FOLLOWING PAGE.]

Exhibit F, Page 5

EXECUTED as of the date first written above.

BORROWER:
MET CENTER PARTNERS-6, LTD.,
a Texas limited partnership
By:	MET CENTER 3, INC.,
	a Texas corporation,
	Its General Partner
By
	Howard C. Yancy, President
LENDER:
COASTAL BANC SSB,
a state savings bank
By
	Douglas A. Cotner, Senior Vice President
TENANT:
PPD DEVELOPMENT, LP,
a Texas limited partnership
By:	PPD GP, LLC,
	a Delaware limited liability company,
	Its General Partner
By
Name:
Title:

Exhibit F, Page 6

THE STATE OF TEXAS	§
	§
COUNTY OF TRAVIS	§

This instrument was acknowledged before me on May     , 2004, by Howard C. Yancy, President of Met Center 3, Inc., a Texas corporation, on behalf of said corporation, the general partner of Met Center Partners-6, Ltd., a Texas limited partnership.

Notary Public - State of Texas

THE STATE OF TEXAS	§
	§
COUNTY OF TRAVIS	§

This instrument was acknowledged before me on May     , 2004, by Douglas A. Cotner, Senior Vice President of Coastal Banc ssb, a state savings bank, on behalf of said bank.

Notary Public - State of Texas

THE STATE OF	§
	§
COUNTY OF	§

This instrument was acknowledged before me on May     , 2004, by                     ,                      of PPD GP, LLC, a Delaware limited liability company, on behalf of said company, the general partner of PPD Development, LP, a Texas limited partnership.

Notary Public - State of

Exhibit F, Page 7

EXHIBIT G

Guaranty Agreement

This Exhibit G is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP, as Tenant.

LEASE GUARANTY

As an inducement to MET CENTER PARTNERS-6, LTD., a Texas limited partnership (“Landlord”), to execute that certain Lease Agreement (the “Lease”), between Landlord and PPD Development, LP, a Texas limited partnership (“Tenant”), entered into as of the Effective Date therein, of the Premises comprising approximately 125,000 gross square feet of space within Building Ten of the Met Center project in Austin, Travis County, Texas, as more particularly described in the Lease, the undersigned (“Guarantor”) covenants and agrees with Landlord as follows:

1. Guarantor unconditionally, absolutely and irrevocably guarantees the performance of all covenants, conditions, agreements and obligations of the Tenant under the Lease, including the payment of all rents and other sums due thereunder (the “Obligations”). If Tenant fails to perform any such covenants, conditions, agreements or obligations, or fails to pay any sums that may arise or become due under the Lease, the undersigned shall cause such covenants, conditions, agreements or obligations to be performed, and/or shall pay such rent or other sums due to Landlord, and/or any damages or other sums that may be due to Landlord during the Term of the Lease immediately upon written notice of such default from Landlord.

2. The obligation of Guarantor to Landlord under this Guaranty is direct and primary and joint and several with Tenant, and is not limited to that of a surety or indemnitor. Guarantor, without limitation on Guarantor’s obligations hereunder, is liable for payment of the Obligations as a primary obligor and in solido with Tenant. The guaranty made hereby is, as to its terms, an irrevocable, absolute, continuing guaranty of payment and performance by Tenant and not a guaranty of collection.

3. After default by Tenant, Landlord may proceed directly against Guarantor without any obligation to proceed against Tenant, any Guarantor or to pursue any other remedy. Without limiting the preceding sentence, Landlord shall not be required to exhaust Landlord’s remedies against Tenant or any collateral for the Lease. Landlord may enforce Guarantor’s payment of all or any of the obligations without any requirement on Landlord to (a) institute suit or exhaust Lender’s remedies against Tenant or any one or more other persons, (b) foreclose or otherwise enforce any liens or security interests, (c) join Tenant or any one or more other persons in any action seeking to enforce this Agreement, or (d) resort to any other means of obtaining payment of any of the Obligations. Any amounts recovered by Landlord under the Lease shall reduce pro tanto the amounts recoverable from Guarantor hereunder.

Exhibit G, Page 1

4. The obligation of Guarantor to Landlord shall continue notwithstanding any extension of credit or other indulgence allowed Tenant by Landlord or release of Tenant from any or all of Tenant’s obligations under the Lease, and notwithstanding any amendment of or alteration to any of the terms, conditions or provisions of the Lease, or any assignment or subletting by Tenant, whether or not consented to by Landlord, or any extension of the term of the Lease, or the exercise by Landlord of any remedy permitted by the provisions of the Lease, provided that any amendment of the Lease or Tenant’s obligations thereunder agreed to in writing by Landlord shall, to such extent, modify the extent of Guarantor’s obligations hereunder, as this Guaranty shall mirror, insofar as possible, the obligations of Tenant under the Lease, except that (as contemplated in paragraph 5 below) no reduction, abatement, or delay in Tenant’s obligations under any bankruptcy or insolvency law shall reduce, abate or delay Guarantor’s obligations hereunder or impair Landlord’s right to enforce same against Guarantor.

5. This Guaranty shall continue unchanged by any bankruptcy, reorganization or insolvency of Tenant, or by the disaffirmance or abandonment by any trustee of Tenant. If, pursuant to any bankruptcy or other debtor relief law, or any judgment, order or decision thereunder, Landlord must rescind or restore any amount taken, credited or received by Landlord in satisfaction of any of the Obligations, any prior release or discharge from the terms of this Agreement given by Landlord shall be without effect, and this Agreement shall remain in full force and effect as to the amount so rescinded or restored. Guarantor’s obligations hereunder shall not be discharged except by Guarantor’s performance of those obligations and then only to the extent of that performance. Except as provided in this paragraph 5, and notwithstanding anything else contained in this Guaranty, Guarantor shall have no liability to Landlord or to any other person for any obligation arising under or with respect to the Lease to the extent that Tenant would have valid defenses thereto or offsets against same, it being the intention of the parties that Guarantor’s liability hereunder shall be measured solely by the duties, obligations and undertakings of Tenant under the express terms of the Lease.

6. As used herein, the term “Guarantor Claims” means all obligations, indebtedness, liabilities and duties of Tenant to Guarantor, whether now existing or in any manner hereafter arising, whether direct or indirect, primary or secondary, joint, several or joint and several, fixed or contingent, whether acquired by Guarantor in a transaction with Tenant or in a transaction with one or more other persons, whether originally owed to Guarantor or owed to one or more other persons, and whether arising in connection with, or evidenced by, notes, advances, bookkeeping entries, guaranty agreements, lien or security interest agreement, or any other method or means. Guarantor Claims include, without limitation, all rights and claims of Guarantor against Tenant arising by way of subrogation or otherwise, as a result of Guarantor’s payment of all or any part of the Obligations. Until the Obligations are paid in full and Guarantor’s liability hereunder has been released and discharged, Guarantor shall not receive or collect, directly or indirectly, from Tenant or any other person any amount upon the Guarantor Claims that would prevent Tenant from timely paying all obligations owed by Tenant to Landlord, provided that during all periods while Tenant is in compliance with this Lease Tenant and Guarantor may conduct their normal intra-corporate financial dealings. In any receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceeding in which Tenant is a debtor, Landlord may prove its claim in any such proceeding, so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian,

Exhibit G, Page 2

dividends and payments which would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such dividends and payments to Landlord to the extent necessary to fulfill this Guaranty. If Landlord receives, for application upon the Obligations, any such dividends or payments which, as between Tenant and Guarantor, constitute payments on the Guarantor Claims, then upon full payment of the Obligations to Landlord, Guarantor shall be subrogated to the rights of Landlord to the extent that payments to Landlord on the Guarantor Claims or otherwise made under this Guaranty have contributed to satisfaction of the Obligations; and such subrogation shall extend to that portion of the Obligations that would have been unpaid if Landlord had not received dividends or payments upon the Guarantor Claims. All liens, security interests, and other encumbrances upon any of Tenant’s assets securing payment of any part of the Guarantor Claims shall be inferior and subordinate to all liens, security interests, and other encumbrances upon Tenant’s assets securing payment of any of the Obligations, regardless of whether such encumbrances in favor of Guarantor or Landlord presently exist or hereafter arise. Except as permitted above, Guarantor shall not: (a) exercise or enforce any creditor’s rights it may have against Tenant, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including, without limitation, the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any liens, security interests or other encumbrances on any of Tenant’s assets.

7. The rights of Landlord under this Guaranty are assignable and shall follow any transfer of Landlord’s interest permitted under the Lease.

8. Guarantor agrees to pay and discharge all reasonable costs, attorney’s fees and expenses which may be incurred or paid by Landlord in enforcing the covenants and agreements of the Lease or of this Guaranty, provided that in the event the enforcement of this Guaranty is submitted to litigation the prevailing party shall be entitled to recover its reasonable attorney’s fees and related expenses.

9. This Guaranty shall be binding upon and inure to the benefit of Guarantor and Landlord, and their respective heirs, executors, administrators, legal representatives, successors and assigns. Any change in status or organization of Tenant shall not affect this Guaranty. This Guaranty shall continue effective with respect to any of the Obligations guaranteed hereby arising or created after any attempted revocation by Guarantor and after Guarantor’s dissolution (in which event this Guaranty shall be binding upon Guarantor’s legal representative, successors and assigns).

10. Guarantor hereby agrees that the venue of any such legal action brought by Landlord shall be in the County of Travis, State of Texas. This Guaranty shall be construed under the laws of the State of Texas.

11. Guarantor represents and warrants to Landlord that:

(a) Guarantor has received, or will receive, direct or indirect benefit and fair consideration from making this Guaranty;

Exhibit G, Page 3

(b) To the extent desired by Guarantor, Guarantor is familiar with all books and records regarding Tenant’s financial condition; however, Guarantor is not relying on that financial condition in making this Guaranty;

(c) No person other than Tenant has made any representation, warranty or statement to Guarantor to induce Guarantor to make this Guaranty;

(d) After giving effect to this Guaranty, Guarantor (i) is solvent, (ii) has assets which, when fairly valued, exceed Guarantor’s obligations, liabilities and debts, and (iii) has property and assets sufficient to satisfy and repay all of Guarantor’s obligations, liabilities, and debts; and

(e) This Guaranty is a legal and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms.

12. Any notices or other communications required or permitted to be given by this Guaranty must be given in writing and personally delivered or mailed by prepaid certified or registered mail to the person to whom such notice or communication is directed, at the address of that person as follows: (i) if to Guarantor, at Guarantor’s address set forth below Guarantor’s signature below, and (ii) if to Landlord, at Landlord’s address for notices as set forth in the Lease. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered as aforesaid or, if mailed, on the third (3rd) business day after it is deposited in the mails as aforesaid. Either Landlord or Guarantor may change their address for purposes of this Guaranty by giving notice of such change to the other pursuant to this paragraph.

13. Subject to the foregoing, no failure to exercise, and no delay in exercising, on the part of Landlord, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. Landlord’s rights hereunder shall be in addition to all other rights provided by law. No oral agreements exist between Landlord and Guarantor that conflict with any of the provisions hereof. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand (unless such notice and/or demand is otherwise required hereunder).

14. If any provision of this Guaranty is held to be illegal, invalid or unenforceable, then that provision shall be fully severable, this Guaranty shall be construed and enforced as if that provision had never been a part of this Guaranty, and the remaining provisions of this Guaranty shall, to the extent permitted by law, remain in full force and effect, unaffected by the illegal, invalid or unenforceable provision.

15. Guarantor acknowledges that Landlord has relied on all written information, if any, provided by Guarantor to Landlord in connection with the Lease and this Guaranty, and that for purposes of this paragraph 15 the information contained on the website for Guarantor and

Exhibit G, Page 4

public filings in accordance with all applicable governmental securities laws shall be deemed to be written information provided by Guarantor to Landlord in connection with the Lease and this Guaranty.

IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed on this      day of                     , 2004.

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

By:

Name:

Title:

Address:

Exhibit G, Page 5

EX-21

Exhibit 21

Pharmaceutical Product Development, Inc., and Subsidiaries

Subsidiaries

The subsidiaries of Pharmaceutical Product Development, Inc., as of February 15, 2005, are as follows:

	Name of Subsidiary	Jurisdiction of Incorporation or Organized in
1.	Applied Bioscience International LLC	Delaware
2.	Belmont Research, Inc.	Massachusetts
3.	CSS Informatics, Inc.	California
4.	Medical Research Laboratories International, LLC	Kentucky
5.	Piedmont Research Center, LLC	North Carolina
6.	PPD Aeronautics, LLC	North Carolina
7.	PPD Virtual, Inc.	North Carolina
8.	APBI Finance Corporation	Delaware
9.	APBI Holdings, LLC	North Carolina
10.	Development Partners, LLC	Delaware
11.	PPD GP, LLC	Delaware
12.	PPD Holdings, LLC	Delaware
13.	PPD UK Holdings Ltd.	United Kingdom
14.	SARCO, LLC	Delaware
15.	Genupro, Inc.	North Carolina
16.	PPD Development, LP	Texas
17.	ATP, LLC	North Carolina
18.	PPD Online Marketing and Education, Inc.	Delaware
19.	PPD Medical Device, Inc.	Delaware
20.	Pharmaco Investments Inc.	Delaware
21.	PPD International Holdings, Inc.	Delaware
22.	PPD France SNC	France
23.	PPD Scandinavia AB	Sweden
24.	Pharmaceutical Product Development Spain SL	Spain
25.	PPD do Brazil-Suporte a Pesquisa, LTDA	Brazil
26.	PPD Argentina, SA	Argentina
27.	PPD International Holdings, Inc. Y Compania Limitada	Chile
28.	PPD South Africa	South Africa
29.	PPD Canada, Ltd.	Canada
30.	PPD Australia Pty Limited	Australia
31.	PPD International Holdings GmbH	Germany
32.	PPD Germany GmbH	Germany
33.	PPD Poland Sp. Zo.O	Poland
34.	PPD Czech Republic, S.r.o.	Czech Republic
35.	PPD Germany GmbH & Co. KG	Germany
36.	PPD Hungary R&D, Ltd.	Hungary
37.	PPD Italy S.r.l	Italy
38.	PPD Mexico S.A. de C.V.	Mexico
39.	PPD Development (Thailand) Co., Ltd.	Thailand
40.	PPD Japan, K.K.	Japan
41.	PPD Global Ltd.	United Kingdom
42.	Clinical Technology Centre International, Limited	United Kingdom

43.	Cambridge Applied Nutrition Toxicology and Bioscience Limited	United Kingdom
44.	Clinical Science Research International, Ltd.	United Kingdom
45.	Leicester Clinical Research Centre, Ltd.	United Kingdom
46.	Chelmsford Clinical Trials Unit, Ltd.	United Kingdom
47.	Gabbay, Ltd.	United Kingdom
48.	Data Analysis & Research, Ltd.	United Kingdom
49.	Medical Research Laboratories International, BVBA	Belgium
50.	PPD Development (S) Pte Ltd	Singapore
51.	PPD Development (HK) Limited	Hong Kong
52.	Propharma CRO Pty Ltd	Australia
53.	PPD (Netherlands) B.V.	Netherlands
54.	PPD Pharmaceutical Development India Private Limited	India
55.	Surromed LLC	North Carolina
56.	River Ventures LLC	North Carolina

Subsidiaries 1, 2, 3, 4, 5, 6, 7 and 55 are wholly-owned subsidiaries of Pharmaceutical Product Development, Inc.

Subsidiaries 8, 9, 10, 11, 12, 13 and 14 are wholly-owned subsidiaries of Subsidiary 1.

Subsidiary 15 is a wholly-owned subsidiary of Subsidiary 7.

Subsidiary 16 is owned 99.9% by Subsidiary 12 and 0.1% by Subsidiary 11.

Subsidiaries 17, 18, 19, 20, 21 and 56 are wholly-owned subsidiaries of Subsidiary 16.

Subsidiaries 23, 24, 25, 28, 29, 30, 31, 37, 39 and 40 are wholly-owned subsidiaries of Subsidiary 21.

Subsidiary 22 is owned 99.9% by Subsidiary 21 and 0.1% by Subsidiary 1.

Subsidiary 26 is owned 99.99% by Subsidiary 21 and 0.01% by Subsidiary 1.

Subsidiary 27 is owned 99% by Subsidiary 21 and 1% by Subsidiary 1.

Subsidiaries 32, 33 and 34 are wholly-owned subsidiaries of Subsidiary 31.

Subsidiary 35 is owned 72% by Subsidiary 31 and 28% by Subsidiary 32.

Subsidiary 36 is owned 96.7% by Subsidiary 31 and 3.3% by Subsidiary 21.

Subsidiary 38 is owned 99% by Subsidiary 21 and 1% by Subsidiary 16.

Subsidiaries 41, 45, 46, 47, 48, 50, 53 and 54 are wholly-owned subsidiaries of Subsidiary 13.

Subsidiaries 42, 43 and 44 are wholly-owned subsidiaries of Subsidiary 41.

Subsidiary 49 is 99.9% owned by Subsidiary 13 and 0.1% by Subsidiary 41.

Subsidiary 51 is 50% owned by Subsidiary 50 and 50% by Subsidiary 1.

Subsidiary 52 is a wholly-owned subsidiary of Subsidiary 50.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements on Form S-8 (File Nos. 333-107005, 333-39974, 333-33760, 333-80691, 333-28435, 333-20925) of our reports dated March 4, 2005, relating to the financial statements of Pharmaceutical Product Development, Inc. and management’s report on the effectiveness of internal control over financial reporting appearing in the Annual Report on Form 10-K of Pharmaceutical Product Development, Inc. for the year ended December 31, 2004.

/s/ DELOITTE & TOUCHE LLP

Raleigh, North Carolina

March 4, 2005

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Fredric N. Eshelman, certify that:

1. I have reviewed this annual report on Form 10-K of Pharmaceutical Product Development, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2005	By:	/s/ Fredric N. Eshelman
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Linda Baddour, certify that:

1. I have reviewed this annual report on Form 10-K of Pharmaceutical Product Development, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2005	By:	/s/ Linda Baddour
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Pharmaceutical Product Development, Inc. (“PPD”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Fredric N. Eshelman, Chief Executive Officer of PPD, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPD as of, and for, the periods presented in the Report.

Date: March 4, 2005

/s/ Fredric N. Eshelman

Fredric N. Eshelman

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Pharmaceutical Product Development, Inc. (“PPD”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Linda Baddour, Chief Financial Officer of PPD, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPD as of, and for, the periods presented in the Report.

Date: March 4, 2005

/s/ Linda Baddour

Linda Baddour

Chief Financial Officer