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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    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: 1-16119
 PHARMANET DEVELOPMENT GROUP, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    59-2407464(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 504 Carnegie Center
Princeton, NJ 08540  (Address of principal executive offices) (Zip Code)
 (609) 951-6800  (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value per share
    
    The NASDAQ Stock Market, LLCSeries A Junior ParticipatingPreferred Stock Purchase Rights
 Securities registered pursuant to Section 12(g) of the Act:
None.
 o þ
 o þ
 þ o
 þ
  o þ o o
  o þ
   Class
    
    Outstanding at March 13, 2008Common Stock, $.001 par value per share
    
    19,186,493 sharesSeries A Junior Participating Preferred Stock
    
    19,186,493 rightsPurchase Rights
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



PHARMANET DEVELOPMENT GROUP, INC.
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    22Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    37Item 9A. Controls and Procedures
    
    
    38Item 9B. Other Information
    
    
    40PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    41Item 11. Executive Compensation
    
    
    41Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    41Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    41Item 14. Principal Accounting Fees and Services
    
    
    41PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    42Severance Agreement and General Release by and between the Company and David NatanRobin Sheldrick Employment AgreementAmended and Restated 1999 Stock PlanCode of EthicsForm of Equity Agreements - August 2007Amended and Restated 2004 Employee Stock Purchase PlanSixth Amendment to the Amended and Restated Credit AgreementSubsidiaries of PharmaNet Development Group, Inc.Consent of Grant Thornton LLP dated March 31, 2008Certification of Chief Executive Officer (Section 302)Certification of Chief Financial Officer (Section 302)Certification of Chief Executive Officer (Section 1350)Certification of Chief Financial Officer (Section 1350)




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##### Table of Contents



PART I
  
 Item 1. Business.
 General
  Early Stage Segment
   Late Stage Segment
  Discontinued Operations
  1




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Industry Overview
   
    
    continued research and development investment and historically robust biotech funding,
    
    the expanding breadth of clinical trials development programs,
    
    the increasing complexity and globalization of clinical trials,
    
    increased focus on and requirements for post-marketing studies, and
    
    new drug entities from small pharmaceutical and biotechnology companies which
typically lack infrastructure, expertise and resources to conduct their own drug
development activities.
 The product development process
 Branded drugs
     
    
    Phase I involves testing a drug on a small number of healthy participants to determine
the drugs basic safety data, including tolerability, absorption, metabolism and excretion.
This phase, which lasts an average of six months to one year, is comprised of numerous
clinical trials of short duration.
    
    Phase II involves testing a small number of participants to determine the drugs safety
profile and effectiveness and how different doses work. This phase, which lasts an average
of one to two years, is comprised of several clinical trials of longer duration.
    
    Phase III involves testing large numbers of participants to verify drug efficacy and
safety on a large scale. These trials usually involve numerous sites. After successfully
completing Phases I, II and III, a company submits a new drug application, or NDA, to the
FDA requesting that the drug be approved for marketing. The NDA is a comprehensive filing
that includes, among other things, the results of all pre-clinical studies and clinical
trials. In other countries in which we operate, a similar filing procedure is required with
the respective equivalent governmental authorities.
    
    Phase IV clinical trials, which are conducted after drug approval, may also be required
by the FDA or equivalent foreign regulatory authorities. These additional trials are
required in order to monitor long-term risks and benefits, to study different dosage levels
or to evaluate different safety and efficacy parameters.
 
 2




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Generic drugs
    5 05(b)(2) approval
  Medical devices
  3




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Our Competitive Strengths
  Our ability to provide a comprehensive range of clinical development and complementary services
  Our ability to recruit
   Our clinical trial facilities
  Our experience
  Our Strategy
  Leverage our global presence to provide a complete range of drug development services worldwide
  Expand our bioanalytical laboratory business
  4




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Augment our current range of services through strategic acquisitions, strategic alliances or joint
ventures
    Leverage complementary early clinical and late phase development services and client relationships
  Our Services
  Early stage clinical development services
    5




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Late stage clinical development services
   Clients and Marketing
    Our Competitors
   
    
    the quality of their staff and services,
    
    the range of services they provide,
    
    medical and scientific expertise in specific therapeutic areas,
    
    the cost of the services they provide,
    
    the ability to recruit doctors and participants for clinical trials,
    
    the ability to organize and manage large-scale trials, and
    
    financial stability.
   6




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Indemnification and Insurance
    
    
    indemnification provisions and provisions seeking to limit or exclude liability contained
in our contracts with clients and investigators,
    
    insurance maintained by clients, investigators and by us, and
    
    complying with various regulatory requirements, including the use of ethics committees
and the procurement of each participants informed consent to participate in the study.
    7




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Government Regulation
   
    
    selecting qualified investigators and sites,
    
    obtaining specific written commitments from investigators,
    
    verifying that informed consents are obtained from participants,
    
    monitoring the validity and accuracy of data,
    
    verifying that we account for the drugs provided to us by our clients, and
    
    instructing investigators to maintain records and reports.
     8




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Backlog
    Backlog
    
    2007
    
    
    2006(in thousands)Early stage
    
    $
    69,485
    
    
    $
    42,340Late stage
    
    
    387,904
    
    
    
    310,395Total
    
    $
    457,389
    
    
    $
    352,735
 9




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Seasonality
  Employees
  Available information
  
 Item 1A. Risk Factors.
  Risks Associated with Recent Actions, Inquiries and Lawsuits
 While we have insurance coverage in connection with the settled securities class action and
pending derivative action, the settlement for the securities class action suit exceeds our
directors and officers, or D&O, liability insurance coverage limits, and there will be limited
additional coverage for the derivative actions and associated future legal fees.
  Depending upon the outcome, the inquiry by the SEC can result in our being sued by the SEC and
being subject to equitable relief, including payment of a fine and civil monetary penalties and a
possible restatement of our prior financial statements.
  10




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The risks and uncertainties associated with discontinued operations could adversely impact our
company.
  Risks Related to Our Business
 If we do not continue to generate a large number of new client contracts, or if our clients cancel
or defer contracts, our profitability may be adversely affected.
  Our backlog may not be indicative of future results.
  
    
    the variable size and duration of the projects,
    
    the loss or delay of projects,
    
    the change in the scope of work during the course of a project, and
    
    the cancellation of such contracts by our clients.
  We may bear financial risk if we under-price our contracts or overrun cost estimates.
  11




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Our indebtedness may impact our financial condition or results of operations, and the terms of our
outstanding indebtedness may limit our activities.
  
    
    we may be required to use a portion of our cash flow from operations for the payment of
principal and interest due on our outstanding indebtedness,
    
    our outstanding indebtedness and leverage will increase the impact of negative changes in
general economic and industry conditions, as well as competitive pressures, and
    
    the level of our outstanding indebtedness may affect our ability to obtain additional
financing for working capital, capital expenditures or general corporate purposes.
  
    
    seek additional financing in the debt or equity markets,
    
    seek to refinance or restructure all or a portion of our indebtedness,
    
    sell selected assets, or
    
    reduce or delay planned capital expenditures.
   
    
    incur indebtedness,
    
    create liens,
    
    pay dividends or make other distributions on or redeem or repurchase capital stock,
    
    issue capital stock,
    
    make capital expenditures, and
    
    sell assets.
 We may not have sufficient funds to pay the principal return upon conversion or to repurchase our
outstanding convertible senior notes under circumstances when we are required to do so.
  12




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We have grown over the last few years and our growth has placed, and is expected to continue to
place, significant demands on our infrastructure.
  A significant portion of our growth has come from acquisitions, and we may make more acquisitions
in the future as part of our growth strategy. This growth strategy subjects us to numerous risks.
  
    
    we will identify suitable acquisition candidates,
 13




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
    
    we will receive any required consent under our Credit Facility,
    
    we can consummate acquisitions on acceptable terms,
    
    we can successfully integrate any acquired business into our operations or successfully
manage the operations of any acquired business, or
    
    we will be able to retain an acquired companys significant client relationships,
goodwill and key personnel or otherwise realize the intended benefits of any acquisition.
  We are subject to changes in outsourcing trends and regulatory requirements affecting the branded
pharmaceutical, biotechnology, generic drug and medical device industries which could adversely
affect our operating results.
  If branded pharmaceutical, biotechnology, generic drug or medical device companies reduce their
expenditures, our future revenue and profitability may be reduced.
  Actions or inspections by regulatory authorities may cause clients not to award future contracts
to us or to cancel existing contracts, which may have a material and adverse effect on our
results of operations.
  We might lose business opportunities as a result of healthcare reform.
  14




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At any given time, one or a limited number of clients may account for a large percentage of our
revenues, which means that we could face a greater risk of loss of revenues if we lose a major
client.
  We may incur significant taxes to repatriate funds.
  Our operating results can be expected to fluctuate from period to period.
  If we are required to write off goodwill or other intangible assets, our financial position or
results of operations could be adversely affected.
  Our business is subject to international economic, political and other risks that could negatively
affect our results of operations or financial position.
  
    
    less stable political and economic environments and 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
repatriate profits,
    
    unfavorable labor regulations,
    
    greater difficulties in managing and staffing foreign operations,
    
    the need to ensure compliance with the numerous regulatory and legal requirements
applicable to our business in each of these jurisdictions, and to maintain an effective
compliance program to ensure compliance,
    
    currency fluctuations,
    
    changes in trade policies, regulatory requirements and other barriers,
    
    civil unrest or other catastrophic events, and
    
    longer payment cycles of foreign customers and difficulty collecting receivables in
foreign jurisdictions.
  15




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Our substantial non-U.S. operations expose us to currency risks.
  We could be adversely affected by tax law changes in Canada or in other foreign jurisdictions.
  Governmental authorities may question our inter-company transfer pricing policies or change their
laws in a manner that could increase our effective tax rate or otherwise harm our business.
  We may lack the resources needed to compete effectively with larger competitors.
  If we do not continue to develop new assay methods for our analytical applications, or if our
current assay methods are incorrect, we may be unable to compete with other entities offering
bioanalytical laboratory services.
  We risk potential liability when conducting clinical trials, which could cost us large amounts
of money.
  
    
    adverse side effects and reactions resulting from administering these drugs to a clinical
trial participant,
 16




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
    
    unintended consequences resulting from the procedures or changes in medical practice to
which a study participant may be subject as part of a clinical trial,
    
    improper administration of these drugs, or
    
    potential professional malpractice of our employees or contractors, including physicians.
  We face a risk of liability from our handling and disposal of medical wastes, which could cause us
to incur significant costs or otherwise adversely affect our business.
  Failure to comply with applicable governmental regulations could harm our operating results and
reputation.
  If we lose the services of our key personnel or are unable to attract qualified staff, our
business could be adversely affected.
  Our business depends on the continued effectiveness and availability of our information technology
infrastructure, and failures of this infrastructure could harm our operations.
  17




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We are self-insured in the U.S. related to employee healthcare insurance, which exposes us to
losses.
  If we are unable to attract suitable investigators and volunteers for our clinical trials, our
clinical development business might suffer.
  If we are not able to remediate the material weaknesses relating to our internal controls
or if we incur further instances of breakdowns in our internal controls, current and
potential stockholders could lose confidence in our financial reporting, which could harm
our business and the price of our common stock.
    Risks Related to Our Common Stock
 We may issue a substantial amount of our common stock which could cause dilution to current
investors, put pressure on earnings per share and otherwise adversely affect our stock price.
  18




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Our stock price can be extremely volatile, and stockholders investments could suffer a decline in
value.
  
    
    actual or anticipated variations in quarterly operating results, including changes in our
guidance as to forecasted earnings,
    
    changes in financial estimates by securities analysts,
    
    media articles,
    
    loss of a major client or contract,
    
    new service offerings introduced or announced by our competitors,
    
    changes in market valuations of other similar companies,
    
    announcement of significant acquisitions, strategic partnerships, joint ventures or
capital commitments,
    
    additions or departures of key personnel, and
    
    sales of our common stock, including short sales.
  Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition
of us, which may be beneficial to our stockholders, more difficult, which could depress our stock
price.
   We may continue to have potential liability owing to our issuances of securities in possible
violation of securities laws.
  19




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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
   
 Item 3. Legal Proceedings.
     20




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21




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Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Market Information
  High
    
    Low2007First Quarter
    
    $
    26.31
    
    
    $
    19.17Second Quarter
    
    $
    33.32
    
    
    $
    26.06Third Quarter
    
    $
    32.66
    
    
    $
    26.00Fourth Quarter
    
    $
    42.39
    
    
    $
    30.332006First Quarter
    
    $
    26.79
    
    
    $
    17.22Second Quarter
    
    $
    24.88
    
    
    $
    13.85Third Quarter
    
    $
    19.93
    
    
    $
    14.22Fourth Quarter
    
    $
    23.21
    
    
    $
    17.76
 Holders
  Dividend Policy
  22




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Comparative Stock Performance Graph
 The following Performance Graph and related information shall not be deemed soliciting
material or to be filed with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by
reference into such filing.
 
  BasePeriod
    
    Years Ending December 31Company / Index
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007PharmaNet Development Group, Inc.
    
    $
    100
    
    
    $
    204.62
    
    
    $
    456.47
    
    
    $
    185.02
    
    
    $
    255.05
    
    
    $
    453.12Nasdaq Composite Index
    
    $
    100
    
    
    $
    150.36
    
    
    $
    163.00
    
    
    $
    166.58
    
    
    $
    183.68
    
    
    $
    201.91Nasdaq Health Services
    
    $
    100
    
    
    $
    148.41
    
    
    $
    173.64
    
    
    $
    236.02
    
    
    $
    224.60
    
    
    $
    295.45
 Recent Sales of Unregistered Securities
   23




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Item 6. Selected Financial Data.
  2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands, except per share data)Total net revenue
    
    $
    470,257
    
    
    $
    406,956
    
    
    $
    361,506
    
    
    $
    111,894
    
    
    $
    71,610Total costs and expenses
    
    $
    448,770
    
    
    $
    393,950
    
    
    $
    331,662
    
    
    $
    96,864
    
    
    $
    62,155Net earnings from continuing operations
    
    $
    12,078
    
    
    $
    6,052
    
    
    $
    17,163
    
    
    $
    11,002
    
    
    $
    7,529Earnings (loss) from discontinued operations, net of tax
    
    $
    838
    
    
    $
    (42,077
    )
    
    $
    (12,384
    )
    
    $
    8,657
    
    
    $
    4,053Net earnings (loss)
    
    $
    12,916
    
    
    $
    (36,025
    )
    
    $
    4,779
    
    
    $
    19,659
    
    
    $
    11,582Earnings per share from continuing operations:Basic
    
    $
    0.64
    
    
    $
    0.33
    
    
    $
    0.97
    
    
    $
    0.73
    
    
    $
    0.64Diluted
    
    $
    0.63
    
    
    $
    0.33
    
    
    $
    0.94
    
    
    $
    0.70
    
    
    $
    0.60Total assets
    
    $
    601,087
    
    
    $
    549,599
    
    
    $
    515,750
    
    
    $
    487,327
    
    
    $
    134,927Long-term obligations and capital leases, including current portion
    
    $
    152,946
    
    
    $
    159,002
    
    
    $
    168,223
    
    
    $
    157,517
    
    
    $
    5,651
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
    24




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Critical Accounting Estimates
   Revenue and Cost Recognition.
  25




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Collectibility of Accounts Receivable.
 Income Taxes.
    Goodwill.
 Impairment of Assets.
 Share-Based Compensation.
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Results of Operations
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
  2007
    
    2006(in thousands, except per share data)Direct revenue
    
    $
    362,471
    
    
    
    100.0
    %
    
    $
    302,385
    
    
    
    100.0
    %Direct costs
    
    
    216,173
    
    
    
    59.6
    
    
    
    182,679
    
    
    
    60.4Selling, general and administrative expenses
    
    
    114,411
    
    
    
    31.6
    
    
    
    98,827
    
    
    
    32.7Provision for settlement of litigation
    
    
    10,400
    
    
    
    2.9
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    7,873
    
    
    
    2.6Total other expense
    
    
    (6,164
    )
    
    
    (1.7
    )
    
    
    (9,821
    )
    
    
    (3.2
    )Earnings from continuing operations before income taxes
    
    
    15,323
    
    
    
    4.2
    
    
    
    3,185
    
    
    
    1.0Income tax expense (benefit)
    
    
    2,340
    
    
    
    0.6
    
    
    
    (3,558
    )
    
    
    (1.2
    )Earnings from continuing operations before minority interest in joint venture
    
    
    12,983
    
    
    
    3.6
    
    
    
    6,743
    
    
    
    2.2Minority interest in joint venture
    
    
    905
    
    
    
    0.2
    
    
    
    691
    
    
    
    0.2Net earnings from continuing operations
    
    
    12,078
    
    
    
    3.3
    
    
    
    6,052
    
    
    
    2.0Earnings (loss) from discontinued operations, net of tax
    
    
    838
    
    
    
    
    
    
    
    (42,077
    )Net earnings (loss)
    
    $
    12,916
    
    
    
    3.6
    %
    
    $
    (36,025
    )
    
    
    (11.9
    )%Earnings per share from continuing operations:Basic
    
    $
    0.64
    
    
    
    
    
    
    $
    0.33Diluted
    
    $
    0.63
    
    
    
    
    
    
    $
    0.33
 Direct Revenue
    Direct Costs
   Gross Profit
  27




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Selling, General and Administrative Expenses
    Provision for Settlement of Litigation
  Interest Income and Interest Expense
  28




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Foreign Currency Exchange Transactions
   Income Taxes
    29




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
    
    the relative profits generated primarily in the U.S., Canada and Europe,
    
    our ability to utilize Canadian tax credits,
    
    the applicable foreign tax rates in effect,
    
    transfer pricing, and
    
    our ability to generate U.S. taxable income to utilize net operating loss carryovers and
thereby decrease the valuation allowance.
 
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Earnings Per Share
  Results of Operations
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  2006
    
    2005(in thousands, except per share data)Direct revenue
    
    $
    302,385
    
    
    
    100.0
    %
    
    $
    269,622
    
    
    
    100.0
    %Direct costs
    
    
    182,679
    
    
    
    60.4
    
    
    
    156,824
    
    
    
    58.2Selling, general and administrative expenses
    
    
    98,827
    
    
    
    32.7
    
    
    
    82,954
    
    
    
    30.8Impairment of goodwill
    
    
    7,873
    
    
    
    2.6
    
    
    
    
    
    
    
    0.0Total other income (expense)
    
    
    (9,821
    )
    
    
    (3.2
    )
    
    
    (11,975
    )
    
    
    (4.4
    )Earnings from continuing operations before income taxes
    
    
    3,185
    
    
    
    1.0
    
    
    
    17,869
    
    
    
    6.6Income tax expense (benefit)
    
    
    (3,558
    )
    
    
    (1.2
    )
    
    
    154
    
    
    
    0.0Earnings from continuing operations before minority interest in joint venture
    
    
    6,743
    
    
    
    2.2
    
    
    
    17,715
    
    
    
    6.6Minority interest in joint venture
    
    
    691
    
    
    
    0.2
    
    
    
    552
    
    
    
    0.2Net earnings from continuing operations
    
    
    6,052
    
    
    
    2.0
    
    
    
    17,163
    
    
    
    6.4Loss from discontinued operations, net of tax
    
    
    (42,077
    )
    
    
    
    
    
    
    (12,384
    )Net earnings (loss)
    
    $
    (36,025
    )
    
    
    (11.9
    )%
    
    $
    4,779
    
    
    
    1.8
    %Earnings per share from continuing operations:Basic
    
    $
    0.33
    
    
    
    
    
    
    $
    0.97Diluted
    
    $
    0.33
    
    
    
    
    
    
    $
    0.94
 Direct Revenue
    Direct Costs
  31




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expenses
     Interest Income and Interest Expense
   Foreign Currency Exchange Transactions
  32




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Income Taxes
   Effects of Inflation
  Liquidity and Capital Resources
        33




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Contractual Obligations
  Payments Due by Period(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsConvertible notes (1)
    
    $
    143,750
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    143,750Interest on convertible notes
    
    
    54,984
    
    
    
    3,234
    
    
    
    6,469
    
    
    
    6,469
    
    
    
    38,812Capital lease obligations
    
    
    9,807
    
    
    
    3,444
    
    
    
    4,872
    
    
    
    1,491
    
    
    
    Operating lease obligations
    
    
    157,449
    
    
    
    22,062
    
    
    
    38,160
    
    
    
    29,122
    
    
    
    68,105Purchase obligations
    
    
    1,136
    
    
    
    499
    
    
    
    491
    
    
    
    130
    
    
    
    16Other liabilities
    
    
    490
    
    
    
    312
    
    
    
    178
    
    
    
    
    
    
    
    Total
    
    $
    367,616
    
    
    $
    29,551
    
    
    $
    50,170
    
    
    $
    37,212
    
    
    $
    250,683
 
 (1)
    
    On or after August 15, 2009, we may, at our option, redeem the notes
in whole or in part for cash at a redemption price equal to 100% of
the principal amount of the notes to be redeemed plus accrued and
unpaid interest. On each of August 15, 2009, 2014 and 2019, holders
may require us to re-purchase all or a portion of their notes at a
purchase price in cash equal to 100% of the principal amount of the
notes to be re-purchased plus accrued and unpaid interest. Capital Expenditures and Commitments
  Off Balance Sheet Commitments
   Recently Issued Accounting Pronouncements
    35




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##### Table of Contents



Forward-Looking Statements
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Market risk
  36




---



##### Table of Contents



Currency risk
     Interest rate risk
  
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
  37




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##### Table of Contents



Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
 Internal
ControlIntegrated Framework
   Revenue Recognition
 
 Income Taxes
   38




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
       Internal ControlIntegrated Framework
  /s/ Grant Thornton LLPPhiladelphia, PennsylvaniaMarch 31, 2008
 39




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  Remediation Steps Subsequent to December 31, 2007
  
    
    Re-evaluate the process relating to the recording and recognition of revenue in our late stage segment;
    
    Work with internal project budget analysts and operational management
to enhance our controls for developing, maintaining and amending
percent achieved calculations;
    
    Provide additional training, review and management as well as project
budget analysts oversight of personnel responsible for the percent
achieved calculations;
    
    Re-evaluate the design of income tax accounting processes and controls
and implement new and improved processes and controls, including the
addition of tax personnel;
    
    Increase the level of review and discussion of tax reconciliations and
supporting documentation with our outside tax advisor and management;
and
    
    Formalize a process for documenting decisions made based upon the
review of tax packages or any other supporting information provided.
  
 Item 9B. Other Information.
  40




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##### Table of Contents



PART III
 
 Item 10. Directors,
Executive Officers and Corporate Governance.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  41




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##### Table of Contents



PART IV
 
 Item 15. Exhibits,
Financial Statement Schedules.
 ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation filed as an exhibit to the Companys Form SB-2 which was filed on August 17, 1999.3.2
    
    First Amendment to Certificate of Incorporation filed as an exhibit to the Companys Form SB-2 which was filed
on August 17, 1999.3.3
    
    Certificate of Correction to Certificate of Incorporation filed as an exhibit to the Companys Form SB-2 filed
on October 5, 2000.3.4
    
    Second Amendment to Certificate of Incorporation filed as an exhibit to the Companys Form 10-K which was
filed on March 22, 2007.3.5
    
    Certificate of Correction to Second Amendment to Certificate of Incorporation filed as an exhibit to the
Companys Form 10-Q which was filed on August 4, 2004.3.6
    
    Certificate of Designation for Series A Junior Participating Preferred Stock filed as an exhibit to the
Companys Form 8-A which was filed on December 28, 2005.3.7
    
    Third Amendment to Certificate of Incorporation filed as an exhibit to the Companys Form 10-K which was filed
on March 22, 2007.3.8
    
    Second Amended and Restated Bylaws filed as an exhibit to the Companys Form 10-Q which was filed on November
9, 2007.4.1
    
    Form of Common Stock Certificate filed as an exhibit to the Companys Form 10-K which was filed on March 22,
2007.4.2
    
    Indenture relating to 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the Companys Form S-3
which was filed on November 2, 2004.4.3
    
    Form of 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the Companys Form S-3 which was filed
on November 2, 2004.4.4
    
    Registration Rights Agreement relating to 2.25% Convertible Senior Notes due 2024 filed as an exhibit to the
Companys Form S-3 which was filed on November 2, 2004.10.1*
    
    Jeffrey P. McMullen Employment Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 14, 2006.10.2*
    
    David Natan Employment Agreement filed as an exhibit to the Companys Form 10-K which was filed on March 22,
2007.10.3*
    
    Lisa Krinsky Severance Agreement filed as an exhibit to the Companys Form 10-K which was filed on March 31,
2006.10.4*
    
    Arnold Hantman Severance Agreement filed as an exhibit to the Companys Form 10-K which was filed on March 31,
2006.10.5*
    
    Marc LeBel Employment Agreement filed as an exhibit to the Companys Form 10-KSB which was filed on April 1,
2002.10.6*
    
    Marc LeBel Amendment to Employment Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 9, 2005.10.7*
    
    Arnold Hantman Employment Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 9, 2005.10.8*
    
    Lisa Krinsky, M.D. Employment Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 9, 2005.10.9
    
    Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 9, 2005.10.10
    
    First Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-K
which was filed on March 31, 2006.10.11
    
    Second Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-K
which was filed on March 31, 2006.10.12
    
    Amended and Restated Security Agreement filed as an exhibit to the Companys Form 10-Q which was filed on
August 9, 2005.10.13*
    
    2004 Employee Stock Purchase Plan filed as an exhibit to the Companys Form S-8 which was filed on August 6,
2004.10.14
    
    Shareholder Rights Agreement filed as an exhibit to the Companys Form 8-A which was filed on December 28,
2005.10.15*
    
    2004 Acquisition Stock Option Plan filed as an exhibit to the Companys Form 8-K which was filed on
December 27, 2004.10.16*
    
    Form of Stock Option Agreement filed as an exhibit to the Companys Form 10-K which was filed on March 8, 2005.10.17*
    
    Amended and Restated Stock Option Agreement (Jeffrey P. McMullen) filed as an exhibit to the Companys
Form 10-K which was filed on March 8, 2005.
 42




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##### Table of Contents



10.18*
    
    Arnold Golieb Restricted Stock Agreement filed as an exhibit to the Companys Form 10-K which was filed on
March 31, 2006.10.19*
    
    Jack Levine Restricted Stock Agreement filed as an exhibit to the Companys Form 10-K which was filed on
March 31, 200610.20
    
    New Drug Services Amended Agreement filed as an exhibit to the Companys Form 10-K which was filed on
March 31, 2006.10.21*
    
    Johane Boucher-Champagne Employment Agreement filed as an exhibit to the Companys Form 8-K which was filed on
May 4, 2006.10.22*
    
    Confidential Separation Agreement and General Release by and between the Company and Gregory B. Holmes filed
as an exhibit to the Companys Form 10-Q which was filed on August 14, 2006.10.23
    
    Third Waiver and Third Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the
Companys Form 10-Q which was filed on August 14, 2006.10.24
    
    Fourth Waiver to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-Q
which was filed on August 14, 2006.10.25*
    
    Thomas J. Newman, MD Employment Agreement filed as an exhibit to the Companys Form 10-K which was filed on
March 22, 2007.10.26
    
    Fifth Waiver to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-Q which
was filed on November 9, 2006.10.27 (1)
    
    Fourth Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-Q
which was filed on November 9, 2006.10.28
    
    Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and PharmaNet, Inc dated
May 1999 filed as an exhibit to the Companys Form 10-Q which was filed on November 9, 2006.10.29
    
    Amendment to No. 1 Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and
PharmaNet, Inc. dated May 1999 filed as an exhibit to the Companys Form 10-Q which was filed on November 9,
2006.10.30
    
    Amendment No. 2 to Lease and Lease Agreement by and between 504 Carnegie Associates Limited Partnership and
PharmaNet, Inc. dated March 30, 2001 filed as an exhibit to the Companys Form 10-Q which was filed on
November 9, 2006.10.31
    
    Amendment No. 3 to Lease and Lease Agreement by and between 504 Carnegie Associated Limited Partnership and
PharmaNet, Inc. dated October 1, 2004 filed as an exhibit to the Companys Form 10-Q which was filed on
November 9, 2006.10.32*
    
    Mark Di Ianni Employment Agreement filed as an exhibit to the Companys Form 8-K which was filed on
December 15, 2006.10.33
    
    Form of Director Indemnification Agreement filed as an exhibit to the Companys Form 10-K which was filed on
March 22, 2007.10.34
    
    Form of Executive Officer Indemnification Agreement filed as an exhibit to the Companys Form 10-K which was
filed on March 22, 2007.10.35*
    
    Form of Director Restricted Stock Unit Agreement filed as an exhibit to the Companys Form 10-K which was
filed on March 22, 2007.10.36*
    
    Form of Employee Restricted Stock Unit Agreement filed as an exhibit to the Companys Form 10-K which was
filed on March 22, 2007.10.37*
    
    John P. Hamill Employment Agreement filed as an exhibit to the Companys Form 10-K which was filed on March
22, 2007.10.38
    
    Transaction Release and Discharge by and between Marc LeBel and Anapharm, Inc. filed as an exhibit to the
Companys Form 8-K which was filed on March 30, 2007.10.39
    
    Fifth Amendment to the Amended and Restated Credit Agreement filed as an exhibit to the Companys Form 10-Q
which was filed on August 9, 2007.10.40
    
    Severance Agreement and General Release by and between the Company and David Natan (filed herewith).10.41
    
    Robin Sheldrick Employment Agreement (filed herewith).10.42*
    
    Amended and Restated 1999 Stock Plan (filed herewith).10.43
    
    Code of Ethics (filed herewith).10.44
    
    Form of Equity Agreements  August 2007 (filed herewith).10.45*
    
    Amended and Restated 2004 Employee Stock Purchase Plan (filed herewith).10.46
    
    Sixth Amendment to the Amended and Restated Credit Agreement (filed herewith).21
    
    Subsidiaries of PharmaNet Development Group, Inc. (filed herewith).23.1
    
    Consent of Grant Thornton LLP dated
March 31, 2008 (filed herewith).31.1
    
    Certification of Chief Executive Officer (Section 302) (filed herewith).31.2
    
    Certification of Chief Financial Officer (Section 302) (filed herewith).32.1
    
    Certification of Chief Executive Officer (Section 1350) (furnished herewith).32.2
    
    Certification of Chief Financial Officer (Section 1350) (furnished herewith).
 *
    
    Compensation plan and arrangements for current and former executive officers and directors.(1)
    
    Portions of the exhibit have been omitted and have been filed separately pursuant to a confidential treatment
request that was granted by the SEC.
 43




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##### Table of Contents



SIGNATURES
  PharmaNet Development Group, Inc.By:
    
    /s/  Jeffrey P. McMullenJeffrey P. McMullenPresident and Chief Executive Officer
   /s/  Peter G. Tombros
    
    Chairman of the Board of Directors
    
    March 31, 2008Peter G. Tombros/s/  Jeffrey P. McMullen
    
    President and Chief Executive Officer
    
    March 31, 2008Jeffrey P. McMullen
    
    and Director (Principal Executive Officer)/s/  John P. Hamill
    
    Executive Vice President and Chief
    
    March 31, 2008John P. Hamill
    
    Financial Officer (Principal Financial
Officer and Principal Accounting Officer)/s/  Rolf A. Classon
    
    Director
    
    March 31, 2008Rolf A. Classon/s/  Lewis R. Elias, MD
    
    Director
    
    March 31, 2008Lewis R. Elias, MD/s/  Arnold Golieb
    
    Director
    
    March 31, 2008Arnold Golieb/s/  Per Wold-Olsen
    
    Director
    
    March 31, 2008Per Wold-Olsen/s/  David M. Olivier
    
    Director
    
    March 31, 2008David M. Olivier
 44




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##### Table of Contents



CONTENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Financial Statements:Consolidated Balance Sheets
    
    F-3Consolidated Statements of Operations
    
    F-4Consolidated Statements of Cash Flows
    
    F-5Consolidated Statements of Changes in Stockholders Equity
    
    F-8Notes to Consolidated Financial Statements
    
    F-9
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
    Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements Share-Based Payment
 Internal Control  Integrated Framework
 /s/ Grant Thornton LLPPhiladelphia, PennsylvaniaMarch 31, 2008
 F-2




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##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
(In thousands, except per share data)
 2007
    
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    77,548
    
    
    $
    45,331Investment in marketable securities
    
    
    2,650
    
    
    
    8,423Accounts receivable, net
    
    
    132,550
    
    
    
    109,188Income taxes receivable
    
    
    1,855
    
    
    
    776Deferred income taxes
    
    
    267
    
    
    
    4,204Prepaid expenses
    
    
    6,589
    
    
    
    5,228Other current assets
    
    
    5,274
    
    
    
    3,822Construction in progress and land in sale-leaseback transaction
    
    
    
    
    
    
    15,851Assets from discontinued operations
    
    
    5,199
    
    
    
    7,177Total current assets
    
    
    231,932
    
    
    
    200,000Property and equipment, net
    
    
    67,506
    
    
    
    52,235Goodwill
    
    
    266,973
    
    
    
    266,973Other intangible assets, net
    
    
    26,442
    
    
    
    29,197Deferred income taxes
    
    
    5,593
    
    
    
    Other assets, net
    
    
    7,840
    
    
    
    8,371Total assets
    
    $
    606,286
    
    
    $
    556,776LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    13,843
    
    
    $
    10,313Accrued liabilities
    
    
    47,978
    
    
    
    26,427Client advances, current portion
    
    
    79,312
    
    
    
    67,857Capital lease obligations and notes payable, current portion
    
    
    3,562
    
    
    
    3,036Other current liabilities
    
    
    154
    
    
    
    Liabilities associated with assets held for sale
    
    
    
    
    
    
    15,851Liabilities from discontinued operations
    
    
    1,770
    
    
    
    4,195Total current liabilities
    
    
    146,619
    
    
    
    127,679Client advances
    
    
    2,602
    
    
    
    2,786Deferred income taxes
    
    
    
    
    
    
    2,202Line of credit
    
    
    
    
    
    
    9,400Capital lease obligations and notes payable
    
    
    5,634
    
    
    
    2,8162.25% Convertible senior notes payable
    
    
    143,750
    
    
    
    143,750Other non-current liabilities
    
    
    15,590
    
    
    
    8,504Minority interest in joint venture
    
    
    2,722
    
    
    
    1,560Commitments and contingencies (Note G)Temporary
equitySale of
unregistered common stock, subject to rescission
    
    
    2,058
    
    
    
    Stockholders equityPreferred stock, $0.10 par value, 5,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.001 par value, 40,000 shares authorized,
19,017 shares and 18,546 shares issued and outstanding in 2007 and
2006, respectively
    
    
    19
    
    
    
    19Additional paid-in capital
    
    
    244,017
    
    
    
    236,540Retained earnings
    
    
    22,616
    
    
    
    12,636Accumulated other comprehensive income
    
    
    20,659
    
    
    
    8,884Total stockholders equity
    
    
    287,311
    
    
    
    258,079Total liabilities and stockholders equity
    
    $
    606,286
    
    
    $
    556,776
  F-3




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##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands, except per share data)
 2007
    
    
    2006
    
    
    2005Net revenue:Direct revenue
    
    $
    362,471
    
    
    $
    302,385
    
    
    $
    269,622Reimbursed out-of-pocket expenses
    
    
    107,786
    
    
    
    104,571
    
    
    
    91,884Total net revenue
    
    
    470,257
    
    
    
    406,956
    
    
    
    361,506Costs and expenses:Direct costs
    
    
    216,173
    
    
    
    182,679
    
    
    
    156,824Reimbursable out-of-pocket expenses
    
    
    107,786
    
    
    
    104,571
    
    
    
    91,884Selling, general and administrative expenses
    
    
    114,411
    
    
    
    98,827
    
    
    
    82,954Provision for settlement of litigation
    
    
    10,400
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    7,873
    
    
    
    Total costs and expenses
    
    
    448,770
    
    
    
    393,950
    
    
    
    331,662Earnings from continuing operations
    
    
    21,487
    
    
    
    13,006
    
    
    
    29,844Other income (expense):Interest income
    
    
    2,128
    
    
    
    1,636
    
    
    
    891Interest expense
    
    
    (6,332
    )
    
    
    (8,115
    )
    
    
    (12,017
    )Foreign currency exchange transaction loss, net
    
    
    (2,138
    )
    
    
    (3,342
    )
    
    
    (849
    )Other income
    
    
    178
    
    
    
    
    
    
    
    Total other income (expense), net
    
    
    (6,164
    )
    
    
    (9,821
    )
    
    
    (11,975
    )Earnings from continuing operations before income taxes
    
    
    15,323
    
    
    
    3,185
    
    
    
    17,869Income tax expense (benefit)
    
    
    2,340
    
    
    
    (3,558
    )
    
    
    154Earnings from continuing operations before minority interest in
joint venture
    
    
    12,983
    
    
    
    6,743
    
    
    
    17,715Minority interest in joint venture
    
    
    905
    
    
    
    691
    
    
    
    552Net earnings from continuing operations
    
    
    12,078
    
    
    
    6,052
    
    
    
    17,163Earnings (loss) from discontinued operations, net of tax
    
    
    838
    
    
    
    (42,077
    )
    
    
    (12,384
    )Net earnings (loss)
    
    $
    12,916
    
    
    $
    (36,025
    )
    
    $
    4,779Basic earnings (loss) per share:Continuing operations
    
    $
    0.64
    
    
    $
    0.33
    
    
    $
    0.97Discontinued operations
    
    $
    0.05
    
    
    $
    (2.31
    )
    
    $
    (0.70
    )Net earnings (loss)
    
    $
    0.69
    
    
    $
    (1.98
    )
    
    $
    0.27Diluted earnings (loss) per share:Continuing operations
    
    $
    0.63
    
    
    $
    0.33
    
    
    $
    0.94Discontinued operations
    
    $
    0.05
    
    
    $
    (2.28
    )
    
    $
    (0.68
    )Net earnings (loss)
    
    $
    0.68
    
    
    $
    (1.95
    )
    
    $
    0.26Weighted average common shares outstanding:Basic
    
    
    18,790
    
    
    
    18,221
    
    
    
    17,702Diluted
    
    
    19,048
    
    
    
    18,447
    
    
    
    18,356
  F-4




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##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands)
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    12,916
    
    
    $
    (36,025
    )
    
    $
    4,779(Earnings) loss from discontinued operations
    
    
    (838
    )
    
    
    42,077
    
    
    
    12,384Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    15,477
    
    
    
    14,415
    
    
    
    14,476Amortization and write-off of deferred debt issuance costs
    
    
    1,578
    
    
    
    2,827
    
    
    
    5,067Impairment of goodwill
    
    
    
    
    
    
    7,873
    
    
    
    Provision for settlement of litigation
    
    
    10,400
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    381
    
    
    
    160
    
    
    
    142Minority interest
    
    
    905
    
    
    
    691
    
    
    
    552Provision for doubtful accounts
    
    
    587
    
    
    
    2,279
    
    
    
    569Non cash compensation  reduction of note receivable
    
    
    
    
    
    
    200
    
    
    
    200Share-based compensation expense
    
    
    5,119
    
    
    
    4,275
    
    
    
    461Tax benefit resulting from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    4,612Changes in
assets and liabilities:Accounts receivable
    
    
    (15,927
    )
    
    
    (20,020
    )
    
    
    (18,581
    )Income taxes receivable
    
    
    (1,141
    )
    
    
    6,688
    
    
    
    (144
    )Prepaid expenses and other current assets
    
    
    (1,085
    )
    
    
    2,777
    
    
    
    (5,976
    )Other assets
    
    
    (749
    )
    
    
    (734
    )
    
    
    (1,105
    )Accounts payable
    
    
    (3,555
    )
    
    
    3,240
    
    
    
    (4,492
    )Accrued liabilities
    
    
    9,986
    
    
    
    8,802
    
    
    
    6,072Other current liabilities
    
    
    154
    
    
    
    
    
    
    
    Client advances
    
    
    9,812
    
    
    
    (597
    )
    
    
    20,934Deferred income taxes
    
    
    (2,453
    )
    
    
    (8,717
    )
    
    
    (2,095
    )Other long-term liabilities
    
    
    2,963
    
    
    
    
    
    
    
    Total adjustments
    
    
    32,452
    
    
    
    24,159
    
    
    
    20,692Net cash provided by operating activities  continuing operations
    
    
    44,530
    
    
    
    30,211
    
    
    
    37,855Net cash (used in) provided by operating activities  discontinued
operations
    
    
    (792
    )
    
    
    1,737
    
    
    
    11,578Net cash provided by operating activities
    
    
    43,738
    
    
    
    31,948
    
    
    
    49,433Cash flows from investing activities:Additional purchase price consideration paid relating to acquisitions
    
    
    
    
    
    
    (2,000
    )
    
    
    (5,833
    )Purchase of property and equipment
    
    
    (15,014
    )
    
    
    (13,529
    )
    
    
    (11,652
    )Purchase of property and equipment related to sale-leaseback transaction
    
    
    
    
    
    
    (7,272
    )
    
    
    (2,528
    )Proceeds from the disposal of property and equipment
    
    
    28
    
    
    
    13
    
    
    
    126Net change in investment in marketable securities
    
    
    7,378
    
    
    
    (257
    )
    
    
    1,569Change in loans extended to stockholders
    
    
    
    
    
    
    
    
    
    
    (16
    )Net cash used in investing activities  continuing operations
    
    
    (7,608
    )
    
    
    (23,045
    )
    
    
    (18,334
    )Net cash provided by (used in) investing activities  discontinued
operations
    
    
    1,182
    
    
    
    233
    
    
    
    (10,307
    )Net cash used in investing activities
    
    
    (6,426
    )
    
    
    (22,812
    )
    
    
    (28,641
    )Cash flows from financing activities:Borrowings on line of credit
    
    
    10,000
    
    
    
    8,000
    
    
    
    66,000Payments on line of credit
    
    
    (19,400
    )
    
    
    (15,600
    )
    
    
    (54,000
    )Principal payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (120,000
    )Payments on capital lease obligations and notes payable
    
    
    (4,063
    )
    
    
    (2,712
    )
    
    
    (3,416
    )Proceeds from sale-leaseback transaction
    
    
    
    
    
    
    9,800
    
    
    
    Debt issuance costs attributable to financing instruments
    
    
    
    
    
    
    (421
    )
    
    
    (1,292
    )Dividend payment made to non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (91
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (12,444
    )
 F-5




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##### Table of Contents



Net proceeds from stock issued under option plans, ESPP and restricted stock awards
    
    
    2,358
    
    
    
    5,238
    
    
    
    2,866Proceeds
from sale of unregistered common stock, subject to rescission
    
    
    2,058
    
    
    
    
    
    
    
    Net proceeds from public stock offering
    
    
    
    
    
    
    
    
    
    
    108,050Net cash provided by (used in) financing activities
    
    
    (9,047
    )
    
    
    4,305
    
    
    
    (14,327
    )Net effect of exchange rate changes on cash and cash equivalents
    
    
    3,952
    
    
    
    1,222
    
    
    
    (706
    )Net increase in cash and cash equivalents
    
    
    32,217
    
    
    
    14,663
    
    
    
    5,759Cash and cash equivalents at beginning of year
    
    
    45,331
    
    
    
    30,668
    
    
    
    24,909Cash and cash equivalents at end of year
    
    $
    77,548
    
    
    $
    45,331
    
    
    $
    30,668
  F-6




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##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands)
 2007
    
    2006
    
    2005Supplemental disclosures:Interest paid
    
    $
    4,662
    
    
    $
    5,300
    
    
    $
    10,792Income taxes paid
    
    $
    8,842
    
    
    $
    4,165
    
    
    $
    4,743Income taxes recovered
    
    $
    954
    
    
    $
    9,478
    
    
    $
    4,483Supplemental disclosures of non-cash investing and finance activities:Additional purchase consideration related to the acquisition of a business
    
    $
    
    
    
    $
    
    
    
    $
    2,000Common stock issued in connection with acquisition of a business or
additional consideration
    
    $
    
    
    
    $
    500
    
    
    $
    2,000Change in the valuation of identifiable intangible assets related to the
acquisition of a business
    
    $
    
    
    
    $
    
    
    
    $
    2,142Fair
market value of restricted stock units granted as long-term
incentive compensation
    
    $
    4,354
    
    
    $
    9,326
    
    
    $
    1,677Common stock forfeited in lieu of cash payment related to option exercises
    
    $
    
    
    
    $
    
    
    
    $
    645Forfeiture of common stock issued as deferred compensation
    
    $
    
    
    
    $
    
    
    
    $
    768Note receivable relieved in lieu of bonus payment
    
    $
    
    
    
    $
    200
    
    
    $
    200Capital lease obligations incurred
    
    $
    5,858
    
    
    $
    1,467
    
    
    $
    2,001
  F-7




---



##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands)
 Accumulated
    
    
    CommonAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    StockCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Deferred
    
    
    Comprehensive
    
    
    Held inShares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Treasury
    
    
    TotalBalances  December 31, 2004
    
    
    15,054
    
    
    $
    15
    
    
    $
    123,005
    
    
    $
    43,882
    
    
    $
    (83
    )
    
    $
    5,596
    
    
    $
    
    
    
    $
    172,415Comprehensive earnings (loss):Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,779Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,372
    )
    
    
    
    
    
    
    (1,372
    )Total comprehensive earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,407Issuance of common stock in connection with
exercise of stock options and warrants
    
    
    232
    
    
    
    
    
    
    
    1,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,213Issuance of common stock in connection with
Employee Stock Purchase Plan (ESPP)
    
    
    55
    
    
    
    
    
    
    
    1,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,653Proceeds from issuance of common stock in a public
offering
    
    
    3,078
    
    
    
    3
    
    
    
    110,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,214Costs related to public offering
    
    
    
    
    
    
    
    
    
    
    (2,164
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,164
    )Stock options granted in acquisition
    
    
    
    
    
    
    
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    913Issuance of common stock as additional purchase
consideration for earnout
    
    
    54
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance of restricted common stock as deferred
compensation
    
    
    52
    
    
    
    
    
    
    
    1,677
    
    
    
    
    
    
    
    (1,677
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted common stock issued as
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    461
    
    
    
    
    
    
    
    
    
    
    
    461Forfeiture of restricted common stock issued as
deferred compensation
    
    
    (32
    )
    
    
    
    
    
    
    (768
    )
    
    
    
    
    
    
    768
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,444
    )
    
    
    (12,444
    )Tax benefit resulting from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    4,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,612Balances  December 31, 2005
    
    
    18,493
    
    
    
    18
    
    
    
    242,352
    
    
    
    48,661
    
    
    
    (531
    )
    
    
    4,224
    
    
    
    (12,444
    )
    
    
    282,280Cumulative effect adjustments under SAB No. 108
    
    
    
    
    
    
    
    
    
    
    (2,851
    )
    
    
    
    
    
    
    
    
    
    
    2,701
    
    
    
    
    
    
    
    (150
    )Balances at January 1, 2006, as adjusted
    
    
    18,493
    
    
    
    18
    
    
    
    239,501
    
    
    
    48,661
    
    
    
    (531
    )
    
    
    6,925
    
    
    
    (12,444
    )
    
    
    282,130Comprehensive earnings (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,025
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,025
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,959
    
    
    
    
    
    
    
    1,959Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,066
    )Issuance of common stock with exercise of stock
options
    
    
    322
    
    
    
    1
    
    
    
    3,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,664Issuance of common stock to ESPP
    
    
    176
    
    
    
    
    
    
    
    2,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,332Issuance of common stock as additional purchase
consideration for earnout
    
    
    34
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Issuance of common stock related to vesting of
restricted share and unit grants
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase and retirement of common stock related
to vesting of restricted share unit grants
    
    
    (43
    )
    
    
    
    
    
    
    (757
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (757
    )Share-based compensation expense recognized on
restricted share and unit grants
    
    
    
    
    
    
    
    
    
    
    3,168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,168Share-based compensation expense recognized with
adoption of SFAS 123R
    
    
    
    
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,108Adjustment required with adoption of SFAS 123R
    
    
    
    
    
    
    
    
    
    
    (531
    )
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    Retirement of common stock held in treasury
    
    
    (606
    )
    
    
    
    
    
    
    (12,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,444
    
    
    
    Balances  December 31, 2006
    
    
    18,546
    
    
    
    19
    
    
    
    236,540
    
    
    
    12,636
    
    
    
    
    
    
    
    8,884
    
    
    
    
    
    
    
    258,079Cumulative
effect adjustments under FIN
48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,936
    )Balances at January 1, 2007, as adjusted
    
    
    18,546
    
    
    
    19
    
    
    
    236,540
    
    
    
    9,700
    
    
    
    
    
    
    
    8,884
    
    
    
    
    
    
    
    255,143Comprehensive earnings (loss):Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,916
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,916Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,775
    
    
    
    
    
    
    
    11,775Total comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,691Issuance of common stock with exercise of stock
options and vesting of restricted share and unit
grants
    
    
    337
    
    
    
    
    
    
    
    2,358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,358Issuance of
common stock to ESPP, subject to rescission
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation expense recognized on
restricted share and unit grants
    
    
    
    
    
    
    
    
    
    
    4,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,262Share-based compensation expense recognized on ESPP
and stock options
    
    
    
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857Balances  December 31, 2007
    
    
    19,017
    
    
    $
    19
    
    
    $
    244,017
    
    
    $
    22,616
    
    
    $
    
    
    
    $
    20,659
    
    
    $
    
    
    
    $
    287,311
  F-8




---



##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization
  Principles of Consolidation
  Use of Estimates
  Revenue and Cost Recognition
      F-9




---



##### Table of Contents



Cash and Cash Equivalents
  Investment in Marketable Securities
    Accounts Receivable and Allowance for Doubtful Accounts
  2007
    
    
    2006(in thousands)Accounts receivable  billed
    
    $
    63,829
    
    
    $
    54,595Accounts receivable  unbilled
    
    
    69,594
    
    
    
    55,515Less: allowance for doubtful accounts
    
    
    (873
    )
    
    
    (922
    )Accounts receivable, net
    
    $
    132,550
    
    
    $
    109,188
  2007
    
    
    2006
    
    
    2005(in thousands)Balance at beginning of year
    
    $
    922
    
    
    $
    202
    
    
    $
    392Provisions
    
    
    587
    
    
    
    2,279
    
    
    
    569Write-offs, net of recoveries
    
    
    (636
    )
    
    
    (1,559
    )
    
    
    (759
    )Balance at end of year
    
    $
    873
    
    
    $
    922
    
    
    $
    202
 F-10




---



##### Table of Contents



Property and Equipment and Depreciation
  Automobiles
    
    3  5 yearsBuildings
    
    40 yearsFurniture and fixtures
    
    7  20 yearsMachinery, equipment and software
    
    3 10 yearsLeasehold improvements
    
    Shorter of remaining life of asset or
remaining term of the lease (average
3.25 years)
 Goodwill and Intangible Assets
      (in thousands)Balance as of December 31, 2005
    
    $
    274,849Goodwill impairment*
    
    
    (7,873
    )Foreign exchange translation adjustment*
    
    
    (3
    )Balance as of December 31, 2006 and 2007
    
    $
    266,973Goodwill by segment:Early stage
    
    $
    34,372Late stage
    
    
    232,601Total
    
    $
    266,973
 
 * represents fiscal year 2006 adjustments. F-11




---



##### Table of Contents



2007
    
    
    2006WeightedAverageAmortization
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net(in thousands)Intangible assets subject to
amortization:Internally developed software
    
    
    5.0
    
    
    $
    454
    
    
    $
    (312
    )
    
    $
    142
    
    
    $
    454
    
    
    $
    (221
    )
    
    $
    233Methodologies
    
    
    4.1
    
    
    
    2,568
    
    
    
    (2,303
    )
    
    
    265
    
    
    
    2,568
    
    
    
    (2,134
    )
    
    
    434Technology
    
    
    5.0
    
    
    
    3,859
    
    
    
    (2,335
    )
    
    
    1,524
    
    
    
    3,859
    
    
    
    (1,563
    )
    
    
    2,296Contracts and customer
relationships
    
    
    6.5
    
    
    
    12,077
    
    
    
    (5,616
    )
    
    
    6,461
    
    
    
    12,077
    
    
    
    (3,893
    )
    
    
    8,184Total
    
    
    
    
    
    
    18,958
    
    
    
    (10,566
    )
    
    
    8,392
    
    
    
    18,958
    
    
    
    (7,811
    )
    
    
    11,147Intangible assets not subject
to amortization:Trade names
    
    
    
    
    
    
    18,050
    
    
    
    
    
    
    
    18,050
    
    
    
    18,050
    
    
    
    
    
    
    
    18,050Total
    
    
    
    
    
    $
    37,008
    
    
    $
    (10,566
    )
    
    $
    26,442
    
    
    $
    37,008
    
    
    $
    (7,811
    )
    
    $
    29,197
  (in thousands)2008
    
    $
    2,7552009
    
    
    2,6222010
    
    
    1,6032011
    
    
    1,412Total
    
    $
    8,392
 Impairment of Long-Lived Assets
  Financial Instruments
  Derivative
Financial Instruments
   F-12




---



##### Table of Contents



Income Taxes
    Earnings Per Share
  2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Net earnings from continuing operations
    
    $
    12,078
    
    
    $
    6,052
    
    
    $
    17,163Average shares of common stock outstanding for basic
earnings per share
    
    
    18,790
    
    
    
    18,221
    
    
    
    17,702Contingently issuable shares related to:Stock options
    
    
    193
    
    
    
    212
    
    
    
    654Restricted stock units
    
    
    65
    
    
    
    14
    
    
    
    Total
    
    
    258
    
    
    
    226
    
    
    
    654Average shares of common stock for dilutive earnings
per share
    
    
    19,048
    
    
    
    18,447
    
    
    
    18,356Earnings per share from continuing operations:Basic
    
    $
    0.64
    
    
    $
    0.33
    
    
    $
    0.97Dilutive
    
    $
    0.63
    
    
    $
    0.33
    
    
    $
    0.94
  F-13




---



##### Table of Contents



Share-Based Compensation
   Advertising Expenses
  Foreign Currency Translation
   Reclassifications
  Staff Accounting Bulletin No. 108
  F-14




---



##### Table of Contents



New Accounting Pronouncements
     NOTE B  MAJOR CUSTOMERS
   F-15




---



##### Table of Contents



NOTE C  RELATED PARTY TRANSACTIONS
    2006
    
    
    2005(in thousands)Salaries and benefits
    
    $
    58
    
    
    $
    326Contract labor
    
    
    
    
    
    
    115Total
    
    $
    58
    
    
    $
    441
   NOTE D  PROPERTY AND EQUIPMENT
  2007
    
    
    2006(in thousands)Automobiles
    
    $
    770
    
    
    $
    Land and buildings
    
    
    2,247
    
    
    
    2,074Furniture and fixtures
    
    
    13,865
    
    
    
    12,358Leasehold improvements
    
    
    28,074
    
    
    
    23,838Machinery and equipment
    
    
    51,654
    
    
    
    37,312Computer hardware and software
    
    
    23,222
    
    
    
    19,122Total
    
    
    119,832
    
    
    
    94,704Less: accumulated depreciation
    
    
    (52,326
    )
    
    
    (42,469
    )Total
    
    $
    67,506
    
    
    $
    52,235
  2007
    
    
    2006
    
    
    2005(in thousands)Charged to direct costs
    
    $
    4,053
    
    
    $
    3,511
    
    
    $
    3,000Charged to selling, general and administrative expenses
    
    
    8,669
    
    
    
    7,913
    
    
    
    7,544Total
    
    $
    12,722
    
    
    $
    11,424
    
    
    $
    10,544
 F-16




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##### Table of Contents



NOTE E  ACCRUED LIABILITIES
  2007
    
    
    2006(in thousands)Salaries, bonuses and benefits
    
    $
    22,841
    
    
    $
    12,514Provision for settlement of litigation
    
    
    9,785
    
    
    
    Out-of-pocket expenses and grants
    
    
    3,894
    
    
    
    3,748Professional fees
    
    
    1,994
    
    
    
    2,632Interest
    
    
    1,783
    
    
    
    1,229Deferred rent, current portion
    
    
    747
    
    
    
    211Severance
    
    
    1,529
    
    
    
    Rebates
    
    
    2,146
    
    
    
    1,017Payable to 401(k) plan
    
    
    213
    
    
    
    537Value added tax
    
    
    131
    
    
    
    1,234Other
    
    
    2,915
    
    
    
    3,305Total
    
    $
    47,978
    
    
    $
    26,427
  NOTE F  DEBT
 Credit Facility
     Convertible Senior Notes Payable
  F-17




---



##### Table of Contents




    
    a person or entity becomes, indirectly or directly, the beneficial owner of 50% or more
of the Companys common stock,
    
    certain persons on the Board of Directors cease to constitute a majority of the directors,
    
    the Company merges with another entity,
    
    the Company sells substantially all of its assets, or
    
    the Company is forced to liquidate its assets.
     F-18




---



##### Table of Contents



% of Make-Whole
    
    $ Amount of Make-Stock Price
    
    Premium
    
    Whole Premium
    
    Accrued Interest*
    
    Principal Amount
    
    Total(in thousands)$ 30.43
    
    0.0%
    
    $       
    
    $3,234
    
    $143,750
    
    $146,984$ 35.00
    
    4.4%
    
    $  6,325
    
    $3,234
    
    $143,750
    
    $153,309$ 40.00
    
    11.5%
    
    $16,531
    
    $3,234
    
    $143,750
    
    $163,515$ 45.00
    
    10.3%
    
    $14,806
    
    $3,234
    
    $143,750
    
    $161,790$ 50.00
    
    7.6%
    
    $10,925
    
    $3,234
    
    $143,750
    
    $157,909$ 55.00
    
    5.6%
    
    $  8,050
    
    $3,234
    
    $143,750
    
    $155,034$ 60.00
    
    4.2%
    
    $  6,038
    
    $3,234
    
    $143,750
    
    $153,022$ 65.00
    
    3.2%
    
    $  4,600
    
    $3,234
    
    $143,750
    
    $151,584$ 70.00
    
    2.5%
    
    $  3,594
    
    $3,234
    
    $143,750
    
    $150,578$ 75.00
    
    2.0%
    
    $  2,875
    
    $3,234
    
    $143,750
    
    $149,859$ 80.00
    
    1.7%
    
    $  2,444
    
    $3,234
    
    $143,750
    
    $149,428$ 85.00
    
    1.4%
    
    $  2,013
    
    $3,234
    
    $143,750
    
    $148,997$ 90.00
    
    1.3%
    
    $  1,869
    
    $3,234
    
    $143,750
    
    $148,853$ 95.00
    
    1.1%
    
    $  1,581
    
    $3,234
    
    $143,750
    
    $148,565$100.00
    
    1.0%
    
    $  1,438
    
    $3,234
    
    $143,750
    
    $148,422$105.00
    
    0.9%
    
    $  1,294
    
    $3,234
    
    $143,750
    
    $148,278$110.00
    
    0.9%
    
    $  1,294
    
    $3,234
    
    $143,750
    
    $148,278$115.00
    
    0.8%
    
    $  1,150
    
    $3,234
    
    $143,750
    
    $148,134$120.00
    
    0.8%
    
    $  1,150
    
    $3,234
    
    $143,750
    
    $148,134
 
 *
    
    Annual interest amount, one half of which would have been paid on February 15, 2008. Notes Payable
   Shelf Registration Statement
  NOTE G  COMMITMENTS AND CONTINGENCIES
 Leases
  F-19




---



##### Table of Contents



2007
    
    
    2006(in thousands)Automobiles
    
    $
    770
    
    
    $
    Equipment
    
    
    28,191
    
    
    
    19,725Less: accumulated depreciation
    
    
    (11,778
    )
    
    
    (8,400
    )Total
    
    $
    17,183
    
    
    $
    11,325
  (in thousands)2008
    
    $
    3,4442009
    
    
    2,8302010
    
    
    2,0422011
    
    
    1,3862012
    
    
    105Thereafter
    
    
    Total
    
    
    9,807Less: amount representing interest
    
    
    (1,102
    )Present value of minimum lease payments
    
    
    8,705Less: current portion
    
    
    (3,250
    )Total
    
    $
    5,455
   (in thousands)2008
    
    $
    22,0622009
    
    
    19,6982010
    
    
    18,4622011
    
    
    15,2662012
    
    
    13,856Thereafter
    
    
    68,105Total
    
    $
    157,449
 Sale-Leaseback Transaction
   F-20




---



##### Table of Contents



Investing Activities
    
    
    Financing Activities(in thousands)As previously reported
    
    $
    (13,323
    )
    
    $
    15,851Non-cash adjustment
    
    
    6,051
    
    
    
    (6,051
    )As adjusted
    
    $
    (7,272
    )
    
    $
    9,800
 Litigation and Inquiries
     F-21




---



##### Table of Contents



Indemnification
  NOTE H  EQUITY
 Secondary Public Offering
 .
 Preferred Stock
  Shareholder Rights Plan
  F-22




---



##### Table of Contents



Employee Stock Purchase Plan
   Share-Based Compensation
    999 Stock Option Plan
  F-23




---



##### Table of Contents



Stock Options 
 (in thousands, exceptper share data)Net earnings from continuing operations:As reported
    
    $
    17,163Pro forma
    
    $
    9,232Basic earnings per share from continuing operations:As reported
    
    $
    0.97Pro forma
    
    $
    0.53Diluted earnings per share from continuing operations:As reported
    
    $
    0.94Pro forma
    
    $
    0.51
  2007
    
    2006 (4)
    
    2005Risk-free rate (1)
    
    
    4.9
    %
    
    
    
    
    
    
    4
    %Expected term (2)
    
    4.5 years
    
    
    
    
    
    
    3 yearsExpected
volatility (3)
    
    
    59
    %
    
    
    
    
    
    
    60
    %
 
 (1)
    
    The risk-free rate is based upon the rate on a zero coupon U.S. Treasury bill, for
periods within the contractual life of the option, in effect at the time of grant.(2)
    
    The Company has significantly changed the terms of the stock options granted to
employees over the years such that historical exercise data is not available. As a result,
the expected term of the option is determined using the simplified method provided by Staff
Accounting Bulletin No. 107, the vesting terms and a contractual life of the respective
option.(3)
    
    Expected volatility is based on the daily historical volatility of the Companys stock
price, over a period equal to the expected life of the option.(4)
    
    There were no awards granted during 2006.
  Weighted-Weighted-
    
    AverageNumber of
    
    Average
    
    RemainingOptions
    
    Exercise
    
    Contractual(in thousands)
    
    Price
    
    LifeOutstanding at beginning of year
    
    
    1,034
    
    
    $
    25.68
    
    
    
    3.81Granted
    
    
    92
    
    
    $
    26.91Exercised
    
    
    (203
    )
    
    $
    18.41Forfeited and expired
    
    
    (9
    )
    
    $
    38.00Outstanding at end of year
    
    
    914
    
    
    $
    27.29
    
    
    
    3.27Exercisable at end of year
    
    
    824
    
    
    $
    27.34
    
    
    
    2.91
  F-24




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    Weighted-
    
    
    
    
    
    
    
    
    
    Average
    
    WeightedRemaining
    
    Average
    
    Aggregate
    
    Number
    
    Remaining
    
    Average
    
    AggregateNumber
    
    Contractual
    
    Exercise
    
    Intrinsic
    
    Exercisable
    
    Contractual
    
    Exercise
    
    IntrinsicRange of Exercise
    
    Outstanding (in
    
    Life (in
    
    Price Per
    
    Value (in
    
    (in
    
    Life (in
    
    Price Per
    
    Value (inPrices
    
    thousands)
    
    Years)
    
    Share
    
    thousands)
    
    thousands)
    
    Years)
    
    Share
    
    thousands)$4.00  $5.27
    
    
    46
    
    
    
    2.49
    
    
    $
    4.22
    
    
    $
    1,628
    
    
    
    46
    
    
    
    2.49
    
    
    $
    4.22
    
    
    $
    1,628$6.73  $7.90
    
    
    10
    
    
    
    4.96
    
    
    $
    7.18
    
    
    
    321
    
    
    
    10
    
    
    
    4.96
    
    
    $
    7 18
    
    
    
    321$10.79  $15.93
    
    
    294
    
    
    
    4.06
    
    
    $
    13.10
    
    
    
    7,672
    
    
    
    294
    
    
    
    4.06
    
    
    $
    13.10
    
    
    
    7,672$17.91  $23.67
    
    
    26
    
    
    
    4.28
    
    
    $
    20.39
    
    
    
    495
    
    
    
    26
    
    
    
    4.28
    
    
    $
    20.39
    
    
    
    495$26.91  $38.63
    
    
    175
    
    
    
    4.59
    
    
    $
    32.29
    
    
    
    1,209
    
    
    
    85
    
    
    
    2.45
    
    
    $
    38.02
    
    
    
    101$40.39
    
    
    363
    
    
    
    1.98
    
    
    $
    40.39
    
    
    
    
    
    
    
    363
    
    
    
    1.98
    
    
    $
    40.39
    
    
    914
    
    
    
    3.27
    
    
    $
    27.29
    
    
    $
    11,325
    
    
    
    824
    
    
    
    2.91
    
    
    $
    27.34
    
    
    $
    10,217
   Weighted AverageNumber of
    
    Grant DateOptions
    
    Fair Value(in thousands)Non-vested at beginning of year
    
    
    
    
    
    
    Granted
    
    
    92
    
    
    $
    26.91Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-vested at end of year
    
    
    92
    
    
    $
    26.91
   2007
    
    2006
    
    2005(in thousands)Cash proceeds from stock options exercised
    
    $
    3,733
    
    
    $
    3,663
    
    
    $
    1,213Tax benefits
realized for stock options exercised
    
    $
    
    
    
    $
    
    
    
    $
    1,407
 Restricted Stock and Restricted Stock Units 
   F-25




---



##### Table of Contents



Weighted-AverageRestricted Stock and
    
    Grant-DateRestricted Stock Units
    
    Fair Value(in thousands)Non-vested at beginning of year
    
    
    315
    
    
    $
    19.58Granted
    
    
    169
    
    
    $
    27.89Vested
    
    
    (175
    )
    
    $
    20.31Forfeited
    
    
    (27
    )
    
    $
    24.72Non-vested at end of year
    
    
    282
    
    
    $
    23.62
  Common Stock Repurchases
  NOTE I  EMPLOYEE BENEFITS
 Employment Agreements
    F-26




---



##### Table of Contents



Defined Contribution Plans
   NOTE J  INCOME TAXES
  2007
    
    
    2006
    
    
    2005(in thousands)United States
    
    $
    2,780
    
    
    $
    (24,269
    )
    
    $
    (10,515
    )Foreign
    
    
    12,543
    
    
    
    27,454
    
    
    
    28,384Total
    
    $
    15,323
    
    
    $
    3,185
    
    
    $
    17,869
  2007
    
    
    2006
    
    
    2005(in thousands)Current:Federal
    
    $
    (743
    )
    
    $
    210
    
    
    $
    (3,690
    )State
    
    
    2,604
    
    
    
    152
    
    
    
    1,566Foreign
    
    
    2,618
    
    
    
    6,168
    
    
    
    7,043Total
    
    
    4,479
    
    
    
    6,530
    
    
    
    4,919Deferred:Federal
    
    
    1,180
    
    
    
    (5,971
    )
    
    
    (341
    )State
    
    
    1,119
    
    
    
    (286
    )
    
    
    (36
    )Foreign
    
    
    (4,438
    )
    
    
    (3,831
    )
    
    
    (4,388
    )Total
    
    
    (2,139
    )
    
    
    (10,088
    )
    
    
    (4,765
    )Total
    
    $
    2,340
    
    
    $
    (3,558
    )
    
    $
    154
 F-27




---



##### Table of Contents



2007
    
    2006
    
    2005Federal taxes at U.S. statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal benefit
    
    
    6.0
    
    
    
    (3.0
    )
    
    
    5.5Permanent differences, primarily nondeductible expenses and losses
    
    
    28.7
    
    
    
    1.3
    
    
    
    (2.3
    )Foreign rate differential
    
    
    (10.7
    )
    
    
    (149.5
    )
    
    
    (10.3
    )Cumulative effect of statutory rate change
    
    
    (7.4
    )
    
    
    (35.7
    )
    
    
    Foreign research and development tax credits
    
    
    (56.7
    )
    
    
    (32.1
    )
    
    
    (29.6
    )Other foreign tax credits
    
    
    (6.1
    )
    
    
    
    
    
    
    Change in domestic valuation allowance
    
    
    (17.3
    )
    
    
    73.3
    
    
    
    Change in foreign valuation allowance
    
    
    43.9
    
    
    
    (1.0
    )
    
    
    2.6Other, net
    
    
    (0.2
    )
    
    
    
    
    
    
    Total
    
    
    15.2
    %
    
    
    (111.7
    )%
    
    
    0.9
    %
   2007
    
    
    2006(in thousands)Current deferred tax assets (liabilities):Accounts receivable
    
    $
    345
    
    
    $
    267Prepaid expenses
    
    
    (530
    )
    
    
    (355
    )Accrued expenses
    
    
    5,571
    
    
    
    2,358Other
    
    
    101
    
    
    
    (20
    )Less: domestic valuation allowance
    
    
    (5,220
    )
    
    
    Total current deferred tax asset, net
    
    $
    267
    
    
    $
    2,250
 2007
    
    
    2006(in thousands)Non-current deferred tax assets (liabilities):Foreign research and development tax carryforwards
    
    $
    33,023
    
    
    $
    19,334Depreciation and amortization
    
    
    (11,783
    )
    
    
    (3,569
    )Intangible assets
    
    
    (7,336
    )
    
    
    (14,476
    )Net operating loss carryforwards
    
    
    7,277
    
    
    
    17,894Deferred compensation
    
    
    2,769
    
    
    
    1,206Deferred rent
    
    
    1,825
    
    
    
    964Client advances
    
    
    1,550
    
    
    
    149Capital lease obligations
    
    
    1,424
    
    
    
    1,698Foreign tax credits
    
    
    1,292
    
    
    
    Alternative minimum tax
    
    
    828
    
    
    
    792Deferred revenue
    
    
    (32
    )
    
    
    (30
    )Foreign deferred tax assets
    
    
    
    
    
    
    1,304Other
    
    
    295
    
    
    
    1,412Less: valuation allowance:Domestic
    
    
    (8,043
    )
    
    
    (15,309
    )Foreign
    
    
    (17,496
    )
    
    
    (11,617
    )Total non-current deferred tax asset (liability), net
    
    $
    5,593
    
    
    $
    (248
    )Total deferred tax asset (liability), net
    
    $
    5,860
    
    
    $
    2,002
  F-28




---



##### Table of Contents



Carryforwards and Allowances
       Undistributed Foreign Earnings
  Tax Audits
  FIN 48
  F-29




---



##### Table of Contents



(in thousands)Balance at beginning of year, including cumulative effect amount of $2,900
    
    $
    6,110Additions for tax positions related to the current year
    
    
    1,688Additions for tax positions from prior years
    
    
    416Reductions for tax positions from prior years
    
    
    (1,188
    )Statute of limitations expiration
    
    
    (649
    )Currency translation adjustment
    
    
    835Balance at end of year
    
    $
    7,212
 NOTE K  DISCONTINUED OPERATIONS
   Impairment of Goodwill
  Impairment of Long-lived Assets
  Asset Retirement Obligations and Accrued Charges
  F-30




---



##### Table of Contents



AccruedBalance at
    
    
    Charges
    
    
    
    
    
    Balance at12/31/06
    
    
    (Reversals)
    
    

Payments

    
    
    12/31/07(in thousands)Severance and healthcare costs
    
    $
    1,421
    
    
    $
    (190
    )
    
    $
    1,205
    
    
    $
    26Demolition, asbestos and related costs
    
    
    700
    
    
    
    (61
    )
    
    
    639
    
    
    
    Contract termination costs
    
    
    1,170
    
    
    
    (103
    )
    
    
    415
    
    
    
    652Real estate property taxes
    
    
    
    
    
    
    300
    
    
    
    248
    
    
    
    52Sample storage fees
    
    
    
    
    
    
    177
    
    
    
    
    
    
    
    177Other
    
    
    17
    
    
    
    521
    
    
    
    45
    
    
    
    493Total
    
    $
    3,308
    
    
    $
    644
    
    
    $
    2,552
    
    
    $
    1,400
 AccruedBalance at
    
    
    Charges
    
    
    
    
    
    Balance at12/31/05
    
    
    (Reversals)
    
    
    Payments

    
    
    12/31/06(in thousands)Severance and healthcare costs
    
    $
    3,060
    
    
    $
    2,616
    
    
    $
    4,255
    
    
    $
    1,421Demolition, asbestos and related costs
    
    
    
    
    
    
    1,007
    
    
    
    307
    
    
    
    700Purchase consideration due to stockholders
    
    
    
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    Contract termination costs
    
    
    
    
    
    
    1,363
    
    
    
    193
    
    
    
    1,170Other
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Total
    
    $
    3,060
    
    
    $
    6,003
    
    
    $
    5,755
    
    
    $
    3,308
  Income Taxes
  F-31




---



##### Table of Contents



Condensed Financial Information
  2007
    
    
    2006(in thousands)Assets:Accounts receivable, net of allowance for doubtful accounts of $94 and $1,000, respectively
    
    $
    1,070
    
    
    $
    3,573Income taxes receivable
    
    
    1,082
    
    
    
    317Property and equipment, primarily land held for sale
    
    
    3,047
    
    
    
    3,287Total
    
    $
    5,199
    
    
    $
    7,177Liabilities:Accounts payable
    
    $
    290
    
    
    $
    462Accrued liabilities
    
    
    1,400
    
    
    
    3,308Client advances
    
    
    80
    
    
    
    425Total
    
    $
    1,770
    
    
    $
    4,195
  2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Net revenue:Direct revenue
    
    $
    2,185
    
    
    $
    7,490
    
    
    $
    65,128Reimbursed out-of-pocket expenses
    
    
    19
    
    
    
    957
    
    
    
    2,959Total net revenue
    
    
    2,204
    
    
    
    8,447
    
    
    
    68,087Costs and expenses:Direct costs
    
    
    2,398
    
    
    
    8,762
    
    
    
    35,238Reimbursable out-of-pocket expenses
    
    
    19
    
    
    
    957
    
    
    
    2,959Selling, general and administrative
    
    
    (26
    )
    
    
    18,886
    
    
    
    17,616Impairment of long-lived assets
    
    
    
    
    
    
    18,963
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    4,051
    
    
    
    20,315Total costs and expenses
    
    
    2,391
    
    
    
    51,619
    
    
    
    76,128Other income (expense)
    
    
    941
    
    
    
    14
    
    
    
    Earnings (loss) before income taxes
    
    
    754
    
    
    
    (43,158
    )
    
    
    (8,041
    )Income tax expense (benefit)
    
    
    (84
    )
    
    
    (1,081
    )
    
    
    4,343Earnings (loss) from discontinued operations
    
    $
    838
    
    
    $
    (42,077
    )
    
    $
    (12,384
    )Earnings (loss) per share from discontinued operations:Basic
    
    $
    0.05
    
    
    $
    (2.31
    )
    
    $
    (0.70
    )Diluted
    
    $
    0.05
    
    
    $
    (2.28
    )
    
    $
    (0.68
    )Shares used in computing earnings (loss) per share:Basic
    
    
    18,790
    
    
    
    18,221
    
    
    
    17,702Diluted
    
    
    19,048
    
    
    
    18,447
    
    
    
    18,356
  F-32




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##### Table of Contents



NOTE L  GEOGRAPHIC INFORMATION
  Direct revenue
 2007
    
    
    2006
    
    
    2005(in thousands)United States
    
    $
    165,243
    
    
    $
    136,047
    
    
    $
    123,147Canada
    
    
    108,058
    
    
    
    85,697
    
    
    
    90,812Europe
    
    
    85,681
    
    
    
    78,616
    
    
    
    54,946Other
    
    
    9,879
    
    
    
    6,854
    
    
    
    6,139Total
    
    
    368,861
    
    
    
    307,214
    
    
    
    275,044Less: intercompany eliminations
    
    
    (6,390
    )
    
    
    (4,829
    )
    
    
    (5,422
    )Total
    
    $
    362,471
    
    
    $
    302,385
    
    
    $
    269,622
 Property and equipment, net
 2007
    
    
    2006(in thousands)United States
    
    $
    21,157
    
    
    $
    20,050Canada
    
    
    33,569
    
    
    
    23,723Europe
    
    
    11,760
    
    
    
    7,415Other
    
    
    1,020
    
    
    
    1,047Total
    
    $
    67,506
    
    
    $
    52,235
  NOTE M  SEGMENT REPORTING
    F-33




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##### Table of Contents



CorporateEarly Stage
    
    Late Stage
    
    Allocations
    
    Total(in thousands)Direct revenue2007
    
    $
    137,818
    
    
    $
    224,653
    
    
    $
    
    
    
    $
    362,4712006
    
    $
    103,274
    
    
    $
    199,111
    
    
    $
    
    
    
    $
    302,3852005
    
    $
    110,445
    
    
    $
    159,177
    
    
    $
    
    
    
    $
    269,622Earnings from continuing operations2007
    
    $
    22,260
    
    
    $
    34,092
    
    
    $
    (34,865
    )
    
    $
    21,4872006
    
    $
    12,116
    
    
    $
    21,934
    
    
    $
    (21,044
    )
    
    $
    13,0062005
    
    $
    20,876
    
    
    $
    21,242
    
    
    $
    (12,274
    )
    
    $
    29,844Earnings from continuing operations before income taxes2007
    
    $
    6,675
    
    
    $
    29,219
    
    
    $
    (20.571
    )
    
    $
    15,3232006
    
    $
    12,467
    
    
    $
    20,213
    
    
    $
    (29,495
    )
    
    $
    3,1852005
    
    $
    21,028
    
    
    $
    20,999
    
    
    $
    (24,158
    )
    
    $
    17,869Total assets2007
    
    $
    151,931
    
    
    $
    428,247
    
    
    $
    20,909
    
    
    $
    601,0872006
    
    $
    133,439
    
    
    $
    404,950
    
    
    $
    11,210
    
    
    $
    549,599
  2007
    
    
    2006(in thousands)Total assets for reportable segments, including corporate allocations
    
    $
    601,087
    
    
    $
    549,599Assets from discontinued operations
    
    
    5,199
    
    
    
    7,177Total
    
    $
    606,286
    
    
    $
    556,776
 NOTE N  SELECTED QUARTERLY FINANCIAL DATA (unaudited)
   F-34




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##### Table of Contents



March 31
    
    June 30
    
    September 30
    
    December 31(in thousands, except per share data)2007Direct revenue
    
    $
    84,781
    
    
    $
    85,595
    
    
    $
    99,810
    
    
    $
    92,285Gross profit (1)
    
    $
    34,303
    
    
    $
    32,894
    
    
    $
    42,736
    
    
    $
    36,365Net earnings (loss) from continuing
operations
    
    $
    5,992
    
    
    $
    (4,602
    )
    
    $
    6,887
    
    
    $
    3,801Earnings (loss) from discontinued operations, net of tax
    
    $
    640
    
    
    $
    82
    
    
    $
    (93
    )
    
    $
    209Net earnings (loss)
    
    $
    6,632
    
    
    $
    (4,520
    )
    
    $
    6,794
    
    
    $
    4,010Net earnings (loss) per share:Basic
    
    $
    0.36
    
    
    $
    (0.24
    )
    
    $
    0.36
    
    
    $
    0.21Diluted
    
    $
    0.35
    
    
    $
    (0.24
    )
    
    $
    0.36
    
    
    $
    0.212006Direct revenue
    
    $
    74,424
    
    
    $
    72,837
    
    
    $
    76,019
    
    
    $
    79,105Gross profit (1)
    
    $
    29,095
    
    
    $
    28,052
    
    
    $
    29,477
    
    
    $
    33,082Net earnings (loss) from continuing operations
    
    $
    3,304
    
    
    $
    (3,728
    )
    
    $
    2,980
    
    
    $
    3,496Loss from discontinued operations, net of tax
    
    $
    (7,439
    )
    
    $
    (15,987
    )
    
    $
    (3,242
    )
    
    $
    (15,409
    )Net earnings (loss)
    
    $
    (4,135
    )
    
    $
    (19,715
    )
    
    $
    (262
    )
    
    $
    (11,913
    )Net earnings (loss) per share:Basic
    
    $
    (0.23
    )
    
    $
    (1.09
    )
    
    $
    (0.01
    )
    
    $
    (0.65
    )Diluted
    
    $
    (0.23
    )
    
    $
    (1.09
    )
    
    $
    (0.01
    )
    
    $
    (0.64
    )
 
 (1)
    
    Direct revenue less direct costs. NOTE O  SUBSEQUENT EVENT
  F-35




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##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC.
 Schedule II
 Valuation and Qualifying Accounts
 Balance at
    
    Charged
    
    
    
    
    
    Balance atBeginning
    
    to Costs
    
    
    
    
    
    End ofDescription
    
    of Period
    
    and Expenses
    
    Deductions
    
    Period(in thousands)Deferred tax valuation allowance  Domestic:2007
    
    $
    15,309
    
    
    
    
    
    
    
    (2,046
    )
    
    $
    13,2632006
    
    $
    
    
    
    
    15,309
    
    
    
    
    
    
    $
    15,3092005
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    Deferred tax valuation allowance  Foreign:2007
    
    $
    11,617
    
    
    
    5,930
    
    
    
    (51
    )
    
    $
    17,4962006
    
    $
    5,161
    
    
    
    6,503
    
    
    
    (47
    )
    
    $
    11,6172005
    
    $
    157
    
    
    
    5,004
    
    
    
    
    
    
    $
    5,161
 F-36