##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934For the fiscal year ended
    December 31, 2006o

TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934For 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
    incorporation or organization)

(I.R.S. Employer
    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
    Series A Junior Participating
    Preferred Stock Purchase Rights

The NASDAQ Stock Market, LLC   Securities
    registered pursuant to Section 12(g) of the Act:
    None.
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated filer
    o       
    Accelerated filer
    þ       
    Non-accelerated filer o
  Rule 12b-2 o þ
      Class

Outstanding at March 9, 2006Common Stock, $.001 par value per
    share
    Series A Junior Participating Preferred Stock
    Purchase Rights

18,546,669 shares
    18,546,669 rights   DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 



PHARMANET
    DEVELOPMENT GROUP, INC.
  PagePART
    IItem 1.


Business


1Item 1A.


Risk Factors


16Item 1B.


Unresolved Staff
    Comments


27Item 2.


Properties


28Item 3.


Legal Proceedings


29Item 4.


Submission of
    Matters to a Vote of Security Holders


30PART
    IIItem 5.


Market for
    Registrants Common Equity and Related Stockholder Matters
    and Issuer Purchases of Equity Securities


31Item 6.


Selected Financial
    Data


33Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


34Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


48Item 8.


Financial
    Statements and Supplemental Data


49Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


49Item 9A.


Controls and
    Procedures


49Item 9B.


Other Information


50PART
    IIIItem 10.


Directors and
    Executive Officers and Corporate Governance


51Item 11.


Executive
    Compensation


51Item 12.


Security Ownership
    of Certain Beneficial Owners and Management


51Item 13.


Certain
    Relationships and Related Transactions, and Director Independence


51Item 14.


Principal
    Accounting Fees and Services


51PART
    IVItem 15.


Exhibits, Financial
    Statement Schedules


52Ex-3.4 Second Amendment to Certificate of IncorporationEx-3.7 Third Amendment to Certificate of IncorporationEx-4.1 Form of Common Stock CertificateEx-10.2 David Natan Employment AgreementEx-10.16 Amended and Restated 1999 Stock PlanEx-10.18 Audit Committee CharterEx-10.29 Thomas J. Newman, MD Employment AgreementEx-10.37 Form of Director Indemnification AgreementEx-10.38 Form of Executive Officer Indemnification AgreementEx-10.39 Form of Director Restricted Stock Unit AgreementEx-10.40 Form of Employee Restricted Stock Unit AgreementEx-10.41 John P. Hamill Employment AgreementEx-21 Subsidiaries of PharmaNet Development Group, Inc.Ex-23.1 Consent of Grant Thornton LLPEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO   i




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##### Table of Contents



PART I  Form 10-K,
  Item 1.
    Business.  General
    Early
    Stage      Late
    Stage




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History
      Locations as of theDate of Acquisition

Name

Current Business

date of this reportDecember 2004

PharmaNet, Inc.

Late Stage Clinical Trials
    Management

Eleven North American offices, Ten
    European offices, Eight Asian offices plus Buenos Aires,
    Argentina and Sydney, AustraliaJuly 2004

Taylor Technology, Inc.

Bioanalytical Laboratory

Princeton, New JerseyOctober 2003

Anapharm Europe, S.L.

Bioanalytical Laboratory (49%
    interest in joint venture)

Barcelona, SpainAugust 2003

Clinical Pharmacology
    Associates(1)

Early Stage Clinical Trials

Miami, Florida (discontinued in
    2006)July 2003

SFBC New Drug Services
    Canada.(2)
    (remaining 51% interest not previously owned by Anapharm, Inc.)

Late Stage Clinical Trials
    Management

London, Ontario, CanadaMarch 2003

SynFine Research Inc.

Chemical Synthesis

Toronto, CanadaSeptember 2002

New Drug Services,
    Inc.(3)

Data Management, Biostatistical
    and Regulatory

Kennett Square, Pennsylvania 2




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##### Table of Contents



Locations as of theDate of Acquisition

Name

Current Business

date of this reportMarch 2002

Anapharm, Inc.

Early Stage Clinical Trials and
    Bioanalytical Laboratory

Quebec City, CanadaEarly Stage Clinical Trials and
    Clinical Laboratory Services

Montreal, CanadaBioanalytical Laboratory (opened
    January 2005)

Toronto, CanadaEarly Stage Clinical Trials
    (expected to open in the second quarter of 2007)

Toronto, CanadaAugust 2001

Keystone Analytical, Inc.

Bioanalytical Laboratory

Philadelphia, PennsylvaniaFebruary 2001

Lee Coast Research, Inc.

Early Stage Clinical Trials

Ft. Myers, Florida (discontinued
    in 2006)March 2000

Pharmaceutical Development
    Associates,
    Inc.(2)

Late Stage Clinical Trials
    Management

Charlotte, North Carolina1984 (formation)

PharmaNet Development Group, Inc.
    (formerly SFBC International, Inc.)

Early Stage Clinical Trials and
    Clinical Laboratory Services and also Corporate Headquarters

Corporate headquarters moved to
    Princeton, New Jersey in 2006 (clinical operations in Miami were
    discontinued in 2006)   (1)
    
    Formerly part of our Miami subsidiary.(2)
    
    Now part of PharmaNet.(3)
    
    Operated as Clinical Pharmacology Services since January 2005 in
    our early stage segment. Effective January 1, 2007, began
    operating as PharmaNet Specialized Pharmaceutical Services, Inc.  Discontinued
    Operations
    Form 10-K
 3




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Industry
    Overview
      The
    product development process
  Branded
    drugs
          
    Phase I clinical trials involve testing a drug on a limited
    number of participants, typically 20 to 80 persons per study, 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 clinical trials involve testing a small number of
    participants, typically 100 to 200 persons who qualify for
    inclusion in a clinical trial based upon meeting the applicable
    trial protocols criteria and having a particular medical
    condition, to determine the drugs safety profile and
    effectiveness and how different doses 4




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##### Table of Contents



work. This phase, which lasts an average of one to two years, is
    comprised of several longer duration clinical trials.  
    Phase III clinical trials involve testing large numbers of
    participants, typically several hundred, with a medical
    condition to verify drug efficacy and safety on a large scale.
    These trials usually involve numerous sites. Multiple trials are
    often conducted within each of Phase I through Phase III. After
    successfully completing all three clinical phases, a company
    submits a new drug application, or NDA, to the FDA and/or other
    national regulatory agencies 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 authority. 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.  Generic
    drugs
        505(b)(2)
    approval
    Medical
    devices
   5




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Industry
    trends
    Emergence
    of new research technologies that are resulting in greater drug
    development activities
        Escalating
    research and development expenditures by pharmaceutical
    companies
    Changes
    in the regulatory environment
       6




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Industry
    Association Appointment
  , ,
  Growth
    of the biotechnology industry
    Growth
    and price pressures of the generic drug industry
    Increasingly
    global scope of clinical trials
     7




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Our
    Competitive Strengths
    Our
    ability to provide a comprehensive range of clinical development
    and complementary services
    Our
    ability to recruit
      The
    scope of our clinical trials facilities
         8




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Our
    experience
    Our
    Strategy
    Leveraging
    complementary early clinical and late phase development services
    and client relationships
    Leveraging
    our global presence to provide a complete range of drug
    development services worldwide
    Expanding
    our bioanalytical laboratory business
   9




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Augmenting
    our current range of services through strategic acquisitions,
    strategic alliances or joint ventures
        Our
    Services
    Early
    stage clinical development services
      Laboratory
    services
     10




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Late
    stage clinical development services
    Data
    management and biostatistics
  . state-of-the-art
  Clients
    and Marketing
    out-of-pockets out-of-pockets.
    Our
    Competitors
      
    the ability to recruit doctors and participants for clinical
    trials; 11




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
    medical and scientific expertise in specific therapeutic areas;
    the ability to organize and manage large-scale trials;
    the quality of their services;
    the range of services they provide;
    financial stability; and
    the cost of services they provide.        Indemnification
    and Insurance
   12




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
    indemnification provisions and provisions seeking to limit or
    exclude liability contained in our contracts with clients and
    investigators;
    insurance maintained by clients and 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.      Government
    Regulation
      
    selecting qualified investigators and sites; 13




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
    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.    right-to-know
  follow-up,
       14




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Backlog
        Backlog

December 31, 2006


December 31, 2005Total

$
352.7 million


$
349.8 millionLate Stage

$
309.6 million


$
317.9 millionEarly Stage

$
43.1 million


$
31.9 million   Seasonality
    Employees
    Available
    information
  Form 10-K, Form 10-Q, Form 8-K,
 15




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Item 1A.
    Risk
    Factors.  Form 10-K
    Risks
    Associated with Recent Actions, Inquiries and Lawsuits
  While
    we have insurance coverage in connection with the pending class
    and derivative actions, the potential adverse outcome may exceed
    our insurance coverage.
    If
    there is an adverse outcome in the securities class action
    lawsuits that have been filed against us, our business may be
    materially harmed. Further, defending against these and other
    lawsuits may be expensive and could divert the attention of our
    management.
      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.
   16




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The
    risks and uncertainties associated with discontinued operations
    could adversely impact our company.
  Form 10-K, Form 10-K.
  If we
    are unable to convince our clients that the problems principally
    related to our Miami facility were either not accurately
    reported or have been rectified, we may lose future revenue and
    our future results of operations may be materially and adversely
    affected.
    FDA
    actions or inspections may cause clients not to award future
    contracts to us or cancel existing contracts, which may have a
    material and adverse affect on our future results of
    operations.
    The
    risks set forth immediately above as well as those in the
    balance of these risk factors may cause us not to meet our
    future earnings guidance, which could cause our stock price to
    fall substantially.
   17




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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
    future profitability may be adversely affected.
    
    manufacturing problems resulting in a shortage or unavailability
    of the drug we are testing;
    a decision by a client to de-emphasize or cancel the development
    of a drug;
    unexpected clinical trial results;
    adverse participant reaction to a drug;
    an action by regulatory authorities (for example, in the United
    States, the FDA, and in Canada, the TPD);
    continued publicity relating to the Senate Finance
    Committees interest in our former Miami facility;
    inadequate participant enrollment; and
    any of the factors discussed in the other risk factors relating
    to issues regarding our discontinued operations.    Our
    backlog may not be indicative of future results.
    
    the variable size and duration of the projects, some of we which
    are performed over several years;
    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. 18




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We may
    bear financial risk if we under-price our contracts or overrun
    cost estimates.
    Our
    indebtedness may impact our financial condition and 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;
    make investments or loans;
    engage in transactions with affiliates; 19




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
    pay dividends or make other distributions on, or redeem or
    repurchase, capital stock;
    issue capital stock;
    make capital expenditures;
    sell assets; and
    pursue mergers or acquisitions.  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 or fund
    ongoing operations without having to repatriate funds from
    foreign operations.
        We
    experience seasonality of our revenues.
    We
    have grown rapidly over the last few years, and our growth has
    placed, and is expected to continue to place, significant
    demands on us.
   20




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A
    significant portion of our growth has come from acquisitions,
    and we may make more acquisitions in the future as part of our
    continuing growth strategy. This growth strategy subjects us to
    numerous risks.
    
    we will identify suitable acquisition candidates;
    we will receive the required consent under our outstanding
    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.   21




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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.
    We
    might lose business opportunities as a result of healthcare
    reform.
    At any
    given time, one or a limited number of clients may account for a
    large percentage of our revenue, which means that we could face
    a greater risk of loss of revenue if we lose a major
    client.
   22




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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 and results of operations would 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 regions 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;
    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. 23




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Our
    substantial
    non-United
    States operations expose us to currency risks.
    We
    could be adversely affected by tax law changes in Canada or in
    other jurisdictions.
    Governmental
    authorities may question our inter-company transfer pricing
    policies or change their laws in a manner that could increase
    our effective tax or otherwise harm our business.
    Because
    we are smaller than our largest competitors, we may lack the
    resources needed to compete effectively.
   24




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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;
    unintended consequences resulting from the procedures and/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 us.
  clean-up
  Failure
    to comply with applicable governmental regulations could harm
    our operating results and reputation.
   25




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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.
    We are
    self-insured in the United States related to medical insurance
    which exposes us to losses.
    Risks
    Related to Our Common Stock
  We may
    issue a substantial amount of our common stock in the future
    which could cause dilution to new investors and otherwise
    adversely affect our stock price.
   26




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Our
    stock price can be extremely volatile, and your investment 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 such as the Bloomberg Reports;
    loss of a major client or contract;
    new service offerings introduced or announced by our competitors;
    changes in market valuations of other similar companies;
    our 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.
      Item 1B.
    Unresolved
    Staff Comments.   27




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Item 2.
    Properties.    Approximate


Type



Base monthlyLocation

square footage


of holding

Expiration

rentAmersfoort, Netherlands


12,959


Leased

August 2012

$
19,670Aventura, FL


4,998


Leased

June 2007

$
10,414Bangalore, India


5,768


Leased

November 2007

$
7,926Barcelona, Spain


4,200


Leased

August 2008

$
2.714Beijing, China


N/A


Leased

August 2007

$
2,937Blue Bell, PA


44,708


Leased

July 2014

$
99,417Boston (Framingham), MA


6,098


Leased

October 2010

$
12,450Buenos Aires, Argentina


4,736


Leased

October 2008

$
8,180Charlotte, NC


17,604


Leased

June 2010

$
22,885Chicago (Deerfield), IL


12,112


Leased

December 2012

$
16,149Frankfurt, Germany


15,983


Leased

June 2012

$
31,737High Wycombe, U.K.


247,191


Leased

August 2012

$
143,292Kennett Square, PA


8,000


Leased

September 2009

$
16,251Kiev, Ukraine


4,973


Leased

February 2009

$
29,390London, Ontario, Canada


7,771


Leased

June 2011

$
6,517Madrid, Spain


8,128


Leased

September 2011

$
30,803Miami, FL


Land


Asset held for sale

N/A


N/AMiami, FL


15,000


Owned

N/A


N/AMilan, Italy


387


Leased

May 2007

$
9,924Montreal, Canada


57,596


Leased

March 2011

$
90,519Morrisville, NC


12,584


Leased

November 2008

$
17,827Moscow, Russia


4,466


Leased

Month-to-Month

$
30,043Mumbai, India


13,265


Leased

August 2008

$
15,759Munich, Germany


1,717


Leased

December 2007

$
3,009Philadelphia (North Wales), PA


8,000


Leased

Month to Month

$
4,300Paris, France


6,884


Leased

July 2011

$
41,487Princeton, NJ


121,990


Leased

June 2011

$
198,234Princeton, NJ


33,148


Leased

March 2016

$
102,525Quebec City,
    Canada(1)


79529


Leased

2007

$
94,647Research Triangle Park (Cary), NC


19,255


Leased

November 2008

$
40,115San Diego, CA


12,055


Leased

July 2012

$
26,159Seoul, South Korea


126


Leased

July 2007

$
2,332Singapore


3,072


Leased

April 2008

$
11,932St Petersburg, Russia


6,197


Leased

December 2008

$
26,646Stockholm, Sweden


5,174


Leased

January 2008

$
10,742Sydney, Australia


11,840


Leased

November 2008

$
30,979Toronto, Canada


39,961


Leased

April 2016

$
44,290Toronto, Canada


18,390


Owned

N/A


N/A 28




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Approximate


Type



Base monthlyLocation

square footage


of holding

Expiration

rentTrois-Rivieres, Canada


1,300


Leased

March 2007

$
1,514Warsaw, Poland


2,938


Leased

November 2007

$
14,506Washington DC


8,323


Leased

November 2011

$
34,651Wilmington, DE


5,356


Leased

July 2011

$
8,815Zurich (Zumikon), Switzerland


6,292


Leased

September 2010

$
16,192     (1)
    
    Does not include the base monthly rent for Anapharms new
    building and headquarters expected to be completed in March 2007.  Item 3.
    Legal
    Proceedings         29




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Item 4.
    Submission
    of Matters to a Vote of Security Holders.   30




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PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities.  Market
    Information
    High


LowFiscal year ending
    December 31, 2005First Quarter

$
43.71


$
33.50Second Quarter


39.28



27.86Third Quarter


45.73



37.41Fourth Quarter


45.29



12.38Fiscal year ending
    December 31, 2006First Quarter

$
26.79


$
17.22Second Quarter


24.88



13.85Third Quarter


19.93



14.22Fourth Quarter


23.21



17.76   Holders
    Dividend
    Policy
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number of Securities to be





Number of SecuritiesIssued Upon Exercise of


Weighted Average Price of


Remaining Available forPlan Category

Outstanding Options


Outstanding Stock Options


Future Issuance1999 Stock Plan approved by
    security holders


656,977


$
17.67



696,747Employee Stock Purchase Plan
    approved by security holders


77,837


$
12.89



218,940Stock Option Agreements not by
    approved security holders


377,447


$
39.62



   Recent
    Sales of Unregistered Securities
   31




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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.
  
  Assumes $100
    invested on January 1, 2002 and assumes dividends
    reinvested through December 31, 2006.
  BasePeriod

Years EndingCompany/Index

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06PharmaNet Development Group,
    Inc.

$100

$63.32

$129.56

$289.02

$117.15

$161.49Nasdaq Composite
    Index

$100

$69.13

$103.36

$112.49

$114.88

$126.22Nasdaq Health
    Services

$100

$86.15

$131.73

$166.02

$228.27

$227.97  32




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Item 6.
    Selected
    Financial Data  three-for-two
  2002


2003


2004


2005


2006(In thousands, except per share data)Net RevenueDirect revenue

$
42,800


$
71,610


$
101,229


$
269,622


$
302,384Reimbursed
    out-of-pockets









$
10,665


$
91,884


$
104,571Total net revenue

$
42,800


$
71,610


$
111,894


$
361,506


$
406,955Costs and expensesDirect costs

$
25,858


$
41,791


$
56,250


$
155,900


$
181,556Reimbursable
    out-of-pocket
    expenses









$
10,665


$
91,884


$
104,571Selling, general and administrative
    expenses

$
11,285


$
20,364


$
29,949


$
83,878


$
99,949Impairment of goodwill

















$
7,873Total costs and expenses

$
37,143


$
62,155


$
96,864


$
331,662


$
393,949Earnings from continuing operations

$
5,657


$
9,455


$
15,030


$
29,844


$
13,006Other income (expense)Interest income

$
215


$
271


$
1,346


$
891


$
1,636Interest expense

$
(271
)

$
(416
)

$
(2,691
)

$
(12,017
)

$
(8,115
)Foreign exchange transaction loss,
    net

$
(123
)

$
(1,642
)

$
(1,989
)

$
(849
)

$
(3,342
)Total other income (expense)

$
(179
)

$
(1,787
)

$
(3,334
)

$
(11,975
)

$
(9,821
)Earnings from continuing operations
    before income taxes

$
5,478


$
7,668


$
11,696


$
17,869


$
3,185Income tax expense (benefit)

$
509


$
139


$
368


$
154


$
(3,558
)Earnings from continuing operations
    before minority interest in joint venture

$
4,969


$
7,529


$
11,328


$
17,715


$
6,743Minority interest in joint venture









$
326


$
552


$
691Net earnings from continuing
    operations

$
4,969


$
7,529


$
11,002


$
17,163


$
6,052Earnings (loss) from discontinued
    operations, net of tax

$
2,899


$
4,053


$
8,657


$
(12,384
)

$
(42,077
)Net earnings (loss)

$
7,868


$
11,582


$
19,659


$
4,779


$
(36,025
)Basic earnings (loss) per share:Continuing operations

$
0.47


$
0.64


$
0.73


$
0.97


$
0.33Discontinued operations

$
0.27


$
0.34


$
0.58


$
(0.70
)

$
(2.31
)Net earnings (loss)

$
0.74


$
0.99


$
1.31


$
0.27


$
(1.98
)Diluted earnings (loss) per share:Continuing operations

$
0.44


$
0.60


$
0.70


$
0.94


$
0.33Discontinued operations

$
0.26


$
0.32


$
0.55


$
(0.68
)

$
(2.28
)Net earnings (loss)

$
0.70


$
0.92


$
1.25


$
0.26


$
(1.95
)Shares used in computing
    earnings (loss) per share:Basic


10,565,277



11,751,885



15,047,245



17,701,810



18,221,418Diluted


11,230,839



12,534,537



15,753,815



18,356,030



18,447,048   As of December 31,2002


2003


2004


2005


2006Consolidated balance sheet
    data(1):Cash and cash equivalents

$
8,775


$
59,932


$
34,644


$
38,835


$
53,754Accounts receivable, net

$
12,326


$
19,962


$
73,434


$
91,446


$
109,188Working capital

$
12,784


$
70,646


$
51,446


$
35,209


$
60,836Total assets

$
71,278


$
134,927


$
487,327


$
515,750


$
548,824Long term debt, including current
    portion

$
4,147


$
5,651


$
157,517


$
168,223


$
159,002Stockholders equity

$
60,132


$
149,943


$
172,415


$
282,282


$
258,079     (1)
    
    Excludes assets and liabilities
    from discontinued operations. 33




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.    Overview
      out-of-pocket out-of-pockets, out-of-pocket
  out-of-pocket
   34




---



##### Table of Contents



.
    Critical
    Accounting Estimates
      Revenue and Cost Recognition. fee-for-service fee-for-service units-of-work units-of-work
   35




---



##### Table of Contents



01-14 out-of-pockets out-of-pocket
    Collectibility of Accounts Receivable.
    Income Taxes.
       36




---



##### Table of Contents



Goodwill.
  Impairment of Assets.
  Share-Based Compensation. three-for-two
  Other Estimates.
 37




---



##### Table of Contents



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


181,556



60.0



155,901



57.8Selling, general and
    administrative expenses


99,949



33.1



83,878



31.1Impairment 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



17,716



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
)


(13.9
)


(12,384
)


(4.6
)Net earnings (loss)

$
(36,025
)


(11.9
)%

$
4,779



1.8
%Earnings per share from continuing
    operationsBasic

$
0.33






$
0.97Diluted

$
0.33






$
0.94   Direct
    revenue
  out-of-pocket
      Direct
    Costs
   38




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##### Table of Contents



Gross
    Profit Margins
  quarter-to-quarter, year-to-year
    Selling,
    General and Administrative Expenses     39




---



##### Table of Contents



Interest
    income (expense)
        Foreign
    exchange
      Income
    tax expense
   40




---



##### Table of Contents



non-U.S. non-U.S.
      
    the relative profits generated primarily in the United States,
    Canada and Europe;
    our ability to utilize Canadian tax credits;
    the applicable foreign tax rates then in effect;
    transfer pricing; and
    our ability to generate U.S. taxable income to utilize the NOL
    and thereby release the valuation allowance.  Earnings
    per share
       41




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##### Table of Contents



Results
    of Operations
  Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
    2005


2004(In thousands, except per share data)Direct revenue

$
269,622



100.0
%

$
101,229



100.0
%Direct costs


155,901



57.8



56,250



55.6Selling, general and
    administrative expenses


83,878



31.1



29,949



29.6Impairment of goodwill






0.0







0.0Total other income (expense)


(11,975
)


(4.4
)


(3,334
)


(3.3
)Earnings from continuing
    operations before income taxes


17,869



6.6



11,696



11.5Income tax expense


154



0.0



368



0.4Earnings from continuing
    operations before minority interest in joint venture


17,716



6.6



11,328



11.1Minority interest in joint venture


552



0.2



325



0.3Net earnings from continuing
    operations


17,163



6.4



11,002



10.8Earnings (Loss) from discontinued
    operations, net of tax


(12,384
)


(4.6
)


8,657



8.6Net earnings

$
4,779



1.8
%

$
19,659



19.4
%Earnings per share from continuing
    operations(1)Basic

$
0.97






$
0.73Diluted

$
0.94






$
0.70     (1)
    
    The earnings per share have been adjusted to reflect the May
    2004
    three-for-two
    stock split as a stock dividend.  Direct
    revenue
  out-of-pocket
    
    PharmaNet contributed approximately $152.5 million in
    direct revenue in 2005 compared to zero in 2004 and to a lesser
    extent an increase in early stage revenues at Anapharm; and
    A full year of revenue at Taylor which we acquired in July 2004.    Direct
    costs
   42




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##### Table of Contents



Gross
    profit margins
    Selling,
    general and administrative expenses
              Interest
    income (expense)
       43




---



##### Table of Contents



Income
    tax expense
  non-U.S. non-U.S.
  Earnings
    per share
          Effects
    of Inflation
    Liquidity
    and Capital Resources
   44




---



##### Table of Contents



.
      build-to-suit
 45




---



##### Table of Contents



Contractual
    Obligations
  Payments Due by PeriodLess than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsCredit facility and line of credit
    obligations

$
9,400,000


$



$
9,400,000


$



$
Convertible notes


143,750,000















143,750,000(1
)Interest on convertible notes


58,218,750



3,234,375



6,468,750



6,468,750



42,046,875Capital lease obligations


6,088,826



3,048,211



2,532,187



508,428



Operating lease obligations


142,167,248



18,555,117



33,247,214



27,332,293



63,032,624Purchase obligations


2,687,758



2,429,995



121,300



121,300



15,163Other long-term liabilities
    reflected on the registrants balance sheet under GAAP


227,527



227,527











Total

$
362,540,109


$
27,495,225


$
51,769,451


$
34,430,771


$
248,844,662     (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, August 15, 2014 and
    August 15, 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.   Off
    Balance Sheet Commitments
  Form 10-K
     46




---



##### Table of Contents



New
    Accounting Pronouncements
            Forward-Looking
    Statements
   47




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Market
    risk
  available-for-sale available-for-sale available-for-sale
     48




---



##### 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.    Item 9A.
    Controls
    and Procedures.  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(b)
   49




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##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f).
  Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15
  Item 9B.
    Other
    Information.   50




---



##### Table of Contents



PART III  Item 10.
    Directors
    and Executive Officers of the Registrant and Corporate
    Governance.    Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and
    Management.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   51




---



##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.  ExhibitNumber

Description3.1

Certificate of Incorporation(1)3.2

First Amendment to Certificate of
    Incorporation(1)3.3

Certificate of Correction to
    Certificate of Incorporation(2)3.4

Second Amendment to Certificate of
    Incorporation (filed herewith)3.5

Certificate of Correction to
    Second Amendment to Certificate of Incorporation(4)3.6

Certificate of Designation for
    Series A Junior Participating Preferred Stock(7)3.7

Third Amendment to Certificate of
    Incorporation (filed herewith)3.8

Amended and Restated Bylaws(8)4.1

Form of Common Stock Certificate
    (filed herewith)4.2

Indenture relating to 2.25%
    Convertible Senior Notes due 2024(3)4.3

Form of 2.25% Convertible Senior
    Notes due 2024(3)4.4

Registration Rights Agreement
    relating to 2.25% Convertible Senior Notes due 2024(3)10.1*

Jeffrey P. McMullen Employment
    Agreement(13)10.2*

David Natan Employment Agreement
    (filed herewith)10.3*

Lisa Krinsky Severance
    Agreement(12)10.4*

Arnold Hantman Severance
    Agreement(12)10.5*

Marc LeBel Employment Agreement(10)10.6*

Marc LeBel Amendment to Employment
    Agreement(9)10.7*

Arnold Hantman Employment
    Agreement(9)10.8*

Lisa Krinsky, M.D. Employment
    Agreement(9)10.9

Amended and Restated Credit
    Agreement(9)10.10

First Amendment to the Amended and
    Restated Credit Agreement(12)10.11

Second Amendment to the Amended
    and Restated Credit Agreement(12)10.12

Amended and Restated Security
    Agreement(9)10.13*

2004 Employee Stock Purchase Plan
    (16)10.14*

Amendment to 2004 Employee Stock
    Purchase Plan(16)10.15*

Second Amendment to 2004 Employee
    Stock Purchase Plan(9)10.16*

Amended and Restated 1999 Stock
    Plan (filed herewith)10.17

Shareholder Rights Agreement(7)10.18

Audit Committee Charter (filed
    herewith)10.19*

2004 Acquisition Stock Option
    Plan(5)10.20*

Form of Stock Option Agreement(11)10.21*

Amended and Restated Stock Option
    Agreement (Jeffrey P. McMullen)(11)10.22*

Arnold Golieb Restricted Stock
    Agreement(12)10.23*

Jack Levine Restricted Stock
    Agreement(12)10.24

New Drug Services Amended
    Agreement(12)10.25*

Johane Boucher-Champagne
    Employment Agreement(6)10.26*

Confidential Separation Agreement
    and General Release by and between the Company and Gregory B.
    Holmes(13)10.27

Third Waiver and Third Amendment
    to the Amended and Restated Credit Agreement(13)10.28

Fourth Waiver to Amended and
    Restated Credit Agreement(13)10.29*

Thomas J. Newman, MD Employment
    Agreement (filed herewith)10.30

Fifth Waiver to the Amended and
    Restated Credit Agreement(14) 52




---



##### Table of Contents



ExhibitNumber

Description10.31

Fourth Amendment to the Amended
    and Restated Credit Agreement(14)10.32

Lease and Lease Agreement by and
    between 504 Carnegie Associates Limited Partnership and
    PharmaNet, Inc dated May 1999(14)10.33

Amendment to No. 1 Lease and
    Lease Agreement by and between 504 Carnegie Associates Limited
    Partnership and PharmaNet, Inc. dated May 1999(14)10.34

Amendment No. 2 to Lease and
    Lease Agreement by and between 504 Carnegie Associates Limited
    Partnership and PharmaNet, Inc. dated March 30, 2001(14)10.35

Amendment No. 3 to Lease and
    Lease Agreement by and between 504 Carnegie Associated Limited
    Partnership and PharmaNet, Inc. dated October 1, 2004(14)10.36*

Mark Di Ianni Employment
    Agreement(15)10.37

Form of Director Indemnification
    Agreement (filed herewith)10.38

Form of Executive Officer
    Indemnification Agreement (filed herewith)10.39*

Form of Director Restricted Stock
    Unit Agreement (filed herewith)10.40*

Form of Employee Restricted Stock
    Unit Agreement (filed herewith)10.41*

John P. Hamill Employment
    Agreement  (filed herewith)21

Subsidiaries of PharmaNet
    Development Group, Inc. (filed herewith)23.1

Consent of Grant Thornton LLP
    dated March 21, 2007 (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)
    
    Contained in
    Form SB-2
    filed on August 17, 1999(2)
    
    Contained in
    Form SB-2
    filed on October 5, 2000(3)
    
    Contained in
    Form S-3
    On November 2, 2004(4)
    
    Contained in
    Form 10-Q
    filed on August 4, 2004(5)
    
    Contained in
    Form 8-K
    filed on December 27, 2004(6)
    
    Contained in
    Form 8-K
    filed on May 4, 2006(7)
    
    Contained in
    Form 8-A
    filed on December 28, 2005(8)
    
    Contained in
    Form 8-K
    filed on February 16, 2006(9)
    
    Contained in the
    Form 10-Q
    filed on August 9, 2005  (10)
    
    Contained in the
    Form 10-KSB
    filed on April 1, 2002(11)
    
    Contained in the
    Form 10-K
    filed on March 8, 2005(12)
    
    Contained in the
    Form 10-K
    filed on March 31, 2006(13)
    
    Contained in the
    Form 10-Q
    filed on August 14, 2006(14)
    
    Contained in the
    Form 10-Q
    filed on November 9, 2006(15)
    
    Contained in the
    Form 8-K
    filed on December 15, 2006(16)
    
    Contained in the
    Form S-8
    filed on August 6, 2004 53




---



##### Table of Contents



SIGNATURES
      By:
    /s/  Jeffrey
    P. McMullen      Date:
    March 22, 2007
    /s/  Jack
    LevineJack
    Levine, CPA

Chairman of the Board of Directors

March 22, 2007/s/  Jeffrey
    P. McMullenJeffrey
    P. McMullen

President and Chief Executive
    Officer and Director (Principal Executive Officer)

March 22, 2007/s/  John
    P. HamillJohn
    P. Hamill

Executive Vice President and Chief
    Financial Officer (Principal Financial Officer)

March 22, 2007/s/  David
    NatanDavid
    Natan

Executive Vice President,
    Reporting & Analysis and Chief Accounting Officer
    (Principal Accounting Officer)

March 22, 2007/s/  Rolf
    A. ClassonRolf
    A. Classon

Director

March 22, 2007/s/  Lewis
    R. Elias,
    MDLewis
    R. Elias, MD

Director

March 22, 2007/s/  Arnold
    GoliebArnold
    Golieb

Director

March 22, 2007/s/  David
    LuckingDavid
    Lucking

Director

March 22, 2007/s/  Peter
    G. TombrosPeter
    G. Tombros

Director

March 22, 2007/s/  Per
    Wold-OlsenPer
    Wold-Olsen

Director

March 22, 2007/s/  David
    M. OlivierDavid
    M. Olivier

Director

March 22, 2007  54




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##### Table of Contents



CONTENTS
  PageReport of
    Independent Registered Public Accountant Firm


F-2Report of
    Independent Registered Public Accountant Firm


F-3Consolidated
    Financial StatementsConsolidated
    Balance Sheets


F-4Consolidated
    Statements of Operations


F-5Consolidated
    Statements of Cash Flows


F-6Consolidated
    Statement of Changes in Stockholders Equity


F-8Notes to
    Consolidated Financial Statements


F-10  F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED
    PUBLIC ACCOUNTING FIRM             Considering the Effects of Prior Year
    Misstatements when Quantifying Misstatements in Current Year
    Financial Statements Share Based Payments
        F-2




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED
    PUBLIC ACCOUNTING FIRM                     F-3




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    DECEMBER 31, 2006 AND 2005
 December 31,


December 31,2006


2005(Revised)ASSETSCurrent AssetsCash and cash equivalents

$
45,331,484


$
30,668,417Investment in marketable securities


8,422,699



8,166,285Accounts receivable, net


109,187,958



91,446,190Income tax receivable






7,140,087Loans receivable from stockholders






203,644Deferred income taxes


4,204,977



662,615Prepaid expenses and other current
    assets


9,050,043



11,826,916Construction in progress and land
    expected to be sold in sale-leaseback transaction


15,851,034



2,528,343Assets from discontinued operations


7,176,506



56,787,078Total current assets


199,224,701



209,429,575Property and equipment, net


52,234,890



46,035,118Goodwill, net


266,972,827



274,849,217Other intangibles, net


29,196,942



32,179,818Other assets, net


8,371,178



10,043,368Total assets

$
556,000,538


$
572,537,096LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable

$
10,312,359


$
7,071,815Accrued liabilities


31,756,070



20,810,511Purchase consideration due to
    stockholders






2,000,000Client advances, current portion


67,857,356



67,518,528Income taxes payable


2,398,991



Line of credit, current portion






17,000,000Capital lease obligations and notes
    payable, current portion


3,036,407



3,032,818Liabilities associated with assets
    held for sale


15,851,034



Liabilities from discontinued
    operations


4,195,262



9,000,389Total current liabilities


135,407,479



126,434,061Client advances


2,785,888



3,721,705Deferred income taxes


2,202,096



11,159,298Line of credit


9,400,000



Capital lease obligations and notes
    payable


2,815,862



4,439,7942.25% Convertible senior notes
    payable, due 2024


143,750,000



143,750,000Minority interest in joint venture


1,560,106



750,639Commitments and contingenciesStockholders equityPreferred stock. $0.10 par
    value, 5,000,000 shares authorized, none issued






Common stock, $0.001 par
    value, 40,000,000 shares authorized, 18,546,203 shares
    and 18,493,364 shares issued and outstanding as of
    December 31, 2006 and 2005


18,546



18,493Additional paid-in capital


236,540,036



242,353,059Retained earnings


12,636,265



48,660,835Deferred compensation






(531,408
)Accumulated other comprehensive
    earnings


8,884,260



4,224,147Common stock held in treasury, at
    cost, zero shares and 606,300 shares held at
    December 31, 2006 and 2005, respectively






(12,443,527
)Total stockholders equity


258,079,107



282,281,599Total liabilities and
    stockholders equity

$
556,000,538


$
572,537,096    F-4




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
    2004 Twelve Months Ended December 31,2006


2005


2004(Revised)


(Revised)Net revenueDirect revenue

$
302,384,611


$
269,622,415


$
101,228,596Reimbursed
    out-of-pockets


104,570,757



91,883,814



10,665,311Total net revenue


406,955,368



361,506,229



111,893,907Costs and expensesDirect costs


181,556,250



155,900,530



56,249,713Reimbursable
    out-of-pocket
    expenses


104,570,757



91,883,814



10,665,311Selling, general and
    administrative expenses


99,949,443



83,877,730



29,948,896Impairment of goodwill


7,873,000







Total costs and expenses


393,949,450



331,662,074



96,863,920Earnings from continuing operations


13,005,918



29,844,155



15,029,987Other income (expense)Interest income


1,635,771



890,646



1,345,872Interest expense


(8,114,581
)


(12,016,506
)


(2,690,995
)Foreign exchange transaction loss,
    net


(3,341,930
)


(849,108
)


(1,988,858
)Total other income (expense)


(9,820,740
)


(11,974,968
)


(3,333,981
)Earnings from continuing
    operations before income taxes


3,185,178



17,869,187



11,696,006Income tax expense (benefit)


(3,557,552
)


153,606



368,496Earnings from continuing
    operations before minority interest in joint venture


6,742,730



17,715,581



11,327,510Minority interest in joint venture


690,527



552,401



325,942Net earnings from continuing
    operations


6,052,203



17,163,180



11,001,568Earnings (loss) from discontinued
    operations, net of tax


(42,076,773
)


(12,384,375
)


8,657,323Net earnings (loss)

$
(36,024,570
)

$
4,778,805


$
19,658,891Basic earnings (loss) per share:Continuing operations

$
0.33


$
0.97


$
0.73Discontinued operations

$
(2.31
)

$
(0.70
)

$
0.58Net earnings (loss)

$
(1.98
)

$
0.27


$
1.31Diluted earnings (loss) per share:Continuing operations

$
0.33


$
0.94


$
0.70Discontinued operations

$
(2.28
)

$
(0.68
)

$
0.55Net earnings (loss)

$
(1.95
)

$
0.26


$
1.25Shares used in computing earnings
    (loss) per share:Basic


18,221,418



17,701,810



15,047,245Diluted


18,447,048



18,356,030



15,753,815    F-5




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 2006


2005


2004(Revised)


(Revised)Cash flows from operating
    activities:Net earnings (loss)

$
(36,024,570
)

$
4,778,805


$
19,658,891Loss (earnings) from discontinued
    operations


42,076,773



12,384,375



(8,657,323
)Adjustments to reconcile net
    earnings (loss) to net cash provided by operating activities:Depreciation and amortization


14,415,409



14,476,453



5,184,869Amortization and write-offs of
    deferred debt issuance costs


2,826,529



5,066,597



501,152Impairment of goodwill


7,873,000







Loss on disposal of property and
    equipment


159,628



141,664



39,116Minority interest


690,527



552,401



325,942Provision for bad debts


2,278,512



569,384



417,151Noncash compensation 
    reduction of note receivable


200,000



200,000



200,000Share-based compensation expense


4,275,203



460,998



168,449Tax benefit resulting from exercise
    of stock options






4,612,417



1,120,232Changes in assets and liabilities:Accounts receivable


(20,020,280
)


(18,581,343
)


(7,207,969
)Income tax receivable


6,688,021



(143,967
)


1,392,796Prepaid expenses and other current
    assets


2,776,873



(5,976,445
)


153,326Other assets


(733,433
)


(1,105,167
)


326,731Accounts payable


3,240,544



(4,492,344
)


1,104,863Accrued liabilities


8,802,409



6,071,907



2,555,473Client advances


(596,989
)


20,933,801



(965,415
)Income tax payable










520,813Deferred income taxes


(8,717,246
)


(2,094,839
)


67,002Total adjustments


24,158,707



20,691,517



5,904,531Net cash provided by operating
    activities  continuing operations


30,210,910



37,854,697



16,906,099Net cash provided by operating
    activities  discontinued operations


1,736,783



11,578,415



213,474Net cash provided by operating
    activities


31,947,693



49,433,112



17,119,573Cash flows from investing
    activities:Cash consideration for
    acquisitions, net of cash received










(250,122,197
)Additional purchase price
    consideration paid relating to acquisitions


(2,000,000
)


(5,832,838
)


(150,000
)Purchase of property and equipment


(13,529,132
)


(11,652,308
)


(5,358,476
)Purchase of property and equipment
    related to assets held for sale


(13,322,691
)


(2,528,343
)


Proceeds from the disposal of
    property and equipment


12,555



126,280



106,552Net change in long term investments
    and marketable securities


(256,414
)


1,569,423



(5,821,441
)Change in loans extended to
    stockholders






(16,356
)


3,582Net cash used in investing
    activities  continuing operations


(29,095,682
)


(18,334,142
)


(261,341,980
)Net cash provided by (used in)
    investing activities  discontinued operations


232,633



(10,307,095
)


(19,839,658
)Net cash used in investing
    activities


(28,863,049
)


(28,641,237
)


(281,181,638
)Cash flows from financing
    activities:Borrowings on lines of credit


8,000,000



66,000,000



15,000,000Payments on lines of credit


(15,600,000
)


(54,000,000
)


(10,000,000
)Principal additions to long term
    debt










9,000,000Principal payments on long term debt






(120,000,000
)


(9,000,000
)Change in capital lease obligations
    and notes payable


(2,711,885
)


(3,415,937
)


(2,019,880
)Proceeds from sale-leaseback
    arrangement


15,851,034







Proceeds from the issuance of long
    term debt










120,000,000Proceeds from the issuance of
    convertible senior notes










143,750,000Debt issue costs attributable to
    financing instruments


(420,906
)


(1,291,872
)


(11,226,762
)Dividend payment made to
    non-controlling interest






(90,842
)


Purchase of treasury stock






(12,443,527
)


(24,952,600
)Proceeds from stock issued under
    employee stock purchase and option plans


5,237,819



2,866,292



1,558,826Net proceeds from secondary public
    stock offering






108,049,969



Net cash provided by (used in)
    financing activities


10,356,062



(14,325,917
)


232,109,584Net effect of exchange rate changes
    on cash


1,222,361



(706,126
)


840,614Net increase (decrease) in cash and
    cash equivalents


14,663,067



5,759,832



(31,111,867
)Cash and cash equivalents at
    beginning of year


30,668,417



24,908,585



56,020,452Cash and cash equivalents at end of
    year

$
45,331,484


$
30,668,417


$
24,908,585    F-6




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS (Continued)
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  2006


2005


2004(Revised)


(Revised)Supplemental disclosures:Interest paid

$
5,299,886


$
10,791,781


$
1,213,063Income taxes paid

$
4,165,159


$
4,743,267


$
2,780,767Income taxes recovered

$
9,478,000


$
4,482,940


$
1,655,891Supplemental disclosures of
    non-cash investing and finance activities:Fair value of net assets
    (liabilities) assumed in connection with acquisition of
    businesses

$



$



$
8,331,630Additional purchase considerations
    related to the acquisition of a business

$



$
2,000,000


$
15,605,255Common stock issued in connection
    with acquisition of business or additional consideration

$
500,000


$
2,000,000


$
19,905,135Professional fees accrued in
    connection with acquisition of business

$



$



$
165,534Change in the valuation of
    identifiable intangible assets related to the acquisition of a
    business

$



$
2,142,000


$
Restricted stock units granted as
    long term incentive compensation to executives and board members

$
9,325,841


$
1,677,061


$
Common stock forfeited in lieu of
    cash payment related to option exercises

$



$
645,000


$
2,269,125Forfeiture of common stock issued
    as deferred compensation

$



$
768,121


$
480,464Note receivable relieved in lieu of
    bonus payment

$
200,000


$
200,000


$
200,000Capital lease obligations incurred

$
1,091,542


$
2,001,104


$
4,393,230    F-7




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  Accumulated


CommonAdditional


Retained





Other


StockCommon Stock


Paid-In


Earnings


Deferred


Comprehensive


Held inShares


Par Value


Capital


(Deficit)


Compensation


Earnings


Treasury


TotalBalances 
    December 31, 2003


14,985,833


$
14,986


$
123,854,436


$
24,223,139


$
(732,380
)

$
2,583,091


$



$
149,943,272Comprehensive earnings:Net earnings














19,658,891















19,658,891Foreign currency translation






















3,013,122







3,013,122Total comprehensive earnings






























22,672,013Issuance of common stock in
    connection with exercise of stock options and warrants


447,135



447



1,558,379



















1,558,826Issuance of common stock as
    additional purchase consideration for CPA earnout


75,354



75



1,999,925



















2,000,000Issuance of common stock in
    connection with Taylor Technology acquisition


133,595



134



3,820,683



















3,820,817Issuance of common stock in
    connection with PharmaNet acquisition


258,971



259



10,075,227



















10,075,486Stock options granted in connection
    with PharmaNet acquisition










6,008,832



















6,008,832Amortization of restricted common
    stock issued as deferred compensation


















168,449











168,449Forfeiture of restricted common
    stock issued as deferred compensation


(27,000
)


(27
)


(480,437
)






480,464











Repurchase and retirement of common
    stock


(820,000
)


(820
)


(24,951,780
)


















(24,952,600
)Tax benefit resulting from the
    exercise of stock options










1,120,232



















1,120,232Balances 
    December 31, 2004


15,053,888


$
15,054


$
123,005,497


$
43,882,030


$
(83,467
)

$
5,596,213


$



$
172,415,327Comprehensive earnings:Net earnings














4,778,805















4,778,805Foreign currency translation






















(1,372,066
)






(1,372,066
)Total comprehensive earnings






























3,406,739Issuance of common stock in
    connection with exercise of stock options and warrants


232,408



232



1,212,674



















1,212,906Issuance of common stock in
    connection with Employee Stock Purchase Plan


55,039



55



1,653,333



















1,653,388Proceeds from issuance of common
    stock in connection with public offering


3,078,000



3,078



110,210,702



















110,213,780Costs related to public offering










(2,163,811
)


















(2,163,811
)Stock options granted in connection
    with PharmaNet acquisition










913,382



















913,382Issuance of common stock as
    additional purchase consideration for CPA earnout


53,740



54



1,999,946



















2,000,000Issuance of restricted common stock
    as deferred compensation


52,115



52



1,677,008







(1,677,060
)










Amortization of restricted common
    stock issued as deferred compensation


















460,998











460,998Forfeiture of restricted common
    stock issued as deferred compensation


(31,826
)


(32
)


(768,089
)






768,121











Repurchase of common stock


























(12,443,527
)


(12,443,527
)Tax benefit resulting from exercise
    of stock options










4,612,417



















4,612,417  F-8




---



##### Table of Contents



PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
    EQUITY  (Continued)
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
   Accumulated


CommonAdditional


Retained





Other


StockCommon Stock


Paid-In


Earnings


Deferred


Comprehensive


Held inShares


Par Value


Capital


(Deficit)


Compensation


Earnings


Treasury


TotalBalances 
    December 31, 2005


18,493,364


$
18,493


$
242,353,059


$
48,660,835


$
(531,408
)

$
4,224,147


$
(12,443,527
)

$
282,281,599Cumulative effect adjustments under
    SAB No. 108










(2,851,057
)










2,700,684







(150,373
)Balances at January 1, 2006 as
    adjusted


18,493,364


$
18,493


$
239,502,002


$
48,660,835


$
(531,408
)

$
6,924,831


$
(12,443,527
)

$
282,131,226Comprehensive loss:Net loss














(36,024,570
)














(36,024,570
)Foreign currency translation






















1,959,429







1,959,429Total comprehensive loss






























(34,065,141
)Issuance of common stock in
    connection with exercise of stock options and warrants


322,324



322



3,662,761



















3,663,083Issuance of common stock in
    connection with Employee Stock Purchase Plan


176,021



176



2,331,730



















2,331,906Issuance of common stock as
    additional purchase consideration for earnout


33,711



34



499,966



















500,000Issuance of common stock related to
    vesting of restricted share and unit grants


170,219



170



(170
)


















Repurchase and retirement of common
    stock related to vesting of restricted share unit grants


(43,126
)


(43
)


(757,127
)


















(757,170
)Share-based compensation expense
    recognized on restricted share and unit grants










3,167,626



















3,167,626Share-based compensation expense
    recognized with adoption of FAS 123R










1,107,577



















1,107,577Adjustment required with adoption
    of FAS 123R










(531,408
)






531,408











Retirement of common stock held in
    treasury


(606,300
)


(606
)


(12,442,921
)














12,443,527



Balances 
    December 31, 2006


18,546,203


$
18,546


$
236,540,036


$
12,636,265


$



$
8,884,260


$



$
258,079,107   F-9




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE A 
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      three-for-two
        Revenue
    and Cost Recognition
  time-and-material
  out-of-pockets out-of-pocket out-of-pockets
 F-10




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  out-of-pockets out-of-pocket
      Collectibility
    of Accounts Receivable
          Income
    Taxes
       F-11




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Impairment
    of Assets
      Goodwill
    Share-Based
    Compensation
    OTHER
    ACCOUNTING POLICIES
  Principles
    of Consolidation
   F-12




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash
    and Cash Equivalents
    Investment
    in Marketable Securities
  available-for-sale available-for-sale available-for-sale
      Property
    and Equipment
    Building

40 yearsFurniture and fixtures

7 yearsMachinery, equipment and software

3-7 yearsLeasehold improvements

Shorter of remaining life of asset
    or remaining term of the lease (average 3.25 years)   Goodwill
    and Intangible Assets
   F-13




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
               F-14




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Goodwill, net at December 31,
    2004

$
268,386,604Revaluation of separately
    identifiable intangible assets related to PharmaNet acquisition


2,142,000Earnout relating to NDS acquisition


2,000,000Other adjustments


2,320,613Goodwill, net at December 31,
    2005

$
274,849,217Goodwill impairment


(7,873,000
)Foreign exchange translation
    adjustment


(3,390
)Goodwill, net at December 31,
    3006

$
266,972,827     December 31, 2006


December 31, 2005Weighted Average


Gross





GrossAmortization Period


Carrying


Accumulated


Carrying


Accumulated(Years)


Amount


Amortization


Amount


AmortizationIntangible assets subject to
    amortization:Internally-developed software


5.0


$
454,000


$
(221,386
)

$
454,000


$
(130,586
)Subject Database


4.0



900,000



(900,000
)


900,000



(843,750
)Contracts and customer relationships


2.5



1,192,000



(1,192,000
)


1,192,000



(1,039,216
)Methodologies


4.1



2,568,000



(2,134,026
)


2,568,000



(1,945,878
)Technology


5.0



3,859,000



(1,562,895
)


3,859,000



(791,095
)Employment and non-compete
    agreements


3.4



12,077,000



(3,892,751
)


12,077,000



(2,169,657
)Subtotal






21,050,000



(9,903,058
)


21,050,000



(6,920,182
)Intangible assets not subject to
    amortizationTrade names






18,050,000







18,050,000



Total





$
39,100,000


$
(9,903,058
)

$
39,100,000


$
(6,920,182
)    F-15




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007

$
2,755,0002008


2,755,0002009


2,622,0002010


1,603,0002011


1,412,000Thereafter


$
11,147,000   Concentration
    of Credit Risk
    Fair
    Value of Financial Instruments
    Earnings
    Per Share
    three-for-two
   F-16




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Share-based
    Compensation
         F-17




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        2005


2004Net earnings from continuing
    operations:As reported

$
17,163,180


$
11,001,568Pro forma


9,322,491



7,019,924Basic earnings per share:As reported

$
0.97


$
0.73Pro forma


0.53



0.47Diluted earnings per share:As reported

$
0.94


$
0.70Pro forma


0.51



0.45        F-18




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Form 10-K
    
    the appointment of John P. Hamill to serve as Executive Vice
    President, Chief Financial Officer, Treasurer and Secretary of
    the Company on August 24, 2006, he received an immediate
    grant of 21,000 RSUs which vest in equal increments on
    December 31st and June 30th over three (3) years
    and an immediate grant of 25,000 RSUs which vests only if the
    Company meets or exceeds the 2008 performance conditions as
    established by the Companys Compensation Committee. As of
    December 31, 2006, no compensation expense has been
    recorded on these 25,000 RSUs, and they have not been included
    in earnings per share as of December 31, 2006 as the
    contingencies have not been met and it is not probable at this
    time that the condition will be met.
    the appointment of Dr. Thomas J. Newman to serve as
    Executive Vice President, Late Stage Development of the Company,
    on August 24, 2006, Dr. Newman received an immediate
    grant of 10,000 RSUs which shall vest on December 31st and
    June 30th over three years.
    as previously disclosed, in accordance with the Companys
    2006 compensation for non-employee directors, on August 24,
    2006, the Company issued to each non-employee director $125,000
    worth of the Companys RSUs which amount is based upon the
    Companys closing stock price on August 24, 2006 of
    $17.25. In addition, as previously disclosed, the Company also
    issued $62,500 worth of RSUs to the Chairman of the Board of
    Directors as consideration for serving in that capacity. As
    such, based upon those dollar amounts, each of the four
    non-employee directors received 7,246 RSUs, which shall vest in
    equal increments on December 31st and the date of the
    Companys next annual meeting. Based upon the dollar amount
    stated above, the Companys Chairman received 3,623 RSUs
    which have the same vesting schedule. All director RSU grants
    are being amortized on a straight line basis from grant date to
    June 2006.     F-19




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Legal
    Costs
    Advertising
    Expenses
    Comprehensive
    Earnings
    Foreign
    Currency Translation
    Volume
    Rebates
   F-20




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Reclassifications
    New
    Accounting Pronouncements
           F-21




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Investments
    NOTE B 
    DISCONTINUED OPERATIONS
      Impairment
    of Goodwill
    Impairment
    of Long-lived Assets
   F-22




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Asset
    Retirement Obligations and Accrued Charges
          F-23




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Balance at





Cash


Balance atDecember 31,


Accrued


and Stock


December 31,2005


Charges


Payments


2006Severance and healthcare costs

$
3,060,000


$
2,616,038


$
4,255,347


$
1,420,691Demolition, asbestos and related
    costs






1,007,319



307,319



700,000Purchase consideration due to
    stockholders






1,000,000



1,000,000



Contract termination costs






1,363,293



193,159



1,170,134$
3,060,000


$
5,986,650


$
5,755,825


$
3,290,825     Income
    Taxes
    Condensed
    Financial Information
   F-24




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,


December 31,2006


2005Assets:Accounts receivable, net

$
3,572,556


$
26,425,479Income tax receivable


317,331



Prepaid expenses and other assets






1,608,866Property and equipment, primarily
    land and building held for sale at December 31, 2006


3,286,619



24,701,651Goodwill, net






4,051,082Assets from discontinued operations

$
7,176,506


$
56,787,078Liabilities:Accounts payable

$
462,421


$
4,598,247Accrued liabilities


3,307,994



4,311,432Client advances


424,847



90,710Liabilities from discontinued
    operations

$
4,195,262


$
9,000,389    F-25




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year EndedDecember 31,2006


2005


2004Net revenue:Direct revenue

$
7,490,287


$
65,128,143


$
47,690,777Reimbursed
    out-of-pocket
    expenses


957,042



2,958,576



Total net revenue


8,447,329



68,086,719



47,690,777Costs and expenses:Impairment of long-lived assets


18,962,838







Goodwill impairment


4,051,082



20,315,300



Purchase consideration due to
    stockholders


1,000,000



4,000,000



4,000,000Salary, severance and healthcare
    costs


4,620,130



3,060,000



Demolition costs


1,007,319







Contract termination costs


1,363,293







Other costs and expenses


20,614,694



48,752,909



29,203,379Total costs and expenses


51,619,356



76,128,209



33,203,379Interest income


14,420







Earnings (loss) before income taxes


(43,157,607
)


(8,041,490
)


14,487,398Income tax (benefit) expense


(1,080,834
)


4,342,885



5,830,075Earnings (loss) from discontinued
    operations

$
(42,076,773
)

$
(12,384,375
)

$
8,657,323Earnings (loss) per share:Basic

$
(2.31
)

$
(0.70
)

$
0.58Diluted

$
(2.28
)

$
(0.68
)

$
0.55Shares used in computing (loss)
    per share:Basic


18,221,418



17,701,801



15,047,245Diluted


18,447,048



18,356,030



15,753,815     NOTE C 
    MAJOR CUSTOMERS
     F-26




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE D 
    ACCOUNTS RECEIVABLE
    2006


2005Accounts receivable 
    billed

$
54,595,145


$
52,697,505Accounts receivable 
    unbilled


55,514,828



38,950,780Less: allowance for doubtful
    accounts


922,015



202,095$
109,187,958


$
91,446,190     Allowance forDoubtfulAccountsBalance 
    December 31, 2003

$
299,372Acquisitions


110,2832004 provisions


417,1512004 reductions


(435,013
)Balance 
    December 31, 2004

$
391,7932005 provision


569,3842005 reductions


(759,082
)Balance 
    December 31, 2005

$
202,0952006 provision


2,278,5122006 reductions


(1,558,592
)Balance 
    December 31, 2006

$
922,015     NOTE E 
    RELATED PARTY TRANSACTIONS
   F-27




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005


2004Salaries and benefits

$
58,277


$
326,306


$
290,996Contract Labor






115,343



159,408$
58,277


$
441,649


$
450,404   Loans
    Receivable from Officers/Stockholders
    Note Receivable
    from Minority Interest
    NOTE F 
    PROPERTY AND EQUIPMENT
    2006


2005Land and Buildings

$
2,073,570


$
4,569,507Furniture and Fixtures


12,358,265



10,719,690Leasehold improvements


23,838,063



14,617,765Machinery and equipment


37,311,315



32,713,147Computer hardware and software


19,122,307



18,702,70094,703,520



81,322,809Less: accumulated depreciation


(42,468,630
)


(35,287,691
)$
52,234,890


$
46,035,118    F-28




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Assets
    Held For Sale
  build-to-suit Accounting for
    Leases:
    Sale-Leaseback
    Transaction Involving Real Estate.
    December 31,

December 31,2006

2005Construction in progress and land
    expected to be sold in sale-leaseback transaction

$
15,851,034


$
2,528,343   NOTE G 
    ACCRUED LIABILITIES
    2006


2005Salaries, bonuses, and benefits

$
12,513,762


$
8,560,198Severance






765,000Professional fees


2,631,803



2,525,808Rebates


1,016,838



144,262Out of pocket expenses and grants


3,747,633



Deferred rent


5,541,346



2,039,618Interest


1,228,687



1,246,948Value added tax


1,233,897



1,609,404PharmaNet 401(k) plan


536,652



544,652Other


3,305,452



3,374,621$
31,756,070


$
20,810,511   NOTE H 
    DEBT AND CAPITAL LEASES
  Convertible
    Senior Notes Payable
   F-29




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Credit
    Facility
           F-30




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             F-31




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Capital
    Leases Obligations, Credit Facility, Convertible Senior Notes
    and Notes Payable
    2006


2005Capital lease obligations

$
5,624,742


$
7,016,621Credit facility


9,400,000



17,000,000
(1)Convertible senior notes


143,750,000



143,750,000Notes payable  other


227,527
(2)


455,991159,002,269



168,222,612Less: current portion


3,036,407



20,032,818Long-term portion

$
155,965,862


$
148,189,794    (1)
    Credit Facility was classified as a current liability for the
    period ended December 31, 2005.(2)
    Notes payable  other of $227,527 is comprised of a
    promissory note payable to the former shareholders of a Canadian
    subsidiary, including interest accrued at the Bank of
    Montreals prime rate plus 2%, with the remaining balance
    payable on July 7, 2007.    December 31,2006


2005Equipment

$
17,544,504


$
16,486,914Less: accumulated depreciation


7,751,641



6,416,757$
9,792,863


$
10,070,157     Amount2007

$
3,048,2112008


1,496,5102009


1,035,6772010


476,5122011 and thereafter


31,916Total minimum lease payments


6,088,826Less: amount representing interest


464,084Present value of minimum lease
    payments


5,624,742Less: current portion


3,036,407Long  term obligation
    under capital leases

$
2,588,335  F-32




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE I 
    COMMITMENTS AND CONTINGENCIES
  Leases
    2007

$
18,555,1172008


17,768,5732009


15,478,6412010


14,693,0502011


12,639,243Thereafter


63,032,624$
142,167,248     Litigation
    and Inquiries
       F-33




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           F-34




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employment
    Agreements
  2007-2008.
    Employee
    Stock Purchase Plan and PharmaNet 401(k) Plan
      NOTE J 
    INCOME TAXES
   F-35




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005


2004Current:Federal

$
210,283


$
(3,690,158
)

$
(997,770
)Foreign


6,168,257



7,042,116



876,479State


151,663



1,565,897



(329,827
)Deferred


(10,087,755
)


(4,764,249
)


819,614$
(3,557,552
)

$
153,606


$
368,496     Deferred
    Tax Asset (Liability)  Current
  2006


2005Accounts receivable

$
647,742


$
303,505Accrued expenses


3,710,715



1,199,798Prepaid expenses


(460,019
)


(746,433
)Net temporary differences due to
    conversion to accrual basis from cash basis


296,697



(84,720
)Capital loss carryforwards


684



658Other


9,158



(10,193
)Net current asset

$
4,204,977


$
662,615  F-36




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Deferred
    Tax Asset (Liability)  Long Term
  2006


2005Research and development tax
    credits carryforwards

$
23,771,706


$
17,294,841Net operating loss carryforwards


17,893,895



2,580,124Deferred compensation


1,238,355



(8,593
)Deferred rent


966,541



682,664Deferred revenue


123,395



FAS 123R compensation


216,388



New Jersey alternative minimum
    assessment tax credits


792,295



792,295Advance payments


148,955



(312,607
)Depreciation and amortization


(4,514,532
)


(6,579,140
)Deferred tax liability, research
    and development credits


(4,438,101
)


(5,269,958
)Foreign currency translation
    adjustment






(2,700,684
)Acquired intangible assets


(14,475,931
)


(12,477,363
)Lease obligations


1,697,788



Valuation allowance (domestic)


(15,309,356
)


Valuation allowance (foreign)


(11,617,400
)


(5,160,877
)Foreign deferreds


1,303,906



Net non-current (liability)

$
(2,202,096
)

$
(11,159,298
)   2006


2005


2004Income taxes at U.S. statutory rate

$
1,115,000


$
6,254,000


$
4,094,000State income taxes, net of federal
    benefit


(94,000
)


982,000



611,000Permanent differences and other


42,000



(415,000
)


80,000Tax on foreign income which
    differs from U.S. statutory rate


(4,762,000
)


(1,848,000
)


Cumulative effect of statutory
    rate change


(1,137,000
)






Research and development tax
    credits


(1,023,000
)


(5,283,000
)


(4,408,000
)Valuation allowance (domestic)


2,334,000







Valuation allowance (foreign)


(33,000
)


463,000



(9,000
)$
(3,558,000
)

$
153,000


$
368,000        F-37




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            2006


2005


2004United States

$
(24,268,676
)

$
(10,514,790
)

$
(1,381,910
)Foreign


27,453,854



28,383,977



13,077,916$
3,185,178


$
17,869,187


$
11,696,006   NOTE K 
    EQUITY
  Secondary
    Public Offering
    Shareholders
    Rights Plan
   F-38




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Share-Based
    Compensation
           F-39




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Weighted-Weighted-


AverageAverage


RemainingNumber of


Exercise


ContractualOptions


Price


LifeOutstanding at beginning of year


2,323,064


$
27.07



4.80Granted






Exercised


322,324


$
11.37Forfeited


966,316


$
33.80Outstanding at end of year


1,034,424


$
25.68



3.81Exercisable at end of year


1,034,424


$
25.68



3.81       Weighted AverageNumber of


Grant DateOptions


Fair ValueNonvested at beginning of year


51,583


$
32.44Granted






Vested


51,583


$
32.44Forfeited






Nonvested at end of year






  F-40




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted-AverageNumber of


Grant-DateRSUs


Fair ValueNonvested at beginning of year


20,289


$
32.18Granted


485,632


$
19.21Vested


190,508


$
19.98Forfeited






Nonvested at end of year


315,413


$
19.58     Other
      NOTE L 
    BUSINESS COMBINATIONS
  PharmaNet,
    Inc.
        agreed-upon
 F-41




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Taylor
    Technology, Inc.
           F-42




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE M 
    GEOGRAPHIC INFORMATION
    2006


2005


2004United States

$
136,046,995


$
123,147,328


$
25,643,775Canada


85,696,724



90,812,194



76,100,669Europe


78,615,686



54,945,982



3,169,942Rest of World


6,853,630



6,138,933



307,213,035



275,044,437



104,914,386Less: intercompany eliminations


4,828,424



5,422,022



3,685,790Consolidated direct revenue

$
302,384,611


$
269,622,415


$
101,228,596   Property
    and equipment, net
  2006


2005United States

$
20,050,495


$
15,523,293Canada


23,723,223



23,644,636Europe


7,414,851



5,932,362Rest of world


1,046,321



934,827$
52,234,890


$
46,035,118     NOTE N 
    SEGMENT REPORTING
      F-43




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Early Stage


Late Stage


Other ReconcilingDevelopment


Development


Items(1)


TotalDirect revenue2006

$
106,975,586


$
195,409,025






$
302,384,6112005

$
112,093,006


$
157,529,409






$
269,622,4152004

$
87,353,687


$
13,874,909






$
101,228,596Depreciation and
    amortization(2)2006

$
6,831,837


$
7,583,572






$
14,415,4092005

$
6,562,159


$
7,914,294






$
14,476,4532004

$
4,891,500


$
293,369






$
5,184,869Goodwill impairment2006

$
7,873,000










$
7,873,0002005














2004














Operating income2006

$
4,860,397


$
29,189,705


$
(21,044,184
)

$
13,005,9182005

$
24,876,063


$
17,242,117


$
(12,274,025
)

$
29,844,1552004

$
20,516,610


$
1,424,213


$
(6,910,836
)

$
15,029,987Interest revenue2006

$
316,269


$
1,283,245


$
36,257


$
1,635,7712005

$
381,364


$
237,496


$
271,786


$
890,6462004

$
254,981






$
1,090,891


$
1,345,872Interest expense2006

$
356,590


$
132,139


$
7,625,852


$
8,114,5812005

$
364,797


$
15,621


$
11,636,088


$
12,016,5062004

$
366,244






$
2,324,751


$
2,690,995Total
    assets(3)2006

$
138,632,692


$
400,233,717


$
9,957,623


$
548,824,0322005

$
128,922,959


$
361,628,139


$
25,198,920


$
515,750,0182004

$
110,706,181


$
347,993,634


$
28,626,812


$
487,326,627Capital expenditures2006

$
19,819,323


$
8,124,042






$
27,943,3652005

$
11,252,276


$
5,049,614






$
16,301,8902004

$
9,429,090


$
322,616






$
9,751,706     (1)
    
    Represents corporate allocations.(2)
    
    The early stage segment was housed at the Companys
    corporate headquarters in Miami in 2005 and 2004. Depreciation
    associated with the area used for corporate headquarters is
    considered immaterial and has been allocated to the early stage
    segment.(3)
    
    Excludes assets of discontinued operations. F-44




---



##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE O 
    QUARTERLY FINANCIAL DATA (unaudited)
    Consolidated
    Statement of Operations for the Year 2006
  31-Mar


30-Jun


30-Sep


31-Dec


YTDNet revenueDirect revenue

$
74,423,994


$
72,837,375


$
76,018,774


$
79,104,468


$
302,384,611Reimbursed
    out-of-pockets


29,076,785



23,806,956



27,235,490



24,451,526



104,570,757Total net revenue


103,500,779



96,644,331



103,254,264



103,555,994



406,955,368Costs and expensesDirect costs


45,328,662



44,785,489



45,769,899



45,672,200



181,556,250Reimbursable
    out-of-pocket
    expenses


29,076,785



23,806,956



27,235,490



24,451,526



104,570,757Selling, general and administrative
    expenses


22,858,685



26,744,566



24,337,454



26,008,738



99,949,443Impairment of goodwill






7,873,000











7,873,000Total costs and expenses


97,264,132



103,210,011



97,342,843



96,132,464



393,949,450Earnings (loss) from continuing
    operations


6,236,647



(6,565,680
)


5,911,421



7,423,530



13,005,918Other income (expense)Interest income


345,478



551,025



153,557



585,711



1,635,771Interest expense


(1,776,241
)


(2,979,861
)


(1,676,517
)


(1,681,962
)


(8,114,581
)Foreign exchange transaction gain
    (loss), net


(526,568
)


(1,828,243
)


(647,315
)


(339,804
)


(3,341,930
)Total other income (expense)


(1,957,331
)


(4,257,079
)


(2,170,275
)


(1,436,055
)


(9,820,740
)Earnings (loss) from continuing
    operations before income taxes


4,279,316



(10,822,759
)


3,741,146



5,987,475



3,185,179Income tax expense
    (benefit)(1)


786,215



(7,199,438
)


538,771



2,316,900



(3,557,552
)Earnings (loss) from continuing
    operations before minority interest in joint venture


3,493,101



(3,623,321
)


3,202,375



3,670,575



6,742,730Minority interest in joint venture


188,786



105,177



222,835



173,729



690,527Net earnings (loss) from continuing
    operations


3,304,315



(3,728,498
)


2,979,540



3,496,846



6,052,203Loss from discontinued operations,
    net of tax
    (2)


(7,438,695
)


(15,986,568
)


(3,242,289
)


(15,409,221
)


(42,076,773
)Net loss

$
(4,134,380
)

$
(19,715,066
)

$
(262,749
)

$
(11,912,375
)

$
(36,024,570
)     (1)
    
    Includes a valuation allowance of $2,629,968 charged to income
    tax expense (benefit) during the fourth quarter of 2006.(2)
    
    Includes a valuation allowance of $12,679,388 charged to
    discontinued operations during the fourth quarter of 2006. F-45




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##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidated
    Statement of Operations for the Year 2005
  31-Mar


30-Jun


30-Sep


31-Dec


YTDNet revenueDirect revenue

$
59,504,647


$
61,658,477


$
71,890,582


$
76,568,709


$
269,622,415Reimbursed
    out-of-pockets


19,461,808



24,025,879



21,852,492



26,543,635



91,883,814Total net revenue


78,966,455



85,684,356



93,743,074



103,112,344



361,506,229Costs and expensesDirect costs


36,159,912



35,830,735



40,099,096



43,810,787



155,900,530Reimbursable
    out-of-pocket
    expenses


19,462,356



24,025,331



21,852,492



26,543,635



91,883,814Selling, general and administrative
    expenses


18,658,191



21,873,347



20,166,287



23,179,905



83,877,730Total costs and expenses


74,280,459



81,729,413



82,117,875



93,534,327



331,662,074Earnings from continuing operations


4,685,996



3,954,943



11,625,199



9,578,017



29,844,155Other income (expense)Interest income


397,556



156,776



140,309



196,005



890,646Interest expense


(5,511,083
)


(3,052,881
)


(1,780,407
)


(1,672,135
)


(12,016,506
)Foreign exchange transaction gain
    (loss), net


83,506



694,511



(1,456,276
)


(170,849
)


(849,108
)Total other income (expense)


(5,030,021
)


(2,201,594
)


(3,096,374
)


(1,646,979
)


(11,974,968
)Earnings (loss) from continuing
    operations before income taxes


(344,025
)


1,753,349



8,528,825



7,931,038



17,869,187Income tax expense (benefit)


10,964



(84,484
)


1,204,844



(977,718
)


153,606Earnings (loss) from continuing
    operations before minority interest in joint venture


(354,989
)


1,837,833



7,323,981



8,908,756



17,715,581Minority interest in joint venture


57,682



116,583



192,590



185,546



552,401Net earnings (loss) from continuing
    operations


(412,671
)


1,721,250



7,131,391



8,723,210



17,163,180Earnings (loss) from discontinued
    operations, net of tax


5,437,575



5,396,924



2,030,825



(25,249,699
)


(12,384,375
)Net earnings (loss)

$
5,024,904


$
7,118,174


$
9,162,216


$
(16,526,489
)

$
4,778,805  F-46




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##### Table of Contents



PHARMANET
    DEVELOPMENT GROUP, INC.
  Schedule II
  Valuation
    and Qualifying Accounts
  Balance at





Charged


Charged to





Balance atBeginning





to Costs


Other





End ofDescription

of Period


PharmaNet


and Expenses


Accounts


Deductions


PeriodYear ended December 31, 2006Reserves deducted from assets to
    which they apply:Allowance for doubtful accounts


202,095







2,278,512







(1,558,592
)


922,015Deferred tax valuation allowance
    (foreign)


5,160,877











6,503,034



(46,511
)


11,617,400Deferred tax valuation allowance
    (domestic)(1)










15,309,356











15,309,356Year ended December 31, 2005Reserves deducted from assets to
    which they apply:Allowance for doubtful accounts


391,793







569,384







(759,082
)


202,095Deferred tax valuation allowance
    (foreign)


156,569







385,390



4,618,918







5,160,877Year ended December 31, 2004Reserves deducted from assets to
    which they apply:Allowance for doubtful accounts


299,372



110,283



417,151







(435,013
)


391,793Deferred tax valuation allowance
    (foreign)






156,569















156,569     (1)
    
    Includes a valuation allowance of
    $2,629,968 charged to continuing operations, and a valuation
    allowance of $12,679,388 charged to discontinued operations. F-47