UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

þQuarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended: September 30, 2007

Commission File No. 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) | (IRS 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)

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

Yes þ No:  ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ̈   Accelerated filer þ   Non-accelerated filer  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ̈ No: þ

The registrant has 18,904,282 shares of common stock outstanding as of November 1, 2007.











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INDEX

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I  FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Item 1.     Financial Statements
1
Consolidated Balance Sheets September 30, 2007 (Unaudited) And December 31, 2006
1
Consolidated Statements Of Operations (Unaudited) For The Three And Nine Months
Ended September 30, 2007 And 2006
2
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2007 and 2006
3
Notes To Consolidated Financial Statements (Unaudited)
5
Item 2.     Managements Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.     Quantitative and Qualitative Disclosures about Market Risk
34
Item 4.     Controls and Procedures
35
PART II  OTHER INFORMATION
Item 1.     Legal Proceedings
36
Item 1A.   Risk Factors
38
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
50
Item 3.     Defaults Upon Senior Securities
50
Item 4.     Submission of Matters to a Vote of Security Holders
50
Item 5.     Other Information
50
Item 6.     Exhibits
50







i





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PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006



|                                                                                                                                                                                          |  |                    |             |                   |   |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -----------
|                                                                                                                                                                                          |  | September 30,
2007 |             | December 31,
2006
|                                                                                                                                                                                          |  | (Unaudited)        |             |                   |  
|ASSETS                                                                                                                                                                                    |  |                    |             |                   |   |            
|Current Assets                                                                                                                                                                            |  |                    |             |                   |   |            
|Cash and cash equivalents                                                                                                                                                                 |  | $                  | 60,421,132  |                   | $ | 45,331,484 
|Investment in marketable securities                                                                                                                                                       |  |                    | 6,091,123   |                   |   | 8,422,699  
|Accounts receivable, net                                                                                                                                                                  |  |                    | 135,066,018 |                   |   | 109,187,958
|Income tax receivable                                                                                                                                                                     |  |                    | 1,578,964   |                   |   | 775,552    
|Deferred income taxes                                                                                                                                                                     |  |                    | 4,126,187   |                   |   | 4,204,977  
|Prepaid expenses and other current assets                                                                                                                                                 |  |                    | 13,344,689  |                   |   | 9,050,043  
|Construction in progress and land expected to be
sold in sale-leaseback transaction                                                                                                       |  |                    |            |                   |   | 15,851,034 
|Assets from discontinued operations                                                                                                                                                       |  |                    | 5,520,661   |                   |   | 7,176,506  
|Total current assets                                                                                                                                                                      |  |                    | 226,148,774 |                   |   | 200,000,253
|Property and equipment, net                                                                                                                                                               |  |                    | 64,375,367  |                   |   | 52,234,890 
|Goodwill, net                                                                                                                                                                             |  |                    | 266,972,827 |                   |   | 266,972,827
|Other intangibles, net                                                                                                                                                                    |  |                    | 27,130,621  |                   |   | 29,196,942 
|Other assets, net                                                                                                                                                                         |  |                    | 7,723,958   |                   |   | 8,371,178  
|Total assets                                                                                                                                                                              |  | $                  | 592,351,547 |                   | $ | 556,776,090
|                                                                                                                                                                                          |  |                    |             |                   |   |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                      |  |                    |             |                   |   |            
|Current liabilities                                                                                                                                                                       |  |                    |             |                   |   |            
|Accounts payable                                                                                                                                                                          |  | $                  | 11,395,226  |                   | $ | 10,312,359 
|Accrued liabilities                                                                                                                                                                       |  |                    | 43,975,513  |                   |   | 26,426,659 
|Client advances, current portion                                                                                                                                                          |  |                    | 80,884,051  |                   |   | 67,857,356 
|Capital lease obligations and notes payable, current portion                                                                                                                              |  |                    | 2,536,742   |                   |   | 3,036,407  
|Liabilities associated with assets held for sale                                                                                                                                          |  |                    |            |                   |   | 15,851,034 
|Liabilities from discontinued operations                                                                                                                                                  |  |                    | 2,523,656   |                   |   | 4,195,262  
|Total current liabilities                                                                                                                                                                 |  |                    | 141,315,188 |                   |   | 127,679,077
|Client advances                                                                                                                                                                           |  |                    | 2,287,268   |                   |   | 2,785,888  
|Deferred income taxes                                                                                                                                                                     |  |                    | 1,920,778   |                   |   | 2,202,096  
|Line of credit                                                                                                                                                                            |  |                    |            |                   |   | 9,400,000  
|Capital lease obligations and notes payable                                                                                                                                               |  |                    | 4,323,036   |                   |   | 2,815,862  
|2.25% Convertible senior notes payable, due 2024                                                                                                                                          |  |                    | 143,750,000 |                   |   | 143,750,000
|Other long term liabilities                                                                                                                                                               |  |                    | 13,969,857  |                   |   | 8,503,954  
|Minority interest in joint venture                                                                                                                                                        |  |                    | 2,265,143   |                   |   | 1,560,106  
|Commitments and contingencies (Note G)                                                                                                                                                    |  |                    |             |                   |   |            
|Stockholders equity                                                                                                                                                                      |  |                    |             |                   |   |            
|Preferred stock. $0.10 par value, 5,000,000 shares authorized, none issued                                                                                                                |  |                    |            |                   |   |           
|Common stock, $0.001 par value, 40,000,000 shares authorized, 18,902,577 shares
and 18,546,203 shares issued and outstanding as of September 30, 2007 and
December 31, 2006, respectively |  |                    | 18,903      |                   |   | 18,546     
|Additional paid-in capital                                                                                                                                                                |  |                    | 244,303,587 |                   |   | 236,540,036
|Retained earnings                                                                                                                                                                         |  |                    | 18,606,191  |                   |   | 12,636,265 
|Accumulated other comprehensive earnings                                                                                                                                                  |  |                    | 19,591,596  |                   |   | 8,884,260  
|Total stockholders equity                                                                                                                                                                |  | $                  | 282,520,277 |                   | $ | 258,079,107
|Total liabilities and stockholders equity                                                                                                                                                |  | $                  | 592,351,547 |                   | $ | 556,776,090



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

1





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PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006



|                                                                              |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|----------------------------------------------------------------------------- |  | -------------------------------- | ----------- | -------------------------------- | - | ----------- | - | ---- | ----------- | - | - | ----------- | -
|                                                                              |  | Three Months Ended
September 30, |             | Nine Months Ended 
September 30, |  
|                                                                              |  | 2007                             |             | 2006                             |   | 2007        |   | 2006 |            
|Net revenue                                                                   |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Direct revenue                                                                |  | $                                | 99,809,887  |                                  | $ | 76,018,774  |   | $    | 270,186,079 |   | $ | 223,280,143 |  
|Reimbursed out-of-pockets                                                     |  |                                  | 24,581,198  |                                  |   | 27,235,490  |   |      | 70,951,385  |   |   | 80,119,231  |  
|Total net revenue                                                             |  |                                  | 124,391,085 |                                  |   | 103,254,264 |   |      | 341,137,464 |   |   | 303,399,374 |  
|Costs and expenses                                                            |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Direct costs                                                                  |  |                                  | 57,074,046  |                                  |   | 46,542,157  |   |      | 160,252,976 |   |   | 136,656,308 |  
|Reimbursable out-of-pocket expenses                                           |  |                                  | 24,581,198  |                                  |   | 27,235,490  |   |      | 70,951,385  |   |   | 80,119,231  |  
|Selling, general and administrative expenses                                  |  |                                  | 27,535,780  |                                  |   | 23,565,196  |   |      | 80,968,752  |   |   | 73,168,447  |  
|Provision for settlement of litigation                                        |  |                                  | 1,500,000   |                                  |   |            |   |      | 10,400,000  |   |   |            |  
|Impairment of goodwill                                                        |  |                                  |            |                                  |   |            |   |      |            |   |   | 7,873,000   |  
|Total costs and expenses                                                      |  |                                  | 110,691,024 |                                  |   | 97,342,843  |   |      | 322,573,113 |   |   | 297,816,986 |  
|Earnings from continuing operations                                           |  |                                  | 13,700,061  |                                  |   | 5,911,421   |   |      | 18,564,351  |   |   | 5,582,388   |  
|Other income (expense)                                                        |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Interest income                                                               |  |                                  | 517,436     |                                  |   | 153,557     |   |      | 1,534,937   |   |   | 1,050,060   |  
|Interest expense                                                              |  |                                  | (1,414,676  | )                                |   | (1,676,517  | ) |      | (4,947,338  | ) |   | (6,432,619  | )
|Foreign exchange transaction losses, net                                      |  |                                  | (2,608,037  | )                                |   | (647,315    | ) |      | (3,340,101  | ) |   | (3,002,126  | )
|Other income (expense), net                                                   |  |                                  | (5,954      | )                                |   |            |   |      | 472,339     |   |   |            |  
|Total other income (expense)                                                  |  |                                  | (3,511,231  | )                                |   | (2,170,275  | ) |      | (6,280,163  | ) |   | (8,384,685  | )
|Earnings (loss) from continuing operations
before income taxes                |  |                                  | 10,188,830  |                                  |   | 3,741,146   |   |      | 12,284,188  |   |   | (2,802,297  | )
|Income tax expense (benefit)                                                  |  |                                  | 2,961,757   |                                  |   | 538,771     |   |      | 3,466,382   |   |   | (5,874,452  | )
|Earnings from continuing operations
Before minority interest in joint venture |  |                                  | 7,227,073   |                                  |   | 3,202,375   |   |      | 8,817,806   |   |   | 3,072,155   |  
|Minority interest in joint venture                                            |  |                                  | 340,249     |                                  |   | 222,835     |   |      | 540,930     |   |   | 516,798     |  
|Net earnings from continuing operations                                       |  |                                  | 6,886,824   |                                  |   | 2,979,540   |   |      | 8,276,876   |   |   | 2,555,357   |  
|(Loss) earnings from discontinued operations, 
net of tax                     |  |                                  | (93,398     | )                                |   | (3,242,289  | ) |      | 628,878     |   |   | (26,667,552 | )
|Net earnings (loss)                                                           |  | $                                | 6,793,426   |                                  | $ | (262,749    | ) | $    | 8,905,754   |   | $ | (24,112,195 | )
|                                                                              |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Basic earnings (loss) per share:                                              |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Continuing operations                                                         |  | $                                | 0.37        |                                  | $ | 0.16        |   | $    | 0.44        |   | $ | 0.14        |  
|Discontinued operations                                                       |  | $                                | (0.01       | )                                | $ | (0.17       | ) | $    | 0.03        |   | $ | (1.47       | )
|Net earnings (loss)                                                           |  | $                                | 0.36        |                                  | $ | (0.01       | ) | $    | 0.47        |   | $ | (1.33       | )
|Diluted earnings (loss) per share:                                            |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Continuing operations                                                         |  | $                                | 0.37        |                                  | $ | 0.16        |   | $    | 0.44        |   | $ | 0.14        |  
|Discontinued operations                                                       |  | $                                | (0.01       | )                                | $ | (0.17       | ) | $    | 0.03        |   | $ | (1.45       | )
|Net earnings (loss)                                                           |  | $                                | 0.36        |                                  | $ | (0.01       | ) | $    | 0.47        |   | $ | (1.31       | )
|Shares used in computing earnings (loss) per share:                           |  |                                  |             |                                  |   |             |   |      |             |   |   |             |  
|Basic                                                                         |  |                                  | 18,893,596  |                                  |   | 18,348,322  |   |      | 18,743,929  |   |   | 18,150,182  |  
|Diluted                                                                       |  |                                  | 19,120,631  |                                  |   | 18,473,375  |   |      | 18,984,625  |   |   | 18,376,696  |  





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

2





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PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006



|                                                                                            |  |                                  |             |      |   |             |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | ---- | - | ----------- | -
|                                                                                            |  | Nine Months Ended 
September 30, |            
|                                                                                            |  | 2007                             |             | 2006 |  
|Cash flows from operating activities:                                                       |  |                                  |             |      |   |            
|Net earnings (loss)                                                                         |  | $                                | 8,905,754   |      | $ | (24,112,195 | )
|(Earnings) loss from discontinued operations                                                |  |                                  | (628,878    | )    |   | 26,667,552  |  
|Adjustments to reconcile net earnings (loss) to net cash provided 
by operating activities: |  |                                  |             |      |   |             |  
|Depreciation and amortization                                                               |  |                                  | 11,131,432  |      |   | 10,870,822  |  
|Amortization of deferred debt issuance costs                                                |  |                                  | 1,183,856   |      |   | 2,432,562   |  
|Provision for settlement of litigation                                                      |  |                                  | 10,400,000  |      |   |            |  
|Impairment of goodwill                                                                      |  |                                  |            |      |   | 7,873,000   |  
|Loss on disposal of property and equipment                                                  |  |                                  | 355,009     |      |   | 66,013      |  
|Minority interest                                                                           |  |                                  | 540,930     |      |   | 516,798     |  
|Noncash compensation  reduction of note receivable                                         |  |                                  |            |      |   | 200,000     |  
|Share-based compensation expense                                                            |  |                                  | 3,622,137   |      |   | 2,912,057   |  
|Changes in assets and liabilities:                                                          |  |                                  |             |      |   |             |  
|Accounts receivable                                                                         |  |                                  | (15,619,666 | )    |   | (18,336,397 | )
|Income tax receivable                                                                       |  |                                  | (528,395    | )    |   | (260,491    | )
|Prepaid expenses and other current assets                                                   |  |                                  | (2,636,412  | )    |   | 3,432,548   |  
|Other assets                                                                                |  |                                  | (279,782    | )    |   | (275,554    | )
|Accounts payable                                                                            |  |                                  | (6,224,355  | )    |   | 3,490,502   |  
|Accrued liabilities                                                                         |  |                                  | 4,037,634   |      |   | 4,308,788   |  
|Client advances                                                                             |  |                                  | 12,064,619  |      |   | 12,678,196  |  
|Deferred income taxes                                                                       |  |                                  | 1,032,940   |      |   | (5,100,268  | )
|Other long term liabilities                                                                 |  |                                  | 1,492,789   |      |   |            |  
|Total adjustments                                                                           |  |                                  | 20,572,736  |      |   | 24,808,576  |  
|Net cash provided by operating activities - continuing operations                           |  |                                  | 28,849,612  |      |   | 27,363,933  |  
|Net cash (used in) provided by operating activities - discontinued operations               |  |                                  | (569,044    | )    |   | 6,050,293   |  
|Net cash provided by operating activities                                                   |  |                                  | 28,280,568  |      |   | 33,414,226  |  
|Cash flows from investing activities:                                                       |  |                                  |             |      |   |             |  
|Additional purchase price consideration from prior acquisitions                             |  |                                  |            |      |   | (2,000,000  | )
|Purchase of property and equipment                                                          |  |                                  | (11,480,050 | )    |   | (17,816,151 | )
|Proceeds from the disposal of property and equipment                                        |  |                                  | 25,380      |      |   | 8,255       |  
|Net sales of long term investments in marketable securities                                 |  |                                  | 3,038,462   |      |   | 6,657,545   |  
|Net cash used in investing activities - continuing operations                               |  |                                  | (8,416,208  | )    |   | (13,150,351 | )
|Net cash provided by investing activities - discontinued operations                         |  |                                  | 1,182,161   |      |   | 232,633     |  
|Net cash used in investing activities                                                       |  |                                  | (7,234,047  | )    |   | (12,917,718 | )
|Cash flows from financing activities:                                                       |  |                                  |             |      |   |             |  
|Borrowings on lines of credit                                                               |  |                                  | 10,000,000  |      |   |            |  
|Payments on lines of credit                                                                 |  |                                  | (19,400,000 | )    |   | (600,000    | )
|Payments on capital lease obligations and notes payable                                     |  |                                  | (2,955,393  | )    |   | (1,917251   | )
|Debt issue costs attributable to financing instruments                                      |  |                                  |            |      |   | (244,318    | )
|Proceeds from stock issued under employee stock purchase and option plans                   |  |                                  | 4,141,474   |      |   | 4,664,198   |  
|Net cash (used in) provided by financing activities                                         |  |                                  | (8,213,919  | )    |   | 1,902,629   |  
|Net effect of exchange rate changes on cash                                                 |  |                                  | 2,257,046   |      |   | (756,091    | )
|Net increase in cash and cash equivalents                                                   |  |                                  | 15,089,648  |      |   | 21,643,046  |  
|Cash and cash equivalents at beginning of period                                            |  |                                  | 45,331,484  |      |   | 30,668,417  |  
|Cash and cash equivalents at end of period                                                  |  | $                                | 60,421,132  |      | $ | 52,311,463  |  



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

3





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PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

|                                                                                                   |  |                                  |           |      |   |          
|-------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ---- | - | ---------
|                                                                                                   |  | Nine Months Ended 
September 30,
|                                                                                                   |  | 2007                             |           | 2006
|Supplemental disclosures:                                                                          |  |                                  |           |      |   |          
|Interest paid                                                                                      |  | $                                | 4,372,512 |      | $ | 4,903,248
|Income taxes paid                                                                                  |  | $                                | 5,455,401 |      | $ | 3,511,563
|Income taxes recovered                                                                             |  | $                                | 491,493   |      | $ | 2,409,420
|Supplemental disclosures of non-cash investing and finance activities:                             |  |                                  |           |      |   |          
|Common stock issued in connection with acquisition of business of additional
consideration         |  | $                                |          |      | $ | 500,000  
|Common stock and options issued as compensation                                                    |  | $                                | 3,622,137 |      | $ | 2,912,057
|Restricted stock units granted as long term incentive compensation to executives
and board members |  | $                                | 4,677,939 |      | $ | 8,992,509
|Noncash compensation  reduction of note receivable                                                |  | $                                |          |      | $ | 200,000  
|Capitalized leasehold incentives included in accrued liabilities                                   |  | $                                | 3,080,275 |      | $ | 480,018  











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

4





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PHARMANET DEVELOPMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A. ORGANIZATION AND BASIS OF PRESENTATION

Principles of Consolidation

The consolidated financial statements include the accounts of PharmaNet Development Group, Inc., its wholly-owned subsidiaries and a 49% owned Spanish joint venture. All financial information presented in this report relating to foreign subsidiaries has been converted to United States dollars. All significant intercompany balances and transactions have been eliminated in consolidation.

All references in this report to we, us, our, PharmaNet Development Group, Inc., PDGI, or the Company refer to PharmaNet Development Group, Inc. and its subsidiaries as a single entity, unless the context otherwise requires. References to PharmaNet relate only to PharmaNet, Inc., our late stage subsidiary.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made. Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the fourth quarter or for the year ending December 31, 2007.

As a result of the Companys decision in May 2006 to discontinue operations in Florida, all financial results in this report reflect the Companys continuing operations only, unless otherwise stated. In addition, certain reclassifications, primarily related to rent escalation clauses, lessor incentives, certain payroll-related costs to conform to the late stage segment presentation and FIN 48 liabilities, have been made to the 2006 financial statement balances to conform to the 2007 presentation.

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements have been prepared in accordance with the accounting policies described in the Companys Annual Report on Form 10-K for the year ended December 31, 2006; and should be read in conjunction with the consolidated financial statements and notes thereto which appear in that report.

The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results will inevitably differ from those estimates, and such differences may be material to the Companys financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances.

Earnings Per Share

The Company applies Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) which requires dual presentation of net earnings per share, basic and diluted. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by increasing the denominator to include additional common share equivalents. Included in diluted shares for the three and nine month periods ended September 30, 2007 are common stock equivalents relating to stock options and restricted stock units (RSU or RSUs) with a dilutive effect of 227,035 and 240,696 shares, respectively, and 125,053 and 226,514 shares of common stock equivalents for the three and nine month periods ended September 30, 2006, respectively.



5





---

Common stock equivalents representing stock options and RSUs of 493,408 shares and 495,075 shares of the Companys common stock outstanding for the three and nine month periods ended September 30, 2007, respectively, were not included in the computation of diluted earnings per share because their prices were greater than the average market price of the Companys common stock during these periods. In addition, 1,011,262 and 623,468 of stock options and RSUs, respectively, were not included in the computation of diluted earnings per share for the same three and nine month periods ended September 30, 2006 because their inclusion would be anti-dilutive.

Share Based Compensation

The Company records its share based compensation under the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payments (SFAS 123R). The grant-date fair value of awards expected to vest is expensed on a straight-line basis over the vesting period of the related awards.

Share-based compensation expense is generally recognized over the stated vesting period with the terms of the arrangement. For both three and nine month periods ended September 30, 2007, shared-based compensation expense related to unvested stock options was approximately $0.1 million as compared to approximately $14,000 and $0.6 million, respectively of share based compensation expense for unvested stock options for the same periods in 2006. For the three and nine month periods ended September 30, 2007, share-based compensation expense of the Companys employee stock purchase plan was approximately $0.2 million and $0.5 million, respectively, compared to $0.1 and $0.4 million for the same periods in 2006.

For the three and nine month periods ended September 30, 2007, compensation expense related to RSUs was approximately $1.1 million and $3.0 million, respectively, compared to $0.8 million and $2.0 million for the same periods in 2006. As of September 30, 2007 and 2006, there was approximately $8.0 million and $7.4 million respectively, of unrecognized compensation cost related to unvested restricted stock and RSUs, which is expected to be recognized over a weighted-average period of approximately 1.9 years and 2.1 years, respectively.

Generally, options granted by the Company vest over a three-year period. Historically, these options expire between 5 and 10 years or three months after separation of service. As of December 31, 2006, all of the Companys stock options were fully vested. Therefore the amount of stock option expense recorded by the Company for the period from January 1, 2007 through July 31, 2007, under the provisions of SFAS 123R, was $0. On August 3, 2007 in conjunction with our Long Term Incentive Plan, the Company granted stock options valued at approximately $1.3 million, which is being recognized over a three-year period starting from the grant date.

The Company has used the following assumptions in determining the grant-date fair value of its option awards. The expected term of the option is based upon the contractual term; taking into account expected employee exercise and expected post-vesting employment termination behavior. The expected volatility of the price of the underlying stock is based upon the historical volatility of the Companys stock computed over a period of time equal to the expected term of the option. The risk free interest rate is based upon the implied yields currently available from the U.S. Treasury zero-coupon yield curve for issues with a remaining duration equal to the expected term of the option. The fair value of the options granted for the three months ended September 30, 2007 was estimated by using the Black-Scholes pricing model with the following assumptions: (i) expected life of the options of four and half years, which was determined using the safe harbor provision of SAB 107, (ii) expected volatility in the market price of the Companys common stock of 60%, (iii) no expected dividends, and (iv) a risk free interest rate of 4.9%. The value calculated for such options was equal to $14.34 per share using the Black-Scholes formula.

In June 1999, the Company established a stock option plan, which is called the 1999 Stock Plan (the Plan). In June 2004, PDGI amended the Plan to broaden the types of awards which could be granted under the Plan to include grants of restricted common stock, RSUs and stock appreciation rights in addition to non-qualified and incentive stock options (collectively, the Awards) to employees, directors and consultants of the Company. The issuance and form of the Awards are at the discretion of the Companys Board of Directors, except that the exercise price of Awards may not be less than the fair market value at the time of grant. As of September 30, 2007, there were 500,972 units available for issuance under the Plan.

On June 21, 2004, PDGIs stockholders approved the 2004 Employee Stock Purchase Plan (the ESPP) permitting eligible participants (excluding executive officers) to purchase up to 150,000 shares of the Companys common stock. The ESPP permits employees who are employed for at least 20 hours per week and who have been



6





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so employed for at least three months continuously by PDGI, or one of its designated subsidiaries, the option of purchasing common stock from PDGI at a 15% discount from the lower of the fair market value of such shares at the beginning of an offering period or the fair market value of such shares at the end of the offering period. Each offering period is six months. Each eligible employee is granted an option to purchase such shares at the beginning of each offering period. In June 2007, PDGIs stockholders approved an amendment to the ESPP, which increased the total number of shares of the Companys common stock available under the ESPP to 550,000 shares. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986. As of September 30, 2007 and 2006, there were 365,163 shares and 231,060 shares, respectively, issued under the ESPP.

As of September 30, 2007, there were 184,837 shares available for issuance under the Companys Employee Stock Purchase Plan.

The following tables provide a summary of the Companys stock option and RSU activity and related information for the nine month period ended September 30, 2007:

|                           |  |                   |  |                                
|-------------------------- |  | ----------------- |  | -------------------------------
|Options                    |  | Number of
Options |  | Weighted-Average
Exercise Price
|Outstanding as of 01/01/07 |  | 1,034,424         |  | $25.68                         
|Granted                    |  | 91,834            |  | $26.91                         
|Exercised                  |  | 152,446           |  | $17.52                         
|Forfeited                  |  | 8,943             |  | $38.00                         
|Outstanding as of 09/30/07 |  | 964,869           |  | $26.97                         
|Exercisable as of 09/30/07 |  | 873,035           |  | $26.98                         

The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2007 were $0.4 million and $1.7 million, respectively, compared to approximately $38,000 and $3.0 million for the same periods in 2006. Intrinsic value is measured using the fair market value of the Companys common stock less the applicable exercise price.

|                           |  |                |  |                                                 
|-------------------------- |  | -------------- |  | ------------------------------------------------
|Nonvested Shares           |  | Number of
RSUs |  | Weighted-Average Fair Market Value at Grant Date
|Outstanding as of 01/01/07 |  | 315,413        |  | $19.58                                          
|Granted                    |  | 133,927        |  | $28.09                                          
|Vested                     |  | 89,327         |  | $19.04                                          
|Forfeited                  |  | 21,043         |  | $22.83                                          
|Outstanding as of 09/30/07 |  | 338,970        |  | $22.88                                          

Income Taxes

For the nine month period ended September 30, 2007, the Company recorded income tax expense from continuing operations of approximately $3.5 million. The Company applies Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes (SFAS 109). Deferred taxes arise because of the different treatment between financial statement accounting and tax accounting known as temporary differences. We record the tax effect of these temporary differences as deferred tax assets or liabilities.

The Company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it operates. These estimates include future taxable profits and losses in each jurisdiction. Based on these estimates, the company evaluates, on a quarterly basis whether it is more likely than not that deferred tax assets are realizable. If not, a valuation allowance is established. The Company has elected to deem its earnings and profits related to its foreign subsidiaries to be permanently reinvested; accordingly, no provision has been recorded for U.S. income taxes that might result from repatriation of these earnings.



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Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation Number 48 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The interpretation is effective for fiscal years beginning after December 15, 2006. On January 1, 2007, the Company adopted FIN 48; the impact of which is described in Note J. Income Taxes.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, the statement establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company is currently evaluating the impact of SFAS 157 and, if adopted, does not expect that it will have a material impact on the Companys financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Furthermore, SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective as of the beginning of the Companys 2008 fiscal year. The Company is currently evaluating the impact of SFAS 159 and, if adopted, does not expect that it will have a material impact on the Companys financial position or results of operations.

NOTE C. DISCONTINUED OPERATIONS

On May 17, 2006, the Miami-Dade Unsafe Structures Board (USB) announced a decision that required the Company to demolish the Companys clinical and administrative office building located on Biscayne Boulevard in Miami, Florida (See Note I. Commitments and Contingencies in Form 10-K for the year ended December 31, 2006). As a result of that decision, upon the recommendation of the Companys management, the Board of Directors of the Company authorized the closure of the Companys operations in Florida consisting of the Miami and Ft. Myers locations. Shortly thereafter, the Company began an orderly completion of its ongoing contracts, a transfer of those contracts which had not been started by third parties, development of a plan for vacating the Miami facilities, the implementation of a termination program for employees located at those subsidiaries and other administrative tasks.

As more fully discussed below, in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144), Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations (SFAS 143) and Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), the Company recorded a goodwill impairment charge, asset write-downs of the Miami buildings and equipment, separation liabilities, the cost to demolish the Miami buildings and costs associated with the remediation of environmental issues and cessation of the use of equipment under operating leases. The assets, including those assets held for sale, liabilities, results of operations and cash flows of the subsidiaries based in Miami and Ft. Myers are separately reported for all periods presented as discontinued operations.

Impairment of Goodwill

During the three month period ended March 31, 2006, the Company recorded an impairment charge of $3.5 million to write-off the remaining goodwill associated with Miami operations as a result of a material decline in the Miami subsidiarys revenue, profitability and cash flows. In addition, the Company also recorded a goodwill



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impairment charge of approximately $0.6 million in the first quarter of 2006 to write-down all of the goodwill related to the Ft. Myers operation. These impairment charges for Miami and Ft. Myers totaling $4.1 million are included in the loss from discontinued operations for the period ended March 31, 2006. As of December 31, 2006, all goodwill relating to discontinued operations had been fully written off.

Impairment of Long-lived Assets

As a result of the further material reduction in the Miami forecast in the first quarter of 2006, the Company wrote-down the carrying value of its Miami buildings by approximately $3.0 million to their then estimated fair value. However, in connection with the Companys decision to discontinue its Florida operations and the requirement by the USB to demolish the Companys buildings located on Biscayne Boulevard, the Company recorded an additional impairment charge in June 2006 of approximately $11.0 million to write-down the Miami buildings to zero.

Additionally, in the second quarter of 2006 the Company recorded a non-cash charge of approximately $4.9 million related to the write-down of fixed assets, which were located at its Florida facilities in Miami and Ft. Myers that would no longer be utilized.

In September 2006, the Company disposed of substantially all remaining fixed assets associated with discontinued operations. As a result of the disposal, the Company recorded an additional write-down of $0.4 million. In March 2007, the Company sold the former Clinical Pharmacology Associates (CPA) building for $1.3 million, resulting in a gain of $0.9 million, which is included in its earnings from discontinued operations. The remaining property balance at September 30, 2007 was approximately $3.0 million, comprised of the land in Miami, which is for sale and is included in assets from discontinued operations.

Asset Retirement Obligations and Accrued Liabilities

As of September 30, 2007, the Company has accrued liabilities of approximately $1.3 million (see table below). The separation obligations noted below include severance payments and estimated healthcare benefits for former employees. With the exception of payments due to a former officer that will end in December 2007, all severance payments associated with discontinued operations have been paid as of December 31, 2006.

The table below is a roll forward of asset retirement obligations and accrued liabilities recorded during the nine month period ended September 30, 2007 in discontinued operations.

|                                       |  |                              |           |  |                             |   |          |               |  |   |                               |  |  |   |           | 
|-------------------------------------- |  | ---------------------------- | --------- |  | --------------------------- | - | -------- | ------------- |  | - | ----------------------------- |  |  | - | --------- | 
|                                       |  | Balance at
December 31,
2006 |           |  | Accrued
Charges
(Reversals) |   |          | Cash
Payments |  |   | Balance at
September 30,
2007 | 
|                                       |  |                              |          
|                                       |  |                              |          
|Severance and healthcare costs         |  | $                            | 1,420,691 |  |                             | $ | (210,608 | )             |  | $ | 1,022,345                     |  |  | $ | 187,738   | 
|Demolition, asbestos and related costs |  |                              | 700,000   |  |                             |   | (61,178  | )             |  |   | 638,822                       |  |  |   |          | 
|Contract termination costs             |  |                              | 1,170,134 |  |                             |   | (103,431 | )             |  |   | 308,228                       |  |  |   | 758,475   | 
|Real Estate property taxes             |  |                              |          |  |                             |   | 299,740  |               |  |   | 150,020                       |  |  |   | 149,720   | 
|Sample storage fees                    |  |                              |          |  |                             |   | 177,000  |               |  |   |                              |  |  |   | 177,000   | 
|Other                                  |  |                              | 17,169    |  |                             |   | 27,782   |               |  |   | 27,615                        |  |  |   | 17,336    | 
|                                       |  | $                            | 3,307,994 |  |                             | $ | 129,305  |               |  | $ | 2,147,030                     |  |  | $ | 1,290,269 | 

The above accrued liabilities are included in the accompanying condensed financial information under the caption Liabilities from discontinued operations. It is possible that actual costs associated with asset retirement obligations, and other separation obligations (such as self insured healthcare benefits to terminated employees) will differ from estimated accrued amounts. Any changes to these amounts will be recorded, as additional facts and circumstances require, during the period in which they become known. The Liabilities from discontinued operations included in the accompanying condensed financial information also include approximately $1.1 million in accounts payable and $0.1 million in advance payments for studies that have been subcontracted are not reflected in the table above.

Condensed Financial Information

The assets and liabilities of the Miami and Ft. Myers locations included in discontinued operations are presented in the accompanying consolidated balance sheets under the captions Assets from discontinued



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operations and Liabilities from discontinued operations. The carrying amounts of the major classes of these assets and liabilities are as follows:

|                                                                  |  |                     |           |                    |   |          
|----------------------------------------------------------------- |  | ------------------- | --------- | ------------------ | - | ---------
|                                                                  |  | September 30, 
2007 |           | December 31, 
2006
|Assets                                                            |  |                     |           |                    |   |          
|Accounts receivable, net                                          |  | $                   | 2,156,711 |                    | $ | 3,572,556
|Income tax receivable                                             |  |                     | 317,331   |                    |   | 317,331  
|Property and equipment, primarily land and building held for sale |  |                     | 3,046,619 |                    |   | 3,286,619
|Assets from discontinued operations                               |  | $                   | 5,520,661 |                    | $ | 7,176,506
|Liabilities                                                       |  |                     |           |                    |   |          
|Accounts payable                                                  |  | $                   | 1,101,620 |                    | $ | 462,421  
|Accrued liabilities                                               |  |                     | 1,290,269 |                    |   | 3,307,994
|Client Advances                                                   |  |                     | 131,767   |                    |   | 424,847  
|Liabilities from discontinued operations                          |  | $                   | 2,523,656 |                    | $ | 4,195,262

At September 30, 2007 and December 31, 2006, accounts receivable for discontinued operations were $2.2 million and $3.6 million, respectively, net of an allowance for doubtful accounts of $1.1 million and $1.0 million, respectively. The Company continues to pursue collections of remaining accounts receivable and will continue to evaluate the adequacy of its allowance for doubtful accounts.

The results of discontinued operations are included in the consolidated statements of operations as Earnings (loss) from discontinued operations, net of tax. The amounts for the three and nine month periods ended September 30, 2007 and 2006 are as follows:

|                                                     |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|---------------------------------------------------- | -------------------------------- | ---------- | ---- | ------------------------------- | ---------- | ---- |  | ---- | ---------- | - | - | ----------- | -
|                                                     | Three Months Ended
September 30, |            |      | Nine Months Ended
September 30, |           
|                                                     | 2007                             |            | 2006 |                                 |            | 2007 |  | 2006 |           
|Net revenue:                                         |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|Direct revenue                                       | $                                | (70,608    | )    | $                               | (722,310   | )    |  | $    | (38,301    | ) | $ | 7,776,078   |  
|Reimbursed out-of-pocket expenses                    |                                  |          |      |                                 |          |      |  |      |          |   |   | 957,042     |  
|Total net revenue                                    |                                  | (70,608    | )    |                                 | (722,310   | )    |  |      | (38,301    | ) |   | 8,733,120   |  
|Cost and Expenses:                                   |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|Impairment of long-lived assets                      |                                  |          |      |                                 | 364,820    |      |  |      |          |   |   | 18,962,838  |  
|Goodwill impairment                                  |                                  |          |      |                                 |          |      |  |      |          |   |   | 4,051,082   |  
|Purchase consideration due to stockholders           |                                  |          |      |                                 |          |      |  |      |          |   |   | 1,000,000   |  
|Salary, severance and healthcare costs               |                                  | 11,699     |      |                                 | 1,075,820  |      |  |      | (195,909   | ) |   | 4,741,649   |  
|Demolition costs                                     |                                  |          |      |                                 | 350,000    |      |  |      | (61,178    | ) |   | 1,050,000   |  
|Contract termination costs                           |                                  |          |      |                                 |          |      |  |      | (103,431   | ) |   | 1,111,321   |  
|Other costs and expense                              |                                  | 11,091     |      |                                 | 1,950,687  |      |  |      | 635,500    |   |   | 18,956,601  |  
|Total costs and expenses                             |                                  | 22,790     |      |                                 | 3,741,327  |      |  |      | 274,982    |   |   | 49,873,491  |  
|Other income (expense)                               |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|Gain on disposal of long-lived assets                |                                  |          |      |                                 |          |      |  |      | 942,161    |   |   |           |  
|Total other income (expense)                         |                                  |          |      |                                 |          |      |  |      | 942,161    |   |   |           |  
|Earnings (loss) before income taxes                  |                                  | (93,398    | )    |                                 | (4,463,637 | )    |  |      | 628,878    |   |   | (41,140,371 | )
|Income tax (benefit)                                 |                                  |          |      |                                 | (1,221,348 | )    |  |      |          |   |   | (14,472,819 | )
|Net earnings (loss) from discontinued 
operations    | $                                | (93,398    | )    | $                               | (3,242,289 | )    |  | $    | 628,878    |   | $ | (26,667,552 | )
|Earnings (loss) per share:                           |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|Basic                                                | $                                | (0.01      | )    | $                               | (0.17      | )    |  | $    | 0.03       |   | $ | (1.47       | )
|Diluted                                              | $                                | (0.01      | )    | $                               | (0.17      | )    |  | $    | 0.03       |   | $ | (1.45       | )
|Shares used in computing earnings (loss) 
per share: |                                  |            |      |                                 |            |      |  |      |            |   |   |             |  
|Basic                                                |                                  | 18,893,596 |      |                                 | 18,348,322 |      |  |      | 18,743,929 |   |   | 18,150,182  |  
|Diluted                                              |                                  | 19,120,631 |      |                                 | 18,473,375 |      |  |      | 18,984,625 |   |   | 18,376,696  |  



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NOTE D. GOODWILL AND INTANGIBLE ASSETS

In connection with adopting Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), the company reassessed the useful lives and classifications of its identifiable intangible assets and determined that they continue to be appropriate. The components of the Companys intangible assets are approximately as follows:

|                                               |                                                  |  |                         |            |                           |   |             |   |                         |            |                           |   |            |  |   |            |   |   |            | 
|---------------------------------------------- | ------------------------------------------------ |  | ----------------------- | ---------- | ------------------------- | - | ----------- | - | ----------------------- | ---------- | ------------------------- | - | ---------- |  | - | ---------- | - | - | ---------- | 
|                                               |                                                  |  | September 30, 2007      |            | December 31, 2006         |  
|                                               | Weighted 
Average 
Amortization 
Period 
(Years) |  | Gross 
Carrying 
Amount |            | Accumulated 
Amortization |   | Net         |   | Gross 
Carrying 
Amount |            | Accumulated 
Amortization |   | Net        | 
|Intangible assets subject to amortization:     |                                                  |  |                         |            |                           |   |             |   |                         |            |                           |   |            |  |   |            |   |   |            | 
|Internally-developed software                  | 5.0                                              |  | $                       | 454,000    |                           | $ | (289,486    | ) | $                       | 164,514    |                           | $ | 454,000    |  | $ | (221,386   | ) | $ | 232,614    | 
|Employment & non-compete agreements            | 3.4                                              |  |                         | 1,192,000  |                           |   | (1,192,000  | ) |                         |          |                           |   | 1,192,000  |  |   | (1,192,000 | ) |   |          | 
|Methodologies                                  | 4.1                                              |  |                         | 2,568,000  |                           |   | (2,261,076  | ) |                         | 306,924    |                           |   | 2,568,000  |  |   | (2,134,026 | ) |   | 433,974    | 
|Technology                                     | 5.0                                              |  |                         | 3,859,000  |                           |   | (2,141,745  | ) |                         | 1,717,255  |                           |   | 3,859,000  |  |   | (1,562,895 | ) |   | 2,296,105  | 
|Contracts & customer relationships             | 6.5                                              |  |                         | 12,077,000 |                           |   | (5,185,072  | ) |                         | 6,891,928  |                           |   | 12,077,000 |  |   | (3,892,751 | ) |   | 8,184,249  | 
|Subtotal                                       |                                                  |  |                         | 20,150,000 |                           |   | (11,069,379 | ) |                         | 9,080,621  |                           |   | 20,150,000 |  |   | (9,003,058 | ) |   | 11,146,942 | 
|Intangible assets not subject to amortization: |                                                  |  |                         |            |                           |   |             |   |                         |            |                           |   |            |  |   |            |   |   |            | 
|Trade names                                    |                                                 |  |                         | 18,050,000 |                           |   |            |   |                         | 18,050,000 |                           |   | 18,050,000 |  |   |           |   |   | 18,050,000 | 
|                                               |                                                  |  |                         |            |                           |   |             |   |                         |            |                           |   |            |  |   |            |   |   |            | 
|Total                                          |                                                  |  | $                       | 38,200,000 |                           | $ | (11,069,379 | ) | $                       | 27,130,621 |                           | $ | 38,200,000 |  | $ | (9,003,058 | ) | $ | 29,196,942 | 

Amortization expense for intangible assets for the three and nine month periods ended September 30, 2007, were approximately $0.7 million and $2.1 million, respectively and approximately $0.7 million and $2.9 million for the same periods ended September 30, 2006. The following table provides information regarding the remaining estimated amortization expense for intangible assets subject to amortization for each of the following years ending December 31:

|                    |  |   |           | 
|------------------- |  | - | --------- | 
|Remainder of 2007   |  | $ | 688,774   | 
|2008                |  |   | 2,755,096 | 
|2009                |  |   | 2,627,384 | 
|2010                |  |   | 1,602,744 | 
|2011 and thereafter |  |   | 1,406,623 | 
|                    |  | $ | 9,080,621 | 

As of September 30, 2007, all intangible assets except goodwill and trade names were subject to amortization.

Under SFAS 142, the Company is required to perform an annual impairment test of its goodwill and indefinite-lived intangibles. On an annual basis, management assesses the composition of the Companys assets and liabilities, as well as the events that have occurred and the circumstances which have changed, since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill and indefinite-lived intangibles below their carrying amounts, they will be tested for impairment. The Company will recognize an impairment charge if the carrying value of the asset exceeds the fair value determination. The impairment test the Company has selected, historically consisted of a 10 year discounted cash flow analysis including the determination of a terminal value, and requires management to make various assumptions and estimates including revenue growth, future profitability, peer group comparisons, and a discount rate which management believes are reasonable.



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The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiarys future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.

Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

The Company has completed both annual and interim tests during the year ended December 31, 2006. These tests indicated the fair value of the goodwill and other indefinite-lived intangible assets were equivalent to or greater than the recorded value as of December 31, 2006; no adjustment was made to the carrying value of the goodwill in the Companys financial statements, except for the SPS impairment described below.

In June 2006, the Company recorded an impairment charge in continuing operations of approximately $7.9 million related to Specialized Pharmaceutical Services (SPS) formerly Clinical Pharmacology Services, a division of NDS, which provides data management and biostatistical services. While SPS contributed to earnings from operations for the first half of 2006, the outlook for the remainder of the year and future periods was significantly reduced because a large portion of SPS revenues related to projects being conducted at the Miami and Ft. Myers locations which the Company discontinued.

The Company completed its annual test on December 31, 2006 for its Taylor Technology Inc. (Taylor), Anapharm, Inc. (Anapharm) and PharmaNet subsidiaries. The remaining goodwill of SPS, approximately $4.5 million, was combined with PharmaNet for impairment testing purposes, because SPS has been under the operational control of PharmaNet since July 2006 and became a late stage business effective January 1, 2007. These tests indicated the fair value of the goodwill and other indefinite-lived intangible assets were equivalent to or greater than the recorded value; no adjustment has been made to the carrying value of the goodwill in the Companys financial statements.

As of September 30, 2007, the Company had total net consolidated goodwill of approximately $267.0 million which includes:

·

$232.6 million in goodwill related to the of PharmaNet acquisition;

·

$16.8 million in goodwill related to acquisition of Anapharm;

·

$14.3 million in goodwill related to the acquisition of Taylor;

·

$3.3 million in goodwill related to the acquisition of Keystone Analytical Inc. (KAL) formerly SFBC Analytical Laboratories Inc.

NOTE E. SALE-LEASEBACK TRANSACTION

In 2005, Anapharm purchased land for $2.5 million and in 2006, commenced building a new facility in Quebec City, Canada intended to house all of its clinical and bioanalytical operations as well as administrative functions. In early 2006, Anapharm negotiated a build-to-suit arrangement with a building contractor. Subsequent to this arrangement, Anapharm decided that it was advantageous to enter into a leasing arrangement for this location versus owning the property and building. In October 2006, Anapharm completed a transaction with a third party investor. Under the terms of the agreement, the Investor advanced Anapharm approximately $9.8 million which represented substantially all of the funds that Anapharm had spent on the land purchase and construction as of that date. Additionally, the Investor agreed to pay the contractor for the remaining building costs not to exceed approximately $18.0 million. Any construction costs in excess of $18.0 million would be borne by the Company.

Under the terms of Statement of Financial Accounting Standards No. 98 Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate (SFAS 98), our contingent liability to the builder as well as our



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involvement in ensuring the building is designed and built to properly meet its operational need, constitutes continuing involvement. Prior to September 30, 2007, the sale-leaseback for accounting purposes could not be completed until all required building documentation was completed and the Company no longer had legal liability for construction costs. As a result, the Company had previously classified the Quebec City building as construction in progress and land expected to be sold in sale-leaseback transaction on the Consolidated Balance Sheets along with a corresponding liability until final approvals could be obtained.

On September 24, 2007, the Company received a letter from the architect certifying that the building was complete. As of September 30, 2007, the building was 100% complete and operational. As a result, the Company has been relieved of future obligations, contingencies and liability related to the construction of the building. Accordingly, the Company has removed the construction in progress and land expected to be sold in sale-leaseback transaction and the corresponding liability of approximately $23.7 million from the Consolidated Balance Sheets and approximately $7.9 million of non-cash from investing and financing activities has been excluded from the Consolidated Statements of Cash Flows as of and for the nine month period ended September 30, 2007. Pursuant to sale-leaseback accounting rules, a gain of approximately $867,000 was deferred at September 30, 2007 and is being amortized as a rent subsidy as an offset against rent expense over the 20-year term of the lease, subject to two five-year renewal options. The rental payment, exclusive of the rent subsidy, for the first five years of the lease term is $2,373,285 per year and increases by 10.0% for each of the next three five-year increments. Both the rental payments and rent subsidy are recorded in Anapharms functional currency, the Canadian dollar. The lease is being accounted for as an operating lease.

NOTE F. DEBT

Convertible Senior Notes Payable

In August and September 2004, the Company issued $143.8 million aggregate principal amount of its 2.25% Convertible Senior Notes due 2024 (the Convertible Senior Notes). The Companys net proceeds after repurchasing 820,000 shares of its common stock and transaction costs were approximately $113.0 million. Interest is payable on the Convertible Senior Notes semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2005. The Convertible Senior Notes are convertible into cash and, if applicable, shares of PDGIs common stock based upon an initial conversion rate of 24.3424 shares per $1,000 in principal amount of the Convertible Senior Notes not to exceed 3,086,445 shares, subject to adjustment in certain circumstances. This results in an initial conversion price of approximately $41.08 per share. The Convertible Senior Notes are convertible at any time prior to the date of maturity and, upon conversion, holders of the Convertible Senior Notes will be entitled to receive cash up to the principal amount of the Convertible Senior Notes and, if applicable, shares of common stock pursuant to a formula contained in the Convertible Senior Notes. Upon a fundamental change, as defined in the Convertible Senior Notes, holders may require PDGI to repurchase all or a portion of their Convertible Senior Notes for cash at a price equal to 100% of the principal amount of the Convertible Senior Notes, plus accrued and unpaid interest. If a fundamental change occurs prior to August 15, 2009, PDGI is required to pay, in addition to the repurchase price, a make-whole premium in cash and/or common stock. On or after August 15, 2009 PDGI, may at its option, redeem the Convertible Senior Notes in whole or in part for cash at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed plus accrued and unpaid interest. On each of August 15, 2009, 2014 and 2019, holders may require the Company to re-purchase all or a portion of their Convertible Senior Notes at a purchase price in cash equal to 100% of the principal amount of the Convertible Senior Notes to be re-purchased plus accrued and unpaid interest. The Convertible Senior Notes are unsecured senior obligations and are effectively subordinated to all of PDGIs existing and future secured indebtedness and to all existing and future liabilities of PDGI subsidiaries (including trade payables). The Company capitalized all costs related to the issuance of these Convertible Senior Notes in 2004, including approximately $1.1 million in one-time bonuses paid to executives directly related to the securing of the Convertible Senior Notes and credit facility, as amended and restated, (the Credit Facility) described below, and amortizes the costs on a straight-line basis over the expected term of the Convertible Senior Notes, which approximates the effective interest method.

If a fundamental change, occurs, each holder may require the Company to purchase all or a portion of the holders notes for cash at 100% of the principal amount, plus any accrued and unpaid interest to, but excluding, the repurchase date.



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Under the terms of the notes, a fundamental change is deemed to have occurred upon a change of control, which, generally, is defined as when a person or entity becomes:

·

indirectly or directly, the beneficial owner of 50% or more of the Companys common stock,

·

certain persons on the Companys board of directors cease to constitute a majority of the Companys directors,

·

the Company merges with another entity,

·

the Company sells substantially all of its assets, or

·

the Company is forced to liquidate its assets.

Under the terms of the notes, a fundamental change is deemed to have also occurred upon a termination of trading, which is when the Companys common stock (or other common stock into which the notes are then convertible) is neither listed for trading on a US national securities exchange nor approved for trading on an established automated over-the-counter trading market in the United States.

If specified events constituting a fundamental change occur prior to August 15, 2009, the Company will pay, in addition to the foregoing repurchase price, a make-whole premium. Such payment shall be made on a date selected by the Company which cannot be later than thirty (30) trading days nor earlier than twenty (20) trading days after the date on which notice of the fundamental change is mailed to a holder.  Such notice must be mailed within thirty (30) days of the occurrence of the fundamental change.  The following is a table which calculates the total amount due under the notes in the event of a fundamental change on August 15, 2008:



|            |                         |                                |                   |                  |             
|----------- | ----------------------- | ------------------------------ | ----------------- | ---------------- | ------------
|Stock Price | % of Make-Whole Premium | $ Amount of Make-Whole Premium | Accrued Interest* | Principal Amount | Total       
|$30.43      | 0.00%                   | $                            | $3,234,376        | $143,750,000     | $146,984,376
|$35.00      | 4.40%                   | $6,325,000                     | $3,234,376        | $143,750,000     | $153,309,376
|$40.00      | 11.50%                  | $16,531,250                    | $3,234,376        | $143,750,000     | $163,515,626
|$45.00      | 10.30%                  | $14,806,250                    | $3,234,376        | $143,750,000     | $161,790,626
|$50.00      | 7.60%                   | $10,925,000                    | $3,234,376        | $143,750,000     | $157,909,376
|$55.00      | 5.60%                   | $8,050,000                     | $3,234,376        | $143,750,000     | $155,034,376
|$60.00      | 4.20%                   | $6,037,500                     | $3,234,376        | $143,750,000     | $153,021,876
|$65.00      | 3.20%                   | $4,600,000                     | $3,234,376        | $143,750,000     | $151,584,376
|$70.00      | 2.50%                   | $3,593,750                     | $3,234,376        | $143,750,000     | $150,578,126
|$75.00      | 2.00%                   | $2,875,000                     | $3,234,376        | $143,750,000     | $149,859,376
|$80.00      | 1.70%                   | $2,443,750                     | $3,234,376        | $143,750,000     | $149,428,126
|$85.00      | 1.40%                   | $2,012,500                     | $3,234,376        | $143,750,000     | $148,996,876
|$90.00      | 1.30%                   | $1,868,750                     | $3,234,376        | $143,750,000     | $148,853,126
|$95.00      | 1.10%                   | $1,581,250                     | $3,234,376        | $143,750,000     | $148,565,626
|$100.00     | 1.00%                   | $1,437,500                     | $3,234,376        | $143,750,000     | $148,421,876
|$105.00     | 0.90%                   | $1,293,750                     | $3,234,376        | $143,750,000     | $148,278,126
|$110.00     | 0.90%                   | $1,293,750                     | $3,234,376        | $143,750,000     | $148,278,126
|$115.00     | 0.80%                   | $1,150,000                     | $3,234,376        | $143,750,000     | $148,134,376
|$120.00     | 0.80%                   | $1,150,000                     | $3,234,376        | $143,750,000     | $148,134,376



*

Of the $3.2 million interest payment due on August 15, 2008, the Company would pay one half ($1,617,188) on February 2008.



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In the event of a fundamental change on August 15, 2009, the Company shall pay a total of $150,218,752 to the holders of notes, consisting of principal and $6,468,752 of accrued interest*. There would be no make-whole premium due in this instance.

* Of the $6.5 million interest payment due on August 15, 2009, the Company would pay $1,617,188 on each of February 2008, August 2008 and February 2009 (thereby leaving only $1,617,188 due).

The make-whole premium is an additional amount payable to a holder, which is equal to between 0% - 20% of the principal amount of the note, may be paid in cash, shares of common stock, or a combination thereof.  More specifically, the make-whole premium is equal to an amount that is derived by multiplying each $1,000 principal amount of securities by a specified percentage. The specific percentages are set forth in greater detail in the Companys registration statement on Form S-3 which was filed on November 2, 2004, and declared effective on February 4, 2005 (Reg. No. 333-120152). The make-whole premium is based on the date on which the fundamental change becomes effective and the price paid per share of common stock in the transaction constituting the fundamental change. If holders of common stock receive only cash in the fundamental change, the stock price for purposes of the calculation shall be the cash amount paid per share. Otherwise, the stock price shall be the average of the closing sale prices of common stock on the five (5) trading days up to but not including the date of the fundamental change. If the Company elects to pay the make-whole premium, in whole or in part, in shares of common stock, the number of shares of the Companys common stock to be delivered by the Company will be equal to the portion of the make whole premium to be paid in shares of the Companys common stock divided by 97% of the current market price of the Companys common stock. The current market price for this purpose will be determined prior to the fundamental change repurchase date as described below. If the Company elects to pay the make-whole premium in whole or in part in shares of the Companys common stock, the Company will pay cash in lieu of fractional shares.

Credit Facility

On October 14, 2006, the Company entered into a Fourth Amendment (the Amendment), to its Credit Facility with a syndicate of banks (the Bank). As a result of this Amendment, certain financial covenants and conditions in the Credit Facility were modified to reflect its current operations and business needs. The other material terms of the Amendment (i) require the Company to provide the Bank with additional financial reporting, (ii) permit the Company to enter into a sale-leaseback transaction for the Companys Quebec City facility, and (iii) would require a temporary reduction in the amount of borrowing capacity under the Credit Facility to $22.5 million in the event the Companys trailing twelve month EBITDA (as defined in the Credit Facility), or TTM, is materially below, by a certain percentage, the forecasts provided to the Bank. If the total amount of the Companys outstanding loans exceeds $22.5 million at the time of the occurrence of such an event, the Company has no immediate obligation to repay these loans. If the TTM exceeds this threshold in future periods, the full borrowing capacity of the Credit Facility will be restored to $45.0 million. In conjunction with the Fourth Amendment, the Applicable Margin with respect to LIBOR Loans were increased by 25 basis points to 3.25% and the Applicable Margin with respect to Revolving Loans that are Prime Rate Loans were increased by 25 basis points to 2.25%, subject to change based upon certain leverage ratios.

In June 2007, the Company entered into a Fifth Amendment, to its Credit Facility. This amendment modified the Companys financial reporting requirements to the Bank. This amendment had no impact on the covenants or borrowing capacity available to the Company on the line of credit.

The principal balance outstanding on the Credit Facility at September 30, 2007 was $0 compared to $9.4 million at December 31, 2006. Although the outstanding balance of the Credit Facility is $0 at September 30, 2007 the Company may borrow against the credit line in the future to meet its cash needs. We are in compliance with the covenants and conditions contained therein at September 30, 2007. The obligations under the Credit Facility are guaranteed by each of our U.S. subsidiaries, is secured by a lien on the vacant land in Miami, Florida, a pledge of all of the assets of our U.S. operations and U.S. subsidiaries, and a pledge of 65% of the stock of certain of our foreign subsidiaries. The Credit Facility is due in December 2009. The U.S. assets collateralizing the Credit Facility are valued at approximately $420.6 million, including goodwill and intangible assets.



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NOTE G. COMMITMENTS AND CONTINGENCIES

On March 12, 2007, the Company received notice that the SEC staff has secured a formal order of private investigation. The formal order relates to revenue recognition, earnings, company operations and related party transactions. The Company has been cooperating fully with the SEC. In late December 2005, the Company received an informal request from the SEC for documents relating to the duties, qualifications, compensation, and reimbursement of former officers and employees. This request also asked for a copy of the report to Senator Grassley by the Companys independent counsel. In a second request, sent March 28, 2006, the SEC asked for information regarding related parties and transactions, duties and compensation of various employees, internal controls, revenue recognition and other accounting policies and procedures, and selected regulatory filings. As part of its investigation, the SEC staff has interviewed several former and current employees on the topics identified in the formal order. On June 11, 2007, the Company received a subpoena from the SEC for additional accounting documents. The Company has voluntarily complied with these requests and has produced and will continue to produce documents to the SEC.

Beginning in late December 2005, a number of class action lawsuits were filed in the United States District Court for the Southern District of Florida and the United States District Court for the District of New Jersey alleging that PDGI and certain of its current and former officers and directors violated federal securities laws (the Federal Securities Actions). The Company was served notice of these lawsuits in early January 2006. On June 21, 2006, the Judicial Panel for Multidistrict Litigation transferred all of the Federal Securities Actions for pre-trial proceedings to the District of New Jersey where they were later consolidated.

On November 1, 2006, Arkansas Teachers Retirement System, the lead plaintiff in the Federal Securities Action, filed a consolidated amended class action complaint (the Amended Complaint). The Amended Complaint alleges that the Company and several of its current and former officers and directors violated Sections 11, 12 (a)(2) and 15 of the Securities Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Amended Complaint claims violations of these federal securities laws through misstatements or omissions regarding: the maximum occupancy at the Companys Miami facility; the Miami facilitys purportedly dangerous and unsafe structure; the Companys clinical practices; purported conflicts of interests involving Independent Review Boards used by the Company; related-party transactions; and some former executives qualifications.

On August 1, 2007, the Company issued a press release announcing that the Company had entered into an Agreement to settle the Federal Securities Action on the principal terms set forth in an Agreement to Settle Class Action. Pursuant to the terms of the settlement, the class will receive $28.5 million (less legal fees, administration and other costs). The Company recorded charges of $1.5 million and $10.4 million, respectively during the three and nine month periods ended September 30, 2007 associated with the Agreement to Settle Class Action and other related litigation, of which the Company may elect to pay up to $4.0 million in stock, or in all cash. The stock will be valued according to the volume weighted average closing price for the ten trading days leading up to the date the district court enters an Order finally approving the settlement.

The Agreement to Settle Class Action is contingent upon the satisfaction of various conditions, including, but not limited to, preliminary approval by the district court and final approval by the court after notice to the class and a hearing. The Company cannot assure you that the settlement will be approved by the court or upheld if challenged by the class action.

Beginning in late December 2005, a total of five stockholder derivative complaints were filed in the United States District Court for the Southern District of Florida and the United States Court for the District of New Jersey against certain of the Companys current and former officers and directors, as well as PDGI (as a nominal defendant) for alleged violations of state and federal law, including breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, disgorgement under the Sarbanes-Oxley Act of 2002 and violation of Section 14(a) of the Securities Exchange Act of 1934 (the Federal Derivative Actions). The Company was served notice of these lawsuits in early January 2006. The Federal Derivative Actions allege that the individual defendants misrepresented and engaged in a conspiracy to misrepresent the Companys business condition, prospects and financial results, failed to disclose the Companys allegedly improper and reckless business practices, such as mismanagement of clinical trials and mistreatment of research participants, used the Companys artificially inflated stock to acquire other companies and complete public offerings and engaged in illegal insider trading.



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Beginning in late January 2006, two substantially similar derivative actions were filed in Florida Circuit Court (the Florida Circuit Court Derivative Actions). On June 21, 2006, the Judicial Panel for Multidistrict Litigation transferred the Federal Derivative Actions pursuant to 28 U.S.C. § 1407 for pre-trial proceedings in the District of New Jersey where they were later consolidated (the Federal Derivative Action).

Following the decision of the Judicial Panel for Multidistrict Litigation and the decision to consolidate all of the Federal Derivative Actions in the District of New Jersey, the Florida Circuit Court entered an order staying the cases pending final resolution of the Federal Derivative Action.

A consolidated amended complaint was filed in the Federal Derivative Action on November 13, 2006. On January 11, 2007, the defendants filed a motion to dismiss that amended complaint. On July 24, 2007, the district court denied defendants' motion to dismiss the Federal Derivative Action. On September 17, 2007, the parties sent the Court a letter informing it that the parties have engaged in preliminary settlement discussions and are attempting to mediate this case before year-end.  The parties have agreed to extend the deadline for all defendants to respond to the operative complaint until after the anticipated mediation.

The individuals named as defendants in the Federal Derivative Action and the Florida Circuit Court Derivative Action intend to vigorously defend against the lawsuits. As the outcome of these matters is difficult to predict, significant changes in the Companys estimated exposures could occur.

As a result of the settlement of the Federal Securities Action, disclosed above, the Companys applicable insurance policies to cover the derivative actions and other proceedings have been exhausted, and any amounts spent on settling or challenging these matters will be borne by the Company.

On March 21, 2006, another law firm made a demand for documents pursuant to Section 220 of the Delaware Code on behalf of an alleged shareholder (the Demand). The Demand was purportedly made to investigate potential wrongdoing, mismanagement or breaches of fiduciary duties by the Companys Board of Directors in connection with clinical trials and financial reporting since January 1, 2003 and take action on behalf of the Company in the event that the board did not discharge its fiduciary duties. Additionally, the demand was purportedly brought to assess the impartiality of the Board of Directors to consider a demand to take action on behalf of the Company. The Demand sought certain meeting minutes of the Board of Directors and documents concerning the Companys Board of Directors, financial statements, financial data reporting procedures and controls, auditing procedures and controls, recruitment and retention of clinical trial participants, clinical trials in Florida and Montreal, the Bloomberg Magazine articles, and any internal investigation relating to the foregoing. Additionally, the Demand requested all documents requested by or provided to the United States Senate Finance Committee or United States Food and Drug Administration, or United States Department of Justice. On May 12, 2006, the Company agreed to provide documents in response to the demand subject to an agreement narrowing the scope of the requests, ensuring the confidentiality of the documents, and limiting use of the documents to the purposes articulated in the Demand. No such agreements have been finalized. The Company has not heard from the law firm which made such demand since May 2006. Legal fees incurred in connection with the Demand could have a material adverse effect on future profitability. The Demand may also result in additional derivative litigation.

Employee Stock Purchase Plan and PharmaNet 401(k) Plan

On June 21, 2004, PDGIs stockholders approved the ESPP permitting eligible participants (excluding executive officers) to purchase up to 150,000 shares of the Companys common stock. The ESPP permits employees who are employed for at least 20 hours per week and who have been so employed for at least three months continuously by PDGI or one of its designated subsidiaries the option of purchasing common stock from PDGI at a 15% discount from the lower of the fair market value of such shares at the beginning of an offering period or the fair market value of such shares at the end of the offering period. Each offering period (except the initial period) is six months. Each eligible employee is granted an option to purchase such shares at the beginning of each offering period. In August 2006, PDGIs stockholders approved an amendment to the ESPP which increased the total number of shares of the Companys common stock available under the ESPP by 200,000 shares. At its June 2007 Annual Meeting, PDGI stockholders approved an amendment to the Purchase Plan, which increased the number of shares of our common stock reserved for issuance under such plan from 450,000 shares to 550,000 shares.

The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986. As of September 30, 2007 and September 30, 2006, there were 365,163 shares and 231,060 shares, respectively, issued under the ESPP. The ESPP follows IRS guidelines for eligibility.



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As of September 30, 2007 there were 184,837 shares available for issuance under the Companys Employee Stock Purchase Plan.

The Company offers a 401(k) plan to its employees of U.S. subsidiaries with annual matching contributions. The employer matching contribution level is determined by the Companys Board of Directors, and these contributions vest ratably over a three-year period. Company matching contributions for all employees for the three and nine month periods ended September 30, 2007 were $0.4 million and $1.6 million, respectively, compared to $0.7 million and $1.7 million, respectively for the three and nine month periods ended September 30, 2006. PharmaNet has also provided defined contribution plans for employees of certain foreign subsidiaries with aggregate contributions of approximately $0.6 million and $1.8 million for the three and nine month periods ended September 30, 2007, respectively, and $0.5 million and $1.3 million for the three and nine month periods ended September 30, 2006, respectively.

PharmaNet has offered a 401(k) plan to its U.S. employees. Effective December 31, 2005, the PharmaNet 401(k) plan was amended to provide that it will not accept further plan contributions. After such date, PharmaNet employees were eligible to participate in the Companys 401(k) plan. During 2005, the Company discovered the PharmaNet 401(k) plan may have sustained certain operational defects. PharmaNet applied with the Internal Revenue Service to correct these 401(k) plan defects. During the nine month period ended September 30, 2007, the Company resolved the matter with the IRS for a nominal amount, and as a result, reversed its accrual of approximately $0.5 million and recorded this amount as Other income in its results of operations for the nine month period ended September 30, 2007.

NOTE H. SEGMENT INFORMATION

Statement of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131) requires a public business enterprise report financial and descriptive information about its reportable operating segments including a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. The Companys early stage segment consists primarily of the Companys Phase I clinical trial services and the Companys bioanalytical laboratories. The Companys late stage segment consists primarily of Phase II through Phase IV services including consulting services. As referenced throughout this report, prior and current year financial results have been revised to exclude discontinued operations.

Segment information for the three month periods ended September 30, 2007 and 2006, respectively is as follows:

|                              |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|----------------------------- |  | ----------------------- | ----------- | ---------------------- | - | --------------------------- | - | ------------------------------- | ---------- | - | - | ----------- | ---
|                              |  | Early Stage
Development |             | Late Stage
Development |   | Other Reconciling
Items (1) |   | Total Continuing Operations (3) |           
|Direct revenue                |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 37,645,724  |                        | $ | 62,164,163                  |   | $                               |          |   | $ | 99,809,887  |    
|2006                          |  | $                       | 25,111,121  |                        | $ | 50,907,653                  |   | $                               |          |   | $ | 76,018,774  |    
|Depreciation and amortization |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 1,896,812   |                        | $ | 2,006,353                   |   | $                               | 23,790     |   | $ | 3,926,955   |    
|2006                          |  | $                       | 1,631,876   |                        | $ | 1,854,735                   |   | $                               |          |   | $ | 3,486,611   |    
|Operating income (loss)       |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 8,039,677   |                        | $ | 13,192,947                  |   | $                               | (7,532,563 | ) | $ | 13,700,061  |    
|2006                          |  | $                       | 3,873,882   |                        | $ | 7,102,061                   |   | $                               | (5,064,522 | ) | $ | 5,911,421   |    
|Interest income               |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 110,098     |                        | $ | 407,003                     |   | $                               | 335        |   | $ | 517,436     |    
|2006                          |  | $                       | 58,594      |                        | $ | 377,756                     |   | $                               | (282,793   | ) | $ | 153,557     |    
|Interest expense              |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 97,269      |                        | $ | 21,398                      |   | $                               | 1,296,009  |   | $ | 1,414,676   |    
|2006                          |  | $                       | 86,574      |                        | $ | (800                        | ) | $                               | 1,590,743  |   | $ | 1,676,517   |    
|Total assets                  |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 141,662,529 |                        | $ | 434,919,665                 |   | $                               | 10,248,692 |   | $ | 586,830,886 | (2)
|2006                          |  | $                       | 123,892,982 |                        | $ | 398,987,757                 |   | $                               | 32,189,682 |   | $ | 555,070,421 | (2)
|Capital expenditures          |  |                         |             |                        |   |                             |   |                                 |            |   |   |             |    
|2007                          |  | $                       | 2,398,999   |                        | $ | 1,530,290                   |   | $                               | 60,802     |   | $ | 3,990,091   |    
|2006                          |  | $                       | 5,225,648   |                        | $ | 2,485,364                   |   | $                               |          |   | $ | 7,711,012   |    



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(1)

Represents corporate allocations and reclassifications.

(2)

Excludes assets of discontinued operations.

(3)

Segment related information for SPS on a stand alone basis for 2006 (noted in the table below) has been reclassified from early stage operations as originally reported in the September 30, 2006 Form 10-Q to late stage operations. Results for 2007 which are included in late stage operations have been provided for comparative purposes.



|                                   |  |                                  |           |      |   |           |  
|---------------------------------- |  | -------------------------------- | --------- | ---- | - | --------- | -
|                                   |  | Three Months Ended
September 30, |          
|Segment Information Related to SPS |  | 2007                             |           | 2006 |  
|Direct Revenues                    |  | $                                | 1,343,437 |      | $ | 798,047   |  
|Depreciation and amortization      |  |                                  | (13,649   | )    |   | (17,017   | )
|Operating income                   |  |                                  | 564,092   |      |   | 118,115   |  
|Total assets                       |  |                                  | 7,326,355 |      |   | 1,119,486 |  
|Capital expenditures               |  | $                                | 1,490     |      | $ |         |  

Segment information for the nine month periods ended September 30, 2007 and 2006, respectively is as follows:

|                              |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |     | 
|----------------------------- |  | ----------------------- | ----------- | ---------------------- | - | --------------------------- |  | ------------------------------- | ----------- | - | - | ----------- | --- | 
|                              |  | Early Stage
Development |             | Late Stage
Development |   | Other Reconciling
Items (1) |  | Total Continuing Operations (3) |            
|Direct revenue                |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 98,060,357  |                        | $ | 172,125,721                 |  | $                               |           |   | $ | 270,186,079 |    
|2006                          |  | $                       | 73,318,297  |                        | $ | 149,961,846                 |  | $                               |           |   | $ | 223,280,143 |    
|Depreciation and amortization |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 5,161,515   |                        | $ | 5,905,199                   |  | $                               | 64,718      |   | $ | 11,131,432  |    
|2006                          |  | $                       | 5,169,399   |                        | $ | 5,701,423                   |  | $                               |           |   | $ | 10,870,822  |    
|Goodwill Impairment           |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       |           |                        | $ |                           |  | $                               |           |   | $ |           |    
|2006                          |  | $                       |           |                        | $ | 7,873,000                   |  | $                               |           |   | $ | 7,873,000   |    
|Operating income (loss)       |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 17,490,962  |                        | $ | 28,032,735                  |  | $                               | (26,959,346 | ) | $ | 18,564,351  |    
|2006                          |  | $                       | 6,422,882   |                        | $ | 15,618,432                  |  | $                               | (16,458,926 | ) | $ | 5,582,388   |    
|Interest income               |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 379,770     |                        | $ | 1,142,952                   |  | $                               | 12,215      |   | $ | 1,534,937   |    
|2006                          |  | $                       | 196,987     |                        | $ | 831,584                     |  | $                               | 21,489      |   | $ | 1,050,060   |    
|Interest expense              |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 256,907     |                        | $ | 72,696                      |  | $                               | 4,617,735   |   | $ | 4,947,338   |    
|2006                          |  | $                       | 272,640     |                        | $ | 77,183                      |  | $                               | 6,082,796   |   | $ | 6,432,619   |    
|Total assets                  |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 141,662,529 |                        | $ | 434,919,665                 |  | $                               | 10,248,692  |   | $ | 586,830,886 | (2)
|2006                          |  | $                       | 123,892,982 |                        | $ | 398,987,757                 |  | $                               | 32,189,682  |   | $ | 555,070,421 | (2)
|Capital expenditures          |  |                         |             |                        |   |                             |  |                                 |             |   |   |             |    
|2007                          |  | $                       | 6,150,201   |                        | $ | 5,242,825                   |  | $                               | 87,024      |   | $ | 11,480,050  |    
|2006                          |  | $                       | 10,923,564  |                        | $ | 6,892,587                   |  | $                               |           |   | $ | 17,816,151  |    



(1)

Represents corporate allocations and reclassifications.

(2)

Excludes assets of discontinued operations.

(3)

Segment related information for SPS on a stand alone basis for 2006 (noted in the table below) has been reclassified from early stage operations as originally reported in the September 30, 2006 Form 10-Q to late stage operations. Results for 2007 which are included in late stage operations have been provided for comparative purposes.



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|                                   |  |                                 |           |      |   |            |     
|---------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------- | ----
|                                   |  | Nine Months Ended
September 30, |          
|Segment Information Related to SPS |  | 2007                            |           | 2006 |  
|Direct Revenues                    |  | $                               | 3,225,842 |      | $ | 3,373,718  |     
|Depreciation and amortization      |  |                                 | 40,856    |      |   | (58,958    | )   
|Operating income                   |  |                                 | 1,038,789 |      |   | (6,800,023 | )(a)
|Total assets                       |  |                                 | 7,326,355 |      |   | 1,119,486  |     
|Capital expenditures               |  | $                               | 23,264    |      | $ | 7,462      |     



(a)

Includes impairment of goodwill of $7.9 million.



NOTE I. RELATED PARTY TRANSACTIONS

Loans Receivable from Officers/Stockholders

In connection with the acquisition of KAL, the Company entered into a five-year employment agreement with the former president of KAL. The agreement provided for, among other things, a loan of $1,000,000 repayable in equal installments of $200,000 plus interest of 4.45% per annum on each August 20th commencing in 2002, which is secured by a portion of the common stock issued to the employee. Provided the employee serves on a full-time basis, as defined, the Company will annually forgive $200,000 of the outstanding principal balance and accrued interest until the note is fully satisfied. In that regard, the Company amortized the note and accrued interest receivable to salaries expense on a straight-line basis over a five-year period. On August 20, 2006, the note along with the accrued interest was completely forgiven. As of December 31, 2006 the loan balance was $0.

Note Receivable from Minority Interest

In December 2005, the Company entered into a five-year promissory note with Novatia, LLC, in which its subsidiary, Taylor, owns a 25% interest. The agreement provides for a note of approximately $0.2 million with an interest rate of 6% per annum repayable in monthly payments of approximately $4,156 for 59 months. As of September 30, 2007, the loan balance was $0.1 million, which is reflected in Other assets in the consolidated balance sheet.

NOTE J. INCOME TAXES

The Companys effective tax rate for the nine month period ended September 30, 2007 was an expense of 28.2% compared to benefit of 209.6% for the same period in 2006. This change is primarily attributable to certain discrete items and a change in the proportion of earnings from domestic and international operations.

During the third quarter 2007, the Company filed its U.S. Federal Income Tax Return for the 2006 tax year. Subsequent to this filing, the Company had approximately $37.0 million of federal net operating losses for U.S. federal income tax purposes. The Company also had approximately $40.8 million of state net operating losses which will begin to expire in 2011. The Company maintains a valuation allowance against the federal and certain state net operating loss carryforwards, as the Company believes it is not likely that certain of the benefits will be realized prior to expiration. In addition, the Company had approximately $2.5 million of foreign net operating losses that began expiring in 2006. The Company has determined that a significant portion of these foreign net operating losses will not be realized prior to expiration, and therefore has a valuation allowance of approximately $0.5 million against these related deferred tax assets. The Company anticipates that it will continue to generate additional net operating tax losses in the U.S. operations at this time and will record future valuation allowance against such losses.

The Company receives significant tax credits from the government of Canada relating to its research and development expenses. These credits lower its tax liability in Canada. The Company expects the nature of the early stage business and the generation of significant tax credits to continue. However, the Company cannot assure you as to the future amount of these credits on a quarterly or annual basis due to the mix of contracts and the related amounts of research and development activity. Further, the Company has placed a valuation allowance against certain of these credits, as the amount of credits earned currently exceed projected taxable income in Canada for which such credits can be used to reduce taxes.



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PharmaNet generates a significant portion of its net earnings from foreign operations. PharmaNets non-U.S. and non-Canadian operations are based in Zurich, Switzerland where the effective tax rate is approximately 10%. The Swiss office subcontracts work to the non-U.S. and non-Canadian PharmaNet offices. Fees are based on a reimbursement to these offices for their operating costs, plus a fair markup based on appropriate transfer pricing comparables. The residual income in these non-U.S. and non-Canadian offices are taxed at their statutory rate, which is generally 10% to 37%. The Company has elected to deem its earnings and profits related to its foreign subsidiaries as permanently reinvested, accordingly, no provision has been recorded for U.S. income taxes that might result from repatriation of these earnings. The undistributed earnings of its foreign subsidiaries as of September 30, 2007 are approximately $84.2 million.

The Company adopted the provisions of FIN 48 effective January 1, 2007 which included a decrease adjustment to the January 1, 2007 retained earnings balance in the amount of $2.9 million, which together along with a previously existing income tax liability of $3.2 million resulted in a total liability for unrecognized tax benefits in the amount of $6.1 million related to the Companys U.S. and foreign operations.

As the Company is in a U.S. net operating loss (NOL) carryforward position, any potential liabilities relating to uncertain tax positions in the U.S. will be offset by existing NOLs until such time as the NOLs either expire or are utilized.  During the third quarter 2007, the Company identified approximately $0.9 million of previously recorded liabilities for unrecognized tax benefits in the U.S, which were included in the $6.1 million. This liability will be offset by existing NOLs in the Companys annual tabular disclosures related to FIN 48.

At September 30, 2007, the Company had a $5.8 million liability for unrecognized tax benefits related to the Companys operations in foreign taxing jurisdictions, which was comprised of $3.7 million for items generating unrecognized tax benefits, and $0.9 million and $1.2 million, respectively, for interest and related penalties.

The Company recognizes interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses. During the three and nine month periods ended September 30, 2007 the Company recorded expense of $0.2 million and $0.6 million, respectively for interest expense related to FIN 48.

The Companys U.S. subsidiaries have joined in the filing of a U.S. federal consolidated income tax return since acquisition in December 2004. The U.S. federal statute of limitations remains open for the years 2002 onward. The Company is subject to ongoing tax audits by the Internal Revenue Service for tax years ending December 31, 2004 and 2005. The Company believes that the results of these audits will not have a material effect on its financial position. A Quebec provincial audit for years 2003, 2004, 2005 and 2006 commenced in the third quarter of this year.

It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

NOTE K. SUBSEQUENT EVENTS

On October 22, 2007, Jack Levine, C.P.A., a member of the Companys board of directors since August 1999, announced his resignation as chairman and member of the board of directors, chairman and member of the audit committee, member of the compensation committee and member of the nominating committee, effective immediately. In connection with Mr. Levines resignation, he retains any equity awards granted to him, which vested on or before October 22, 2007. In addition, 2,472 shares of restricted stock units, which were granted to Mr. Levine on June 6, 2007 (representing 5/12 of his original grant of 5,933 shares on that date), shall vest, subject to approval by the NASDAQ Stock Market. All other unvested equity awards were forfeited.

On October 22, 2007, David Lucking, a member of the Companys board of directors since June 2002, announced his resignation as a member of the board of directors, chairman and member of the nominating committee, member of the audit committee and member of the compensation committee, effective immediately. In connection with Mr. Luckings resignation, he shall retain any equity awards granted to him, which vested on or before October 22, 2007. In addition, 1,648 shares of restricted stock units, which were granted to Mr. Lucking on June 6, 2007 (representing 5/12 of his original grant of 3,955 shares on that date), shall vest, subject to approval by the NASDAQ Stock Market. All other unvested equity awards were forfeited.



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As a result of these resignations, our board of directors reduced its size from nine to seven members. On October 24, 2007, the board of directors appointed Peter G. Tombros, a current independent member of the board of directors, as the chairman of the board.

On October 22, 2007, David Natan, who joined the Company in February 2002 and most recently served as Executive Vice President of Reporting and Analysis and Chief Accounting Officer, agreed to a mutual separation, whereby Mr. Natan will no longer be an officer of the Company effective immediately, and he shall remain an employee for up to thirty (30) days from October 22, 2007 as per the terms of his employment agreement.

The severance agreement between Mr. Natan and the Company is currently being negotiated by the Company. The material terms of his severance, which are otherwise required pursuant to his current employment agreement and were approved by the independent members of the board of directors, are as follows:

·

The Company shall make severance payments to Mr. Natan, in cash, equal to two times Mr. Natans current annual base salary. Such cash payment shall be made over a period of twenty-four months;

·

The Company shall arrange to provide Mr. Natan with life, disability, accident and health insurance benefits substantially similar to those currently received by Mr. Natan for a period of twenty-four months; and;

·

All long term incentive grants outstanding as of October 22, 2007 shall immediately vest.



Management has estimated costs associated with Mr. Natans separation will be approximately $1.1 million and will be recorded in the fourth quarter 2007. The separation agreement with Mr. Natan, if and when executed, will be filed as an exhibit to a Form 8-K or the Companys next periodic report.



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Item 2.

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

The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2006.

Due to the Board of Directors decision, after managements recommendation, in May 2006, to discontinue operations in Florida, all financial results in this report reflect our continuing operations only, unless otherwise stated (see Note C. Discontinued Operations).

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those contained in the discussion on forward-looking statements and those contained in Risk Factors contained in Item 1A of this report. We disclaim any intention or obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Overview

We report our results of operations in two segments  early stage and late stage clinical development. Our early stage segment primarily includes the areas of Phase I and bioequivalency clinical trials, bioanalytical services and support services. Our late stage segment primarily consists of the conduct of Phase II through IV clinical trials, data management and biostatistics, medical and scientific affairs, regulatory affairs and submissions, and provides software tools and services for use in clinical trials. Prior to 2005, we grew significantly through organic growth and acquisitions. We have not completed any acquisitions since December 2004. During 2006, we discontinued operations at our Miami and Ft. Myers facilities and focused our efforts on addressing issues which impacted us during 2005 as described throughout this report. Due to our decision to discontinue operations in Florida, all financial results in this report reflect our continuing operations only, unless otherwise stated. In addition, certain reclassifications, primarily related to rent escalation clauses, lessor incentives, certain payroll-related costs to conform to the late stage segment presentation and FIN 48 liabilities, have been made to the 2006 financial statement balances to conform to the 2007 presentation.

Our net revenue consists primarily of fees earned for services performed under contracts with branded pharmaceutical, biotechnology and generic drug company clients. Typically, a portion of our contract fee is due upon signing of the contract, and the majority of the contract fee is generally paid in installments upon the achievement of certain agreed upon performance milestones. Because PharmaNets late-stage contracts are generally larger and longer in duration, it typically receives larger advance payments relative to our early stage contracts. Our contracts are generally terminable immediately or after a specified period following notice by the client. These contracts usually require payment to us of expenses to wind-down a study, fees earned to date, and in some cases a termination fee. Specifically, most of our contracts in our early stage segment are of short duration, and accordingly, we do not experience any significant terminations of contracts in progress. In contrast, our late stage segment typically performs services under long-term contracts, which are subject to a greater risk of delay or cancellation.

In our late stage business, we report revenue line items consisting of direct revenue and reimbursed out-of-pockets, together with an expense line item for reimbursable out-of-pocket expenses which will consist of travel and other expenses that are reimbursed by our clients.

We record our recurring operating expenses in three primary categories: (i) direct costs, (ii) selling, general and administrative expenses and (iii) reimbursable out-of-pocket expenses. Direct costs consist primarily of participant fees and associated expenses, direct labor and employee benefits, facility costs, depreciation associated with facilities and equipment used in conducting trials, and other costs and materials directly related to contracts. Direct costs as a percentage of net revenue vary from period to period, due to the varying mix of contracts and services performed and to the percentage of revenue arising from our early stage Canadian operations, which generally have higher direct costs. Selling, general and administrative costs consist primarily of administrative payroll, except for the late stage segment, overhead, advertising, legal and accounting expense, travel, depreciation



23





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and amortization related to amortizable intangibles. The late stage segment includes all payroll related costs as part of direct costs, and all office costs and depreciation as part of selling, general and administrative costs.

The gross profit margins on our contracts vary depending upon the nature of the services we perform for our clients. Gross profit margins for our early stage clinical development trials and bioanalytical services generally tend to be higher than those for our late stage trials, and other services we perform. Within our early stage business, our gross profit margins are generally higher for trials that involve a larger number of participants, a longer period of study time and/or the performance of more tests. Gross profit margins for our services to branded drug clients generally tend to be higher than those for generic drug clients. In addition, our gross profit margins will vary based upon our mix of domestic and international business. Gross profit margins are calculated by dividing the gross profit excluding reimbursed out-of-pocket expenses by direct revenue.

Discontinued Operations

In connection with our decision to discontinue our Florida operations, we have incurred approximately $0.3 million in net costs; and approximately $0.9 million in net gain on the sale of the former CPA property during the nine month period ended September 30, 2007.

During periods subsequent to September 30, 2007, we expect to incur the following cash expenditures in connection with our discontinued operations: (i) approximately $0.2 million remaining to be paid over a period of time for the separation payment made to a former officer; and (ii) approximately $0.8 million to be paid over time in connection with the early termination of certain service agreements for office equipment. In addition to these amounts, we expect to incur the following additional estimated amounts relating to potential issues associated with our discontinued operations: (i) between $0.1 million to $0.3 million for general and administrative expenses which are expected to be incurred through December 31, 2007; and (ii) the potential uncollectibility of certain accounts receivable from discontinued operations. Our current gross outstanding accounts receivable from discontinued operations as of September 30, 2007 is approximately $3.3 million which we have reserved approximately $1.1 million.

The foregoing amounts are our current estimates and are subject to change depending on actual amounts. We will update this disclosure as soon as more information becomes available.

Critical Accounting Estimates

The preparation of our financial statements requires our management to make estimates and assumptions, which affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the applicable period. Future events and their effects cannot be determined with certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates and such differences may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors we believe to be reasonable under the circumstances. These estimates and our actual results are subject to known and unknown risks and uncertainties, including those discussed in the Special Factors Relating to Our Business and Common Stock section of Part II, Item 1A of this Form 10-Q. There have been no material changes in our critical accounting estimates or our application of these estimates in 2007, with the exception of the Canadian tax credits.





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Results of Operations

The following table summarizes our results of continuing operations for the three month periods ended September 30, 2007 and 2006. With the exception of the tax rate, which is calculated as a percentage of earnings (loss) from continuing operations before income tax, all percentages calculated are ratios of direct revenue.

|                                                                              |  |                                        |            |   |                       |        |                                        |   |            |                       |  |          |  |   |            |   |  |            | 
|----------------------------------------------------------------------------- |  | -------------------------------------- | ---------- | - | --------------------- | ------ | -------------------------------------- | - | ---------- | --------------------- |  | -------- |  | - | ---------- | - |  | ---------- | 
|                                                                              |  | Three Months
Ended
September 30, 
2007 |            |   | % of 
Direct 
Revenue |        | Three Months
Ended
September 30, 
2006 |   |            | % of 
Direct 
Revenue |  | $ Change |  |   | % Change   |  
|Direct revenue                                                                |  | $                                      | 99,809,887 |   |                       | 100.0% |                                        | $ | 76,018,774 |                       |  | 100.0%   |  | $ | 23,791,113 |   |  | 31.3%      | 
|Direct costs                                                                  |  |                                        | 57,074,046 |   |                       | 57.2%  |                                        |   | 46,542,157 |                       |  | 61.2%    |  |   | 10,531,889 |   |  | 22.6%      | 
|Selling, general and administrative expenses                                  |  |                                        | 27,535,780 |   |                       | 27.6%  |                                        |   | 23,565,196 |                       |  | 31.0%    |  |   | 3,970,584  |   |  | 16.8%      | 
|Provision for settlement of litigation                                        |  |                                        | 1,500,000  |   |                       | 1.5%   |                                        |   |          |                       |  |          |  |   | 1,500,000  |   |  | 100.0%     | 
|Total other income (expense)                                                  |  |                                        | (3,511,231 | ) |                       | 3.5%   |                                        |   | (2,170,275 | )                     |  | 2.9%     |  |   | (1,340,956 | ) |  | 61.8%      | 
|Earnings from continuing operations before income tax                         |  |                                        | 10,188,830 |   |                       | 10.2%  |                                        |   | 3,741,146  |                       |  | 4.9%     |  |   | 6,447,684  |   |  | 172.3%     | 
|Income tax expense                                                            |  |                                        | 2,961,757  |   |                       | 29.1%  |                                        |   | 538,771    |                       |  | 14.4%    |  |   | 2,422,986  |   |  | 449.7%     | 
|Earnings from continuing operations before minority interest in joint venture |  |                                        | 7,227,073  |   |                       | 7.2%   |                                        |   | 3,202,375  |                       |  | 4.2%     |  |   | 4,024,698  |   |  | 125.7%     | 
|Minority interest in joint venture                                            |  |                                        | 340,249    |   |                       | 0.3%   |                                        |   | 222,835    |                       |  | 0.3%     |  |   | 117,414    |   |  | 52.7%      | 
|Net earnings from continuing operations                                       |  |                                        | 6,886,824  |   |                       | 6.9%   |                                        |   | 2,979,540  |                       |  | 3.9%     |  |   | 3,907,284  |   |  | 131.1%     | 
|Loss from discontinued operations, net of tax                                 |  |                                        | (93,398    | ) |                       | 0.1%   |                                        |   | (3,242,289 | )                     |  | 4.3%     |  |   | 3,148,891  |   |  | (97.1%)    | 
|Net earnings (loss)                                                           |  | $                                      | 6,793,426  |   |                       | 6.8%   |                                        | $ | (262,749   | )                     |  | 0.3%     |  | $ | 7,056,175  |   |  | (2,685.5%) | 
|Earnings (loss) per share from continuing operations                          |  |                                        |            |   |                       |        |                                        |   |            |                       |  |          |  |   |            |   |  |            | 
|Basic                                                                         |  | $                                      | 0.37       |   |                       |        |                                        | $ | 0.16       |                       |  |          |  |   |            |   |  |            | 
|Diluted                                                                       |  | $                                      | 0.37       |   |                       |        |                                        | $ | 0.16       |                       |  |          |  |   |            |   |  |            | 





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The following table summarizes our results of continuing operations for the nine month periods ended September 30, 2007 and 2006. With the exception of the tax rate, which is calculated as a percentage of earnings (loss) from continuing operations before income tax, all percentages calculated are ratios of direct revenue.

|                                                                              |  |                                       |             |   |                       |        |                                       |   |             |                       |  |          |  |   |            |   |  |          | 
|----------------------------------------------------------------------------- |  | ------------------------------------- | ----------- | - | --------------------- | ------ | ------------------------------------- | - | ----------- | --------------------- |  | -------- |  | - | ---------- | - |  | -------- | 
|                                                                              |  | Nine Months
Ended
September 30, 
2007 |             |   | % of 
Direct 
Revenue |        | Nine Months
Ended
September 30, 
2006 |   |             | % of 
Direct 
Revenue |  | $ Change |  |   | % Change   |  
|Direct revenue                                                                |  | $                                     | 270,186,079 |   |                       | 100.0% |                                       | $ | 223,280,143 |                       |  | 100.0%   |  | $ | 46,905,936 |   |  | 21.0%    | 
|Direct costs                                                                  |  |                                       | 160,252,976 |   |                       | 59.3%  |                                       |   | 136,656,308 |                       |  | 61.2%    |  |   | 23,596,668 |   |  | 17.3%    | 
|Selling, general and administrative expenses                                  |  |                                       | 80,968,752  |   |                       | 30.0%  |                                       |   | 73,168,447  |                       |  | 32.8%    |  |   | 7,800,305  |   |  | 10.7%    | 
|Provision for settlement of litigation                                        |  |                                       | 10,400,000  |   |                       | 3.8%   |                                       |   |           |                       |  |          |  |   | 10,400,000 |   |  | 100.0%   | 
|Impairment of goodwill                                                        |  |                                       |           |   |                       |        |                                       |   | 7,873,000   |                       |  | 3.5%     |  |   | (7,873,000 | ) |  | (100.0%) | 
|Total other income (expense)                                                  |  |                                       | (6,280,163  | ) |                       | 2.3%   |                                       |   | (8,384,685  | )                     |  | 3.8%     |  |   | 2,104,522  |   |  | (25.1%)  | 
|Earnings (loss) from continuing operations before income tax                  |  |                                       | 12,284,188  |   |                       | 4.5%   |                                       |   | (2,802,297  | )                     |  | 1.3%     |  |   | 15,086,485 |   |  | (538.4%) | 
|Income tax expense (benefit)                                                  |  |                                       | 3,466,382   |   |                       | 28.2%  |                                       |   | (5,874,452  | )                     |  | 209.6%   |  |   | 9,340,834  |   |  | (159.0%) | 
|Earnings from continuing operations before minority interest in joint venture |  |                                       | 8,817,806   |   |                       | 3.3%   |                                       |   | 3,072,155   |                       |  | 1.4%     |  |   | 5,745,651  |   |  | 187.0%   | 
|Minority interest in joint venture                                            |  |                                       | 540,930     |   |                       | 0.2%   |                                       |   | 516,798     |                       |  | 0.2%     |  |   | 24,132     |   |  | 4.7%     | 
|Net earnings from continuing operations                                       |  |                                       | 8,276,876   |   |                       | 3.1%   |                                       |   | 2,555,357   |                       |  | 1.1%     |  |   | 5,721,519  |   |  | 223.9%   | 
|Earnings (loss) from discontinued operations, net of tax                      |  |                                       | 628,878     |   |                       | 0.2%   |                                       |   | (26,667,552 | )                     |  | 11.9%    |  |   | 27,296,430 |   |  | (102.4%) | 
|Net earnings (loss)                                                           |  | $                                     | 8,905,754   |   |                       | 3.3%   |                                       | $ | (24,112,195 | )                     |  | 10.8%    |  | $ | 33,017,949 |   |  | (136.9%) | 
|Earnings (loss) per share from continuing operations                          |  |                                       |             |   |                       |        |                                       |   |             |                       |  |          |  |   |            |   |  |          | 
|Basic                                                                         |  | $                                     | 0.44        |   |                       |        |                                       | $ | 0.14        |                       |  |          |  |   |            |   |  |          | 
|Diluted                                                                       |  | $                                     | 0.44        |   |                       |        |                                       | $ | 0.14        |                       |  |          |  |   |            |   |  |          | 

Direct Revenue

Direct revenue, which does not include reimbursed out-of-pocket expenses, was $99.8 million for the three month period ended September 30, 2007, compared to $76.0 million for the corresponding period ended September 30, 2006. Direct revenue was $270.2 million for the nine month period ended September 30, 2007 compared to $223.3 million for the corresponding period ended September 30, 2006. This represents an increase of 31.3% and 21.0%; respectively for the three month and nine month periods ended September 30, 2007 compared to the same periods in 2006. The increase in both the three and nine month periods is attributable to an increase in revenues of 49.9% and 33.7%, respectively in our early stage segment and 22.1% and 14.8%, respectively in our late stage segment.

For the three month period ended September 30, 2007, direct revenue was approximately $47.7 million from U.S. operations and $52.1 million from foreign operations compared to $34.8 million from our U.S. operations and $41.2 million from foreign operations for the same three month period in 2006. For the nine month period ended September 30, 2007, direct revenue was approximately $125.3 million from U.S. operations and $144.9 million from foreign operations compared to approximately $104.9 million from our U.S. operations and approximately $118.4 million from foreign operations for the same nine month period in 2006. The increase in direct revenue for both U.S. and foreign operations for 2007 compared to the same periods in 2006 is consistent with the increased revenues and segment mix from our late and early stage businesses.





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Direct Costs

Direct costs as a percentage of direct revenue decreased to 57.2% for the three months ended September 30, 2007 compared to 61.2% for the same period in 2006. For the nine month period ended September 30, 2007, direct costs as a percentage of direct revenue decreased to 59.3% from 61.2% for the same period in 2006. The decrease in direct costs as a percentage of direct revenue for the nine month period ended September 30, 2006 is attributable to a significant decrease in direct costs as a percentage of revenue in our early stage operations offset by a slight increase in direct costs as a percentage of revenue at our late stage operations. In both of our early stage and late stage businesses, we often receive requests from our clients for a change in the scope of project. During the change order process, we may begin to perform additional work for a client while waiting for final client approval on the change order amount. This is done to avoid delays in the progress of a study. During the third quarter 2007, the Company was able to recognize approximately $3.0 million of direct revenues which came from change orders that were not authorized in the previous quarter. For the nine month period ended September 30, 2007, we experienced a significant improvement in our early stage bioanalytical and clinical businesses. Although we continue to experience pricing pressure in our early stage business, prices currently have stabilized. Additionally, some of the measures we have taken to reduce costs and change operations to address this pricing pressure have been successful. We expect this trend to continue for the immediate future, however, there can be no assurances that further pricing pressure will not develop. Direct costs in our early stage business as a percentage of revenue are higher in our clinical operations than in the bioanalytical operations. Our utilization rate for the three and nine months ended September 30, 2007 has improved compared to the same periods during the prior year as a result of our increased capacity in our bioanalytical operations.

Our early stage business has historically experienced periods of competition. However, during 2006, we concluded that the industry change with generic pricing would become permanent for the foreseeable future. As a result of this determination we began implementing steps in the third quarter of 2006 to reduce both direct and other costs at our Anapharm subsidiary which comprises the majority of our early stage segment. These steps included headcount reductions, reduction of personnel through attrition, process changes to improve efficiencies, reduced reliance on outside contractors and other cost reductions. These measures yielded approximately $1.5 million in cost savings in 2006. During the first quarter of 2007, as a result of significantly increased backlog and business conditions, we discontinued the reduction of personnel and began recruiting for additional personnel. We continue to pursue cost reduction initiatives, however, there can be no assurance that these measures will be successful nor that the increased backlog will continue to generate increased levels of revenue due to the historic rates of cancellation in our early stage business and other factors.

Gross Profit Margins

Our gross profit margins as a percentage of direct revenue increased to 42.8% from 38.8% for the three month period ended September 30, 2007 compared to the same period in the prior year. For the nine month period ended September 30, 2007, gross profit margins as a percentage of direct revenue increased to 40.7% from 38.8% compared to the same period in the prior year. Since we perform a wide variety of services, all of which carry different gross margins, our future margins will vary from quarter-to-quarter and year-to-year based upon the mix of these contracts, our capacity levels at the time we begin the projects, and the amount of revenue generated for each type of service we perform. Even within category types, the amount of gross margins generated might vary due to the unique nature and size of each contract and project we undertake. This could impact our future profit margins and profit comparisons to historical levels. During the three and nine month periods ended September 30, 2007, the early stage segment experienced significantly lower direct costs resulting in higher profit margins, while the late stage segment experienced increased direct revenues resulting in higher profit margins compared to the same period in 2006. During the third quarter 2007, late stage operating margins benefited from the recognition of approximately $3.0 million of revenue related to authorized change order for which certain expense had been incurred in previous quarters.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses, or SG&A expenses, which includes corporate SG&A expenses, increased to approximately $27.5 million for the three month period ended September 30, 2007 compared to $23.6 million for the same period in the prior year. For the nine month period ended September 30, 2007, SG&A expenses were $81.0 million compared to $73.2 million for the nine month period in 2006. The increase in the nine month period in SG&A expenses for the period ended September 30, 2007 compared to 2006, is primarily



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attributable to additional expenditures consistent with the expansion of our business, including additional administrative and other personnel costs, health and casualty insurance, increased sales, marketing, business development efforts and facility costs in 2007 related to the move to the new Quebec and Toronto facilities. The moving costs to the new Quebec facility were $0.1 million and $0.5 million, respectively for the three and nine month periods ended September 30, 2007. Commencing July 1, 2007, the rent expense for the new Quebec facility will be approximately $1.8 million per year in excess of previous levels.

As a percentage of direct revenue, our SG&A expenses decreased to 27.6% for the three month period ended September 30, 2007 compared to 31.0% for the same three month period ended September 30, 2006. As a percentage of direct revenue, our SG&A expenses decreased to 30.0%, for the nine month period ended September 30, 2007 compared to 32.8% for the same nine month period ended September 30, 2006. The decrease in both the three and nine month periods is primarily attributable to an increase in direct revenue offset to a lesser extent, by additional expenditures in 2007.

Corporate SG&A expenses for the three month period ended September 30, 2007, excluding $1.5 million for the provision for the settlement of the securities class action lawsuit and other related litigation amounted to $6.0 million compared to $5.0 million in the same period in 2006. Corporate SG&A expenses for the nine month periods ended September 30, 2007 and 2006, excluding the provision for the settlement of the securities class action lawsuit and other related litigation amounted to approximately $16.5 million, respectively. The increase for the three month period in 2007 compared to 2006 is primarily attributable to increase in general SG&A expenses and an increase in non-cash compensation expense related to RSUs, which amounted to $0.3 million for the three month period ended September 30, 2007 compared to $0.1 million for the same period in 2006; offset by a decrease in legal fees related to the SEC investigation, which amounted to $0.2million for the three month period ended September 30, 2007, compared to $0.4 million for the three month period ended September 30, 2006.

Provision for Settlement of Litigation

For the three and nine month periods ended September 30, 2007, we recorded a charge of $1.5 million and $10.4 million, respectively for the settlement of the securities class action lawsuit and other litigation. The current reserve level for the settlement of the securities class action lawsuit and other litigation represents an estimate. We may need to adjust the provision as the outcomes of the securities class action and other related litigation become more predictable. For further discussion regarding this matter, refer to Note G. Commitments and Contingencies.

Interest Income and Expense, Foreign Exchange Transactions, Other Income

Our interest expense decreased to approximately $1.4 million for the three month period ended September 30, 2007 compared to approximately $1.7 million for the same period ended September 30, 2006. Our interest expense decreased to approximately $4.9 million for the nine month period ended September 30, 2007, compared to approximately $6.4 million for the same period ended September 30, 2006. This decrease is primarily due to substantially lower loan balances; offset slightly by higher interest rates and a write-off of deferred finance costs in the nine month period ended September 30, 2006. In May 2006, we agreed to permanently reduce the size of our credit facility, as amended and restated, referred to herein as the Credit Facility, from $90.0 million to $45.0 million. As a result of this reduction, we wrote-off approximately $1.2 million of deferred financing costs related to the Credit Facility in the second quarter of 2006.

Interest expense includes amortization of deferred finance costs, which amounted to $0.4 million and $1.2 million for both the three and nine months periods ended September 30, 2007 and 2006, respectively.

At September 30, 2007, the balance outstanding under our Credit Facility was $0. The current interest rate on this variable rate facility is approximately 9.5% on the revolving line of credit, excluding interest expense relating to unused borrowing capacity on the line of credit. Based upon a zero loan balance outstanding at September 30, 2007, and assuming no further borrowings are incurred and interest rates do not increase, the projected interest expense on the Credit Facility (and the fees paid on the unutilized portion of the Credit Facility) and convertible debt for the remainder of 2007 will be approximately $0.9 million excluding amortization of deferred finance costs. The remaining deferred financing costs of approximately $3.4 million relating to the convertible notes and remaining Credit Facility are being amortized over a period of between three and four years and are charged to interest expense.

For the three and nine month periods ended September 30, 2007, we recorded approximately $0.5 million and $1.5 million in interest income compared to approximately $0.2 million and $1.1 million for the same periods



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ended September 30, 2006. This increase is primarily attributable to higher interest rates available on cash balances and investments and slightly higher average cash balances during 2007 compared to the same period in 2006.

Foreign exchange transaction losses increased to $2.6 million and $3.3 million, respectively for the three and nine month periods ended September 30, 2007, compared to $0.6 million and $3.0 million for the same periods ended September 30, 2006. The increases are primarily attributable to the weakening of the U.S. dollar against the Canadian dollar, Euro, and Swiss Franc in the early and late stage segments. Within our early stage businesses operating in Canada essentially all costs are in Canadian dollars, while a significant portion of direct revenues are either in U.S. dollars or Euros. Similarly, in the late stage businesses in Europe costs are primarily in Euros, and Swiss Francs, while a significant portion of revenues are in U.S dollars. We have a number of ongoing initiatives to effectively mitigate foreign currency exposure.

During the second quarter 2007, we resolved a 401(k) plan matter with the IRS for a nominal amount and as a result reversed our accrual of $0.5 million and recorded this amount as Other income in our results of operations for the nine month period ended September 30, 2007. For further discussion regarding this matter, refer to Note G. Commitments and Contingencies.

Income tax

Our effective tax rate for the three months ended September 30, 2007 was an expense of 29.1% compared to an expense of 14.4% for the same three months ended in 2006. Our effective tax rate for the nine months ended September 30, 2007 was an expense of 28.2%, compared to a benefit of 209.6% for the same nine months ended in 2006. This was primarily attributable to certain discrete items and a change in the proportion of earnings between domestic and international operations.

During the third quarter 2007, we filed our U.S. Federal Income Tax Return for the 2006 tax year. Subsequent to this filing, we had approximately $37.0 million of federal net operating losses for U.S. federal income tax purposes. We also have approximately $40.8 million of state net operating losses that will begin to expire in 2011. We maintain a valuation allowance against the federal and certain state net operating loss carryforwards, as we believe it is not likely that the benefits will be realized prior to expiration. In addition, we had approximately $2.5 million of foreign net operating losses that began expiring in 2006. We have determined that a significant portion of these foreign net operating losses will not be realized prior to expiration, and therefore has a valuation allowance of approximately $0.5 million against these related deferred tax assets. We anticipate that we will continue to generate additional net operating tax losses in the U.S. operations at this time and will record future valuation allowance against such losses.

We receive significant tax credits from the government of Canada relating to research and development expenses. These credits lower the tax liability in Canada. We expect the nature of our early stage business and the generation of significant tax credits to continue. However, we cannot assure you as to the future amount of these credits on a quarterly or annual basis due to the mix of contracts and the related amounts of research and development activity. Further, we have placed a valuation allowance against certain of these credits, as the amount of credits earned currently exceed projected taxable income in Canada for which such credits can be used to reduce taxes.

PharmaNet generates a significant portion of its net earnings from foreign operations. PharmaNets non-U.S. and non-Canadian operations are based in Zurich, Switzerland where the effective tax rate is approximately 10%. The Swiss office subcontracts work to the non-U.S. and non-Canadian PharmaNet offices. Fees are based on a reimbursement to these offices for their operating costs, plus a fair markup based on appropriate transfer pricing comparables. The residual income in these non-U.S. and non-Canadian offices are taxed at their statutory rate, which is generally 10% to 37%. We have elected under APB 23 to permanently reinvest earnings and profits related to its foreign subsidiaries; accordingly, no provision has been recorded for U.S. income taxes that might result from repatriation of these earnings. The undistributed earnings of foreign subsidiaries as of September 30, 2007 are approximately $84.2 million.

We adopted the provisions of FIN 48 effective January 1, 2007 which included a decrease adjustment to the January 1, 2007 retained earnings balance in the amount of $2.9 million, which together along with a previously existing income tax liability of $3.2 million resulted in a total liability for unrecognized tax benefits in the amount of $6.1 million related to our U.S. and foreign operations.



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We are in a U.S. net operating loss (NOL) carryforward position, any potential liabilities relating to uncertain tax positions in the U.S. will be offset by existing NOLs until such time as the NOLs either expire or are utilized. During the third quarter 2007, we identified approximately $0.9 million of previously recorded liabilities for unrecognized tax benefits in the U.S, which were included in the $6.1 million. This liability will be offset by existing NOLs in our annual tabular disclosures related to FIN 48.

At September 30, 2007, we had a $5.8 million liability for unrecognized tax benefits related to our operations in foreign taxing jurisdictions, which was comprised of $3.7 million for items generating unrecognized tax benefits, and $0.9 million and $1.2 million, respectively, for interest and related penalties.

During the three and nine month periods ended September 30, 2007 we recorded expense of $0.2 million and $0.6 million, respectively for interest expense related to FIN 48.

It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on the results of operations or our financial position.

Our U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return since acquisition in December 2004. The U.S. federal statute of limitations remains open for the years 2002 onward. We are subject to ongoing tax audits by the Internal Revenue Service for tax years ending December 31, 2004 and 2005. A Quebec provincial audit for years 2003, 2004, 2005 and 2006 commenced during the third quarter of this year. The state of New Jersey audit for PharmaNet LLC for the years 2003  2006 is scheduled to begin during the fourth quarter 2007 for partnership and gross income tax, as well as for sales and use tax for the years 2003  2007. We believe the results of these audits will not have a material effect on our financial position.

PharmaNet operates both in the U.S. and in numerous different taxing jurisdictions worldwide, many with lower tax rates than the U.S. We expect (i) the nature of Anapharms business and the generation of Canadian tax credits to continue; and (ii) PharmaNet to continue generating the majority of their profits in taxing jurisdictions with lower effective tax rates than the U.S. There can be no assurance as to the future amount of Canadian tax credits on a quarterly or annual basis due to the mix of contracts and the related amounts of research and development activity. Nor can there be any assurance that PharmaNets foreign subsidiaries can contribute to pre-tax earnings on the same proportion from period to period.

For the full year 2007, we expect our average effective tax rate, excluding the provision for settlement of litigation to be approximately 18% - 20% based on current projections. We cannot be certain, however, that the changes in the operating income of our operations, or shifts in the location of the performance of work, or other expected factors such as FIN 48 described above will not adversely impact the effective tax rate.

Earnings (loss) Per Share

For the three month period ended September 30, 2007, net earnings from continuing operations increased to $6.9 million from $3.0 million for the same period during 2006. For the nine month period ended September 30, 2007, net earnings from continuing operations increased to $8.3 million from $2.6 million for the same period during 2006. On a diluted basis, our earnings per share was $0.37 for the three months ended September 30, 2007 compared to earnings per share of $0.16 for the three month period ended September 30, 2006. The principal reasons for the change in net earnings for both the three and nine month periods were primarily due to significant increases in earnings in both our early and late stage segments; offset bythe provision recorded for the settlement of the securities class action lawsuit and other litigation, which amounted to $1.5 million and $10.4 million, respectively, and the increase in other income and expense attributable to foreign exchange losses, which increased to $2.6 million and $3.3 million for the three and nine month periods ended September 30, 2007, compared to $0.6 million and $3.0 million for the same periods during 2006. For the three months ended September 30, 2007, we had 19,120,631 diluted shares of common stock outstanding compared to 18,473,375 shares for the same period in 2006. The change is primarily attributable to previously issued RSUs and the exercise of stock options. For the nine months ended September 30, 2007, we had 18,984,625 diluted shares of common stock compared to 18,376,696 shares of diluted stock for the same period in 2006. If our average common stock price exceeds $41.08 during a reporting period, we will be required to include additional shares in calculating the weighted average number of fully diluted shares due to our convertible notes. The amount of additional shares will be calculated comparable to the treasury method used for in-the-money stock options.



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Liquidity and Capital Resources

At September 30, 2007, we had cash, cash equivalents and marketable securities of approximately $66.5 million, and working capital (which excludes the assets and liabilities of discontinued operations) of $81.8 million, compared to $53.8 million of cash, cash equivalents and marketable securities and working capital of $55.3 million at September 30, 2006. For the nine months ended September 30, 2007, net cash provided by operating activities from continuing operations was $28.8 million compared to $27.4 million for the corresponding period during the prior year. The increase in cash flow provided by continuing operating activities is due to net earnings of $8.3 million and adjustments to reconcile net earnings, which include $10.4 million for the provision for settlement of litigation, $11.1 million related to depreciation and amortization and $3.6 million of share-based compensation expense; offset by a net decrease in operating assets and liabilities of $6.7 million, which included increases of $4.0 million in accrued liabilities, $12.1 million in client advances and $1.5 million in other long term liabilities, offset by increases of $15.6 million in accounts receivable and $2.6 million in prepaid expenses and other current assets, and a decrease of $6.2 million in accounts payable.

For the nine month period ended September 30, 2007, net cash used in investing activities from continuing operations was $8.4 million compared to $13.2 million for the corresponding period during the prior year. During the first nine months of 2007, we used approximately $11.5 million for capital expenditures compared to $17.8 million in capital expenditures for the corresponding period during the prior year. Additionally, during the nine months ended September 30, 2007, our receipt of proceeds of marketable securities decreased to $3.0 million as compared to $6.7 million during the prior year as a result of the redemption or sale of investments in marketable securities.

For the nine months ended September 30, 2007, net cash used in financing activities from continuing operations was $8.2 million compared to net cash provided by financing activities of $1.9 million in the corresponding period during the prior year. The decrease in cash received from financing activities is primarily attributable to $9.4 million in net payments on our Credit Facility and principal repayment of $3.0 million on capital lease obligations, offset by $4.1 million in proceeds from stock option exercises and our employee stock purchase program compared to $4.7 million in proceeds from stock option exercises and our employee stock purchase program in the corresponding period last year.

On October 14, 2006, we entered into a Fourth Amendment, referred to herein as the Amendment, to our Credit Facility with a syndicate of banks. As a result of this Amendment, certain financial covenants and conditions in the Credit Facility were modified to reflect our current operations and business needs. The other material terms of the Amendment (i) require us to provide the Bank with additional financial reporting, (ii) permit us to enter into a sale-leaseback transaction for our Quebec City facility, and (iii) would require a temporary reduction in the amount of borrowing capacity under the Credit Facility to $22.5 million in the event our trailing twelve month EBITDA (as defined in the Credit Facility), or TTM, is materially below, by a certain percentage, the forecasts provided to the Bank. If the total amount of our outstanding loans exceeds $22.5 million at the time of the occurrence of such an event, we have no immediate obligation to repay these loans. If the TTM exceeds this threshold in future periods, the full borrowing capacity of the Credit Facility will be restored to $45.0 million. In conjunction with the Fourth Amendment, the Applicable Margin with respect to LIBOR Loans was increased by 25 basis points to 3.25% and the Applicable Margin with respect to Revolving Loans that are Prime Rate Loans was increased by 25 basis points to 2.25%, subject to change based upon certain leverage ratios.

In June 2007, we entered into a Fifth Amendment. This amendment modified our financial reporting requirements to the Bank. This amendment had no impact on the covenants or borrowing capacity available to us on the line of credit.

The principal balance outstanding on the Credit Facility at September 30, 2007 was $0 compared to $9.4 million at December 31, 2006. Although the outstanding balance of the Credit Facility was $0 at September 30, 2007, we may borrow against the Credit Facility in the future to meet our cash needs. We are in compliance with the covenants and conditions contained therein at September 30, 2007. The obligations under the Credit Facility are guaranteed by each of our U.S. subsidiaries, are secured by a lien on the vacant land in Miami, Florida, a pledge of all of the assets of our U.S. operations and U.S. subsidiaries, and a pledge of 65% of the stock of certain of our foreign subsidiaries. The facility is due in December 2009. The U.S. assets collateralizing the Credit Facility are approximately valued at $420.6 million including goodwill and intangible assets.



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Previously, a significant component of our business strategy was to seek to make acquisitions that are accretive to earnings and meet certain operational requirements. The Company may also consider other strategic initiatives which may include joint ventures and business development. Although our management continues to assess acquisitions and business development opportunities, its primary focus is on current operations. If we consummate any acquisitions, we expect to use our existing cash, our Credit Facility to the extent available and, if necessary, obtain additional debt or equity financing to fund any such acquisitions.

When we purchased New Drug Services, Inc., also referred to herein as NDS, in 2002, we agreed to pay the seller additional purchase consideration based upon NDS future operating results over a three year period commencing September 30, 2002. Although NDS was profitable, except for approximately $0.5 million in guaranteed payments, we have not paid any additional purchase consideration. Beginning in 2005, we began tracking on a stand-alone basis the core business of that subsidiary as it existed as of the date of acquisition and PharmaNet began operating our Charlotte, North Carolina based late stage business. As a result, we entered into an amendment of our earn-out agreement with the former shareholders of NDS, and, based upon the profitability of the core business, we paid $2.0 million in April 2006 to the former shareholders of NDS.

We anticipate spending between $5.5 million and $7.5 million in capital asset expenditures during the fourth quarter 2007, consisting primarily of new bioanalytical computer equipment and other capital expenditures.

In 2005, Anapharm purchased land for $2.5 million and in 2006, commenced building a new facility in Quebec City, Canada intended to house all of its clinical and bioanalytical operations as well as administrative functions. In early 2006, Anapharm negotiated a build-to-suit arrangement with a building contractor. Subsequent to this arrangement, Anapharm decided that it was advantageous to enter into a leasing arrangement for this location versus owning the property and building. In October 2006, Anapharm completed a transaction with a third party investor. Under the terms of the agreement, the Investor advanced Anapharm approximately $9.8 million which represented substantially all of the funds that Anapharm had spent on the land purchase and construction as of that date. Additionally, the Investor agreed to pay the contractor for the remaining building costs not to exceed approximately $18.0 million. Any construction costs in excess of $18.0 million would be borne by us.

Under the terms of SFAS 98 our contingent liability to the builder as well as our involvement in ensuring the building is designed and built to properly meet its operational need, constitutes continuing involvement. Prior to September 30, 2007, the sale-leaseback for accounting purposes could not be completed until all required building documentation was completed and we no longer had legal liability for construction costs. As a result, we had previously classified the Quebec City building as construction in progress and land expected to be sold in sale-leaseback transaction on the Consolidated Balance Sheets along with a corresponding liability until final approvals could be obtained.

On September 24, 2007, we received a letter from the architect certifying that the building was complete. As of September 30, 2007, the building was 100% complete and operational. As a result, we have been relieved of future obligations, contingencies and liability related to the construction of the building. Accordingly, the Company has removed the construction in progress and land expected to be sold in sale-leaseback transaction and the corresponding liability of approximately $23.7 million from the Consolidated Balance Sheets and approximately $7.9 million of non-cash from investing and financing activities has been excluded from the Consolidated Statements of Cash Flows as of and for the nine month period ended September 30, 2007. Pursuant to sale-leaseback accounting rules, a gain of approximately $867,000 was deferred at September 30, 2007 and is being amortized as a rent subsidy as an offset against rent expense over the 20-year term of the lease, subject to two five-year renewal options. The rental payment, exclusive of the rent subsidy, for the first five years of the lease term is $2,373,285 per year and increases by 10.0% for each of the next three five-year increments. Both the rental payments and rent subsidy are recorded in Anapharms functional currency, the Canadian dollar. The lease is being accounted for as an operating lease.

Based upon our cash balances and cash flows from operations, we believe we have adequate working capital to meet our operational needs for the next 12 months.

In order to provide a liquidity metric that enables investors to benchmark us against others in the industry, we calculate days sales outstanding, also referred to herein as DSO, for each three month period for continuing operations. DSOs are calculated by taking the consolidated accounts receivable balance for continuing operations at



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the end of a period, and subtracting both short term and long term client advances balances for continuing operations at the end of the period. The resulting number is divided by average net revenue per day for continuing operations for the three month period. For the three month period ended September 30, 2007, our DSO was 38 days. We expect our annual DSO to be between 35  42 days.

Capital Expenditures and Commitments

During the three and nine months ended September 30, 2007, we incurred approximately $4.0 million and $11.5 million, respectively, for capital expenditures compared to $7.7 million and $17.8 million for the corresponding periods during 2006. We expect to spend between $5.5 million and $7.5 million in capital asset expenditures during the fourth quarter 2007, consisting primarily of new bioanalytical laboratory computer equipment.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into contractual commitments to purchase materials and services from suppliers in exchange for favorable pricing arrangements or more beneficial terms. At September 30, 2007, these non-cancelable purchase obligations were not materially different than those disclosed in the Contractual Commitments table contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

Under our agreement with our joint venture partner in Spain, we are required to fund the working capital of Anapharm Europe, S.L. Since that operation generates sufficient cash flow from operations, we have not had to provide it any working capital nor do we expect to be required to do so in the immediate future.

When we purchased New Drug Services, Inc. in 2002, we agreed to pay the seller additional purchase consideration based upon New Drug Services future operating results over a three year period commencing September 30, 2002. Although New Drug Services was profitable, except for approximately $0.5 million in guaranteed payments, we have not paid any additional purchase consideration. Beginning in 2005, we began tracking on a stand-alone basis the core business of that subsidiary as it existed as of the date of acquisition and PharmaNet began operating our Charlotte, North Carolina based late stage business. As a result, we entered into an amendment of our earn-out agreement. Based upon the profitability of the core business, we paid $2.0 million in April 2006 to the former shareholders of NDS.

Forward-Looking Statements

There are a number of forward-looking statements in this report within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, industry trends and information; our ability to implement our strategy described in Item 1 of our Annual Report on Form 10-K; our ability to determine our impairment charges and costs of discontinued operations; whether we will achieve our estimated value for our discontinued operations; developments with respect to the SECs inquiry and securities class action lawsuits and derivative lawsuits; our ability to successfully achieve and manage the technical requirements of specialized clinical trial services, while complying with applicable rules and regulations; regulatory changes; changes affecting the clinical research industry; a reduction of outsourcing by pharmaceutical and biotechnology companies; our ability to compete internationally in attracting clients in order to develop additional business; our evaluation of our backlog and the potential cancellation of contracts; our ability to retain and recruit new employees; our clients ability to provide the drugs and medical devices used in our clinical trials; our future stock price; our assessment of our effective tax rate; our financial guidance; our future effective tax rate; our anticipated 2007 capital expenditures; our 2007 costs of compliance of Section 404 of the Sarbanes-Oxley Act; the impact of foreign currency transaction costs and the effectiveness of any hedging strategies that we implement; and the national and international economic climate as it affects drug development operations. Additionally, words such as expects, anticipates, intends, believes, will and similar words are used to identify forward-looking statements.

The results anticipated by any or all of these forward-looking statements might not occur. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the risk factor section of this report and our other filings with the SEC.



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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risks in some of our financial instruments. These instruments are carried at fair value on our financial statements. We are subject to currency risk due to our foreign operations. We are also subject to interest rate risk on our Credit Facility as described below. We have not entered into any market risk sensitive instruments for trading purposes.

Market Risk

In 2007 and 2006, we purchased certain debt securities. We classify our investments in debt securities as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments classified as available-for-sale are carried at fair value based on quoted market prices. The unrealized holding gain (loss) on available-for-sale securities is reported as a component of accumulated other comprehensive earnings, net of applicable deferred income taxes. For the three month periods ended September 30, 2007 and 2006, the unrealized gain on investments in marketable securities was insignificant. Cost is determined on the actual purchase price of the marketable security for determining realized gains and losses. For the three month periods ended September 30, 2007 and 2006, there were no material realized gains or losses. As of September 30, 2007 and December 31, 2006, we had approximately $6.1 million and $8.4 million, respectively, in investments in marketable securities.

Financial instruments that potentially subject us to credit risk consist principally of trade receivables. We perform services and extend credit based on an evaluation of the clients financial condition without requiring collateral. Exposure to losses on receivables is expected to vary by client based on the financial condition of each client. We monitor exposure to credit losses and maintain allowances for anticipated losses considered necessary under the circumstances. Additionally, we, from time to time, maintain cash balances with financial institutions in amounts that exceed federally insured limits.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable, convertible senior notes and notes payable. At September 30, 2007, the fair value of these instruments approximates their carrying amounts.

Currency Risk

We operate on a global basis and therefore are exposed to various types of currency risks. Two specific transaction risks arise from the nature of the contracts we execute with our customers. From time to time contracts are denominated in a currency different than the particular local currency. This contract currency denomination issue is applicable only to a portion of the contracts executed. The first risk occurs as revenue recognized for services rendered is denominated in a currency different from the currency in which our subsidiarys expenses are incurred. As a result, our subsidiarys net service revenues and resultant net income or loss can be affected by fluctuations in exchange rates.

The second risk results from the passage of time between the invoicing of customers under these contracts and the ultimate collection of customer payments against such invoices. Because the contract may be denominated in a currency other than our subsidiarys local currency, we recognize a receivable at the time of invoicing in the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared until the payment from the customer is received will result in us receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. This difference is recognized as a foreign currency transaction gain or loss, as applicable, and is reported in Other Income (Expense) in the Consolidated Statements of Operations.

Our Consolidated Financial Statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiarys financial results into U.S. dollars for purposes of reporting Consolidated Financial Statements. Our foreign subsidiaries translate their financial results from local currency into U.S. dollars as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the shareholders equity account referred to as the foreign currency translation adjustment account. This account exists only in the foreign subsidiaries U.S. dollar balance sheet and is necessary to keep the foreign subsidiaries balance sheet stated in U.S. dollars in balance.



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During the nine month period ended September 30, 2007 we had a pre-tax loss from foreign currency transactions of $3.3 million related to the risks described above. During the first six months of 2007, we entered into foreign currency hedge transactions to hedge exposure related to receivables denominated in currencies other than the functional currency. As of September 30, 2007, we had outstanding foreign exchange put contracts with a notional amount of approximately $6.0 million as a hedge against a portion of our foreign exchange exposure.

Interest rate risk

We have a $45.0 million Credit Facility. At September 30, 2007, our outstanding balance under the Credit Facility was $0. The interest rate on the Credit Facility is LIBOR based and variable. The Credit Facility is secured by substantially all of our U.S. assets and a pledge of 65% of the capital stock of certain of our foreign subsidiaries. Changes in interest rates and LIBOR in particular, will affect our cost of funds under this facility. A 10% change in our variable rate Credit Facility would result in a change in annual interest expense of approximately $0.4 million.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuers reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms; and (ii) information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures. The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this report. In the course of this evaluation, we sought to identify any significant deficiencies in our use of a disclosure committee or reporting to our management of information relating to our operating subsidiaries. This type of evaluation will be done quarterly so the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on their evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic reports filed with the SEC as of the end of the period covered by this report. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur.

(b) Changes in Internal Controls

There has been no change in our internal control over financial reporting which occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





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PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

On March 12, 2007, we received notice that the SEC staff had secured a formal order of private investigation. The formal order relates to revenue recognition, earnings, company operations and related party transactions. We have been cooperating fully with the SEC. In late December 2005, we received an informal request from the SEC for documents relating to the duties, qualifications, compensation, and reimbursement of former officers and employees. This request also asked for a copy of the report to Senator Grassley by our independent counsel. In a second request, sent March 28, 2006, the SEC asked for information regarding related parties and transactions, duties and compensation of various employees, internal controls, revenue recognition and other accounting policies and procedures, and selected regulatory filings. As part of its investigation, the SEC staff has interviewed several former and current employees on the topics identified in the formal order. On June 11, 2007, we received a subpoena from the SEC for additional accounting documents. We have voluntarily complied with these requests and have produced and will continue to produce documents to the SEC.

Beginning in late December 2005, a number of class action lawsuits have been filed in the United States District Court for the Southern District of Florida and the United States District Court for the District of New Jersey alleging that PDGI and certain of its current and former officers and directors violated federal securities laws, such actions are collectively referred to herein as the Federal Securities Actions. We were served notice of these lawsuits in early January 2006. On June 21, 2006, the Judicial Panel for Multidistrict Litigation transferred all of the Federal Securities Actions for pre-trial proceedings in the District of New Jersey where they were later consolidated.

On November 1, 2006, Arkansas Teachers Retirement System, the lead plaintiff in the Federal Securities Action, filed a consolidated amended class action complaint, also referred to herein as the amended complaint. The amended complaint alleges that we and several of our current and former officers and directors violated Sections 11, 12 (a)(2) and 15 of the Securities Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint claims violations of these federal securities laws through misstatements or omissions regarding: the maximum occupancy at our Miami facility; the Miami facilitys purportedly dangerous and unsafe structure; our clinical practices; purported conflicts of interests involving Independent Review Boards used by us; related-party transactions; and some former executives qualifications.

On August 1, 2007, we issued a press release announcing that we had entered into an Agreement to settle the Federal Securities Action on the principal terms set forth in an Agreement to Settle Class Action. Pursuant to the terms of the settlement, the class will receive $28.5 million (less legal fees, administration and other costs). We recorded charges of $1.5 million and $10.4 million, for the three and nine month periods ended September 30, 2007 associated with the Agreement to Settle Class Action and other related litigation, of which we may elect to pay up to $4.0 million in stock, or in all cash. The stock will be valued according to the volume weighted average closing price for the ten trading days leading up to the date the district court enters an Order finally approving the settlement. The Agreement to Settle Class Action is contingent upon the satisfaction of various conditions, including, but not limited to, preliminary approval by the district court and final approval by the court after notice to the class and a hearing. We cannot assure you that the settlement will be approved by the court or upheld if challenged by the class. Beginning in late December 2005, a total of five stockholder derivative complaints were filed in the United States District Court for the Southern District of Florida and the United States Court for the District of New Jersey against certain of our current and former officers and directors, as well as PDGI (as a nominal defendant) for alleged violations of state and federal law, including breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, disgorgement under the Sarbanes-Oxley Act of 2002 and violation of Section 14(a) of the Securities Exchange Act of 1934, such actions are referred to herein as the Federal Derivative Actions. We were served notice of these lawsuits in early January 2006. The Federal Derivative Actions allege that the individual defendants misrepresented and engaged in a conspiracy to misrepresent our business condition, prospects and financial results, failed to disclose our allegedly improper and reckless business practices, such as mismanagement of clinical trials and mistreatment of research participants, used our artificially inflated stock to acquire other companies and complete public offerings and engaged in illegal insider trading.

Beginning in late January 2006, two substantially similar derivative actions were filed in Florida Circuit Court, also referred to herein as the Florida Circuit Court Derivative Action. On June 21, 2006, the Judicial Panel for Multidistrict Litigation transferred the Federal Derivative Actions pursuant to 28 U.S.C. § 1407 for pre-trial



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proceedings in the District of New Jersey where they were later consolidated; such consolidated action is referred to herein as the Federal Derivative Action.

Following the decision of the Judicial Panel for Multidistrict Litigation and the decision to consolidate all of the Federal Derivative Actions in the District of New Jersey, the Florida Circuit Court entered an order staying those cases pending final resolution of the Federal Derivative Action.

A consolidated amended complaint was filed in the Federal Derivative Action on November 13, 2006. On January 11, 2007, the defendants filed a motion to dismiss that amended complaint. On July 24, 2007, the district court denied defendants' motion to dismiss the Federal Derivative Action. On September 17, 2007, the parties sent the Court a letter informing it that the parties have engaged in preliminary settlement discussions and are attempting to mediate this case before year-end.  The parties have agreed to extend the deadline for all defendants to respond to the operative complaint until after the anticipated mediation.

The individuals named as defendants in the Federal Derivative Action and the Florida Circuit Court Derivative Action intend to vigorously defend against the lawsuits. As the outcome of these matters is difficult to predict, significant changes in our estimated exposures could occur.

As a result of the settlement of the Federal Securities Action, disclosed above, our applicable insurance policies to cover the derivative actions and other proceedings have been exhausted and any amounts spent on settling or challenging these matters will be borne by us.

On March 21, 2006, another law firm made a demand for documents pursuant to Section 220 of the Delaware Code on behalf of an alleged shareholder, also referred to herein as the Demand. The Demand was purportedly made to investigate potential wrongdoing, mismanagement or breaches of fiduciary duties by our Board of Directors in connection with clinical trials and financial reporting since January 1, 2003 and take action on behalf of us in the event that our Board of Directors did not discharge its fiduciary duties. Additionally, the Demand was purportedly brought to assess the impartiality of the Board of Directors to consider a demand to take action on behalf of us. The Demand sought certain meeting minutes of the Board of Directors and documents concerning our Board of Directors, financial statements, financial data reporting procedures and controls, auditing procedures and controls, recruitment and retention of clinical trial participants, clinical trials in Florida and Montreal, the Bloomberg Magazine articles, and any internal investigation relating to the foregoing. Additionally, the Demand requested all documents requested by or provided to the United States Senate Finance Committee or United States Food and Drug Administration, or United States Department of Justice. On May 12, 2006, we agreed to provide documents in response to the demand subject to an agreement narrowing the scope of the requests, ensuring the confidentiality of the documents, and limiting use of the documents to the purposes articulated in the Demand. No such agreements have been finalized. We have not heard from the law firm which made such demand since May 2006. Legal fees incurred in connection with the Demand could have a material adverse effect on future profitability. The Demand may also result in additional derivative litigation.

Our attempts to resolve these legal proceedings involve a significant amount of attention from our management, additional cost and uncertainty, and these legal proceedings may result in material damage or penalty awards or settlements, and may have a material and adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings.





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Item 1A.

Risk Factors

You should carefully consider the following risks and all of the other information set forth in this Form 10-Q before deciding to invest in shares of our common stock. The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial may also impair our business operations.

If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the market price of our common stock would likely decline due to the occurrence of any of these risks, and you may lose all or part of your investment.



Risks Associated With Recent Actions, Inquiries and Lawsuits

While we have insurance coverage in connection with the pending securities class and derivative actions, the current proposed settlement for the securities class action suit exceeds our insurance coverage limits, and there will be no additional coverage for the derivative actions and associated future legal fees.



We are subject to a number of class actions and derivative actions in federal court, which were consolidated in the District of New Jersey.  A number of securities class actions and derivative actions have been filed against us. The securities class actions allege that we and certain of our former and current officers and directors engaged in violations of the anti-fraud provisions of the federal securities laws. The derivative suits are brought on behalf of PharmaNet against certain of our former and current officers and/or directors alleging, among other things, breaches of fiduciary duty. The complaints in these actions seek, among other things, unspecified damages and costs associated with the litigation.  As of December 31, 2006, our $250,000 insurance deductible was reached.  On August 1, 2007 we entered into an Agreement to Settle Class Action to settle the securities class action lawsuit.  Under the terms of the Agreement to Settle Class Action, which is subject to court approval, our insurance coverage has been exceeded.  Since the pending settlement of the securities class action suit has exhausted our policy limits, we no longer have any coverage for additional legal fees or to cover any adverse judgment in or derivative suit.  As such, our future earnings and financial condition could be materially and adversely affected. Additionally, in the event the court does not approve the Agreement to Settle Class Action and the derivative action continues to be litigated, the attention of our management and other personnel could be diverted.



Depending upon the outcome, the inquiry by the SEC can result in our being sued by the SEC and being subject to equitable relief including payment of a fine and civil monetary penalties and a possible restatement of our prior financial statements.



On March 12, 2007, we received notice that the SEC staff had secured a formal order of private investigation. The formal order relates to revenue recognition, earnings, company operations and related party transactions. In late December 2005, we received an informal request from the SEC for documents relating to the duties, qualifications, compensation, and reimbursement of former officers and employees. This request also asked for a copy of the report to Senator Grassley by Independent Counsel. In a second request, sent March 28, 2006, the SEC asked for information regarding related parties and transactions, duties and compensation of various employees, internal controls, revenue recognition and other accounting policies and procedures, and selected regulatory filings. As part of its investigation, the SEC staff has interviewed several former and current employees on the topics identified in the formal order. On June 11, 2007, we received a subpoena from the SEC for additional accounting documents. We have voluntarily complied with these requests and have produced and will continue to produce documents to the SEC. We have been cooperating fully with the SEC.  However, we cannot assure you that we will be able to successfully resolve these matters with the SEC.  If we are not able to resolve these matters, we may be sued by the SEC, subject to equitable relief including payment of a fine and civil monetary penalties and a possible restatement of our prior financial statements, which may have a material adverse affect on our future results of operations.



The risks and uncertainties associated with discontinued operations could adversely impact our company.



During May 2006, we made the strategic decision to exit our Florida operations in order to focus more selectively on our other businesses. There continue to be risks associated with closing the Florida operations, primarily associated with moving our finance and administrative functions from our Miami, Florida office to our



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Princeton, New Jersey headquarters.  While the former Miami facility has been demolished as of September 30, 2007, we may incur costs in addition to those disclosed in the discontinued operations note to our financial statements and elsewhere in the Managements Discussion and Analysis section of our most recent Form 10-Q, incorporated herein by reference. For additional costs related to this risk factor, see the Managements Discussion and Analysis section of our most recent Form 10-Q, incorporated herein by reference.



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.



The allegations of the problems related to our former Miami facility and the repetition of these allegations in the media has harmed our reputation. Ultimately, we closed our Miami facility and we discontinued operations in Florida. As a result, clients may decline to give us contracts for studies to be performed by us unless we can convince them that the allegations, which affected our Miami facility, are not impacting our ability to provide high quality clinical research in compliance with our clients protocols and all regulatory requirements. Depending upon the impact of the forgoing and previous issues on our business for future quarters, the foregoing allegations may still have a material adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings.



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.



We provide earnings guidance in press releases and in public conference calls on an annual basis. This guidance is not incorporated by reference into this report. The guidance is made in a good faith belief that we will achieve the range of net revenue and earnings per share we forecast. Depending upon future events including legal and other fees associated with our outstanding litigation, including any additional legal fees for our underwriters named in those lawsuits, and the SEC investigation, as well as clients perceptions about doing business with us, we may not achieve the forecasted results.  Our forecasts reflect numerous assumptions concerning our expected performance, as well as other factors, which are beyond our control, and which might not turn out to be correct. Although we believe the assumptions underlying our projections are reasonable, actual results could be materially different. Our financial results are subject to numerous risks and uncertainties, including those identified throughout these risk factors and elsewhere in this report.



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.



Our late stage contracts generally extend over a period of 31 months, although some may be of longer duration. However, all of our contracts are generally cancelable by our clients with little or no notice. A client may cancel or delay existing contracts with us at its discretion and is likely to do so for a variety of reasons, including:



·

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);

·

inadequate participant enrollment; and



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·

any of the factors discussed in the other risk factors relating to issues regarding our discontinued operations.

All of these factors are beyond our control and we must continually replace our existing contracts with new contracts to sustain our revenue. Our inability to generate new contracts on a timely basis would have a material adverse effect on our business, financial condition, and results of operations. In addition, since a large portion of our operating costs are relatively fixed, variations in the timing and progress of contracts can materially affect our financial results. The loss or delay of a large project or contract or the loss or delay of multiple smaller contracts could have a material adverse effect on our business, financial condition and results of operations. We have experienced termination, cancellation and delay of contracts by clients from time to time in the past in the ordinary course of our business.



Our backlog may not be indicative of future results.



Our reported backlog of $472.5 million at September 30, 2007 is based on anticipated service revenue from uncompleted projects with clients. Backlog is the amount of revenue that remains to be earned and recognized on written awards, signed contracts and letters of intent. Contracts included in backlog are subject to termination by our clients at any time. In the event that the client cancels a contract, we would be entitled to receive payment for all services performed up to the cancellation date and subsequent client authorized services related to the cancellation of the project. The duration of the projects included in our backlog range from less than three months to approximately six years. We cannot assure that this backlog will be indicative of future results. A number of factors may affect backlog, including:



·

the variable size and duration of the projects, some of 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.

Also, if clients delay projects, the projects will remain in backlog, but will not generate revenue at the rate originally expected. Accordingly, historical indications of the relationship of backlog to revenues are not indicative of future results.



We may bear financial risk if we under-price our contracts or overrun cost estimates.



Most of our contracts are fixed price contracts. We bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. In addition, we may not be successful convincing our clients to approve change orders, which change the scope of current contracts. For example, in the second quarter of 2007, we experienced a high level of change orders that were not executed prior to the end of the quarter, causing a delay in our ability to recognize the associated revenue. Such under-pricing, lack of change orders or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition and cash flows.



Our indebtedness may impact our financial condition and results of operations; and the terms of our outstanding indebtedness may limit our activities.



As of September 30, 2007, we had approximately $150.6 million of consolidated indebtedness. Subject to applicable restrictions in our outstanding indebtedness, we may incur additional indebtedness in the future. Our level of indebtedness will have several important effects on our future operations, including, without limitation:



·

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;



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·

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.

As of September 30, 2007, since our line of credit had no balance, we had no outstanding debt tied to LIBOR or ABR loans. $143.8 million of our outstanding indebtedness bears interest at a fixed rate of 2.25% per year. Accordingly, if interest rates increase, whether generally or as the result of our lenders requirement in connection with a proposed amendment, then the amount of the interest payments on our floating rate indebtedness will also increase. General economic conditions, industry cycles, financial business and other factors affecting our operations, many of which are beyond our control, may affect our future performance. As a result, these and other factors may affect our ability to make principal and interest payments on our indebtedness. Our business might not continue to generate cash flow at or above current levels. Moreover, if we are required to repatriate foreign earnings in order to pay our debt service, we may incur additional income taxes at rates as high as 35% in some jurisdictions. This would have the impact of reducing our earning per share and the amount of net cash we receive. If we cannot generate sufficient cash flow from operations in the future to service our indebtedness, we may, among other things:



·

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.

These measures might not be sufficient to enable us to service our indebtedness. In addition, any financing, refinancing or sale of assets might not be available on economically favorable terms, if at all.

Furthermore, our Credit Facility contains certain restrictive covenants which will affect, and in many respects significantly limit or prohibit, among other things, our ability to:



·

incur indebtedness;

·

create liens;

·

make investments or loans;

·

engage in transactions with affiliates;

·

pay dividends or make other distributions on, or redeem or repurchase, capital stock;

·

issue capital stock;

·

make capital expenditures;

·

sell assets; or

·

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.



With the exception of the proposed new convertible notes contemplated by this prospectus supplement, we have outstanding $143.8 million in aggregate principal amount of our 2.25% convertible senior notes due 2024. The



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notes are convertible at the option of the holders at any time. The initial conversion rate of the notes is 24.3424 shares of common stock per $1,000 principal amount of the notes. This is equivalent to an initial conversion price of approximately $41.08 per share of common stock. However, the notes provide for what is known as net share settlement upon conversion. This means that upon conversion of the notes, we will be required to pay up to $1,000 in cash, per $1,000 principal amount of notes, and, if applicable, issue a number of shares of our common stock based upon the conversion value in excess of the principal amount. The conversion value of the notes is based on the volume weighted average price of our common stock for the 10 trading day period commencing the second trading day after we receive notice of conversion. The conversion value must be paid as soon as practicable after it is determined. In addition, holders of the notes may require us to purchase their notes for cash on August 15, 2009, 2014 and 2019 and, under certain circumstances, in the event of a fundamental change, as defined in the indenture under which the notes were issued. Further, if a fundamental change occurs prior to August 15, 2009, we will be required to pay a make-whole premium in addition to the repurchase price which may be payable at our election in cash or shares of our common stock, valued at 97% of the then current market price, or a combination of both.



Finally, if we violate certain covenants contained in the notes, which include a covenant to timely file certain SEC reports, such a violation may be considered an event of default under the notes.



We may not have sufficient funds at any such time to make the required payment upon conversion or to purchase the notes and we may not be able to raise sufficient funds to satisfy our obligations. Furthermore, the terms of our existing Credit Facility contain, and the terms of other indebtedness we may incur in the future may contain, financial covenants or other provisions that could be violated by payment of the required amounts upon conversion or the repurchase of the notes. Our failure to pay the required amounts on conversion of any of the notes when converted or to repurchase any of the notes when we are required to do so would result in an event of default with respect to the notes, which could result in the entire outstanding principal balance and accrued but unpaid interest on all of the notes being accelerated and could also result in an event of default under our other outstanding indebtedness.



We experience seasonality of our revenues.



Our revenues are affected by such factors as the length of our sales cycles and the seasonality of the purchase of our services. These factors historically have resulted in lower revenue in our early stage business in the first half of the year, and lower revenue in our late stage business in the second half of the year. As a result, our results are difficult to predict.



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.



We have grown rapidly over the last seven years through acquisitions and we continue to integrate these businesses. Businesses that grow rapidly often have difficulty managing their growth. Our rapid growth has placed and is expected to continue to place significant demands on our management, on our accounting, financial, information and other systems and on our business. Although we have expanded our management, we need to continue recruiting and employing experienced employees capable of providing the necessary support. In addition, we will need to continue to improve our financial, accounting, information and other systems in order to effectively manage our growth. In particular, our late stage clinical trial management business faces stiff competition for clinical trial monitors and other experienced personnel. Historically, when making acquisitions, we have targeted operations we believe can be operated as autonomous business units. As the result of the 2005/2006 problems in our former Miami facility, the discontinuation of our Florida operations and our change in senior management, we have reorganized and are now managing our operations on a more centralized basis from our Princeton, New Jersey headquarters. This prior decentralization of our operations and systems may create difficulties for us in the future. For example, each of our business segments uses a different accounting software platform. We also continue to expand our early and late stage facilities. In 2006 we began the expansion of our operations and facilities in Toronto, Barcelona and Quebec City. This process continues throughout 2007. We cannot assure you that we will be able to manage our growth and integrate acquired businesses effectively or successfully, or that our financial, accounting, information or other systems will be able to successfully accommodate our external and internal growth. Our failure to meet these challenges could materially impair our business.





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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.



A very important aspect of our growth strategy has been to pursue strategic acquisitions of related businesses that we believe can expand or complement our business. Since March 2000, we have substantially grown our business through the completion of 11 acquisitions. We have not completed any acquisitions since December 2004, but as part of our ordinary course of business, we continue to explore future acquisitions although on a limited basis. Acquisitions require significant capital resources and divert managements attention from our existing business. Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct pre-dating our acquisition of a business that were not known to us at the time of acquisition. We may also incur significantly greater expenditures in integrating an acquired business than we had anticipated at the time of its purchase. In addition, acquisitions may create unanticipated tax and accounting problems, including the possibility that we might be required to write-off goodwill, which we have paid for in connection with an acquisition. A key element of our acquisition strategy has been to retain management of acquired businesses to operate the acquired business for us. Many of these individuals maintain important contacts with clients of the acquired business. Our inability to retain these individuals could materially impair the value of an acquired business. Our failure to successfully identify and consummate future acquisitions or to manage and integrate the acquisitions we make could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that:



·

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.

Our Credit Facility contains certain restrictive covenants that, absent the consent of the administrative agent on behalf of the lenders under the Credit Facility, limit our ability to enter into acquisitions by setting limits on the maximum aggregate amounts of cash we can pay in acquisition consideration in any fiscal year and the maximum aggregate amount of all acquisition consideration paid during the term of the Credit Facility, as well as restricting the terms of equity consideration paid in acquisitions.



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.



Economic factors and industry and regulatory trends that affect our primary clients, branded pharmaceutical, biotechnology, generic drug and medical device companies, also affect our business and operating results. The outsourcing of drug development activities grew substantially during the past decade and we benefited from this trend. If these industries reduce the outsourcing of their clinical research and other drug development projects, our operations will be adversely affected. A continuing negative trend could have an ongoing adverse effect on our business, results of operations or financial condition. Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. Potential regulatory changes under consideration include the mandatory substitution of generic drugs for innovator drugs, relaxation in the scope of regulatory requirements or the introduction of simplified drug approval procedures. If future regulatory cost containment efforts limit the profits, which can be derived from new and generic drugs or if regulatory approval standards are relaxed, our clients may reduce the business they outsource to us. We cannot predict the likelihood of any of these events.





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If branded pharmaceutical, biotechnology, generic drug or medical device companies reduce their expenditures, our future revenue and profitability may be reduced.



Our business and continued expansion depend on the research and development expenditures of our clients, which in turn are impacted by their profitability. If these companies want to reduce costs, they may proceed with fewer clinical trials and other drug development. An economic downturn or other factors may cause our clients to decrease their research and development expenditures, which would adversely affect our future revenue and profitability.



Actions or inspections by regulatory authorities 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.



We may be subject to continuing inspections of our facilities in connection with studies we have conducted in support of marketing applications or routine inspections of our offices/facilities that have yet to be inspected by regulatory authorities. Regulatory authorities can have significant authority over the conduct of clinical trials, and has the power to take regulatory and legal action in response to violations of clinical standards and subject protection in the form of civil and criminal fines, injunctions, and other measures. If, for example, the FDA obtains an injunction such action could result in significant obstacles to future operations. Additionally, there is a risk that actions by regulatory authorities, if they result in significant inspectional observations or other measures, could cause clients to not award us future contracts or cancel existing contracts. Depending upon the amount of revenue lost, the results may have a material and adverse affect on our future results of operations, including a reduction not only in our net earnings but a deviation from our forecasted net earnings.



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



Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with healthcare providers and drug companies. Healthcare reform could reduce demand for our services, and, as a result, our revenue. In the last several years, the U.S. Congress has reviewed several comprehensive health care reform proposals. The proposals are intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures. The U.S. Congress has also considered and may adopt legislation, which could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Any such legislation could cause our customers to spend less on research and development. If this were to occur, we could have fewer clinical trials for our business, which could reduce our earnings. Similarly, pending future healthcare reform proposals outside the United States could negatively impact our revenues from our international operations. In addition, the United States Senate Finance Committee has twice requested documents and/or information from us and we have complied fully with its requests. The public disclosure of the Committees requests has negatively affected our common stock price. Although we have reported that these matters were deemed closed by the Finance Committee, future legislation, if any, by the Finance Committee may have a material adverse effect on our future results of operations.



At any given time, one or a limited number of clients may account for a large percentage of our revenue, which means we could face a greater risk of loss of revenue if we lose a major client.



Historically, a small number of clients have generated a large percentage of our direct revenue in any given period. In each of 2006 and 2005, no client provided more than 10% of our direct revenue, but our 10 largest clients provided approximately 40% of our direct revenue in 2006 and 42% of our direct revenue in 2005. Our late stage segment has experienced greater client concentration. For example, during 2006, direct revenue from one client in our late stage segment represented 11% of our late stage segment direct revenue in 2006, and four of our late stage segment clients provided approximately 36.5% of our late stage segment direct revenue in 2006 and 37.6% of our late stage segment direct revenue in 2005. Companies that constitute our largest clients vary from year to year and our direct revenue from individual clients fluctuates each year. If we lose one or more major clients in the future or if one or more clients encounter financial difficulties, our business, financial condition and results of operations could be materially and adversely affected.





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We may incur significant taxes to repatriate funds.



On September 30, 2007, we had approximately $66.5 million of cash and marketable securities with approximately $19.3 million held in the United States, and approximately $47.2 million in all other foreign subsidiaries. As of September 30, 2007, we could repatriate limited amounts of cash without incurring additional significant U.S. tax liability. If a significant amount of cash is needed in the United States beyond the borrowing capacity of our Credit Facility, and we are not able to negotiate revised covenant terms on the Credit Facility, or devise effective repatriation strategies, we may need to repatriate funds from foreign subsidiaries in a non-tax-efficient manner, which would require us to pay additional taxes.



Our operating results can be expected to fluctuate from period to period.



These fluctuations are usually due to the level of new business awards in a particular period and the timing of the initiation, progress, or cancellation of significant projects. Even a short acceleration or delay in such projects could have a material effect on our results in a given reporting period. Varying periodic results could adversely affect the price of our common stock if investors react to our reporting operating results which are less favorable than in a prior period or than those anticipated by investors or the financial community generally.



If we are required to write-off goodwill or other intangible assets, our financial position and results of operations would be adversely affected.



For the twelve months ended December 31, 2006, we incurred a non-cash goodwill impairment charge of $7.9 million relating to our SPS operation, which historically received a significant portion of its business from our former Miami and Ft. Myers facilities. For the year ended December 31, 2005, we incurred a non-cash goodwill impairment charge of $20.3 million relating to our Miami operations. These charges had a material adverse effect on our results of operations for the twelve-month periods ended December 31, 2006 and 2005. We had goodwill and other intangible assets of approximately $296.2 million as of December 31, 2006 and $307.0 million for the same period ending in 2005, which constituted approximately 53.3% of our total assets for 2006 and 54% of our total assets for 2005. We periodically evaluate goodwill and other intangible assets for impairment. Any future determination requiring the write off of a significant portion of our goodwill or other intangible assets could adversely affect our results of operations and financial condition.



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



A significant portion of our revenue is derived from countries outside the United States. Further, we anticipate revenue from international operations may grow in the future. Accordingly, our business is subject to risks associated with doing business internationally, including:



·

less stable political and economic environments and changes in a specific countrys or regions political or economic conditions;

·

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

·

unfavorable labor regulations;

·

greater difficulties in managing and staffing foreign operations;

·

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.



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These factors are beyond our control. The realization of any of these or other risks associated with operating in foreign countries could have a material adverse effect on our business, results of operations and financial condition.



Our substantial non-United States operations expose us to currency risks.



Our financial statements are denominated in U.S. dollars and accordingly, changes in the exchange rate between the Canadian dollar, Euro or other foreign currencies and the U.S. dollar could materially affect the translation of our subsidiaries financial results into U.S. dollars for purposes of reporting our consolidated financial results. We have locations worldwide, and as a result, we are subject to exchange rate gains and losses for multiple currencies. We also may be subject to foreign currency transaction risk when our service contracts are denominated in a currency other than the currency in which we incur expenses or earn fees related to such contracts. For example, our Canadian operations often perform services for a fixed price denominated in U.S. dollars or in Euros while their payroll and other expenses are primarily Canadian dollar expenses. In 2005, we adopted a formal foreign currency risk hedging policy in attempt to mitigate this risk in the future. We initiated hedging transactions in 2005 to seek to mitigate our foreign currency risks. In 2006, we incurred a pre-tax loss from foreign currency transactions relating to our foreign operations for the year of approximately $3.3 million. As of September 30, 2007, we have incurred a pre-tax loss from foreign currency transactions relating to our foreign operations of approximately $3.3 million. While we are implementing systems and processes to further mitigate this risk, we cannot assure you that we will be successful in limiting risks associated with foreign currency transactions.



We could be adversely affected by tax law changes in Canada or in other jurisdictions.



Our operations in Canada currently benefit from favorable corporate tax arrangements. We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments. Our Canadian operations employ a large number of research and development employees, which results in significant expenses related to these services. Due to the nature of these services, the Canadian government subsidizes a portion of these expenses through tax credits that result in a reduced effective tax rate as well as a significant deferred tax asset on our balance sheet. However, there is no assurance the credits will be fully realized. Further, any reduction in the availability or amount of these tax credits could have a material adverse effect on our profits and cash flow from our Canadian operations. Additionally, a large part of our net earnings is generated outside of the United States where tax rates are generally lower. If applicable foreign tax rates, particularly in Canada and Switzerland, increase, it will reduce our consolidated net earnings.



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.



As a U.S. company doing business in international markets through subsidiaries, we are subject to foreign tax and inter-company pricing laws, including those relating to the flow of funds between our company and our subsidiaries. Regulators in the United States and in foreign markets closely monitor our corporate structure and how we effect inter-company fund transfers. If regulators challenge our corporate structure, transfer pricing mechanisms or inter-company transfers, our operations may be negatively impacted and our effective tax rate may increase. Tax rates vary from country to country and if regulators determine that our profits in one jurisdiction need to be increased, we may not be able to fully utilize all foreign tax credits that are generated, which would increase our effective tax rate. We cannot assure you that we will be in compliance with all applicable customs, exchange control and transfer pricing laws despite our efforts to be aware of and to comply with such laws. Further, if these laws change, we may need to adjust our operating procedure and our business could be adversely affected.



Because we are smaller than our largest competitors, we may lack the resources needed to compete effectively.



There are a large number of drug development services companies ranging in size from one-person firms to full service, global drug development corporations. Intense competition may lead to price pressure or other conditions, which could adversely affect our business. Some of our competitors are substantially larger than us and have greater financial, human and other resources. We may lack the operating and financial resources needed to compete effectively.





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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 must continuously develop assay methods to test drug products in order to meet the needs of our clients and attract new clients. In order to substantially increase the business of our bioanalytical laboratories, which provide services for branded pharmaceutical, biotechnology and generic drug companies; we must be able to provide bioanalytical solutions for our clients. This requires staying abreast of current regulatory requirements and identifying assay methods and applications that will assist our clients in obtaining approval for their products. If we are not successful in developing new methods and applications, we may lose our current clients, or not be able to compete effectively for new clients. Moreover, if our current assay methods are incorrect, we may need to repeat our tests, which will have an adverse affect on our operations.



We risk potential liability when conducting clinical trials, which could cost us significant amounts of money.



In general, our clinical trials involve administering investigational drugs to humans in order to determine the effects of the investigational drugs. By doing so, we are subject to the general risks of liability to these persons, which include those relating to:



·

adverse side effects and reactions resulting from administering these investigational 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 investigational drugs; or

·

potential professional malpractice of our employees or contractors, including physicians.

Our contracts may not have adequate indemnification agreements requiring our clients to indemnify us in the event of adverse consequences to our participants caused by their investigational drugs or participation in their trials. We also carry liability insurance, but there is no certainty as to the adequacy or the continued availability at rates acceptable to us, of such liability insurance. We could also be held liable for other errors or omissions in connection with our services. For example, we could be held liable for errors or omissions or breach of contract if our laboratories inaccurately report or fail to report lab results. If we do not perform our services to contractual or regulatory standards, the clinical trial process could be adversely affected. Additionally, if clinical trial services such as laboratory analysis do not conform to contractual or regulatory standards, trial participants could be affected. If there is a damage claim not covered by insurance or in excess of our policy limits, the indemnification agreement is not enforceable or broad enough, or our client is insolvent, any resulting award against us could result in our experiencing large losses.



We face a risk of liability from our handling and disposal of hazardous materials, such as medical waste, which could cause us to incur significant costs or otherwise adversely affect us.



Our clinical trial activities and laboratory services involve the controlled disposal of medical wastes, which are considered hazardous materials. Although we may use reputable third parties to dispose of hazardous materials, we cannot completely eliminate the risk of accidental contamination or injury from these materials. If this occurs, we could be held liable for clean-up costs, damages, face significant fines, and face the temporary or permanent shutdown of our operations.



Failure to comply with applicable governmental regulations could harm our operating results and reputation.



We may be subject to regulatory action, which in some jurisdictions includes criminal sanctions, if we fail to comply with applicable laws and regulations. Failure to comply can also result in the termination of ongoing research and disqualification of data collected during the clinical trials. This could harm our reputation, our prospects for future work and our operating results. A finding by the FDA or other regulatory agencies that have jurisdiction over the trials we conduct or our operations that we are not in compliance with GLP standards for our



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laboratories, current GMP standards, where applicable, and/or GCP standards for our clinical facilities or study sites we monitor could materially and adversely affect us. Similarly, a finding by the TPD that we are not in compliance with Canadian Good Manufacturing Practices, where applicable, or Canadian GMP standards, and/or Canadian Good Clinical Practices, or Canadian GCPs, and/or other legislative requirements for clinical trials in Canada, could materially and adversely affect us. In addition to the above United States and Canadian laws and regulations, we must comply with the laws of all countries where we do business, including laws governing clinical trials in the jurisdiction where the trials are performed. Failure to comply with applicable requirements could subject us to regulatory risk, liability and potential costs associated with redoing the trials, which could damage our reputation and adversely affect our operating results.



If we lose the services of our key personnel or are unable to attract qualified staff, our business could be adversely affected.



Our success is substantially dependent upon the performance, contributions and expertise of our senior management team, including, among others, Mr. Jeffrey P. McMullen, our chief executive officer, the executive committee comprised of 17 members and certain key officers of our subsidiaries. In addition, some members of our senior management team play a very significant role in the generation of new business and retention of existing clients. We also depend on our ability to attract and retain qualified management, professional and operating staff. Our loss of the services of any of the members of senior management, or any other key executive, or our inability to continue to attract and retain qualified personnel could have a material adverse effect on our business.



Our business depends on the continued effectiveness and availability of our information technology infrastructure, and failures of this infrastructure could harm our operations.



To remain competitive in our industry, we must employ information technologies that capture, manage, and analyze the large streams of data generated during our clinical trials in compliance with applicable regulatory requirements. In addition, because we provide services on a global basis, we rely extensively on our technology to allow the concurrent conduct of studies and work sharing around the world. As with all information technology, our system is vulnerable to potential damage or interruptions from fires, blackouts, telecommunications failures, and other unexpected events, as well as to break-ins, sabotage, or intentional acts of vandalism. Given the extensive reliance of our business on this technology, any substantial disruption or resulting loss of data that is not avoided or corrected by our backup measures could harm our business and operations.



We are self-insured in the United States related to medical insurance, which exposes us to losses.



We are self-insured for our U.S. employee medical plan. While our medical costs in recent years have generally increased at the same level as the regional average, the mix and age of our workforce could result in higher than anticipated medical claims, resulting in an increase in our costs beyond what we have experienced. We do have stop loss coverage in place for catastrophic events, but the aggregate impact may have an effect on profitability.



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



The clinical research studies we operate rely upon the ready accessibility and willing participation of physician-investigators and volunteer subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial. Volunteer subjects generally include people from the communities in which the studies are conducted. Our clinical research development business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis.





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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.



An element of our growth strategy is to make acquisitions. As part of our acquisition strategy, we may issue additional shares of common stock as consideration for such acquisitions. These issuances could be significant. To the extent that we make acquisitions and issue our shares of common stock as consideration, your equity interest in us will be diluted. Any such issuance will also increase the number of outstanding shares of common stock that will be eligible for sale in the future. Persons receiving shares of our common stock in connection with these acquisitions may be likely to sell off their common stock rather than hold their shares for investment, which may impact the price of our common stock. In addition, the potential issuance of additional shares in connection with anticipated acquisitions could lessen demand for our common stock and result in a lower price than might otherwise be obtained. We plan to issue common stock, for compensation purposes and in connection with strategic transactions or for other purposes.



Our stock price can be extremely volatile and your investment could suffer a decline in value.



The trading price of our common stock has been, and is likely to be, volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:



·

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; or

·

loss of a major client or contract.

As a result, investors could lose all or part of their investment. In addition, the stock market in general experiences extreme price and volume fluctuations that are often unrelated and disproportionate to the operating performance of companies.



Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult, which could depress our stock price.



We are incorporated in Delaware. Certain anti-takeover provisions of Delaware law and our charter documents currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to the stockholders. Our charter documents provide that our Board of Directors may issue, without a vote of our stockholders, one or more series of preferred stock that has more than one vote per share. This could permit our Board of Directors to issue preferred stock to investors who support our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in the price of our common stock and a decline in interest in the stock, which could make it more difficult for stockholders to sell their shares. This could cause the market price of our common stock to drop significantly, even if our business is performing well. Our bylaws also limit who may call a special meeting of stockholders and establish advance notice requirements for nomination for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the Board of Directors approves the transaction. Our Board of Directors may use these provisions to prevent changes in the management and control of our company. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. In addition, provisions of certain contracts, such as employment agreements with our executive officers, may have an anti-takeover effect.





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In December 2005, our Board of Directors adopted a Shareholder Rights Plan, which has the effect of deterring hostile takeovers. This plan also makes it more difficult to replace or remove our current management team in the event our stockholders believe this would be in the best interest of our company and our stockholders.



We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have not declared or paid any cash dividends on our common stock since our initial public offering, and we currently do not anticipate paying any cash dividends in the foreseeable future, and we are, in any event, restricted by the Facility from paying any dividends.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable.

(c) Not applicable

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable

Item 5.

Other Information

Not applicable

Item 6.

Exhibits

Exhibit Index

|               |  |                                                                           
|-------------- |  | --------------------------------------------------------------------------
|               |  |                                                                           
|               |  |                                                                           
|Exhibit Number |  | Description                                                               
|3.1            |  | Second Amended and Restated By-Laws (filed herewith)                      
|31.1           |  | Certification of Chief Executive Officer (filed herewith)                 
|31.2           |  | Certification of Chief Financial Officer (filed herewith)                 
|32.1           |  | Section 1350 Certification of Chief Executive Officer (furnished herewith)
|32.2           |  | Section 1350 Certification of Chief Financial Officer (furnished herewith)



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf on November 9, 2007 by the undersigned, thereunto duly authorized.

| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| |                                                                                                        
| |                                                                                                        
| | PharmaNet Development Group, Inc.                                                                      
| |                                                                                                        
| | /s/ Jeffrey P. McMullen                                                                                
| | Jeffrey P. McMullen, Chief Executive Officer
(principal executive officer)                             
| |                                                                                                        
| |                                                                                                        
| | /s/ John P. Hamill                                                                                     
| | John P. Hamill, Chief Financial Officer
(principal financial officer and principal accounting officer )
| |                                                                                                        
| |                                                                                                        





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