PRAI Pra Intl Common Stk (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

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

For the quarterly period ended September 30, 2007

or

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

For the transition period from        to

Commission File Number:  000-51029

12120 Sunset Hills Road
Suite 600
Reston, Virginia 20190
(Address of principal executive offices)

(703) 464-6300
(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 o

     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.

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 6, 2007, 24,878,011 shares of the registrant’s common stock, par value $0.01 per share were outstanding.

 

 

INDEX

		Page
Part I Financial Information
Item 1. Financial Statements			3
Consolidated Condensed Balance Sheets as of December 31, 2006 and September 30, 2007 (unaudited)			3
Consolidated Condensed Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2006 and 2007			4
Consolidated Condensed Statement of Changes in Stockholders’ Equity and Other Comprehensive Income (unaudited) for the Nine Months Ended September 30, 2007			5
Consolidated Condensed Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2006 and 2007			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			28
Part II Other Information
Item 1. Legal Proceedings			28
Item 6. Exhibits			29
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I FINANCIAL INFORMATION

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

The accompanying notes are an integral part of these financial statements

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

PRA INTERNATIONAL AND SUBSIDIARIES

Goodwill and Other Intangibles

     The Company follows Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), whereby goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Separate intangible assets that have finite useful lives continue to be amortized over their estimated useful lives. The most recent annual test performed for 2006 did not identify any instances of impairment and there were no events through September 30, 2007 that warranted a reconsideration of our impairment test results.

Advance Billings

     Advance billings represent amounts associated with services, reimbursement revenue and investigator fees that have been received but have not yet been earned or paid.

Revenue Recognition

     Revenue from fixed-price contracts are recorded on a proportional performance basis. To measure performance, the Company compares the direct costs incurred to estimated total direct contract costs through completion. The estimated total direct costs are reviewed and revised periodically throughout the lives of the contracts, with adjustments to revenue resulting from such revisions being recorded on a cumulative basis in the period in which the revisions are first identified. Direct costs consist primarily of direct labor and other related costs. Revenue from time and materials contracts are recognized as hours are incurred, multiplied by contractual billing rates. Revenue from unit-based contracts are generally recognized as units are completed.

     A majority of the Company’s contracts undergo modifications over the contract period and the Company’s contracts provide for these modifications. During the modification process, the Company recognizes revenue to the extent it incurs costs, provided client acceptance and payment is deemed reasonably assured.

     If it is determined that a loss will result from performance under a contract, the entire amount of the loss is charged against income in the period in which the determination is made.

Reimbursement Revenue and Reimbursable Out-of-Pocket Costs

     In addition to the various contract costs previously described, the Company incurs out-of-pocket costs, in excess of contract amounts, which are reimbursable by its customers. The Company includes out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket costs in the consolidated statements of operations.

     As is customary in the industry, the Company routinely enters into separate agreements on behalf of its clients with independent physician investigators in connection with clinical trials. The funds received for investigator fees are netted against the related cost because such fees are the obligation of the Company’s clients, without risk or reward to the Company. The Company is not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, the Company does not pay the independent physician investigator until funds are received from the client. The amounts identified for payment to investigators were $15.8 million and $46.5 million for the three and nine months ended September 30, 2007 and $12.2 million and $38.7 million for the three and nine months ended September 30, 2006, respectively.

Significant Customers

     Service revenue from individual customers greater than 10% of consolidated service revenue in the respective periods was as follows:

     Due to the nature of the Company’s business and the relative size of certain contracts, it is not unusual for a significant customer in one year to be less significant in the next. However, it is possible that the loss of any single significant customer could have a material adverse effect on the Company’s results from operations.

Concentration of Credit Risk —

     Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services. As of September 30, 2007, substantially all of the Company’s cash and cash equivalents were held in or invested with domestic banks. Accounts receivable include amounts due from pharmaceutical and biotechnology companies. Accounts receivable and unbilled services from individual customers that are equal to or greater than 10% of consolidated accounts receivable in the respective periods were as follows:

     The Company establishes an allowance for potentially uncollectible receivables.

Foreign Currency Translation

     The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of the period. Equity activities are translated at the spot rate effective at the date of the transaction. Revenue and expense accounts and cash flows of these operations are translated at average exchange rates prevailing during the period the transactions occurred. Translation gains and losses are included as an adjustment to the accumulated other comprehensive income account in stockholders’ equity. Transaction gains and losses are included in other income (expenses), net, in the accompanying Consolidated Condensed Statements of Operations.

Comprehensive Income

     The components of comprehensive income include the foreign currency translation adjustment and adjustments resulting from changes in the fair value of foreign currency hedges. Changes in the fair value of an interest rate agreement were included in comprehensive income until the Company paid off the related debt.

Income Taxes

     Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not. Future reversals of valuation allowances on acquired deferred tax assets will be a recognition of a tax benefit in the consolidated statement of operations. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities, exclusive of amounts related to the exercise of stock options which benefit is recognized directly as an adjustment to stockholders’ equity.

Stock-Based Compensation

     The primary type of share-based payment utilized by the Company is stock options. Stock options are awards which allow the employee to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to the Company stock price at the date of grant. The Company issued stock options in the first nine months of 2007 that vest over four years and have a contractual term of seven years. In addition, the Company issued performance based options to certain executives that vest if the Company’s closing share price meets certain thresholds during the executive’s employment with the Company. These performance based options also have a seven year contractual term.

     Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, as described by FASB Interpretation No. 44. Accordingly, no compensation expense was required to be recognized as long as the exercise price of the Company’s stock options was equal to the market price of the underlying stock on the date of grant. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R) “Share-Based Payment” under the modified prospective method as described in SFAS No. 123(R). Under this transition method, compensation expense recognized in the three and nine months ended September 30, 2006 and September 30, 2007 includes compensation expense for all stock-based payments granted after January 1, 2006, and for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123. For the three and nine months ended September 30, 2006, the amount of compensation expense recognized was $1.5 million and $3.5 million, respectively. For the three and nine months ended September 30, 2007, the amount of compensation expense recognized was $1.9 million and $4.7 million, respectively. Stock based compensation expense is recorded in selling, general, and administrative expenses in the condensed consolidated statement of operations.

Stock Options

     The stock option compensation cost calculated under the fair value approach is recognized on a pro rata basis over the vesting period of the stock options (usually four years for time vested options). All stock option grants are subject to graded vesting as services are rendered. The fair value for options with a service condition was estimated at the time of the grant using the Black-Scholes option-pricing model. The options with a market condition were valued using a Monte Carlo model. For both valuation methods, expected volatilities are based on the volatility of share prices of similar entities and the Company uses historical data to estimate option exercise behavior.

     During the nine months ended September 30, 2007 and 2006, the Company issued 1,280,000 and 828,750 options, respectively. Included in the options issued in 2007 are 460,000 options with a market vesting condition. The fair value of each option issued during these periods was estimated on the date of grant using the Black-Scholes option pricing model for service condition awards and a Monte Carlo model for market condition awards, with the following weighted average assumptions:

The following table summarizes information related to stock option activity for the respective periods:

     Aggregated information regarding the Company’s fixed stock option plans is summarized below:

     Stock-based compensation expense included in the statement of operations for the three and nine months ended September 30, 2007, was approximately $1.9 million and $4.7 million, respectively and $1.5 million and $3.5 million for the three and nine months ended September 30, 2006, respectively. As of September 30, 2007, there were approximately $14.7 million of total unrecognized stock-based compensation costs related to options granted under our plans that will be recognized over a weighted average period of 1.4 years.

Net income per share

     Basic income per common share is computed by dividing reported net income by the weighted average number of common shares outstanding during each period.

     Diluted income per common share is computed by dividing reported net income by the weighted average number of common shares and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of stock options.

     The following is a reconciliation of the amounts used to determine the basic and diluted earnings per share (in thousands, except for per share amounts):

Excluded from the calculation of earnings per diluted share were 915,000 and 205,000 shares for the quarters ended September 30, 2006 and 2007, respectively, and 890,000 and 777,200 for the nine months ended September 30, 2006 and 2007, respectively as their inclusion would be antidilutive.

Recent Accounting Pronouncements

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes , (FIN 48) which establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company identified, evaluated and measured the amount of income tax benefits and liabilities to be recognized for all of its income tax positions. The net income tax liability of $4.6 million did not differ from the net income tax liability recognized before adoption,

and, therefore, the Company did not record an adjustment related to the adoption of FIN 48 during the first quarter of 2007. During the third quarter of 2007, the statute for the 2003 US income tax return closed and we therefore reduced our FIN 48 reserve by $1.3 million. During the third quarter, we recognized interest of $112,000 related to our tax liabilities and will continue our practice of recognizing interest and/or penalties related to income tax matters in the income tax provision. While it is reasonably possible that an increase or reduction in the amount on our net income tax liability will occur in the next twelve months, quantification of an estimated range cannot be made at this time.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS 157 outlines a common definition of fair value and the new standard intends to make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Company will need to adopt SFAS 157 for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe that SFAS 159 will have a material impact on its consolidated financial position and results of operations.

Out-of-Period Adjustment

During the second quarter of 2007, the Company identified an error of approximately $554,000 in its 2004 consolidated income tax expense related to the allocation of pass-through revenue between the U.S and non U.S. entities. The company identified and corrected this error in the second quarter of 2007, which had the effect of reducing the 2007 consolidated tax expense by $554,000. The Company does not believe this adjustment is material to the consolidated financial statements for the years ended December 31, 2006, 2005, or 2004 and the nine months ended September 30, 2007 and, as a result, has not restated its consolidated financial statements for the year ended December 31, 2004.

(4) Accounts receivable and unbilled services

     Accounts receivable and unbilled services include service revenue, reimbursement revenue, and amounts associated with work performed by investigators (dollars in thousands):

(5) Goodwill and Other Intangibles

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 were as follows (dollars in thousands):

     Other intangibles consist of the following (dollars in thousands):

     Amortization expense related to other intangibles was approximately $0.6 million and $1.2 million for the three and nine months ended September 30, 2006 and $0.9 million and $2.7 million for the three and nine months ended September 30, 2007, respectively. Estimated amortization expense for the next five years is as follows:

(6) Accounting for Derivative Instruments and Hedging Activities

     We entered into foreign currency derivatives to mitigate exposure to movements between the US dollar and the British pound, Canadian dollar and Euro. We agreed to purchase a given amount of British pounds, Canadian dollars and Euros at established dates through 2006 and 2007. The transactions are structured as no-cost collars whereby we neither paid more than an established ceiling exchange rate nor less than an established floor exchange rate on the notional amounts hedged. These agreements expired throughout 2006 and 2007. We expect to continue to use similar derivatives to mitigate our foreign currency exposure.

     These derivatives are accounted for in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize derivatives as instruments as either assets or liabilities in the balance sheet and measure them at fair value. These derivatives are designated as cash flow hedges and accordingly the changes in fair value have been recorded in stockholders equity (as a component of comprehensive income/expense).

     In August, 2006 we entered into an interest rate swap with a notional amount of $15 million, to mitigate exposure to movements in our borrowing rate under our credit facility. We agreed to swap our floating rate for a fixed rate for 2 years. As the Company paid off its revolving credit facility in March of 2007, this derivative is no longer designated as a hedging instrument.

(7) Commitments and Contingencies

Legal Proceedings

     The Company is involved in legal proceedings from time to time in the ordinary course of its business, including employment claims and claims related to other business transactions. Although the outcome of such claims is uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.

(8) Related-Party Transactions

     The Company currently leases operating facilities from a related party under a lease agreement which expires in December 2009. Under terms of the lease, we have exercised our option to terminate the lease as of September 30, 2007 in exchange for a termination fee of approximately $0.2 million, which was paid prior to September 30, 2007. Rental expense under this lease was approximately $0.1 million and $0.3 million for each of the three and nine months ended September 30, 2006 and 2007, respectively.

(9) Segment Reporting — Operations by Geographic Area

     The Company’s operations consist of one reportable segment, which represents management’s view of the Company’s operations based on its management and internal reporting structure. The following table presents certain enterprise-wide information about the Company’s operations by geographic area (dollars in thousands):

(10) Restructuring

     In February 2007, the Company announced the planned closing of our Eatontown, New Jersey and Ottawa, Canada facilities. During the three months ended September 30, 2007, we recorded an expense of approximately $0.4 million, including $0.3 million for severance costs and $0.1 million in other costs. During the nine months ended September 30, 2007, we recorded an expense of approximately $8.0 million, of which $5.4 million related to real estate costs, $2.3 million for severance, including executive separation, and $0.3 million in other costs. These expenses are included in selling, general and administrative expense in the Consolidated Condensed Statement of Operations. Included in the real estate costs is an early termination fee for the Eatontown office. The Company sublet its Ottawa facility. No further expenses are expected to be incurred for these closings.

     In September 2007, the Company announced a plan to move its corporate headquarters to Raleigh, North Carolina. The move is expected to be completed by the end of the first quarter 2008, with an estimated charge of $1.7 million expected to be taken over the next two quarters.

     The changes in the liability for the restructuring for the nine months ended September 30, 2007 were as follows (dollars in thousands):

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information included elsewhere in this report. This discussion contains forward-looking statements about our business and operations. Our actual results could differ materially from those anticipated in such forward-looking statements.

Acquisition of Company by Genstar Capital LLC

     On July 25, 2007, the Company announced that it had entered into a definitive merger agreement to be acquired by affiliates of Genstar Capital, LLC (“Genstar”), a private equity firm for approximately $790 million. Affiliates of Genstar beneficially own 12.6% of the outstanding shares of the Company. Upon the consummation of the merger, the Company’s stockholders will be entitled to receive $30.50 in cash for each share of the Company’s stock. Pending the receipt of stockholder approval and other customary closing conditions, the transaction is expected to be completed in the fourth quarter of 2007.

Overview

     We provide clinical drug development services on a contract basis to biotechnology and pharmaceutical companies worldwide. We conduct clinical trials globally and are one of a limited number of clinical research organizations, or CROs, with the capability to serve the growing need of pharmaceutical and biotechnology companies to conduct complex clinical trials in multiple geographies concurrently. We offer our clients high-quality services designed to provide data to clients as rapidly as possible and reduce product development time. We believe our services enable our clients to introduce their products into the marketplace faster and, as a result, maximize the period of market exclusivity and monetary return on their research and development investments. Additionally, our comprehensive services and broad experience provide our clients with a variable cost alternative to fixed cost internal development capabilities.

     Contracts define our relationships with clients in the pharmaceutical and biotechnology industries and establish the way we earn revenue. Two types of relationships are most common: a fixed-price contract or a time and materials contract. The duration of our contracts ranges from a few months to several years. A fixed-price contract typically requires a portion of the contract fee to be paid at the time the contract is entered into and the balance is received in installments over the contract’s duration, in most cases when certain performance targets or milestones are reached. Service revenue from fixed-price contracts is generally recognized on a proportional performance basis, measured principally by the total costs incurred as a percentage of estimated total costs for each contract. We also perform work under time and materials contracts, recognizing service revenue as hours are incurred, which is then multiplied by the contractual billing rate. Our costs consist of expenses necessary to carry out the clinical development project undertaken by us on behalf of the client. These costs primarily include the expense of obtaining appropriately qualified labor to administer the project, which we refer to as direct cost headcount. Other costs we incur are attributable to the expense of operating our business generally, such as leases and maintenance of information technology and equipment.

     We review various financial and operational metrics, including service revenue, margins, earnings, new business awards, and backlog to evaluate our financial performance. Our service revenue was $303.2 million in 2006 and $96.7 million and $271.9 million for the three and nine months ended September 30, 2007, respectively. Once contracted work begins, service revenue is recognized over the life of the contract as services are performed. We commence service revenue recognition when a contract is signed or when we receive a signed task order or letter of intent.

     Our new business awards were $383 million and $479 million for the nine months ended September 30, 2006 and 2007, respectively. New business awards arise when a client selects us to execute its trial and so indicates by written or electronic correspondence. The number of new business awards can vary significantly from quarter to quarter, and awards can have terms ranging from several months to several years. The value of a new award is the anticipated service revenue over the life of the contract, which does not include reimbursement activity or investigator fees.

     In the normal course of business, we experience contract cancellations, which are reflected as cancellations when the client provides written or electronic correspondence that the work should cease. The number of cancellations can vary significantly from quarter to quarter. The value of the cancellation is the remaining amount of unrecognized service revenue, less the estimated effort to transition the work back to the sponsor. Our cancellations for the three months ended September 30, 2006 and 2007 were $21.0 million and $48.2 million, respectively.

     Our backlog consists of anticipated service revenue from new business awards that either have not started but are anticipated to begin in the near future or are contracts in process that have not been completed. Backlog varies from period to period depending upon new business awards and contract increases, cancellations, and the amount of service revenue recognized under existing contracts. Our backlog at September 30, 2006 and 2007 was $605 million and $753 million, respectively.

     Income from operations was $11.0 million and $9.6 million for the quarters ended September 30, 2006 and 2007, respectively.

Announced Restructuring

          In February 2007, we announced the planned closing of our Eatontown, New Jersey and Ottawa, Canada facilities. Our project managers, product directors and lead clinical research associates will work from a home-based environment while our associated support functions will be consolidated into our larger offices. We expect no overall reduction in staff. We incurred $8.0 million in costs related to these closings in the first nine months of 2007, of which $5.4 million related to real estate costs and $2.6 million for severance and other costs. Included in the real estate costs is an early termination fee for the Eatontown office. The Company sublet its Ottawa facility. We expect an annual cost savings of approximately $4 million from these office closings.

     In September 2007, the Company announced a plan to move its corporate headquarters to Raleigh, North Carolina. The move is expected to be completed by the end of the first quarter 2008, with an estimated charge of $1.7 million expected to be taken over the next two quarters.

Service Revenue

     We recognize service revenue from fixed-price contracts on a proportional performance basis as services are provided. To measure performance on a given date, we compare each contract’s direct cost incurred to such contract’s total estimated direct cost through completion. We believe this is the best indicator of the performance of the contractual obligations because the costs relate to the amount of labor incurred to perform the service revenues. For time and materials contracts, revenue is recognized as hours are incurred, multiplied by contractual billing rates. Our contracts often undergo modifications, which can change the amount of and the period of time in which to perform services. Our contracts provide for such modifications.

     Most of our contracts can be terminated by our clients after a specified period, typically 30 to 60 days, following notice by the client. In the case of early termination, these contracts typically require payment to us of expenses to wind down a study, payment to us of fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Based on ethical, regulatory, and health considerations, this wind-down activity may continue for several quarters or years.

     Historically, direct costs have increased with increases in net service revenues. The relationship between direct costs and net service revenues may vary from historical relationships. In recent years the Company has expected that its direct costs will generally represent an amount within a range from 48% to 52% of service revenues. For the 2007 fiscal year, the Company expects that its direct costs as a percentage of revenue will increase to approximately 55% due to the full-year impact of the PBR acquisition, reinstatement of bonus amounts, and increased salary and benefit costs.

     Increases in the estimated total direct costs to complete a contract without a corresponding proportional increase to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined.

Reimbursement Revenue and Reimbursable Out-of-Pocket Costs

     We incur out-of-pocket costs, which are reimbursable by our customers. We include these out-of-pocket costs as reimbursement revenue and reimbursable out-of-pocket expenses in our consolidated statement of operations. In addition, we routinely enter into separate agreements on behalf of our clients with independent physician investigators in connection with clinical trials. The funds received for investigator fees are netted against the related costs, since such fees are the obligation of the Company’s clients, without risk or reward to the Company. The Company is not obligated either to perform the service or to pay the investigator in the event of default by the client. In addition, the Company does not pay the independent physician investigator until funds are received from the client. Reimbursement costs and investigator fees are not included in our backlog.

Direct Costs

          Our direct costs are primarily labor-related charges. They include elements such as salaries, benefits, and incentive compensation for our employees. In addition, we utilize staffing agencies to procure primarily part time individuals to perform work on our contracts. For the years ended December 31, 2004, 2005 and 2006, the labor-related charges were 94%, 97% and 91% of our direct costs, respectively. The cost of labor procured through staffing agencies is included in these percentages and represents 3% or less of total direct costs in each year presented. The remaining direct costs are items such as travel, meals, postage and freight, patient costs, medicine waste and supplies. The total of all these items has historically been less than 10% of total direct cost.

          Historically, direct costs have increased with an increase in net service revenues. The relationship between direct costs and net service revenues may vary from historical relationships. Generally, several factors will cause direct costs to decrease as a percentage of net service revenues. Deployment of our billable staff in an optimally efficient manner has the most impact on our ratio of direct cost to service revenue. The most effective deployment of our staff is when they are fully engaged in billable work and are accomplishing contract related activities at a rate that meets or exceeds the targets in our internal budgets. We also seek to optimize our efficiency by performing work using the employee with the lowest cost. Generally, the following factors will cause direct costs to increase as a percentage of net service revenues: our staff are not fully deployed, as is the case when there are unforeseen cancellations or delays, or when our staff are accomplishing tasks at levels of effort that exceed budget, such as rework; and pricing pressure from increased competition.

          We achieved a particularly high level of efficiency in 2005 and exceeded our budgeted targets, thus increasing our margin by approximately $2.4 million over our internal plans. This effect did not occur in 2006 or 2004, when our levels of operational efficiency were consistent with our targets. The increase in direct cost percentage in 2006 is primarily related to the acquisition of PBR in July, 2006 which increased direct costs as a percentage of revenues on a full year basis by approximately 1.2%. The remainder of the increase, representing 3.4% of direct costs as a percentage of revenues on a full year basis, is attributable to changes in our contract mix. We anticipate the integration of PBR will increase our direct cost percentage by approximately 1% in future periods. Although we are not able to forecast the effects on direct cost of our ability to optimize our efficiency in deploying our staff to meet our internal operational objectives, we believe that changes in our contract mix will be roughly consistent with our historical experience.

Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses consist of administration payroll and benefits, marketing expenditures, and overhead costs such as information technology and facilities costs. These expenses also include central overhead costs that are not directly attributable to our operating business and include certain costs related to insurance, professional fees, and property.

Depreciation and Amortization

     Depreciation represents the depreciation charged on our fixed assets. The charge is recorded on a straight-line method, based on estimated useful lives of three to seven years for computer hardware and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated over ten years or the life of the lease term. Amortization expenses consist of a amortization costs recorded on computer software and identified finite-lived intangible assets on a straight-line method over their estimated useful lives. Goodwill and indefinite-lived intangible assets were being amortized prior to January 1, 2002. Pursuant to SFAS No. 142 “Goodwill and Other Intangible Assets” we do not amortize goodwill and indefinite-lived intangible assets.

Income Taxes

     Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pre-tax earnings among several statutory foreign jurisdictions. Our effective tax rate can also vary based on changes in the tax rates of different jurisdictions. Our effective tax rate is also impacted by tax credits, the establishment or release of tax asset valuation allowances and tax reserves as well as changes to prior year tax expense or prior year net operating loss carryforwards.

     Our foreign subsidiaries are taxed separately in their respective jurisdictions. As of September 30, 2007 and December 31, 2006, we had foreign net operating loss carryforwards in some jurisdictions. The carryforward periods for these losses vary from five years to nine years depending on the jurisdiction. Our ability to offset future taxable income with the foreign net operating loss carryforwards may be limited in certain instances, including changes in ownership.

Results of Operations

     Many of our current contracts include clinical trials covering multiple geographic locations. We utilize the same management system and reporting structure to monitor and manage these activities on the same basis worldwide. For this reason, we consider our operations to be a single business unit, and we present our results of operations as a single reportable segment.

     The following table summarizes certain statement of operations data as a percentage of service revenue for the periods shown. We monitor and measure costs as a percentage of service revenue rather than total revenue as this is a more meaningful comparison and better reflects the operations of our business.

Selected Consolidated Financial Data

     The following table represents selected historical consolidated financial data. The statement of operations data for the years ended December 31, 2004, 2005 and 2006 and balance sheet data at December 31, 2005 and 2006 are derived from our audited consolidated financial statements included in the Form 10-K filed on March 14, 2007. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements, unaudited consolidated financial statements included herein, and notes to the financial statements.

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

     Service revenue increased by $15.2 million, from $81.5 million for the third quarter of 2006 to $96.7 million for the third quarter of 2007 due primarily to contribution of a full quarter of service revenue from our acquisition of Pharma-Bio Research (PBR), which closed in July, 2006, and a favorable impact from foreign currency fluctuations of approximately $3.7 million. On a geographic basis, service revenue for the third quarter of 2007 was distributed as follows: North America $52.2 million (54.0%), Europe $40.2 million (41.6%), and rest of world $4.3 million (4.4%). For the third quarter of 2006, service revenue was distributed as follows: North America $51.0 million (62.6%), Europe $27.9 million (34.3%), and rest of world $2.6 million (3.2%).

     Direct costs increased by $12.7 million, from $41.0 million for the third quarter of 2006 to $53.7 million for the third quarter of 2007. Direct costs as a percentage of service revenue increased from 50.3% for the third quarter of 2006 to 55.5% for the third quarter of 2007. The increase is due primarily to the acquisition of PBR, increased labor costs; including salaries, benefits and contractor costs, as well as patient and medical supply costs. In addition, there was an unfavorable impact from foreign currency fluctuations of $2.2 million. The decline in gross margin is attributed to the increase in costs noted above.

     Selling, general, and administrative expenses increased by $3.7 million, from $25.8 million for the third quarter of 2006 to $29.5 million for the third quarter of 2007. The increase is primarily due to $1.5 million for our management bonus plan, a $0.4 million increase in non-cash stock option expense, as well as a $0.9 million impact from foreign currency fluctuations. Selling,

general, and administrative expenses as a percentage of service revenue were 31.7% for the third quarter of 2006 and 30.5% for the third quarter of 2007.

     Depreciation and amortization expense increased by approximately $0.2 million, from $3.7 million for the third quarter of 2006 to $3.9 million for the third quarter of 2007. Depreciation and amortization expense as a percentage of service revenue was 4.5% for the third quarter of 2006 and 4.1% for the third quarter of 2007.

     Income from operations decreased by $1.4 million, from $11.0 million for the third quarter of 2006 to $9.6 million for the third quarter of 2007, due primarily to the increased costs as noted above. Income from operations as a percentage of service revenue decreased from 13.5% for the third quarter of 2006 to 9.9% for the third quarter of 2007.

     Our effective tax rate for the third quarter of 2006 was 23.2% as compared to 31.5% for the same period in 2007. The 2007 rate was impacted by discrete items including a release of our FIN 48 reserve for the closing of the statute for our 2003 US income tax return during the third quarter; an increase in our FIN 48 reserve for additional information related to our state income tax liabilities; provision to return true ups related to income tax returns filed during the third quarter; the effect of the enacted reduction in the income tax rate in the UK on our deferred tax assets and interest related to outstanding US income tax refunds and FIN 48 reserves. The 2006 rate was impacted by discrete events originating in the second quarter for the tax benefit for UK research and development deductions and the inclusion of PBR in our operations for the third quarter.

Nine months Ended September 30, 2007 Compared to Nine months Ended September 30, 2006

     Service revenue increased by $51.1 million, from $220.8 million for the first nine months of 2006 to $271.9 million for the first nine months of 2007 due primarily to the acquisition of PBR, which closed in the third quarter of 2006, as well as a favorable impact from foreign currency exchange of $9.4 million. On a geographic basis, service revenue for the first nine months of 2007 was distributed as follows: North America $146.6 million (53.9%), Europe $113.9 million (41.9%), and rest of world $11.4 million (4.2%). For the first nine months of 2006 service revenue was distributed as follows: North America $144.6 million (65.5%), Europe $69.8 million (31.6%), and rest of world $6.4 million (2.9%).

     Direct costs increased by $37.5 million, from $112.7 million for the first nine months of 2006 to $150.2 million for the same period of 2007. Direct costs as a percentage of service revenue increased from 51.1% for the first nine months of 2006 to 55.3% for the same period of 2007. The increase in the dollar amount is due primarily to the acquisition of PBR, increased labor costs, including salaries, benefits and the employee incentive program, as well as patient and medical supply costs. In addition, there was an unfavorable impact from foreign currency fluctuations of $5.5 million. The decline in gross margin is primarily attributed to higher labor costs, the employee incentive compensation program, and increased patient and medical supply costs.

     Selling, general, and administrative expenses increased by $23.1 million, from $72.7 million for the first nine months of 2006 to $95.8 million for the same period of 2007. The increase is primarily due to the additional costs from PBR, $8.0 million restructuring charge for the closing of the New Jersey and Ottawa facilities, $3.0 million for our management bonus plan, a $1.2 million increase in non-cash stock option expense, as well as a $2.3 million impact from foreign currency fluctuations. Selling, general, and administrative expenses as a percentage of service revenue were 32.9% for the first nine months of 2006 and 35.3% for the same period in 2007.

     Depreciation and amortization expense increased by approximately $2.7 million, from $8.8 million for the first nine months of 2006 to $11.5 million for the same period of 2007. Depreciation and amortization expense as a percentage of service revenue was 4.0% for the first nine months of 2006 and 4.2% for the first nine months of 2007. The increase was due to the acquisition of PBR.

     Income from operations decreased by $12.3 million, from $26.6 million for the first nine months of 2006 to $14.3 million for the same period of 2007. Income from operations as a percentage of service revenue decreased from 12.0% for the first nine months of 2006 to 5.3% for the same period in 2007. The decrease in income from operations is primarily due to the restructuring charge taken to close 2 facilities described above.

     Our effective tax rate for the first nine months of 2006 was 20.4% as compared to 25.8% for the same period in 2007. The third quarter 2007’s rate is impacted by discrete items including a release of our FIN 48 reserve for the closing of the statute for our 2003 US income tax return and an increase in our FIN 48 reserve for additional information related to our state income taxes; provision to return true-ups related to income tax returns filed during the third quarter; the effect of the enacted reduction in the income tax rate in the UK on our deferred tax assets and additional interest related to outstanding US income tax refunds and FIN 48 reserves. In 2006,

the Company’s rate was impacted by a release of tax valuation allowances on the foreign net operating loss carry forwards in Spain and France as well as tax benefits available to the Company related to research and development incentive programs in the United Kingdom in 2006 and for prior periods.

Liquidity and Capital Resources

     As of September 30, 2007, we had approximately $38.4 million of cash and cash equivalents. Our expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible acquisitions, geographic expansion, working capital, and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, borrowings, and issuances of equity securities.

     In the first nine months of 2007, net cash provided by operations was $19.1 million as compared to $15.3 million for the same period during the prior year. Cash collections from accounts receivable were $363.5 million for the first nine months of 2007, as compared to $299.1 million for the same period in 2006. This increase is primarily due to the timing of collections of initial billings on new business. In addition, adjustments to reconcile net income of $10.2 million in 2007 to cash provided by operating activities include the addback of $11.5 million for depreciation and amortization, $4.7 million in non-cash stock option expense, and $0.8 million for a loss on disposal of fixed assets, offset by a $4.1 million deferred tax provision, $2.8 million in excess tax benefits from share based compensation as well as $1.2 million in changes in assets and liabilities. Days sales outstanding, which includes accounts receivable, unbilled services and advanced billings, were 8 days and 27 days as of September 30, 2007 and 2006, respectively.

     Net cash used in investing activities was $9.6 million for the first nine months of 2007 as compared to $98.3 million used for the same period of 2006. This is primarily for the purchase of fixed assets, offset by fixed asset disposals. In 2006, we paid $93.5 million for acquisitions. We expect our capital expenditures to be approximately $13 million to $15 million for the full year 2007, with the majority of the spending related to information technology enhancement and expansion of our laboratory business.

     Net cash used in financing activities in the first nine months of 2007 was $16.2 million compared to net cash provided of $28.2 million in the same period of 2006. The Company paid off the $24 million outstanding on our revolving credit facility in March of 2007, which was offset by proceeds from stock option exercises of $5.3 million and $2.8 million in excess tax benefits from share based compensation.

     On March 7, 2006, we filed a shelf registration statement registering the resale of common stock to satisfy certain of our obligations under our September 2001 registration rights agreement with our pre-IPO investor and other parties. The registration statement allows these parties to publicly resell up to 5,000,000 shares of common stock, subject to certain limitations and the satisfaction by selling stockholders of the prospectus delivery requirements of the Securities Act of 1933 in connection with any such resale. We will not receive any of the proceeds from the sale of common stock sold by selling stockholders. The registration statement also includes a universal shelf component that provides for the offer and sale by us, from time to time on a delayed basis, of up to $350 million aggregate amount of debt securities, common stock, preferred stock and warrants. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities.

     Our current credit facility provides for a $75.0 million revolving line of credit that terminates on December 23, 2008. At any time within three years after December 23, 2004 and so long as no event of default is continuing, we have the right, in consultation with the administrative agent, to request increases in the aggregate principal amount of the facility in minimum increments of $5.0 million up to an aggregate increase of $50.0 million (and which would make the total amount available under the facility $125.0 million). The revolving credit facility is available for general corporate purposes (including working capital expenses, capital expenditures, and permitted acquisitions), the issuance of letters of credit and swingline loans for our account, for the refinancing of certain existing indebtedness, and to pay fees and expenses related to the facility. All borrowings are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. A portion of the facility is also available for alternative currency loans. There were no amounts outstanding on the credit facility as of September 30, 2007.

     The revolving credit facility requires us to comply with certain financial covenants, including a maximum total leverage ratio, a minimum fixed charge coverage ratio, and a minimum net worth, which we currently are in compliance with.

     We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities or issuances of equity securities. We believe that our existing capital resources, together with cash flows from operations and our borrowing capacity under the $75 million credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next eighteen months. Our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, and personal injury, environmental or other material litigation claims.

     On March 23, 2007, the Board of Directors adopted a Stockholder Rights Plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock of the Company. The dividend was paid on April 3, 2007, to the stockholders on record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value $0.01 per share (The “Preferred Shares”), at a price of $110.00 per one one-thousandth of a Preferred Share. The Plan is designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company’s stockholders. The preferred share purchase rights will expire on March 23, 2017.

      On July 24, 2007, immediately prior to the execution of the merger agreement, PRA and the rights agent entered into an amendment to the rights agreement which provides that neither the execution of the merger agreement nor the consummation of the merger will trigger the provisions of this rights agreement. In particular, the amendment to the rights agreement provides that neither Parent, Merger Sub nor any of their affiliates or associates will be deemed to be an acquiring person (as defined by the rights agreement) solely by virtue of the approval, execution, delivery and adoption or performance of the merger agreement or the consummation of the merger of any other transactions contemplated by the merger agreement.

Non-GAAP Financial Measures

     We use certain measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles (GAAP). These non-GAAP financial measures are “EBITDA” and “adjusted EBITDA.” These measures should not be considered as an alternative to income from operations, net income, net income per share, or any other performance measures derived in accordance with GAAP.

     EBITDA represents net income before interest, taxes, depreciation, and amortization. We use EBITDA to facilitate operating performance comparisons from period to period. In addition, we believe EBITDA facilitates company to company comparisons by backing out potential differences caused by variations in capital structures (affecting interest expense), taxation, and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. We also use EBITDA, and we believe that others in our industry use EBITDA, to evaluate and price potential acquisition candidates. We further believe that EBITDA is frequently used by securities analysts, investors, and other interested parties in the evaluation of issuers, many of which present EBITDA when reporting their results.

     In addition to EBITDA, we use a measure that we call adjusted EBITDA, which we define as EBITDA excluding the effects of a one-time $25.0 million tender offer specifically relating to our repurchase in 2004 of stock options and the payment of a special bonus to certain employee option holders. In addition to our GAAP results and our EBITDA, we use adjusted EBITDA to manage our business and assess our performance. Our management does not view the tender offer and option repurchase costs as indicative of the status of our ongoing operating performance because such costs related to a special non-recurring restructuring transaction.

     These non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, EBITDA and adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; our significant interest expense, or the cash requirements necessary to service interest and principal payments on our debts; and any cash requirements for the replacement of assets being depreciated and amortized, which will often have to be replaced in the future, even though depreciation and amortization are non-cash charges. Neither EBITDA nor adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business.

     In addition, adjusted EBITDA is not uniformly defined and varies among companies that use such a measure. Accordingly, EBITDA and adjusted EBITDA have limited usefulness as comparative measures. We compensate for these limitations by relying primarily on our GAAP results and by using non-GAAP financial measures only supplementally.

Critical Accounting Policies and Estimates

     In preparing our financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our audit committee.

Revenue Recognition

     The majority of our service revenue is recorded from fixed-price contracts on a proportional performance basis. To measure performance, we compare direct costs incurred to estimated total contract direct costs through completion. We believe this is the best indicator of the performance of the contract obligations because the costs relate to the amount of labor hours incurred to perform the service. Direct costs are primarily comprised of labor overhead related to the delivery of services. Each month we accumulate costs on each project and compare them to the total current estimated costs to determine the proportional performance. We then multiply the proportion completed by the contract value to determine the amount of revenue that can be recognized. Each month we review the total current estimated costs on each project to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each project. During our monthly contract review process, we review each contract’s performance to date, current cost trends, and circumstances specific to each study. The original or current cost estimates are reviewed and if necessary the estimates are adjusted and refined to reflect any changes in the anticipated performance under the study. In the normal course of business, we conduct this review each month in all service delivery locations. As the work progresses, original estimates might be deemed incorrect due to, among other things, revisions in the scope of work or patient enrollment rate, and a contract modification might be negotiated with the customer to cover additional costs. If not, we bear the risk of costs exceeding our original estimates. Management assumes that actual costs incurred to date under the contract are a valid basis for estimating future costs. Should management’s assumption of future cost trends fluctuate significantly, future margins could be reduced. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower margins on those projects. Should our actual costs exceed our estimates on fixed price contracts, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future.

Allowance for Doubtful Accounts

     Included in “Accounts receivable and unbilled services, net” on our consolidated balance sheets is an allowance for doubtful accounts. Generally, before we do business with a new client, we perform a credit check, as our allowance for doubtful accounts requires that we make an accurate assessment of our customers’ creditworthiness. Approximately 50% of our client base is emerging pharmaceutical and biotech companies, creating a heightened risk related to the creditworthiness for a significant portion of our customer base. We manage and assess our exposure to bad debt on each of our contracts. We age our billed accounts receivable and assess exposure by customer type, by aged category, and by specific identification. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Historically, we have not had any write-offs in excess of our allowance. If, at September 30, 2007, our aged accounts receivable balance greater than 90 days were to increase by 10% (for the U.S. operations), no additional bad debt expense would need to be recorded.

Tax Valuation Allowance

     We have operations in various foreign jurisdictions and in multiple United States jurisdictions. We provide a tax valuation allowance for deferred tax assets in each of the jurisdictions where we have operations based on the weight of available evidence, both positive and negative, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining our tax valuation allowance, we assess both the historical and the projected entity level earnings before tax. Historically we have established valuation allowances when estimates of future profitability are not present. As part of our analysis, we consider the previous three years’ cumulative activity to determine whether it is more likely than not that the deferred tax assets will be realized. We review and adjust these tax valuation allowances based on current profitability and positive future financial projections. In a meaningful tax jurisdiction, where we currently have a tax valuation allowance, if we were able to demonstrate sufficient taxable income to realize a tax benefit, we would reduce our tax valuation allowance in this jurisdiction by approximately $1.1 million.

     Our quarterly and annual effective income tax rate could vary substantially. We operate in several foreign jurisdictions and in each jurisdiction where we estimate pre-tax income, we must also estimate the local effective tax rate. In each jurisdiction where we estimate pre-tax losses, we must evaluate local tax attributes and the likelihood of recovery for foreign loss carryforwards, if any. Changes in currency exchange rates and the factors discussed above result in the consolidated tax rate being subject to significant variations and adjustments during interim and annual periods.

Stock-Based Compensation

     On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made

to our employees and directors based on estimated fair values. Stock-based compensation expense recognized under SFAS 123(R) for the nine months ended September 30, 2006 and 2007 was $3.5 million and $4.7 million, respectively, which consisted of stock-based compensation expense related to employee stock options. See Note 2 to the Consolidated Financial Statements for additional information.

     We estimate the value of employee stock options on the date of grant using either the Black-Scholes model for all options with a service condition or a Monte Carlo model for options with a market condition. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the stock price of similar entities as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The use of Black-Scholes and a Monte Carlo models require the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, and expected term. Due to our limited trading history, we calculated expected volatility of our stock based on the volatility of the share price of similar entities. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

     In determining our estimated stock-based compensation expense, our assessment of the forfeiture rate, volatility, and expected term of the equity instrument impacts the related option expense after the equity instrument is issued. We have been a public company since November 2004. As such the volatility is based upon overall industry experience. For those options valued using the Black Scholes model, the expected term is based upon a formula in the accounting literature. Both are estimates that are calculated in accordance with the guidance provided by SAB 107. Under the Monte Carlo model, the expected term varies depending on the target stock price that triggers vesting, as the higher stock price will result in options that are deeper in the money when they vest. Forfeitures are based on our company experience. A 1% increase in the forfeiture rate would cause a 2% decrease in our stock-based compensation expense.

Long-Lived Assets and Goodwill and Indefinite-lived Intangible Assets

     We review long-lived asset groups for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable. If indicators of impairment are present, we evaluate the carrying value of property and equipment in relation to estimates of future undiscounted cash flows. As a result of our acquisitions we have recorded goodwill and other identifiable finite and indefinite-lived acquired intangibles. The identification and valuation of these intangible assets at the time of acquisition require significant management judgment and estimates.

     We test goodwill for impairment on at least an annual basis by comparing the carrying value to the estimated fair value of our reporting unit. We test indefinite-lived intangible assets, principally trade names, on at least an annual basis by comparing the fair value of the trade name to our carrying value. The measure of goodwill impairment, if any, would include additional fair market value measurements, as if the reporting unit was newly acquired.

     This process is inherently subjective and dependent upon the estimates and assumptions we make. In determining the expected future cash flows of our company, we assume that we will continue to enter into new contracts, execute the work on these contracts profitably, collect receivables from customers, and thus generate positive cash flows. To date, we have been able to generate and execute work to support the valuation of our long lived assets, goodwill, and indefinite-lived intangible assets. As of our most recent fiscal year end, our cash flow substantially exceeds the historical book value of these assets. Adverse conditions impacting our industry or poor execution of our business plan could impair the undiscounted future cash flows and result in asset impairments.

Inflation

     Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition. Historically our projection of inflation contained within our contracts has not significantly impacted our operating income. Should inflation be in excess of the estimates within our contracts our operating margins would be negatively impacted if we were unable to negotiate contract modifications with our customers.

Potential Liability and Insurance

     We obtain contractual indemnification for all of our contracts. In addition, we attempt to manage our risk of liability for personal injury or death to patients from administration of products under study through measures such as stringent operating procedures and insurance. We monitor our clinical trials in a manner designed to ensure compliance with government regulations and guidelines. We have adopted global standard operating procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and serve as a tool for controlling and enhancing the quality of our clinical trials. We currently maintain professional liability insurance coverage with limits we believe are adequate and appropriate. If our insurance coverage is not adequate to cover actual claims, or if insurance coverage does not continue to be available on terms acceptable to us, our business, financial condition, and operating results could be materially harmed. Historically we have experienced infrequent and immaterial claims. Should a material claim arise that exceeds our insurance coverage levels, there would be a dollar for dollar impact to operating income for the amount in excess of our insurance coverage.

Special Note Regarding Risks and Forward-Looking Statements

     The discussion of our operations, cash flows and financial position includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” and similar expressions are forward-looking statements. Although these statements are based upon assumptions we consider reasonable, they are subject to risks and uncertainties that are described more fully below and in the notes accompanying our financial statements. Accordingly, we can give no assurance that we will achieve the results anticipated or implied by our forward-looking statements.

exchange rates from those in effect at the time contracts were executed have not had a material effect on our consolidated financial results.

     For the nine months ended September 30, 2007, approximately 24.9%, 7.0% and 0.8% of total service revenue was denominated in Euros, British pounds and Canadian dollars, respectively. We periodically enter into foreign currency derivatives to mitigate exposure to movements between the U.S. dollar and the British pound, the U.S. dollar and the Euro, and the U.S. dollar and Canadian dollar. We agreed to purchase a given amount of Euros, British pounds and Canadian dollars at established dates. The transactions were structured as no-cost collars. These foreign currency derivatives are designated as cash flow hedges and we recognize them as either assets or liabilities in the balance sheet and measure them at fair value with the changes in fair value recorded in stockholders equity (as a component of comprehensive income), in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The potential decrease in net income resulting from a hypothetical weakening of the U.S. dollar relative to the Euro, British pound and Canadian dollar of 10% would have been approximately $0.7 million for the nine months ended September 30, 2007.

ITEM 6. EXHIBITS