Edgar Filing: PAREXEL INTERNATIONAL CORP

e10vq

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, 2006


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: 000-21244

PAREXEL INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its Charter)


Massachusetts		04-2776269
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

200 West Street
Waltham, Massachusetts		02451
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (781) 487-9900

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 5, 2006, there were 27,204,999 shares of common stock outstanding.

PAREXEL INTERNATIONAL CORPORATION

INDEX


			Page
Part I.		Financial Information

	Item 1	Financial Statements (Unaudited):

		Condensed Consolidated Balance Sheets – September 30, and June 30, 2006		3

		Condensed Consolidated Statements of Operations – Three Months Ended September 30, 2006 and 2005		4

		Condensed Consolidated Statements of Cash Flows – Three Months Ended September 30, 2006 and 2005		5

		Notes to Condensed Consolidated Financial Statements		6

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

	Item 3	Quantitative and Qualitative Disclosure About Market Risk		17

	Item 4	Controls and Procedures		18

Part II.		Other Information

	Item 1A	Risk Factors		19

	Item 6	Exhibits		27

Signatures				28
Ex-31.1 Section 302 Certification of CEO
Ex-31.1 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PAREXEL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


	September 30,
	2006		June 30,
	(Unaudited)		2006
ASSETS
Current assets:
Cash and cash equivalents	$	84,217	$	82,749
Marketable securities		—		10,000
Billed and unbilled accounts receivable, net		295,654		272,063
Prepaid expenses		12,140		11,258
Deferred tax assets		954		934
Other current assets		6,541		8,074

Total current assets		399,506		385,078

Property and equipment, net		80,690		78,386
Goodwill		50,111		50,112
Other intangible assets, net		7,527		7,832
Non-current deferred tax assets		10,476		10,495
Other assets		6,637		6,730

Total assets	$	554,947	$	538,633


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current portion of long-term debt	$	5,494	$	498
Accounts payable		8,364		17,185
Deferred revenue		156,573		139,836
Accrued expenses		15,737		20,117
Accrued restructuring charges		5,728		5,190
Accrued employee benefits and withholdings		39,940		46,385
Current deferred tax liabilities		12,645		12,645
Income tax payable		11,715		7,498
Other current liabilities		2,740		4,172

Total current liabilities		258,936		253,526
Long-term debt, net of current portion		628		705
Non-current deferred tax liabilities		16,812		16,780
Long-term accrued restructuring charges		8,394		10,967
Other liabilities		7,751		5,569

Total liabilities		292,521		287,547

Minority interest in subsidiary		2,189		2,323
Stockholders’ equity:
Preferred stock—$.01 par value; shares authorized: 5,000,000; Series A junior participating preferred stock - 50,000 shares designated, none issued and outstanding		—		—
Common stock—$.01 par value; shares authorized: 50,000,000; shares issued and outstanding: 27,191,636 at September 30, 2006 and 26,920,119 at June 30, 2006		286		283
Additional paid-in capital		182,195		177,309
Retained earnings		72,252		65,275
Accumulated other comprehensive income		5,504		5,896

Total stockholders’ equity		260,237		248,763

Total liabilities and stockholders’ equity	$	554,947	$	538,633

See notes to condensed consolidated financial statements.

PAREXEL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)


	For the three months ended
	September 30,
	2006			2005
Service revenue	$	165,057		$	138,380
Reimbursement revenue		38,450			31,188


Total revenue		203,507			169,568

Costs and expenses:
Direct costs		109,221			93,623
Reimbursable out-of-pocket expenses		38,450			31,188
Selling, general and administrative		38,039			34,051
Depreciation and amortization		6,550			6,370
Restructuring benefit		(74	)		(679	)


Total costs and expenses		192,186			164,553


Income from operations		11,321			5,015

Interest income		2,457			1,894
Interest expense		(1,761	)		(1,416	)
Other income (loss)		(213	)		559


Total other income		483			1,037


Income before provision for income taxes and minority interest expense (benefit)		11,804			6,052

Provision for income taxes		4,816			3,078
Minority interest expense (benefit), net of tax		11			(344	)


Net income	$	6,977		$	3,318


Earnings per share:
Basic	$	0.26		$	0.13
Diluted	$	0.25		$	0.13

Weighted average shares:
Basic		27,052			26,419
Diluted		27,930			26,529

See notes to condensed consolidated financial statements.

PAREXEL INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)


	For the three months ended
	September 30,
	2006			2005
Cash flow from operating activities:
Net income	$	6,977		$	3,318
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Minority interest expense (benefit), net of tax		11			(344	)
Depreciation and amortization		6,550			6,370
Stock-based compensation		1,468			608
Changes in operating assets/liabilities		(22,887	)		(1,757	)

Net cash (used in) provided by operating activities		(7,881	)		8,195


Cash flow from investing activities:
Purchases of marketable securities		(25,575	)		—
Proceeds from sale of marketable securities		35,575			4,000
Purchases of property and equipment		(8,578	)		(6,081	)
Acquisition of businesses		(39	)		(5,479	)
Proceeds from sale of assets		71			6

Net cash provided by (used in) investing activities		1,454			(7,554	)


Cash flow from financing activities:
Proceeds from issuance of common stock		3,421			4,708
Payments to repurchase common stock		—			(2,000	)
Borrowings (repayments) under lines of credit and long-term debt		4,919			(26	)

Net cash provided by financing activities		8,340			2,682


Effect of exchange rate changes on cash and cash equivalents		(445	)		28


Net increase in cash and cash equivalents		1,468			3,351
Cash and cash equivalents at beginning of period		82,749			84,622


Cash and cash equivalents at end of period	$	84,217		$	87,973


Supplemental disclosures of cash flow information

Net cash paid during the period for:
Interest	$	1,761		$	1,416
Income taxes, net of refunds	$	203		$	4,193

Supplemental disclosures of investing activities

Fair value of assets acquired and goodwill	$	39		$	6,274
Liabilities assumed		—			(795	)

Cash paid for acquisitions	$	39		$	5,479

See notes to condensed consolidated financial statements.

PAREXEL INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of PAREXEL International Corporation (“PAREXEL” or “the Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2006 are not necessarily indicative of the results that may be expected for other quarters or the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006 (the “2006 10-K”).

NOTE 2 – EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares plus the dilutive effect of outstanding stock options and shares issuable under the Company’s employee stock purchase plan. Outstanding options to purchase approximately 49,000 and 1.4 million shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2006 and 2005, respectively, because they were anti-dilutive.

The following table outlines the basic and diluted earnings per common share computations:


	For the three months ended
	September 30,
($ in thousands, except per share data)	2006		2005
Net income	$	6,977	$	3,318


Weighted average number of shares outstanding used in computing basic earnings per share		27,052		26,419

Dilutive common stock equivalents		878		110


Weighted average number of shares outstanding used in computing diluted earnings per share		27,930		26,529


Basic earnings per share	$	0.26	$	0.13
Diluted earnings per share	$	0.25	$	0.13

NOTE 3 – COMPREHENSIVE INCOME

Comprehensive income has been calculated by the Company in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income.” Comprehensive income for the three months ended September 30, 2006 and 2005 was as follows:


	For the three months ended
	September 30,
($ in thousands)	2006			2005
Net income	$	6,977		$	3,318
Add: Foreign currency translation		(313	)		(1,177	)
Unrealized gain (loss) on available for sale securities and derivative instruments		(79	)		146


Comprehensive income	$	6,585		$	2,287

NOTE 4 – STOCK-BASED COMPENSATION

Effective July 1, 2005, the Company adopted 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 months ended September 30, 2006 and 2005 includes compensation expense for all stock-based payments granted during the quarter and for all stock-based payments granted prior to, but not yet vested, as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123. For the three months ended September 30, 2006, the amount of compensation expense recognized was $1.5 million, of which $0.2 million was recorded in direct costs and $1.3 million was recorded in Selling, general and administrative expense in the Condensed Consolidated Statement of Operations. For the three months ended September 30, 2005, the amount of compensation expense recognized was $0.6 million, of which $0.2 million was recorded in direct costs and $0.4 million was recorded in Selling, general and administrative expense in the Condensed Consolidated Statement of Operations. The adoption of SFAS No. 123(R) had no effect on cash flows for the three months ended September 30, 2006 and 2005. There were no significant stock option and restricted stock grants during the three-month period ended September 30, 2006.

NOTE 5 – SEGMENT INFORMATION

The Company is managed through three business segments, namely, Clinical Research Services (“CRS”), PAREXEL Consulting and MedCom Services (“PCMS”), and Perceptive Informatics, Inc. (“Perceptive”). CRS constitutes the Company’s core business and includes clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory and investigator site services. PCMS provides technical expertise and advice in such areas as drug development, regulatory affairs, and bio/pharmaceutical process and management consulting; and provides a full spectrum of market development, product development, and targeted communications services in support of product launch. PCMS consultants identify alternatives and propose solutions to address clients’ product development, registration, and commercialization issues. PCMS also provides health policy consulting and strategic reimbursement services. Perceptive provides information technology solutions designed to improve clients’ product development processes. Perceptive offers a portfolio of products and services that includes medical imaging services, interactive voice response systems (“IVRS”), clinical trials management systems (“CTMS”), web-based portals, systems integration, and patient diary applications.

The Company evaluates its segment performance and allocates resources based on service revenue and gross profit (service revenue less direct costs), and allocates and evaluates other operating costs on a geographic basis. Accordingly, the Company does not include selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income tax expense in segment profitability. The Company attributes revenue to individual countries based upon the number of hours of services performed in the respective countries and inter-segment transactions are not included in service revenue. Furthermore, PAREXEL has a global infrastructure supporting its business segments, and therefore, assets are not identified by reportable segment.


	For the three months ended
	September 30,
($ in thousands)	2006		2005
Service revenue:
Clinical Research Services	$	120,236	$	99,348
PAREXEL Consulting and MedCom Services		29,310		26,745
Perceptive Informatics, Inc.		15,511		12,287

	$	165,057	$	138,380


Gross profit on service revenue:
Clinical Research Services	$	41,079	$	32,226
PAREXEL Consulting and MedCom Services		8,637		7,979
Perceptive Informatics, Inc.		6,120		4,552

	$	55,836	$	44,757

NOTE 6 – RESTRUCTURING CHARGES

During the three months ended September 30, 2006, the Company recorded a $0.1 million reduction to the existing restructuring reserve as a result of changes in assumptions of leased facilities.

Current activity charged against the restructuring accrual in the three months ended September 30, 2006 (which is included in “Current Liabilities — Accrued Restructuring Charges” and “Long-term Accrued Restructuring Charges” in the Condensed Consolidated Balance Sheet) was as follows:


						Payments/
	Balance at					Foreign			Balance at
	June 30,		Provision/			Currency			September 30,
($ in thousands)	2006		Adjustments			Exchange			2006
Employee severance costs	$	734		—		$	(251	)	$	483
Facilities-related charges		15,423		(74	)		(1,710	)		13,639

	$	16,157	$	(74	)	$	(1,961	)	$	14,122

NOTE 7 – STOCKHOLDERS’ EQUITY

On September 9, 2004, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $20.0 million of the Company’s common stock to be repurchased in the open market subject to market conditions. Unless terminated earlier by resolution of the Company’s Board of Directors, the Plan will expire when the entire amount authorized has been fully utilized. Through September 30, 2006, the Company had acquired 620,414 shares at a total cost of $14.0 million under this program, leaving a remaining balance on the authorization of $6.0 million. There were no additional shares repurchased during the first quarter of fiscal year 2007 and the period from October 1, 2006 to November 7, 2006.

NOTE 8 – RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that fair-value measurements have on earnings. FAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years and will be in effect for PAREXEL beginning on July 1, 2008. The Company is currently evaluating the potential impact that the adoption of FAS 157 will have on its financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements in accordance with the provisions of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the derecognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods and new disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006 and will be in effect for PAREXEL beginning on July 1, 2007. The Company is currently evaluating the potential impact that the adoption of FIN 48 will have on its financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“FAS 154”), which changes the requirements for the accounting and reporting of a change in accounting principle. FAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. FAS 154 requires that changes in accounting principle be retrospectively applied. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. PAREXEL adopted FAS 154 on July 1, 2006 and the adoption of this statement did not have a material impact on the Company’s financial statements in the first quarter of fiscal year 2007.

NOTE 9 – INCOME TAXES

For the three months ended September 30, 2006 and 2005, the Company had an effective income tax rate of 40.8% and 50.9%, respectively. The favorable movement in the tax rate was primarily attributable to projected profitability improvements in the United States (U.S.). The Company has evaluated the likelihood of unfavorable adjustments arising from on-going reviews by taxing authorities and believes adequate provisions have been made in the income tax provision.

NOTE 10 – COMMITMENTS, CONTINGENCIES AND GUARANTEES

In connection with the Integrated Marketing Concepts (“IMC”) acquisition during fiscal year 2005, as discussed in Note 3 to the Consolidated Financial Statements included in Item 8 of the Company’s 2006 10-K, the Company agreed to make additional payments of up to $2.9 million in contingent purchase price if IMC achieves certain established financial targets through March 31, 2008. As of September 30, 2006, the Company had paid $0.6 million in earn-out payments under the terms of the IMC acquisition.

In connection with the Qdot acquisition, as discussed in Note 3 to the Consolidated Financial Statements included in Item 8 of the Company’s 2006 10-K, the Company agreed to make maximum additional payments of approximately $3.0 million in contingent purchase price if Qdot achieves certain established financial targets through June 30, 2008. As of September 30, 2006, the Company had paid approximately $0.8 million in contingent earn-out payments.

The Company has letter-of-credit agreements with banks totaling approximately $5.7 million guaranteeing performance under various operating leases and vendor agreements. In addition, the Company’s $15.0 million line of credit with JP Morgan Chase Bank, N.A. is guaranteed by some of PAREXEL’s U.S. entities.

As of September 30, 2006, the Company had approximately $3.9 million in purchase obligations with various vendors for the purchase of computer software and recruiting services.

NOTE 11 – SUBSEQUENT EVENTS

On October 12, 2006, PAREXEL entered into a definitive purchase agreement to acquire the business and operations of California Clinical Trials Medical Group, Inc. (“CCT”) and Behavioral and Medical Research, LLC (“BMR”). Established in 1981 with headquarters in San Diego, CCT and BMR provide a broad range of specialty Phase I – IV clinical research services through four clinical sites in California. The purchase price is $65 million, and the acquisition is expected to close during the second quarter of fiscal year 2007. The Company plans to finance the acquisition with borrowings under new financing arrangements and existing cash.

Subsequent to the quarter ended September 30, 2006, the Company received notice that a clinical trials contract in the $50 million range is highly likely to be cancelled, unrelated to PAREXEL’s performance on the project. The contract will likely be removed from backlog in the second quarter of this fiscal year.

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

The financial information discussed below is derived from the Condensed Consolidated Financial Statements included herein. The financial information set forth and discussed below is unaudited but, in the opinion of management, reflects all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation of such information. The Company’s results of operations for a particular quarter may not be indicative of results expected during subsequent fiscal quarters or for the entire year.

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained in this report regarding the Company’s strategy, future operations, financial position, future revenue, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “will”, “would”, “targets”, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The Company cannot guarantee that they actually will achieve the plans, intentions or expectations expressed or implied in its forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements the Company makes. These important factors are described under “Critical Accounting Policies and Estimates” and under “Risk Factors” set forth in Item 1A below. Although the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if its estimates change, and readers

should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of this quarterly report.

OVERVIEW

The Company is a leading bio/pharmaceutical services company, providing a broad range of expertise in clinical research, medical marketing, consulting and informatics and advanced technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. The Company’s primary objective is to provide solutions for managing the bio/pharmaceutical product lifecycle with the goal of reducing the time, risk and cost associated with the development and commercialization of new therapies. Since its founding in 1983, PAREXEL has developed significant expertise in processes and technologies supporting this strategy. The Company’s product and service offerings include: clinical trials management, data management, biostatistical analysis, medical marketing, clinical pharmacology, patient recruitment, regulatory and product development consulting, health policy and reimbursement, performance improvement, industry training and publishing, medical imaging services, IVRS, CTMS, web-based portals, systems integration, patient diary applications, and other drug development consulting services. The Company believes that its comprehensive services, depth of therapeutic area expertise, global footprint and related access to patients, and sophisticated information technology, and experience in global drug development and product launch services represent key competitive strengths.

The Company is managed through three business segments, namely, CRS, PCMS and Perceptive.

	•		CRS constitutes the Company’s core business and includes clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory and investigator site services.

	•		PCMS provides technical expertise and advice in such areas as drug development, regulatory affairs, and bio/pharmaceutical process and management consulting; and provides a full spectrum of market development, product development, and targeted communications services in support of product launch. PCMS consultants identify alternatives and propose solutions to address clients’ product development, registration, and commercialization issues. PCMS also provides health policy consulting and strategic reimbursement services.

	•		Perceptive provides information technology solutions designed to improve clients’ product development processes. Perceptive offers a portfolio of products and services that includes medical imaging services, IVRS, CTMS, web-based portals, systems integration, and patient diary applications.

The Company conducts a significant portion of its operations in foreign countries. Approximately 64.2% of the Company’s consolidated service revenue for the three months ended September 30, 2006 and 63.5% of the Company’s consolidated service revenue for the three months ended September 30, 2005, were from non-U.S. operations. Because the Company’s financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates can have a significant effect on its operating results. For the three months ended September 30, 2006, 16.0% of total consolidated service revenue was denominated in British pounds and approximately 36.3% of total consolidated service revenue was denominated in Euros. For the three months ended September 30, 2005, 18.4% of total consolidated service revenue was denominated in British pounds and approximately 35.5% of total consolidated service revenue was denominated in Euros.

Approximately 90% of the Company’s contracts are fixed rate, with some variable components, and range in duration from a few months to several years. Cash flows from these contracts typically consist of a down payment required to be paid at the time of contract execution with the balance due in installments over the contract’s duration, usually on a milestone achievement basis. Revenue from these contracts is generally recognized as work is performed. As a result, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts.

Generally, the Company’s clients can terminate their contracts with the Company upon thirty to sixty days notice or can delay execution of services. Clients may terminate or delay contracts for a variety of reasons, including: merger or potential merger-related activities involving the client, the failure of products being tested to satisfy safety requirements or efficacy criteria, unexpected or undesired clinical results of the product, client cost reductions as a result of budgetary limits or changing priorities, the client’s decision to forego a particular study, insufficient patient enrollment or investigator recruitment, or clinical drug manufacturing problems resulting in shortages of the product.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and other financial information. On an ongoing basis, the Company evaluates its estimates and judgments. The Company bases its estimates on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The Company regards an accounting estimate underlying its financial statements as a “critical accounting estimate” if the nature of the estimate or assumption is material due to level of subjectivity and judgment involved or the susceptibility of such matter to change and if the impact of the estimate or assumption on financial condition or operating performance is material. The Company believes that the following accounting policies are most critical to aid in fully understanding and evaluating its reported financial results:

REVENUE RECOGNITION

Service revenue on fixed-price contracts is recognized as services are performed. The Company measures progress for fixed-price contracts using the concept of proportional performance based upon a unit-based output method. Changes in the scope of work generally result in a renegotiation of contract pricing terms. Renegotiated amounts are not included in net revenues until earned and realization is assured. Costs are not deferred in anticipation of contracts being awarded, but instead are expensed as incurred. Historically, there have not been any significant variations between contract estimates and the actual cost incurred that were not recovered from clients.

BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE

Billed accounts receivable represent amounts for which invoices have been sent to clients. Unbilled accounts receivable represent amounts recognized as revenue for which invoices have not yet been sent to clients. Deferred revenue represents amounts billed or payments received for which revenue has not yet been earned. The Company maintains a provision for losses on receivables based on historical collectability and specific identification of potential problem accounts. In the event the Company is unable to collect portions of its outstanding billed or unbilled receivables, there may be a material impact to the Company’s consolidated results of operations and financial position.

INCOME TAXES

The Company’s global provision for corporate income taxes is determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. A valuation allowance is established if it is more likely than not that future tax benefits from the deferred tax assets will not be realized. Income tax expense is based on the distribution of profit before tax among the various taxing jurisdictions in which the Company operates, adjusted as required by the tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on the Company’s effective tax rate.

Interim tax provision calculations are prepared during the year based on estimates. Differences between these interim estimates and the final results for the year could materially impact the Company’s effective tax rate and its consolidated results of operations and financial position. The Company is required under Financial Interpretation No. 18, “Accounting for Income Taxes in Interim Periods – an Interpretation of APB Opinion No. 28” to exclude from its quarterly worldwide effective income tax rate calculation losses in jurisdictions where no tax benefit can be recognized. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.

The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. The Company’s estimate for the potential outcome for any uncertain tax issue is based on judgment. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters. However, future results may include favorable or unfavorable adjustments to the Company’s estimated tax liabilities in the period assessments are made or resolved or when statutes of limitation on potential assessments expire.

GOODWILL

Goodwill represents the excess of the cost of an acquired business over the fair value of the related net assets at the date of acquisition. Under SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is subject to annual impairment testing or more frequent testing if an event occurs or circumstances change that would more likely than not reduce the carrying value of the reporting unit below its fair value. The Company has assessed the impairment of goodwill under SFAS No. 142 in fiscal years 2006 and 2005. The impairment testing involves determining the fair market value of each of the reporting units with which the goodwill was associated and comparing that value with the reporting unit’s carrying value. Based on this assessment, there was no impairment identified at June 30, 2006 or 2005. Any future impairment of goodwill could have a material impact to the Company’s financial position or its results of operations.

RESULTS OF OPERATIONS

ANALYSIS BY SEGMENT

The Company evaluates its segment performance and allocates resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are allocated and evaluated on a geographic basis. Accordingly, the Company does not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income tax expense in segment profitability. The Company attributes revenue to individual countries based upon the number of hours of services performed in the respective countries and inter-segment transactions are not included in service revenue. Furthermore, PAREXEL has a global infrastructure supporting its business segments and therefore, assets are not identified by reportable segment. Service revenue, direct costs and gross profit on service revenue for the three months ended September 30, 2006 and 2005 were as follows:


	For the three months ended September 30,
					Increase
($ in thousands)	2006		2005		(Decrease)		%
Service revenue:
CRS	$	120,236	$	99,348	$	20,888		21.0	%
PCMS		29,310		26,745		2,565		9.6	%
Perceptive		15,511		12,287		3,224		26.2	%

	$	165,057	$	138,380	$	26,677		19.3	%


Direct costs:
CRS	$	79,157	$	67,122	$	12,035		17.9	%
PCMS		20,673		18,766		1,907		10.2	%
Perceptive		9,391		7,735		1,656		21.4	%

	$	109,221	$	93,623	$	15,598		16.7	%


Gross profit on service revenue:
CRS	$	41,079	$	32,226	$	8,853		27.5	%
PCMS		8,637		7,979		658		8.2	%
Perceptive		6,120		4,552		1,568		34.4	%

	$	55,836	$	44,757	$	11,079		24.8	%

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2005:

Service revenue increased $26.7 million, or 19.3%, to $165.1 million for the three months ended September 30, 2006 from $138.4 million for the three months ended September 30, 2005. On a geographic basis, service revenue for the three months ended September 30, 2006 was distributed as follows: United States — $59.0 million (35.8%), Europe — $94.2 million (57.0%), and Asia & Other - $11.9 million (7.2%). For the three months ended September 30, 2005, service revenue was distributed as follows: United States — $50.4 million (36.5 %), Europe — $80.7 million (58.3 %), and Asia & Other — $7.3 million (5.2 %).

On a segment basis, CRS service revenue increased by $20.9 million, or 21.0%, to $120.2 million in the three months ended September 30, 2006 from $99.3 million in the three months ended September 30, 2005. Of the total $20.9 million increase, $19.5 million was attributed to business growth across all CRS business units, with the remaining $1.9 million attributed to foreign currency fluctuations. PCMS service revenue increased by $2.6 million, or 9.6%, to $29.3 million in the three months ended September 30, 2006 from $26.7 million in the three months ended September 30, 2005. Of the total $2.6 million increase, $3.3 million was attributed to a strong performance in the consulting business, which was offset by a $0.7 million decline caused by weakness in the MedCom business. Perceptive service revenue increased by $3.2 million, or 26.2%, to $15.5 million for the three months ended September 30, 2006 from $12.3 million in the three months ended September 30, 2005. The year-over-year increase was mainly the result of strong growth in the Company’s medical imaging, integration services and IVRS.

Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred on behalf of and reimbursable by clients. Reimbursement revenue does not yield any gross profit to the Company, nor does it have an impact on net income.

Direct costs increased by $15.6 million, or 16.7%, to $109.2 million for the three months ended September 30, 2006 from $93.6 million in the three months ended September 30, 2005. On a segment basis, CRS direct costs increased by $12.0 million, or 17.9%, to $79.1 million for the three months ended September 30, 2006 from $67.1 million in the three months ended September 30, 2005. The year-over-year increase in CRS direct costs was primarily due to higher labor and related costs incurred to support higher revenue levels. As a percentage of service revenue, CRS direct costs decreased by 1.8 points to 65.8% for the three months ended September 30, 2006 from 67.6% for the three months ended September 30, 2005 primarily due to improved productivity and better performance in the U.S. PCMS direct costs increased by $1.9 million, or 10.2%, to $20.7 million in the three months ended September 30, 2006 from $18.8 million in the three months ended September 30, 2005. The year-over-year increase in PCMS direct costs was primarily due to higher labor costs associated with higher revenue levels. As a percentage of service revenue, PCMS direct costs remained relatively flat at 70.5% for the three months ended September 30, 2006 and 70.2% for the three months ended September 30, 2005. Perceptive direct costs increased $1.7 million, or 21.4%, to $9.4 million in the three months ended September 30, 2006 from $7.7 million in the three months ended September 30, 2005. The year-over-year increase in Perceptive direct costs is primarily due to higher labor costs associated with increased staffing needs to support business growth. As a percentage of service revenue, Perceptive’s direct costs decreased by 2.5 points to 60.5% in the three months ended September 30, 2006 from 63.0% in the three months ended September 30, 2005 primarily because there was no counterpart in recording compensation expense in conjunction with the buyback of the minority interest in Perceptive in the first quarter of fiscal year 2006.

Selling, general and administrative (“SG&A”) expenses increased by $4.0 million, or 11.7%, to $38.0 million in the three-month period ended September 30, 2006 from $34.0 million in the three months ended September 30, 2005. Of the total $4.0 million increase, $1.1 million was attributed to increased spending for research and development, $1.0 million in higher selling and promotion costs, $0.9 million was related to higher stock-based compensation; approximately $0.6 million was caused by foreign exchange fluctuation, with the remaining $0.4 million related to other sources. As a percentage of service revenue, SG&A decreased by 1.6 points to 23.0% in the three months ended September 30, 2006 from 24.6% in the three months ended September 30, 2005 mainly because of substantial leverage associated with strong revenue growth and the lack of a counterpart to recording compensation expense in conjunction with the buyback of the minority interest in Perceptive in the prior year period.

Depreciation and amortization (“D&A”) expense was $6.6 and $6.4 million for the three months ended September 30, 2006 and 2005, respectively. As a percentage of service revenue, D&A decreased by 0.6 points to 4.0% in the three months ended September 30, 2006 from 4.6% in the three months ended September 30, 2005.

During the three months ended September 30, 2006, the Company recorded a $0.1 million reduction to the existing restructuring reserve as a result of changes in assumptions related to facilities sub-leases. During the three months ended September 30, 2005, the Company recorded a $1.2 million reduction to the existing restructuring reserve as a result of changes in assumptions primarily related to facilities sub-leases, which was partially offset by $0.5 million in severance-related restructuring activity.

Other income decreased by $0.5 million, or 53.4% to $0.5 million in the three months ended September 30, 2006 from $1.0 million in the three months ended September 30, 2005. The change was due to a swing in foreign exchange from a gain to a loss.

The Company had an effective income tax rate of 40.8% for the three months ended September 30, 2006 and 50.9% for the three months ended September 30, 2005. The favorable movement in the tax rate was primarily attributable to projected profitability improvements in the U.S. The Company has evaluated the likelihood of unfavorable adjustments arising from on-going reviews by taxing authorities and believes adequate provisions have been made in the income tax provision.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations and growth, including acquisitions, with cash flow from operations and proceeds from the sale of equity securities. Investing activities primarily reflect acquisition costs and capital expenditures for information systems enhancements and leasehold improvements.

DAYS SALES OUTSTANDING

The Company’s operating cash flow is heavily influenced by changes in the levels of billed and unbilled receivables and deferred revenue. These account balances as well as days sales outstanding (“DSO”) in accounts receivable, net of deferred revenue, can vary based on contractual milestones and the timing and size of cash receipts. DSO was 55 days at September 30, 2006, 49 days at June 30, 2006, and 42 days at September 30, 2005. The increase in DSO was caused by record levels of billing in August and September 2006 as a result of triggering an unusually high level of billing milestones. Accounts receivable, net of the provision for losses on receivables was $295.7 million ($173.1 million in billed accounts receivable and $122.6 million in unbilled accounts receivable) at September 30, 2006 and $272.1 million ($152.2 million in billed accounts receivable and $119.9 million in unbilled accounts receivable) at June 30, 2006. Deferred revenue was $156.6 million at September 30, 2006 and $139.8 million at June 30, 2006. DSO is calculated by adding the end-of-period balances for billed and unbilled account receivables, net of deferred revenue and the provision for losses on receivables, then dividing the resulting amount by the sum of total revenue plus investigator fees billed for the most recent quarter, and multiplying the resulting fraction by the number of days in the quarter.

CASH FLOWS

Net cash used in operating activities for the three months ended September 30, 2006 totaled $7.9 million and was attributable to an $8.8 million decrease in accounts payable, a $7.9 million decrease in other current and non-current liabilities, and a $6.9 million increase in account receivable (net of allowance for doubtful accounts and deferred revenue), offset by 7.0 million of net income, $6.5 million related to non-cash charges for depreciation and amortization expense, $1.5 million in stock-based compensation expense, and a $0.7 million decrease in prepaid expenses and other assets. Net cash provided by operating activities for the three months ended September 30, 2005 totaled $8.2 million and consisted of $6.4 million related to non-cash charges for depreciation and amortization expense, $3.3 million of net income, a $1.5 million decrease in accounts receivable (net of allowance for doubtful accounts and deferred revenue), and a $1.1 million increase in other current and non-current liabilities, offset by a $3.4 million decrease in accounts payable, a $0.4 million increase in prepaids and other assets, and a $0.3 million decrease in other sources.

Net cash provided by investing activities for the three months ended September 30, 2006 totaled $1.5 million and consisted of $10.0 million of net proceeds from the sales of marketable securities and $0.1 million from other sources, offset by $8.6 million used for capital expenditures (primarily analytical equipment and computer software and hardware). Net cash used in investing activities for the three months ended September 30, 2005 totaled $7.6 million and consisted of $6.1 million of capital expenditures (primarily analytical equipment and computer software and hardware), $5.5 million for the acquisition of Qdot and the acquisition of the equity interest of minority stockholders in Perceptive, offset by $4.0 million in proceeds from the sale of marketable securities.

Net cash provided by financing activities for the three months ended September 30, 2006 totaled $8.3 million, and consisted of $5.0 million in borrowing under a line of credit and $3.4 million from proceeds related to the issuance of common stock in conjunction with the Company’s stock option plan, offset by $0.1 million used for payment of capital lease obligations. Net cash provided by financing activities for the three months ended September 30, 2005 totaled $2.7 million, and consisted of $4.7 million in proceeds related to the issuance of common stock in conjunction with the Company’s stock option plan, offset by $2.0 million used to repurchase the Company’s common stock pursuant to its stock repurchase program.

LINES OF CREDIT

The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro 12.0 million. This line of credit is not collateralized, is payable on demand, and bears interest at a rate ranging between 4% and 6%. The line of credit may be revoked or canceled by the bank at any time at its discretion. The Company primarily entered into this line of credit to facilitate business transactions with the bank. At September 30, 2006, the Company had approximately Euro 12.0 million available under this line of credit.

The Company has other foreign lines of credit with banks totaling approximately $1.8 million. These lines of credit are used as overdraft protection and bear interest at rates ranging from 5% to 7%. The lines of credit are payable on demand and are supported by PAREXEL International Corporation. At September 30, 2006, the Company had approximately $1.8 million available under these arrangements.

The Company has a cash pooling arrangement with ABN AMRO Bank. Pooling occurs when debit balances are offset against credit balances and the net position is used as a basis by the bank for calculating interest. Each legal entity owned by the Company and party to this arrangement remains the owner of either a credit or debit balance. Therefore, interest income is earned in legal entities with credit balances, while interest expense is charged to legal entities with debit balances. Based on the pool’s overall balance, the Bank then (1) recalculates the overall interest to be charged or earned, (2) compares this amount with the sum of previously charged/earned interest amounts per account and (3) additionally pays/charges the difference. Interest income and interest expense are included in “other income (expense), net” in the Company’s Condensed Consolidated Statements of Operations.

To fund its U.S. operations, the Company has in place an unsecured, uncommitted line of credit with JP Morgan Chase Bank, N.A. for up to USD $15.0 million. The line bears interest rates based on either Libor or Prime rates, as the Company selects. PAREXEL borrowed $5.0 million under this line of credit during the first quarter of fiscal year 2007. As of September 30, 2006, the amount outstanding under this line was $5.0 million. On October 2, 2006 this $5.0 million was repaid in full.

FINANCING NEEDS

The Company’s primary cash needs are for the payment of salaries and fringe benefits, hiring and recruiting expenses, business development costs, acquisition-related costs, capital expenditures, and facility-related expenses. The Company’s principal source of cash is from contracts with clients. If the Company were unable to generate new contracts with existing and new clients or if the level of contract cancellations increased, the Company’s revenue and cash flow would be adversely affected (see “Item 1A–Risk Factors” for further detail). Absent a material adverse change in the level of the Company’s new business bookings or contract cancellations, PAREXEL believes that its existing capital resources together with cash flow from operations and borrowing capacity under existing lines of credit will be sufficient to meet its foreseeable cash needs over the next twelve months and on a longer term basis.

In the future, the Company expects to continue to acquire businesses to enhance its service and product offerings, expand its therapeutic expertise, and/or increase its global presence. Any such acquisitions may require additional external financing, and the Company may from time to time seek to obtain funds from public or private issuances of equity or debt securities. The Company may be unable to secure such financing on terms acceptable to the Company.

The Company expects capital expenditures to total approximately $32.0 million in fiscal year 2007. As of September 30, 2006, the Company had spent approximately $8.6 million and expects to spend an additional $23.4 million primarily for computer software and hardware, analytical equipment, and leasehold improvements during the remainder of the fiscal year.

On September 9, 2004, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $20.0 million of the Company’s common stock to be repurchased in the open market subject to market conditions. As of September 30, 2006, the Company had acquired 620,414 shares at a total cost of $14.0 million under this program. There were no repurchases made during the three months ended September 30, 2006.

As discussed in Note 11 to the Condensed Consolidated Financial Statements included in Item 1 of this quarterly report, on October 12, 2006, PAREXEL entered into a definitive purchase agreement to acquire the business and operations of CCT and BMR. Established in 1981 with headquarters in San Diego, CCT and BMR provide a broad range of specialty Phase I – IV clinical research services through four clinical sites in California. The purchase price is $65 million, and the acquisition is expected to close during the second quarter of fiscal year 2007. The Company plans to finance the acquisition with borrowings under new financing arrangements and existing cash.

COMMITMENTS, CONTINGENCIES AND GUARANTEES

As of September 30, 2006, the Company had approximately $3.9 million in purchase obligations with various vendors for the purchase of computer software and recruiting services.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company’s investors.

FOREIGN CURRENCY EXCHANGE RATES

The Company derived approximately 64.2% of its consolidated service revenue for the three-month period ended September 30, 2006 from operations outside of the U.S., of which 16.0% was denominated in British pounds and approximately 36.3% was denominated in Euros. The Company derived approximately 63.5% of its consolidated service revenue for the three months ended September 30, 2005 from operations outside of the U.S., of which 18.4% was denominated in British pounds and approximately 35.5% was denominated in Euros. The Company does not have significant operations in countries in which the economy is considered to be highly inflationary. The Company’s financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between foreign currencies and the U.S. dollar will affect the translation of financial results into U.S. dollars for purposes of reporting the Company’s consolidated financial results.

The Company may be subjected to foreign currency transaction risk when the Company’s foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiary’s functional (local) currency. To the extent the Company is unable to shift the effects of foreign currency fluctuations to its clients, foreign exchange fluctuations as a result of currency exchange losses could have a material effect on the Company’s results of operations. The Company has a derivative hedging policy to hedge certain foreign denominated accounts receivable and intercompany payables. Under this policy, derivatives are accounted for in accordance with SFAS

No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). The notional contract amount of these outstanding foreign currency exchange contracts totaled approximately $13.2 million at September 30, 2006.

Occasionally, the Company enters into other foreign currency exchange contracts to offset the impact of currency fluctuations. These foreign currency exchange contracts are entered into as economic hedges, but are not designated as hedges for accounting purposes as defined under SFAS 133. The notional contract amount of these outstanding foreign currency exchange contracts was approximately $20.1 million at September 30, 2006. The Company does not expect gains or losses on these contracts to have a material impact on its financial results. During the three-month period ended September 30, 2006, the Company recorded foreign exchange losses of $0.4 million and during the three-month period ended September 30, 2005, the Company recorded foreign-exchange gains of $0.5 million. The Company acknowledges its exposure to additional foreign exchange risk as it relates to assets and liabilities that are not part of the economic hedge program, but quantification of this risk is very difficult to assess at any given point in time.

INFLATION

The Company believes the effects of inflation generally do not have a material adverse impact on its operations or financial condition.

RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. FAS 157 provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that fair-value measurements have on earnings. FAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years and will be in effect for PAREXEL beginning on July 1, 2008. The Company is currently evaluating the potential impact that the adoption of FAS 157 will have on its financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements in accordance with the provisions of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the derecognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods and new disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006 and will be in effect for PAREXEL beginning on July 1, 2007. The Company is currently evaluating the potential impact that the adoption of FIN 48 will have on its financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which changes the requirements for the accounting and reporting of a change in accounting principle. FAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. FAS 154 requires that changes in accounting principle be retrospectively applied. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. PAREXEL adopted FAS 154 on July 1, 2006 and the adoption of this statement did not have a material impact on the Company’s financial statements in the first quarter of fiscal year 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates, and other relevant market rates or price changes. In the ordinary course of business, the Company is exposed to market risk resulting from changes in foreign currency exchange rates, and the Company regularly evaluates its exposure to such changes. The Company’s overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments.

FOREIGN CURRENCY EXCHANGE RATES

The Company may be subjected to foreign currency transaction risk when the Company’s foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiary’s functional (local) currency. To the extent the Company is unable to shift the effects of currency fluctuations to its clients, foreign exchange fluctuations as a result of currency exchange losses could have a material effect on the Company’s results of operations. The Company has a derivative hedging policy to hedge certain foreign denominated accounts receivable and intercompany payables. Under this policy, derivatives are accounted for in accordance with SFAS 133. The notional contract amount of these outstanding foreign currency exchange contracts totaled approximately $13.2 million at September 30, 2006.

Occasionally, the Company enters into other foreign currency exchange contracts to offset the impact of currency fluctuations. These foreign currency exchange contracts are entered into as economic hedges, but are not designated as hedges for accounting purposes as defined under SFAS 133. The notional contract amount of these outstanding foreign currency exchange contracts was approximately $20.1 million at September 30, 2006. The Company does not expect gains or losses on these contracts to have a material impact on its financial results. The potential change in the fair value of these foreign currency exchange contracts that would result from a hypothetical change of 10% in exchange rates would be approximately $2.0 million. During the three-month period ended September 30, 2006, the Company recorded foreign exchange loss of $0.4 million and during the three-month period ended September 30, 2005, the Company recorded foreign exchange gain of $0.5 million, respectively. The Company acknowledges its exposure to additional foreign exchange risk as it relates to assets and liabilities that are not part of the economic hedge program, but quantification of this risk is very difficult to assess at any given point in time.

INTEREST RATE

The Company’s exposure to interest rate changes is currently minimal as the level of long-term debt and marketable securities the Company has are minimal. Long-term debt was approximately $0.6 million at September 30, 2006 and approximately $0.7 million at June 30, 2006. Marketable securities were zero at September 30, 2006 and $10.0 million at June 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of September 30, 2006, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to other information in this report, the following risk factors should be considered carefully in evaluating our Company and our business. These risk factors could cause actual results to differ from those indicated by forward-looking statements made in this report, including in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other forward-looking statements that we may make from time to time. If any of the following risks occur, our business, financial condition, or results of operations would likely suffer.

THE LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY IMPACT OUR FINANCIAL PERFORMANCE

Our clients generally can terminate their contracts with us upon 30 to 60 days notice or can delay the execution of services. The loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect our operating results, possibly materially. We have in the past experienced contract cancellations, which have adversely affected our operating results, including a major Phase III cancellation during the first quarter of fiscal year 2005.

Clients terminate or delay their contracts for a variety of reasons, including,:

	–		merger or potential merger related activities;

	–		failure of products being tested to satisfy safety requirements;

	–		failure of products being tested to prove effective;

	–		products having unexpected or undesired clinical results;

	–		client decisions to forego a particular study, perhaps for economic reasons;

	–		insufficient patient enrollment in a study;

	–		insufficient investigator recruitment;

	–		production problems which cause shortages of the product;

	–		product withdrawal following market launch; and

	–		shut down of manufacturing facilities.

In addition, clients may determine to proceed with fewer clinical trials or conduct them without the assistance of bio/pharmaceutical services companies if they are trying to reduce costs as a result of budgetary limits or changing priorities. These factors may cause such clients to cancel contracts with us.

WE FACE INTENSE COMPETITION IN MANY AREAS OF OUR BUSINESS; IF WE DO NOT COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED

The bio/pharmaceutical services industry is highly competitive and we face numerous competitors in many areas of our business. If we fail to compete effectively, we may lose clients, which would cause our business to suffer.

We primarily compete against in-house departments of pharmaceutical companies, other full service clinical research organizations, or CROs, small specialty CROs, and to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which we compete include Quintiles Transnational Corporation, Covance, Inc. and Pharmaceutical Product Development Inc. In addition, our PCMS business competes with a large and fragmented group of specialty service providers, including advertising/promotional companies, major consulting firms with pharmaceutical industry groups and smaller companies with pharmaceutical industry focus. Perceptive competes primarily with CROs, information technology companies and other software companies. Some of these competitors, including the in-house departments of pharmaceutical companies, have greater capital, technical and other resources than us. In addition, our competitors that are smaller specialized companies may compete effectively against us because of their concentrated size and focus.

THE FIXED RATE NATURE OF OUR CONTRACTS COULD HURT OUR OPERATING RESULTS

Approximately 90% of our contracts are fixed rate. If we fail to adequately price our contracts or if we experience significant cost overruns, our gross margins on the contracts would be reduced and we could lose money on contracts. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future.

IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY INDUSTRY CHANGES, THE NEED FOR OUR SERVICES COULD DECREASE

Governmental regulation of the drug, medical device and biotechnology product development process is complicated, extensive, and demanding. A large part of our business involves assisting pharmaceutical and biotechnology companies through the regulatory approval process. Changes in regulations, that, for example, streamline procedures or relax approval standards, could eliminate or reduce the need for our services. If companies regulated by the Food and Drug Administration (“FDA”) or similar foreign regulatory authorities needed fewer of our services, we would have fewer business opportunities and our revenues would decrease, possibly materially.

In the U.S., the FDA and the Congress have attempted to streamline the regulatory process by providing for industry user fees that fund the hiring of additional reviewers and better management of the regulatory review process. In Europe, governmental authorities have approved common standards for clinical testing of new drugs throughout the European Union by adopting standards for good clinical practice (“GCP”) and by making the clinical trial application and approval process more uniform across member states. The FDA has had GCP in place as a regulatory standard and requirement for new drug approval for many years and Japan adopted GCP in 1998. The U.S., Europe and Japan have also collaborated in the 15-year-long International Conference on Harmonisation, or ICH, the purpose of which is to eliminate duplicative or conflicting regulations in the three regions. The ICH partners have agreed upon a common format (the Common Technical Document) for new drug marketing applications that reduces the need to tailor the format to each region. Such efforts and similar efforts in the future that streamline the regulatory process may reduce the demand for our services.

Parts of our PCMS business advises clients on how to satisfy regulatory standards for manufacturing and clinical processes and on other matters related to the enforcement of government regulations by the FDA and other regulatory bodies. Any reduction in levels of review of manufacturing or clinical processes or levels of regulatory enforcement, generally, would result in fewer business opportunities for our business in this area.

IF WE FAIL TO COMPLY WITH EXISTING REGULATIONS, OUR REPUTATION AND OPERATING RESULTS WOULD BE HARMED

Our business is subject to numerous governmental regulations, primarily relating to worldwide pharmaceutical product development and regulatory approval and the conduct of clinical trials. If we fail to comply with these governmental regulations, it could result in the termination of our ongoing research, development or sales and marketing projects, or the disqualification of data for submission to regulatory authorities. We also could be barred from providing clinical trial services in the future or could be subjected to fines. Any of these consequences would harm our reputation, our prospects for future work and our operating results. In addition, we may have to repeat research or redo trials. If we are required to repeat research or redo trials, we may be contractually required to do so at no further cost to our clients, but at substantial cost to us.

WE MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM AND THE EXPANSION OF MANAGED-CARE ORGANIZATIONS

Numerous governments, including the U.S. government and governments outside of the U.S. have undertaken efforts to control growing health care costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. If these efforts are successful, drug, medical device and biotechnology companies may react by spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenues could decrease, possibly materially. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings.

For instance, in the past the U.S. Congress has entertained several comprehensive health care reform proposals. The proposals were generally intended to expand health care coverage for the uninsured and reduce the growth of total health care expenditures. While the U.S. Congress has not yet adopted any comprehensive reform proposals, members of Congress may raise similar proposals in the future. We are unable to predict the likelihood that health care reform proposals will be enacted into law.

In addition to health care reform proposals, the expansion of managed-care organizations in the health care market and managed-care organizations’ efforts to cut costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenues could decrease, possibly materially.

IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN OUR PERCEPTIVE BUSINESS

The biotechnology, pharmaceutical and medical device industries generally, and clinical research specifically, are subject to increasingly rapid technological changes. Our competitors or others might develop technologies, products or services that are more effective or commercially attractive than our current or future technologies, products or services, or render our technologies, products or services less competitive or obsolete. If competitors introduce superior technologies, products or services and we cannot make enhancements to our technologies, products and services necessary to remain competitive, our competitive position would be harmed. If we are unable to compete successfully, we may lose clients or be unable to attract new clients, which could lead to a decrease in our revenue.

BECAUSE WE DEPEND ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL OF OUR BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM OUR BUSINESS, REVENUE AND FINANCIAL CONDITION

The loss of, or a material reduction in the business of, a significant client could cause a substantial decrease in our revenue and adversely affect our business and financial condition, possibly materially. In both fiscal year 2006 and fiscal year 2005, our five largest clients accounted for approximately 25% of our consolidated service revenue and no single client accounted for 10% or more of consolidated service revenue. We expect that a small number of clients will continue to represent a significant part of our consolidated revenue. Our contracts with these clients generally can be terminated on short notice. We have in the past experienced contract cancellations with significant clients.

IF OUR PERCEPTIVE BUSINESS IS UNABLE TO MAINTAIN CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE, SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS WILL BE HARMED

Our Perceptive Informatics business involves collecting, managing, manipulating and analyzing large amounts of data, and communicating data via the Internet. In our Perceptive Informatics business, we depend on the continuous, effective, reliable and secure operation of computer hardware, software, networks, telecommunication networks, Internet servers and related infrastructure. If the hardware or software malfunctions or access to data by internal research personnel or customers through the Internet is interrupted, our Perceptive Informatics business could suffer. In addition, any sustained disruption in Internet access provided by third parties could adversely impact our Perceptive Informatics business.

Although the computer and communications hardware used in our Perceptive Informatics business is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, the Perceptive Informatics software products are complex and sophisticated, and could contain data, design or software errors that could be difficult to detect and correct. If Perceptive fails to maintain and further develop the necessary computer capacity and data to support the needs of our Perceptive Informatics customers, it could result in a loss of or a delay in revenue and market acceptance.

IF WE ARE UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL TRIALS OF OUR CLIENTS, OUR CRS BUSINESS MAY SUFFER

One of the factors on which our CRS business competes is the ability to recruit patients for the clinical studies we are managing. These clinical trials rely upon the ready accessibility and willing participation of volunteer subjects. These subjects generally include volunteers from the communities in which the studies are conducted. Although to date these communities have provided a substantial pool of potential subjects for research studies, there may not be enough patients available with the traits necessary to conduct the studies. For example, if we manage a study for a treatment of a particular type of cancer, our ability to conduct the study may be limited by the number of patients that we can recruit that have that form of cancer. If multiple organizations are conducting similar studies and competing for patients, it could also make our recruitment efforts more difficult. If we were unable to attract suitable and willing volunteers on a consistent basis, it would have an adverse effect on the trials being managed by our CRS business, which could have a material adverse effect on our CRS business.

IF WE CANNOT RETAIN OUR HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL, OUR BUSINESS WOULD BE HARMED

We rely on the expertise of our Chairman and Chief Executive Officer, Josef H. von Rickenbach and it would be difficult and expensive to find a qualified replacement with the level of specialized knowledge of our products and services and the bio/pharmaceutical services industry. We are a party to an employment agreement with Mr. von Rickenbach, which may be terminated by us or Mr. von Rickenbach upon notice to the other party.

In addition, in order to compete effectively, we must attract and maintain qualified sales, professional, scientific, and technical operating personnel. Competition for these skilled personnel, particularly those with a medical degree, a Ph.D. or equivalent degrees, is intense. We may not be successful in attracting or retaining key personnel.

WE MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS

Our CRS business primarily involves the testing of experimental drugs and medical devices on consenting human volunteers pursuant to a study protocol. Clinical research involves a risk of liability for personal injury or death to patients who participate in the study or who use a product approved by regulatory authorities after the clinical research has concluded, due to, among other reasons, possible unforeseen adverse side effects or improper administration of the drug or device by physicians. In some cases, these patients are already seriously ill and are at risk of further illness or death.

In order to mitigate the risk of liability, we seek to include indemnity provisions in our Clinical Research Services contracts with clients and with investigators. However, we are not able to include indemnity provisions in all of our contracts. The indemnity provisions we include in these contracts would not cover our exposure if:

	–		we had to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnity; or

	–		a client failed to indemnify us in accordance with the terms of an indemnity agreement because it did not have the financial ability to fulfill its indemnification obligation or for any other reason.

We also carry insurance to cover our risk of liability. However, our insurance is subject to deductibles and coverage limits and may not be adequate to cover claims. In addition, liability coverage is expensive. In the future, we may not be able to maintain or obtain liability insurance on reasonable terms, at a reasonable cost, or in sufficient amounts to protect us against losses due to claims.

In March 2006, we conducted a Phase I clinical trial on behalf of TeGenero AG, a German pharmaceutical company. During the trial, six participants experienced adverse reactions to the TeGenero compound being tested. Through September 30, 2006, we recorded approximately $1.4 million in legal fees and other incremental costs in connection with the incident. To date, none of the participants in the clinical trial have filed suit against us. We carry insurance to cover risks such as this, but our insurance is subject to deductibles and coverage limits and may not be adequate to cover claims against us. While we believe that TeGenero is responsible to indemnify us with respect to claims related to this matter, TeGenero filed for insolvency in July 2006, which likely will limit any recovery by us from them. In addition, while TeGenero carried insurance with respect to this type of matter, this insurance also is subject to deductibles and coverage limits.

OUR BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL, AND OTHER RISKS THAT COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS OR FINANCIAL POSITION

We provide most of our services on a worldwide basis. Our service revenue from non-U.S. operations represented approximately 64.2% of total consolidated service revenue for the three months ended September 30, 2006 and approximately 63.5% of total consolidated service revenue for the three months ended September 30, 2005. More specifically, our service revenue from operations in the United Kingdom represented 16.0% of total consolidated service revenue for the three months ended September 30, 2006 and 18.4% of total consolidated service revenue for the three months ended September 30, 2005. Our service revenue from operations in Germany represented 19.3% of total consolidated service revenue for the three months ended September 30, 2006 and 18.8% of total consolidated service revenue for the three months ended September 30, 2005. Accordingly, our business is subject to risks associated with doing business internationally, including:

	–		changes in a specific country’s or region’s political or economic conditions, including Western Europe, in particular;

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

	–		difficulty in staffing and managing widespread operations;

	–		unfavorable labor regulations applicable to its European or other international operations;

	–		changes in foreign currency exchange rates; and

	–		longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions.

OUR OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF OUR COMMON STOCK

Our quarterly and annual operating results have varied and will continue to vary in the future as a result of a variety of factors. For example, our income from operations totaled $10.6 million for the fiscal quarter ended December 31, 2005, $11.2 million for the fiscal quarter ended March 31, 2006, $13.1 million for the fiscal quarter ended June 30, 2006 and $11.3 million for the fiscal quarter ended September 30, 2006. Factors that cause these variations include:

	–		the level of new business authorizations in a particular quarter or year;

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

	–		exchange rate fluctuations between quarters or years;

	–		restructuring charges;

	–		the mix of services offered in a particular quarter or year;

	–		the timing of the opening of new offices;

	–		costs and the related financial impact of acquisitions;

	–		the timing of internal expansion;

	–		the timing and amount of costs associated with integrating acquisitions;

	–		the timing and amount of startup costs incurred in connection with the introduction of new products, services or subsidiaries; and

	–		the dollar amount of changes in contract scope finalized during a particular period.

Many of these factors, such as the timing of cancellations of significant projects and exchange rate fluctuations between quarters or years, are beyond our control.

Approximately 60-65% of our operating costs are fixed in the short term with a significant portion of those costs related to personnel. Total personnel costs are estimated to have accounted for approximately 80% of our total operating costs in fiscal year 2006. As a result, the effect on our revenues of the timing of the completion, delay or loss of contracts, or the progress of client projects, could cause our operating results to vary substantially between reporting periods.

If our operating results do not match the expectations of securities analysts and investors, the trading price of our common stock will likely decrease.

OUR REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS

Approximately 64.2% of our total consolidated service revenue for the three months ended September 30, 2006 and approximately 63.5% of our total consolidated service revenue for the three months ended September 30, 2005 were from non-U.S. operations. Our financial statements are denominated in U.S. dollars. As a result, changes in foreign currency exchange rates could have and have had a significant effect on our operating results. For example, as a result of year-over-year foreign currency fluctuation, service revenue for the three months ended September 30, 2006 was positively impacted by approximately $2.4 million as compared to the three months ended September 30, 2005. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including:

	–		Foreign Currency Translation Risk. The revenue and expenses of our foreign operations are generally denominated in local currencies, primarily the British pound and the Euro, and then are translated into U.S. dollars for financial reporting purposes. For the three months ended September 30, 2006, 16.0% of total consolidated service revenue was denominated in British pounds and approximately 36.3% of total consolidated service revenue was denominated in Euros. For the three months ended September 30, 2005, 18.4% of total consolidated service revenue was denominated in British pounds and approximately 35.5% of total consolidated service revenue was denominated in Euros. Accordingly, changes in exchange rates between foreign currencies and the U.S. dollar will affect the translation of foreign results into U.S. dollars for purposes of reporting our consolidated results.

	–		Foreign Currency Transaction Risk. We may be subjected to foreign currency transaction risk when our foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiaries functional (local) currency. To the extent we are unable to shift the effects of currency fluctuations to the clients, foreign exchange fluctuations as a result of foreign currency exchange losses could have a material adverse effect on our results of operations.

Although we try to limit these risks through exchange rate fluctuation provisions stated in our service contracts, or by hedging transaction risk with foreign currency exchange contracts, we may still experience fluctuations in financial results from our operations outside of the U.S., and may not be able to favorably reduce the currency transaction risk associated with our service contracts.

OUR BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN OUR RESOURCES IF NOT PROPERLY MANAGED

We have expanded our business substantially in the past. Future rapid expansion could strain our operational, human and financial resources. In order to manage expansion, we must:

	–		continue to improve operating, administrative, and information systems;

	–		accurately predict future personnel and resource needs to meet client contract commitments;

	–		track the progress of ongoing client projects; and

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

If we do not take these actions and are not able to manage the expanded business, the expanded business may be less successful than anticipated, and we may be required to allocate additional resources to the expanded business, which we would have otherwise allocated to another part of our business.

We may face additional risks in expanding our foreign operations. Specifically, we may find it difficult to:

	–		assimilate differences in foreign business practices, exchange rates and regulatory requirements;

	–		operate amid political and economic instability;

	–		hire and retain qualified personnel; and

	–		overcome language, tariff and other barriers.

WE MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS TO OUR ONGOING BUSINESS

We have made a number of acquisitions and will continue to review new acquisition opportunities. If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business. The success of an acquisition will depend upon, among other things, our ability to:

	–		assimilate the operations and services or products of the acquired company;

	–		integrate acquired personnel;

	–		retain and motivate key employees;

	–		retain customers;

	–		identify and manage risks facing the acquired company; and

	–		minimize the diversion of management’s attention from other business concerns.

Acquisitions of foreign companies may also involve additional risks, including assimilating differences in foreign business practices and overcoming language and cultural barriers.

In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.

OUR EFFECTIVE INCOME TAX RATE MAY FLUCTUATE FROM QUARTER-TO-QUARTER, WHICH MAY AFFECT EARNINGS AND EARNINGS PER SHARE

Our quarterly effective income tax rate is influenced by our projected profitability in the various taxing jurisdictions in which we operate. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have a material adverse effect on our net income and earnings per share. Factors that affect the effective income tax rate include, but are not limited to:

	–		the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions where no tax benefit can be recognized;

	–		actual and projected full year pretax income;

	–		changes in tax laws in the various taxing jurisdictions;

	–		audits by the taxing authorities; and

–

the establishment of valuation allowances against deferred tax assets if it is determined that it is more likely than not that future tax benefits will not be realized.

Fluctuations in our effective income tax rate could cause fluctuations in our earnings and earnings per share, which can affect our stock price.

OUR CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF OUR ARTICLES OF ORGANIZATION, AND BY-LAWS, AND OUR SHAREHOLDER RIGHTS PLAN, AND MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT STOCKHOLDERS MAY CONSIDER DESIRABLE

Provisions of our articles of organization, by-laws and our shareholder rights plan, as well as provisions of Massachusetts law, may enable our management to resist acquisition of us by a third party, or may discourage a third party from acquiring us. These provisions include the following:

	–		we have divided our board of directors into three classes that serve staggered three-year terms;

	–		we are subject to Section 8.06 of the Massachusetts Business Corporation Law which provides that directors may only be removed by stockholders for cause, vacancies in our board of directors may only be filled by a vote of our board of directors and the number of directors may be fixed only by our board of directors;

	–		we are subject to Chapter 110F of the Massachusetts General Laws which limits our ability to engage in business combinations with certain interested stockholders;

	–		our stockholders are limited in their ability to call or introduce proposals at stockholder meetings; and

	–		our shareholder rights plan would cause a proposed acquirer of 20% or more of our outstanding shares of common stock to suffer significant dilution.

These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our stock.

In addition, our board of directors may issue preferred stock in the future without stockholder approval. If our board of directors issues preferred stock, the holders of common stock would be subordinate to the rights of the holders of preferred stock. Our board of directors’ ability to issue the preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of our stock.

OUR STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS

The market price of our common stock has fluctuated widely in the past and may continue to do so in the future. On November 6, 2006, the closing sale price of our common stock on the NASDAQ Global Select Market was $31.29 per share. During the period from October 1, 2004 to September 30, 2006, the closing price of our common stock ranged from a high of $37.28 per share to a low of $17.28 per share. Investors in our common stock must be willing to bear the risk of such fluctuations in stock price and the risk that the value of an investment in our stock could decline.

Our stock price can be affected by quarter-to-quarter variations in a number of factors including, but not limited to:

	–		operating results;

	–		earnings estimates by analysts;

	–		market conditions in the industry;

	–		prospects of health care reform;

	–		changes in government regulations;

	–		general economic conditions, and

	–		our effective income tax rate.

In addition, the stock market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may adversely affect the market price of our common stock. Since our common stock has traded in the past at a relatively high price-earnings multiple, due in part to analysts’ expectations of earnings growth, the price of the stock could quickly and substantially decline as a result of even a relatively small shortfall in earnings from, or a change in, analysts’ expectations.

ITEM 6. EXHIBITS

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated by this reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PAREXEL International Corporation
Date: November 9, 2006	By:	/s/ Josef H. von Rickenbach
		Josef H. von Rickenbach
		Chairman of the Board and Chief Executive Officer



Date: November 9, 2006	By:	/s/ James F. Winschel, Jr.
		James F. Winschel, Jr.
		Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description

31.1		Principal executive officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Principal financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Principal executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Principal financial officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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