UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 0-29100

eResearchTechnology, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-3264604
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1818 Market Street
Philadelphia, PA		19103
(Address of principal executive offices)		(Zip code)

215-972-0420

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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.

The number of shares of Common Stock, $.01 par value, outstanding as of July 23, 2010, was 48,854,517.

 

 

eResearchTechnology, Inc. and Subsidiaries

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets-December 31, 2009 and June 30, 2010 (unaudited)			3
Consolidated Statements of Operations (unaudited)—Three and six months Ended June 30, 2009 and 2010			4
Consolidated Statements of Cash Flows (unaudited)—Six months Ended June 30, 2009 and 2010			5
Notes to Consolidated Financial Statements (unaudited)			6-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21-33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
Part II. Other Information
Item 1A Risk Factors			35-45
Item 6. Exhibits			46
Signatures			47
Exhibit Index			48
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Part 1. Financial Information

Item 1. Financial Statements

eResearchTechnology, Inc. and Subsidiaries

Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(unaudited)

		December 31, 2009				June 30, 2010
Assets
Current Assets:
Cash and cash equivalents		$	68,979			$	22,504
Short-term investments			9,782				50
Investment in marketable securities			1,026				972
Accounts receivable, less allowance for doubtful accounts of $548 and $507, respectively			16,579				31,670
Inventory			—				3,160
Prepaid income taxes			2,698				3,022
Prepaid expenses and other			3,308				6,498
Deferred income taxes			1,649				1,670
Total current assets			104,021				69,546
Property and equipment, net			24,205				38,261
Goodwill			34,676				71,990
Intangible assets			1,607				21,717
Other assets			352				337
Total assets		$	164,861			$	201,851
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	3,007			$	6,843
Accrued expenses			5,990				13,055
Income taxes payable			346				—
Deferred revenues			11,728				12,174
Total current liabilities			21,071				32,072
Deferred rent			2,357				2,241
Deferred income taxes			2,502				2,765
Long-term debt			—				23,000
Other liabilities			1,259				2,256
Total liabilities			27,189				62,334
Commitments and contingencies
Stockholders’ Equity:
Preferred stock — $10.00 par value, 500,000 shares authorized, none issued and outstanding			—				—
Common stock — $.01 par value, 175,000,000 shares authorized, 60,189,235 and 60,444,045 shares issued, respectively			602				604
Additional paid-in capital			97,367				99,051
Accumulated other comprehensive loss			(1,580	)			(3,999	)
Retained earnings			121,166				123,744
Treasury stock, 11,589,603 shares at cost			(79,883	)			(79,883	)
Total stockholders’ equity			137,672				139,517
Total liabilities and stockholders’ equity		$	164,861			$	201,851

The accompanying notes are an integral part of these statements.

eResearchTechnology, Inc. and Subsidiaries

Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2010				2009				2010
Net revenues:
Services		$	16,215			$	18,697			$	32,323			$	33,532
Site support			6,878				10,399				13,138				17,432
EDC licenses and services			1,083				—				2,501				—
Total net revenues			24,176				29,096				47,962				50,964
Costs of revenues:
Cost of services			7,671				8,325				15,364				15,636
Cost of site support			3,470				4,957				7,105				7,756
Cost of EDC licenses and services			397				—				863				—
Total costs of revenues			11,538				13,282				23,332				23,392
Gross margin			12,638				15,814				24,630				27,572
Operating expenses:
Selling and marketing			3,274				3,941				6,700				7,349
General and administrative			3,527				9,753				7,604				14,498
Research and development			993				1,069				2,142				1,927
Total operating expenses			7,794				14,763				16,446				23,774
Operating income			4,844				1,051				8,184				3,798
Other (expense) income, net			(409	)			396				(293	)			496
Income before income taxes			4,435				1,447				7,891				4,294
Income tax provision			1,887				621				3,273				1,716
Net income		$	2,548			$	826			$	4,618			$	2,578
Net income per share:
Basic		$	0.05			$	0.02			$	0.09			$	0.05
Diluted		$	0.05			$	0.02			$	0.09			$	0.05
Shares used in computing net income per share:
Basic			48,866				48,831				49,872				48,753
Diluted			49,175				49,383				50,169				49,114

The accompanying notes are an integral part of these statements.

eResearchTechnology, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

		Six Months Ended June 30,
		2009				2010
Operating activities:
Net income		$	4,618			$	2,578
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of EDC operations			(530	)			—
Depreciation and amortization			6,620				6,307
Cost of sales of equipment			26				4
Provision for uncollectible accounts			210				—
Share-based compensation			1,515				1,425
Deferred income taxes			1,421				216
Changes in operating assets and liabilities:
Accounts receivable			11,987				(1,722	)
Inventory			—				(436	)
Prepaid expenses and other			(1,277	)			(925	)
Accounts payable			683				1,227
Accrued expenses			(3,447	)			4,925
Income taxes			(4,602	)			(1,120	)
Deferred revenues			1,829				102
Deferred rent			(3	)			(204	)
Net cash provided by operating activities			19,050				12,377
Investing activities:
Purchases of property and equipment			(2,520	)			(8,773	)
Purchases of investments			—				(999	)
Proceeds from sales of investments			—				10,731
Payment related to sale of EDC operations			(1,150	)			—
Payments for acquisitions			(655	)			(80,475	)
Net cash used in investing activities			(4,325	)			(79,516	)
Financing activities:
Proceeds from long-term debt			—				23,000
Repayment of capital lease obligations			(43	)			—
Proceeds from exercise of stock options			72				205
Stock option income tax benefit			62				12
Repurchase of common stock for treasury			(14,038	)			—
Net cash (used in) provided by financing activities			(13,947	)			23,217
Effect of exchange rate changes on cash			1,575				(2,553	)
Net increase (decrease) in cash and cash equivalents			2,353				(46,475	)
Cash and cash equivalents, beginning of period			66,376				68,979
Cash and cash equivalents, end of period		$	68,729			$	22,504

The accompanying notes are an integral part of these statements.

eResearchTechnology, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements, which include the accounts of eResearchTechnology, Inc. (the “Company,” “ERT^®” or “we”) and its wholly-owned subsidiaries, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. Further information on potential factors that could affect our financial results can be found in our Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) and in this Form 10-Q. Subsequent events have been evaluated for disclosure and recognition.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ERT^® and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We consider our business to consist of one segment which is providing technology and service solutions to collect, interpret and distribute diagnostic data principally used by the pharmaceutical industry as part of clinical drug trials.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Our services revenues consist primarily of our services offered under our Cardiac Safety, Respiratory Services and, to a lesser extent, our electronic patient reported outcomes ( ePRO™) solutions that we provide on a fee for services basis and are recognized as the services are performed. We also provide Cardiac Safety and Respiratory consulting services on a time and materials basis and recognize revenues as we perform the services. Our site support revenue, consisting of equipment rentals and sales along with related supplies and logistics management, are recognized at the time of sale or over the rental period.

At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. If a significant portion of a fee is due after our normal payment terms or upon implementation or client acceptance, the fee is accounted for as not being fixed or determinable and revenue is recognized as the fees become due or after implementation or client acceptance has occurred.

Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client. If it is determined that collection of a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash. Under a typical contract for services, clients pay us a portion of our fee for these services upon contract execution as an upfront deposit, some of which is typically nonrefundable upon contract termination. Revenues are then recognized under service contracts as the services are performed.

For arrangements with multiple deliverables where the fair value of each element is known, the revenue is allocated to each component based on the relative fair value of each element. For arrangements with multiple deliverables where the fair value of one or more delivered elements is not known, revenue is allocated to each component of the arrangement using the residual method provided that the fair value of all undelivered elements is known. Fair values for undelivered elements are based primarily upon stated renewal rates for future products or services.

We have recorded reimbursements received for out-of-pocket expenses incurred as revenue in the accompanying consolidated statements of operations.

Unbilled revenue is revenue that is recognized but is not currently billable to the customer pursuant to contractual terms. In general, such amounts become billable in accordance with predetermined payment schedules, but recognized as revenue as services are performed. Amounts included in unbilled revenue are expected to be collected within one year and are included within current assets.

Our former electronic data capture (EDC) operations are included in EDC licenses and services revenue and include license revenue, technology consulting and training services and software maintenance services. We recognized up-front license fee revenues under the residual method when a formal agreement existed, delivery of the software and related documentation occurred, collectability was probable and the license fee was fixed or determinable. We recognized monthly and annual term license fee revenues over the term of the arrangement. Hosting service fees were recognized evenly over the term of the service. We recognized revenues from software maintenance contracts on a straight-line basis over the term of the maintenance contract, which was typically twelve months. We provided consulting and training services on a time and materials basis and recognized revenues as we performed the services.

Business Combinations

On May 28, 2010, we acquired Research Services Germany 234 GmbH (Research Services or RS), which was formed as a result of a demerger of CareFusion Germany 234 GmbH under German law which effectively divided CareFusion Germany 234 GmbH into RS and another entity. RS is comprised of the research services division of CareFusion Germany 234 GmbH and certain research operations of CareFusion Corporation (CareFusion). RS is a leading provider of respiratory diagnostics services and a manufacturer of diagnostic devices and also offers cardiac safety and ePRO services. We paid $83.2 million for RS after giving effect to preliminary closing balance sheet working capital adjustments of $2.2 million. The acquisition and related transaction costs was financed from our existing cash and a portion of the $23.0 million drawn from our new $40.0 million revolving credit facility through Citizens Bank of Pennsylvania. The credit facility was established on May 27, 2010. See Note 4 for additional disclosure on the RS acquisition and Note 7 for additional disclosure regarding the revolving credit facility. At June 30, 2010, we recorded in accounts payable $2.9 million due to CareFusion with respect to closing balance sheet working capital adjustments and acquisition-related professional fees. Subject to final review of the balance sheet adjustments, we expect to pay CareFusion in August 2010.

We allocated the purchase price to the tangible and intangible assets we acquired and liabilities we assumed based on their estimated fair values. This valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer relationships, proprietary technology and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Other estimates associated with the accounting for this acquisition may change as additional information becomes available regarding the assets we acquired and liabilities we assumed and are subject to final working capital adjustments.

For a discussion of how we allocated the purchase price of RS, see Note 4.

Concentration of Credit Risk and Significant Clients

Our business depends entirely on the clinical trials that pharmaceutical, biotechnology and medical device companies conduct. Our revenues and profitability will decline if there is less competition in the pharmaceutical, biotechnology or medical device industries, which could result in fewer products under development and decreased pressure to accelerate a product approval. Our revenues and profitability will also decline if the FDA or similar agencies in foreign countries modify their requirements in a manner that decreases the need for our solutions.

Financial instruments that potentially subject us to concentration of credit risk consist primarily of trade accounts receivable from companies operating in the pharmaceutical, biotechnology and medical device industries. For the six months ended June 30, 2009 and 2010, one client accounted for approximately 18% and 20% of net revenues, respectively. The loss of this client could have a material adverse effect on our operations. We maintain reserves for potential credit losses. Such losses, in the aggregate, have not historically exceeded management’s estimates.

Cash and Cash Equivalents

We consider cash on deposit and in overnight investments and investments in money market funds with financial institutions to be cash equivalents. At the balance sheet dates, cash equivalents consisted primarily of investments in money market funds. At December 31, 2009 and June 30, 2010, approximately $13.1 million and $8.2 million, respectively, was held by our UK subsidiary. At June 30, 2010, approximately $3.9 million was held by our German subsidiary.

Short-term Investments and Investments in Marketable Securities

At June 30, 2010, short-term investments consisted of an auction rate security issued by a municipality while marketable securities consisted of common stock received from the buyer of certain assets of our EDC operations. Available-for-sale securities are carried at fair value, based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders’ equity. We classified our short-term investments and investment in marketable securities at December 31, 2009 and June 30, 2010 as available-for-sale. At December 31, 2009 and June 30, 2010, unrealized gains and losses were immaterial. Realized gains and losses during the six months ended June 30, 2009 and 2010 were immaterial. For purposes of determining realized gains and losses, the cost of the securities sold is based upon specific identification.

The following summarizes the short-term investments at December 31, 2009 and June 30, 2010 (in thousands):

		December 31, 2009
						Gross				Gross
						Unrealized				Unrealized
		Amortized cost				Gains				Losses				Fair Value
Municipal securities		$	6,764			$	—			$	(2	)		$	6,762
Corporate debt securities			1,769				1				—				1,770
Bonds of government sponsored agencies			1,250				—				—				1,250
Total short-term investments as of December 31, 2009		$	9,783			$	1			$	(2	)		$	9,782

		June 30, 2010
						Gross				Gross
						Unrealized				Unrealized
		Amortized cost				Gains				Losses				Fair Value
Municipal securities		$	50			$	—			$	—			$	50
Total short-term investments as of June 30, 2010		$	50			$	—			$	—			$	50

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of three years for computer and other equipment, two to four years for rental equipment, five years for furniture and fixtures and three to five years for system development costs. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Repair and maintenance costs are expensed as incurred. Improvements and betterments are capitalized. Depreciation expense was $2.3 million and $1.9 million for the three months ended June 30, 2009 and 2010, respectively, and $4.7 million and $3.6 million for the six months ended June 30, 2009 and 2010, respectively.

We capitalize costs associated with internally developed and/or purchased software systems for new products and enhancements to existing products that have reached the application development stage and meet recoverability tests. These costs are included in property and equipment. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software project.

Amortization of capitalized software development costs is charged to costs of revenues. Amortization of capitalized software development costs was $0.8 million and $0.9 million for the three months ended June 30, 2009 and 2010, respectively, and $1.5 million and $1.8 million for the six months ended June 30, 2009 and 2010, respectively. For the six-month periods ended June 30, 2009 and 2010, we capitalized $1.2 million and $2.5 million, respectively, of software development costs. As of June 30, 2010, $4.3 million of capitalized costs have not yet been placed in service and are therefore not being amortized.

The largest component of property and equipment is rental equipment which is internally manufactured and also purchased from third parties. Our clients use the rental equipment to perform the ECG, respiratory and ePRO tests and collect and send the related data to us. Our clients use the respiratory diagnostic equipment to perform the centralized spirometry and pulmonary function recordings, and it also provides the means to send such recordings to us. We provide this equipment to clients primarily through rentals via cancellable agreements and, in some cases, through non-recourse equipment sales. The equipment rentals and sales are included in our services agreements with our clients and the decision to rent or buy equipment is made by our clients prior to the start of the study. The decision to buy rather than rent is usually predicated upon the economics to the client based upon the length of the study and the number of diagnostic tests to be performed each month. The longer the study and the fewer the number of tests performed, the more likely it is that the client may request to purchase equipment rather than rent. Regardless of whether the client rents or buys the equipment, we consider the resulting cash flow to be part of our operations and reflect it as such in our consolidated statements of cash flows.

Our services agreements contain multiple elements. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting. In doing so, we consider factors such as whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes and, if so, how the contract value should be allocated among the deliverable elements and when to recognize revenue for each element. We recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding client acceptance are resolved and there are no client-negotiated refund or return rights affecting the revenue recognized for delivered elements.

The gross cost for rental equipment was $37.3 million and $51.2 million at December 31, 2009 and June 30, 2010, respectively. The accumulated depreciation for rental equipment was $30.9 and $32.2 million at December 31, 2009 and June 30, 2010, respectively. At December 31, 2009, rental equipment consisted solely of cardiac safety equipment, whereas at June 30, 2010, rental equipment included cardiac safety, respiratory and ePRO equipment.

Goodwill

The carrying value of goodwill was $34.7 million as of December 31, 2009 and $72.0 as of June 30, 2010. During the first six months of 2010, goodwill increased $37.3 million, of which $37.2 million was due to the acquisition of RS. See Note 4 for additional disclosure regarding the RS and Covance Cardiac Safety Services (CCSS) acquisitions. Goodwill is not amortized but is subject to an impairment test at least annually. We perform the impairment test annually as of December 31 or more frequently if events or circumstances indicate that the value of goodwill might be impaired. No provisions for goodwill impairment were recorded during 2009 or during the six months ended June 30, 2010.

When it is determined that the carrying value of goodwill may not be recoverable, measurement of any impairment will be based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in the current business model.

Long-lived Assets

When events or circumstances so indicate, we assess the potential impairment of our long-lived assets based on anticipated undiscounted cash flows from the assets. Such events and circumstances include a sale of all or a significant part of the operations associated with the long-lived asset, or a significant decline in the operating performance of the asset. If an impairment is indicated, the amount of the impairment charge would be calculated by comparing the anticipated discounted future cash flows to the carrying value of the long-lived asset. No impairment was indicated during either of the six-month periods ended June 30, 2009 or 2010.

Software Development Costs

Research and development expenditures related to software development are charged to operations as incurred. We capitalize certain software development costs subsequent to the establishment of technological feasibility. Because software development costs have not been significant after the establishment of technological feasibility, all such costs have been charged to expense as incurred.

Share-Based Compensation

Accounting for Share-Based Compensation

Share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The aggregate share-based compensation expense recorded in the consolidated statements of operations for each of the three month periods ended June 30, 2009 and 2010 was $0.6 million. The aggregate share-based compensation expense recorded in the consolidated statements of operations for the six months ended June 30, 2009 and 2010 was $1.5 million and $1.4 million, respectively.

Valuation Assumptions for Options Granted

The fair value of each stock option granted during the six months ended June 30, 2009 and 2010 was estimated at the date of grant using Black-Scholes, assuming no dividends and using the weighted-average valuation assumptions noted in the following table.

		2009				2010
Risk-free interest rate			1.34	%			2.44	%
Expected life		3.5 years				3.8 years
Expected volatility			63.98	%			61.73	%

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, calculated on a daily basis. Fluctuations in the market that affect these estimates could have an impact on the resulting compensation cost. The above assumptions were used to determine the weighted-average per share fair value of $2.14 and $3.24 for stock options granted during the first six months of 2009 and 2010, respectively.

Equity Incentive Plans

In 1996, we adopted a stock option plan (the “1996 Plan”) that authorized the grant of both incentive and non-qualified options to acquire up to 9,450,000 shares of the Company’s common stock, as subsequently amended. Our Board of Directors determined the exercise price of the options under the 1996 Plan. The exercise price of incentive stock options was not below the market value of the common stock on the grant date. Incentive stock options under the 1996 Plan expire ten years from the grant date and are exercisable in accordance with vesting provisions set by the Board, which generally are over three to five years. No additional options have been granted under this plan, as amended, since December 31, 2003 and no additional options may be granted thereunder in accordance with the terms of the 1996 Plan.

In May 2003, the stockholders approved a new stock option plan (the “2003 Plan”) that authorized the grant of both incentive and non-qualified options to acquire shares of our common stock and provided for an annual option grant of 10,000 shares to each outside director. The Compensation Committee of our Board of Directors determines or makes recommendations to our Board of Directors regarding the recipients of option grants, the exercise price and other terms of the options under the 2003 Plan. The exercise price of incentive stock options may not be set below the market value of the common stock on the grant date. Incentive stock options under the 2003 Plan expire ten years from the grant date, or at the end of such shorter period as may be designated by the Compensation Committee, and are exercisable in accordance with vesting provisions set by the Compensation Committee, which generally are over four years.

On April 26, 2007, the stockholders approved the adoption of the Company’s Amended and Restated 2003 Equity Incentive Plan (the “Amended 2003 Plan”) which included prohibition on repricing of any stock options granted under the Plan unless the stockholders approve such repricing and permitted awards of stock appreciation rights, restricted stock, long term performance awards and performance shares in addition to grants of stock options. On April 29, 2009 the Board of Directors approved a revised amendment to the Amended 2003 Plan that provides for the inclusion of restricted stock units in addition to the other equity-based awards authorized thereunder and eliminated the fixed option grants to outside directors. Restricted stock was granted for the first time in the first quarter of 2010 which is being recorded as compensation expense over the four-year vesting period. In accordance with the terms of the Amended 2003 Plan, there are a total of 7,318,625 shares reserved for issuance under the Amended 2003 Plan and there were 1,239,071 shares available for grant as of June 30, 2010.

Information regarding the stock option and equity incentive plans for the six months ended June 30, 2010 is as follows:

										Remaining
						Weighted				Contractual				Intrinsic
						Average				Term				Value
Share Options		Shares				Exercise Price				(in years)				(in thousands)
Outstanding as of January 1, 2010			4,406,606			$	9.62
Granted			877,930				6.46
Exercised			(51,031	)			4.03
Cancelled/forfeited			(44,837	)			8.58
Outstanding as of June 30, 2010			5,188,668			$	9.15				4.7			$	7,153
Options exercisable or expected to vest at June 30, 2010			4,724,358			$	9.36				4.6			$	6,531
Options exercisable at June 30, 2010			3,095,675			$	10.74				3.9			$	3,285

						Weighted
						Average
						Grant Date
Restricted Stock		Shares				Fair Value
Outstanding as of January 1, 2010			—			$	—
Granted			203,779				6.22
Exercised			—				—
Cancelled/forfeited			—				—
Outstanding as of June 30, 2010			203,779			$	6.22

The aggregate intrinsic value in the share options table above represents the total pre-tax intrinsic value (the difference between the closing price of our common stock on the last trading day of the second quarter of 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2010. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for each of the six month periods ended June 30, 2009 and 2010 was $0.2 million.

As of June 30, 2010, 3,095,675 options with a weighted average exercise price of $10.74 per share were exercisable under the 1996 Plan and the 2003 Plan.

As of June 30, 2010, there was $6.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and restricted stock awards) granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

Tax Effect Related to Share-based Compensation Expense

Income tax effects of share-based payments are recognized in the consolidated financial statements for those awards that will normally result in tax deductions under existing tax law. Under current U.S. federal tax law, we receive a compensation expense deduction related to non-qualified stock options only when those options are exercised. Accordingly, the consolidated financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the consolidated statements of operations. We do not recognize a tax benefit for compensation expense related to incentive stock options (ISOs) unless the underlying shares are disposed of in a disqualifying disposition. Accordingly, compensation expense related to ISOs is treated as a permanent difference for income tax purposes. The tax benefit recognized in our consolidated statements of operations for the six months ended June 30, 2009 and 2010 related to stock-based compensation expense was approximately $0.5 million and $0.3 million, respectively.

Note 3. Fair Value of Financial Instruments

A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is based upon an exit price model.

We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale securities. Available-for-sale securities as of June 30, 2010 consisted of an auction rate security, or ARS, issued by a municipality and common stock received from the buyer of certain assets of our EDC operations. Available-for-sale securities are included in short-term investments in our consolidated balance sheets with the exception of the common stock which is included in investment in marketable securities. The marketable securities, which were priced at a discount due to a restriction on trading that was in effect until June 23, 2010, are included in investments in marketable securities in our consolidated balance sheets. The discount on the marketable securities was valued using an option pricing model and takes into consideration multiple inputs including quoted prices of the securities, volatility factors and discount rates. The three levels of the fair value hierarchy are described below:

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset or liability
Level 3		Unobservable inputs for the asset or liability

The following tables represent our fair value hierarchy for financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2009 and June 30, 2010 (in thousands):

		Fair Value Measurements at December 31, 2009
						Quoted Prices								Significant
						in Active Markets				Significant Other				Unobservable
						for Identical Assets				Observable Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents		$	68,979			$	68,979			$	—			$	—
Municipal securities			6,762				6,712				—				50
Corporate debt securities			1,770				1,770				—				—
Bonds of government sponsored agencies			1,250				1,250				—				—
Marketable securities			1,026				—				1,026				—
Total		$	79,787			$	78,711			$	1,026			$	50
		Fair Value Measurements at June 30, 2010
						Quoted Prices								Significant
						in Active Markets				Significant Other				Unobservable
						for Identical Assets				Observable Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents		$	22,504			$	22,504			$	—			$	—
Municipal securities			50				—				—				50
Marketable securities			972				—				972				—
Total		$	23,526			$	22,504			$	972			$	50

Cash and cash equivalents consist primarily of checking accounts and highly rated money market funds with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity. Bank debt consists of loans drawn under our bank credit facility. Based on our assessment of the current financial market and corresponding risks associated with the debt, we believe that the carrying amount of bank debt at June 30, 2010 approximates fair value.

Note 4. Business Combinations

Research Services (RS)

On May 28, 2010, we acquired RS. See Note 2 for a summary of the terms of this acquisition. We have included RS’s operating results in our consolidated statements of operations from the date of the acquisition. We present pro forma results of operations for RS because the effect of this acquisition was material to ERT^® on a standalone basis. We paid $83.2 million for RS after giving effect to preliminary closing balance sheet working capital adjustments of $2.2 million. At June 30, 2010, we recorded in accounts payable $2.9 million due to CareFusion with respect to closing balance sheet working capital adjustments and acquisition-related professional fees. Subject to final review of the balance sheet adjustments, we expect to pay CareFusion in August 2010. We have additionally incurred approximately $3.3 million and $4.0 million in the three and six months ended June 30, 2010, respectively, in transaction costs which were included in general and administrative expenses. The acquisition of RS was a nontaxable transaction.

The RS acquisition purchase consideration of $83.2 million has been allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition as follows (in thousands):

Fair value of assets acquired:
Cash		$	149
Accounts receivable			12,943
Inventory			2,598
Other current assets			1,454
Property and equipment, net			11,179
Goodwill, including workforce			37,160
Other intangible assets, net			21,085
Other assets			407
Liabilities assumed:
Accrued and other liabilities			(3,257	)
Deferred revenue			(515	)
Net assets acquired		$	83,203

Pro Forma Results

The unaudited financial information in the table below summarizes the combined results of operations for us and RS on a pro forma basis as though the companies had been combined as of the beginning of each of the periods presented after giving effect to certain adjustments. Our historical results of operations for the three and six months ended June 30, 2010, included the results of RS since May 28, 2010, the date of acquisition. The unaudited pro forma financial information for the three and six months ended June 30, 2009 and 2010 combines our historical results for these periods with the historical results for the comparable reporting periods for RS. The unaudited pro forma financial information below is for informational purposes only and is not indicative of the results of operations or financial condition that would have been achieved if the acquisition would have taken place at the beginning of each of the periods presented and should not be taken as indicative of our future consolidated results of operations or financial condition. Acquisition-related transaction costs of $3.3 million and $4.0 million were excluded from the pro forma results for the three and six months ended June 30, 2010, respectively. Pro forma adjustments are tax-effected at our effective tax rate. Our actual consolidated financial results for the three and six months ended June 30, 2010 included RS revenue of $5.7 million, operating income of $0.6 million and net income of $0.7 million.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2010				2009				2010
		(Unaudited, in thousands except per share amounts)
Revenue		$	37,555			$	41,037			$	68,152			$	79,304
Operating income			5,342				6,306				7,267				8,534
Net income			2,581				3,777				3,651				5,861
Basic net income per share		$	0.05			$	0.08			$	0.07			$	0.12
Diluted net income per share		$	0.05			$	0.08			$	0.07			$	0.12

Covance Cardiac Safety Services, Inc. (CCSS)

On November 28, 2007, we completed the acquisition of CCSS from Covance Inc. (Covance). Under the terms of the Purchase Agreement, we purchased all of the outstanding shares of capital stock of CCSS in consideration of an upfront cash payment of $35.2 million plus additional cash payments of up to approximately $14.0 million. We fully integrated the operations of CCSS into our existing operations in the quarter ended September 30, 2008. We did so by merging CCSS’s Reno, Nevada based operations into our existing operations and closing the operations in Reno. The following table sets forth the activity and balance of our accrued liability relating to lease costs associated with the closing of CCSS operations, which is included in “Accrued expenses” and “Other liabilities” on our Consolidated Balance Sheets (in thousands):

		Lease
		Liability
Balance at December 31, 2009			1,758
Adjustments to previous estimates			593
Cash payments			(248	)
Balance at June 30, 2010		$	2,103

Based on the continued poor commercial rental market in Reno, we determined to increase our reserve as of June 30, 2010 by $0.6 million to provide for any estimated costs for the remaining lease term.

Note 5. Inventory

Inventory consists of the following:

		June 30, 2010
		(Unaudited, in
		thousands)
Raw materials		$	1,095
Work in process			406
Finished goods			1,659
Inventory		$	3,160

Note 6. Intangible Assets

Amortization of intangible assets represents the amortization of the intangible assets from the RS and CCSS acquisitions. The gross and net carrying amounts of the acquired intangible assets as of December 31, 2009 (CCSS only) and June 30, 2010 were as follows (in thousands):

RS		June 30, 2010
																		Estimated
						Accumulated				Net Book								Useful Life
Description		Gross Value				Amortization				Value								(in years)
Backlog		$	12,518			$	654			$	11,864	*							4
Technology			8,248				86				8,162								8
Covenants not-to-compete			319				7				312								4
Total		$	21,085			$	747			$	20,338

The related amortization expense reflected in our consolidated statements of operations for the three and six months ended June 30, 2010 was $0.7 million.

The estimated amortization expense of the intangible assets acquired in the RS transaction for the current fiscal year, including amounts amortized to date, and in future years will be recorded on the consolidated statements of operations as follows (in thousands):

		Amortization of
Years ending December 31,		Intangible Assets
2010		$	5,231
2011			6,619
2012			3,202
2013			1,446
2014			1,064
Thereafter			3,523
Total		$	21,085

CCSS		December 31, 2009
																		Estimated
						Accumulated				Net Book								Useful Life
Description		Gross Value				Amortization				Value								(in years)
Backlog		$	1,900			$	1,643			$	257	*							3
Customer Relationships			1,700				350			$	1,350								10
Technology			400				400			$	—								1
Total		$	4,000			$	2,393			$	1,607

		June 30, 2010
																		Estimated
						Accumulated				Net Book								Useful Life
Description		Gross Value				Amortization				Value								(in years)
Backlog		$	1,900			$	1,787			$	113	*							3
Customer Relationships			1,700				434			$	1,266								10
Technology			400				400			$	—								1
Total		$	4,000			$	2,621			$	1,379

Backlog is being amortized over three years on an accelerated basis. Customer relationships are being amortized over ten years using the straight-line method and technology was amortized over one year using the straight-line method.

The related amortization expense reflected in our consolidated statements of operations for the three and six months ended June 30, 2009 was $0.1 million and $0.3 million, respectively. The related amortization expense reflected in our consolidated statements of operations for the three and six months ended June 30, 2010 was $0.1 million and $0.2 million, respectively.

Estimated amortization expense for the remaining estimated useful life of the acquired intangible assets is as follows for the years ending December 31 (the 2010 amount represents the amortization expense to be recognized over the last six months of the year (in thousands)):

		Amortization of
Years ending December 31,		Intangible Assets
2010		$	204
2011			170
2012			170
2013			170
2014			170
Thereafter			495
Total		$	1,379

Note 7. Credit Agreement

On May 27, 2010, we entered into a credit agreement (Credit Agreement) with Citizens Bank of Pennsylvania (Lender) which provides for a $40 million revolving credit facility. Also on May 27, 2010, we borrowed $23.0 million under the Credit Agreement to finance a portion of the purchase price for RS and related transaction costs and to provide working capital. At our option, borrowings under the Credit Agreement bear interest either at the Lender’s prime rate or at a rate equal to LIBOR plus a margin ranging from 1.00% to 1.75% based on our senior leverage ratio as calculated under the Credit Agreement. In addition, we pay a quarterly unused commitment fee ranging from 0.10% to 0.20% of the unused commitment based on our senior leverage ratio. From the initial borrowing on May 27, 2010 through June 30, 2010, the annual interest rate was 1.35% and the unused commitment fee was 0.10% resulting in a payment of less than $0.1 million for the three and six months ended June 30, 2010. Borrowings under the Credit Agreement may be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any. The Credit Agreement terminates, and any outstanding borrowings mature, on May 27, 2013.

The Credit Agreement requires us to maintain a maximum senior leverage ratio of 2.0 to 1.0 and a minimum debt service coverage ratio of 1.5 to 1.0, in each case as calculated under the Credit Agreement. The Credit Agreement contains other customary affirmative and negative covenants and customary events of default.

At June 30, 2010, we were in compliance with all debt covenants. Borrowings under the line of credit are secured by 65% of the capital stock of certain of our foreign subsidiaries.

Note 8. Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock options. The dilutive effect of stock options is calculated using the treasury stock method.

The tables below set forth the reconciliation of the numerators and denominators of the basic and diluted net income per share computations (in thousands, except per share amounts):

		Net								Per Share
Three Months Ended June 30,		Income				Shares				Amount
2009
Basic net income		$	2,548				48,866			$	0.05
Effect of dilutive shares			—				309				—
Diluted net income		$	2,548				49,175			$	0.05
2010
Basic net income		$	826				48,831			$	0.02
Effect of dilutive shares			—				552				—
Diluted net income		$	826				49,383			$	0.02

		Net								Per Share
Six Months Ended June 30,		Income				Shares				Amount
2009
Basic net income		$	4,618				49,872			$	0.09
Effect of dilutive shares			—				297				—
Diluted net income		$	4,618				50,169			$	0.09
2010
Basic net income		$	2,578				48,753			$	0.05
Effect of dilutive shares			—				361				—
Diluted net income		$	2,578				49,114			$	0.05

In computing diluted net income per share, options to purchase 3,088,000 and 2,615,000 shares of common stock were excluded from the computations for the three months ended June 30, 2009 and 2010, respectively, and options to purchase 3,086,000 and 2,792,000 shares of common stock were excluded from the computations for the six months ended June 30, 2009 and 2010, respectively. These options were excluded from the computations because the exercise prices of such options were greater than the average market price of our common stock during the respective period.

Note 9. Comprehensive Income (Loss)

Companies are required to classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in-capital in the stockholders’ equity section of the balance sheet. Our comprehensive income (loss) includes net income and unrealized gains and losses from marketable securities and foreign currency translation as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2010				2009				2010
Net income		$	2,548			$	826			$	4,618			$	2,578
Other comprehensive income (loss):
Change in unrealized losses on marketable securities			(219	)			(224	)			(219	)			(35	)
Currency translation adjustment			2,078				(1,407	)			1,846				(2,384	)
Comprehensive income (loss), net of tax		$	4,407			$	(805	)		$	6,245			$	159

Note 10. Recent Accounting Pronouncements

In September 2009, the FASB issued a new accounting standard regarding revenue arrangements with multiple deliverables. As codified in ASC 605-25 (formerly Emerging Issues Task Force Issue No. 08-1, Revenue Arrangements with Multiple Deliverables), this accounting standard sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. One of those current requirements is that there be objective and reliable evidence of the standalone selling price of the undelivered items, which must be supported by either vendor-specific objective evidence (VSOE) or third-party evidence (TPE).

This consensus eliminates the requirement that all undelivered elements have VSOE or TPE before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted. The accounting standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are evaluating the potential impact of these requirements on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standard Update 2010-06 which will require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Except for the detailed Level 3 roll forward disclosures, we adopted this standard effective January 1, 2010. The adoption of this aspect of the accounting standard did not have any impact on our consolidated financial statements. The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair-value measurements are effective for interim and annual reporting periods beginning after December 15, 2010. We are evaluating the potential impact of these requirements on our consolidated financial statements.

Note 11. Income Taxes

At December 31, 2009 and June 30, 2010, we had $0.2 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The tax years 2006 through 2009 remain open to examination by the major taxing jurisdictions to which we are subject.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

Our effective income tax rate was 42.5% and 42.9% for the three months ended June 30, 2009 and 2010, respectively, and 41.5% and 40.0% for the six months ended June 30, 2009 and 2010, respectively.

Note 12. Related Party Transactions

Our Chairman, Dr. Morganroth, is a cardiologist who, through his wholly-owned professional corporation, provides medical professional services to the Company and receives consulting fees as an independent contractor. Additionally, beginning in January 2007, we entered into an arrangement with Dr. Morganroth’s professional corporation, relating to Dr. Morganroth’s initiation of a consulting practice for us through the transition of his historic consulting services to us. Our Executive Vice President and Chief Medical Officer is responsible for assigning the consulting work to internal and external resources based upon the requirements of the engagement. In return, Dr. Morganroth’s professional corporation receives a percentage fee of 80% of the net amounts we bill for Dr. Morganroth’s services to our customers. Beginning in March 2010, we entered into a new arrangement with Dr. Morganroth’s professional corporation which eliminated the consulting fees other than the percentage fees. We recorded revenues in connection with services billed to customers under this consulting arrangement of approximately $0.2 million and $0.3 million in the three months ended June 30, 2009 and 2010, respectively, and $0.6 million in the six-month periods ended June 30, 2009 and 2010. We incurred percentage fees under this consulting arrangement of approximately $0.2 million in each of the three-month periods ended June 30, 2009 and 2010, and $0.5 million in each of the six month periods ended June 30, 2009 and 2010, respectively. Total amounts payable incurred under this consulting arrangement, including consulting fees and the percentage fees, approximated $0.3 million and $0.2 million in the three months ended June 30, 2009 and 2010, respectively, and $0.7 million and $0.5 million in the six months ended June 30, 2009 and 2010, respectively. At December 31, 2009 and June 30, 2010, we owed $0.1 million and less than $0.1 million, respectively, to the professional corporation in connection with this consulting agreement, which is included in accounts payable.

Note 13. Commitments and Contingencies

We have a long-term strategic relationship with Healthcare Technology Systems, Inc. (HTS), a leading authority in the research, development and validation of computer administered clinical rating instruments. The strategic relationship includes the exclusive licensing (subject to one pre-existing license agreement) of 57 Interactive Voice Response (IVR) clinical assessments offered by HTS along with HTS’s IVR system. We placed the system into production in December 2007. As of June 30, 2010, we paid HTS $1.5 million for the license and $1.0 million in advanced payments against future royalties. As of June 30, 2010, HTS earned royalties of $0.2 million, which were offset against these advanced payments. Royalty payments will be made to HTS based on the level of revenues received from the assessments and the IVR system. Any royalties earned by HTS will be applied against these payments. All future payments to HTS will be solely based on royalty payments based on revenues received from ePRO™ sales.

On November 28, 2007, we completed the acquisition of CCSS. Under the terms of the purchase agreement, we purchased all of the outstanding shares of capital stock of CCSS in consideration of an upfront cash payment of $35.2 million plus additional cash payments of up to approximately $14.0 million, based upon our potential realization of revenue from the backlog transferred and from new contracts secured through Covance’s marketing activities. Through June 30, 2010, Covance earned $5.3 million of this contingent amount with less than $0.1 million earned during the three months ended June 30, 2010. At June 30, 2010, less than $0.1 million of the contingent amount earned remained to be paid to Covance, which we recorded in accounts payable. These contingent payments increased goodwill by $5.3 million. The acquisition included a marketing agreement under which Covance is obligated to use us as its provider of centralized cardiac safety solutions, and to offer these solutions to Covance’s clients, on an exclusive basis, for a 10-year period, subject to certain exceptions. We expense payments to Covance based upon a portion of the revenues we receive during each calendar year of the 10-year term that are based primarily on referrals made by Covance under the agreement. The agreement does not restrict our continuing collaboration with our other key CRO, Phase I units, Academic Research Centers and other strategic partners.

Note 14. Operating Segments / Geographic Information

We consider our business to consist of one segment which is providing technology and service solutions to collect, interpret and distribute diagnostic data principally used by the pharmaceutical industry as part of clinical drug trials. We operate on a worldwide basis with two primary locations in the United States, categorized below as North America, and one primary location each in the United Kingdom and Germany, which are categorized below collectively as Europe. The majority of our revenues are allocated among our geographic segments based upon the profit split transfer pricing methodology, and revenues are generally allocated to the geographic segment where the work is performed. Included with the information for Europe for the three and six months ended June 30, 2010 is German net revenues of $5.7 million, operating income of $0.6 million, long-lived assets of $10.9 million and total assets of $92.8 million.

Geographic information is as follows (in thousands of dollars):

		Three Months Ended June 30, 2009
		North
		America				Europe				Total
Service revenues		$	13,717			$	2,498			$	16,215
Site support revenues			4,930				1,948				6,878
EDC licenses and services revenues			1,083				—				1,083
Net revenues from external customers		$	19,730			$	4,446			$	24,176
Operating income		$	4,197			$	647			$	4,844
Long-lived assets		$	22,240			$	3,169			$	25,409
Total assets		$	139,648			$	19,482			$	159,130

		Three Months Ended June 30, 2010
		North
		America				Europe				Total
Service revenues		$	10,837			$	7,860			$	18,697
Site support revenues			4,950				5,449				10,399
Net revenues from external customers		$	15,787			$	13,309			$	29,096
Operating income		$	(2,444	)		$	3,495			$	1,051
Long-lived assets		$	22,130			$	16,131			$	38,261
Total assets		$	144,569			$	57,282			$	201,851

		Six Months Ended June 30, 2009
		North
		America				Europe				Total
Service revenues		$	27,604				4,719				32,323
Site support revenues			9,373				3,765				13,138
EDC licenses and services revenues			2,501				—				2,501
Net revenues from external customers		$	39,478			$	8,484			$	47,962
Operating income		$	7,182			$	1,002			$	8,184
Long-lived assets		$	22,240			$	3,169			$	25,409
Total assets		$	139,648			$	19,482			$	159,130

		Six Months Ended June 30, 2010
		North
		America				Europe				Total
Service revenues		$	20,781			$	12,751			$	33,532
Site support revenues			9,723				7,709				17,432
Net revenues from external customers		$	30,504			$	20,460			$	50,964
Operating income		$	(1,191	)		$	4,989			$	3,798
Long-lived assets		$	22,130			$	16,131			$	38,261
Total assets		$	144,569			$	57,282			$	201,851

Note 15. Stock Repurchase

Our board of directors has authorized the repurchase of up to an aggregate of 12.5 million shares, of which 5.0 million shares remain to be purchased as of June 30, 2010. The stock buy-back authorization allows us, but does not require us, to purchase the authorized shares. During the three months ended June 30, 2009, we purchased 741,267 shares of our common stock at a cost of $4.0 million. During the six months ended June 30, 2009, we purchased 2,706,719 shares of our common stock at a cost of $14.0 million. We did not purchase any shares during the six months ended June 30, 2010.

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

Cautionary Statement for Forward-Looking Information

Except for historical matters, the matters discussed in this Form 10-Q are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views as to future events and financial performance with respect to our operations. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “aim,” “anticipate,” “are confident,” “estimate,” “expect,” “will be,” “will continue,” “will likely result,” “project,” “intend,” “plan,” “believe,” “look to” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include: unfavorable economic conditions; our ability to obtain new contracts and accurately estimate net revenues due to variability in size, scope and duration of projects and internal issues at the sponsoring client; our ability to successfully integrate acquisitions; competitive factors in the market for centralized cardiac safety services; changes in the pharmaceutical, biotechnology and medical device industries to which we sell our solutions; technological development; and market demand. There is no guarantee that the amounts in our backlog will ever convert to revenue. Should the current economic conditions continue or deteriorate further, the cancellation rates that we have historically experienced could increase. Further information on potential factors that could affect the Company’s financial results can be found in the reports we file with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date made. We undertake no obligation to update any forward-looking statements, including prior forward-looking statements, to reflect the events or circumstances arising after the date as of which they were made. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included in this discussion or that may be made in our filings with the Securities and Exchange Commission or elsewhere from time to time by, or on behalf of, us.

Overview

eResearchTechnology, Inc. (ERT^®), a Delaware corporation, was founded in 1977 to provide Cardiac Safety solutions to evaluate the safety of new drugs. ERT^® and its consolidated subsidiaries collectively are referred to as the “Company” or “we.” We are a global provider of technology and services to the pharmaceutical, biotechnology and medical device industries. We are the market leader in providing centralized core-diagnostic electrocardiographic (ECG) technology and services (Cardiac Safety services) to evaluate cardiac safety in clinical development. We are also a leading provider of centralized respiratory technology and services (Respiratory services) to evaluate pulmonary function efficacy and safety in clinical development. We also provide solutions to streamline the clinical trials process by automating the collection, analysis, and distribution of electronic patient reported outcomes (ePRO) clinical data using multi-mode technology in all phases of clinical development as well as providing selected medical devices for the clinical trials and healthcare industries.

Our solutions improve the accuracy, timeliness and efficiency of trial set-up, data collection from sites worldwide, data interpretation, and new drug, biologic and device application submissions. We offer Cardiac Safety, Respiratory and ePRO solutions, which are utilized by pharmaceutical, biotechnology and medical device companies, clinical trial sponsors and clinical research organizations (CROs) during all phases of the clinical trial cycle. Our centralized data collection services include the collection, interpretation and distribution of electocardiographic (ECG) data, respiratory data from spirometry to full pulmonary function tests (PFTs) and patient reported outcomes such as daily symptoms, quality of life data and medication usage.

The data collected provides an assessment of the efficacy and safety of a new drug by documenting the change of selected parameters over a defined time period.

Acquisition of RS

On May 28, 2010, we acquired Research Services Germany 234 GmbH (Research Services or RS), which was formed as a result of a demerger of CareFusion Germany 234 GmbH under German law which effectively divided CareFusion Germany 234 GmbH into RS and another entity. RS is comprised of the research services division of CareFusion Germany 234 GmbH and certain research operations of CareFusion Corporation. RS is a leading provider of respiratory diagnostics services and manufacturer of diagnostic devices and also offers cardiac safety and ePRO services. The RS business has been included in our financial results from the acquisition date.

RS is a business with its roots in the former Erich Jaeger GmbH which was founded in Würzburg, Germany in 1954 as a healthcare device manufacturing and servicing operation. The business entered the clinical research market in 2002 under VIASYS Healthcare Inc. It subsequently became part of Cardinal Health in 2007 when Cardinal Health acquired VIASYS Healthcare Inc. In 2009, RS was part of the businesses spun off from Cardinal Health with the creation of CareFusion, a $4 billion healthcare company with products and services focused on improving safety and quality of care. RS currently provides services to 16 of the 20 largest pharmaceutical companies and has supported clinical trials in more than 75 countries and more than 25,000 investigator sites.

We acquired the following key products as part of the RS acquisition:

•

MasterScope® CT — a PC-based device platform for centralized spirometry/ pulmonary function tests (PFT) and Cardiac Safety featuring fully customizable workflows that is 21 CFR 11 compliant.

•

Flow/CorScreen® CT — a desktop-based device platform for centralized spirometry and ECG featuring a built-in color printer that is customizable and 21 CFR 11 compliant.

•

Asthma Monitor AM3® — an electronic lung function monitor with text-based diary available in a broad range of languages.

•

VIAPad® — a dedicated hand held ePRO device for capturing high quality patient reported outcomes in a broad range of languages.

•

VIAPen™ — an ePRO device which utilizes digital pen technology to capture quality of life information

•

VIAConnect® — an intelligent modem solution for transferring collected data from any patient’s home to the data center, using an analog or wireless connection.

Our acquisition of RS offers multiple strategic benefits:

•

Establishes us as one of the market leaders in respiratory core lab services in the clinical trials market. The transaction provides us with a leadership position in an attractive clinical end market and serves to diversify our revenue base.

•

Provides us with a leading diagnostic device capability. RS is a leader in diagnostic device manufacturing, having developed over 20 proprietary devices and supporting software platforms for use in the clinical trials industry. This device manufacturing expertise has expanded our technological capabilities, enables us to provide greater breadth of services and technologies for clinical research, and will serve as a basis for development of other healthcare solutions.

•

Expands our revenue base in cardiac safety. RS has a significant, and growing, business in cardiac safety services that will add to our current position in this market

•

Provides scale for our ePRO business, as well as expands the depth and breadth of our ePRO services. This transaction will establish us as one of the five largest providers in the ePRO market. RS’s offering is based on innovative hand-held devices. When combined with our interactive voice response technology and our planned web-based technology, we will be able to offer our customers a multi-modality approach for their ePRO solutions.

•

Expands significantly our global footprint. RS employs more than 250 people, of whom approximately 230 are in Germany. This increased local European presence will enable us to bolster our already strong international presence, better serve our continental European customers, and enable us to expand our relationships with other clients in Europe.

•

Accelerates our movement into healthcare solutions. RS’s device manufacturing and services capabilities provides us with a platform and experience for future growth in healthcare delivery.

Sale of EDC Assets

On June 23, 2009, we completed the sale of certain assets relating to our electronic data capture (EDC) operations. Under the terms of the transaction, OmniComm Systems, Inc. issued to us 8.1 million shares of common stock and assumed certain liabilities including deferred revenue relating to our EDC operations in exchange for our EDC assets which primarily included our EDC software, applications and fixed assets and $1.15 million in cash we paid. During the three months ended June 30, 2009, we recorded a gain on the sale of these assets of $0.5 million within general and administrative expenses in the consolidated statements of operations.

Products and Services

We offer the following products and services on a global basis:

Centralized Cardiac Safety Solutions

Our Cardiac Safety solutions include the collection, interpretation and distribution of electrocardiographic (ECG) data and images and are performed during clinical trials in all phases of the clinical research process. The ECG provides an electronic map of the heart’s rhythm and structure, and is performed in most clinical trials. Our Cardiac Safety solutions permit assessments of the safety of therapies by documenting the occurrence of cardiac electrical change. Specific trials, such as a Thorough QTc study, focus on the cardiac safety profile of a compound. Thorough QTc studies are comprehensive studies that typically are of large volume and short duration and are recommended by the United States Food and Drug Administration (FDA) under guidance issued in 2005 by the International Committee on Harmonization (ICH E14).

Cardiac Safety solutions, including our EXPERT^® technology platform, provide for workflow-enabled cardiac safety data collection, interpretation and distribution of electrocardiographic (ECG) data and images as well as for analysis and cardiologist interpretation of ECGs performed on research subjects in connection with our clients’ clinical trials. EXPERT^® is designed specifically to address global regulatory guidance and technical standards for digital ECG processing to include digital collection, waveform measurements and annotations, review and output to the regulatory standard file format. Also included in Cardiac Safety solutions is FDA XML delivery, which provides for the delivery of ECGs in a format compliant with the United States Food and Drug Administration’s XML standard for digital ECGs. We also provide ECG equipment through rental and sales to clients to perform the ECG recordings and give them means to send such recordings to us. Our portal product, MyStudy Portal, provides sponsors and investigator sites with the ability to order supplies, gain real time reports and respond to queries via a secure web portal in lieu of less efficient means such as faxing and telephone calls.

Cardiac Safety Consulting

The centralization of electrocardiograms in clinical research has become increasingly important to organizations involved in the development of new drugs. Global regulators each apply their own slightly different interpretation of the ICH E14 guidelines and, as a result, sponsors look to their vendors to provide key scientific input into the overall process. Our cardiac safety consulting service aids sponsors in the development of protocol synopses, the creation and analysis of statistical plans as well as the provision of an expert medical report with regard to the cardiac findings. We are involved in all phases of clinical development from a consultancy point of view. We offer this service both as a stand-alone service and integrated with our full suite of Cardiac Safety solutions.

Centralized Spirometry / Pulmonary Function Solutions

Spirometry is the most commonly performed PFT today and measures the volume and/or flow of air that can be inhaled and exhaled. Sponsors developing new compounds for the treatment of asthma, cystic fibrosis and Chronic Obstructive Pulmonary Disease (COPD) use this non-invasive, cost effective test to assess the efficacy of a drug. Lung diseases such as asthma, COPD, and emphysema decrease a patient’s air flow by narrowing or blocking the airways during exhalation. Peak flow is a simple, non-invasive and inexpensive method to measure the function of the airway and we provide a unique electronic peak flow meter with integrated diary for clinical trials capturing peak flow data at home.

The diffusing capacity of the lung related to carbon monoxide, which is known as DLCO, measures the extent to which oxygen passes from the air sacs of the lungs into the blood and involves measuring the partial pressure difference between inspired and expired carbon monoxide. Centralized DLCO testing offers sponsors the advantage of being able to diagnose and treat lung disorders not found by either spirometry or chest x-ray. DLCO testing is also described as single-breath determination of carbon monoxide uptake in the lung or “Lung Safety” in clinical research and is used to determine if new drugs being inhaled for pain, diabetes or multiple sclerosis may have an effect on the lung, e.g. if the diffusion of oxygen into the bloodstream is affected or not.

Electronic Patient Reported Outcomes (ePRO)

We offer electronic patient report outcomes (ePRO) solutions which refers to the electronic capture of patient self-reported data pertaining to their quality of life. ePRO solutions offer our clients higher quality data with accurate timestamps and real-time data access. ePRO provides less variable and more reliable data enabling smaller trials and better scientific conclusions.

Our solutions include both products and services for clinical trials. We manufacture devices which include convenient handheld electronic diaries that are designed exclusively for clinical research or using an Interactive Voice Response (IVR) system accessible through standard telephone lines or using an electronic pen (VIAPen™). We also offer device customization, worldwide logistics and our in-house global and local support to ensure comprehensive and efficient trial management. Diaries, screening, recruitment and all clinical assessments can be completed directly by the subject without requiring clinician involvement.

In December 2009 the FDA finalized “PRO Guidance for Label Claims,” which outlines the steps required to develop a PRO instrument from hypothesis of a concept or claim through data item evaluation, collection, cognitive debriefing, interpretation, revision and finalization. We believe that our devices conform to this guidance.

Project Assurance

We provide a full spectrum of project assurance services that augment the study management and implementation efforts of clients in support of their clinical research requirements. Our project assurance methodology is a consistent framework through which we can efficiently manage the delivery of all data, from study initiation to completion. It also provides our clients with the standards, guidelines and services that allow us to effectively anticipate their needs and ensure proactive communication to meet and exceed their goals.

Integrated Product Offering

With the acquisition of the RS, we now offer a fully integrated set of products and services for centralized cardiac safety, respiratory, and ePRO and a single point of contact for all aspects of the electronic data collection process in clinical trials.

The protocols of many of the respiratory trials in which we participate often also require ECGs and/or Holter monitoring. Our flagship investigator site device, MasterScope^® CT, is a comprehensive solution for standardized and centralized spirometry, full PFT, ECG and ePRO in clinical trials. Using customized software, this innovative system combines protocol-driven workflows (with many diagnostic applications) into a single easy-to-use clinical trial workstation. These workflows can be specially tailored for multicentre studies. Our clients and their users consider the availability of a fully integrated platform for respiratory, cardiac safety and ePRO a major advantage.

Revenues

Our services revenues consist primarily of our services offered under our Cardiac Safety, Respiratory Services and, to a lesser extent, ePRO solutions that we provide on a fee for services basis and are recognized as the services are performed. We also provide Cardiac Safety consulting services on a time and materials basis and recognize revenues as we perform the services. Site support revenues, consisting of equipment rentals and sales along with related supplies and logistics management, are recognized at the time of sale or over the rental period.

For arrangements with multiple deliverables where the fair value of each element is known, the revenue is allocated to each component based on the relative fair values of each element. For arrangements with multiple deliverables where the fair value of one or more delivered elements is not known, revenue is allocated to each component of the arrangement using the residual method provided that the fair value of all undelivered elements is known. Fair values for undelivered elements are based primarily upon stated renewal rates for future products or services.

We have recorded reimbursements received for out-of-pocket expenses incurred as revenue in the accompanying consolidated financial statements.

Unbilled revenue is revenue that is recognized but is not currently billable to the customer pursuant to contractual terms. In general, such amounts become billable in accordance with predetermined payment schedules, but recognized as revenue as services are performed. Amounts included in unbilled revenue are expected to be collected within one year and are included within current assets.

Our former electronic data capture (EDC) operations were included in EDC licenses and services revenue and included license revenue, technology consulting and training services and software maintenance services. We recognized up-front license fee revenues under the residual method when a formal agreement existed, delivery of the software and related documentation occurred, collectability was probable and the license fee was fixed or determinable. We recognized monthly and annual term license fee revenues over the term of the arrangement. Hosting service fees were recognized evenly over the term of the service. We recognized revenues from software maintenance contracts on a straight-line basis over the term of the maintenance contract, which was typically twelve months. We provided consulting and training services on a time and materials basis and recognized revenues as we performed the services.

Costs

Cost of services includes the cost of Cardiac Safety, Respiratory and ePRO services. Cost of services consists primarily of wages, depreciation, amortization of intangible assets, fees paid to consultants and other direct operating costs. Cost of site support consists primarily of wages, equipment rent and depreciation, amortization of intangible assets, supplies, cost of equipment sold, shipping expenses and other direct operating costs. Selling and marketing expenses consist primarily of wages and incentive compensation paid to sales personnel, travel expenses and advertising and promotional expenditures. General and administrative expenses consist primarily of wages and direct costs for our finance, administrative, corporate information technology and executive management functions, in addition to professional service fees and corporate insurance. Research and development expenses consist primarily of wages paid to our product development staff, costs paid to outside consultants and other direct costs associated with the development of our technology.

Costs of our former EDC operations included primarily wages, fees paid to outside consultants and other direct operating costs related to our software licensing, consulting and client support functions.

We conduct our operations through offices in the United States (U.S.) and Europe (the United Kingdom and Germany). Our international net revenues represented approximately 18% and 20% of total net revenues for the six months ended June 30, 2009 and 2010, respectively. The majority of our revenues are allocated among our geographic segments based upon the profit split transfer pricing methodology which equalizes gross margins for each legal entity based upon its respective direct revenue or direct costs, as determined by the relevant revenue source. Through September 30, 2009, we calculated our transfer pricing for Cardiac Safety services using a profit split methodology based on cost. After reviewing the transfer pricing methodology, management decided to modify its application of the profit split methodology for Cardiac Safety services to allocate costs based on revenue beginning in 2009. This has resulted in an increase in revenue attributed to the UK beginning in the fourth quarter of 2009.

Results of Operations

Executive Overview

Net revenues were $29.1 million for the second quarter of 2010, an increase of $4.9 million or 20.2% from $24.2 million in the second quarter of 2009. The revenue change was due primarily to the $5.7 million of revenue contributed by our newly acquired RS business which closed on May 28, 2010. Revenue in the second quarter of 2009 included $1.1 of EDC revenue for which we had no corresponding revenue in 2010 as this business was sold in June 2009. The general business environment across all our product lines — cardiac safety, respiratory, and ePRO — continued to improve, as seen in another strong bookings quarter, strong backlog and general level of business development activities. We saw our third consecutive quarter of increased Thorough QT bookings, which serves as an indication of renewed activity in this part of the market.

Gross margin percentage was 54.4% in the second quarter of 2010 compared to 52.3% in the second quarter of 2009. The increase in gross margin percentage was driven by increased margins for services and site support. Our gross margin on site support was 52.3% for the second quarter, up from 49.5% a year ago due to lower depreciation as a portion of our older, more expensive ECG equipment has become fully depreciated. In addition, we have more equipment out in the field which is contributing a higher level of revenue. The gross margin percentage for services was 55.5% in the second quarter of 2010 compared to 52.7% in the comparable quarter a year ago due to transitioning the costs associated with the customer support center to the cost of site support to better align costs with related revenue. The increase in total gross margin percentage is also positively impacted by the operational changes and efficiencies that we have implemented over the past year.

Operating income for the second quarter of 2010 was $1.1 million or 3.6% of total net revenues compared to $4.8 million or 20.0% of total net revenues in the second quarter of 2009. Operating income for the second quarter of 2010 was negatively impacted by $3.8 million of acquisition related costs and $0.8 million of amortization of acquisition related intangibles related to the acquisition of RS, which reduced our operating margin by approximately 16 percentage points. Our effective income tax rate for the second quarter of 2010 was 42.9% (which was negatively impacted by a certain portion of the acquisition related costs which are not deductable for income tax purposes) compared to 42.5% in the second quarter of 2009.

Net income for the second quarter of 2010 was $0.8 million, or $0.02 per diluted share, compared to $2.5 million, or $0.05 per diluted share, in the second quarter of 2009. Net income in the second quarter was positively impacted by the one month of contribution from RS and negatively impacted by the amortization of acquired intangibles and acquisition related costs.

The following table presents certain financial data as a percentage of total net revenues:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2010				2009				2010
Net revenues:
Services			67.1	%			64.3	%			67.4	%			65.8	%
Site support			28.4	%			35.7	%			27.4	%			34.2	%
EDC licenses and services			4.5	%			0.0	%			5.2	%			0.0	%
Total net revenues			100.0	%			100.0	%			100.0	%			100.0	%
Costs of revenues:
Cost of services			31.7	%			28.6	%			32.0	%			30.7	%
Cost of site support			14.4	%			17.0	%			14.8	%			15.2	%
Cost of EDC licenses and services			1.6	%			0.0	%			1.8	%			0.0	%
Total costs of revenues			47.7	%			45.6	%			48.6	%			45.9	%
Gross margin			52.3	%			54.4	%			51.4	%			54.1	%
Operating expenses:
Selling and marketing			13.6	%			13.6	%			14.0	%			14.4	%
General and administrative			14.6	%			33.5	%			15.8	%			28.4	%
Research and development			4.1	%			3.7	%			4.5	%			3.8	%
Total operating expenses			32.3	%			50.8	%			34.3	%			46.6	%
Operating income			20.0	%			3.6	%			17.1	%			7.5	%
Other income (expense), net			-1.7	%			1.4	%			-0.7	%			1.0	%
Income before income taxes			18.3	%			5.0	%			16.4	%			8.5	%
Income tax provision			7.8	%			2.2	%			6.8	%			3.4	%
Net income			10.5	%			2.8	%			9.6	%			5.1	%

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2010.

The following table presents our consolidated statements of operations with product line detail (dollars in thousands):

		Three Months Ended June 30,
		2009				2010				Increase (Decrease)
Services:
Net revenues		$	16,215			$	18,697			$	2,482				15.3	%
Costs of revenues			7,671				8,325				654				8.5	%
Gross margin		$	8,544			$	10,372			$	1,828				21.4	%
Site support:
Net revenues		$	6,878			$	10,399			$	3,521				51.2	%
Costs of revenues			3,470				4,957				1,487				42.9	%
Gross margin		$	3,408			$	5,442			$	2,034				59.7	%
EDC licenses and services:
Net revenues		$	1,083			$	—			$	(1,083	)			(100.0	%)
Costs of revenues			397				—				(397	)			(100.0	%)
Gross margin		$	686			$	—			$	(686	)			(100.0	%)
Total
Net revenues		$	24,176			$	29,096			$	4,920				20.4	%
Costs of revenues			11,538				13,282				1,744				15.1	%
Gross margin			12,638				15,814				3,176				25.1	%
Operating expenses:
Selling and marketing			3,274				3,941				667				20.4	%
General and administrative			3,527				9,753				6,226				176.5	%
Research and development			993				1,069				76				7.7	%
Total operating expenses			7,794				14,763				6,969				89.4	%
Operating income			4,844				1,051				(3,793	)			(78.3	%)
Other (expense) income, net			(409	)			396				805				(196.8	%)
Income before income taxes			4,435				1,447				(2,988	)			(67.4	%)
Income tax provision			1,887				621				(1,266	)			(67.1	%)
Net income		$	2,548			$	826			$	(1,722	)			(67.6	%)