Etrials Worldwide 10QSB 2007 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50531

ETRIALS WORLDWIDE, INC.

(Exact name of small business issuer as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		20-0308891 (I.R.S. Employer Identification No.)
4000 Aerial Center Parkway Morrisville, North Carolina 27560 (Address of principal executive offices)
(919) 653-3400 (Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: None

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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. ý Yes o No

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

ETRIALS WORLDWIDE, INC.

QUARTERLY REPORT ON FORM 10-QSB

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

Table of Contents

		Page

	Part I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006	3
	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2007 and 2006	4
	Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2007	5
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2007 and 2006	6
	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis	19

Item 3.	Controls and Procedures	28

	Part II - OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	22

Item 4.	Submission of Matters to a Vote of Security Holders	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

Signatures		30

Exhibit Index		31

PART I - Financial Information

Item 1. Financial Statements

etrials Worldwide, Inc.
Consolidated Balance Sheets

	March 31,			December 31,
	2007			2006
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	13,809,657		$	11,828,667
Short-term investments		5,875,000			8,160,293
Accounts receivable, net of allowance for doubtful accounts
of $29,000 and $22,000, respectively		5,206,936			4,980,350
Inventory		641,604			-
Prepaid expenses and other current assets		629,335			408,786
Total current assets		26,162,532			25,378,096
Property and equipment, net of accumulated depreciation of
$3,184,717 and $2,895,543, respectively		2,439,962			1,856,949
Goodwill		8,011,037			8,011,037
Developed technology, net of accumulated amortization of
$1,669,889 and $1,658,491, respectively		3,801			15,199
Other assets		117,021			117,021

Total assets	$	36,734,353		$	35,378,302

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	1,394,200		$	804,471
Accrued expenses		2,322,178			1,976,226
Deferred revenue		2,427,758			2,013,533
Bank line of credit and other short-term borrowings		1,337,526			646,000
Current portion of capital lease obligations		50,195			74,796
Total current liabilities		7,531,857			5,515,026
Capital lease obligations, net of current portion		43,867			46,846
Long-term borrowings, net of current portion		-			20,000
Total liabilities		7,575,724			5,581,872

Commitments and contingencies

Stockholders' equity
Common stock; $0.0001 par value; 50,000,000 shares authorized at March 31, 2007 and December 31, 2006; and 12,303,015 and 12,278,804 issued and outstanding at March 31, 2007 and December 31, 2006, respectively		1,230			1,228
Additional paid-in capital		53,916,007			53,629,085
Deferred compensation		(92,670	)		(108,102	)
Accumulated deficit		(24,665,938	)		(23,725,781	)
Total stockholders' equity		29,158,629			29,796,430

Total liabilities and stockholders' equity	$	36,734,353		$	35,378,302

See accompanying notes.

etrials Worldwide, Inc.
Consolidated Statements of Operations
(unaudited)


	Three Months Ended March 31,
	2007			2006


Net service revenues	$	4,077,008		$	2,705,637
Reimbursable out-of-pocket revenues		644,847			54,026
Total revenues		4,721,855			2,759,663

Costs and expenses:
Costs of revenues		2,176,303			1,642,275
Reimbursable out-of-pocket expenses		644,847			54,026
Sales and marketing		1,171,885			820,654
General and administrative		1,472,475			920,668
Amortization of intangible assets		11,398			54,223
Research and development		418,179			430,211
Total costs and expenses		5,895,087			3,922,057
Operating loss		(1,173,232	)		(1,162,394	)

Other income (expenses):
Interest expense		(19,330	)		(18,426	)
Interest income		253,895			102,451
Other (expense) income, net		(1,489	)		31,220
Total other income, net		233,075			115,245
Net loss		(940,157	)		(1,047,149	)
Dividends and accretion of preferred stock		-			(95,969	)
Induced conversion of common stock warrants		-			(1,030,000	)

Net loss attributable to common stockholders	$	(940,157	)	$	(2,173,118	)

Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.09	)	$	(0.29	)
Weighted average common shares outstanding:
Basic and diluted		10,729,884			7,569,572

See accompanying notes.

etrials Worldwide, Inc.
Consolidated Statements of Stockholders' Equity
(unaudited)



					Additional
	Common Stock				Paid-In			Deferred			Accumulated			Stockholders’
	Shares		Amount		Capital			Compensation			Deficit			Equity
Balance at December 31, 2006		12,278,803	$	1,228	$	53,629,085		$	(108,102	)	$	(23,725,781	)	$	29,796,430
Stock-based compensation recorded in accordance with SFAS 123R		-		-		245,470			-			-			245,470
Amortization of deferred stock-based compensation		-		-		-			12,932			-			12,932
Reversal of employee stock compensation expense due to terminations		-		-		(4,000	)		2,500			-			(1,500	)
Exercise of employee stock options		24,212		2		45,452			-			-			45,454
Net loss		-		-		-			-			(940,157	)		(940,157	)

Balance at March 31, 2007		12,303,015	$	1,230	$	53,916,007		$	(92,670	)	$	(24,665,938	)	$	29,158,629

See accompanying notes.

etrials Worldwide, Inc.
Consolidated Statements of Cash Flows
(unaudited)


	Three Months Ended March 31,
	2007			2006
Operating activities
Net loss	$	(940,157	)	$	(1,047,149	)

Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		299,789			213,101
Accretion of discount on investments held-to-maturity		(4,707	)		-
Amortization of prepaid software application-hosting discount		-			334,339
Non-cash stock-based compensation expense		256,902			14,495
Provision for allowance for doubtful accounts		7,000			(4,000	)
Foreign currency remeasurement losses		(1,069	)		-
Changes in operating assets and liabilities:
Accounts receivable		(233,586	)		(542,219	)
Prepaid expenses and other assets		(220,549	)		754,422
Inventory		(641,604	)		-
Accounts payable and accrued expenses		935,681			(332,744	)
Deferred revenue		414,225			336,334
Net cash used in operating activities		(128,075	)		(273,421	)

Investing activities
Purchase of property and equipment		(696,493	)		(68,919	)
Capitalized internal software development costs		(173,842	)		(102,108	)
Sales of short-term investments, net		2,290,000			-
Net cash provided by (used in) investing activities		1,419,665			(171,027	)

Financing activities
Net proceeds (payments) from bank line of credit		701,526			(100,000	)
Payments on bank equipment loan		(30,000	)		(30,000	)
Borrowings from capital leases		-			48,972
Principal payments on capital leases		(27,580	)		(74,442	)
Proceeds from issuance of stock options and warrants		45,454			118,733
Proceeds from issuance of common stock in merger,
net of issuance costs		-			19,661,485
Net cash provided by financing activities		689,400			19,624,748
Effect of exchange rate changes on cash		-			2,578
Net increase in cash and cash equivalents		1,980,990			19,182,878
Cash and cash equivalents at beginning of year		11,828,667			1,650,323

Cash and cash equivalents at end of period	$	13,809,657		$	20,833,201

Supplemental cash flow information
Cash paid for interest	$	17,236		$	18,321

See accompanying notes.

etrials Worldwide, Inc.

Notes to Consolidated Financial Statements (unaudited)

1. Organization and Capitalization

etrials Worldwide, Inc.

etrials Worldwide, Inc. (“etrials” or the “Company”) is a provider of eClinical software technology and services to pharmaceutical, biotechnology, medical device, and contract research organizations. The Company offers insight into the clinical trial process, maximizing its customers’ return on investment and accelerating their time to market. The Company’s primary focus is on the costly and time-consuming clinical trial phase of drug development.

The Company’s operations are subject to certain risks and uncertainties, including among others, rapid technological change, increased competition from existing competitors and new entrants, lack of operating history, and dependence upon key members of the management team. The operating results are also affected by general economic conditions impacting the pharmaceutical industry.

Merger and Accounting Treatment

CEA Acquisition Corporation (“CEA”) was incorporated in Delaware on October 14, 2003 as a blank check company, the objective of which was to effect a merger, capital stock exchange, asset acquisition or other similar business combination in the entertainment, media and communications industry. On February 19, 2004, CEA consummated an Initial Public Offering (the “Offering”) and raised net proceeds of $21,390,100. Of the net proceeds from the Offering, $20,527,250 was placed in trust and invested in government securities. The remaining proceeds were available for business, legal, and accounting due diligence on prospective acquisitions and continuing general and administration expenses.

In connection with CEA’s initial public offering in February 2004, CEA issued to representatives of its underwriter options to purchase 350,000 units at an exercise price of $9.90 per unit. Each unit consists of one share of common stock and two warrants to purchase one common share each at an exercise price of $6.40 per share. The unit purchase options expire on February 11, 2009.

On February 9, 2006 etrials Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of CEA, consummated a merger with etrials Worldwide, Inc., in which etrials Worldwide, Inc. changed its name back to etrials, Inc. and became CEA’s wholly owned subsidiary. At that time CEA changed its name to etrials Worldwide, Inc.

The merger was accounted for under the purchase method of accounting as a reverse acquisition in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method of accounting, CEA was treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, this merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the merger was treated as the equivalent of etrials issuing stock for the net monetary assets of CEA, accompanied by a recapitalization. All historical share and per share amounts have been retroactively adjusted to give effect to the reverse acquisition of CEA and related recapitalization.

The shares of common stock held by etrials stockholders were converted into a total of 7,446,360 shares of CEA’s common stock, or approximately 60.3% of the subsequently outstanding common stock of the combined company. In connection with the merger, etrials stockholders also received warrants to purchase 4,250,000 shares of CEA common stock with an exercise price of $5.00 per share. The warrants issued in the merger are immediately tradable.

Upon consummation of the merger, $21.4 million was released from trust to be used by the combined company. After payments totaling approximately $1.1 million for professional fees and other costs related to the merger, the net proceeds amounted to $19.6 million. The total direct and incremental costs of $1.1 million, incurred by the Company in connection with the merger was reflected as a reduction to additional paid-in capital as of the effective date of the merger.

Induced Conversion of Common Stock Warrants

In order to induce certain pre-merger common stock warrant holders to exercise their warrants concurrent with the reverse acquisition, the Company issued such warrant holders 157,512 shares of common stock and 73,073 warrants to purchase common stock with an aggregate fair value of $1,030,000. The Company accounted for the consideration allocated to these warrant holders as an induced conversion feature. Accordingly, the fair value of this consideration has been reflected as an increase to net loss in the computation of loss per common share in the accompanying consolidating statement of operations for the three months ended March 31, 2006.

Shares Held in Escrow

A total of 1,400,000 shares of common stock of the Company issued to etrials stockholders in the merger with CEA and 166,250 shares of common stock of former CEA shareholders (including all CEA officers and directors) were placed in escrow (“Trigger shares”) and will not be released unless and until, over a 20 consecutive trading day period (i) the volume weighted average price of etrials common stock is $7.00 or more, and (ii) the average daily trading volume is at least 25,000 shares. The Trigger shares will be cancelled if these conditions are not met by February 19, 2008.

Series A and Series B Redeemable Convertible Preferred Stock

In connection with the reverse acquisition of CEA in February 2006, all of the outstanding shares of Series A and Series B Redeemable Convertible Preferred Stock of etrials plus accrued dividends were converted into 3,395,369 shares of common stock and 1,945,741 warrants of the Company. The Company accreted an aggregate $95,969 of dividends related to its redeemable convertible preferred stock for the three months ended March 31, 2006.

Unaudited Interim Financial Statements

The accompanying consolidated balance sheet as of March 31, 2007, consolidated statements of operations for the three months ended March 31, 2007 and 2006, consolidated statements of cash flows for the three months ended March 31, 2007 and 2006 and consolidated statement of stockholders’ equity (deficit) for the three months ended March 31, 2007 are unaudited. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of such financial statements. The information disclosed in the notes to the financials statements for these periods is unaudited. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or for any future period.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, etrials, Inc. and etrials Worldwide LTD. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year balances have been reclassified to conform to the presentation of the current year. Such reclassifications had no effect on previously reported net loss or stockholders' equity.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results will differ from those estimates and may differ materially.

Revenue Recognition

The Company derives its revenues from providing software application-hosting which includes: services, software subscription and usage fees, hosting fees, and other fees. Revenues resulting from software application-hosting are recognized in accordance with Emerging Issues Task Force (EITF) Issue No. 00-03, Application of AICPA Statement of Position 97-2 to Arrangements that include the Right to Use Software Stored on Another Entity’s Hardware and Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) Nos. 101 and No. 104, Revenue Recognition. The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

The Company offers its eClinical software products through an application service provider model. Revenues are generated in three stages for each clinical trial. The first stage (development and deployment) includes trial and application setup, including design of electronic case report forms and edit checks, investigator site training, and implementation of the system and server configuration. The second stage (study conduct) consists of project management services, application hosting and related professional and support services. The third stage (close out) consists of services required to close out, or lock, the database for the clinical trial and deliver final data sets to the client.

Services provided during the three phases of clinical trials are typically earned under fixed-price contracts. Although etrials enters into master agreements with each customer, these master agreements do not contain any minimum revenue commitment by customers and contain general terms and conditions. All services and revenues are covered by separately negotiated addendums called task orders. Revenues generated from each task order, including; services, software subscription and usage fees, and hosting fees are generally recognized using the proportional performance method, measured principally by the total labor hours incurred as a percentage of estimated total labor hours for each contract. This method is used because management considers total labor hours incurred to be the best available measure of progress on these contracts.

Customers generally have the ability to terminate contracts upon 30 days notice to the Company. However, these contracts typically require payment to etrials for fees earned from all services provided through the termination date. In the event that a customer cancels a clinical trial and its related task order, all deferred revenue is recognized and certain termination related fees may be charged.

The estimated total labor hours of contracts are reviewed and revised periodically throughout the duration of the contracts with an adjustment to revenues from such revisions being recorded on a cumulative basis in the period in which the revisions are made. When estimates indicate a loss, such loss is recognized in the current period in its entirety. Because of the inherent uncertainties in estimating total labor hours, it is reasonably possible that the estimates will change in the near term and could result in a material change. The Company records a loss for its contracts at the point it is determined that the total estimated contract costs will exceed management’s estimates of contract revenues. As of March 31, 2007, the Company has not experienced any material losses on uncompleted contracts.

The following summarizes the components of the revenues recognized:

	Three Months Ended March 31
	2007		2006
Services	$	3,030,201	$	1,740,885
Software subscriptions and usage fees		684,130		628,056
Hosting fees		362,677		336,696
Net service revenues		4,077,008		2,705,637
Reimbursable out-of-pocket revenues		644,847		54,026
Total	$	4,721,855	$	2,759,663

The Company accounts for pass-through expenses in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF No. 01-14). EITF No. 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenues in the statement of operations.

Unbilled services are recorded for revenue recognized to date that has not yet been billed to the customers. In general, amounts become billable upon the achievement of milestones or in accordance with predetermined payment schedules. Unbilled services are billable to customers within one year from the respective balance sheet date. Deferred revenue represents amounts billed or cash received in advance of revenue recognition.

In connection with a software application-hosting agreement entered into on April 1, 2005, the Company issued to a customer 220,840 shares of the Company’s common stock with an estimated fair value of $1.26 million. Of the 220,840 shares issued, 98,151 were vested immediately and the remaining 122,689 shares of common stock were placed in escrow. In the event the customer terminated certain agreements during a three year period, all or part of the shares held in escrow would be forfeited. EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), requires that the value of the common stock be treated as a reduction to revenue. The fair value of the 98,151 shares of non-forfeitable common stock was recorded to common stock and additional paid-in capital and to prepaid software application-hosting discount, a contra-equity account. The prepaid software application-hosting discount was originally reduced on a straight-line basis over the three year term of the agreement, offsetting revenue generated under the agreement. In accordance with EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Non-employee, the fair value of the 122,689 shares of forfeitable common stock held in escrow was treated as unissued for accounting purposes until the future services are provided and the shares are vested. Accordingly, the fair value of the 122,689 shares of forfeitable common stock were originally recorded to additional paid-in-capital as the reduction to revenue is recorded on a straight-line basis over the three year term of the agreement. In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services, the fair value of the common stock was remeasured at each interim reporting date during the three-year performance period with changes in fair value reflected as a cumulative adjustment.

Effective February 8, 2006, etrials amended the software application-hosting agreement previously entered into with a customer on April 1, 2005. Under the terms of the amendment, etrials released from escrow 40,897 shares and terminated 81,792 shares of common stock, which were previously held in escrow, resulting in a total of 139,048 shares issued to this customer. As a result of this amendment, there are no longer any shares held in escrow and the shares issued are no longer subject to forfeiture should the customer terminate certain agreements. In conjunction with the application-hosting agreement the company recorded as a discount to revenue $334,339 during the three months ended March 31, 2006, which reflects the fair value of the total shares of common stock issued to the customer as of February 8, 2006 less the discounts previously recorded.

Internal Use Software and Website Development Costs

The Company follows the guidance of EITF Issue No. 00-2, Accounting for Web Site Development Costs, which sets forth the accounting for website development costs based on the website development activity. The Company follows the guidance set forth in SOP No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP No. 98-1), in accounting for the development of internal use software. SOP No. 98-1 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage and amortize them over the software’s estimated useful life of one to three years. The Company has capitalized $173,842 and $102,108 of internal software development costs during the three months ended March 31, 2007 and 2006, respectively.

Warranties and Indemnification

The Company’s hosting service is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Company’s online help documentation under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe on a third party’s intellectual property rights. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations in accordance with Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies, and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these agreements as of March 31, 2007.

The Company has entered into service level agreements with its hosted application customers warranting certain levels of uptime reliability and permitting those customers to receive credits against monthly hosting fees or terminate their agreements in the event that the Company fails to meet those levels. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

Cash, Cash Equivalents and Short-term Investments

The Company accounts for its investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents. The Company invests in high quality investments rated at least A2 by Moody’s Investors Service or A by Standard & Poors. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 95, Statement of Cash Flows, the Company classifies available-for-sale securities, including its investments in auction rate securities that are available to meet the Company’s current operational needs, as short-term. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 95, Statement of Cash Flows, the Company classifies available-for-sale securities, including its investments in auction rate securities that are available to meet the Company's current operational needs, as short-term.

Inventory

The Company accounts for electronic patient diaries purchased for future clinical trials which will be billed to its clients as reimbursable out-of-pocket revenues and expenses, as inventory.

Intangible Assets

During April 2004, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with Authentrics, Inc. (Authentrics) whereby the Company acquired an interactive voice recognition system technology (Acquired Technology) and certain other assets in exchange for 24,538 shares of common stock. The total cost of Acquired Technology of $132,000 is being amortized on a straight-line basis over its estimated useful life of three years. The Company recorded amortization expense of $11,398 and $54,223 for the three months ended March 31, 2007 and 2006, respectively, related to these assets.

Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets including property and equipment and its developed technology, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the long-lived assets, then such assets are written down to their fair value. The Company’s estimates of anticipated cash flows and the remaining estimated useful lives of long-lived assets could be reduced in the future, resulting in a reduction to the carrying amount of long-lived assets.

Goodwill

The Company accounts for its goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment at least annually and written down and charged to operations only in the periods in which the recorded value of goodwill and certain intangibles exceeds its fair value. The Company has elected to perform its annual impairment test as of November 1 of each calendar year. An interim goodwill impairment test would be performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During November 2006, the Company completed the required annual test, which indicated there was no impairment.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and outstanding indebtedness. In management’s opinion, the carrying amount of these financial instruments approximates their fair values at March 31, 2007 and December 31, 2006, based on their short-term nature or underlying variable interest rate.

Foreign Currency

The reporting currency for the Company is the U.S. dollar. Effective April 1, 2006, following a restructuring of the Company’s foreign subsidiary in the United Kingdom, the Company determined that the functional currency of its United Kingdom operations is the U.S. dollar. Prior to April 1, 2006 the functional currency of its United Kingdom operations was the local currency.

The financial statements of the Company’s foreign subsidiary in the United Kingdom are translated in accordance with SFAS No. 52, Foreign Currency Translation. Prior to April 1, 2006 assets and liabilities denominated in foreign currencies were translated into U.S. dollars at current exchange rates. Operating results were translated into U.S. dollars using the average rates of exchange prevailing during the period. Gains or losses resulting from the translation of assets and liabilities were included as a component of accumulated other comprehensive income in stockholders’ (deficit) equity. Effective April 1, 2006 remeasurement adjustments for non-functional currency monetary assets and liabilities are included in other income (net) in the accompanying consolidated statements of operations.

Net Loss Per Common Share

Basic and diluted loss per common share was determined by dividing net loss attributable to common stockholders by the weighted average common shares outstanding during the period in accordance with SFAS No. 128, Earnings Per Share (SFAS 128). Dilutive net income per share includes the effects of all dilutive, potentially issuable common shares.

The following common shares and common share equivalents have been excluded from the computation of diluted weighted average shares outstanding as the effect would have been anti-dilutive:

	Three Months Ended March 31
	2007		2006
Unit Purchase Options		1,050,000		1,050,000
Stock Options outstanding		2,794,744		1,734,121
Warrants outstanding		12,350,000		12,350,000

In addition, the 1,566,250 shares of common stock held in escrow as of March 31, 2007 in connection with the reverse acquisition of CEA have been excluded from the computation of basic and diluted loss per share in accordance with SFAS 128.

Stock Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share Based Payment (SFAS 123R). SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements using the fair value method. The provisions of SFAS 123R are effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (January 1, 2006 for the Company). SFAS 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The Company will recognize excess tax benefits when those benefits reduce current income taxes payable. The Company recognizes compensation cost for awards with pro rata vesting using the straight line prorated method.

The Company used the minimum-value method as a non-public company to estimate the fair value of stock awards under SFAS 123 for pro forma footnote disclosure purposes, the Company was required to adopt SFAS 123R using the “prospective-transition” method upon the effective date. Under the prospective transition method, nonpublic entities that previously applied SFAS 123 using the minimum-value method whether for financial statement recognition or pro forma disclosure purposes will continue to account for non-vested equity awards outstanding at the date of adoption of SFAS 123R in the same manner as they had been accounted for prior to adoption (APB 25 intrinsic value method for the Company). All awards granted, modified, or settled after the date of adoption have been accounted for using the measurement, recognition, and attribution provisions of SFAS 123R. The Company has continued to recognize compensation expense for awards issued prior to the adoption of SFAS 123R in accordance with the provisions of APB 25.

Stock Option Plan

The Company maintains an Equity Compensation Plan (the “Plan”) to provide incentives to eligible employees, officers, directors and consultants in the form of non-qualified stock options and, as permissible, incentive stock options. The Company has reserved a total of 3,200,000 shares of common stock for issuance under the Plan. Of this amount, 324,900 shares are available for future stock option grants as of March 31, 2007.

The Board has the authority to administer the Plan and determine, among other things, the interpretation of any provisions of the Plan, the number of options that an individual may be granted, vesting schedules and option exercise prices. With few exceptions, stock options granted under the Plan have vesting periods of three to five years, have a contractual life not to exceed five or ten years, and have exercise prices equal to the estimated fair market value of the Company’s common stock on the grant date.

3. Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalents and short-term investments were as follows:

	March 31		December 31
	2007		2006
Cash	$	716,119	$	3,115,362
Money market		10,353,797		6,024,155
U.S. agency notes		2,739,741		2,689,150
Total cash and cash equivalent	$	13,809,657	$	11,828,667

Auction rate securities	$	5,875,000	$	6,600,000
Corporate bonds		-		1,560,293
Total short-term investments	$	5,875,000	$	8,160,293

4. Accounts Receivable

Accounts receivable consists of the following:

	March 31			December 31
	2007			2006

Billed accounts receivable	$	3,646,751		$	3,394,583
Unbilled accounts receivable		1,589,185			1,607,767
Total accounts receivable		5,235,936			5,002,350
Allowance for doubtful accounts		(29,000	)		(22,000	)
	$	5,206,936		$	4,980,350

5. Accrued Expenses

Accrued expenses consist of the following:

	March 31		December 31
	2007		2006

Accrued professional fees	$	165,658	$	97,881
Accrued client reimbursable expenses		314,229		866,032
Accrued diary inventory liability		641,604		-
Accrued other expenses		687,077		545,194
Accrued compensation		205,975		206,106
Accrued vacation		307,635		261,013
	$	2,322,178	$	1,976,226

6. Debt

Debt consists of the following:

	March 31		December 31
	2007		2006

Borrowings:
Bank line of credit, with an interest rate of 8.50% at March 31, 2007	$	1,140,000	$	526,000
Bank equipment loan, with an interest rate of 9.25% at March 31, 2007		110,000		140,000
Note payable, with an interest rate of 7.15%		87,526		-
Total borrowings		1,337,526		666,000
Bank line of credit and other short-term borrowings		1,337,526		646,000
Long-term borrowings, less current portion	$	-	$	20,000

Bank Line of Credit

On February 1, 2005, the Company entered into two loan agreements with RBC Centura Bank. These loan agreements were modified on May 31, 2006 and a third loan agreement was added. The first agreement is a $2,000,000 revolving accounts receivable line of credit which provides for borrowings up to 80% of current accounts receivable balance at the prime rate of interest plus 0.25%. These borrowings are secured primarily by accounts receivable. The second agreement is a $300,000 equipment line of credit. This loan funds equipment purchases and provides for interest at the bank’s prime rate of interest plus 1.0%. Borrowings under the equipment line of credit are being paid over a period of thirty months. The third agreement is a $500,000 equipment line of credit. This loan funds equipment purchases and provides for interest at the bank’s prime rate of interest plus 0.75%. Borrowings under the equipment line of credit, if any, will be paid over a period of thirty-five months. The Company has not had any borrowings under this equipment loan as of March 31, 2007. The capital equipment borrowings are secured by the fixed assets that were acquired.

Note Payable

On February 9, 2007, the Company entered into a note payable for $108,800 with First Insurance Funding Corp. The note bears interest at an annual rate of 7.15% and principle and interest payments are due in ten monthly installments from the date of issue through December 9, 2007.

7. Contingencies

From time to time, the Company may become involved in various legal actions, administrative proceedings and claims in the ordinary course of its business. Although it is not possible to predict with certainty the outcome of such legal actions or the range of possible loss or recovery, based upon current information, management believes such legal actions will not have a material effect on the financial position or results of operations of the Company.

On July 17, 2006 the Company was informed that an action was filed by a company alleging that the Company had infringed on its patent. The plaintiff alleging infringement has not specified damages so management is unable to estimate a potential range of loss, if any. Management intends to vigorously contest the action. No assurance can be given as to the outcome of this litigation.

8. Stockholders’ Equity

Outstanding Warrants

The Company’s outstanding warrants were issued in two transactions. CEA sold 4,025,000 units (the Units) in its initial public offering in 2004. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two warrants. In connection with this initial public offering, the CEA issued an option for $100 to the representative of the underwriters to purchase 350,000 Units at an exercise price of $9.90 per Unit. In connection with the CEA merger, the Company also issued to shareholders of etrials warrants to purchase 4,300,000 Warrants as part of the merger consideration.

At December 31, 2006 and March 31, 2007, the Company had outstanding 12,350,000 warrants to purchase common stock. Each warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 per share on the terms and conditions set forth in the warrants and the warrant agreement governing the warrants. The warrants expire on February 12, 2008, unless redeemed before that time. The warrants are redeemable at the option of the Company at a price of $.01 per warrant upon 30 days notice by the Company after the warrants become exercisable, only in the event that the last sale price of the common stock of the Company is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to date on which notice of redemption is given.

In addition, 700,000 warrants underlying an underwriters’ purchase option are subject to the same terms and conditions as the outstanding warrants of the Company described above, except that the exercise price is $6.40 per share. The exercise price and number of units issuable upon exercise of the undewriters’ purchase option may be adjusted in certain circumstances, including issuances of a stock dividend, recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances at a price below its exercise price. The holders of the underwriters’ purchase option have demand and piggy-back registration rights under the Securities Act for periods of five and seven years, respectively, from the date of the initial public offering of the Company with respect to registration of the securities directly and indirectly issuable upon exercise of the underwriters’ purchase option.

As of March 31, 2007, the Company had reserved a total of 16,519,644 of its authorized 50,000,000 shares of common stock for future issuance as follows:

Unit purchase options (See Note 1)			1,050,000
Stock options outstanding			2,794,744
Reserved for future stock option grants			324,900
Common stock warrants outstanding			12,350,000

Total shares reserved for future issuance			16,519,644

9. Stock Based Compensation

Effective with the adoption of SFAS No. 123R, the Company has elected to use the Black-Scholes-Merton option pricing model to determine the weighted average fair value of options granted. The Company has a limited trading history for its common stock as it began trading on the NASDAQ National Market on February 10, 2006. Accordingly, the Company has determined the volatility for options granted in 2006 based on an analysis of reported data for a peer group of companies that have issued stock options with substantially similar terms. The expected life of options granted by the Company has been determined based upon the “simplified” method as allowed under the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”) and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures. As a result, using historical data among other factors, the Company has applied an estimated forfeiture rate of 5.93% in determining the expense recorded in the Company’s consolidated statement of operations.

The weighted average exercise price of options granted during the three months ended March 31, 2007 was $3.69. There were no options granted during the three months ended March 31, 2006. The weighted-average assumptions utilized to determine the above values are indicated in the following table:

	Three Months Ended March 31,
	2007
Expected dividend yield	0%
Expected volatility	100%
Risk-free interest rate	4.8%
Expected life (in years)	4.00

During the three months ended March 31, 2007, the Company recorded $256,902 of stock-based compensation expense, of which $245,470 was related to options issued subsequent to the adoption of SFAS No. 123R. The compensation expense recorded during the three months ended March 31, 2007 reduced both basic and diluted earnings per share by $0.02. As of March 31, 2007, there was $2,586,626 of unrecognized compensation expense related to non-vested share awards issued under SFAS No. 123R that is expected to be recognized over a weighted-average period of 2.81 years. Net cash provided by operating and financing activities was unchanged for the period ended March 31, 2007, since there were no excess tax benefits from stock-based compensation plans. The remaining stock-based compensation expense is due to the amortization of previously recorded deferred compensation, for stock options that have continued to be accounted for under APB Opinion No. 25 in accordance with the prospective transition method of SFAS 123R. As of March 31, 2007, there was $92,670 of deferred compensation recorded related to such options.

The following summarizes the activity of the Plan for the three months ended March 31, 2007:

								Weighted
								Average
				Weighted		Aggregate		Remaining
	Number of			Average		Intrinsic		Contractual
	Shares			Exercise Price		Value		Term (yrs)
Outstanding at December 31, 2006		2,775,914		$	2.37
Granted		58,000			3.69
Exercised		(24,212	)		1.88
Canceled		(14,958	)		4.11
Outstanding at March 31, 2007		2,794,744		$	3.84	$	3,938,722	$	5.24
Exercisable at March 31, 2007		1,369,303		$	2.70	$	3,228,284	$	5.48
Vested or expected to vest at March 31, 2007						$	3,228,284

The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 were $43,114 and $1,675, respectively.

Selected information regarding stock options as of March 31, 2007 is as follows:

			Options Outstanding			Options Exercisable
				Weighted
				Average	Weighted		Weighted
				Remaining	Average		Average
			Number of	Life	Exercise	Number of	Exercise
Exercise Price			Shares	(in Years)	Price	Shares	Price
$0.57	-	$1.14	55,120	2.50	$0.91	55,120	$0.91
$1.14	-	$1.71	158,201	4.09	1.63	158,201	1.63
$1.71	-	$2.28	1,038,196	6.36	2.02	848,168	1.99
$3.43	-	$4.00	58,000	4.82	3.69	-	-
$4.00	-	$4.57	251,318	6.09	4.34	35,478	4.35
$4.57	-	$5.14	58,909	8.48	5.08	17,224	5.08
$5.14	-	$5.71	1,175,000	4.21	5.71	255,112	5.71
			2,794,744	5.24	$3.84	1,369,303	$2.70

A summary of the activity of the Company’s unvested stock options is as follows:

				Weighted Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2006		1,472,356		$	2.91
Granted		58,000			2.63
Vested		(91,955	)		2.46
Forfeited		(12,960	)		2.94
Unvested at March 31, 2007		1,425,441		$	2.93

10. Income Taxes

The Company adopted the provisions of FIN 48, an interpretation of the SFAS 109, Accounting for Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007 the Company had no unrecognized tax benefits which would affect the Company’s effective tax rate. At March 31, 2007, the Company had no unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. As of the date of adoption, January 1, 2007 and as of March 31, 2007, the Company had no accrued interest related to uncertain tax positions.

The Company has its tax years of 2003 - 2006 open to examination by federal tax and 2001 - 2006 for state tax jurisdictions. The Company’s only foreign subsidiary is in the United Kingdom and it has its tax years of 2005 - 2006 open to examination. The Company has not been informed by any tax authorities for any jurisdiction that any of its tax years are under examination as of March 31, 2007.

The Company has no current provision for income taxes. Due to the history of losses by the Company, management has determined that a valuation allowance is needed to reduce the net deferred tax assets to zero.

The Company has operating loss carryforwards for federal tax purposes of approximately $26.3 million and $25.4 million at December 31, 2006 and 2005, respectively, expiring beginning in 2010. The Company has state net operating losses of approximately $15.6 million and $14.3 million at December 31, 2006 and 2005, respectively, available to offset future state taxable income, expiring beginning in 2010.

At December 31, 2006, the Company no longer qualified to use the cash method of accounting for tax purposes under the Small Business Taxpayer Exemption. An adjustment was made under IRC Section 481 to convert the Company to the accrual method for tax purposes and since this adjustment was negative, it is included in the 2006 tax return and no deferred tax asset or liability exists for accrual to cash conversion at December 31, 2006.

Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses carried forward may be impaired or limited in certain circumstances. Events which might cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative change in ownership of more than 50% over a three-year period.

The American Jobs Creation Act of 2004 added section 409A to the Internal Revenue Code. Section 409A provides that all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. Generally, these new rules are effective for amounts deferred after December 31, 2004. Management has reviewed these requirements and believes all requirements have been met. Actual results could differ.

11. Recently Issued Accounting Pronouncement

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company is currently analyzing the effect, if any, SFAS No. 157 will have on the Company’s consolidated financial position and results of operations.

In February 2007, the FASB released SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently analyzing the effect, if any, SFAS No. 159 will have on the Company’s consolidated financial position and results of operations.

Item 2. Management’s Discussion and Analysis

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-QSB. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-QSB, as well as in our Form 10-KSB filed on March 30, 2007.

Overview

We offer a broad range of Web-based electronic data capture, handheld device, and interactive voice recognition software and services uniquely designed to speed the process of clinical trials performed for drug development. Our primary focus is on the costly and time-consuming clinical trial phase of drug development. We provide pharmaceutical and biotechnology companies with integrated software tools and services designed to significantly reduce the time spent collecting clinical trials data, managing clinical trials performance, and which provides an automated and easy-to-use mechanism to collect data directly from clinical investigators and patients. We believe that our automated data collection software enables our customers to reduce overall clinical trial research costs, enhance existing data quality and time to close a study database.

Our operations are subject to certain risks and uncertainties, including among others, rapid technological change, increased competition from existing competitors and new entrants, lack of operating history, and dependence upon key members of the management team. The operating results are also affected by general economic conditions affecting the pharmaceutical and biotechnology industry.

Industry analysts and commentators have estimated that the growth in the use of eClinical technologies will continue to accelerate. We will have to continue to expand our customer base and technologies in order to maintain and grow our market share. Since 2002 the number of active eClinical trials being performed by us has grown from approximately 24 to 100 because of the increased adoption of eClinical technologies by the pharmaceutical and biotechnology industries.

Sources of Revenues

We derive revenues from providing software application-hosting and related services to our customers on clinical trial projects. We offer our eClinical solutions through an application service provider model. Revenues resulting from our professional services and software application-hosting, which include hosting fees and software usage fees, are generated in three stages of drug development for each clinical trial. The first stage (development and deployment) includes trial and application setup, including design of electronic case report forms and edit checks, investigator site training, and implementation of the system and server configuration. The second stage (study conduct) consists of project management services, application hosting and related professional and support services. The third stage (close out) consists of services required to close out, or lock, the database for the clinical trial and deliver final data sets to the client.

Software subscriptions and usage fees and hosting fees revenues - We derive our software subscriptions and usage fees and hosting fees revenues from our eClinical solution suite, which includes primarily our electronic data capture, electronic patient diaries, interactive voice response and post marketing solutions.

Services revenue - We provide our customers a full range of professional services in support of our eClinical software solutions. These services are delivered during all three stages of the clinical trial as further described below.

•

First stage— trial and application setup, including design of electronic case report forms and edit checks, installation and server configuration of the system;

•

Second stage— consists of project management services, application hosting and related professional and support services; and

•

Third stage— services required to close out, or lock, the database for the clinical trial.

Services provided for all three stages are generally on a fixed fee basis as per the budget assumptions specified in the contract. If budget assumptions change, etrials and the client generally agree to a change in scope amendment to the contract. Revenues from services are recognized utilizing the proportional performance method, measured principally by the total labor hours incurred as a percentage of estimated total labor hours for each contract. This method is used because management considers total labor hours incurred to be the best available measure of progress on these contracts. The company records a loss for its contracts at the point it is determined that the total estimated contract costs will exceed management’s estimates of contract revenues. No such losses have been incurred to date.

Billing for eClinical services will occur over the life of the contract. Although the billing increments are negotiated in each contract individually, the total value of the agreement is generally invoiced in the following increments:

Stage				% of Contract Value
Contract execution				25%
System deployment				25%
Study conduct				40%
Project close out				10%

Total Contract Value				100%

Customers generally have the ability to terminate contracts upon 30 days notice to us. In the event that a customer cancels a clinical trial and its related task order, all deferred revenue is recognized and certain termination related fees may be charged.

We record new projects into backlog when we receive from clients written confirmation that they have decided to award us contracts or work orders for specific projects, which means that our backlog includes projects for which we do not have contracts or project work orders signed by customers. The amount of backlog is the total amount of the project budget agreed upon by the client and us less revenue previously recognized by us on each project. Customer delays in conducting clinical trials and the ability of customers to cancel projects without penalty means that our backlog is not a guaranty as to the amount or timing of future revenue.

Cost of Revenues and Operating Expenses

We allocate overhead expenses such as rent, occupancy charges, certain office administrative costs, depreciation and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in the costs of revenues, sales and marketing, research and development, and general and administrative expense categories. Overhead costs that can be specifically identifiable back to the applicable functional area are charged to the functional area that it belongs to.

Costs of Revenues - Costs of revenues consists primarily of compensation and related fringe benefits for project-related personnel, department management and all other dedicated project related costs and indirect costs including facilities, information systems, hosting facility fees, server depreciation, amortization of capitalized internal software development costs, software license and royalty costs and other costs. Costs can fluctuate and impact our expenses based upon employee utilization levels associated with specific projects.

Reimbursable Out-of-pocket Revenues - Reimbursable out-of-pocket revenues and corresponding expenses consist of client pass-through costs which can fluctuate quarterly based upon contract activity.

Sales and Marketing - Sales and marketing expenses consist primarily of employee-related expenses, including travel, marketing programs (which include product marketing expenses such as trade shows, workshops and seminars, corporate communications, other brand building and advertising), allocated overhead and commissions. We expect that sales and marketing expenses will increase as we expand and further penetrate our customer base, expand our domestic and international selling and marketing activities associated with existing and new product and service offerings, build brand awareness and sponsor additional marketing events.

Research and Development - Research and development expenses consist primarily of employee-related expenses, allocated overhead and outside contractors. We have historically focused our research and development efforts on increasing the functionality, performance and integration of our software products. We expect that in the future, research and development expenses will increase as we introduce additional integrated software solutions to our product suite. We capitalize certain internal software development costs for new software products and releases, which are incurred during the application development stage and amortize them over the software’s estimated useful life of one to three years. The amortization of such capitalized costs is included in costs of revenues.

General and Administrative - General and administrative expenses consist primarily of employee-related expenses, professional fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase as we add personnel and incur additional professional fees and insurance costs related to being a publicly held company. We also expect to incur significant legal costs to defend the patent related lawsuit recently commenced against us, which will adversely impact general and administrative expenses in future periods.

Amortization of Intangible Assets - Our amortization costs of intangible assets represents the amortization on a straight-line basis of acquired technologies over their estimated useful lives, which is typically three years.

Stock-Based Compensation Expenses - Our operating expenses include stock-based compensation expenses related to the fair value of options issued to non-employees and option grants to employees in situations where the exercise price is determined to be less than the deemed fair value of our common stock at the date of grant. Operating expenses also include stock-based compensation expense in accordance with SFAS 123R.

Foreign Currency

The reporting currency for the Company is the U.S. dollar. Effective April 1, 2006, following a restructuring of the Company’s foreign subsidiary in the United Kingdom, the Company has determined that the functional currency of its United Kingdom operations is the U.S. dollar. Prior to April 1, 2006 the functional currency of its United Kingdom operations was the local currency.

The financial statements of the Company’s foreign subsidiary in the United Kingdom are translated in accordance with SFAS No. 52, Foreign Currency Translation. Prior to April 1, 2006 assets and liabilities denominated in foreign currencies were translated into U.S. dollars at current exchange rates. Operating results were translated into U.S. dollars using the average rates of exchange prevailing during the period. Gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive income in stockholders’ equity (deficit). Effective April 1, 2006 remeasurement adjustments for non-functional currency monetary assets and liabilities are included in other income (net) in the accompanying consolidated statements of operations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are regularly

monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. These estimates include, among others, our revenue recognition policies related to the proportional performance methodology of revenue recognition of contracts and assessing our goodwill for impairment annually. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. Actual results will differ and may differ materially from the estimates if past experience or other assumptions do not turn out to be substantially accurate.

Our significant accounting policies are presented within Note 2 to our consolidated financial statements as filed with the SEC on Form 10-KSB on March 30, 2007, and the following summaries should be read in conjunction with the unaudited consolidated financial statements and the related notes included in this Quarterly Report. While all accounting policies impact the financial statements, certain policies may be viewed as critical. Critical accounting policies are those that are both most important to the portrayal of financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Our management believes the policies that fall within this category are the policies on revenue recognition, accounting for stock-based compensation, goodwill and income taxes.

Revenue Recognition

We derive our revenues from providing software application-hosting and related services. Revenues resulting from application hosting services are recognized in accordance with Emerging Issues Task Force (EITF) Issue No. 00-03, Application of AICPA Statement of Position 97-2 to Arrangements that include the Right to Use Software Stored on Another Entity’s Hardware and Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) Nos. 101 and No. 104, Revenue Recognition. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

We offer our eClinical software products through an application service provider model. The revenues generated from services, software subscriptions and usage fees, hosting fees and other fees, in three stages for each clinical trial. The first stage (development and deployment) includes trial and application setup, including design of electronic case report forms and edit checks, investigator site training, implementation of the system and server configuration. The second stage (study conduct) consists of project management services, application hosting and related professional and support services. The third stage (close out) consists of services required to close out, or lock, the database for the clinical trial and deliver final data sets to the client.

Services provided during the three phases of clinical trials are typically earned under fixed-price contracts. Although we enter into master agreements with each customer, the master agreements do not contain any minimum commitment by customers and contain general terms and conditions. All services and revenues are covered by separately negotiated addendums called task orders. Revenues generated from each project or task order are generally recognized using the proportional performance method, measured principally by the total labor hours incurred as a percentage of estimated total labor hours for each contract. This method is used because management considers total labor hours incurred to be the best available measure of progress on these contracts. The estimated total labor hours of contracts are reviewed and revised periodically throughout the duration of the contracts with adjustment to revenues from such revisions being recorded on a cumulative basis in the period in with the revisions are made. When estimates indicate a loss, such loss is recognized in the current period in its entirety. Because of the inherent uncertainties in estimating total labor hours, it is reasonably possible that the estimates will change in the near term and could result in a material change.

Customers generally have the ability to terminate contracts upon 30 days written notice. In the event that a customer cancels a clinical trial and its related task order, deferred revenue is recognized for the work performed prior to termination and certain termination related fees may be charged. Consequently, termination of a contact may result in us recognizing more revenue during the period in which the termination occurs.

Deferred revenue represents amounts billed or cash received in advance of revenue recognition. Included in accounts receivable are unbilled accounts receivable, which represent revenue recognized in excess of amounts billed.

Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses become probable and can be reasonably estimated. To date, we have not experienced any material losses on uncompleted contracts.

The Company generally does not require collateral as a substantial amount of the revenues are generated from recurring customers. Management performs periodic reviews of the aging of customer balance, the current economic environment and its industry experience and establishes an allowance on accounts receivable based on these reviews.

The following summarizes the components of our revenues:

	Three Months Ended March 31
	2007		2006
Services	$	3,030,201	$	1,740,885
Software subscriptions and usage fees		684,130		628,056
Hosting fees		362,677		336,696
Net service revenues		4,077,008		2,705,637
Reimbursable out-of-pocket revenues		644,847		54,026
Total	$	4,721,855	$	2,759,663

We account for pass-through expenses in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF No. 01-14). EITF No. 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in the statement of operations.

In connection with a software application-hosting agreement entered into on April 1, 2005, we issued to a customer 220,840 shares of etrials’ common stock with an estimated fair value of $1.26 million. Of the 220,840 shares issued, 98,151 were issued immediately and the remaining 122,689 shares of common stock were placed in escrow. In the event the customer terminated certain agreements during a three year period, all or part of the shares held in escrow would be forfeited. EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), requires that the value of the common stock be treated as a reduction in revenue. The fair value of the 98,151 shares of non-forfeitable common stock was recorded to common stock and additional paid-in capital and to prepaid software application-hosting discount, a contra-equity account. The prepaid software application-hosting discount was originally reduced on a straight-line basis over the three year term of the agreement, offsetting revenue generated under the agreement. In accordance with EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Non-employee, the fair value of the 122,689 shares of forfeitable common stock held in escrow were treated as unissued for accounting purposes until the future services are provided and the shares are vested. Accordingly, the fair value of the 122,689 shares of forfeitable common stock were originally recorded to additional paid-in capital as the reduction to revenue was recorded on a straight-line basis over the three year term of the agreement. In accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services, the fair value of the common stock was remeasured at each interim reporting date during the three-year performance period with changes in fair value reflected as a cumulative adjustment.

Effective February 8, 2006, etrials amended the software application-hosting agreement previously entered into with a customer on April 1, 2005. Under the terms of the amendment etrials released from escrow 40,897 shares and terminated 81,792 shares of common stock, which were previously held in escrow, resulting in a total of 139,048 shares issued to this customer. As a result of this amendment, there are no longer any shares held in escrow and the shares issued are no longer subject to forfeiture should the customer terminate certain agreements. In conjunction with this application-hosting agreement we recorded as a discount to revenue $198,333 and $396,666 for the three and nine months ended September 30, 2005, respectively. In conjunction with this amended software-application hosting agreement, the Company recorded a reduction to revenues of $334,339 during the three months ended March 31, 2006, which reflects the fair value of the total shares of common stock issued to the customer as of February 8, 2006 less the discounts previously recorded.

Accounting for Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share Based Payment (SFAS 123R). SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements using the fair value method. The provisions of SFAS 123R are effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (January 1, 2006 for the Company). The impact of adoption of SFAS 123R will depend on levels of share-based payments granted in the future. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The Company will recognize excess tax benefits when those benefits reduce current income taxes payable.

The Company used the minimum-value method as a non-public company to estimate the fair value of stock awards under SFAS 123 for pro forma footnote disclosure purposes, the Company was required to adopt SFAS 123R using the “prospective-transition” method upon the effective date. Under the prospective method, nonpublic entities that previously applied SFAS 123 using the minimum-value method whether for financial statement recognition or pro forma disclosure purposes will continue to account for non-vested equity awards outstanding at the date of adoption of SFAS 123R in the same manner as they had been accounted for prior to adoption (APB 25 intrinsic value method for the Company). All awards granted, modified, or settled after the date of adoption are accounted for using the measurement, recognition, and attribution provisions of SFAS 123R. The Company has continued to recognize compensation expense for awards issued prior to the adoption of SFAS 123R in accordance with the provisions of APB 25.

Goodwill

We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment at least annually and written down and charged to operations only in the periods in which the recorded value of goodwill and certain intangibles exceeds its fair value. We have elected to perform our annual impairment test in November of each calendar year. An interim goodwill impairment test would be performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For purposes of performing the goodwill impairment test, we concluded there is one reporting unit. During November 2006, we completed the required annual test, which indicated there was no impairment.

Accounting for Income Taxes

In connection with preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the assessment of our net operating loss carryforwards and credits, as well as estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on historical results, we believe that it is more likely than not that we will not realize the value of our deferred tax assets and therefore have provided a full valuation allowance against our net deferred tax assets as of March 31, 2007.

Results of Operations

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Net service revenues increased 50.7% to $4,077,008 for the three months ended March 31, 2007 as compared to $2,705,637 for the three months ended March 31, 2006. The increase in revenues is primarily the result of the timing and size of new clinical project deployments in process during the period.

Reimbursable out-of-pocket revenues and corresponding expenses increased to $644,847 from $54,026 for the three months ended March 31, 2007 and 2006, respectively. This increase is primarily the result of diary hardware costs related to new electronic patient diary trials commenced in the three months ended March 31, 2007.

Costs of revenues increased 32.5% to $2,176,303 from $1,642,275 for the three months ended March 31, 2007 and 2006, respectively. This increase was primarily the result of operations personnel increasing approximately 35% to 74 from 55 as of March 31, 2007 and 2006, respectively. As a percentage of net service revenues, costs of revenues decreased to 53.4% from 60.7% for the three months ended March 31, 2007 and 2006, respectively.

Sales and marketing costs increased 42.8% to $1,171,885 from $820,654 for the three months ended March 31, 2007 and 2006, respectively. This increase was primarily the result of increased marketing expenses and sales travel related to the Company’s goal of increasing new projects additions during 2007. As a percentage of net service revenues, sales and marketing costs decreased to 28.7% from 30.3% for the three months ended March 31, 2007 and 2006, respectively.

General and administrative costs increased by 59.9% to $1,472,475 from $920,668 for the three months ended March 31, 2007 and 2006, respectively. This increase was primarily the result of $222,854 non-cash stock-based compensation expense in accordance with SFAS 123R, costs associated with being a public company, and approximately $177,000 in patent infringement litigation costs. We expect patent litigation costs will continue to increase during the remainder of 2007. As a percentage of net service revenues, general and administrative expenses increased to 36% from 34% for the three months ended March 31, 2007 and 2006, respectively.

Amortization of intangible assets consists of amortization of acquired software technologies over their estimated useful life of three years. These costs were $11,398 and $54,223 for the three months ended March 31, 2007 and 2006, respectively. These costs declined since certain intangible assets were fully amortized in early 2006.

Research and development costs declined by 2.8% to $418,179 from $430,211 for the three months ended March 31, 2007 and 2006, respectively. The decrease was primarily attributable to the capitalization of internal software development costs during the quarter. As a percentage of net service revenues, research and development expenses decreased to 10.3% from 15.9% for the three months ended March 31, 2007 and 2006, respectively.

Other income for the three months ended March 31, 2007 was $233,075 as compared with $115,245 for the three months ended March 31, 2006. The change is primarily the result of interest income on the cash received in the CEA merger on February 10, 2006.

We experienced a net loss of $940,157 compared with net loss of $1,047,149 for the three months ended March 31, 2007 and 2006, respectively. The net loss for the three months ended March 31, 2007 was impacted primarily by increased revenues and interest income partially offset by non-cash stock-based compensation expense (approximately $257,000), costs associated with being a public company, and approximately $177,000 of legal costs related to a patent infringement lawsuit (see Part II - Item 1) .

Net loss attributable to common stockholders was $940,157 for the three months ended March 31, 2007 as compared with net loss attributable to common stockholders of $2,173,118 for the three months ended March 31, 2006. The three months ended March 31, 2006 included conversion of common stock warrants and accretion of preferred stock dividends of $1,125,969 for the three months ended March 31, 2006.

Liquidity and Capital Resources

Our principal sources of cash have been from revenues from software application-hosting and related services as well as from proceeds from the issuance of various debt instruments and the sale of equity securities.

At March 31, 2007 we had cash, cash equivalents and short-term investments of approximately $19.7 million. Our cash, cash equivalents and short-term investments decreased by approximately $304,000 during the three months ended March 31, 2007 primarily due to the purchase of property, equipment and inventory.

In the three months ended March 31, 2007 and 2006 operating activities used approximately $128,000 and $273,000 of net cash, respectively. The decrease in net cash used in operating activities was primarily due to a reduced net loss and an increase in accounts receivable, prepaid and non-cash expenses and inventory partially offset by an increase in accounts payable, and accrued expenses.

In the three months ended March 31, 2007 and 2006, investing activities provided approximately $1.4 million and used approximately $171,000 of net cash, respectively. The increase is primarily attributable to the net sales of $2,290,000 of short-term investment offset by approximately $696,000 in purchases of property and equipment. The Company has capitalized $173,842 and $102,108 of internal software development costs during the three months ended March 31, 2007 and 2006, respectively.

In the three months ended March 31, 2007 approximately $689,400 of net cash was provided by financing activities, as compared to approximately $19.6 in the three months ended March 31, 2006. The decrease was primarily the result of the net cash received in connection with the CEA merger in 2006.

We intend to continue to fund the enhancement and expansion of the etrials eClinical software technologies through both internal development and acquiring additional complementary technologies in the future. We believe our existing cash, cash equivalents, short-term investments, and cash provided by operating activities and our debt facilities will be sufficient to meet our working capital and capital expenditure needs over the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new services and enhancements to existing services, and the continuing market acceptance of our services. To the extent that existing cash and securities and cash from operations, are insufficient to fund our future activities, including potential acquisitions of complementary eClinical technology companies, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Our backlog was approximately $19.8 million at March 31, 2007 compared to $17.7 million at December 31, 2006 and $24.8 million at March 31, 2006. Our backlog includes both projects covered by contracts and projects for which customers have provided written confirmation that they have decided to award contracts or work orders to us for a specific project. The increase in backlog since December 31, 2006 is primarily the result of an increase in new project bookings during the quarter (approximately $6.6 million of new project bookings during the first quarter of 2007 compared to $2.8 million during the first quarter of 2006) and a decrease in project cancellations experienced in 2007 as compared to 2006 (approximately $380,000 of cancellations during the first quarter of 2007 compared to $3.6 million during the first quarter of 2006). Project cancellations, which can be made by customers without penalty, are a normal part of the clinical research services industry and occur for a variety of reasons outside our control. Some examples of reasons for cancellations are noted below:

The FDA can request changes in a clinical trial program - additional Phase II trials may be requested before Phase III trials may begin;

Mergers and acquisitions - client companies can be acquired and the resulting review of clinical programs can result in project cancellations due to similar compounds in development by each company;

Short project start timelines can result in client decisions to utilize paper instead of eClinical technologies which require longer start times;

Adverse and serious adverse reactions to the study drug;

Poor results or lack of statistically significant performance of drug in active trials based upon interim analysis;

Adjustments of future subscription license commitments based upon actual usage during prior contract year.

Contractual Obligations

We do not have any special purpose entities or any other off balance sheet financing arrangements. We have operating leases for office space and office equipment and a capital lease for the purchase of third party software, which are described below.

We generally do not enter into binding purchase commitments. Our principal commitments are primarily for leases for office space and equipment and a capital lease for the purchase of third party software. At March 31, 2007, the future minimum payments under these commitments were as follows:

Periods Ending December 31,	Capital Leases			Operating Leases

2007		49,520			448,448
2008		31,676			607,098
2009		26,642			615,081
2010		122			602,168
2011		-			419,125
2012 and thereafter		-			490,898
Total required lease payments	$	107,960		$	3,182,818
Less interest included		(13,899	)		-
Total minimum payments		94,062		$	3,182,818
Current portion of capital lease		50,195
Long term portion of capital lease	$	43,867

As of February 1, 2005 and as amended on May 31, 2006, we entered into a revolving account receivable line of credit with RBC Centura Bank under which we can borrow up to $2,000,000. In addition we also have two capital equipment lines with the same bank under which we can borrow up to $300,000 and $500,000 respectively. Interest accrues and is paid monthly at the prime rate of interest plus 0.25% for the accounts receivable revolving line of credit and at the prime rate plus 1.0% and 0.75% for the fixed asset lines of credit. Borrowings under the equipment line of credit are payable in monthly principle and interest payments over a 30 month and 35 month period, respectively. The revolving line of credit expires on May 31, 2007 at which time all advances will be immediately due and payable unless the line is renewed. As of March 31, 2007, we had $1,140,000 outstanding under the accounts receivable line of credit and $110,000 outstanding under the capital equipment lines.

Working capital borrowings are secured primarily by our accounts receivable while capital equipment borrowings are secured by the fixed assets that were acquired. Under the terms of these credit lines, we are required to comply with certain financial covenants. To the extent we are unable to satisfy those covenants in the future, we will need to obtain waivers to avoid being in default of the terms of these credit lines. If an unwaived default occurs, the bank may require that we repay all amounts then outstanding. We expect that we will have sufficient resources to fund any amounts which may become due under these credit lines as a result of a default by us or otherwise. However, any amounts which we may be required to repay prior to a scheduled repayment date would reduce funds that we could otherwise allocate to other opportunities that we consider desirable.

Inflation

To date, we believe that the effects of inflation have not had a material adverse effect on our results of operations or financial condition.

Certain Factors Which May Affect Future Results

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

Forward Looking Statements and Risks

We believe that some of the information in this document constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in this Report.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in “Risk Factors” in our Current Report on Form 10-KSB filed on March 30, 2007, which could materially affect our business, financial condition or future results. The risks described in that Form 10-KSB are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

A company brought a patent infringement action against us in July 2006. See Item 1 of Part II of this Report. We expect to incur substantial litigation costs during the remainder of 2007 as this case has moved into the discovery phase on May 1, 2007. We intend to vigorously defend our rights in this case. Many patents have been issued in our industry, some of which have been asserted in litigation. We expect intellectual property disputes and related litigation costs will be an ongoing risk to us. The risks that are most likely to cause unexpected adverse quarterly operating performance affects include project delays or cancellations by customers due to changes in the clinical trials being conducted by our customers, over which we have no control and which can be made by our customers without financial penalties under our customer contracts. Such changes by customers represent an ongoing risk each quarter.

You can identify forward looking statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

•

discuss future expectations;

•

contain projections of future results of operations or financial condition; or

•

state other “forward-looking” information.

We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in this Report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements:

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.

All forward-looking statements included herein attributable to any of us, or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

Item 3. Controls and Procedures

An evaluation of the effectiveness of both our disclosure controls and procedures and of our internal control over financial reporting as of March 31, 2007 was made under the supervision and with the participation of management, including our chief executive officer and chief financial officer. The evaluations of our disclosure controls and procedures and our internal control over financial reporting include a review of the objectives, design and operation of the controls and the effect of the controls on the information generated for use in this Annual Report.

Based on that evaluation, we concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During our review of the quarter ended March 31, 2007 our management corrected a previously identified weakness at December 31, 2006 in our internal control over financial reporting related to our internal controls over the financial statement close process, especially in the area of appropriate accounting management review of certain critical accounts and the recognition of transactions in the proper accounting periods.

During 2007, we are continuing to enhance Company-wide policies and procedures intended to reasonably assure consistent and appropriate assessment and application of generally accepted accounting principles. We have also retained consultants and are recruiting additional experienced accounting personnel in order to strengthen our internal controls and enable the Company to implement Sarbanes Oxley compliance by the currently required compliance date.

Our management does not expect that our disclosure controls and procedures and our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not a party to any pending legal proceeding other than routine litigation that is incidental to our business, except as follows:

On July 17, 2006, Datasci, LLC filed a complaint against us in the U.S. District Court for the Baltimore District of Maryland (Civil Action No. MJG06CV1818). The complaint alleges infringement of United States Patent No. 6,496,827 entitled “Methods and Apparatus for the Centralized Collection and Validation of Geographically Distributed Clinical Study Data with Verification of Input Data to the Distributed System”. The Company intends to vigorously defend its rights. Discovery in the case began on May 1, 2007, and a trial date has not yet been scheduled. There can be no assurance as to the outcome of this case.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

No unregistered sales of securities were made during the quarter that were not previously reported on a Current Report on Form 8-K, except for stock option grants in the normal course of the Company’s business.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

The Exhibit Index that follows the signature page of the Report is hereby incorporated by 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.

	ETRIALS WORLDWIDE, INC.

May 14, 2007	By:	/s/ JOHN K. CLINE John K. Cline President, Chief Executive Officer and Director (Principal Executive Officer)

May 14, 2007	By:	/s/ JAMES W. CLARK, JR. James W. Clark, Jr. Chief Financial Officer (Principal Accounting and Financial Officer)

EXHIBIT INDEX

Exhibit	Description
3.1	Certificate of Incorporation of the Registrant. (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

3.1.1	Amended and Restated Certificate of Incorporation of the Registrant. (Incorporated by reference from Registration Statement No. 333-110365 on Form S-4 filed October 28, 2005).

3.2	Bylaws of the Registrant (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

4.1	Specimen Unit Certificate of Registrant (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

4.2	Specimen Common Stock Certificate of Registrant (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

4.3	Specimen Warrant Certificate of Registrant (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

4.4	Form of Unit Purchase Option. (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

4.5	Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant (Incorporated by reference from Registration Statement No. 333-110365 on Form S-1 filed November 10, 2003).

31.1	Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)*

31.2	Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)*

32.1	Certification of Principal Executive Officer and Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350*

*Filed herewith.

Etrials Worldwide Inactive 10QSB2007 Q1 Quarterly report (small business)