UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


             ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934


                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004


                         COMMISSION FILE NUMBER: 0-24249


                                    PDI, INC.
                                    ---------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                            22-2919486
----------------------------------                       -----------------------
 (STATE OR OTHER JURISDICTION OF                             (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)

                          SADDLE RIVER EXECUTIVE CENTRE
                                1 ROUTE 17 SOUTH
                             SADDLE RIVER, NJ 07458
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (201) 258-8450

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                          COMMON STOCK, $.01 PAR VALUE
                                (TITLE OF CLASS)

       INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X  NO __
                                              -

       INDICATE BY CHECK MARK IF  DISCLOSURE OF  DELINQUENT  FILERS  PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED  HEREIN,  AND WILL NOT BE CONTAINED,
TO THE BEST OF  REGISTRANT'S  KNOWLEDGE,  IN  DEFINITIVE  PROXY  OR  INFORMATION
STATEMENTS  INCORPORATED  BY  REFERENCE  IN PART  III OF THIS  FORM  10-K OR ANY
AMENDMENT TO THIS FORM 10-K. __

       INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 IN THE
ACT.) YES X  NO __
          -

       THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY  NON-AFFILIATES OF
THE REGISTRANT AS OF JUNE 30, 2004 WAS APPROXIMATELY $273,333,083.*

       THE NUMBER OF SHARES  OUTSTANDING OF THE REGISTRANT'S  COMMON STOCK, $.01
PAR VALUE, AS OF MARCH 4, 2005 WAS 14,735,415 SHARES.

                       DOCUMENTS INCORPORATED BY REFERENCE

       CERTAIN INFORMATION  REQUIRED BY PART III OF THIS REPORT,  (ITEMS 10, 11,
12, 13 AND 14),  IS  INCORPORATED  HEREIN  BY  REFERENCE  FROM THE  REGISTRANT'S
DEFINITIVE PROXY STATEMENT  RELATING TO THE ANNUAL MEETING OF SHAREHOLDERS TO BE
HELD IN  2005,  WHICH  DEFINITIVE  PROXY  STATEMENT  SHALL  BE  FILED  WITH  THE
SECURITIES AND EXCHANGE  COMMISSION  WITHIN 120 DAYS AFTER THE END OF THE FISCAL
YEAR TO WHICH THIS REPORT RELATES.

------------------
*  Excludes  the  Common  Stock  held  by  executive  officers,   directors  and
stockholders  whose ownership exceeds 5% of the Common Stock outstanding at June
30, 2004. This  calculation  does not reflect a determination  that such persons
are affiliates for any other purposes.

                                       1
<PAGE>


                                    PDI, INC.

                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS


                                                                            Page
PART I.........................................................................3
   Item 1.     Business........................................................3
   Item 2.     Properties.....................................................17
   Item 3.     Legal Proceedings..............................................18
   Item 4.     Submission of Matters to a Vote of Security Holders............19
PART II.......................................................................20
   Item 5.     Market for our Common Equity, Related Stockholder Matters
               and Issuer Purchases of Equity Securities......................20
   Item 6.     Selected Financial Data........................................20
   Item 7.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations......................................21
   Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.....40
   Item 8.     Financial Statements and Supplementary Data....................40
   Item 9.     Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosures......................................40
   Item 9A.    Controls and Procedures........................................40
   Item 9B.    Other Information..............................................40
PART III......................................................................41
   Item 10.    Directors and Executive Officers...............................41
   Item 11.    Executive Compensation.........................................41
   Item 12.    Security Ownership of Certain Beneficial Owners
               and Management....................................41
   Item 13.    Certain Relationship and Related Transactions..................41
   Item 14.    Principal Accounting Fees and Services.........................41
PART IV.......................................................................42
   Item 15.    Exhibits and Financial Statement Schedules.....................42



                      FORWARD LOOKING STATEMENT INFORMATION

         VARIOUS  STATEMENTS  MADE IN  THIS  ANNUAL  REPORT  ON  FORM  10-K  ARE
"FORWARD-LOOKING  STATEMENTS"  (WITHIN  THE  MEANING OF THE  PRIVATE  SECURITIES
LITIGATION  REFORM ACT OF 1995) REGARDING THE PLANS AND OBJECTIVES OF MANAGEMENT
FOR  FUTURE  OPERATIONS.  THESE  STATEMENTS  INVOLVE  KNOWN AND  UNKNOWN  RISKS,
UNCERTAINTIES  AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS,  PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,  PERFORMANCE
OR ACHIEVEMENTS  EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING  STATEMENTS.  THE
FORWARD-LOOKING  STATEMENTS  INCLUDED  IN  THIS  REPORT  ARE  BASED  ON  CURRENT
EXPECTATIONS  THAT  INVOLVE  NUMEROUS  RISKS  AND  UNCERTAINTIES.  OUR PLANS AND
OBJECTIVES ARE BASED, IN PART, ON ASSUMPTIONS  INVOLVING  JUDGMENTS ABOUT, AMONG
OTHER THINGS,  FUTURE  ECONOMIC,  COMPETITIVE  AND MARKET  CONDITIONS AND FUTURE
BUSINESS  DECISIONS,  ALL OF  WHICH  ARE  DIFFICULT  OR  IMPOSSIBLE  TO  PREDICT
ACCURATELY  AND MANY OF WHICH ARE BEYOND OUR  CONTROL.  ALTHOUGH WE BELIEVE THAT
OUR ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF
THESE  ASSUMPTIONS COULD PROVE INACCURATE AND,  THEREFORE,  WE CANNOT ASSURE YOU
THAT THE  FORWARD-LOOKING  STATEMENTS  INCLUDED  IN THIS REPORT WILL PROVE TO BE
ACCURATE.   IN  LIGHT  OF  THE   SIGNIFICANT   UNCERTAINTIES   INHERENT  IN  THE
FORWARD-LOOKING  STATEMENTS  INCLUDED IN THIS  REPORT,  THE  INCLUSION  OF THESE
STATEMENTS  SHOULD NOT BE  INTERPRETED  BY ANYONE THAT OUR  OBJECTIVES AND PLANS
WILL BE ACHIEVED.  FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY
AND  ADVERSELY  FROM THOSE  EXPRESSED OR IMPLIED BY  FORWARD-LOOKING  STATEMENTS
INCLUDE,  BUT ARE NOT  LIMITED  TO, THE  FACTORS,  RISKS AND  UNCERTAINTIES  (I)
IDENTIFIED OR DISCUSSED HEREIN, (II) SET FORTH UNDER THE HEADINGS "BUSINESS" AND
"RISK  FACTORS"  IN PART I, ITEM 1; "LEGAL  PROCEEDINGS"  IN PART I, ITEM 3; AND
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS"  IN PART II, ITEM 7, OF THIS ANNUAL  REPORT ON FORM 10-K,  AND (III)
SET FORTH IN THE  COMPANY'S  PERIODIC  REPORTS ON  AMENDED  ANNUAL  REPORT  FORM
10-K/A,  QUARTERLY  REPORT ON FORM 10-Q,  AMENDED  QUARTERLY  REPORTS ON 10-Q/A,
CURRENT  REPORTS ON FORM 8-K AND CURRENT REPORTS ON FORM 8-K/A AS FILED WITH THE
SECURITIES AND EXCHANGE  COMMISSION (SEC) SINCE JANUARY 1, 2004. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE PUBLICLY ANY  FORWARD-LOOKING  STATEMENTS FOR ANY
REASON.

                                       2
<PAGE>


PART 1

ITEM 1.  BUSINESS

SUMMARY OF BUSINESS

      We are a diversified  sales and  marketing  services  company  serving the
biopharmaceutical and medical devices and diagnostics (MD&D) industries.

      We create and execute sales and marketing programs intended to improve the
profitability of biopharmaceutical and MD&D products. We do this by working with
companies who recognize our ability to add value to their  products and maximize
their sales performance. We have a variety of agreement types that we enter into
with our clients.  In these  agreements,  we leverage our  experience  in sales,
medical  education and marketing  research to help our partners and clients meet
strategic and financial objectives.

      We have  assembled our commercial  capabilities  through  organic  growth,
acquisitions,  and internal  expansion.  These  capabilities can be applied on a
stand-alone or integrated basis.  This flexibility  enables us to provide a wide
range of marketing  and  promotional  options  that can benefit  many  different
products throughout the various stages of their life cycles.

      It is important for us to form strong  relationships with companies within
the biopharmaceutical  and MD&D industries.  Our focus is to achieve operational
excellence that delivers the desired product sales results.

      We are among the leaders in outsourced sales and marketing services in the
U.S.  We  have  designed  and  implemented   programs  for  many  of  the  major
pharmaceutical   companies   serving  the  U.S.  market.   Our  clients  include
AstraZeneca   PLC   (AstraZeneca),    GlaxoSmithKline   PLC   (GSK),    Novartis
Pharmaceutical Corporation (Novartis),  Pfizer Inc. (Pfizer) and Sanofi-Aventis,
AG  (Sanofi-Aventis)  as  well  as  many  small  and  specialty   pharmaceutical
companies.  Our  relationships  are built on consistent  performance and program
results.

      Our  clients  engage us on a  contractual  basis to design  and  implement
promotional  programs for both prescription and over-the-counter  products.  The
programs  are  designed to increase  product  sales and are tailored to meet the
specific  needs of the product  and the  client.  These  services  are  provided
predominantly on a fee for service basis. Occasionally,  there is an opportunity
for us to  earn  incentives  if we  meet  or  exceed  predetermined  performance
targets.  Contracts may also be terminated  for cause,  or we may incur specific
penalties if we fail to meet stated performance benchmarks.

REPORTING SEGMENTS AND OPERATING GROUPS

      During  the  fourth  quarter  of 2004 as a result  of our  acquisition  of
Pharmakon we restructured  certain management  responsibilities  and changed our
internal financial  reporting.  As a result of these changes, we determined that
our reporting segments were required to be amended.  Accordingly,  we now report
under the following three segments:  Sales Services,  Marketing Services and PDI
Products Group (PPG).

SALES SERVICES

      This segment includes  dedicated teams,  shared teams, MD&D contract sales
and MD&D  InServe  clinical  teams.  This  segment,  which  focuses  on  product
detailing and clinical education,  represented 91.2% of consolidated revenue for
the year ended December 31, 2004.

      Product  detailing  involves a representative  meeting  face-to-face  with
targeted  physicians and other healthcare decision makers to provide a technical
review of the product being  promoted.  Contract  sales teams can be deployed on
either a dedicated or shared basis.

o  Dedicated Teams
   ---------------

      A dedicated  contract sales team works exclusively on behalf of one client
and often carries the business cards of the client. The sales team is customized
to meet the specifications of our client with respect to representative profile,
physician targeting, product training, incentive compensation plans, integration
with  clients'  in-house  sales  forces,   call  reporting   platform  and  data
integration. Without adding permanent personnel, the client gets a high quality,
industry-standard sales team comparable to its internal sales force.

                                       3
<PAGE>


o  Shared Teams
   ------------

      Our shared sales teams sell multiple brands from different  pharmaceutical
companies.  Using these teams, we make a face-to-face selling resource available
to those clients that want an alternative to a dedicated  team. PDI Shared Sales
is a leading  provider of these  detailing  programs in the U.S. Since costs are
shared among various  companies,  these  programs may be less  expensive for the
client than  programs  involving a dedicated  sales  force.  With a shared sales
team, the client still gets targeted  coverage of its physician  audience within
the representatives' geographic territories.

o  MD&D Contract Sales
   -------------------

      We also  provide  contract  sales  services  within  the MD&D  market.  We
leveraged   our  knowledge   from  years  of  providing   sales  forces  to  the
pharmaceutical industry and applied it to our MD&D business. As a result, we now
offer the  provision of contract  sales  forces as one of the  services  that we
market to the MD&D industry to assist our clients in improving product sales.

o  MD&D Clinical Teams
   -------------------

      Our MD&D  Clinical  Teams group  provides an array of sales and  marketing
services to the MD&D  industry.  Its core  service is the  provision of clinical
after sales support teams. Our clinical after sales support teams employ nurses,
medical  technologists,  and other  clinicians  who train and  provide  hands-on
clinical education and after sales support to the medical staff of hospitals and
clinics that recently purchased our clients' equipment.  Our activities maximize
product  utilization and customer  satisfaction  for the medical  practitioners,
while  simultaneously  enabling  our  clients'  sales  forces to continue  their
selling activities instead of in-servicing the equipment.

MARKETING SERVICES

      This  segment,  which  includes  PDI  Education  and  Communications  (PDI
Edcomm), Pharmakon, and TVG Marketing Research and Consulting,  represented 8.0%
of consolidated revenue for 2004.

      PDI Edcomm provides medical  education and promotional  communications  to
the  biopharmaceutical and MD&D industries.  Using an expert-driven,  customized
approach,   we  provide  our  clients  with  integrated  advocacy   development,
accredited continuing medical education (CME), promotions,  publication services
and interactive sales initiatives to generate incremental value for products.

     We create custom designed  programs focusing on optimizing the informed use
of our  clients'  products.  Our services  are  executed  through a  customized,
integrated plan that can be leveraged across the product's entire life cycle. We
can meet a wide  range of  objectives,  including  advocacy  during  pre-launch,
communicating disease state awareness,  supporting a product launch,  helping an
under-performing  brand,  fending  off new  competition,  and  expanding  market
leadership.

     Pharmakon's  emphasis  is on the  creation,  design and  implementation  of
interactive  peer  persuasion  programs.  In the last five years,  Pharmakon has
conducted  over  20,000  peer   persuasion   programs  with  more  than  250,000
participants.  Pharmakon's peer programs can be designed as promotional,  CME or
marketing research/advisory programs. We acquired Pharmakon in August 2004.

     Each marketing program can be offered through a number of different venues,
including: teleconferences,  dinner meetings, "lunch and learns," and web casts.
Within each of our programs,  we offer a number of services including  strategic
design, tactical execution,  technology support,  moderator services and thought
leader management.

       TVG  Marketing  Research and  Consulting  employs  leading  edge, in some
instances  proprietary,  research  methodologies.  We  provide  qualitative  and
quantitative  marketing  research to  pharmaceutical  companies  with respect to
healthcare  providers,  patients  and managed  care  customers  in the U.S.  and
globally.  We offer a full range of pharmaceutical  marketing research services,
including  studies to identify the most impactful  business  strategy,  profile,
positioning,  message,  execution,  implementation and post implementation for a
product.  Our marketing  research  model  improves the knowledge  clients obtain
about how physicians  and other  healthcare  professionals  will likely react to
products.

                                       4
<PAGE>


      We utilize a systematic  approach to  pharmaceutical  marketing  research.
Recognizing  that every marketing  need, and therefore every marketing  research
solution,  is unique, we have developed our marketing model to help identify the
work that  needs to be done in order to  identify  critical  paths to  marketing
goals.  At  each  step of the  marketing  model  we can  offer  proven  research
techniques,  proprietary  methodologies  and customized study designs to address
specific product needs.

      In addition to  conducting  marketing  research,  we have trained  several
thousand  industry  professionals  at  our  public  seminars.  Our  professional
development seminars focus on key marketing processes and issues.

PDI PRODUCTS GROUP (PPG)

      The goal of the PPG segment has been to source biopharmaceutical  products
in  the  U.S.  through   licensing,   copromotion,   acquisition  or  integrated
commercialization  services  arrangements.  This  segment  represented  0.8%  of
consolidated revenue for 2004.

      Notwithstanding  the fact that we are shifting our strategy to deemphasize
the PPG  Segment  and  focus  on our  service  businesses  and  that we had only
approximately  $2.9  million in revenue  from the PPG segment of our business in
2004,  we may continue to review  opportunities  which may include  copromotion,
distribution arrangements, as well as licensing and brand ownership of products.
Revenue in 2004 was due to royalty  payments  received  from  Novartis  from the
Lotensin(R)  agreement  completed at the end of 2003.  See  complete  discussion
below in the  "Examples of  Significant  Contracts."  We do not  anticipate  any
revenue for 2005 from the PPG segment at this time.

HISTORY

      We commenced  operations as a contract sales  organization  in 1987.  From
1990 to 1995, contract sales became accepted in the pharmaceutical industry as a
tactical solution for a lower cost, high quality sales team. The representatives
were principally  flextime.  We were paid per call and there was little, if any,
risk sharing.

      The expansion of pharmaceutical field forces in general and the acceptance
of contract  sales by the  industry  were two main  drivers that fueled our high
growth  from  1996 to  2000.  Our  representatives  were  principally  full-time
employees,  and we provided a  compensation  package that was  competitive  with
those of the major  pharmaceutical  companies in order to attract higher quality
personnel and become a better provider of contract sales services.

      We completed  our initial  public  offering in May 1998.  In May 1999,  we
acquired TVG,  Inc.  (TVG) which gave us one of the leading  marketing  research
groups in the U.S. and a scientifically  focused medical  education  capability,
which we now refer to as PDI  Education and  Communication.  The addition of TVG
provided us with  incremental  growth  potential  as a result of the  additional
capabilities they provide.

      In August 1999, we added a shared sales capability through the acquisition
of ProtoCall, Inc. (ProtoCall),  now PDI Shared Sales. This addition provided us
with a lower cost product  offering and increased  business  opportunities  with
existing and new clients.  This offering also  supplemented  our dedicated sales
force capacity.

      In September 2001, we acquired InServe Support  Solutions  (InServe) which
provides  clinical  after sales support to the MD&D  industry.  InServe  employs
nurses,  medical  technologists,  and  other  clinicians  who  train  healthcare
practitioners  with respect to medical  equipment.  InServe informs and supports
the  end  users  of  medical   equipment,   with  the  objective  of  increasing
satisfaction  and utilization of the equipment.  The client benefits by reducing
the time its sales representatives spend on training and service, increasing the
time available for sales activity.

      In June 2000, we established LifeCycle Ventures, Inc. (LCV) to support our
agreements that require marketing and other commercial capabilities. Our initial
strategy,  in  response  to the market  dynamics  at the time,  was to  identify
under-promoted  brands within  pharmaceutical  companies' product portfolios and
put a focused promotional effort behind them, increasing product performance. In
the fourth  quarter of 2000, we entered into an exclusive  sales,  marketing and
distribution contract with GSK in support of Ceftin(R).

      From 2001 through 2003, we continued to identify late stage pharmaceutical
products  that could  benefit from focused  sales and  marketing  efforts.  Many
companies had products within their portfolios that were under-promoted and that
could  potentially  benefit from focused  sales and  marketing  efforts.  As the
dynamics within the industry changed,  affected by mergers and  acquisitions,  a
slowdown in the approval of new products,  and increased generic availability of
once large brands,  the  willingness of  pharmaceutical  companies to relinquish
commercial control of

                                       5
<PAGE>


products decreased.  During this period, we entered into a number of copromotion
agreements.  In 2001,  we entered into an  agreement  with Eli Lilly and Company
(Eli Lilly) to copromote Evista(R) in the U.S. In the fourth quarter of 2002, we
entered into two licensing arrangements,  one with Xylos Corporation (Xylos) and
one with Cellegy Pharmaceuticals,  Inc. (Cellegy). The Xylos arrangement was for
the  sales,  marketing  and  distribution  rights  for the  XCell(R)  wound care
products.  The Cellegy  agreement was for exclusive  North  American  rights for
Fortigel(TM),  a testosterone gel product.  Please refer to the subsection below
under "Contracts"  entitled  "EXAMPLES OF SIGNIFICANT  CONTRACTS" for a detailed
description of these contractual arrangements.

CORPORATE STRATEGY

      We are a diversified  sales and marketing  service  business,  serving the
biopharmaceutical  and MD&D  industries.  We intend to increase the value of our
company by investing  in the  businesses  we currently  have and to increase our
service offerings by internal development or through acquisitions.

CONTRACTS

      Our contracts are nearly all fee for service. They may contain operational
benchmarks,  such as a minimum amount of activity  within a specified  amount of
time. These contracts can include  incentive  payments that can be earned if our
activities generate results that meet or exceed performance  targets.  Contracts
may be  terminated  for cause or we may incur  specific  penalties if we fail to
meet stated performance benchmarks.

      SALES SERVICES

      The majority of our revenue is generated by contracts for dedicated  sales
teams.  These contracts are generally for terms of one to three years and may be
renewed or extended. The majority of these contracts, however, are terminable by
the client for any reason upon 30 to 90 days' notice. These contracts often, but
not always,  provide  for  termination  payments by the client upon  termination
without cause.  While such termination may result in the imposition of penalties
on the  client,  these  penalties  may not act as an adequate  deterrent  to the
termination  of any contract.  In addition,  these  penalties may not offset the
revenue we could have earned  under the  contract or the costs we may incur as a
result of its  termination.  The loss or  termination of a large contract or the
loss of multiple contracts could have a material adverse effect on our business,
financial condition and results of operations.

      MARKETING SERVICES

      Our marketing services  contracts  generally are for projects lasting from
three to six months.  The contracts  are  terminable by the client and typically
provide for termination  payments in the event they are terminated by the client
without cause.  Termination  payments  include payment for all work completed to
date,  plus the cost of any  nonrefundable  commitments  made on  behalf  of the
client.  Due to the typical size of these contracts,  it is unlikely the loss or
termination of any individual  contract would have a material  adverse effect on
our business, financial condition and results of operations.

      PPG

      The contracts  within the PPG segment have been  performance  based or fee
for service and some required sales,  marketing and distribution of product.  In
performance  based contracts,  we provide and finance a portion,  if not all, of
the  commercial  activities  in support of a brand in return for a percentage of
product  sales.  An important  performance  parameter  was normally the level of
sales  or  prescriptions  attained  by the  product  during  the  period  of our
marketing or promotional  responsibility,  and in some cases,  for periods after
our promotional activities have ended.

      EXAMPLES OF SIGNIFICANT CONTRACTS

      In the  fourth  quarter  of 2000,  we  entered  into a  performance  based
contract  with GSK. Our  agreement  with GSK was in support of Ceftin and was an
exclusive  sales,  marketing  and  distribution  contract.  The  agreement had a
five-year  term,  but was  cancelable by either party without cause on 120 days'
notice.  The agreement was terminated by mutual consent,  effective February 28,
2002, due to the unexpected loss of patent exclusivity for Ceftin.

      In May 2001, we entered into a copromotion agreement with Novartis for the
U.S. sales,  marketing and promotion  rights for Lotensin,  and Lotensin HCT(R).
Another product,  Lotrel(R), was promoted by the same sales force under the same
agreement,  but  was a  fee-for-service  arrangement.  On  May  20,  2002,  that
agreement was

                                       6
<PAGE>


replaced  by two  separate  agreements,  one for  Lotensin  and  another one for
Lotrel,  Diovan(R) and Diovan HCT(R).  Both agreements ran through  December 31,
2003; however, the Lotrel-Diovan  agreement was renewed on December 24, 2003 for
an additional one year period. In February 2004, we were notified by Novartis of
its intent to terminate the  Lotrel-Diovan  agreement  without cause,  effective
March 16, 2004. We continued to be compensated  under the terms of the agreement
through the effective  termination date. The Lotensin agreement called for us to
provide  promotion,  selling,  marketing and brand  management for Lotensin.  In
exchange,  we were entitled to receive a percentage of product  revenue based on
certain  total  prescription   (TRx)  objectives  above  specified   contractual
baselines.  Even though the Lotensin  agreement  ended  December  31,  2003,  we
received royalty payments on the sales of Lotensin through December 31, 2004.

      In October 2001, we entered into an agreement  with Eli Lilly to copromote
Evista in the U.S.  Under this  agreement,  we were  entitled to be  compensated
based upon net sales achieved above a  predetermined  level.  In the event these
predetermined  net sales  levels  were not  achieved,  we would not  receive any
revenue to offset  expenses  incurred.  During 2002, it became apparent that the
net sales levels  likely to be achieved  would not be  sufficient  to recoup our
expenses.  In November  2002,  we agreed with Eli Lilly to terminate  the Evista
copromotion agreement effective December 31, 2002.

      In October 2002, we entered into an agreement with Xylos for the exclusive
U.S.  commercialization  rights to the XCell  line of wound  care  products.  On
January 2, 2004, we exercised our  contractual  right to terminate the agreement
on 135 days'  notice to  Xylos,  since  sales of XCell  were not  sufficient  to
sustain our role as  commercialization  partner for the product. Our promotional
activities in support of the brand  concluded in January 2004, and the agreement
was terminated  effective May 16, 2004. In 2002, we had acquired $1.0 million of
preferred  stock of Xylos and in 2004, we loaned $500,000 to Xylos. As discussed
on page 24, we determined our $1.0 million  investment  and $500,000  short-term
loan to Xylos were  impaired as of December  31, 2004 and both were written down
to zero.

      On December 31, 2002,  we entered  into an exclusive  licensing  agreement
with Cellegy (the Cellegy Licensing  Agreement) for the exclusive North American
rights for the  testosterone gel product,  Fortigel.  The agreement is in effect
for the commercial life of the product. Cellegy submitted a New Drug Application
(NDA) for the hypogonadism  indication to the U.S. Food and Drug  Administration
(FDA) in June  2002.  In July  2003,  Cellegy  received  a  letter  from the FDA
rejecting its NDA for  Fortigel.  Cellegy has told us that, in the first quarter
of 2005, it received FDA approval for the protocol  parameters for a new Phase 3
study  proposed  by Cellegy to the FDA.  We do not know when,  or even  whether,
Cellegy will conduct  such a new Phase 3 Study,  and we cannot  predict with any
certainty whether the FDA will ultimately  approve Fortigel for sale in the U.S.
Under the  terms of the  agreement,  we paid  Cellegy  a $15.0  million  initial
licensing fee on December 31, 2002.  This payment was made prior to FDA approval
and since there is no alternative future use of the licensed rights, we expensed
the $15.0  million  payment in December  2002,  when  incurred.  This amount was
recorded in other selling,  general and administrative  expenses in the December
31, 2002  consolidated  statements of  operations.  Pursuant to the terms of the
Cellegy Licensing Agreement,  we will be required to pay Cellegy a $10.0 million
incremental  license  fee  milestone  payment  upon  Fortigel's  receipt  of all
approvals required by the FDA (if such approvals are obtained) to promote,  sell
and distribute the product in the U.S. This incremental  milestone  license fee,
if incurred,  will be recorded as an  intangible  asset and  amortized  over its
estimated useful life, as then  determined,  which is not expected to exceed the
life of the patent.  Royalty payments to Cellegy over the term of the commercial
life of the product  will range from 20% to 30% of net sales.  On  December  12,
2003, we instituted an action against Cellegy in the U.S. District Court for the
Southern District of New York seeking to rescind the Cellegy Licensing Agreement
on the grounds that it was procured by fraud. We are seeking return of the $15.0
million license fee we paid plus additional damages caused by Cellegy's conduct.
See Item 3 - "Legal Proceedings" for additional information.

SIGNIFICANT CUSTOMERS

      Our  significant  customers are  discussed in Note 12 to the  consolidated
financial statements included elsewhere in this report.

MARKETING

      Our marketing  efforts target the  biopharmaceutical  and MD&D industries.
Companies with large product  portfolios have been the most likely customers for
the services and solutions we provide,  but we also  frequently  serve  smaller,
emerging  companies.  Our  marketing  efforts  are  designed to reach the senior
sales, marketing and business development personnel within these companies, with
the goal of informing them of the value we can bring to their

                                       7
<PAGE>


products.  Our tactical plan usually includes advertising in trade publications,
direct  mail  campaigns,  presence  at industry  seminars  and a direct  selling
effort.  We have a dedicated team of business  development  specialists who work
within our business  units to identify  needs within the  biopharmaceutical  and
MD&D  industries  which we can  address.  A  multi-disciplinary  team of  senior
managers reviews possible  business  opportunities as identified by the business
development team and determines strategies and negotiation positions to contract
for the most attractive business opportunities.

COMPETITION

      There are relatively few barriers to entry into the businesses in which we
operate and, as the industry  continues to evolve, new competitors are likely to
emerge. We compete on the basis of such factors as reputation,  service quality,
management experience,  performance record,  customer  satisfaction,  ability to
respond to specific  client needs,  integration  skills and price. We believe we
compete effectively with respect to each of these factors. Increased competition
may lead to price and other  forms of  competition  that  could  have a material
adverse effect on our business, financial condition and results of operations.

      The  competition  includes  in-house  sales and marketing  departments  of
biopharmaceutical   and  MD&D  companies,   as  well  as  other  contract  sales
organizations  (CSOs),   medical  education  providers  and  marketing  research
companies.  Companies  that  compete  with us from  the  perspective  of  having
diversified  service  offerings  include  Innovex  (a  subsidiary  of  Quintiles
Transnational),  Ventiv Health,  Publicis Selling Solutions and Cardinal Health,
Inc.

GOVERNMENT AND INDUSTRY REGULATION

      The  healthcare  sector  is  heavily  regulated  by  both  government  and
industry.  Various laws,  regulations and guidelines  established by government,
industry and  professional  bodies affect,  among other  matters,  the approval,
provision,   licensing,   labeling,   marketing,   promotion,  price,  sale  and
reimbursement of healthcare services and products,  including pharmaceutical and
MD&D products.  The federal government has extensive enforcement powers over the
activities  of  pharmaceutical  manufacturers,  including  authority to withdraw
product approvals, commence actions to seize and prohibit the sale of unapproved
or  non-complying  products,  to halt  manufacturing  operations that are not in
compliance with good manufacturing practices, and to impose or seek injunctions,
voluntary recalls, and civil monetary and criminal penalties. These restrictions
or  prohibitions  on sales or withdrawal of approval of products  marketed by us
could have a material  adverse effect on our business,  financial  condition and
results of operations.

      The  Food,  Drug and  Cosmetic  Act,  as  supplemented  by  various  other
statutes,  regulates, among other matters, the approval, labeling,  advertising,
promotion,  sale and distribution of drugs,  including the practice of providing
product  samples  to  physicians.  Under this  statute,  the FDA  regulates  all
promotional   activities  involving  prescription  drugs.  The  distribution  of
pharmaceutical  products is also governed by the Prescription Drug Marketing Act
(PDMA),  which regulates  these  activities at both the federal and state level.
The PDMA imposes  extensive  licensing,  personnel  record  keeping,  packaging,
quantity,   labeling,   product  handling  and  facility  storage  and  security
requirements  intended to prevent the sale of pharmaceutical  product samples or
other diversions.  Under the PDMA and its implementing  regulations,  states are
permitted to require  registration of manufacturers and distributors who provide
pharmaceutical products even if such manufacturers or distributors have no place
of business  within the state.  States are also  permitted to adopt  regulations
limiting  the  distribution  of product  samples to licensed  practitioners  and
require  extensive  record  keeping  and  labeling  of such  samples for tracing
purposes.  The sale or distribution of pharmaceutical  products is also governed
by the Federal Trade Commission Act.

      Some of the services  that we currently  perform or that we may provide in
the future may also be affected by various  guidelines  established  by industry
and professional  organizations.  For example, ethical guidelines established by
the American Medical Association (AMA) govern,  among other matters, the receipt
by physicians of gifts from  health-related  entities.  These guidelines  govern
honoraria  and other items of economic  value  which AMA member  physicians  may
receive,  directly  or  indirectly,   from  pharmaceutical  companies.   Similar
guidelines  and policies  have been adopted by other  professional  and industry
organizations,  such as Pharmaceutical Research and Manufacturers of America, an
industry trade group.

      There are also  numerous  federal and state laws  pertaining to healthcare
fraud  and  abuse.  In  particular,  certain  federal  and state  laws  prohibit
manufacturers,  suppliers  and  providers  from  offering,  giving or  receiving
kickbacks or other  remuneration in connection with ordering or recommending the
purchase or rental of healthcare items and services.  The federal  anti-kickback
statute  imposes  both civil and criminal  penalties  for,  among other  things,
offering

                                       8
<PAGE>


or  paying  any  remuneration  to induce  someone  to refer  patients  to, or to
purchase,  lease or order (or arrange for or recommend  the  purchase,  lease or
order of) any item or service for which payment may be made by Medicare or other
federally-funded state healthcare programs (E.G.,  Medicaid).  This statute also
prohibits  soliciting or receiving any  remuneration in exchange for engaging in
any of these  activities.  The prohibition  applies whether the  remuneration is
provided  directly  or  indirectly,  overtly  or  covertly,  in cash or in kind.
Violations of the statute can result in numerous  sanctions,  including criminal
fines,  imprisonment  and  exclusion  from  participation  in the  Medicare  and
Medicaid programs.

      Several  states also have  referral,  fee splitting and other similar laws
that may restrict the payment or receipt of  remuneration in connection with the
purchase or rental of medical  equipment and supplies.  State laws vary in scope
and have been infrequently  interpreted by courts and regulatory  agencies,  but
may apply to all healthcare items or services, regardless of whether Medicare or
Medicaid funds are involved.

      The FDA  regulates the drug  development  process in the U.S. This impacts
products we may develop, license or acquire, including, for example, the Cellegy
licensed product.  These regulations affect all aspects of the research programs
conducted on unapproved  products in the U.S.,  including  manufacturing  of the
drug  substance  and  drug  product,  preliminary  pharmacology  and  toxicology
evaluation,  and all exposure of human subjects or patients.  This human testing
is performed under an Investigational  New Drug Exemption (IND). When sufficient
evidence of efficacy and safety is available to enable  unrestricted  commercial
distribution,  an  NDA  is  submitted  under  the  regulations.  The  NDA  is  a
comprehensive  filing  that  includes,  among other  things,  the results of all
Chemistry,  Manufacturing  and Controls  preclinical and clinical  studies.  The
FDA's  review of this  application  results in a  decision  on the  approval  or
non-approval  of  the  drug.   Approved  drugs  may  be  marketed  in  the  U.S.
post-approval,  however,  the NDA regulations require continuing  monitoring and
reporting  on the  safety  of  the  approved  product  in  the  general  patient
population.

      We cannot  determine  what effect  changes in  regulations  or statutes or
legal  interpretations,  when and if  established  or  enacted,  may have on our
business in the future.  Changes could require,  among other things,  changes to
manufacturing methods,  expanded or different labeling, the recall,  replacement
or  discontinuance  of certain  products,  additional record keeping or expanded
documentation   of  the   properties   of  certain   products   and   scientific
substantiation.  Further, we may experience delays in the regulatory approval of
products we license or acquire.  Such  changes,  or new  legislation,  or delays
could have a material  adverse effect on our business,  financial  condition and
results of  operations.  Our failure,  or the failure of our clients  and/or the
partners,   to  comply  with,  or  any  change  in,  the  applicable  regulatory
requirements or professional  organization or industry  guidelines or regulatory
delays  could,  among other  things,  limit or  prohibit us or our clients  from
conducting  business  activities  as  presently  conducted  or  proposed  to  be
conducted,  result  in  adverse  publicity,  increase  the  costs of  regulatory
compliance  or  result  in  monetary  fines  or  other  penalties.  Any of these
occurrences  could have a material  adverse  effect on our  business,  financial
condition and results of operations.


                                  RISK FACTORS

      In addition to the other information  provided in our reports,  you should
carefully consider the following factors in evaluating our business,  operations
and financial condition.  Additional risks and uncertainties not presently known
to us, that we currently  deem  immaterial or that are similar to those faced by
other  companies  in our  industry or business in general,  such as  competitive
conditions,  may also impair our business  operations.  The occurrence of any of
the  following  risks  could have a  material  adverse  effect on our  business,
financial condition and results of operations.

OUR SERVICE  BUSINESSES DEPEND ON EXPENDITURES BY COMPANIES IN THE LIFE SCIENCES
INDUSTRIES.

      Our  service   revenues  depend  on   promotional,   marketing  and  sales
expenditures  by  companies  in the  life  sciences  industries,  including  the
pharmaceutical,  MD&D and biotechnology industries.  Promotional,  marketing and
sales  expenditures by pharmaceutical  manufacturers  have in the past been, and
could in the future be, negatively impacted by, among other things, governmental
reform  or  private   market   initiatives   intended  to  reduce  the  cost  of
pharmaceutical   products   or   by   governmental,   medical   association   or
pharmaceutical  industry  initiatives  designed to regulate  the manner in which
pharmaceutical  manufacturers promote their products.  Furthermore, the trend in
the life sciences  industries toward  consolidation may result in a reduction in
overall sales and marketing  expenditures and,  potentially,  a reduction in the
use of contract sales and marketing services providers.

                                       9
<PAGE>


CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS,  FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND GROWTH RATE.

      Our  business  and  growth  depend  in  large  part  on  demand  from  the
pharmaceutical and life sciences  industries for outsourced  marketing and sales
services.  The practice of many  companies in these  industries has been to hire
outside  organizations  like us to conduct large sales and  marketing  projects.
However,  companies may elect to perform these services internally for a variety
of reasons,  including the rate of new product  development  and FDA approval of
those products,  number of sales representatives employed internally in relation
to demand for or the need to promote new and existing products,  and competition
from other  suppliers.  If these  industries  reduce their tendency to outsource
these projects,  our business,  financial  condition,  results of operations and
growth rate could be materially adversely affected.

MOST OF OUR SERVICE  REVENUE IS DERIVED  FROM A LIMITED  NUMBER OF CLIENTS,  THE
LOSS OF ANY ONE OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

      Our  revenue  and   profitability   depend  to  a  great   extent  on  our
relationships with a limited number of large pharmaceutical  companies. In 2004,
we had two major  clients  that  accounted  for  approximately  42.0% and 21.0%,
respectively, or a total of approximately 63.0% of our service revenue. In 2003,
our two major  clients  accounted  for a total of  approximately  66.5%,  of our
service revenue. We are likely to continue to experience a high degree of client
concentration,  particularly  if  there  is  further  consolidation  within  the
pharmaceutical  industry.  The loss or a significant  reduction of business from
any of our major clients could have a material  adverse  effect on our business,
financial condition and results of operations. For example, in December 2004, we
announced  a  reduction  in the  aggregate  number  of  representatives  that we
deployed  for  AstraZeneca.  This  reduction  is expected  to  decrease  revenue
generated from  AstraZeneca in 2005 by  approximately $60.0 million  compared to
revenues generated in 2004.

PRODUCT LIABILITY CLAIMS COULD HARM OUR BUSINESS.

      We could face substantial product liability claims in the event any of the
pharmaceutical  and medical  device  products we market now or in the future are
alleged to cause negative  reactions or adverse side effects or in the event any
of these products  causes  injury,  is alleged to be unsuitable for its intended
purpose or is alleged to be otherwise defective. For example, we have been named
in numerous  lawsuits as a result of our  detailing  of  Baycol(R)  on behalf of
Bayer Corporation (Bayer). Product liability claims, regardless of their merits,
could be costly and  divert  management's  attention,  or  adversely  affect our
reputation  and the demand for our products.  Although we currently have product
liability  insurance in the aggregate amount of $10.0 million,  we cannot assure
you that our insurance  will be sufficient to cover fully all potential  claims.
Also,  adequate  insurance  coverage  might not be  available  in the  future at
acceptable costs, if at all.

IF WE DO NOT MEET  PERFORMANCE  GOALS  SET IN OUR  INCENTIVE-BASED  AND  REVENUE
SHARING ARRANGEMENTS, OUR PROFITS COULD SUFFER.

      We sometimes enter into  incentive-based and revenue sharing  arrangements
with  pharmaceutical  companies.  Under  incentive-based  arrangements,  we  are
typically paid a fixed fee and, in addition, have an opportunity to increase our
earnings  based on the market  performance  of the  products  being  detailed in
relation  to  targeted  sales  volumes,  sales  force  performance  metrics or a
combination thereof. Additionally,  certain of our service contracts may contain
penalty provisions pursuant to which our fees may be significantly reduced if we
do not meet certain performance  metrics, for example number and timing of sales
calls,   physician  reach,   territory  vacancies  and/or  sales  representative
turnover.  Under revenue sharing arrangements,  our compensation is based on the
market  performance  of the  products  being  detailed,  usually  expressed as a
percentage of product sales.  These types of  arrangements  transfer some market
risk from our  clients  to us. In  addition,  these  arrangements  can result in
variability in revenue and earnings due to seasonality of product usage, changes
in market share,  new product  introductions,  overall  promotional  efforts and
other market related factors. As an example, in October 2001, we entered into an
agreement with Eli Lilly to copromote  Evista in the U.S. under which we were to
receive payments once product net sales exceeded a pre-determined  baseline. The
net sales of Evista were  insufficient  for us to achieve our revenue and profit
goals and as a result we incurred an operating loss for 2002 of $35.1 million on
this contract,  consisting of $28.9 million from  operating  activities and $6.2
million in unused sales force capacity.  This contract was terminated  effective
December 31, 2002.

                                       10
<PAGE>


OUR SERVICE CONTRACTS ARE GENERALLY SHORT-TERM  AGREEMENTS AND ARE CANCELABLE AT
ANY TIME, WHICH MAY RESULT IN LOST REVENUE AND ADDITIONAL COSTS AND EXPENSES.

      Our  service  contracts  are  generally  for a term of one to three  years
(certain of our operating  entities have contracts of shorter duration) and many
may be  terminated  by the  client  at any  time for any  reason.  Additionally,
certain of our clients  have the ability to  significantly  reduce the number of
representatives we deploy on their behalf. For example, as discussed above, as a
result  of the  reduction  in the  number of  representatives  we  deployed  for
AstraZeneca  and  the  early   termination  of  our  fee  for  service  contract
arrangement  with Novartis,  we expect to generate  approximately  $60.0 million
less revenue from our AstraZeneca relationship in 2005 than we realized in 2004,
and $28.9 million of originally anticipated revenue associated with the Novartis
contract in 2004 was not realized. The termination or significant reduction of a
contract by one of our major clients not only results in lost revenue,  but also
may  cause  us to  incur  additional  costs  and  expenses.  All  of  our  sales
representatives are employees rather than independent contractors.  Accordingly,
when  a  contract  is  significantly  reduced  or  terminated,   unless  we  can
immediately  transfer the related  sales force to a new program,  we must either
continue to compensate those employees,  without  realizing any related revenue,
or terminate their employment.  If we terminate their  employment,  we may incur
significant  expenses relating to their  termination.  The loss,  termination or
significant  reduction  of a large  contract or the loss of  multiple  contracts
could have a material  adverse effect on our business,  financial  condition and
results of operations.

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

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

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

o  integrate new personnel due to the acquisition;

o  retain and motivate key employees;

o  retain customers; and

o  minimize the diversion of management's attention from other business
   concerns.

      In the event that the  operations of an acquired  business do not meet our
performance  expectations,  we may have to restructure the acquired  business or
write-off  the  value of some or all of the  assets  of the  acquired  business,
including   goodwill  and  other  intangible   assets   identified  at  time  of
acquisition.

WE AND TWO OF OUR OFFICERS ARE DEFENDANTS IN A CLASS ACTION SHAREHOLDER  LAWSUIT
WHICH COULD DIVERT OUR TIME AND ATTENTION FROM MORE PRODUCTIVE ACTIVITIES.

      Beginning on January 24, 2002,  several  purported class action complaints
were filed in the U.S. District Court for the District of New Jersey, against us
and certain of our officers on behalf of persons who  purchased our common stock
during the period  between May 22, 2001 and August 12, 2002. On May 23, 2002 the
court  consolidated  these suits into a single class action lawsuit.  We believe
that meritorious  defenses exist to the allegations asserted in this lawsuit and
we intend to  vigorously  defend this  action.  Although we  currently  maintain
director and officer liability insurance coverage, there is no assurance that we
will  continue  to maintain  such  coverage  or that any such  coverage  will be
adequate to offset potential damages.

OUR  FAILURE,  OR THAT OF OUR  CLIENTS,  TO COMPLY  WITH  APPLICABLE  HEALTHCARE
REGULATIONS  COULD LIMIT,  PROHIBIT OR OTHERWISE  ADVERSELY  IMPACT OUR BUSINESS
ACTIVITIES.

      Various  laws,  regulations  and  guidelines  established  by  government,
industry and professional bodies affect,  among other matters, the provision of,
licensing,  labeling, marketing,  promotion, sale and distribution of healthcare
services  and  products,   including   pharmaceutical  and  MD&D  products.   In
particular,  the  healthcare  industry is governed by various  federal and state
laws  pertaining to healthcare  fraud and abuse,  including  prohibitions on the
payment or  acceptance  of  kickbacks  or other  remuneration  in return for the
purchase  or lease of  products  that are  paid  for by  Medicare  or  Medicaid.
Sanctions  for  violating  these  laws  include  civil  and  criminal  fines and
penalties and possible  exclusion from  Medicare,  Medicaid and other federal or
state healthcare programs. Although we believe our current business arrangements
do not  violate  these  federal  and state  fraud and abuse  laws,  we cannot be
certain that our business  practices will not be challenged  under these laws in
the future or that a challenge  would not have a material  adverse effect on our
business,  financial  condition and results of operations.  Our failure,  or the
failure of our

                                       11
<PAGE>


clients, to comply with these laws, regulations and guidelines, or any change in
these  laws,  regulations  and  guidelines  may,  among other  things,  limit or
prohibit our  business  activities  or those of our  clients,  subject us or our
clients to adverse  publicity,  increase the cost of regulatory  compliance  and
insurance  coverage  or subject us or our  clients  to  monetary  fines or other
penalties.

OUR  INDUSTRY  IS HIGHLY  COMPETITIVE  AND OUR  FAILURE TO  ADDRESS  COMPETITIVE
DEVELOPMENTS  PROMPTLY  WILL LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET
SHARE.

      Our primary  competitors for sales and marketing services include in-house
sales and marketing  departments  of  pharmaceutical  companies,  other CSOs and
medical  education and marketing  research  providers.  There are relatively few
barriers to entry in the  businesses  in which we compete  and, as the  industry
continues to evolve,  new competitors are likely to emerge.  Many of our current
and potential  competitors are larger than we are and have substantially greater
capital,  personnel and other resources than we have. Increased  competition may
lead to competitive  practices that could have a material  adverse effect on our
market share,  our ability to source new business  opportunities,  our business,
financial condition and results of operations.

OUR STOCK PRICE IS VOLATILE  AND COULD BE FURTHER  AFFECTED BY EVENTS NOT WITHIN
OUR CONTROL.  IN 2004, OUR STOCK TRADED AT A LOW OF $18.94 AND A HIGH OF $33.23.
IN 2003, OUR STOCK TRADED AT A LOW OF $6.86 AND A HIGH OF $31.71.

      The market for our common  stock is  volatile.  The  trading  price of our
common stock has been and will continue to be subject to:

o  volatility in the trading markets generally;

o  significant fluctuations in our quarterly operating results;

o  announcements regarding our business or the business of our competitors;

o  industry developments;

o  regulatory developments;

o  changes in revenue mix;

o  changes in revenue and revenue growth rates for us and for our industry as a
   whole; and

o  statements or changes in opinions, ratings or earnings estimates made by
   brokerage firms or industry analysts relating to the markets in which we
   operate or expect to operate.

OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY VARY, WHICH MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO FLUCTUATE.

      Our  quarterly  operating  results  may  vary as a result  of a number  of
factors, including:

o  the commencement, delay, cancellation or completion of programs;

o  regulatory developments;

o  uncertainty related to compensation based on achieving performance
   benchmarks;

o  the mix of services provided;

o  the mix of programs -- i.e., contract sales, medical education, marketing
   research;

o  the timing and amount of expenses for implementing new programs and services
   and acquiring license rights for products;

o  the accuracy of estimates of resources required for ongoing programs;

o  the timing and integration of acquisitions;

o  changes in regulations related to pharmaceutical companies; and

o  general economic conditions.

      In  addition,  in the case of revenue  related to  service  contracts,  we
recognize  revenue as services are performed,  while program  costs,  other than
training costs, are expensed as incurred.  As a result,  during the first two to
three months of a new contract,  we may incur  substantial  expenses  associated
with  implementing  that new program without  recognizing any revenue under that
contract. This could have a material adverse impact on our operating results and
the price of our common  stock for the  quarters  in which  these  expenses  are
incurred.  For these and other reasons, we believe that quarterly comparisons of
our financial  results are not  necessarily  meaningful and should not be relied
upon as an indication of future  performance.  Fluctuations in quarterly results
could  materially  adversely  affect the market  price of our common  stock in a
manner unrelated to our long-term operating performance.

                                       12
<PAGE>


WE MAY REQUIRE  ADDITIONAL  FUNDS IN ORDER TO IMPLEMENT  OUR  EVOLVING  BUSINESS
MODEL.

      We may require additional funds in order to:

o pursue other business opportunities or meet future operating  requirements;

o  develop incremental marketing and sales capabilities;

o  acquire other services businesses;

o  license or acquire additional pharmaceutical or medical device products or
   technologies; and/or

o  pursue regulatory approvals.

      We may seek  additional  funding  through public or private equity or debt
financing  or  other  arrangements  with  collaborative  partners.  If we  raise
additional  funds by issuing  equity  securities,  further  dilution to existing
stockholders  may result.  In  addition,  as a condition  to  providing  us with
additional  funds,  future  investors  may demand,  and may be  granted,  rights
superior to those of existing  stockholders.  We cannot be sure,  however,  that
additional  financing  will be  available  from  any of  these  sources  or,  if
available,  will be available on  acceptable or  affordable  terms.  If adequate
additional  funds are not  available,  we may be required  to delay,  reduce the
scope of, or eliminate one or more of our growth strategies.

IF WE ARE UNABLE TO ATTRACT KEY EMPLOYEES AND  CONSULTANTS,  WE MAY BE UNABLE TO
SUPPORT THE GROWTH OF OUR BUSINESS.

      Successful  execution of our business strategy depends,  in large part, on
our  ability to attract and retain  qualified  management,  marketing  and other
personnel  with the skills and  qualifications  necessary  to fully  execute our
programs  and  strategy.  Competition  for  personnel  among  companies  in  the
pharmaceutical industry is intense and we cannot assure you that we will be able
to continue to attract or retain the  personnel  necessary to support the growth
of our business.

OUR  BUSINESS  MAY  SUFFER IF WE FAIL TO  ATTRACT  AND  RETAIN  QUALIFIED  SALES
REPRESENTATIVES.

      The success and growth of our  business  depends on our ability to attract
and retain  qualified  pharmaceutical  sales  representatives.  There is intense
competition   for   pharmaceutical   sales   representatives   from   CSOs   and
pharmaceutical  companies.  On  occasion,  our  clients  have  hired  the  sales
representatives  that we trained to detail their products.  We cannot be certain
that we can  continue to attract and retain  qualified  personnel.  If we cannot
attract and retain qualified sales personnel,  we will not be able to expand our
teams  business and our ability to perform under our existing  contracts will be
impaired.

OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY MANAGEMENT PERSONNEL.

      The  success of our  business  also  depends on our ability to attract and
retain qualified senior management,  and financial and administrative  personnel
who  are in  high  demand  and  who  often  have  multiple  employment  options.
Currently, we depend on a number of our senior executives,  including Charles T.
Saldarini,  our  chief  executive  officer  and vice  chairman  of our  board of
directors,  Steven K. Budd, our president,  global sales and marketing services,
and Bernard C. Boyle, our chief financial  officer.  The loss of the services of
any one or more of these  executives could have a material adverse effect on our
business, financial condition and results of operations. Except for a $5 million
key-man  life  insurance  policy on the life of Mr.  Saldarini  and a $3 million
policy  on the  life of Mr.  Budd  and  life  insurance  policies  on two  other
executives,  we do  not  maintain  and do not  contemplate  obtaining  insurance
policies on any of our employees.

OUR  CONTROLLING  STOCKHOLDER  CONTINUES TO HAVE EFFECTIVE  CONTROL OF US, WHICH
COULD  DELAY OR PREVENT A CHANGE IN  CORPORATE  CONTROL  THAT MAY  OTHERWISE  BE
BENEFICIAL TO OUR STOCKHOLDERS.

      John P. Dugan, our chairman,  beneficially owns approximately 33.0% of our
outstanding  common  stock.  As a result,  Mr.  Dugan  will be able to  exercise
substantial control over the election of all of our directors,  and to determine
the outcome of most corporate actions requiring stockholder approval,  including
a merger with or into another company,  the sale of all or substantially  all of
our assets and amendments to our certificate of incorporation.

WE HAVE  ANTI-TAKEOVER  DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION  AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

                                       13
<PAGE>


      Our certificate of incorporation  and bylaws include  provisions,  such as
providing  for three  classes of  directors,  which are  intended to enhance the
likelihood  of  continuity  and  stability  in the  composition  of our board of
directors.  These  provisions may make it more difficult to remove our directors
and  management  and may  adversely  affect  the price of our common  stock.  In
addition,  our  certificate of  incorporation  authorizes the issuance of "blank
check"  preferred  stock.  This  provision  could have the  effect of  delaying,
deterring  or  preventing a future  takeover or a change in control,  unless the
takeover or change in control is approved by our board of directors, even though
the transaction might offer our stockholders an opportunity to sell their shares
at a price above the current market price.


RISK FACTORS MORE CLOSELY ASSOCIATED WITH THE PPG SEGMENT OF OUR BUSINESS:

WE MAY  CONTINUE TO REVIEW  OPPORTUNITIES  FOR THE PPG SEGMENT OF OUR  BUSINESS,
WHICH MAY INCLUDE COPROMOTION AND EXCLUSIVE DISTRIBUTION  ARRANGEMENTS,  AS WELL
AS LICENSING AND BRAND  OWNERSHIP OF PRODUCTS.  WE CANNOT ASSURE YOU THAT WE CAN
SUCCESSFULLY DEVELOP THIS BUSINESS.

      Notwithstanding  the fact that we had only  approximately  $2.9 million in
revenue from the PPG segment of our business in 2004,  we may continue to review
opportunities which may include copromotion,  distribution arrangements, as well
as licensing and brand ownership of products.  These types of  arrangements  can
significantly increase our operating expenditures in the short-term.  Typically,
these  agreements  require  significant  "upfront"  payments,  minimum  purchase
requirements,   minimum  royalty   payments,   payments  to  third  parties  for
production,   inventory  maintenance  and  control,  distribution  services  and
accounts receivable administration, as well as sales and marketing expenditures.
In addition,  particularly  where we license or acquire products before they are
approved for commercial use, we may be required to incur significant  expense to
gain the required regulatory approvals. As a result, our working capital balance
and cash flow position  could be materially  and  adversely  affected  until the
products in question become commercially viable, if ever. The risks that we face
in developing the PPG segment of our business may increase in proportion with:

          o  the number and types of products covered by these types of
             agreements;

          o  the applicable stage of the drug regulatory process of the products
             at the time we enter into these agreements; and

          o  our control over the manufacturing, distribution and marketing
             processes.

      In December  2002, we acquired from Cellegy the exclusive  right to market
and sell  Fortigel,  a  transdermal  testosterone  gel for the treatment of male
hypogonadism in the U.S., Puerto Rico, Mexico and Canada.  While we have entered
into  copromotion  and  exclusive  distribution  arrangements  in the past,  the
Cellegy  License  Agreement  was our  first  licensing  arrangement.  We paid an
initial $15.0 million license fee and another $10.0 million  incremental license
fee  milestone  payment is due after the product has all FDA  approvals (if such
approvals are obtained) required to promote,  sell and distribute the product in
the U.S. If the drug is approved,  in addition to paying Cellegy a royalty based
on  net  sales,  all  of the  costs  associated  with  manufacturing  the  drug,
distributing  it,  as well as  sales  and  marketing  expenditures  would be our
obligation.  If  additional  testing is required  after the drug is approved for
sale in the U.S.,  the costs  associated  with those tests are our obligation as
well.  Furthermore,  if we want to sell the drug in Mexico and  Canada,  we must
fund the regulatory process in those countries.

      In July 2003, Cellegy received a letter from the FDA rejecting its NDA for
Fortigel.  In December 2003, we filed a lawsuit  against  Cellegy as we believed
they  fraudulently  induced us to enter the Cellegy  License  Agreement  and for
breaching certain obligations under the Cellegy License Agreement. (See the Risk
Factor  describing the Cellegy  litigation in this section,  below.) Cellegy has
told us that,  in the first  quarter of 2005,  it received  FDA approval for the
protocol  parameters  for a new Phase 3 study proposed by Cellegy to the FDA. We
do not know when, or even whether Cellegy will conduct such a new Phase 3 Study,
and we cannot predict with any certainty whether the FDA will ultimately approve
Fortigel for sale in the U.S.

WE ARE  INVOLVED  IN  LAWSUITS  WITH  CELLEGY  CONCERNING  THE  CELLEGY  LICENSE
AGREEMENT.

      On December 12,  2003,  we filed a complaint  against  Cellegy in the U.S.
District Court for the Southern District of New York. The complaint alleges that
Cellegy  fraudulently  induced  us to enter into a license  agreement  regarding
Fortigel  on  December  31,  2002.   The  complaint   also  alleges  claims  for
misrepresentation  and  breach  of  contract  related  to  the  Cellegy  License
Agreement.  In the  complaint,  we seek,  among other things,  rescission of the
Cellegy License Agreement and return of the $15.0 million we paid Cellegy. After
we filed this  lawsuit,  also on December  12, 2003,  Cellegy  filed a complaint
against us in the U.S.  District Court for the Northern  District of California.
Cellegy's complaint seeks a declaration that Cellegy did not fraudulently induce
us to enter the Cellegy

                                       14
<PAGE>


License  Agreement and that Cellegy has not breached its  obligations  under the
Cellegy  License  Agreement.  We are unable to predict the  ultimate  outcome of
these lawsuits.  The trial is scheduled to commence during the second quarter of
2005. Material legal expense has been and is expected to continue to be incurred
in  connection  with  this  lawsuit;  however,  at this  time we are not able to
estimate the magnitude of the expense. See Item 3 - Legal Proceedings.

WE RELY ON THIRD  PARTIES  TO  MANUFACTURE  ALL OF OUR  PRODUCTS  AND SUPPLY RAW
MATERIALS. OUR DEPENDENCE ON THESE THIRD PARTIES MAY RESULT IN UNFORESEEN DELAYS
OR OTHER PROBLEMS BEYOND OUR CONTROL, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON  OUR  BUSINESS,  FINANCIAL  CONDITION  AND  RESULTS  OF  OPERATIONS  AND  OUR
REPUTATION.

      We do not  manufacture  any  products  and expect to continue to depend on
third  parties to provide us with  sufficient  quantities  of  products  to meet
demand.  As a result, we cannot assure you that we will always have a sufficient
supply of  products  on hand to satisfy  demand or that the  products we do have
will meet our specifications.  This risk is more acute in those situations where
we have no control  over the  manufacturers.  For example,  the Cellegy  License
Agreement  obligates  us to purchase all  quantities  of the product from PanGeo
Pharma  Inc.  (PanGeo),  a  third-party  manufacturer  with  which  we  have  no
contractual   relationship   and  to  which   Cellegy  has   granted   exclusive
manufacturing rights. If there are any problems with this contract manufacturer,
the supply of product could be temporarily halted until either PanGeo is able to
get their  facilities back on-line or we are able to source another supplier for
the product.  This  manufacturing  shutdown could have a material  impact on the
future demand for the product and thus could have a material  adverse  effect on
our business, financial condition and results of operations. Even if third-party
manufacturers comply with the terms of their supply  arrangements,  we cannot be
certain  that supply  interruptions  will not occur or that our  inventory  will
always be adequate.  Numerous factors could cause interruptions in the supply of
our  finished  products,  including  shortages  in raw  materials,  strikes  and
transportation difficulties. Any disruption in the supply of raw materials or an
increase in the cost of raw  materials to our supplier  could have a significant
effect on its ability to supply us with products.

      In addition, manufacturers of products requiring FDA approval are required
to  comply  with  FDA  mandated  standards,  referred  to as good  manufacturing
practices,  relating not only to the manufacturing process but to record-keeping
and  quality  control  activities  as  well.  Furthermore,   they  must  pass  a
pre-approval  inspection  of  manufacturing  facilities  by the FDA and  foreign
authorities  before obtaining  marketing  approval,  and are subject to periodic
inspection by the FDA and  corresponding  foreign  regulatory  authorities under
reciprocal  agreements with the FDA. These  inspections may result in compliance
issues that could  prevent or delay  marketing  approval or require  significant
expenditures on corrective measures.

      If for any reason we are unable to obtain or retain our relationships with
third-party  manufacturers on commercially  acceptable terms, or if we encounter
delays or difficulties with contract manufacturers in producing or packaging our
products,  the  distribution,  marketing and subsequent  sales of these products
would be  adversely  affected,  and we may have to seek  alternative  sources of
supply.  We cannot  assure  you that we will be able to  maintain  our  existing
manufacturing  relationships  or enter into new ones on commercially  acceptable
terms, if at all.

OUR LICENSE  AGREEMENTS MAY REQUIRE US TO MAKE MINIMUM PAYMENTS TO THE LICENSOR,
REGARDLESS OF THE REVENUE DERIVED UNDER THE LICENSE,  WHICH COULD FURTHER STRAIN
OUR WORKING CAPITAL AND CASH FLOW POSITION. IN ADDITION, THESE AGREEMENTS MAY BE
NONEXCLUSIVE OR MAY CONDITION EXCLUSIVITY ON MINIMUM SALES LEVELS.

      Under the Cellegy  License  Agreement,  we are  required  to make  certain
minimum  royalty  payments  to Cellegy  once the product is approved by the FDA,
assuming such an approval  occurs.  If the Cellegy  product fails to gain market
acceptance,  we would still be required to make these minimum royalty  payments.
This would  likely have a material  adverse  effect on our  business,  financial
condition and results of operations.  In addition, the Cellegy License Agreement
requires us to satisfy  certain  minimum net sales  requirements.  If we fail to
satisfy  these  minimum  net sales  requirements,  under  certain  circumstances
Cellegy  may, at its option,  convert our  exclusive  license to a  nonexclusive
license.  This could mean that we would face  increased  competition  from third
parties with respect to the marketing and sale of the product.

WE MAY BE UNABLE TO SECURE OR ENFORCE ADEQUATE  INTELLECTUAL  PROPERTY RIGHTS TO
PROTECT THE PRODUCTS OR TECHNOLOGIES WE ACQUIRE, LICENSE OR DEVELOP.

      Our  ability to  successfully  commercialize  newly  branded  products  or
technologies depends on our ability to secure and enforce intellectual  property
rights,  generally  patents,  and we may be unable  to do so.  To obtain  patent
protection,  we must be  able to  successfully  persuade  the  U.S.  Patent  and
Trademark Office and its foreign

                                       15
<PAGE>


counterparts  to issue  patents on a timely  basis and  possibly  in the face of
third-party challenges. Even if we are granted a patent, our rights may later be
challenged  or  circumvented  by third  parties.  Likewise,  a  third-party  may
challenge our trademarks or, alternatively, use a confusingly similar trademark.
The issuance of a patent is not conclusive as to its validity or  enforceability
and the patent life is limited. In addition, from time to time, we might receive
notices from third parties  regarding  patent claims  against us. These types of
claims,  with or without merit,  could be  time-consuming  to defend,  result in
costly litigation,  divert management's attention and resources, and cause us to
incur significant expenses. As a result of litigation over intellectual property
rights, we may be required to stop selling a product,  obtain a license from the
owner to sell the product in question or use the relevant intellectual property,
which we may not be able to obtain on  favorable  terms,  if at all, or modify a
product to avoid using the relevant intellectual property. A successful claim of
infringement  against us could have a material  adverse  effect on our business,
financial condition and results of operations.

THE REGULATORY  APPROVAL PROCESS IS EXPENSIVE,  TIME CONSUMING AND UNCERTAIN AND
MAY PREVENT US FROM OBTAINING  REQUIRED APPROVALS FOR THE  COMMERCIALIZATION  OF
DRUGS AND PRODUCTS THAT WE LICENSE OR ACQUIRE.

      In those  potential  situations  where we license or acquire  ownership of
drugs or other medical or diagnostic equipment,  the product in question may not
yet be approved for sale to the public, in which case we may have the obligation
to  obtain  the  required   regulatory   approvals.   The   research,   testing,
manufacturing and marketing of drugs and other medical and diagnostic devices is
heavily  regulated in the U.S. and other  countries.  The  regulatory  clearance
process typically takes many years and is extremely expensive.  Despite the time
and expense  expended,  regulatory  clearance is never  guaranteed.  The FDA can
delay, limit or deny approval of a drug for many reasons, including:

o  safety or efficacy;

o  inconsistent or inconclusive data or test results;

o  failure to demonstrate compliance with the FDA's good manufacturing
   practices; or

o  changes in the approval process or new regulations.

THE FDA  CONTINUES TO REGULATE  THE SALE AND  MARKETING OF DRUGS AND MEDICAL AND
DIAGNOSTIC  DEVICES  EVEN AFTER THEY HAVE BEEN  APPROVED FOR SALE TO THE PUBLIC.
COMPLYING WITH THESE  REGULATIONS  MAY BE COSTLY AND OUR FAILURE TO COMPLY COULD
LIMIT OUR ABILITY TO CONTINUE MARKETING AND DISTRIBUTING THESE PRODUCTS.

      Even  after  drugs  have been  approved  for sale,  the FDA  continues  to
regulate their sale.  These  post-approval  regulatory  requirements may require
further testing and/or clinical studies, and may limit our ability to market and
distribute  the product or may limit the use of the  product.  Under the Cellegy
License  Agreement,   we  are  responsible  for  all  post-approval   regulatory
compliance. If we fail to comply with the regulatory requirements of the FDA, we
may be  subject to one or more of the  following  administrative  or  judicially
imposed sanctions:

o  warning letters;

o  civil penalties;

o  criminal penalties;

o  injunctions;

o  product seizure or detention;

o  product recalls;

o  total or partial suspension of production; and

o  FDA refusal to approve pending NDAs, or supplements to approved NDAs.

FDA APPROVAL DOES NOT GUARANTEE  COMMERCIAL  SUCCESS. IF WE FAIL TO SUCCESSFULLY
COMMERCIALIZE  OUR PRODUCTS,  OUR BUSINESS,  FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED.

      Even if a  product  is  approved  for  sale  to the  general  public,  its
commercial  success will depend on our marketing  efforts and  acceptance by the
general  public.  The  commercial  success of any drug or medical or  diagnostic
device depends on a number of factors, including:

o  demonstration of clinical efficacy and safety;

o  cost;

o  reimbursement policies of large third-party payors;

o  competitive products;

                                       16
<PAGE>


o  convenience and ease of administration;

o  potential advantages over alternative treatment methods;

o  marketing and distribution support; and

o  successfully creating and sustaining demand.

      We  cannot  assure  you  that  any of our  future  products  will  achieve
commercial success, regardless of how effective they may be.

CONSOLIDATION OF THE WHOLESALE DISTRIBUTION NETWORK FOR PHARMACEUTICAL  PRODUCTS
COULD ADVERSELY IMPACT THE TERMS AND CONDITIONS OF OUR PRODUCT SALES.

      The  distribution   network  for  pharmaceutical   products  has  recently
experienced  significant  consolidation among wholesalers and chain stores. As a
result, a few large wholesale  distributors  control a significant  share of the
market and we have less ability to negotiate  price,  return  policies and other
terms and  related  provisions  of the sale.  If our  distribution  of  products
expands,   some  of  these  wholesalers  and  distributors  may  account  for  a
significant  portion of our product sales. Our inability to negotiate  favorable
terms  and  conditions  for  product  sales to those  wholesalers  could  have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

FAILURE  TO OBTAIN  ADEQUATE  REIMBURSEMENT  COULD  LIMIT OUR  ABILITY TO MARKET
PRODUCTS.

      Our  ability to  commercialize  products,  including  licensed or acquired
products,  will  depend in part on the  reimbursements,  if any,  obtained  from
third-party payors such as government health administration authorities, private
health  insurers,  managed care  programs and other  organizations.  Third-party
payors are increasingly  attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for pharmaceutical  products and medical
devices. Cost control initiatives could decrease the price that we would receive
for products and affect our ability to  commercialize  any product.  Third-party
payors also tend to discourage use of branded products when generic  substitutes
are available.  As a result,  reimbursement may not be available to enable us to
maintain  price  levels  sufficient  to  realize  an  appropriate  return on our
investment in product  acquisition and  development.  If adequate  reimbursement
levels for either  newly  approved or branded  products  are not  provided,  our
business,  financial condition and results of operations could be materially and
adversely affected.

EMPLOYEES

      As of December 31, 2004, we had 3,140  employees.  Included in that amount
are 130 part-time field representatives employed by InServe, the number of which
varies  from  time to time  based  on  project  demand.  We are not  party  to a
collective  bargaining  agreement  with a  labor  union.  We  believe  that  our
relations with our employees are good.

AVAILABLE INFORMATION

      Our  website  address  is  www.pdi-inc.com.   We  are  not  including  the
information  contained  on our  website  as  part  or,  or  incorporating  it by
reference  into,  this annual  report on Form 10-K.  We make  available  free of
charge through our website our annual report on Form 10-K,  quarterly reports on
Form 10-Q,  current  reports on Form 8-K, and all amendments to those reports as
soon as reasonably  practicable after such material is electronically filed with
or furnished to the SEC.

      The  public  may read and copy any  materials  we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W.,  Washington,  D.C. 20549.
The public may obtain  information on the operation of the Public Reference Room
by calling the SEC at  1-800-SEC-0330.  The SEC  maintains an Internet site that
contains  reports,  proxy and  information  statements,  and  other  information
regarding issuers such as us that file  electronically with the SEC. The website
address is www.sec.gov.

ITEM 2.  PROPERTIES

FACILITIES

      Our corporate  headquarters are located in Saddle River, New Jersey, in an
84,000  square  foot  facility.  The lease runs for a term of  approximately  12
years, which began in July 2004.

                                       17
<PAGE>


       TVG  currently  operates  out of a 48,000  square  foot  facility in Fort
Washington,  Pennsylvania,  under a lease that  expires in the third  quarter of
2005. In the third  quarter of 2005,  TVG will be moving to a 37,700 square foot
facility  in  Upper  Dublin,  Pennsylvania.   The  lease  runs  for  a  term  of
approximately 12 years, which commenced January 2005.

       InServe  operates  out  of  a  9,100  square  foot  facility  in  Novato,
California,  under a lease that expires in the second  quarter of 2005.  We will
not be renewing  the lease in Novato as  operations  will have been moved to the
corporate headquarters in New Jersey.

       Pharmakon  operates  out of a 6,700 square foot  facility in  Schaumburg,
Illinois, under a lease that expires in February 2010.

       The office containing  ProtoCall's Shared Sales operations was closed and
those operations were  transferred to corporate  headquarters in New Jersey from
Cincinnati,  Ohio,  in early 2003.  The Ohio  facility is  approximately  11,000
square feet of space and was rented to a  sub-tenant  in early 2003  through the
end of the lease which expires in April 2005.

       We believe that our current and recently  leased  facilities are adequate
for our current and foreseeable  operations and that suitable  additional  space
will be available if needed.

ITEM 3.  LEGAL PROCEEDINGS

SECURITIES LITIGATION

       In January and February  2002,  we, our chief  executive  officer and our
chief financial officer were served with three complaints that were filed in the
United States District Court for the District of New Jersey alleging  violations
of the Securities  Exchange Act of 1934 (the 1934 Act).  These  complaints  were
brought as purported shareholder class actions under Sections 10(b) and 20(a) of
the 1934 Act and Rule 10b-5 established  thereunder.  On May 23, 2002, the Court
consolidated  all  three  lawsuits  into  a  single  action  entitled  In re PDI
Securities Litigation, Master File No. 02-CV-0211, and appointed lead plaintiffs
(Lead Plaintiffs) and Lead Plaintiffs'  counsel.  On or about December 13, 2002,
the Lead  Plaintiffs  filed a second  consolidated  and amended  complaint  (the
Consolidated and Amended Complaint), which superseded their earlier complaints.

       The  Consolidated  and Amended  Complaint  names us, our chief  executive
officer and our chief financial officer as defendants;  purports to state claims
against us on behalf of all persons who  purchased  our common stock between May
22, 2001 and August 12, 2002; and seeks money damages in unspecified amounts and
litigation  expenses including  attorneys' and experts' fees. The essence of the
allegations in the Consolidated  and Amended  Complaint is that we intentionally
or  recklessly  made  false  or  misleading   public  statements  and  omissions
concerning  our financial  condition and prospects with respect to our marketing
of Ceftin in connection with the October 2000  distribution  agreement with GSK,
our marketing of Lotensin in connection with the May 2001 distribution agreement
with Novartis, as well as our marketing of Evista in connection with the October
2001 distribution agreement with Eli Lilly.

       In  February  2003,  we filed a motion to dismiss  the  Consolidated  and
Amended Complaint.  We believe that the allegations in this purported securities
class action are without merit and we intend to defend the action vigorously.

BAYER-BAYCOL LITIGATION

       We have been named as a defendant  in numerous  lawsuits,  including  two
class  action  matters,  alleging  claims  arising  from  the use of  Baycol,  a
prescription  cholesterol-lowering medication. Baycol was distributed,  promoted
and sold by Bayer in the U.S.  through  early August  2001,  at which time Bayer
voluntarily  withdrew  Baycol  from  the U.S.  market.  Bayer  retained  certain
companies,  such as us, to provide detailing  services on its behalf pursuant to
contract sales force agreements. We may be named in additional similar lawsuits.
To  date,  we have  defended  these  actions  vigorously  and  have  asserted  a
contractual right of defense and indemnification against Bayer for all costs and
expenses we incur  relating to these  proceedings.  In February 2003, we entered
into a joint defense and indemnification agreement with Bayer, pursuant to which
Bayer has agreed to assume substantially all of our defense costs in pending and
prospective  proceedings  and to  indemnify  us in these  lawsuits,  subject  to
certain  limited  exceptions.  Further,  Bayer  agreed to  reimburse  us for all
reasonable costs and expenses  incurred to date in defending these  proceedings.
As of December 31, 2004, Bayer has reimbursed us for approximately  $1.6 million
in legal

                                       18
<PAGE>


expenses,  the  majority of which was  received in 2003 and was  reflected  as a
credit within selling,  general and administrative expense. No amounts have been
received in 2004.

AUXILIUM PHARMACEUTICALS LITIGATION

       On January 6, 2003,  we were named as a defendant  in a lawsuit  filed by
Auxilium  Pharmaceuticals,  Inc. (Auxilium), in the Pennsylvania Court of Common
Pleas,  Montgomery County.  Auxilium was seeking monetary damages and injunctive
relief, including preliminary injunctive relief, based on several claims related
to our alleged breaches of a contract sales force agreement  entered into by the
parties on November 20,  2002,  and claims that we were  misappropriating  trade
secrets in connection with the Cellegy License Agreement.

       On May 8, 2003, we entered into a settlement and mutual release agreement
with  Auxilium  (Settlement  Agreement),  by which the  lawsuit  and all related
counter claims were dropped without any admission of wrongdoing by either party.
The  settlement  terms  included a cash payment which was paid upon execution of
the  Settlement  Agreement  as well as certain  other  additional  expenses.  We
recorded a $2.1  million  charge in the first  quarter  of 2003  related to this
settlement.  Pursuant to the Settlement Agreement,  we also agreed that we would
(a)  not  sell,  ship,  distribute  or  transfer  any  Fortigel  product  to any
wholesalers,  chain drug stores,  pharmacies  or hospitals  prior to November 1,
2003,  and  (b)  pay  Auxilium  an  additional  amount  per  prescription  to be
determined based upon a specified  formula,  in the event any prescriptions were
filled for Fortigel prior to January 26, 2004. As discussed above, in July 2003,
Cellegy  received a letter from the FDA rejecting its NDA for Fortigel.  We have
not paid and will not pay any  additional  amount  to  Auxilium  as set forth in
clause (b) above since Fortigel was not approved by the FDA prior to January 26,
2004. We do not believe that the terms of the Settlement Agreement will have any
material impact on the success of our commercialization of Fortigel if, or when,
the FDA approves it.

CELLEGY PHARMACEUTICALS LITIGATION

       On December 12, 2003,  we filed a complaint  against  Cellegy in the U.S.
District Court for the Southern District of New York. The complaint alleges that
Cellegy  fraudulently  induced us to enter into the  Cellegy  License  Agreement
regarding  Fortigel on December 31, 2002.  The complaint also alleges claims for
misrepresentation  and  breach  of  contract  related  to  the  Cellegy  License
Agreement.  In the  complaint,  we seek,  among other things,  rescission of the
Cellegy License Agreement and return of the $15.0 million we paid Cellegy. After
we filed this  lawsuit,  also on December  12, 2003,  Cellegy  filed a complaint
against us in the U.S.  District Court for the Northern  District of California.
Cellegy's complaint seeks a declaration that Cellegy did not fraudulently induce
us to enter the Cellegy License  Agreement and that Cellegy has not breached its
obligations under the Cellegy License Agreement. We filed an answer to Cellegy's
complaint on June 18, 2004, in which we make the same allegations and claims for
relief as we do in our New York  action,  and we also  allege  Cellegy  violated
California  unfair  competition  law. By order dated April 23, 2004, our lawsuit
was  transferred  to  the  Northern  District  of  California  where  it  may be
consolidated  with  Cellegy's  action.  We are  unable to predict  the  ultimate
outcome of these lawsuits.  The trial is scheduled to commence during the second
quarter of 2005.  Material legal expense has been and is expected to continue to
be incurred in connection  with this lawsuit;  however,  at this time we are not
able to estimate the magnitude of the expense.

OTHER LEGAL PROCEEDINGS

       We are  currently a party to other legal  proceedings  incidental  to our
business. While management currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect  on  our  business,   financial  condition  and  results  of  operations,
litigation is subject to inherent uncertainties.  Were we to settle a proceeding
for a material amount or were an unfavorable  ruling to occur,  there exists the
possibility of a material  adverse impact on our business,  financial  condition
and results of operations.

      No amounts have been  accrued for losses under any of the above  mentioned
matters,  other than for the Auxilium litigation settlement reserve, as no other
amounts are considered probable or reasonably estimable at this time. Legal fees
are expensed as incurred.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                       19
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR OUR COMMON EQUITY,  RELATED  STOCKHOLDER  MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.

       Our common stock is traded on the Nasdaq National Market under the symbol
"PDII." The following table sets forth, for each of the periods  indicated,  the
range of high and low closing  sales  prices for the common stock as reported by
the Nasdaq National Market.

                                                               High        Low
                                                               ----        ---

      2004
      ----
   First quarter..........................................     31.770     23.290
   Second quarter.........................................     32.060     24.400
   Third quarter..........................................     29.980     21.600
   Fourth quarter ........................................     31.550     21.780

      2003
      ----
   First quarter..........................................     12.650      7.100
   Second quarter.........................................     12.600      7.350
   Third quarter..........................................     26.810     10.330
   Fourth quarter ........................................     30.870     20.250



       There were 379 shareholders of record of PDI common shares as of February
24, 2005.

                      EQUITY COMPENSATION PLAN INFORMATION
                          YEAR ENDED DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                                              Number of securities
                                                                                             remaining available for
                                          Number of securities       Weighted-average         future issuance under
                                           to be issued upon         exercise price of         equity compensation
                                              exercise of               outstanding             plans (excluding
                                          outstanding options,       options, warrants       securities reflected in
           Plan Category                  warrants and rights           and rights                 column (a))
-------------------------------------    -----------------------    --------------------    --------------------------
<S>                                            <C>                        <C>                       <C>
                                                  (a)                      (b)
Equity compensation plans
  approved by security holders
  (2004 Stock Award and
  Incentive Plan, 2000 Omnibus
  Incentive Compensation Plan,
  and 1998 Stock Option Plan) .....            1,343,745                  $27.86                    1,230,563
Equity compensation plans not
   approved by security
   holders(1)....................                  --                         --                          --
                                         =======================    ====================    ==========================

Total............................              1,343,745                  $27.86                    1,230,563
                                         =======================    ====================    ==========================

(1)    The Company does not have any equity compensation plans which have not been approved by security holders.
</TABLE>

DIVIDEND POLICY

       We have not paid any  dividends and do not intend to pay any dividends in
the foreseeable  future.  Future  earnings,  if any, will be used to finance the
future growth of our business.  Future dividends,  if any, will be determined by
our board of directors.


ITEM 6.  SELECTED FINANCIAL DATA

       The selected  consolidated  financial  data set forth below as of and for
the years ended December 31, 2004,  2003,  2002, 2001, and 2000 are derived from
our  audited  consolidated  financial  statements  and the  accompanying  notes.
Consolidated  balance  sheets at  December  31,  2004 and 2003 and  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the three
years ended December 31, 2004,  2003 and 2002 and the related notes are included
elsewhere  in  this  Annual  Report  on Form  10-K  and  have  been  audited  by
PricewaterhouseCoopers LLP, Independent

                                       20
<PAGE>


Registered Public  Accounting Firm. The selected  financial data set forth below
should be read together with,  and are qualified by reference to,  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
our  audited  consolidated  financial  statements  and related  notes  appearing
elsewhere in this report.

STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                 -----------------------------------------------------------------
                                                                    2004          2003          2002          2001         2000
                                                                 ----------    ----------    ----------    ----------   ----------
<S>                                                              <C>           <C>           <C>           <C>          <C>
                                                                                (in thousands, except per share data)
Revenue
  Service ....................................................   $  365,965    $  356,143    $  301,437    $  301,447   $  338,038
  Product, net ...............................................       (1,521)      (11,613)        6,438       415,314      101,008
                                                                 ----------    ----------    ----------    ----------   ----------
    Total revenue ............................................      364,444       344,530       307,875       716,761      439,046
                                                                 ----------    ----------    ----------    ----------   ----------

Cost of goods and services
  Program expenses ...........................................      265,360       254,162       278,002       252,349      257,526
  Cost of goods sold .........................................          254         1,287            --       328,629       68,997
                                                                 ----------    ----------    ----------    ----------   ----------
    Total cost of goods and services .........................      265,614       255,449       278,002       580,978      326,523
                                                                 ----------    ----------    ----------    ----------   ----------

Gross profit .................................................       98,830        89,081        29,873       135,783      112,523

Operating expenses
  Compensation expense .......................................       34,325        36,901        32,670        39,263       32,820
  Other selling, general and administrative expenses .........       29,314        30,347        44,163        83,815       38,827
  Restructuring and other related expenses ...................           --           143         3,215            --           --
  Litigation settlement ......................................           --         2,100            --            --           --
                                                                 ----------    ----------    ----------    ----------   ----------
    Total operating expenses .................................       63,639        69,491        80,048       123,078       71,647
                                                                 ----------    ----------    ----------    ----------   ----------
Operating income (loss) ......................................       35,191        19,590       (50,175)       12,705       40,876
Other income, net ............................................          779         1,073         1,967         2,275        4,864
                                                                 ----------    ----------    ----------    ----------   ----------
Income (loss) before provision (benefit) for income taxes ....       35,970        20,663       (48,208)       14,980       45,740
Provision (benefit) for income taxes .........................       14,838         8,405       (17,447)        8,626       18,712
                                                                 ----------    ----------    ----------    ----------   ----------
Net income (loss) ............................................   $   21,132    $   12,258    $  (30,761)   $    6,354   $   27,028
                                                                 ==========    ==========    ==========    ==========   ==========


Basic net income (loss) per share(1) .........................   $     1.45    $     0.86    $    (2.19)   $     0.46   $     2.00
                                                                 ==========    ==========    ==========    ==========   ==========
Diluted net income (loss) per share(1) .......................   $     1.42    $     0.85    $    (2.19)   $     0.45   $     1.96
                                                                 ==========    ==========    ==========    ==========   ==========
Basic weighted average number of shares outstanding(1) .......       14,564        14,231        14,033        13,886       13,503
                                                                 ==========    ==========    ==========    ==========   ==========
Diluted weighted average number of shares outstanding(1) .....       14,893        14,431        14,033        14,113       13,773
                                                                 ==========    ==========    ==========    ==========   ==========


BALANCE SHEET DATA:

<CAPTION>
                                                                                         As of December 31,
                                                                 -----------------------------------------------------------------
                                                                    2004          2003          2002          2001         2000
                                                                 ----------    ----------    ----------    ----------   ----------
<S>                                                              <C>           <C>           <C>           <C>          <C>
                                                                                           (in thousands)
Cash and cash equivalents ....................................   $   96,367    $  113,288    $   66,827    $  160,043   $  109,000
Working capital ..............................................       96,156       100,009        81,854       113,685      120,720
Total assets .................................................      224,705       219,623       190,939       302,671      270,225
Total long-term debt .........................................           --            --            --            --           --
Stockholders' equity .........................................      165,425       138,488       123,211       150,935      138,110
</TABLE>

----------
(1)    See Note 9 to our  audited  consolidated  financial  statements  included
       elsewhere in this report for a description  of the  computation  of basic
       and diluted weighted average number of shares  outstanding for 2004, 2003
       and 2002.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

       We make forward-looking statements that involve risks, uncertainties, and
assumptions  in this report.  Actual  results may differ  materially  from those
anticipated in these forward-looking  statements as a result of various factors,
including, but not limited to, those presented under "Forward-Looking  Statement
Information" on page 2.

       The following Management's Discussion and Analysis of Financial Condition
and Results of Operations  should be read in conjunction  with our  consolidated
financial statements and the related notes appearing elsewhere in this report.

                                       21
<PAGE>


OVERVIEW

       We are a diversified  sales and marketing  services  company  serving the
biopharmaceutical and MD&D industries. We create and execute sales and marketing
programs  intended  to improve  the  profitability  of  pharmaceutical  and MD&D
products. We do this by working with companies who own the intellectual property
rights  to these  products  and  recognize  our  ability  to add  value to these
products and maximize  their sales  performance.  We have a variety of agreement
types that we enter into with our clients,  from fee for service arrangements to
arrangements which involve risk-sharing and incentive based provisions.

DESCRIPTION OF REPORTING SEGMENTS AND NATURE OF CONTRACTS

      During  the  fourth  quarter of 2004,  as a result of our  acquisition  of
Pharmakon (as described in Note 5 to the consolidated  financial  statements) we
restructured  certain  management  responsibilities  and  changed  our  internal
financial  reporting.  As a  result  of these  changes  we  determined  that our
reporting segments were required to be amended. Accordingly, we now report under
the following three segments:

       o  SALES SERVICES:

          o  DEDICATED CONTRACT SALES (CSO);

          o  SHARED CONTRACT SALES;

          o  MEDICAL DEVICES AND DIAGNOSTICS (MD&D) CONTRACT SALES TEAMS; AND

          o  CLINICAL SALES TEAMS (INSERVE)

       o  MARKETING SERVICES:

          o  EDUCATION AND COMMUNICATION (EDCOMM);

          o  PHARMAKON; AND

          o  TVG MARKETING RESEARCH AND CONSULTING (TVG)

       o  PDI PRODUCTS GROUP (PPG)

       An analysis of these  reporting  segments and their results of operations
is contained in Note 23 to the consolidated financial statements found elsewhere
in this report and in the CONSOLIDATED RESULTS OF OPERATIONS discussion below.

SALES SERVICES

       Given the  customized  nature of our  business,  we  utilize a variety of
contract structures.  Historically, most of our product detailing contracts have
been fee for  service,  i.e.,  the client pays a fee for a specified  package of
services.  These contracts typically include operational  benchmarks,  such as a
minimum number of sales  representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by built-in  incentives we can earn
based on our performance.  In these situations,  we have the opportunity to earn
additional fees, as incentives, based on attaining performance benchmarks.

       Our product detailing  contracts  generally are for terms of one to three
years and may be renewed or extended.  However,  the majority of these contracts
are  terminable  by the client for any  reason on 30 to 90 days'  notice.  These
contracts often, but not always,  provide for termination  payments in the event
they are  terminated by the client without cause.  While the  cancellation  of a
contract by a client  without cause may result in the imposition of penalties on
the  client,  these  penalties  may  not  act as an  adequate  deterrent  to the
termination  of any  contract.  In  addition,  we cannot  assure  you that these
penalties will offset either the revenue we could have earned under the contract
or the costs we may incur as a result of its termination.  The loss, termination
or significant  reduction of a large contract or the loss of multiple  contracts
could have a material  adverse effect on our business,  financial  condition and
results of operations.  For example,  in December 2004, we announced a reduction
in the aggregate  number of  representatives  that we deployed for  AstraZeneca.
This reduction is expected to decrease  revenue  generated  from  AstraZeneca in
2005 by approximately $60.0 million versus revenues generated in 2004. Contracts
may also be terminated for cause or we may incur  specific  penalties if we fail
to meet stated performance benchmarks.

       We also provide a contract  sales  offering  within the MD&D  market.  We
leveraged   our  knowledge   from  years  of  providing   sales  forces  to  the
pharmaceutical  industry and applied it to the MD&D market.  As a result, we now
offer the  provision of contract  sales  forces as one of the  services  that we
market to the MD&D  industry to assist our clients in  improving  their  product
sales.

                                       22
<PAGE>


       Our clinical sales teams employ nurses, medical technologists,  and other
clinicians  who train and provide  hands-on  clinical  education and after sales
support to the medical staff of hospitals  and clinics that  recently  purchased
our clients' equipment. Our activities maximize product utilization and customer
satisfaction for the medical  practitioners,  while simultaneously  enabling our
clients'  sales  forces  to  continue  their  selling   activities   instead  of
in-servicing the equipment they had recently sold.

MARKETING SERVICES

       Our marketing services contracts  generally are for projects lasting from
three to six months.  The contracts  are typically  terminable by the client and
provide for termination payments in the event they are terminated without cause.
Termination  payments  include  payment for all work completed to date, plus the
cost of any nonrefundable  commitments made on behalf of the client.  Due to the
usual  size of the  projects,  it is  unlikely  the loss or  termination  of any
individual  medical  education  or  marketing  research  contract  would  have a
material  adverse  effect on our  business,  financial  condition  or results of
operations.

PDI PRODUCTS GROUP (PPG)

      We are shifting our strategy to  deemphasize  the PPG segment and focus on
the service businesses.  However, we may continue to review  opportunities which
may include  copromotion,  distribution  arrangements,  as well as licensing and
brand ownership of products.

       The contracts within the PPG segment can be either  performance  based or
fee for service and may require sales, marketing and distribution of product. In
performance  based contracts,  we provide and finance a portion,  if not all, of
the  commercial  activities  in support of a brand in return for a percentage of
product sales. An important performance parameter is normally the level of sales
or  prescriptions  attained by the product during the period of our marketing or
promotional responsibility, and in some cases, for periods after our promotional
activities have ended.

       In the  fourth  quarter  of 2000,  we entered  into a  performance  based
contract  with GSK. Our  agreement  with GSK was in support of Ceftin and was an
exclusive  sales,  marketing  and  distribution  contract.  The  agreement had a
five-year  term,  but was  cancelable by either party without cause on 120 days'
notice.  The agreement was terminated by mutual consent,  effective February 28,
2002, due to the unexpected entry of a competitive generic product.

       In May 2001,  we entered into a copromotion  agreement  with Novartis for
the U.S. sales,  marketing and promotion rights for Lotensin,  and Lotensin HCT.
Another  product,  Lotrel,  was  promoted by the same sales force under the same
agreement,  but was a fee for service  arrangement.  That  agreement ran through
December 31, 2003. On May 20, 2002,  that agreement was replaced by two separate
agreements,  one for Lotensin and another one for Lotrel, Diovan and Diovan HCT.
Both  agreements  ran through  December 31,  2003;  however,  the  Lotrel-Diovan
agreement was renewed on December 24, 2003 for an additional one year period. In
February  2004,  we were  notified by Novartis  of its intent to  terminate  the
Lotrel-Diovan  agreement  without  cause,  effective  March 16,  2004 and,  as a
result,  $28.9 million of anticipated  revenue associated with the Lotrel-Diovan
agreement in 2004 was not  realized.  We continued to be  compensated  under the
terms of the agreement  through the effective  termination date. Even though the
Lotensin  agreement  ended  December 31, 2003, we were still entitled to receive
royalty  payments  on the sales of  Lotensin  through  December  31,  2004.  The
Lotensin  agreement  stipulated  that  we were to  provide  promotion,  selling,
marketing and brand  management for Lotensin.  In exchange,  we were entitled to
receive a percentage of product  revenue based on certain TRx  objectives  above
specified contractual  baselines.  The revenue resulting from the efforts of the
Novartis sales force  responsible for  Lotrel-Diovan was classified in the sales
and marketing  services segment in 2003 (defined in 2003 as a combination of the
current  sales  services and  marketing  services  segments)  instead of the PPG
segment,  where it was  classified  in 2002,  due to the fact  that  there was a
change in the terms of the Lotensin  agreement.  During 2002, we were reliant on
the  attainment  of  performance  incentives,  whereas in 2003 this contract was
basically a fixed fee arrangement.

       In October 2001, we entered into an agreement with Eli Lilly to copromote
Evista in the U.S.  Under this  agreement,  we were  entitled to be  compensated
based upon net sales achieved above a  predetermined  level.  In the event these
predetermined  net sales  levels  were not  achieved,  we would not  receive any
revenue to offset  expenses  incurred.  During 2002, it became apparent that the
net sales levels  likely to be achieved  would not be  sufficient  to recoup our
expenses.  In November  2002,  we agreed with Eli Lilly to terminate  the Evista
copromotion agreement effective December 31, 2002.

                                       23
<PAGE>


       In October  2002,  our MD&D products  unit  partnered  with Xylos for the
exclusive U.S. commercialization rights to XCell line of wound care products. We
became the  exclusive  commercialization  partner for the sales,  marketing  and
distribution  of the product  line in the U.S. On January 2, 2004,  we exercised
our  contractual  right to terminate  the agreement on 135 days' notice to Xylos
since   sales  of  XCell   were  not   sufficient   to   sustain   our  role  as
commercialization partner for the product. Our promotional activities in support
of the  brand  concluded  in  January  2004  and the  agreement  was  terminated
effective  May 16, 2004.  We provided  short-term  loans to Xylos of $250,000 in
February  2004 and  $250,000 in April 2004,  totaling  $500,000.  As a result of
continuing  operating  losses  incurred  by  Xylos  as well as  recent  negative
developments  regarding  their  inability to obtain  appropriate  financing,  we
concluded  during the fourth  quarter of 2004 that both the  investment  and the
recoverability  of the loan were  impaired as of December 31, 2004. As a result,
the $1.0 million  investment  was written down to zero in the fourth  quarter of
2004 and the $500,000 loan was fully  reserved for during the fourth  quarter as
well.

       On December 31, 2002,  we entered into an exclusive  licensing  agreement
with  Cellegy  for  the  exclusive  North  American   rights  for  Fortigel,   a
testosterone gel product.  The agreement is in effect for the commercial life of
the product. Cellegy submitted an NDA for the hypogonadism indication to the FDA
in June 2002. In July 2003, Cellegy received a letter from the FDA rejecting its
NDA for  Fortigel.  Cellegy has told us that,  in the first  quarter of 2005, it
received  FDA  approval  for the  protocol  parameters  for a new  Phase 3 study
proposed by Cellegy to the FDA. We do not know when,  or even  whether,  Cellegy
will conduct such a new Phase 3 Study,  and we cannot predict with any certainty
whether the FDA will ultimately  approve Fortigel for sale in the U.S. Under the
terms of the agreement, we paid Cellegy a $15.0 million initial licensing fee on
December 31,  2002.  This payment was made prior to FDA approval and since there
is no  alternative  future use of the  licensed  rights,  we expensed  the $15.0
million  payment in December 2002,  when  incurred.  This amount was recorded in
other  selling,  general and  administrative  expenses in the  December 31, 2002
consolidated  statements  of  operations.  Pursuant  to the terms of the Cellegy
License  Agreement,  we  will  be  required  to  pay  Cellegy  a  $10.0  million
incremental  license  fee  milestone  payment  upon  Fortigel's  receipt  of all
approvals required by the FDA (if such approvals are obtained) to promote,  sell
and distribute the product in the U.S. This incremental  milestone  license fee,
if incurred,  will be recorded as an  intangible  asset and  amortized  over its
estimated useful life, as then  determined,  which is not expected to exceed the
life of the patent.  Royalty payments to Cellegy over the term of the commercial
life of the product will range from 20% to 30% of net sales.

       On December 12, 2003, we instituted an action against Cellegy in the U.S.
District  Court for the  Southern  District  of New York  seeking to rescind the
Cellegy  License  Agreement on the grounds that it was procured by fraud. We are
seeking  return of the license fee we paid on December 31, 2002 of $15.0 million
plus additional damages caused by Cellegy's conduct.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

       USE OF ESTIMATES
       ----------------

       We prepare our financial statements in accordance with generally accepted
accounting  principles  (GAAP).  The  preparation  of  financial  statements  in
conformity with GAAP requires the use of estimates and  assumptions  that affect
the  reported  amounts  of  assets  and  liabilities,  including  disclosure  of
contingent assets and liabilities,  at the date of the financial  statements and
the reported  amounts of revenue and expenses during the reporting  period.  Our
critical  accounting policies are those that are most important to our financial
condition  and results and that  require the most  significant  judgments on the
part of our  management  in their  application.  Some of those  judgments can be
subjective  and  complex.  In many  instances,  we could  have  reasonably  used
different accounting estimates, and in other instances changes in the accounting
estimates  are  reasonably  likely to occur from period to period.  Accordingly,
actual results could differ significantly from the estimates made by management.
Management considers an accounting estimate to be critical if:

       o  it requires assumptions to be made that were uncertain at the time the
          estimate was made; and

       o  changes in the estimate are reasonably  likely to occur from period to
          period as new information becomes available, or

       o  use of different  estimates that we reasonably  could have used in the
          current  period  could  have a  material  effect  on our  consolidated
          results of any one period, or

       o  the time period over which the  uncertainties  are  resolved  could be
          extensive.

       To the extent that there are material differences between these estimates
and actual results, our future financial statement presentation of our financial
condition and results of operations will be affected.

                                       24
<PAGE>


       We continually  evaluate the accounting  policies and estimates we use to
prepare  the  consolidated  financial  statements.  In  cases  where  management
estimates are used, they are based on historical  experience,  information  from
third-party   professionals  and  various  other  assumptions   believed  to  be
reasonable.  We  refer  to  accounting  estimates  of  this  type  as  "critical
accounting  policies,"  which  are  discussed  further  below.   Management  has
discussed the  development and selection of these critical  accounting  policies
with the  Audit  Committee.  In  addition,  there  are other  items  within  our
financial  statements  that require  estimation,  but are not deemed critical as
based on the criteria above.  Changes in estimates used in these and other items
could have a material  impact on our  consolidated  results of operations in any
one period.

       CRITICAL ACCOUNTING POLICIES
       ----------------------------

       We must ensure  that our  financial  statements  are  properly  stated in
accordance  with GAAP. In many cases,  the accounting  treatment of a particular
transaction is specifically  dictated by GAAP and does not require  management's
judgment in its  application,  while in other  cases,  management's  judgment is
required in selecting  among  available  alternative  accounting  standards that
allow   different   accounting   treatment  for  similar   transactions   (e.g.,
depreciation  methodology,  accounting  changes).  We believe that the following
accounting  policies are critical to  understanding  our  historical  and future
performance,  as these policies relate to the more  significant  areas involving
management's judgments and estimates: revenue recognition; loans and investments
in privately  held  entities;  income  taxes;  goodwill,  intangibles  and other
long-lived assets; incentive compensation; and contingencies.

       For a summary of our significant  accounting policies,  see Note 1 to the
consolidated financial statements.

REVENUE RECOGNITION

       Service revenue
       ---------------

       Service  revenue is earned  primarily  by  performing  product  detailing
programs and other marketing and promotional  services under contracts.  Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured.  Revenue is recognized  net of any potential  penalties
until the  performance  criteria  relating to the penalties  have been achieved.
Performance  incentives,  as well as  termination  payments,  are  recognized as
revenue in the period  earned and when payment of the bonus,  incentive or other
payment is assured.  Under  performance  based contracts,  revenue is recognized
when the performance based parameters are achieved.

       Product revenue
       ---------------

       Product  revenue is  recognized  when  products  are shipped and title is
transferred to the customer. For product sales, provision is made at the time of
sale for all estimated  rebates,  discounts and product  returns and allowances.
Although we have had  significant  product sales in recent  years,  we no longer
plan to  emphasize  the types of  contracts  and  agreements  that would  entail
product sales.

LOANS AND INVESTMENTS IN PRIVATELY HELD ENTITIES

       As  discussed in Note 7 to the  consolidated  financial  statements,  our
loans and  investments in privately held entities are accounted for under either
the  cost  or  equity  method,  whichever  is  appropriate  for  the  particular
investment.  The  appropriate  method is  determined  by our ability to exercise
significant influence over the investee, through either quantity of voting stock
or other means.  If we were to determine that our  accounting  treatment for our
investments should change from the cost to the equity method, in accordance with
APB No. 18, "EQUITY  METHOD OF ACCOUNTING  FOR  INVESTMENTS IN COMMON STOCK," we
would retroactively  restate our previously issued financial statements as if we
had always accounted for the investment under the equity method.

       We assess our loans and  investments  in  privately  held  entities  on a
quarterly  basis for impairment and propriety of current  accounting  treatment.
This  quarterly  review  includes  discussions  with  senior  management  of the
investee,  and  evaluations  of, among other  things,  the  investee's  progress
against its  business  plan,  its  customer  base,  the market  condition of the
overall   industry  of  the  investee,   historical   and  projected   financial
performance,  expected cash needs and recent funding events.  Our assessments of
value are highly  subjective given that these companies may be at an early stage
of  development  and rely  regularly  on  their  investors  for cash  infusions.
Consequently,  if we determine based on the above factors that the loans are not
collectible  and/or  investments are other than  temporarily  impaired,  we will
record a loss on our  investments  which may be  material to the period in which
the  adjustment  is recorded.  For the years ended  December 31, 2004,  2003 and
2002, we recorded  write-downs  of these loans and  investments of $1.5 million,
zero, and approximately $379,000, respectively.

                                       25
<PAGE>


INCOME TAXES

       In accordance with the provisions of SFAS No. 109, "ACCOUNTING FOR INCOME
TAXES," we account for income taxes using the asset and liability  method.  This
method requires  recognition of deferred tax assets and liabilities for expected
future tax  consequences of temporary  differences  that currently exist between
tax bases and financial  reporting bases of our assets and liabilities  based on
enacted  tax  laws  and  rates.  A  valuation  allowance  is  established,  when
necessary,  to reduce the  deferred  income tax assets  that are not more likely
than not to be realized.

       We  operate in  multiple  tax  jurisdictions  and  provide  taxes in each
jurisdiction where we conduct business and are subject to taxation.

       We have  established  estimated  liabilities for federal and state income
tax  exposures  that arise and meet the criteria  for accrual  under SFAS No. 5,
"ACCOUNTING FOR  CONTINGENCIES"  (SFAS 5). These accruals  represent  accounting
estimates  that are subject to inherent  uncertainties  associated  with the tax
audit process. We adjust these accruals as facts and circumstances  change, such
as the progress of a tax audit. We believe that any potential audit  adjustments
will not have a material adverse effect on our financial condition or liquidity.
However,  any adjustments  made may be material to our  consolidated  results of
operations of a reporting period.

GOODWILL, INTANGIBLES AND OTHER LONG-LIVED ASSETS

      We account for our purchases of acquired companies in accordance with SFAS
No. 141, "BUSINESS COMBINATIONS" (SFAS 141) and account for the related acquired
intangible  assets  in  accordance  with  SFAS  No.  142,  "GOODWILL  AND  OTHER
INTANGIBLE  ASSETS"  (SFAS 142). In connection  with our  acquisitions,  we have
historically obtained a valuation from an independent specialist that assists in
the  identification of any specific  intangibles and provides  assistance in our
determination  of an  estimated  value  and  useful  life for  each.  Identified
intangible assets are assigned a value, generally as estimated in the valuation,
and amortized over the estimated  life. In accordance with SFAS 141, we allocate
the cost of the acquired  companies to the identifiable  tangible and intangible
assets and liabilities  acquired,  with the remaining amount being classified as
goodwill.  Since the entities we have acquired do not have significant  tangible
assets,  a  significant  portion of the  purchase  price has been  allocated  to
intangible assets and goodwill.  See Note 21 for more information about goodwill
and other identified intangible assets associated with our acquisitions.

       We test  goodwill for  impairment  at the  reporting  unit level at least
annually and more frequently  upon the occurrence of certain events,  as defined
by SFAS 142.  Goodwill  has been  assigned to the  reporting  units to which the
value of the goodwill  relates.  Goodwill is tested for  impairment  annually on
December 31 in a two-step  process.  First,  for each reporting unit  containing
goodwill,  we must determine if the carrying amount exceeds the fair value based
on a discounted future cash flows model,  which would indicate that goodwill may
be impaired.  Because of the  complexity  of  assumptions  and judgment  used in
estimating  the  future  cash  flows  expected  from a  reporting  unit(s),  the
appropriate  discount rate and other  significant  assumptions used to determine
the fair  value  of the  unit(s),  there is  significant  risk  that the  actual
reporting unit's fair value will vary from the original estimate.  If we were to
determine that goodwill may be impaired,  we would then compare the implied fair
value of the  goodwill,  as  defined  by SFAS  142,  to its  carrying  amount to
determine  the  impairment  loss,  if any.  We  performed  the  required  annual
impairment  tests for each of the three years ended December 31, 2004,  2003 and
2002 and determined that no impairment existed.

       We  evaluate  all  of  our  long-lived  assets  (primarily  property  and
equipment  and  intangible   assets  other  than  goodwill)  for  impairment  in
accordance  with the provisions of SFAS No. 144,  "ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED  ASSETS" (SFAS 144). SFAS 144 requires that long-lived
assets and  intangible  assets other than goodwill be evaluated  for  impairment
whenever events or changes in circumstances  indicate that the carrying value of
an asset  may not be  recoverable  based on  expected  undiscounted  cash  flows
attributable  to that  asset.  Because  of the  complexity  of  assumptions  and
judgment  used  in  estimating  the  value  and  life  of the  identified  other
intangible  assets  resulting from our  acquisitions,  there is significant risk
that  their  actual  value  and life may vary  from the  original  estimate.  We
periodically  evaluate  whether  events and  circumstances  have  occurred  that
indicate the carrying amount of intangibles  may warrant  revision or may not be
recoverable.  We may determine that an intangible asset has diminished or has no
remaining  value  prior  to it  being  fully  amortized.  In this  instance,  in
accordance with SFAS 144, we would be required to record a charge to earnings to
account for the impairment of the asset which may have a material adverse effect
on our results of operations for the current period.

                                       26
<PAGE>


       While  we do not  currently  believe  any of our  long-lived  assets  are
impaired,  and we do not  anticipate an impairment in the near term, if a change
in circumstances  were to occur requiring an assessment of impairment,  we would
be required to evaluate  whether the future  undiscounted  cash flows related to
the asset will be greater than its carrying  value at the time of the impairment
test.  While  our cash  flow  assumptions  are  consistent  with the  plans  and
estimates we are using to manage our operations,  there is significant  judgment
in determining the cash flows  attributable to our intangible  assets over their
respective  estimated  useful  lives.  If such  an  evaluation  resulted  in the
identification of an impairment of any of our long-lived assets, such impairment
would be recorded in the period we determine the impairment has occurred.

INCENTIVE COMPENSATION

       We have various incentive  compensation programs that are funded based on
one or more of the following targets:

       o  Annual consolidated net income

       o  Business unit operating income

       o  Individual contract milestone achievements

       o  Individual performance goals

       All of the incentive  programs  feature a  discretionary  component,  and
incentives  based on annual  consolidated  net income or business unit operating
income are subject to approval by the board of directors.  Quarterly reviews are
made for any changes in the facts and circumstances underlying the estimates for
accrual of these  incentives;  changes in these estimates could be material from
quarter to quarter  depending on the current and projected results of operations
and field  performance on the programs.  In making changes to our estimates,  we
conform to the guidance  contained in APB No. 20,  "ACCOUNTING  CHANGES,"  which
outlines the methods that companies may use to record accounting changes,  which
includes changes in estimates, among other items.

CONTINGENCIES

       In  the  normal   course  of   business,   we  are   subject  to  various
contingencies.   Contingencies  are  recorded  in  the  consolidated   financial
statements  when it is probable that a liability will be incurred and the amount
of the loss can be reasonably estimated,  or otherwise disclosed,  in accordance
with SFAS 5. Litigation outcomes are not within our complete control,  are often
very  difficult to predict and often are resolved over long periods of time. For
a discussion of legal contingencies, please refer to Note 19 to the consolidated
financial statements.

CONSOLIDATED RESULTS OF OPERATIONS

       The  following  table sets  forth,  for the periods  indicated,  selected
statement of operations data as a percentage of revenue.  The trends illustrated
in this table may not be indicative of future operating results.

                                       27
<PAGE>


<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                              -------------------------------------------------
OPERATING DATA                                 2004       2003       2002       2001      2000
                                              ------     ------     ------     ------    ------
<S>                                            <C>        <C>        <C>        <C>       <C>
Revenue
  Service                                      100.4%     103.4%      97.9%      42.1%     77.0%
  Product, net                                  (0.4)      (3.4)       2.1       57.9      23.0
                                              ------     ------     ------     ------    ------
    Total revenue                              100.0      100.0      100.0      100.0     100.0
                                              ------     ------     ------     ------    ------
Cost of goods and services
  Program expenses                              72.8       73.8       90.3       35.3      58.6
  Cost of goods sold                             0.1        0.4         --       45.8      15.8
                                              ------     ------     ------     ------    ------
    Total cost of goods and services            72.9       74.2       90.3       81.1      74.4
                                              ------     ------     ------     ------    ------

Gross profit                                    27.1       25.8        9.7       18.9      25.6

Operating expenses
  Compensation expense                           9.4       10.7       10.6        5.5       7.5
  Other selling, general and administrative
   expenses                                      8.0        8.8       14.3       11.7       8.8
  Restructuring and other related expenses        --        0.1        1.0         --        --
    Litigation settlement                         --        0.6         --         --        --
                                              ------     ------     ------     ------    ------
      Total operating expenses                  17.4       20.2       25.9       17.2      16.3
                                              ------     ------     ------     ------    ------
Operating income (loss)                          9.7        5.7      (16.2)       1.7       9.3
Other income, net                                0.2        0.3        0.6        0.3       1.1
                                              ------     ------     ------     ------    ------
Income (loss) before provision (benefit)
  for income taxes                               9.9        6.0      (15.6)       2.0      10.4
Provision (benefit) for income taxes             4.1        2.4       (5.6)       1.2       4.3
                                              ------     ------     ------     ------    ------
Net income (loss)                                5.8%       3.6%     (10.0)%      0.8%      6.1%
                                              ======     ======     ======     ======    ======
</TABLE>


       COMPARISON OF 2004 AND 2003


           REVENUE (IN THOUSANDS)

<TABLE>
<CAPTION>
-------------------------------------------------------------------
                       2004       2003     Inc/(Dec)  % Inc/(Dec)
-------------------------------------------------------------------
<S>                  <C>        <C>        <C>           <C>
Sales services       $332,431   $271,210   $ 61,221      22.6%
Marketing services     29,057     29,436       (379)     (1.3)%
PPG                     2,956     43,884    (40,928)    (93.3)%
-------------------------------------------------------------------
   TOTAL             $364,444   $344,530   $ 19,914       5.8%
-------------------------------------------------------------------

<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                            Service                                         Product
------------------------------------------------------------------- ----------------------------------------------
                       2004       2003     Inc/(Dec)  % Inc/(Dec)      2004        2003     Inc/(Dec) % Inc/(Dec)
------------------------------------------------------------------- ----------------------------------------------
<S>                  <C>        <C>        <C>           <C>         <C>         <C>         <C>           <C>
Sales services       $332,431   $271,210   $ 61,221      22.6%       $    --     $     --    $    --       0.0%
Marketing services     29,057     29,436       (379)     (1.3)%           --           --         --       0.0%
PPG                     4,477     55,497    (51,020)    (91.9)%       (1,521)     (11,613)    10,092        **
------------------------------------------------------------------- ----------------------------------------------
TOTAL                $365,965   $356,143   $  9,822       2.8%       $(1,521)    $(11,613)   $10,092        **
------------------------------------------------------------------- ----------------------------------------------
</TABLE>


       REVENUE.  Total revenue for 2004 was $364.4 million, an increase of $19.9
million or 5.8% from  revenue of $344.5  million for 2003.  Service  revenue was
$366.0  million in 2004,  an  increase  of $9.8  million or 2.8% from the $356.1
million recorded in 2003. Product net revenue for 2004 was negative $1.5 million
primarily as a result of a $1.7  million  increase in the Ceftin  reserve;  this
increase  was mainly  attributable  to the  changes in  estimate  related to the
allowance for sales returns recorded on previous Ceftin sales.  (Please see Note
3 to the consolidated financial statements.)

                                       28
<PAGE>


       The sales services segment  generated $332.4 million in revenue for 2004,
an  increase  of $61.2  million  over 2003.  This  increase in revenue is mainly
attributable  to three  dedicated CSO contracts,  all of which  commenced in the
second half of 2003 and were active for the full year in 2004.

       The  marketing  services  segment  generated  $29.1 million in revenue in
2004, a slight decrease of $379,000 from the comparable  prior year period.  The
EdComm unit's revenue for 2004 declined on a year-over-year  basis mainly due to
the  decrease in services  provided to one major  client.  Revenue  generated by
Pharmakon,  which was acquired on August 31, 2004,  almost completely offset the
decline in revenue from the EdComm unit.

       The PPG  segment  generated  net revenue of $2.9  million in 2004,  which
consisted of $4.4 million in service revenue offset by negative  product revenue
of $1.5  million.  The  service  revenue of $4.4  million was  generated  almost
entirely by revenue from Lotensin  royalties;  the negative  product  revenue of
$1.5 million was  primarily  related to the increase in the Ceftin sales returns
reserve.  As our  responsibility  to accept  product  returns ended December 31,
2004,  no further  increases  to this  reserve  are  likely.  We will,  however,
continue to pay these returns  during 2005. In 2003, the PPG segment had service
revenue of $55.5  million  almost  entirely from Lotensin and this was offset by
negative  product revenue of $11.6 million which was mainly  attributable to the
$12.0  million  increase  in the  Ceftin  reserve.  The  Lotensin  contract  was
effectively  completed  December  31, 2003,  but we  continued to earn  Lotensin
royalties  through  December 31, 2004.


           COST OF GOODS AND SERVICES (IN THOUSANDS)

<TABLE>
<CAPTION>
-------------------------------------------------------------------
                       2004       2003    Inc/(Dec)  % Inc/(Dec)
-------------------------------------------------------------------
<S>                  <C>        <C>        <C>           <C>
Sales services       $249,131   $201,059   $ 48,072      23.9%
Marketing services     16,352     15,674        678       4.3%
PPG                       131     38,716    (38,585)    (99.7)%
-------------------------------------------------------------------
   TOTAL             $265,614   $255,449   $ 10,165       4.0%
-------------------------------------------------------------------

<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                      Service                                        Product
------------------------------------------------------------------- ----------------------------------------------
                       2004        2003    Inc/(Dec)  % Inc/(Dec)       2004       2003   Inc/(Dec)  % Inc/(Dec)
------------------------------------------------------------------- ----------------------------------------------
<S>                  <C>         <C>        <C>           <C>         <C>       <C>        <C>           <C>
Sales services       $249,131    $201,059   $ 48,072      23.9%       $    --   $     --   $    --       0.0%
Marketing services     16,352      15,674        678       4.3%            --         --        --       0.0%
PPG                      (123)     37,429    (37,552)   (100.3)%          254      1,287    (1,033)    (80.3)%
------------------------------------------------------------------- ----------------------------------------------
   TOTAL             $265,360    $254,162   $ 11,198       4.4%       $   254   $  1,287   $(1,033)    (80.3)%
------------------------------------------------------------------- ----------------------------------------------
</TABLE>

       COSTS OF GOODS AND SERVICES, AND GROSS PROFIT. Cost of goods and services
for 2004 was $265.6  million,  which was $10.2 million or 4.0% more than cost of
goods and services of $255.4 million for 2003.

       o  During 2004 the gross profit percentage was 27.1% compared to 25.8% in
          the comparable prior year period.

       o  The gross profit margins were similar in 2004 and 2003 for each of the
          segments, and

       o  The service revenue gross profit  percentages were 27.5% and 28.6% for
          2004 and 2003, respectively.

       The sales  services  segment had gross  profit of $83.3  million in 2004,
with a gross  profit  percentage  of 25.1%;  during 2003 this  segment had gross
profit of $70.2 million and a gross profit  percentage of 25.9%. The increase in
gross profit is mainly  attributable  to three  dedicated CSO contracts,  all of
which  commenced in the second half of 2003,  and which were active for the full
year in 2004.

       The marketing  services  segment earned gross profit of $12.7 million and
$13.8 million for 2004 and 2003,  respectively.  The gross  percentage  declined
slightly  from  46.8% in 2003 to 43.7% in 2004.  The  decrease  in gross  profit
attributable  to the  marketing  services  is due  primarily  to the  decline in
revenue from EdComm on a year over year basis.  The  acquisition of Pharmakon in
August 2004 partially offset this decline.

                                       29
<PAGE>


       The PPG segment  had $2.8  million in gross  profit for 2004  compared to
$5.2 million in 2003.  The decrease in PPG gross profit is  attributable  to the
Lotensin contract ending December 31, 2003.

       (NOTE:  COMPENSATION  AND OTHER SG&A  EXPENSE  AMOUNTS  FOR EACH  SEGMENT
CONTAIN ALLOCATED CORPORATE OVERHEAD.)

--------------------------------------------------------------------------------
COMPENSATION EXPENSE (IN THOUSANDS)
--------------------------------------------------------------------------------
                                % of                % of                 % Inc/
                       2004    revenue     2003    revenue  Inc/(Dec)    (Dec)
--------------------------------------------------------------------------------
Sales services       $25,022     7.5%    $17,573     6.5%    $ 7,449     42.4%
Marketing services     7,367    25.4%      7,463    25.4%        (96)    (1.3)%
PPG                    1,936    65.5%     11,865    27.0%     (9,929)   (83.7)%
================================================================================
TOTAL                $34,325     9.4%    $36,901    10.7%    $(2,576)    (7.0)%
--------------------------------------------------------------------------------

       COMPENSATION EXPENSE.  Compensation expense for 2004 was $34.3 million, a
decrease of $2.6 million or 7.0% less than the $36.9 million for the  comparable
prior year  period.  This  decrease can be  primarily  attributed  to an overall
decrease in the amount of incentive  compensation  in 2004.  As a percentage  of
total revenue,  compensation  expense  decreased to 9.4% for 2004 from 10.7% for
2003. Compensation expense for the sales services segment increased $7.4 million
or 42.4%.  Conversely,  the compensation expense associated with the PPG segment
decreased by $9.9 million or 83.7%.  The changes in both the sales  services and
PPG segments reflect the changes in how  management's  time and effort was being
concentrated on a year-over-year basis. Compensation expense associated with the
marketing  services  segment  remained  virtually  the same,  decreasing by 1.3%
overall.

--------------------------------------------------------------------------------
OTHER SG&A
(IN THOUSANDS)
--------------------------------------------------------------------------------
                                % of                % of                 % Inc/
                       2004    revenue     2003    revenue  Inc/(Dec)    (Dec)
--------------------------------------------------------------------------------
Sales services       $24,260     7.3%    $16,267     6.0%    $ 7,993     49.1%
Marketing services     3,803    13.1%      2,622     8.9%      1,181     45.0%
PPG                    1,250    42.3%     11,458    26.1%    (10,208)   (89.1)%
================================================================================
TOTAL                $29,313     8.0%    $30,347     8.8%    $(1,034)    (3.4)%
--------------------------------------------------------------------------------

       OTHER  SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Total other SG&A
expenses were $29.3 million in 2004,  versus $30.3 million in 2003.  Even though
total other SG&A for 2004 did decrease overall, included is $500,000 in bad debt
expense  associated  with the write off of the Xylos loan discussed  previously,
which was recorded in the fourth quarter of 2004. As a percent to revenue, other
SG&A expenses  decreased  slightly to 8.0% in 2004 from 8.8% in 2003. Other SG&A
expenses  associated with the sales services  segment  increased $8.0 million or
49.1%. In the PPG segment, other SG&A decreased by $10.2 million or 89.1% as the
majority of  management's  time and efforts as well as the associated  resources
were  concentrated  on the  other two  segments.  Other  SG&A for the  marketing
services segment  increased by $1.2 million or 45.3%. This increase is partially
attributable  to  the  Pharmakon   acquisition  and  the  amortization   expense
associated with the acquisition.

       RESTRUCTURING AND LITIGATION SETTLEMENT EXPENSES.  There were no expenses
incurred in 2004 in these  categories.  In 2003,  approximately  $143,000 of net
restructuring  expense and $2.1 million for the Auxilium legal  settlement  were
recorded in SG&A.

--------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
(IN THOUSANDS)
--------------------------------------------------------------------------------
                                                                        % Inc/
                       2004   % of rev    2003    % of rev  Inc/(Dec)   (Dec)
--------------------------------------------------------------------------------
Sales services       $34,018    10.2%    $34,891    12.9%    $  (873)   (2.51)%
Marketing services     1,535     5.3%      3,567    12.1%     (2,032)  (56.95)%
PPG                     (362)  -12.2%    (18,868)  -43.0%     18,506      **
================================================================================
   TOTAL             $35,191     9.7%    $19,590     5.7%    $15,601    79.64%
--------------------------------------------------------------------------------

                                       30
<PAGE>


       OPERATING  INCOME.  There was operating income for 2004 of $35.2 million,
compared  to  operating  income of $19.6  million in 2003,  an increase of $15.6
million.  This increase can be mainly  attributed to the negative impact in 2003
of the $12.0  million  increase to the Ceftin  sales  returns  reserve (the 2004
Ceftin sales returns impact was approximately $1.7 million).  As a percentage of
revenue  from the sales  services  segment,  operating  income for that  segment
decreased to 10.2% for 2004,  from 12.9% for 2003. This decrease as a percent to
revenue can be attributed to the increased amount of SG&A being absorbed by this
segment in 2004. There was operating  income in 2004 for the marketing  services
segment of $1.5  million  compared to  operating  income of $3.6  million in the
comparable  prior  year  period.   This  can  be  attributed  to  the  decreased
contribution  from the EdComm  division,  partially  offset by the  income  from
Pharmakon.  There was an operating loss for the PPG segment for 2004 of $362,000
that was primarily attributable to the increase in the Ceftin returns reserve of
$1.7 million.  In 2003,  the PPG segment had an operating  loss of $18.9 million
primarily  attributable  to the $12.0  million  adjustment  to the Ceftin  sales
returns accrual and the losses associated with the Xylos product launch, and the
slower than anticipated sales of that product.

       OTHER INCOME, NET. Other income, net, for 2004 and 2003 was approximately
$780,000  and $1.1  million,  respectively.  For 2004,  other  income,  net, was
comprised primarily of interest income of $1.8 million,  partially offset by the
loss on the  preferred  stock  investment in Xylos (see Note 7) of $1.0 million.
For 2003, other income,  net, was primarily  comprised of interest  income.  The
increase in interest income is primarily  attributed to higher interest rates in
2004, and larger average cash balances in 2004.

       PROVISION FOR INCOME  TAXES.  We recorded a provision for income taxes of
$14.8 million for 2004,  compared to $8.4 million in 2003. Our overall effective
tax rate was 41.3% and 40.7% for 2004 and 2003,  respectively.  The  increase in
the 2004  effective  rate is primarily due to a valuation  allowance  associated
with the capital  loss  carryforward  that  resulted  from the Xylos  investment
write-off since management believes it is more likely than not that the deferred
tax asset will not be realized.

       NET INCOME.  There was net income for 2004 of $21.1 million,  compared to
net income of $12.3 million for 2003 due to the factors discussed above.


       COMPARISON OF 2003 AND 2002

REVENUE (IN THOUSANDS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                                       % Inc/
                       2003       2002     Inc/(Dec)    (Dec)
-----------------------------------------------------------------
<S>                  <C>        <C>        <C>           <C>
Sales services       $271,210   $185,386   $ 85,824      46.3%
Marketing services     29,436     26,284      3,152      12.0%
PPG                    43,884     96,205    (52,321)    (54.4)%
-----------------------------------------------------------------
   TOTAL             $344,530   $307,875   $ 36,655      11.9%
-----------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------- ---------------------------------------------
                                      Service                                         Product
----------------------------------------------------------------- ---------------------------------------------
                                                         % Inc/                                         % Inc/
                       2003        2002    Inc/(Dec)     (Dec)         2003        2002     Inc/(Dec)    (Dec)
----------------------------------------------------------------- ---------------------------------------------
<S>                  <C>        <C>       <C>            <C>         <C>         <C>        <C>           <C>
Sales services       $271,210   $185,386  $  85,824      46.3%       $     --    $     --   $    --       0.0%
Marketing services     29,436     26,284      3,152      12.0%             --          --        --       0.0%
PPG                    55,497     89,767    (34,270)    (38.2)%       (11,613)      6,438    (18,051)      **
----------------------------------------------------------------- ---------------------------------------------
   TOTAL             $356,143   $301,437   $ 54,706      18.2%       $(11,613)   $  6,438   $(18,051)      **
----------------------------------------------------------------- ---------------------------------------------
</TABLE>

       REVENUE,  NET. Total net revenue for 2003 was $344.5 million,  11.9% more
than revenue of $307.9  million for the prior year period.  Service  revenue was
$356.1  million in 2003,  an increase of $54.7  million or 18.2% from the $301.4
million  recorded in 2002. This increase is mainly  attributable to the addition
of three  significant  dedicated  CSO  contracts  in July  2003,  as well as the
performance on the Lotensin contract.  Product net revenue for 2003 was negative
$11.6  million  as a result of a $12.0  million  increase  in the  Ceftin  sales
returns  accrual which was recorded in the fourth quarter of 2003; this increase
was attributable to the changes in estimates  related to the allowance for sales
returns  recorded  on  previous  Ceftin  sales.   (Please  see  Note  3  to  the
consolidated  financial  statements.)  This was  partially  offset  by Xylos net
product sales of approximately $387,000 in 2003.

                                       31
<PAGE>


       The sales  services  segment had $271.2  million in revenue for 2003,  an
increase of $85.8 million over 2002. This increase was attributable to the three
new dedicated CSO contracts mentioned  previously,  and the  reclassification of
the Lotrel-Diovan  revenues due to the renegotiation of our Novartis contract in
May 2002. The Novartis sales force  responsible for Lotrel-Diovan was classified
in the  sales and  marketing  services  segment  in 2003  (defined  in 2003 as a
combination  of the current  sales  services and  marketing  services  segments)
instead of the PPG segment  (where it was  classified in 2002).  During 2002, we
were reliant on the attainment of performance incentives,  whereas in 2003, this
contract was basically a fixed fee arrangement.

       The marketing  services  segment had $29.4 million in revenue in 2003, an
increase of $3.2  million  over 2002.  This  increase  was  attributable  to the
improved  performance of the EdComm  division in 2003.  This division  benefited
from a significant increase in revenue from one of its largest clients in 2003.

       The PPG  segment  had service  revenue of $55.5  million in 2003,  mainly
attributable  to the results of the  Lotensin  contract.  Lotensin  prescription
levels remained  relatively  stable  throughout the year,  which resulted in our
earning  additional  revenue under the terms of the  agreement.  The decrease of
$34.3  million in 2003 from the  comparable  prior year period can be  primarily
attributed to the Lotrel-Diovan  revenue  reclassification  discussed above. The
negative product revenue of $11.6 million compares to $6.4 million in revenue to
2002. The negative product revenue in 2003 was mainly  attributable to the $12.0
million increase in the Ceftin sales returns accrual discussed above.

COST OF GOODS AND SERVICES (IN THOUSANDS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                                         % Inc/
                       2003       2002     Inc/(Dec)     (Dec)
-----------------------------------------------------------------
<S>                  <C>        <C>        <C>           <C>
Sales services       $201,059   $149,305   $ 51,754      34.7%
Marketing services     15,674     13,718      1,956      14.3%
PPG                    38,716    114,979    (76,263)    (66.3)%
-----------------------------------------------------------------
   TOTAL             $255,449   $278,002   $(22,553)     (8.1)%
-----------------------------------------------------------------
<CAPTION>

----------------------------------------------------------------- ---------------------------------------------
                                       Service                                        Product
----------------------------------------------------------------- ---------------------------------------------
                                                         %Inc/                                           % Inc/
                       2003       2002     Inc/(Dec)     (Dec)         2003        2002     Inc/(Dec)    (Dec)
----------------------------------------------------------------- ---------------------------------------------
<S>                  <C>        <C>        <C>           <C>         <C>         <C>        <C>           <C>
Sales services       $201,059   $149,305   $ 51,754      34.7%       $     --    $     --   $    --       0.0%
Marketing services     15,674     13,718      1,956      14.3%             --          --        --       0.0%
PPG                    37,429    114,979    (77,550)    (67.5)%         1,287          --     1,287       0.0%
----------------------------------------------------------------- ---------------------------------------------
   TOTAL             $254,162   $278,002   $(23,840)     (8.6)%      $  1,287    $     --   $ 1,287       0.0%
----------------------------------------------------------------- ---------------------------------------------
</TABLE>

       COSTS OF GOODS  AND  SERVICES.  Cost of goods and  services  for 2003 was
$255.5  million,  which  was $22.5  million  or 8.1% less than cost of goods and
services of $278.0 million for 2002. During 2003 the gross profit percentage was
25.8%  compared to 9.7% in the  comparable  prior year period.  The gross profit
attributable  to service revenue was $102.0 million in 2003 versus $23.4 million
in 2002,  an increase of 335.9%.  As discussed in Note 2, during 2002, it became
apparent that the net sales levels likely to be achieved  under the terms of the
Evista  contract  would not be sufficient  to recoup our  expenses.  In November
2002,  we agreed with Eli Lilly to terminate  the Evista  copromotion  agreement
effective  December  31,  2002.  A  $34.7  million  negative  gross  profit  was
recognized  under this contract for the year ended December 31, 2002.  Excluding
the effect of the Evista  contract,  the gross profit  percentage for 2002 would
have been 21.0%.

       The sales services segment had gross profit of $70.2 million with a gross
profit percentage of 25.9%, a substantial  increase over the $36.1 million gross
profit and 19.5% gross profit percentage achieved in 2002,  primarily due to the
three new  significant  contracts  entered  into in 2003.  Generally,  the gross
profit percentage achieved in 2003 was slightly higher than our historical gross
profit percentages and was attributable to the greater efficiencies  achieved in
the performance of our contractual obligations for most service units.

                                       32
<PAGE>


      The marketing  services segment earned a gross profit of $13.8 million and
$12.6 million for the 2003 and 2002, respectively.  The increase in gross profit
of $1.2 million is primarily attributable to the increased revenue in the EdComm
division.

      The PPG  segment  had $5.2  million in gross  profit for 2003  compared to
negative  gross profit of $18.8  million in 2002.  Excluding  the $12.0  million
effect of the increase in the Ceftin  accrual for sales  returns,  the contracts
within  PPG  contributed  $17.2  million  in gross  profit  with a gross  profit
percentage of 30.7%. Excluding the Evista contract, in 2002 total PPG would have
earned a positive gross profit of $16.0 million and a gross profit percentage of
16.6%;  the Evista contract was terminated as of December 31, 2002. The increase
in gross profit  percentage  excluding  these items from an adjusted 16.6% to an
adjusted  30.7%  resulted  from our success on the  Lotensin  program.  Lotensin
prescription  levels  remained  relatively  stable  throughout  the year,  which
resulted in our earning additional revenue under the terms of the agreement.

      (NOTE:  COMPENSATION  AND OTHER  SG&A  EXPENSE  AMOUNTS  FOR EACH  SEGMENT
CONTAIN ALLOCATED CORPORATE OVERHEAD.)

--------------------------------------------------------------------------------
COMPENSATION EXPENSE (EXCLUDING RESTRUCTURING EXPENSE)
(IN THOUSANDS)
--------------------------------------------------------------------------------
                                % of                 % of               % Inc/
                        2003   revenue    2002      revenue  Inc/(Dec)   (Dec)
--------------------------------------------------------------------------------
Sales Services        $17,573    6.5%   $13,509       7.3%    $ 4,064    30.1%
Marketing Services      7,463   25.4%     8,798      33.5%     (1,335)  (15.2)%
PPG                    11,865   27.0%    10,363      10.8%      1,502    14.5%
--------------------------------------------------------------------------------
   TOTAL              $36,901   10.7%   $32,670      10.6%    $ 4,231    13.0%
--------------------------------------------------------------------------------

         COMPENSATION EXPENSE.  Compensation expense for 2003 was $36.9 million,
an  increase  of $4.2  million  or 13.0%  more  than the $32.7  million  for the
comparable prior year period.  This increase can be attributed to a $7.1 million
increase in incentive  compensation  in 2003,  which  resulted from the improved
performance  of  most  business  units  in  2003.  This  increase  in  incentive
compensation  was  partially  offset  by  savings  attributable  to the  reduced
headcount associated with our 2002 restructuring  initiative. As a percentage of
total revenue,  compensation  expense increased  slightly to 10.7% for 2003 from
10.6% for 2002.  Compensation  expense  as a percent  of  revenue  for the sales
services and  marketing  services  segments  decreased but increased for the PPG
segment.  The increase in expense,  as a percent of revenue for the PPG segment,
reflects the investment of additional  management  effort during 2003 toward our
investigation  of  opportunities  for  licensing or acquiring  products for that
segment.

--------------------------------------------------------------------------------
OTHER SG&A (EXCLUDING RESTRUCTURING EXPENSE AND LITIGATION EXPENSE)
(IN THOUSANDS)
--------------------------------------------------------------------------------
                               % of                 % of               % Inc/
                       2003   revenue    2002      revenue  Inc/(Dec)   (Dec)
--------------------------------------------------------------------------------
Sales Services       $16,267    6.0%   $15,477        7.3%  $    790      5.1%
Marketing Services     2,622    8.9%     2,986       11.4%      (364)   (12.2)%
PPG                   11,458   26.1%    25,700       26.7%   (14,242)   (55.4)%
--------------------------------------------------------------------------------
  TOTAL              $30,347    8.8%   $44,163       14.3%  $(13,816)   (31.3)%
--------------------------------------------------------------------------------
  Less: Cellegy
    licensing fee         --     --     15,000       15.6%   (15,000)  (100.0)%
--------------------------------------------------------------------------------
  ADJUSTED TOTAL     $30,347    8.8%   $29,163        9.5%  $  1,193      4.1%
--------------------------------------------------------------------------------

       OTHER  SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Total other SG&A
expenses were $30.3 million for 2003, which represented 8.8% of revenues.  Other
selling,  general and administrative  expenses were $44.2 million in 2002, which
included the $15.0 million payment for the initial licensing fee associated with
the Cellegy License  Agreement.  Excluding the $15.0 million Cellegy license fee
payment  we  incurred  in  2002,   other  SG&A   increased  year  over  year  by
approximately  $1.2 million or 4.1%,  however it  decreased  as a percentage  of
revenue.

      RESTRUCTURING AND OTHER RELATED  EXPENSES.  During the year ended December
31, 2002, we accrued $6.3 million in restructuring and other related expenses in
connection with our decision to consolidate operations to create efficiencies.

                                       33
<PAGE>

       During the year ended December 31, 2003, we recognized a net reduction in
the  restructuring  accrual of  $197,000,  of which  $143,000  was  recorded  as
additional  expense in SG&A and  $340,000  was  recorded  as a credit to program
expenses  consistent with the original  recording of the restructuring  charges.

       As  of  December  31,  2003,  the  restructuring  accrual  was  $744,000,
consisting  of  remaining  severance  and  lease  payments.   All  restructuring
activities  associated  with  this  accrual  are  substantially   complete.  The
restructuring  accrual and related  activities  are discussed  more fully in the
"RESTRUCTURING AND OTHER RELATED EXPENSES" section of this MD&A.

       LITIGATION  SETTLEMENT.  On May 8,  2003,  we entered  into a  settlement
agreement with Auxilium.  We recorded a $2.1 million charge in the first quarter
of 2003 which  included a cash  payment paid upon  execution  of the  settlement
agreement  and  other  additional  expenses  that were  required  as part of the
settlement.  Please see Note 19 to the  consolidated  financial  statements  for
additional information.


   -------------------------------------------------------------------------
   OPERATING INCOME (LOSS)
   (IN THOUSANDS)
   -------------------------------------------------------------------------
                                           2003         2002       Inc/(Dec)
   -------------------------------------------------------------------------
    Sales Services                      $ 34,891      $  4,745      $30,146
    Marketing Services                     3,567           290        3,277
    PPG                                  (18,868)      (55,210)      36,342
   -------------------------------------------------------------------------
       TOTAL                            $ 19,590      $(50,175)     $69,765
   -------------------------------------------------------------------------

       OPERATING  INCOME  (LOSS).  There was operating  income for 2003 of $19.6
million, compared to an operating loss of $50.2 million in 2002. The 2002 period
operating  loss was  primarily the result of the $35.1  million  operating  loss
generated  by the Evista  contract and $15.0  million in licensing  fee expenses
associated with the Cellegy License Agreement. Operating income for 2003 for the
sales  services  segment was $34.9  million,  or 635.3% more than sales services
operating  income for 2002 of $4.7 million.  As a percentage of revenue from the
sales services segment, operating income for that segment increased to 12.9% for
2003,  from 2.6% in 2002.  There was an  operating  loss for the PPG segment for
2003 of $18.9 million which was attributable to the $12.0 million  adjustment to
the Ceftin sales return accrual in 2003 and the losses associated with the Xylos
product launch, and the slower than anticipated sales of the Xylos product. This
compares  to an  operating  loss of $55.2  million  in 2002,  most of which  was
attributable to the Evista  contract loss and the Cellegy initial  licensing fee
discussed above.  There was operating income for 2003 for the marketing services
segment of $3.6 million compared to operating  income of approximately  $290,000
in the prior period.  This can be attributed to the increased  contribution from
the EdComm division.

       OTHER INCOME,  NET. Other income, net, for 2003 and 2002 was $1.1 million
and $2.0  million,  respectively.  For 2003,  other  income,  net, was comprised
primarily  of interest  income.  For 2002,  other  income,  net,  was  primarily
comprised of $2.5 million in other  income and net  interest  income,  which was
partially  offset by losses on minority  investments  and  disposal of assets of
$0.5 million.  The  reduction in other income,  net, in 2003 is primarily due to
lower interest rates in 2003.

       PROVISION  (BENEFIT) FOR INCOME TAXES.  There was an income tax provision
of $8.4 million for 2003, compared to an income tax benefit of $17.4 million for
2002, which consisted of Federal and state corporate income taxes. The effective
tax rate for 2003 was 40.7%,  compared to an effective tax benefit rate of 36.2%
for 2002. During 2002, the benefit rate was lower than the target rate of 41% to
42% as a result of the effect of recording a valuation allowance

                                       34
<PAGE>


against certain state NOL carryforwards, for which it was determined that it was
not more likely than not that the benefit from the net operating losses would be
realized.  The effective tax rate for 2003 was lower than the target rate of 41%
to 42% due to reductions in certain  non-deductible  costs and a decrease in the
state  effective  tax rate  resulting  from  changes in state tax  apportionment
factors  and an  increase  in the number of filing  jurisdictions  required as a
result of changes in our  operations.  The tax benefit  from the reversal of the
state valuation allowance was offset by a decrease in the value of our net state
deferred tax asset  resulting  from the decrease in our overall state  effective
tax rate.

       NET  INCOME  (LOSS).  There  was net  income  for 2003 of $12.3  million,
compared to a net loss of $30.8  million  for 2002 due to the factors  discussed
above.

RESTRUCTURING AND OTHER RELATED EXPENSES

       During the third quarter of 2002, we adopted a  restructuring  plan,  the
objectives of which were to consolidate operations in order to enhance operating
efficiencies (the 2002 Restructuring  Plan). This plan was primarily in response
to the recognition that the infrastructure that supported certain business units
was larger than required.  We originally  estimated that the restructuring would
result in annualized SG&A savings of approximately  $14.0 million,  based on the
level of SG&A  spending at the time we  initiated  the  restructuring.  However,
these savings have been partially  offset by  incremental  SG&A expenses we have
incurred in  subsequent  periods as we have been  successful  in  expanding  our
business  platforms for our  segments.  Substantially  all of the  restructuring
activities  were  completed  by December 31, 2003,  except for  remaining  lease
payments and severance payouts.

       In connection with this plan, we originally estimated that we would incur
total restructuring  expenses of approximately $5.4 million, other non-recurring
expenses  of  $0.1  million,  and  accelerated  depreciation  of  $0.8  million.
Excluding $0.1 million,  all of these expenses were recognized in 2002. The $0.1
million  recognized  in 2003  consisted  of $0.4 million in  additional  expense
incurred for severance and other exit costs  partially  offset by the receipt of
$0.3 million for subletting the Cincinnati, Ohio facility.

       The primary items comprising the $5.4 million in  restructuring  expenses
were  $3.7  million  in  severance  expense  consisting  of  cash  and  non-cash
termination   payments  to  employees  in  connection  with  their   involuntary
termination  and $1.7  million in other  restructuring  exit costs  relating  to
leased facilities and other contractual obligations.

       During the year ended December 31, 2003, we recognized a net reduction in
the  restructuring  accrual of  $197,000,  of which  $143,000  was  recorded  as
additional  expense in SG&A and  $340,000  was  recorded  as a credit to program
expenses  consistent with the original  recording of the restructuring  charges.
For the year ended December 31, 2004, there were no such adjustments.

       The  accrual  for  restructuring  and exit  costs  totaled  approximately
$161,000 at December 31,  2004,  and is recorded in current  liabilities  on the
accompanying balance sheet.

       A roll  forward of the  activity  for the 2002  Restructuring  Plan is as
follows:

                            BALANCE AT                              BALANCE AT
                           DECEMBER 31,                             DECEMBER 31,
      (IN THOUSANDS)           2003       ADJUSTMENTS    PAYMENTS       2004
Administrative severance      $  285         $   -         $(272)     $    13
Exit costs                       459             -          (311)         148
                              ------         -----         -----      -------
                                 744             -          (583)         161
                              ------         -----         -----      -------
Sales force severance             --            --            --           --
                              ------         -----         -----      -------
   TOTAL                      $  744         $  --         $(583)     $   161
                              ======         =====         =====      =======

LIQUIDITY AND CAPITAL RESOURCES

       As of December 31, 2004, we had cash and cash  equivalents and short-term
investments  of  approximately  $109.5  million  and  working  capital  of $96.2
million,  compared to cash and cash  equivalents  and short-term  investments of
approximately $113.3 million and working capital of approximately $100.0 million
at December 31, 2003.

                                       35
<PAGE>


       For the year ended  December  31,  2004,  net cash  provided by operating
activities  was $27.5  million,  compared to $41.6  million net cash provided by
operating  activities in 2003. The main components of cash provided by operating
activities during 2004 were:

          o  net income of $21.1 million;

          o  decrease in the net deferred tax asset of $9.2 million;

          o  depreciation  and other  non-cash  expense  of $5.9  million  which
             included:

             o  bad debt  expense  of  $683,000,  which  includes  the  $500,000
                associated  with the write off of the Xylos  loan in the  fourth
                quarter of 2004,

             o  stock compensation expense of $1.2 million,

             o  non-cash  rent expense of  $954,000;  we were exempt from paying
                rent  for  the  period  July  through  December  2004 on the new
                facility under the terms of the lease,

             o  amortization of intangible assets of approximately $1.0 million,

             o  loss on  disposal or sale of assets of  approximately  $622,000,
                each of which was charged to SG&A,

             offset by a net cash  decrease  in "other  changes  in  assets  and
             liabilities" of $13.3 million.

       The net changes in the "Other changes in assets and liabilities"  section
of the consolidated  statement of cash flows may fluctuate depending on a number
of factors, including the number and size of programs,  contract terms and other
timing  issues;  these  variations  may change in size and  direction  with each
reporting  period.  A major net cash  outflow in 2004 has been net  payments  of
$18.5 million to reimburse customers for returns of Ceftin product.

       As of  December  31,  2004,  we had $3.4  million of  unbilled  costs and
accrued profits on contracts in progress. When services are performed in advance
of billing, the value of such services is recorded as unbilled costs and accrued
profits on  contracts  in  progress.  Normally  all  unbilled  costs and accrued
profits are earned and billed  within 12 months  from the end of the  respective
period.  As of December  31,  2004,  we had $6.9  million of  unearned  contract
revenue.  When we bill  clients for  services  before they have been  completed,
billed amounts are recorded as unearned  contract  revenue,  and are recorded as
income when earned.

       During 2004, we continued to hold a $1.0 million  investment of preferred
stock of Xylos.  In addition we provided  short-term  loans to Xylos in February
2004 and April  2004  totaling  $500,000.  As a result of  continuing  operating
losses incurred by Xylos as well as recent negative developments regarding their
inability  to obtain  appropriate  financing,  we  concluded  during  the fourth
quarter of 2004 that both the investment and the recoverability of the loan were
impaired as of December 31, 2004. As a result,  the $1.0 million  investment was
written  down to zero in the fourth  quarter of 2004 and the  $500,000  loan was
fully reserved for during the fourth quarter as well.

       For the  year  ended  December  31,  2004,  net  cash  used in  investing
activities was $48.3 million. The main components consisted of the following:

       o  Approximately  $11.7  million  used  primarily  in the  purchase  of a
          laddered  portfolio  of  investment  grade  debt  instruments  such as
          obligations of the U.S. Treasury and U.S. Federal Government agencies;
          municipal  bonds;  and commercial  paper. We are focused on preserving
          capital,  maintaining liquidity,  and maximizing returns in accordance
          with our investment criteria.

       o  Capital  expenditures  for the year ended  December 31, 2004 were $8.1
          million,  primarily  comprised of purchases related to the move to our
          new corporate  headquarters  which occurred in July of 2004. The lease
          at our new  location,  which  replaces  our  expiring  leases,  is for
          approximately  84,000 square feet and has a duration of  approximately
          12 years at market  rates.  There was  approximately  $1.8  million in
          capital  expenditures  for the year ended  December 31, 2003. For both
          periods, all capital expenditures were funded out of available cash.

       o  Cash  disbursed  for the  Pharmakon  acquisition  for the  year  ended
          December 31, 2004, was approximately $28.4 million.

       On August  31,  2004,  we  acquired  substantially  all of the  assets of
Pharmakon,  LLC  ("Pharmakon") in a transaction  treated as an asset acquisition
for tax purposes. The acquisition has been accounted for as a purchase,  subject
to the provisions of Statement of Financial Accounting Standards (SFAS) No. 141.
We made payments to the members of Pharmakon,  LLC at closing of $27.4  million,
of which  $1.5  million  was  deposited  into an  escrow  account,  and  assumed
approximately $2.6 million in net liabilities.  As of December 31, 2004 we still
hold $1.0

                                       36
<PAGE>


million in the escrow  account  which is recorded in other assets on our balance
sheet  and will  paid  out  during  2005  subject  to  certain  working  capital
adjustments.  Approximately $1.1 million in direct costs of the acquisition were
also capitalized. Based upon the attainment of annual profit targets agreed upon
at the  date  of  acquisition,  the  members  of  Pharmakon,  LLC  will  receive
approximately  $1.5  million in  additional  payments in March 2005 for the year
ended December 31, 2004.  Additionally,  the members of Pharmakon, LLC can still
earn up to an additional $6.7 million in cash based upon  achievement of certain
annual  profit  targets   through   December  2006.  In  connection   with  this
transaction,  we recorded  $12.7  million in goodwill and $18.9 million in other
identifiable intangibles.

       In May 2004, we entered into a loan agreement with TMX Interactive,  Inc.
(TMX), a provider of sales force effectiveness technology.  Pursuant to the loan
agreement,  we  provided  TMX  with a  term  loan  facility  of  $500,000  and a
convertible  loan  facility of  $500,000,  each of which are due to be repaid on
November 26, 2005. In connection with the convertible loan facility, we have the
right to convert all, or, in multiples of $100,000,  any part of the convertible
note into common  stock of TMX.  Although  TMX  experienced  losses in 2004,  we
continue to believe that, based on current  prospects and activities at TMX, our
loans are not impaired and the amounts are  recoverable as of December 31, 2004.
However,  if TMX  continues  to  experience  losses and is not able to  generate
sufficient cash flows through operations and financing, we may determine that we
will be unable to recover  our loans and would have to reserve  for them at that
time.

       For the year ended  December  31,  2004,  net cash  provided by financing
activities of  approximately  $3.9 million was due to the net proceeds  received
from the exercise of stock options and the employee stock purchase plan.

       Our  revenue  and   profitability   depend  to  a  great  extent  on  our
relationships with a limited number of large pharmaceutical  companies.  For the
year ended  December  31, 2004,  we had two major  clients  that  accounted  for
approximately 42.0% and 21.0%, respectively,  or a total of 63.0% of our service
revenue.  We are  likely  to  continue  to  experience  a high  degree of client
concentration,  particularly  if  there  is  further  consolidation  within  the
pharmaceutical  industry.  The loss or a significant  reduction of business from
any of our major clients, or a decrease in demand for our services, could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  For  example,  in December  2004,  we  announced a reduction in the
aggregate  number of  representatives  that we deployed  for  AstraZeneca.  This
reduction is expected to decrease revenue  generated from AstraZeneca in 2005 by
approximately $60.0 million versus revenues generated in 2004.

       Under the Cellegy License Agreement, we will be required to pay Cellegy a
$10.0 million  incremental license fee milestone payment upon Fortigel's receipt
of all approvals required by the FDA to promote, sell and distribute the product
in the U.S. (if such approvals are  obtained).  Upon payment,  this  incremental
milestone license fee will be recorded as an intangible asset and amortized over
the estimated  commercial life of the product, as then determined.  This payment
will be funded,  when due, out of cash flows provided by operations and existing
cash balances.  In addition,  under the Cellegy License  Agreement,  we would be
required to pay Cellegy royalty  payments  ranging from 20% to 30% of net sales,
including  minimum  royalty  payments,  if and when  complete  FDA  approval  is
received.  The initial 10-month  Prescription Drug User Fee Act (PDUFA) date for
the product was April 5, 2003.  In March 2003,  Cellegy was  notified by the FDA
that the PDUFA date had been revised to July 3, 2003.  On July 3, 2003,  Cellegy
was  notified by the FDA that  Fortigel  was not  approved.  Cellegy has told us
that,  in the first  quarter of 2005,  it received FDA approval for the protocol
parameters  for a new Phase 3 study  proposed  by Cellegy to the PDA.  We do not
know when, or even whether,  Cellegy will conduct such a new Phase 3 study,  and
we cannot  predict with any certainty  whether the FDA will  ultimately  approve
Fortigel for sale in the U.S.  Management  believes that it will not be required
to pay Cellegy the $10.0 million  incremental  license fee milestone  payment in
2005,  and it is unclear at this  point  when or if  Cellegy  will get  Fortigel
approved by the FDA which would  trigger our  obligation to pay $10.0 million to
Cellegy.

       On December 12, 2003,  we filed a complaint  against  Cellegy in the U.S.
District Court for the Southern District of New York. The complaint alleges that
Cellegy fraudulently induced us to enter into the Cellegy License Agreement with
Cellegy  regarding  Fortigel on December 31, 2002.  The  complaint  also alleges
claims for  misrepresentation  and  breach of  contract  related to the  Cellegy
License Agreement. In the complaint, we seek, among other things,  rescission of
the license agreement and return of the $15.0 million we paid Cellegy.  After we
filed this lawsuit, also on December 12, 2003, Cellegy filed a complaint against
us in the U.S. District Court for the Northern District of California. Cellegy's
complaint  seeks a declaration  that Cellegy did not  fraudulently  induce us to
enter the  Cellegy  License  Agreement  and that  Cellegy has not  breached  its
obligations under the Cellegy License Agreement. We filed an answer to Cellegy's
complaint on June 18, 2004, in which we make the same allegations and claims for
relief as we do in our New York  action,  and we also  allege  Cellegy  violated
California unfair competition law. By order dated April 23, 2004 our lawsuit was
transferred to the Northern  District of California where it may be consolidated
with Cellegy's  action.  We are unable to predict the ultimate  outcome of these
lawsuits.

                                       37
<PAGE>


The trial is scheduled to commence  during the second quarter of 2005.  Material
legal  expense has been and is expected to continue to be incurred in connection
with  this  lawsuit;  however,  at this  time we are not  able to  estimate  the
magnitude of the expense.

       We believe  that our  existing  cash  balances  and  expected  cash flows
generated from  operations  will be sufficient to meet our operating and capital
requirements  for the  next 12  months.  We  continue  to  evaluate  and  review
financing  opportunities  and  acquisition  candidates in the ordinary course of
business.

CONTRACTUAL OBLIGATIONS

       As of December 31, 2004,  the aggregate  minimum  future rental  payments
required by  non-cancelable  operating  leases with initial or  remaining  lease
terms exceeding one year are as follows:

<TABLE>
<CAPTION>
                                     2005       2006      2007      2008      2009       TOTAL
                                   -------     ------    ------    ------    ------    --------
<S>                                <C>         <C>       <C>       <C>       <C>       <C>
                                                          (in thousands)
Operating leases
  Minimum lease payments           $ 3,799     $3,232    $3,042    $3,130    $3,189    $ 16,392
  Less minimum sublease rentals        (34)        --        --        --        --         (34)
                                  -------------------------------------------------------------
    Net minimum lease payments     $ 3,765     $3,232    $3,042    $3,130    $3,189    $ 16,358
                                  =============================================================
</TABLE>

OFF-BALANCE SHEET ARRANGEMENTS

       As of December 31, 2004, we had no off-balance sheet arrangements.

QUARTERLY OPERATING RESULTS

       Our results of  operations  have varied,  and are expected to continue to
vary,  from  quarter to  quarter.  These  fluctuations  result  from a number of
factors including, among other things, the timing of commencement, completion or
cancellation of major programs. In the future, our revenue may also fluctuate as
a result of a number of additional  factors,  including the types of products we
market  and  sell,  delays or costs  associated  with  acquisitions,  government
regulatory  initiatives  and  conditions in the healthcare  industry  generally.
Revenue,  generally,  is  recognized  as services are performed and products are
shipped.  Program costs, other than training costs, are expensed as incurred. As
a result,  we may incur  substantial  expenses  associated  with  staffing a new
detailing  program  during the first two to three  months of a contract  without
recognizing  any revenue under that contract.  This could have an adverse impact
on our operating  results for the quarters in which those expenses are incurred.
Revenue  related to performance  incentives is recognized in the period when the
performance based parameters are achieved. A significant portion of this revenue
could be  recognized  in the fourth  quarter of a year.  Costs of goods sold are
expensed  when  products are shipped.  For milestone  payments  associated  with
licensing  agreements,  amounts paid before the underlying  product has obtained
regulatory  approval and which have no  alternate  use are expensed as incurred,
whereas payments  post-approval  are capitalized and amortized over the economic
life of the product or agreement. We believe that because of these fluctuations,
quarterly  comparisons  of our  financial  results  cannot be relied  upon as an
indication of future performance.

                                       38
<PAGE>


       The following tables set forth quarterly  operating results for the eight
quarters ended December 31, 2004:

<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                           ---------------------------------------------------------------------------------------
                                           Mar 31,    Jun 30,    Sep 30,      Dec 31,     Mar 31,    Jun 30,   Sep 30,     Dec 31,
                                             2004      2004        2004        2004        2003        2003      2003       2003
                                           -------   --------    --------    --------    --------    -------   -------   ---------
<S>                                        <C>       <C>         <C>         <C>         <C>         <C>       <C>       <C>
                                                                     (in thousands except per share data)
                                                                                  (unaudited)
Revenue
  Service ..............................   $92,547   $ 92,519    $ 92,525    $ 88,299    $ 73,099    $77,543   $94,470   $ 111,031
  Product, net .........................       101     (1,131)         (3)       (487)         34         82        81     (11,810)
                                           -------   --------    --------    --------    --------    -------   -------   ---------
    Total revenue ......................    92,648     91,388      92,522      87,812      73,133     77,625    94,551      99,221
                                           -------   --------    --------    --------    --------    -------   -------   ---------
Cost of goods and services
  Program expenses .....................    65,988     69,483      68,127      61,690      55,469     56,673    70,085      71,935
  Cost of goods sold ...................       145         89          10          10          62         83       952         190
                                           -------   --------    --------    --------    --------    -------   -------   ---------
    Total cost of goods and services ...    66,133     69,572      68,137      61,700      55,531     56,756    71,037      72,125
                                           -------   --------    --------    --------    --------    -------   -------   ---------

Gross profit ...........................    26,515     21,816      24,385      26,112      17,602     20,869    23,514      27,096

Operating expenses
  Compensation expense .................    10,216      7,924       8,409       7,776       8,874      9,123     9,297       9,607
  Other selling, general and
    administrative expenses ............     6,490      5,657       6,941      10,224       5,833      7,206     7,676       9,632
  Restructuring and other
    related expenses ...................        --         --          --          --        (270)        --        --         413
  Litigation settlement ................        --         --          --          --       2,100         --        --          --
                                           -------   --------    --------    --------    --------    -------   -------   ---------
    Total operating expenses ...........    16,706     13,581      15,350      18,000      16,537     16,329    16,973      19,652
                                           -------   --------    --------    --------    --------    -------   -------   ---------
Operating income .......................     9,809      8,235       9,035       8,112       1,065      4,540     6,541       7,444
Other income (expense) net .............       318        313         231         (82)        269        226       246         332
                                           -------   --------    --------    --------    --------    -------   -------   ---------
Income before provision for taxes ......    10,127      8,548       9,266       8,030       1,334      4,766     6,787       7,776
Provision for income taxes .............     4,152      3,505       3,799       3,383         556      1,954     2,605       3,290
                                           -------   --------    --------    --------    --------    -------   -------   ---------
Net income .............................   $ 5,975   $  5,043    $  5,467    $  4,647    $    778    $ 2,812   $ 4,182   $   4,486
                                           =======   ========    ========    ========    ========    =======   =======   =========

Basic net income per share .............   $  0.41   $   0.35    $   0.37    $   0.32    $   0.05    $  0.20   $  0.29   $    0.31
                                           =======   ========    ========    ========    ========    =======   =======   =========
Diluted net income per share ...........   $  0.40   $   0.34    $   0.37    $   0.31    $   0.05    $  0.20   $  0.29   $    0.31
                                           =======   ========    ========    ========    ========    =======   =======   =========

Weighted average number of shares:
    Basic ..............................    14,461     14,533      14,621      14,641      14,166     14,188    14,252      14,320
                                           =======   ========    ========    ========    ========    =======   =======   =========
    Diluted ............................    14,767     14,918      14,933      14,922      14,237     14,266    14,543      14,677
                                           =======   ========    ========    ========    ========    =======   =======   =========
</TABLE>

NOTE: FOR 2003, THE SUM OF THE QUARTERLY BASIC NET INCOME PER SHARE AMOUNTS DOES
NOT EQUAL THE ANNUAL BASIC NET INCOME PER SHARE DUE TO ROUNDING.


EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

       In November 2004, the FASB issued SFAS No. 151,  "INVENTORY COSTS," (SFAS
151) which  clarifies  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling costs, and wasted material  (spoilage) by requiring
these items to be recognized as  current-period  charges.  SFAS 151 is effective
for inventory  costs incurred during fiscal years beginning after June 15, 2005,
with earlier application permitted.  The adoption of SFAS 151 is not expected to
have a material  impact on our  business,  financial  condition  and  results of
operations.

       In December  2004,  the FASB issued SFAS No. 153,  "EXCHANGES OF MONETARY
ASSETS," (SFAS 153) which  addresses the measurement of exchanges of nonmonetary
assets and eliminates the exception from fair value  measurement for nonmonetary
exchanges of similar  productive  assets and  replaces it with an exception  for
exchanges  that do not have  commercial  substance.  SFAS 153 is  effective  for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005,  with  earlier  application  permitted.  The  adoption  of SFAS 153 is not
expected to have a material  impact on our  business,  financial  condition  and
results of operations.

       In December 2004, the FASB issued a revision of SFAS No. 123,  "STATEMENT
OF FINANCIAL  ACCOUNTING  STANDARDS  NO. 123 (REVISED  2004)," (SFAS 123R) which
requires that the cost resulting from all  share-based  payment  transactions be
recognized in the financial statements. This Statement establishes fair value as
the measurement objective in accounting for share-based payment arrangements and
requires  all  entities  to  apply  a  fair-value-based  measurement  method  in
accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans.  This Statement is effective
as of the beginning of the first interim or annual  reporting period that begins
after June 15,  2005,  and we expect to adopt this  standard  using the modified
prospective  method. The adoption of SFAS 123R may have a material effect on our
business, financial condition and results of operations, depending on the number
of options granted in the future.

                                       39
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       Not applicable.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       Our financial  statements and the required  financial  statement schedule
are included herein beginning on page F-1.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURES

       None.

ITEM 9A.  CONTROLS AND PROCEDURES

CHANGES IN INTERNAL  CONTROLS OVER  FINANCIAL  REPORTING  DURING THE MOST RECENT
QUARTER

      As described in Note 1B to the  consolidated  financial  statements in our
Amended  Annual  Report on Form 10-K/A for the year ended  December 31, 2003 and
our Amended  Quarterly  Reports on Form  10-Q/A for the periods  ended March 31,
2004 and June 30, 2004,  during 2004,  the Company had a restatement  due to the
non-application   of  EITF  01-14,   "INCOME   STATEMENT   CHARACTERIZATION   OF
REIMBURSEMENTS  RECEIVED FOR OUT-OF-POCKET  EXPENSES  INCURRED",  from the first
quarter of 2002 through June 30, 2004. We became aware of the  applicability  of
EITF 01-14 to the Company in September 2004. As a result of this restatement, we
determined that a material weakness existed in our disclosure controls regarding
the  selection  and  application  of GAAP and  preparation  of our  consolidated
financial statements through June 30, 2004.

        Beginning in September 2004, we have taken a series of steps designed to
improve the control  processes  regarding the selection and  application of GAAP
and  preparation   and  review  of  our   consolidated   financial   statements.
Specifically,  key personnel involved in our financial  reporting processes have
enhanced  the process  through  which  authoritative  guidance is monitored on a
regular basis.  Review of both authoritative  guidance and industry practices is
conducted in order to ensure that all new guidance is being complied with in the
preparation  of our  financial  statements,  related  disclosures  and  periodic
filings with the SEC. As of December 31, 2004, we have completed the remediation
of our disclosure  controls  regarding the selection and application of GAAP and
preparation of our consolidated  financial  statements and have concluded that a
material weakness no longer exists.

CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the  participation  of our  management,
including our principal  executive officer and principal  financial officer,  we
conducted an evaluation of our disclosure controls and procedures,  as such term
is defined under Rule  13a-15(e)  promulgated  under the 1934 Act. Based on this
evaluation,  our principal executive officer and our principal financial officer
concluded that our disclosure  controls and procedures  were effective as of the
end of the period covered by this annual report.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management is responsible for  establishing  and  maintaining  adequate
internal control over financial  reporting,  as such term is defined in 1934 Act
Rules  13a-15(f).  Under  the  supervision  and  with the  participation  of our
management,  including our principal  executive officer and principal  financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in INTERNAL CONTROL - INTEGRATED
FRAMEWORK  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.  Based on our evaluation  under the framework in INTERNAL CONTROL --
INTEGRATED  FRAMEWORK,  our management  concluded that our internal control over
financial  reporting was effective as of December 31, 2004. We have excluded the
Pharmakon  business  from our  assessment  of internal  control  over  financial
reporting  since the business was acquired in an asset  purchase in August 2004.
The Pharmakon business' total assets and total revenues represent 2.1% and 1.3%,
respectively,  of the related consolidated financial statement amounts as of and
for the year ended December 31, 2004.

     Our  management's  assessment of the  effectiveness of our internal control
over  financial   reporting  as  of  December  31,  2004  has  been  audited  by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.

ITEM 9B.  OTHER INFORMATION

None.

                                       40
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       Information   relating  to  directors  and  executive   officers  of  the
registrant  that is  responsive  to Item 11 of Form 10-K will be included in our
Proxy Statement in connection  with our 2005 annual meeting of stockholders  and
such information is incorporated by reference herein.

CODE OF CONDUCT

       We have adopted a code of conduct that applies to our principal executive
officer,  principal  financial  officer  and other  persons  performing  similar
functions,  as well as all of our other  employees and  directors.  This code of
conduct is posted on our website at www.pdi-inc.com.

ITEM 11. EXECUTIVE COMPENSATION

       Information relating to executive compensation that is responsive to Item
11 of Form 10-K will be included in our Proxy  Statement in connection  with our
2005 annual meeting of  stockholders  and such  information is  incorporated  by
reference herein.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       Information  relating to security  ownership of certain beneficial owners
and  management  that is  responsive to Item 12 of Form 10-K will be included in
our Proxy  Statement in connection  with our 2005 annual meeting of stockholders
and such information is incorporated by reference herein.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Information  relating to certain  relationships and related  transactions
that is  responsive  to  Item 13 of Form  10-K  will be  included  in our  Proxy
Statement in connection  with our 2005 annual meeting of  stockholders  and such
information is incorporated by reference herein.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

       Information  relating to principal  accounting  fees and services that is
responsive  to Item 14 of Form 10-K will be included in our Proxy  Statement  in
connection with our 2005 annual meeting of stockholders  and such information is
incorporated by reference herein.

                                       41
<PAGE>


PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

       (a)    The following documents are filed as part of this report:

              (1)    FINANCIAL STATEMENTS - See Index to Financial Statements on
                     page F-1 of this report.

              (2)    FINANCIAL STATEMENT SCHEDULE

                     Schedule II: Valuation and Qualifying Accounts

       Schedules  not  listed  above  have  been  omitted  because  they are not
required by the instructions or are inapplicable.

              (3)    EXHIBITS

  Exhibit
      No.     Description

       3.1    Certificate of Incorporation of PDI, Inc.(1)

       3.2    By-Laws of PDI, Inc.(1)

       3.3    Certificate of Amendment of Certificate of Incorporation of PDI,
              Inc.(4)

       4.1    Specimen Certificate Representing the Common Stock(1)

      10.1    Form of 1998 Stock Option Plan(1)

      10.2    Form of 2000 Omnibus Incentive Compensation Plan(2)

      10.4    Form of Employment Agreement between the Company and Charles T.
              Saldarini(4)

      10.5    Agreement between the Company and John P. Dugan(1)

      10.6    Form of Amended and Restated Employment Agreement between the
              Company and Steven K. Budd(4)

      10.7    Form of Amended and Restated Employment Agreement between the
              Company and Bernard C. Boyle(4)

      10.8    Form of Employment Agreement between the Company and Christopher
              Tama(5)

      10.9    Form of Amended and Restated Employment Agreement between the
              Company and Stephen Cotugno(4)

      10.10   Form of Employment Agreement between the Company and Beth
              Jacobson(5)

      10.11   Form of Employment Agreement between the Company and Alan
              Rubino(7)

      10.12   Form of Loan Agreement between the Company and Steven K. Budd(3)

      10.13   Exclusive License Agreement between the Company and Cellegy
              Pharmaceuticals, Inc.(5)(6)

      10.14   Saddle River Executive Centre Lease, as amended(7)

      10.15   2004 Stock Award and Incentive Plan(8)

      14.1    Code of Conduct(7)

      21.1    Subsidiaries of the Registrant(4)

      23.1    Consent of PricewaterhouseCoopers LLP*

      31.1    Certification of Chief Executive Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002*

                                       42
<PAGE>


      31.2    Certification of Chief Financial Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002*

      32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
              Section 1350, as adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002*

      32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
              Section 1350, as adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002*

----------

    *         Filed herewith

    (1)       Filed as an exhibit to our Registration Statement on Form S-1
              (File No 333-46321), and incorporated herein by reference.

    (2)       Filed as an Exhibit to our definitive proxy statement dated May
              10, 2000, and incorporated herein by reference.

    (3)       Filed as an exhibit to our Annual Report on Form 10-K for the year
              ended December 31, 1999, and incorporated herein by reference.

    (4)       Filed as an exhibit to our Annual Report on Form 10-K for the year
              ended December 31, 2001, and incorporated herein by reference.

    (5)       Filed as an exhibit to our Annual Report on Form 10-K for the year
              ended December 31, 2002, and incorporated herein by reference.

    (6)       The Securities and Exchange Commission granted the Registrant's
              application for confidential treatment, pursuant to Rule 24b-2
              under the Exchange Act, of certain portions of this exhibit. These
              portions of the exhibit have been redacted from the exhibit as
              filed.

    (7)       Filed as an exhibit to our Annual Report on Form 10-K for the year
              ended December 31, 2003, and incorporated herein by reference.

    (8)       Filed as an Exhibit to our definitive proxy statement dated April
              28, 2004, and incorporated herein by reference.

                                       43
<PAGE>


                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on the
14th day of March, 2005.

                                             PDI, INC.

                                             /s/ Charles T. Saldarini
                                             -----------------------------------
                                             Charles T. Saldarini,
                                             Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities indicated and on the 14th day of March,
2005.



          Signature                                  Title

/s/ John P. Dugan                   Chairman of the Board of Directors
----------------------------
   John P. Dugan

                                    Vice Chairman of the Board of Directors
/s/ Charles T. Saldarini            and Chief Executive Officer
----------------------------
   Charles T. Saldarini

                                    Chief Financial Officer and Treasurer
/s/ Bernard C. Boyle                (principal accounting and financial officer)
----------------------------
   Bernard C. Boyle

/s/ John M. Pietruski               Director
----------------------------
   John M. Pietruski

/s/ Jan Martens Vecsi               Director
----------------------------
   Jan Martens Vecsi

/s/ Frank Ryan                      Director
----------------------------
   Frank Ryan

/s/ Larry Ellberger                 Director
----------------------------
   Larry Ellberger

/s/ John C. Federspiel              Director
----------------------------
   John Federspiel

/s/ Dr. Joseph T. Curti             Director
----------------------------
   Dr. Joseph T. Curti

/s/ Stephen J. Sullivan             Director
----------------------------
   Stephen J. Sullivan


                                       44
<PAGE>


  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


                                                                            Page
PDI, INC

     Report of Independent Registered Public Accounting Firm                F-2

     Consolidated Balance Sheets                                            F-3

     Consolidated Statements of Operations                                  F-4

     Consolidated Statements of Cash Flows                                  F-5

     Consolidated Statements of Stockholders' Equity                        F-6

     Notes to Consolidated Financial Statements                             F-7

     Schedule II.  Valuation and Qualifying Accounts                        F-28

                                      F-1


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and
Stockholders of PDI, Inc.:

We have completed an integrated audit of PDI, Inc.'s 2004 consolidated financial
statements and of its internal  control over financial  reporting as of December
31, 2004 and audits of its 2003 and 2002  consolidated  financial  statements in
accordance with the standards of the Public Company  Accounting  Oversight Board
(United States). Our opinions, based on our audits, are presented below.

CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 15(a)(1)  present  fairly,  in all material  respects,  the
financial position of PDI, Inc. and its subsidiaries (the "Company") at December
31, 2004 and December 31, 2003,  and the results of their  operations  and their
cash flows for each of the three years in the period ended  December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index  appearing  under  Item  15(a)(2)  presents  fairly,  in all  material
respects,  the information  set forth therein when read in conjunction  with the
related  consolidated  financial  statements.  These  financial  statements  and
financial statement schedule are the responsibility of the Company's management.
Our  responsibility  is to express an opinion on these financial  statements and
financial  statement  schedule  based on our audits.  We conducted our audits of
these  statements  in  accordance  with  the  standards  of the  Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material  misstatement.  An audit of financial statements
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, in our opinion,  management's assessment,  included in Management's Report
on Internal Control Over Financial  Reporting  appearing under Item 9A, that the
Company  maintained  effective  internal control over financial  reporting as of
December 31, 2004 based on criteria established in INTERNAL CONTROL - INTEGRATED
FRAMEWORK  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission  (COSO), is fairly stated, in all material  respects,  based on those
criteria.  Furthermore,  in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria  established in INTERNAL CONTROL - INTEGRATED  FRAMEWORK
issued by the COSO.  The Company's  management is  responsible  for  maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to express  opinions on  management's  assessment  and on the
effectiveness of the Company's  internal control over financial  reporting based
on our  audit.  We  conducted  our  audit of  internal  control  over  financial
reporting in  accordance  with the  standards of the Public  Company  Accounting
Oversight  Board  (United  States).  Those  standards  require  that we plan and
perform  the  audit to  obtain  reasonable  assurance  about  whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects.  An  audit of  internal  control  over  financial  reporting  includes
obtaining  an  understanding  of  internal  control  over  financial  reporting,
evaluating  management's  assessment,  testing  and  evaluating  the  design and
operating   effectiveness  of  internal  control,   and  performing  such  other
procedures as we consider  necessary in the  circumstances.  We believe that our
audit provides a reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (i) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions of the assets of the company;  (ii)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use,  or  disposition  of the
company's assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

As  described  in  Management's   Report  on  Internal  Control  over  Financial
Reporting,  management has excluded the Pharmakon business  (Pharmakon) from its
assessment of internal control over financial  reporting as of December 31, 2004
because it was acquired by the Company in a purchase business combination during
2004. We have also excluded  Pharmakon  from our audit of internal  control over
financial reporting.  Pharmakon's total assets and total revenues represent 2.1%
and 1.3%, respectively,  of the related consolidated financial statement amounts
as of and for the year ended December 31, 2004.



/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 11, 2005



                                      F-2
<PAGE>


                                    PDI, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                             2004         2003
                                                                          ---------    ---------
<S>                                                                       <C>          <C>
ASSETS                                                                         (in thousands)
Current assets:
  Cash and cash equivalents ...........................................   $  96,367    $ 113,288
  Short-term investments ..............................................      13,131        1,344
  Inventory, net of obsolescence reserve of $0 and $818 as of
   December 31, 2004 and 2003, respectively ...........................          --           43
  Accounts receivable, net of allowance for doubtful accounts of
    $74 and $749 as of December 31, 2004 and 2003, respectively .......      26,662       40,885
  Unbilled costs and accrued profits on contracts in progress .........       3,393        4,041
  Deferred training ...................................................         740        1,643
  Other current assets ................................................      11,818        8,847
  Deferred tax asset ..................................................       3,325       11,053
                                                                          ---------    ---------
Total current assets ..................................................     155,436      181,144
  Property and equipment, net ..........................................     17,170       14,494
  Deferred tax asset ..................................................       5,832        7,304
  Goodwill ............................................................      23,791       11,132
  Other intangible assets .............................................      19,548        1,648
  Other long-term assets ..............................................       2,928        3,901
                                                                          ---------    ---------
Total assets ..........................................................   $ 224,705    $ 219,623
                                                                          =========    =========


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ....................................................   $   7,217    $   8,689
  Accrued rebates, sales discounts and returns ........................       4,316       22,811
  Accrued incentives ..................................................      16,282       20,486
  Accrued salaries and wages ..........................................       8,414        9,031
  Unearned contract revenue ...........................................       6,924        3,604
  Restructuring accruals ..............................................         161          744
  Other accrued expenses ..............................................      15,966       15,770
                                                                          ---------    ---------
Total current liabilities .............................................      59,280       81,135
                                                                          ---------    ---------
Long-term liabilities .................................................          --           --
                                                                          ---------    ---------
Total liabilities .....................................................   $  59,280    $  81,135
                                                                          ---------    ---------

Commitments and Contingencies

Stockholders' equity:
  Preferred stock, $.01 par value; 5,000,000 shares authorized,
    no shares issued and outstanding ..................................   $      --    $      --
  Common stock, $.01 par value; 100,000,000 shares authorized;
    shares issued and outstanding, 2004 - 14,665,945;
    2003 - 14,387,126; restricted $.01 par value; shares issued
    and outstanding, 2004- 154,554; 2003 - 136,178 ....................         148          145
Additional paid-in capital ............................................     116,737      109,531
Retained earnings .....................................................      50,637       29,505
Accumulated other comprehensive income ................................          76           25
Unamortized compensation costs ........................................      (2,063)        (608)
Treasury stock, at cost: 5,000 shares at December 31, 2004 and 2003 ...        (110)        (110)
                                                                          ---------    ---------
Total stockholders' equity ............................................   $ 165,425    $ 138,488
                                                                          ---------    ---------
Total liabilities & stockholders' equity ..............................   $ 224,705    $ 219,623
                                                                          =========    =========
</TABLE>


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

                                      F-3
<PAGE>


                                    PDI, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                              For The Years Ended December 31,
                                                             ----------------------------------
                                                               2004         2003         2002
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
                                                          (in thousands, except for per share data)
Revenue
  Service ...............................................    $365,965     $356,143     $301,437
  Product, net ..........................................      (1,521)     (11,613)       6,438
                                                             --------     --------     --------
    Total revenue .......................................     364,444      344,530      307,875
                                                             --------     --------     --------
Cost of goods and services
  Program expenses (including related party amounts
    of $180, $983 and $516 for the periods ended
    December 31, 2004, 2003 and 2002, respectively) .....     265,360      254,162      278,002
  Cost of goods sold ....................................         254        1,287           --
                                                             --------     --------     --------
    Total cost of goods and services ....................     265,614      255,449      278,002
                                                             --------     --------     --------

Gross profit ............................................      98,830       89,081       29,873

Operating expenses
  Compensation expense ..................................      34,325       36,901       32,670
  Other selling, general and administrative expenses ....      29,314       30,347       44,163
  Restructuring and other related expenses ..............          --          143        3,215
  Litigation settlement .................................          --        2,100           --
                                                             --------     --------     --------
    Total operating expenses ............................      63,639       69,491       80,048
                                                             --------     --------     --------
Operating income (loss) .................................      35,191       19,590      (50,175)
Other income, net .......................................         779        1,073        1,967
                                                             --------     --------     --------
Income (loss) before provision (benefit) for taxes ......      35,970       20,663      (48,208)
Provision (benefit) for income taxes ....................      14,838        8,405      (17,447)
                                                             --------     --------     --------
Net income (loss) .......................................    $ 21,132     $ 12,258     $(30,761)
                                                             ========     ========     ========

Basic net income (loss) per share .......................    $   1.45     $   0.86     $  (2.19)
                                                             ========     ========     ========
Diluted net income (loss) per share .....................    $   1.42     $   0.85     $  (2.19)
                                                             ========     ========     ========
Basic weighted average number of shares outstanding .....      14,564       14,231       14,033
                                                             ========     ========     ========
Diluted weighted average number of shares outstanding ...      14,893       14,431       14,033
                                                             ========     ========     ========
</TABLE>


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

                                      F-4
<PAGE>


                                    PDI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         For The Years Ended December 31,
                                                                        ----------------------------------
                                                                          2004         2003         2002
                                                                        --------     --------     --------
<S>                                                                     <C>          <C>          <C>
                                                                                  (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from operations ..................................    $ 21,132     $ 12,258     $(30,761)
   Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization ................................       5,916        6,243        7,374
      Loss on disposal of asset ....................................         622           --           --
      Stock compensation costs .....................................       1,232          554          443
      Deferred taxes, net ..........................................       9,199       (3,117)       8,501
      Reserve for inventory obsolescence and bad debt ..............         683        1,939       (2,080)
      Loss on other investments ....................................       1,000           --          379
   Other changes in assets and liabilities, net of acquisitions:
      Decrease (increase) in accounts receivable ...................      15,807       (1,277)      13,991
      Decrease (increase) in inventory .............................          43         (216)        (203)
      Decrease (increase) in unbilled costs ........................         648         (681)       3,538
      Decrease (increase) in deferred training .....................         903         (537)       4,463
      (Increase) decrease in other current assets ..................        (936)      14,813      (15,559)
      (Increase) decrease in other long-term assets ................         (28)      (2,052)       4,385
      (Decrease) increase in accounts payable ......................      (3,439)       3,316       (4,119)
      (Decrease) increase in accrued rebates, sales discounts
         and returns ...............................................     (18,495)       6,311      (51,903)
      (Decrease) increase in accrued contract losses ...............          --           --      (12,256)
      (Decrease) increase in accrued liabilities ...................      (3,867)      11,957      (10,398)
      Increase (decrease) in unearned contract revenue .............         507       (5,869)      (1,404)
      (Decrease) increase in other current liabilities .............      (1,362)       1,943       (3,371)
      (Decrease) in restructuring liability ........................        (583)      (3,954)          --
                                                                        --------     --------     --------
Net cash provided by (used in) operating activities ................      28,982       41,631      (88,980)
                                                                        --------     --------     --------

CASH FLOWS FROM INVESTING ACTIVITIES
      Sales (net) of short-term investments ........................          --        4,614        1,532
      Purchases (net) of short-term investments ....................     (11,736)          --           --
      Investments in Xylos, TMX, and iPhysician Net ................      (1,500)          --       (1,379)
      Purchase of property and equipment ...........................      (8,104)      (1,829)      (4,012)
      Cash paid for acquisition, including acquisition costs .......     (28,443)          --       (2,735)
                                                                        --------     --------     --------
Net cash (used in) provided by investing activities ................     (49,783)       2,785       (6,594)
                                                                        --------     --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES
      Net proceeds from employee stock purchase plan
        and the exercise of stock options ..........................       3,880        2,045        2,358
                                                                        --------     --------     --------
Net cash provided by financing activities ..........................       3,880        2,045        2,358
                                                                        --------     --------     --------

Net (decrease) increase in cash and cash equivalents ...............     (16,921)      46,461      (93,216)
Cash and cash equivalents - beginning ..............................     113,288       66,827      160,043
                                                                        --------     --------     --------
Cash and cash equivalents - ending .................................    $ 96,367     $113,288     $ 66,827
                                                                        ========     ========     ========

Cash paid for interest .............................................    $      3     $     25     $     33
                                                                        ========     ========     ========
Cash paid for taxes ................................................    $  7,389     $  9,619     $  4,827
                                                                        ========     ========     ========
</TABLE>


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

                                      F-5
<PAGE>


                                    PDI, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                   ACCUMULATED
                                                                                      OTHER
                                 COMMON STOCK   TREASURY STOCK                        COMPRE- UNAMORTIZED
                                --------------  ---------------  ADDITIONAL          HENSIVE    COMPEN-
                                                                  PAID IN   RETAINED  INCOME    SATION
                                SHARES  AMOUNT  SHARES  AMOUNT    CAPITAL   EARNINGS  (LOSS)     COSTS      TOTAL
                                ------  ------  ------  ------   ---------  --------  ------    -------   --------
<S>                             <C>     <C>        <C>  <C>      <C>        <C>       <C>       <C>       <C>
Balance - December 31, 2001     13,983  $  140       5  $ (110)  $ 103,711  $ 48,008  $  (79)   $  (735)  $150,935
                                ======  ======  ======  ======   =========  ========  ======    =======   ========

Net loss for the year ended
  December 31, 2002                                                          (30,761)                      (30,761)
Unrealized investment holding
  losses, net of tax                                                                     (21)                  (21)
                                                                                                          --------
Comprehensive income                                                                                       (30,782)
Issuance of common stock           190       2                       2,239                                   2,241
Issuance of employees'
  restricted common stock           29                                 593                                     593
Exercise of common
  stock options                      8                                 130                                     130
Amortization of deferred
  compensation costs                                                                                443        443
Deferred compensation costs                                                                        (349)      (349)
                                ------  ------  ------  ------   ---------  --------  ------    -------   --------
Balance - December 31, 2002     14,210  $  142       5  $ (110)  $ 106,673  $ 17,247  $ (100)   $  (641)  $123,211
                                ======  ======  ======  ======   =========  ========  ======    =======   ========
Net income for the year ended
  December 31, 2003                                                           12,258                        12,258
Unrealized investment holding
  gains, net of tax                                                                      125                   125
                                                                                                          --------
Comprehensive income                                                                                        12,383
Issuance of common stock           143       1                       1,326                                   1,327
Issuance of employees'
  restricted common stock          129       1                         814                                     815
Exercise of common
  stock options                     41       1                         526                                     527
Tax benefit of  nonqualified
  option exercise                                                      192                                     192
Amortization of deferred
  compensation costs                                                                                554        554
Deferred compensation costs                                                                        (521)      (521)
                                ------  ------  ------  ------   ---------  --------  ------    -------   --------
Balance - December 31, 2003     14,523  $  145       5  $ (110)  $ 109,531  $ 29,505  $   25    $  (608)  $138,488
                                ======  ======  ======  ======   =========  ========  ======    =======   ========

Net income for the year ended
  December 31, 2004                                                           21,132                        21,132
Unrealized investment holding
  gains, net of tax                                                                       51                    51
                                                                                                          --------
Comprehensive income                                                                                        21,824
Issuance of common stock            68       1                       1,511                                   1,512
Issuance of employees'
  restricted common stock           98       1                       2,626                                   2,627
Forfeitures of restricted stock    (14)                               (174)                         137        (37)
Exercise of common stock options   145       1                       2,369                                   2,370
Tax benefit of option exercise                                         641                                     641
Acceleration of stock
  option vesting                                                       233                                     233
Amortization of deferred
  compensation costs                                                                              1,035      1,035
Deferred compensation costs                                                                      (2,627)    (2,627)
                                ------  ------  ------  ------   ---------  --------  ------    -------   --------
Balance - December 31, 2004     14,820  $  148       5  $ (110)  $ 116,737  $ 50,637  $   76    $(2,063)  $165,425
                                ======  ======  ======  ======   =========  ========  ======    =======   ========
</TABLE>

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

                                      F-6
<PAGE>


                                    PDI, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

       PDI, Inc.  (PDI and,  together  with its wholly owned  subsidiaries,  the
Company)   is  a   healthcare   sales  and   marketing   company   serving   the
biopharmaceutical  and medical devices and diagnostics  (MD&D)  industries.  See
Note 23 for segment information.

PRINCIPLES OF CONSOLIDATION

       The  consolidated  financial  statements  include accounts of PDI and its
wholly owned subsidiaries TVG, Inc. (TVG), ProtoCall, Inc. (ProtoCall),  InServe
Support Solutions,  Inc. (InServe), and PDI Investment Company, Inc. (PDII). All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

USE OF ESTIMATES

       The preparation of consolidated  financial  statements in conformity with
generally  accepted  accounting  principles  (GAAP) requires the Company to make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements.  Actual  results  could  differ  from those  estimates.  Significant
estimates include incentives earned or penalties incurred on contracts,  accrued
incentives payable to employees, valuation allowances related to deferred taxes,
insurance loss  accruals,  bad debt  reserves,  fair value of assets,  and sales
returns.

REVENUE RECOGNITION AND ASSOCIATED COSTS

       The  paragraphs  that follow  describe  the  guidelines  that the Company
adheres to in accordance  with GAAP when  recognizing  revenue and cost of goods
and services in financial  statements.  In accordance with GAAP, service revenue
and product revenue and their respective direct costs have been shown separately
on the income statement.

       Historically,  the  Company  has  derived a  significant  portion  of its
service revenue from a limited number of clients.  Concentration  of business in
the  pharmaceutical  services  industry is common and the industry  continues to
consolidate.  As a result,  the  Company  is likely to  continue  to  experience
significant client concentration in future periods. For the years ended December
31,  2004,  2003  and  2002,  the  Company's  two  largest  clients,   who  each
individually  represented  10% or more of its  service  revenue,  accounted  for
approximately 63.0%, 66.5% and 61.9%, respectively, of its service revenue.

       Service revenue and program expenses
       ------------------------------------

       Service  revenue is earned  primarily  by  performing  product  detailing
programs and other marketing and promotional  services under contracts.  Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured.  Revenue is recognized  net of any potential  penalties
until the  performance  criteria  relating to the penalties  have been achieved.
Performance  incentives,  as well as  termination  payments,  are  recognized as
revenue in the period  earned and when payment of the bonus,  incentive or other
payment is assured.  Under  performance  based contracts,  revenue is recognized
when the performance based parameters are achieved.

       Program expenses consist primarily of the costs associated with executing
product  detailing  programs,  performance  based  contracts  or other sales and
marketing  services  identified  in  the  contract.   Program  expenses  include
personnel costs and other costs associated with executing a product detailing or
other  marketing or  promotional  program,  as well as the initial  direct costs
associated with staffing a product detailing  program.  Such costs include,  but
are not limited to, facility rental fees, honoraria and travel expenses,  sample
expenses and other promotional  expenses.  Personnel costs, which constitute the
largest portion of program  expenses,  include all labor related costs,  such as
salaries,   bonuses,   fringe   benefits   and  payroll   taxes  for  the  sales
representatives  and sales  managers  and  professional  staff who are  directly
responsible for executing a particular program. Initial direct program costs are
those costs  associated with  initiating a product  detailing  program,  such as
recruiting,   hiring,  and  training  the  sales  representatives  who  staff  a
particular  product  detailing  program.  All personnel costs and initial direct
program costs,  other than training costs,  are expensed as incurred for service
offerings. Product detailing,  marketing and promotional expenses related to the
detailing of products the Company  distributes are recorded as a selling expense
and are included in other selling,  general and  administrative  expenses in the
consolidated statements of operations.

                                      F-7
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


       Reimbursable Out-of-Pocket Expenses
       -----------------------------------

       Reimbursable  out-of-pocket expenses include those relating to travel and
out-of  pocket  expenses  and other  similar  costs,  for which the  Company  is
reimbursed at cost from its clients.  In  accordance  with the  requirements  of
Emerging  Issues Task Force No. 01-14,  "INCOME  STATEMENT  CHARACTERIZATION  OF
REIMBURSEMENTS  RECEIVED FOR  OUT-OF-POCKET  EXPENSES  INCURRED"  (EITF  01-14),
reimbursements received for out-of-pocket expenses incurred are characterized as
revenue and an identical amount is included as cost of goods and services in the
consolidated  statements of  operations.  For the years ended December 31, 2004,
2003 and 2002,  reimbursable  out-of-pocket  expenses were $22.8 million,  $27.1
million and $23.9 million, respectively.

       Training Costs
       --------------

       Training  costs  include the costs of training the sales  representatives
and  managers  on a  particular  product  detailing  program  so that  they  are
qualified to properly  perform the services  specified in the related  contract.
For all contracts,  training costs are deferred and amortized on a straight-line
basis over the  shorter of the life of the  contract  to which they relate or 12
months. When the Company receives a specific contract payment from a client upon
commencement of a product  detailing program expressly to compensate the Company
for  recruiting,  hiring and training  services  associated  with  staffing that
program,  such payment is deferred and  recognized as revenue in the same period
that the recruiting  and hiring  expenses are incurred and  amortization  of the
deferred  training is  expensed.  When the  Company  does not receive a specific
contract  payment for training,  all revenue is deferred and recognized over the
life of the contract.

       Product revenue and cost of goods sold
       --------------------------------------

       Product  revenue is  recognized  when  products  are shipped and title is
transferred  to the customer.  Product  revenue for the years ended December 31,
2004 and 2003 were negative,  primarily from the adjustments to the Ceftin sales
returns  reserve,  as  discussed  in  Note  3  to  the  consolidated   financial
statements,  net of the sale of the Xylos wound care products.  Product  revenue
recognized  in prior  periods  was  related  to the  Ceftin  contract  which was
terminated by mutual consent in February 2002.

       Cost of goods sold includes all expenses for product  distribution costs,
acquisition and manufacturing costs of the product sold.

ESTIMATES FOR ACCRUED REBATES, SALES DISCOUNTS AND RETURNS

       For  product  sales,  provision  is  made at the  time  of  sale  for all
discounts and estimated  sales  allowances.  As is common in the  pharmaceutical
industry, customers who purchased the Company's Ceftin product were permitted to
return unused product, after approval from the Company, up to six months before,
and one year  after  the  expiration  date for the  product,  but no later  than
December  31,  2004.  The  products  sold by the  Company  prior  to the  Ceftin
agreement  termination  date of February 28, 2002 had  expiration  dates through
June 2004.  As discussed  in Note 3 to the  consolidated  financial  statements,
there were $1.7 million and $12.0 million  adjustments  for changes in estimates
to the Ceftin returns reserve in 2004 and 2003, respectively.  These adjustments
were recorded as a reduction to revenue consistent with the initial  recognition
of the returns  allowance  and  resulted in the Company  reporting  net negative
product  revenue in 2004 and 2003.  As the  Company's  responsibility  to accept
product  returns ended  December 31, 2004, no further  increases to this reserve
are likely.  The Company will,  however,  continue to pay these  returns  during
2005.  Additionally,  certain  customers  were  eligible  for price  rebates  or
discounts,  offered  as an  incentive  to  increase  sales  volume  and  achieve
favorable  formulary status, on the basis of volume of purchases or increases in
the product's market share over a specified  period,  and certain  customers are
credited with  chargebacks  on the basis of their resales to end-use  customers,
such as  HMO's,  which  contracted  with the  Company  for  quantity  discounts.
Furthermore,  the Company is  obligated  to issue  rebates  under the  federally
administered  Medicaid program.  In each instance the Company has the historical
data and access to other information, including the total demand for the drug it
distributes,  its market share, the recent or pending  introduction of new drugs
or generic  competition,  the inventory practices of the Company's customers and
the resales by its  customers to end-users  having  contracts  with the Company,
necessary to reasonably  estimate the amount of such returns or allowances,  and
record  reserves  for  such  returns  or  allowances  at the  time  of sale as a
reduction of revenue.  The actual payment of these rebates  varies  depending on
the program and can take several calendar quarters before final settlement.  Any
adjustments  for  changes in  estimates  are  recorded  through  revenue in that
period.

                                      F-8
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


UNBILLED COSTS AND ACCRUED PROFITS AND UNEARNED CONTRACT REVENUE

       In  general,  contractual  provisions,  including  predetermined  payment
schedules  or  submission  of   appropriate   billing   detail,   establish  the
prerequisites  for  billings.  Unbilled  costs and  accrued  profits  arise when
services  have been  rendered  and payment is assured but clients  have not been
billed. These amounts are classified as a current asset.  Normally,  in the case
of detailing  contracts,  the clients  agree to pay the Company a portion of the
fee due under a contract in advance of performance of services  because of large
recruiting and employee  development  costs  associated  with the beginning of a
contract.  The excess of  amounts  billed  over  revenue  recognized  represents
unearned contract revenue, which is classified as a current liability.

CASH AND CASH EQUIVALENTS

       Cash and cash equivalents  consist of unrestricted cash accounts,  highly
liquid  investment  instruments  and  certificates  of deposit  with an original
maturity of three months or less at the date of purchase.

INVESTMENTS

       The Company accounts for certain investments under Statement of Financial
Accounting Standards (SFAS) No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES" (SFAS 115). Available-for-sale  investments are valued at
fair market value based on quoted market values, with the resulting adjustments,
net of deferred taxes,  reported as a separate component of stockholders' equity
as  accumulated  other   comprehensive   income  (loss).  For  the  purposes  of
determining  gross  realized  gains and losses,  the cost of securities  sold is
based upon specific  identification.  The Company's other short-term investments
consist of a laddered  portfolio of investment  grade debt  instruments  such as
obligations of the U.S. Treasury and U.S. Federal Government agencies; municipal
bonds; and commercial paper.  Because the Company's management has the intention
and ability to hold these securities to maturity,  the investments are accounted
for as  HELD-TO-MATURITY  debt securities under the guidance of SFAS 115 and are
stated at amortized cost, which approximates fair value.

       LOANS AND INVESTMENTS IN PRIVATELY HELD ENTITIES

       As  discussed in Note 7 to the  consolidated  financial  statements,  the
Company's  loans and  investments  in privately  held entities are accounted for
under  either  the cost or  equity  method,  whichever  is  appropriate  for the
particular investment,  and are included in other assets. The appropriate method
is determined by the Company's  ability to exercise  significant  influence over
the investee,  through  either  quantity of voting stock or other means.  If the
Company was to determine  that its  accounting  treatment for these  investments
should change from the cost to the equity method, in accordance with APB No. 18,
"EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK," the Company would
retroactively  restate its  previously  issued  financial  statements  as if the
Company had always accounted for the investment under the equity method.

       The Company assesses its loans and investments in privately held entities
on a  quarterly  basis  for  impairment  and  propriety  of  current  accounting
treatment.  This quarterly review includes discussions with senior management of
the investee,  and evaluations of, among other things,  the investee's  progress
against its  business  plan,  its  customer  base,  the market  condition of the
overall   industry  of  the  investee,   historical   and  projected   financial
performance,  expected  cash  needs and recent  funding  events.  The  Company's
assessments of value are highly  subjective given that these companies may be at
an early stage of  development  and rely  regularly on their  investors for cash
infusions.  Consequently,  if the Company  determines based on the above factors
that the loans are not collectible and/or investments are other than temporarily
impaired,  the  Company  will  record  a loss on its  investments  which  may be
material to the period in which the adjustment is recorded.  For the years ended
December 31, 2004,  2003 and 2002,  the Company  recorded  write-downs  of these
loans  and  investments  of $1.5  million,  zero,  and  approximately  $379,000,
respectively.

INVENTORY

       Inventory  is  valued  at the  lower  of cost or  market  value.  Cost is
determined  using the first in,  first out costing  method.  Inventory  consists
entirely of finished goods and is recorded net of a provision for  obsolescence.
The Company had no inventory as of December 31, 2004.

REALIZABILITY OF CARRYING VALUE OF LONG-LIVED ASSETS

       The  Company  reviews  the   recoverability   of  long-lived  assets  and
finite-lived  intangible  assets when  circumstances  indicate that the carrying
amount of assets may not be  recoverable.  This  evaluation  is based on various
analyses  including cash flow  projections.  In the event cash flow  projections
indicate an impairment, the Company would record an impairment based on the fair
value of the assets at the date of the impairment.  No impairments of long-lived
assets were recorded in 2004, 2003, or 2002; however, the Company disposed of or
sold assets in 2004, primarily related to the move of the company's headquarters
in July 2004, resulting in a loss on disposal or sale of approximately $622,000.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Trade accounts  receivable  are recorded at the invoiced  amount and do not bear
interest.  The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in its existing  accounts  receivable.  The
Company determines the allowance based on historical write-off  experience.  The
Company reviews its allowance for doubtful accounts  monthly.  Past due balances
over  90  days  and  over a  specified  amount  are  reviewed  individually  for
collectibility.  Account balances are charged off against the allowance when the
Company feels it is probable the receivable will not be recovered. Additionally,
the  Company  has  other  receivables  from  Xylos  Corporation   (Xylos),   TMX
Interactive,  Inc.  (TMX),  and a related  party,  which are  included  in other
current  and  long-term  assets,  respectively.  See  Notes  7 and 16  for  more
information.  The Company does not have any off balance  sheet  credit  exposure
related to its customers.

      Total  receivables  consist of the following at December 31, 2004 and 2003
(amounts in thousands):

                         2004           2003
                         ----           ----

Trade                  $ 26,736      $ 41,634

Employee                     75           150

Other                     1,694           501
                       --------      --------

Total receivables      $ 28,505      $ 42,285
                       ========      ========

      The  allowance  for  doubtful  accounts  was  approximately  $574,000  and
$749,000 as of December 31, 2004 and 2003,  respectively  and  includes  amounts
recorded for both accounts receivable and other receivables.

PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost less accumulated  depreciation.
Depreciation  is computed  using the  straight-line  method,  based on estimated
useful lives of seven to ten years for  furniture  and  fixtures,  three to five
years for office equipment and computer equipment,  and seven years for computer
software. Leasehold improvements are amortized over the shorter of the estimated
service lives or the terms of the related  leases.  Repairs and  maintenance are
charged  to  expense  as  incurred.  Upon  disposition,  the asset  and  related
accumulated  depreciation are removed from the related accounts and any gains or
losses are reflected in operations.  Purchased  computer software is capitalized
and amortized over the software's useful life, unless the amounts are immaterial
in which case the Company expenses it immediately. Internally developed software
is also capitalized and amortized over its useful life in accordance with of the
American  Institute  of  Certified  Public  Accountants'  (AICPA)  Statement  of
Position (SOP) 98-1 "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE  DEVELOPED OR
OBTAINED FOR INTERNAL USE."

                                      F-9
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


GOODWILL AND OTHER INTANGIBLE ASSETS

       Goodwill is evaluated for  impairment  on at least an annual  basis.  The
Company has  established  reporting  units for purposes of testing  goodwill for
impairment.  The tests involve  determining the fair market value of each of the
reporting  units  with which the  goodwill  was  associated  and  comparing  the
estimated  fair market  value of each of the  reporting  units with its carrying
amount.  Goodwill has been assigned to the reporting units to which the value of
the goodwill relates. The Company evaluates goodwill and other intangible assets
at least on an annual  basis and  whenever  events and changes in  circumstances
suggest that the carrying  amount may not be recoverable  based on the estimated
future cash flows. The Company performed the required annual impairment tests in
the fourth  quarters of 2004,  2003 and 2002 and  determined  that no impairment
existed during any of the comparative periods.

STOCK-BASED COMPENSATION

       As of December  31,  2004,  the Company  has three  stock-based  employee
compensation  plans  described more fully in Note 20. SFAS No. 123,  "ACCOUNTING
FOR STOCK-BASED  COMPENSATION"  allows companies a choice of measuring  employee
stock-based  compensation  expense  based on  either  the fair  value  method of
accounting or the intrinsic  value approach  under the Accounting  Pronouncement
Board (APB)  Opinion No. 25,  "ACCOUNTING  FOR STOCK ISSUED TO  EMPLOYEES."  The
Company   accounts  for  those  plans  under  the  recognition  and  measurement
principles of APB Opinion No. 25 and related  Interpretations.  During 2004, the
Company  accelerated  the vesting of stock option  grants and  restricted  stock
grants  for  certain   employees   which  resulted  in  total   compensation  of
approximately  $275,000.  Other  than  the  expense  mentioned  above,  no stock
option-based  employee  compensation  cost is  reflected  in net income,  as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the underlying common stock on the date of the grant. Certain employees
receive  restricted  common stock, the amortization of which is reflected in net
income.  The following  table  illustrates the effect on net income and earnings
per share if the Company had applied the fair value  recognition  provisions  of
SFAS No. 123 to stock-based employee compensation.

                                                    As of December 31,
                                                2004       2003       2002
                                              --------   --------   --------
                                           (in thousands, except per share data)

Net income (loss), as reported                $ 21,132   $ 12,258   $(30,761)

Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects                 721        368        283

Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects                      (3,946)    (6,133)    (8,137)
                                              --------   --------   --------
Pro forma net income (loss)                   $ 17,907   $  6,493   $(38,615)
                                              ========   ========   ========

Earnings (loss) per share
   Basic--as reported                         $   1.45   $   0.86   $  (2.19)
                                              ========   ========   ========
   Basic--pro forma                           $   1.23   $   0.46   $  (2.75)
                                              ========   ========   ========

   Diluted--as reported                       $   1.42   $   0.85   $  (2.19)
                                              ========   ========   ========
   Diluted--pro forma                         $   1.20   $   0.45   $  (2.75)
                                              ========   ========   ========

       Compensation  cost for the  determination  of Pro forma net income (loss)
and related per share  amounts were  estimated  using the Black  Scholes  option
pricing model,  with the following  assumptions:  (i) risk free interest rate of
3.63%, 4.49% and 5.01% at December 31, 2004, 2003 and 2002,  respectively;  (ii)
expected life of five years for 2004, 2003 and 2002; (iii) expected  dividends -
$0 for 2004,  2003 and 2002;  and (iv)  volatility of 100% for 2004,  2003,  and
2002. The weighted  average fair value of options  granted during 2004, 2003 and
2002 was $19.26, $11.23 and $14.92, respectively.

ADVERTISING

       The Company recognizes  advertising costs as incurred.  The total amounts
charged  to  advertising  expense  were  approximately  $230,000,  $555,000  and
$259,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

                                      F-10
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


INCOME TAXES

       In accordance with the provisions of SFAS No. 109, "ACCOUNTING FOR INCOME
TAXES,"  the Company  accounts  for income  taxes using the asset and  liability
method. This method requires  recognition of deferred tax assets and liabilities
for expected  future tax  consequences of temporary  differences  that currently
exist  between  tax  bases  and  financial  reporting  bases of our  assets  and
liabilities  based on  enacted  tax laws and rates.  A  valuation  allowance  is
established,  when necessary,  to reduce the deferred income tax assets that are
not more likely than not to be realized.

       The Company operates in multiple tax  jurisdictions and provides taxes in
each  jurisdiction  where  the  Company  conducts  business  and is  subject  to
taxation.

       The Company has established  estimated  liabilities for federal and state
income tax exposures that arise and meet the criteria for accrual under SFAS No.
5, "ACCOUNTING FOR CONTINGENCIES"  (SFAS 5). These accruals represent accounting
estimates  that are subject to inherent  uncertainties  associated  with the tax
audit process.  The Company  adjusts these  accruals as facts and  circumstances
change,  such as the  progress  of a tax audit.  The Company  believes  that any
potential  audit  adjustments  will not have a  material  adverse  effect on its
financial condition or liquidity.  However, any adjustments made may be material
to the Company's consolidated results of operations of a reporting period.

LICENSE FEES

       Costs related to the  acquisition  or licensing of products that have not
yet received  regulatory  approval to be marketed,  and that have no alternative
future uses, are expensed as incurred,  while costs incurred  post-approval  are
capitalized and amortized over the shorter of the estimated economic life of the
underlying product or the term of the license agreement. See Note 2.

RECLASSIFICATIONS

       Certain  reclassifications  have  been  made to  conform  prior  periods'
information to the current year presentation.

NEW ACCOUNTING PRONOUNCEMENTS

      In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs," (SFAS
151) which  clarifies  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling costs, and wasted material  (spoilage) by requiring
these  items  to be  recognized  as  current-period  charges.  SFAS  No.  151 is
effective for inventory  costs incurred during fiscal years beginning after June
15, 2005, with earlier  application  permitted.  The adoption of SFAS No. 151 is
not expected to have a material impact on the Company's  financial condition and
results of operations.


       In December  2004,  the FASB issued SFAS No. 153,  "Exchanges of Monetary
Assets," (SFAS 153) which  addresses the measurement of exchanges of nonmonetary
assets and eliminates the exception from fair value  measurement for nonmonetary
exchanges of similar  productive  assets and  replaces it with an exception  for
exchanges that do not have commercial  substance.  SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005, with earlier  application  permitted.  The adoption of SFAS No. 153 is not
expected to have a material  impact on the  Company's  financial  condition  and
results of operations.


       In December 2004, the FASB issued a revision of SFAS No. 123,  "Statement
of Financial  Accounting  Standards  No. 123 (revised  2004)," (SFAS 123R) which
requires that the cost resulting from all  share-based  payment  transactions be
recognized in the financial statements. This Statement establishes fair value as
the measurement objective in accounting for share-based payment arrangements and
requires  all  entities  to  apply  a  fair-value-based  measurement  method  in
accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans.  This Statement is effective
as of the beginning of the first interim or annual  reporting period that begins
after June 15, 2005,  and the Company  expects to adopt this standard  using the
modified  prospective  method.  The  adoption  of SFAS 123R may have a  material
effect on the Company's financial condition and results of operations.


2.     PERFORMANCE BASED CONTRACTS

       In May 2001,  the  Company  entered  into a  copromotion  agreement  with
Novartis  Pharmaceuticals  Corporation  (Novartis) for the U.S. sales, marketing
and promotion  rights for  Lotensin(R),  and Lotensin  HCT(R).  Another product,
Lotrel, was promoted by the same sales force under the same agreement, but was a
fee for service arrangement. On May 20, 2002, this agreement was replaced by two
separate  agreements,  one for  Lotensin and one for  Lotrel-Diovan  through the
addition of Diovan(R) and Diovan HCT(R). Both of these agreements ended December
31, 2003; however, the Lotrel-Diovan  agreement was renewed on December 24, 2003
for an additional one year period. In February 2004, the Company was notified by
Novartis of its intent to terminate the Lotrel-Diovan agreement,  without cause,
effective  March 16, 2004.  The Company was  compensated  under the terms of the
agreement  through the  effective  termination  date.  Even though the  Lotensin
agreement  ended  December  31,  2003,  the Company also was entitled to receive
royalty payments on the sales of Lotensin through December 31, 2004.

                                      F-11
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


       In October 2002, the Company entered into an agreement with Xylos for the
exclusive  U.S.  commercialization  rights  to the  XCell  line  of  wound  care
products.  Pursuant to this agreement,  the Company had certain minimum purchase
requirements.  The minimum  purchase  requirement for the calendar year 2003 was
$750,000,  which was met. The minimum  purchase  requirement for each subsequent
calendar  year  was to be  based  on the  aggregate  dollar  volume  of sales of
products during the 12-month period ending with September of the prior year, but
in no event less than $750,000.  The Company did have the right to terminate the
agreement with 135 days' notice to Xylos, beginning January 1, 2004. The Company
began  selling  the  Xylos  products  in  January  2003;  however,   sales  were
significantly  slower  than  anticipated  and actual 2003 sales did not meet the
Company's  forecasts.  Based on these sales results,  the Company concluded that
sales of XCell were not  sufficient  enough to sustain the  Company's  continued
role as commercialization  partner for the product and therefore,  on January 2,
2004, the Company  exercised its contractual right to terminate the agreement on
135 days' notice to Xylos.  The Company's  promotional  activities in support of
the brand concluded in January 2004, and the agreement was terminated  effective
May 16, 2004.  The Company  recorded a reserve for  potential  excess  inventory
during 2003. In 2002,  the Company had acquired $1.0 million of preferred  stock
of Xylos and in 2004, the Company loaned $500,000 to Xylos. As discussed in Note
7, the Company  determined its $1.0 million  investment and $500,000  short-term
loan to Xylos were  impaired as of December  31, 2004 and both were written down
to zero.

       On December 31,  2002,  the Company  entered into an exclusive  licensing
agreement (the Cellegy  License  Agreement) with Cellegy  Pharmaceuticals,  Inc.
(Cellegy)  for  the  exclusive  North  American  rights  for   Fortigel(TM),   a
testosterone gel product.  The agreement is in effect for the commercial life of
the product. Cellegy submitted a New Drug Application (NDA) for the hypogonadism
indication to the U.S. Food and Drug Administration  (FDA) in June 2002. In July
2003,  Cellegy  received a letter from the FDA  rejecting  its NDA for Fortigel.
Cellegy has told us that, in the first quarter of 2005, it received FDA approval
for the protocol  parameters  for a new Phase 3 study proposed by Cellegy to the
FDA. The Company does not know when, or even whether Cellegy will conduct such a
new Phase 3 Study, and the Company cannot predict with any certainty whether the
FDA will ultimately approve Fortigel for sale in the U.S. Under the terms of the
agreement,  the Company paid Cellegy a $15.0  million  initial  licensing fee on
December 31,  2002.  This  nonrefundable  payment was made prior to FDA approval
and, since there is no alternative  future use of the licensed rights, the $15.0
million  payment was expensed by the Company in December  2002,  when  incurred.
This amount was recorded in other selling,  general, and administrative expenses
in the December 31, 2002 consolidated statements of operations.  Pursuant to the
terms of the Cellegy  License  Agreement,  the  Company  will be required to pay
Cellegy  a  $10.0  million   incremental  license  fee  milestone  payment  upon
Fortigel's  receipt of all approvals  required by the FDA (if such approvals are
obtained)  to  promote,  sell  and  distribute  the  product  in the  U.S.  This
incremental  milestone  license  fee,  if  incurred,  will  be  recorded  as  an
intangible  asset  and  amortized  over  its  estimated  useful  life,  as  then
determined,  which is not  expected  to exceed the life of the  patent.  Royalty
payments to Cellegy over the term of the  commercial  life of the product  would
range from 20% to 30% of net sales.

       Evista
       ------

       In October 2001, the Company entered into an agreement with Eli Lilly and
Company  (Eli Lilly) to copromote  Evista(R) in the U.S.  Under the terms of the
agreement,  the Company  provided sales  representatives  to copromote Evista to
physicians in the U.S. The Company's sales representatives  supplemented the Eli
Lilly  sales  force  promoting  Evista.  Under this  agreement,  the Company was
entitled to be  compensated  based on net sales  achieved by the product above a
predetermined  level.  The  agreement did not provide for the  reimbursement  of
expenses the Company incurred.

       The Eli Lilly arrangement was a performance  based contract.  The Company
was required to commit a certain level of spending for  promotional  and selling
activities, including, but not limited to, providing sales representatives.  The
sales force  assigned to Evista was at times used to promote  other  products in
addition to Evista,  including  products  covered by other  Company  copromotion
arrangements, which partially offset the costs of the sales force. The Company's
compensation  for Evista was  determined  based upon a percentage of net factory
sales of Evista above contractual  baselines.  To the extent that such baselines
were not exceeded, the Company received no revenue.

       Based upon management's assessment of the future performance potential of
the Evista  brand,  on November  11,  2002,  the Company and Eli Lilly  mutually
agreed to terminate the agreement as of December 31, 2002. The Company accrued a
contract  loss of  $7.8  million  as of  September  30,  2002  representing  the
anticipated  future  loss  expected to be incurred by the Company to fulfill its
contractual  obligations  under the  Evista  agreement.  There was no  remaining
accrual as of December 31, 2002 as the Company had no further obligations due to
the  termination  of the  agreement.  An  operating  loss of $35.1  million  was
recognized under this agreement for the year ended December 31, 2002.

                                      F-12
<PAGE>


3.     CEFTIN CONTRACT TERMINATION

       In October  2000,  the  Company  entered  into an  agreement  (the Ceftin
Agreement) with  GlaxoSmithKline  (GSK) for the exclusive U.S. sales,  marketing
and distribution rights for Ceftin(R) Tablets and Ceftin(R) for Oral Suspension,
two dosage forms of a cephalosporin  antibiotic,  which agreement was terminated
in February 2002 by mutual agreement of the parties.  The Ceftin Agreement had a
five-year  term but was  cancelable  by either party  without cause on 120 days'
notice.  From October 2000 through February 2002, the Company marketed Ceftin to
physicians  and sold the  products  primarily to  wholesale  drug  distributors,
retail chains and managed care providers.

       On August 21, 2001,  the U.S.  Court of Appeals  overturned a preliminary
injunction  granted by the New Jersey District Court to GSK, which  subsequently
allowed  for the  entry of a  generic  competitor  to  Ceftin  immediately  upon
approval by the FDA. The affected Ceftin patent had previously been scheduled to
run through July 2003. The generic  version of Ceftin was approved by the FDA in
February 2002 and it began to be manufactured in late March 2002. As a result of
this U.S. Court of Appeals decision and its impact on future sales, in the third
quarter  of 2001  the  Company  recorded  a charge  to cost of goods  sold and a
related reserve of $24.0 million  representing the anticipated future loss to be
incurred by the Company under the Ceftin Agreement as of September 30, 2001. The
recorded loss was  calculated as the excess of estimated  costs that the Company
was  contractually  obligated  to incur to complete  its  obligations  under the
Ceftin Agreement,  over the remaining estimated gross profits to be earned under
the Ceftin Agreement from selling the inventory. These costs primarily consisted
of amounts paid to GSK to reduce purchase commitments, estimated committed sales
force  expenses,  selling and marketing  costs through the effective date of the
termination,  distribution  costs, and fees to terminate existing  arrangements.
The  Ceftin  Agreement  was  terminated  by the  Company  and GSK under a mutual
termination  agreement  entered  into in December  2001.  GSK resumed  exclusive
rights to Ceftin  after the  effective  date of the  termination  of the  Ceftin
Agreement,  and the Company  believes that GSK currently  sells Ceftin under its
own label code.

       Pursuant to the  termination  agreement,  the  Company  agreed to perform
marketing and  distribution  services through February 28, 2002. As is common in
the  pharmaceutical  industry,  customers who  purchased  the  Company's  Ceftin
product  were  permitted  to return  unused  product,  after  approval  from the
Company,  up to six months before and one year after the expiration date for the
product,  but no later than December 31, 2004.  The products sold by the Company
prior  to the  Ceftin  Agreement  termination  date of  February  28,  2002  had
expiration  dates through June 2004. The Company also maintained  responsibility
for processing and payment of certain sales rebates  through  December 31, 2004.
The Company's Ceftin sales aggregated approximately $628 million during the term
of the Ceftin Agreement.

       As  of  December   31,  2002,   the  Company  had  accrued   reserves  of
approximately  $16.5  million  related to Ceftin sales.  Of this accrual,  $11.0
million  related to return  reserves and $5.5 million  related to sales  rebates
accruals.  On an ongoing  basis,  the Company  assesses  its reserve for product
returns  by:  analyzing   historical  sales  and  return  patterns;   monitoring
prescription data for branded Ceftin;  monitoring  inventory  withdrawals by the
wholesalers and retailers for branded Ceftin;  inquiring about inventory  levels
and potential  product  returns with the  wholesaler  companies;  and estimating
demand for the  product.  During the third  quarter of 2003,  the Company made a
$5.5 million payment to settle its estimated remaining sales rebate liabilities,
and concluded  based on its returns  reserve  review  process,  which included a
review  of  prescription  and  withdrawal  data for  branded  Ceftin  as well as
information  communicated to the Company by the wholesalers,  that the remaining
$11.0 million reserve for returns was adequate as of September 30, 2003.

       In the fourth quarter of 2003, the Company  determined,  based  primarily
upon new  information  obtained  from  its  wholesalers  as part of its  ongoing
reserve review process,  that significant  amounts of inventory,  incremental to
that  previously  reported  by the  wholesalers,  were  being  held  by  them in
inventory.  The Company  believed that this resulted,  in part, from the sale by
the  wholesalers  of Ceftin  product not supplied by the Company and acquired by
the wholesalers  subsequent to the mutual  termination of the Ceftin  Agreement.
Based upon that  information,  the Company  increased its returns  reserve $12.0
million to a total reserve of $22.8 million in the fourth quarter of 2003.

       On March 31,  2004,  the Company  signed an  agreement  and waiver with a
large  wholesaler  by which  the  Company  agreed to pay that  wholesaler  $10.0
million,  and purchase $2.5 million  worth of services  from that  wholesaler by
March 31, 2006, in exchange for that wholesaler  waiving,  to the fullest extent
permitted by law, all rights with respect to any additional returns of Ceftin to
the Company.  The Company made the payment on April 5, 2004. In 2004 the Company
increased its return reserve by approximately  $1.7 million based primarily upon
new information  obtained from the wholesalers as part of the Company's  ongoing
reserve review process.

                                      F-13
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


       The  Company's  reserve of $4.3 million at December 31, 2004 reflects the
Company's  estimated  liability for all identified  product that the Company has
accepted  for return by all the  remaining  wholesalers.  The  reserve  has been
calculated based on, with respect to wholesalers, reimbursing the wholesalers at
the amount that they  purchased  the product  from the  Company.  The reserve as
recorded by the Company is its best estimate based on its  understanding  of its
obligations.  The reserve also includes a liability of $2.5 million for services
to be  purchased by the Company  from a large  wholesaler  which the Company was
able to negotiate in lieu of cash  payments as described  above.  Subsequent  to
that  negotiation,  the  Company  entered  into an  agreement  with  this  large
wholesaler  and certain of its  affiliates  pursuant  to which the Company  will
provide $2.5 million of product  detailing  services for such affiliates in lieu
of purchasing services from the wholesaler.  The Company has continued to assess
the adequacy of its reserves until the Company's  obligations for processing any
returned products ceased on December 31, 2004.

4.     REPURCHASE PROGRAM

       On September 21, 2001, the Company  announced that its Board of Directors
(the Board) had  unanimously  authorized  management  to  repurchase  up to $7.5
million of its Common Stock.  Subject to  availability,  the transactions may be
made  from time to time in the open  market or  directly  from  stockholders  at
prevailing  market prices that the Company deems  appropriate.  In October 2001,
5,000  shares  were  repurchased  in an open market  transaction  for a total of
$110,000. No further purchases have been made through December 31, 2004.

5.     ACQUISITION

       On August 31, 2004, the Company acquired  substantially all of the assets
of Pharmakon,  LLC, in a  transaction  treated as an asset  acquisition  for tax
purposes.  The acquisition has been accounted for as a purchase,  subject to the
provisions of SFAS No. 141, "BUSINESS COMBINATIONS" (SFAS 141). The Company made
payments to the members of Pharmakon at closing of $27.4 million,  of which $1.5
million was deposited into an escrow  account,  and assumed  approximately  $2.6
million in net  liabilities.  Approximately  $1.1 million in direct costs of the
acquisition  were also  capitalized.  Based upon the attainment of annual profit
targets agreed upon at the date of  acquisition,  the members of Pharmakon,  LLC
will receive approximately $1.5 million in additional payments in March 2005 for
the year  ended  December  31,  2004.  The  Company  has  determined  that  this
consideration meets the requirements to be capitalized as additional investment,
rather than  expensed  as  compensation.  This amount was  recorded as a current
liability as of December  31,  2004,  with a  corresponding  amount  recorded to
goodwill.  Additionally,  the members of Pharmakon,  LLC can still earn up to an
additional $6.7 million in cash based upon  achievement of certain annual profit
targets through December 2006. In connection with this transaction,  the Company
recorded  $12.7  million in  goodwill  and $18.9  million in other  identifiable
intangibles.

       Pharmakon is a healthcare communications company focused on the marketing
of ethical  pharmaceutical and biotechnology  products. A primary reason for the
acquisition of Pharmakon was the advancement of the Company's goal to expand its
presence  in the  growing  and  heavily  outsourced  medical  education  market.
Pharmakon's   emphasis  is  on  the  creation,   design  and  implementation  of
interactive peer persuasion  programs.  The successful  integration of Pharmakon
and PDI would allow both companies to leverage their account  relationships  and
cross sell their services.

       The following unaudited pro forma consolidated  results of operations for
the years ended  December 31, 2004,  2003,  and 2002 assume that the Company and
Pharmakon had been combined as of the  beginning of the periods  presented.  The
pro forma results include  estimates and assumptions  which management  believes
are reasonable. However, pro forma results are not necessarily indicative of the
results that would have occurred if the acquisition  had been  consummated as of
the dates  indicated,  nor are they  necessarily  indicative of future operating
results.

                                      F-14
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                                                Year ended December 31,
                                        ---------------------------------------
                                            2004           2003          2002
                                        -----------    -----------    ---------
                                       (in thousands, except for per share data)
                                                         (unaudited)

Revenue - pro forma                     $   377,577    $   361,687    $ 324,731
                                        ===========    ===========    =========
Net income (loss) - pro forma           $    22,842    $    14,713    $ (29,657)
                                        ===========    ===========    =========
Pro forma earnings (loss) per share     $      1.53    $      1.02    $   (2.11)
                                        ===========    ===========    =========


6.     SHORT-TERM INVESTMENTS

       At  December  31,  2004,  short-term   investments  were  $13.1  million,
including    approximately   $1.6   million   of   investments   classified   as
available-for-sale securities. At December 31, 2003, short-term investments were
$1.3 million,  including approximately $1.1 million of investments classified as
available-for-sale securities.

       Excluding  investments   classified  as  available-for-sale   securities,
short-term  investments at December 31, 2004 consist  of a laddered portfolio of
investment grade debt  instruments such as obligations of the U.S.  Treasury and
U.S. Federal  Government  agencies;  municipal  bonds; and commercial  paper. At
December  31, 2004,  the weighted  average  maturity  date for these  short-term
investments  is 8.3 months.  Because the Company's  management has the intention
and ability to hold these securities to maturity,  the investments are accounted
for as  HELD-TO-MATURITY  debt  securities  under  the  guidance  of  SFAS  115,
"ACCOUNTING  FOR CERTAIN  INVESTMENTS  IN EQUITY AND DEBT  SECURITIES",  and are
stated at amortized cost, which approximates fair value.

       The unrealized after-tax gain/(loss) on the available-for-sale securities
is included as a separate component of stockholders' equity as accumulated other
comprehensive income (loss).

7.     OTHER INVESTMENTS

       In October 2002, the Company  acquired $1.0 million of preferred stock of
Xylos.  The Company  recorded its  investment in Xylos under the cost method and
its ownership interest in Xylos is less than five percent.  As discussed in Note
2, the Company  served in 2003 as the exclusive  distributor  of the Xylos XCell
product line, but on January 2, 2004, the Company  terminated  that  arrangement
effective May 16, 2004. In addition,  the Company  provided  short term loans in
totaling $500,000 in the first half of 2004. As a result of continuing operating
losses incurred by Xylos as well as recent negative  developments  regarding its
inability to obtain  appropriate  financing,  the Company  concluded  during the
fourth quarter of 2004 that both the investment  and the  recoverability  of the
loan were  impaired as of  December  31,  2004.  As a result,  the $1.0  million
investment  was  written  down to zero in the  fourth  quarter  of 2004  and the
$500,000 loan was fully reserved for during the fourth quarter as well.

       In May 2004,  the  Company  entered  into a loan  agreement  with TMX,  a
provider  of  sales  force  effectiveness  technology.   Pursuant  to  the  loan
agreement,  the Company provided TMX with a term loan facility of $500,000 and a
convertible  loan  facility of  $500,000,  each of which are due to be repaid on
November 26, 2005. In connection with the convertible loan facility, the Company
has the right to convert all,  or, in  multiples  of  $100,000,  any part of the
convertible  note into common stock of TMX.  Although TMX experienced  losses in
2004,  the Company  continues to believe  that,  based on current  prospects and
activities at TMX, its loans are not impaired and the amounts are recoverable as
of December 31, 2004.  However, if TMX continues to experience losses and is not
able to generate  sufficient  cash flows through  operations and financing,  the
Company may determine that it will be unable to recover its loans and would have
to reserve for them at that time.

       The Company has an investment in the  preferred  stock of  iPhysicianNet,
Inc.  (iPhysicianNet)  that is accounted for under the equity  method;  however,
recognition  of losses by the Company was  suspended in 2000 after the Company's
investment was reduced to zero. During 2002, additional  investments of $379,000
were made by the Company.  Due to the continuing  losses of  iPhysicianNet,  the
2002 investments were immediately expensed rather than recorded as an asset. The
Company does not have,  nor has it ever had, any  commitments  to provide future
financing  to  iPhysicianNet.  No  investments  were  made  by  the  Company  in
iPhysicianNet during 2003 or 2004 and no losses were recorded in either year due
to the  suspension of losses  mentioned  above because the  investment  has been
previously reduced to zero. The Company's ownership interest in iPhysicianNet is
less than five  percent.  The Company was  informed by  iPhysicianNet  that they
ceased  operations  effective  August 1, 2003, and they  subsequently  filed for
bankruptcy protection.

                                      F-15
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


8.     INVENTORY

       At December  31, 2004 and  December  31,  2003,  the Company had zero and
approximately  $43,000,  respectively,  in  finished  goods  inventory,  net  of
reserves,  relating to the products that were being marketed and  distributed in
accordance with the Xylos agreement. As discussed in Note 2, on January 2, 2004,
the Company gave notice of termination  of its agreement  with Xylos,  effective
May 16, 2004, and discontinued  sales of the Xylos wound care products after the
effective date. In the third quarter of 2003, as a result of the continued lower
than anticipated Xylos product sales,  management recorded a reserve of $835,000
to reduce  the value of the XCell  inventory  to its  estimated  net  realizable
value.

9.     HISTORICAL BASIC AND DILUTED NET INCOME/(LOSS) PER SHARE

       Historical  basic and diluted net  income/(loss)  per share is calculated
based on the requirements of SFAS No. 128, "Earnings Per Share."

       A reconciliation of the number of shares used in the calculation of basic
and diluted  earnings per share for the years ended December 31, 2004,  2003 and
2002 is as follows:

                                                     Years Ended December 31,
                                                  ------------------------------
                                                   2004        2003        2002
                                                  ------      ------      ------
                                                          (in thousands)
Basic weighted average number of
  common shares outstanding ....................  14,564      14,231      14,033
Dilutive effect of stock options and
  restricted shares ............................     329         200          --
                                                  ------      ------      ------

Diluted weighted average number of
  common shares outstanding ....................  14,893      14,431      14,033
                                                  ======      ======      ======

       Outstanding  options at December 31, 2004 to purchase  409,182  shares of
common stock with  exercise  prices of $27.00 to $93.75 were not included in the
2004  computation  of  historical  and pro forma  diluted  net  income per share
because to do so would have been antidilutive.  Outstanding  options at December
31, 2003 to purchase  380,493  shares of common  stock with  exercise  prices of
$27.00 to $93.75 were not included in the 2003 computation of historical and pro
forma   diluted  net  income  per  share  because  to  do  so  would  have  been
antidilutive.  Outstanding  options at December  31, 2002 to purchase  1,514,297
shares of common  stock with  exercise  prices of $5.21 to $98.70 per share were
not included in the 2002  computation  of  historical  and pro forma diluted net
income per share because to do so would have been  antidilutive,  as a result of
the Company's net loss in 2002.

10.    PROPERTY AND EQUIPMENT

       Property and equipment consisted of the following as of December 31, 2004
and 2003:

                                                               December 31,
                                                            2004         2003
                                                          --------     --------
                                                              (in thousands)
Furniture and fixtures ...............................    $  3,942     $  3,288
Office equipment .....................................       3,787        3,204
Computer equipment ...................................       5,727       13,494
Computer software ....................................      13,674       13,685
Leasehold improvements ...............................       4,565        1,905
                                                          --------     --------
Total property and equipment .........................      31,695       35,576

  Less accumulated depreciation and amortization .....     (14,525)     (21,082)
                                                          --------     --------

Property and equipment, net ..........................    $ 17,170     $ 14,494
                                                          ========     ========

Depreciation  expense was  approximately  $4.9 million,  $5.6 million,  and $6.8
million, for the years ended December 31, 2004, 2003 and 2002, respectively.

                                      F-16
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


11.    OPERATING LEASES

       The Company leases  facilities,  automobiles and certain  equipment under
agreements  classified as operating leases which expire at various dates through
2017.  Lease expense  under these  agreements  for the years ended  December 31,
2004, 2003 and 2002 was approximately  $24.4 million,  $21.3 million,  and $26.1
million,  respectively,  of which $21.2 million in 2004,  $18.0 million in 2003,
and $21.2 million in 2002 related to automobiles leased for employees for a term
of one-year from the date of delivery.

       As of December 31, 2004,  the aggregate  minimum  future rental  payments
required by  non-cancelable  operating  leases with initial or  remaining  lease
terms exceeding one year are as follows:

<TABLE>
<CAPTION>
                                    2005       2006      2007      2008      2009      TOTAL
                                   ------     ------    ------    ------    ------    -------
<S>                                <C>        <C>       <C>       <C>       <C>       <C>
                                                         (in thousands)
Operating leases
  Minimum lease payments           $3,799     $3,232    $3,042    $3,130    $3,189    $16,392
  Less minimum sublease rentals       (34)        --        --        --        --        (34)
                                   ------     ------    ------    ------    ------    -------
    Net minimum lease payments     $3,765     $3,232    $3,042    $3,130    $3,189    $16,358
                                   ======     ======    ======    ======    ======    =======
</TABLE>

12.    SIGNIFICANT CUSTOMERS

       During 2004, 2003 and 2002 the Company had several significant  customers
for which it provided  services under  specific  contractual  arrangements.  The
following  sets  forth  the net  service  revenue  generated  by  customers  who
accounted for more than 10% of the Company's  revenue during each of the periods
presented.

                                             Years Ended December 31,
                                         -------------------------------
          Customers                        2004        2003       2002
          ---------                      --------    --------    -------
                                                  (in thousands)

             A ......................    $153,801    $118,713    $96,456
             B ......................      76,744          --         --
             C ......................          --     118,291     90,238

       For each of the years ended December 31, 2004, 2003 and 2002, the Company
had two large  clients,  who each  individually  represented  10% or more of its
service  revenue;  these clients  accounted for in the aggregate,  approximately
63.0%, 66.5% and 61.9%, respectively, of its service revenue.

       At December 31, 2004 and 2003, two customers represented 55.0% and 69.2%,
respectively,  of the aggregate of outstanding  service accounts  receivable and
unbilled services.  The loss of any one of the foregoing  customers could have a
material adverse effect on the Company's business,  financial position,  results
of operations and cash flows.

13.    RELATED PARTY TRANSACTIONS

       The Company purchases  certain print advertising for initial  recruitment
of  representatives  through a company that is wholly-owned by family members of
the Company's largest stockholder.  The amounts charged to the Company for these
purchases totaled approximately $180,000,  $983,000, and $516,000, for the years
ended  December 31, 2004,  2003 and 2002. We are no longer using this company as
of December 31, 2004.

14.    INCOME TAXES

       The provision (benefit) for income taxes for the years ended December 31,
2004, 2003 and 2002 are summarized as follows:

                                      F-17
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                                                 2004        2003         2002
                                               -------    --------     --------
                                                       (in thousands)
Current:
   Federal ................................    $ 3,709    $ 10,308     $(26,972)
   State ..................................      1,930       1,181        1,024
                                               -------    --------     --------
   Total current ..........................      5,639      11,489      (25,948)
                                               -------    --------     --------
Deferred:
   Federal ................................      8,039      (3,856)      10,249
   State ..................................      1,160         772       (1,748)
                                               -------    --------     --------
   Total deferred .........................      9,199      (3,084)       8,501
                                               -------    --------     --------
Provision (benefit) for income taxes ......    $14,838    $  8,405     $(17,447)
                                               =======    ========     ========

       A  reconciliation  of the  difference  between the Federal  statutory tax
rates and the Company's effective tax rate is as follows:

                                                 2004        2003        2002
                                               -------    --------     -------
Federal statutory rate ....................       35.0%       35.0%      (35.0)%
State income tax effect, net of Federal benefit    5.6         6.1        (1.1)
Meals and entertainment ...................        0.2         0.3         0.8
Federal valuation allowance ...............        0.9          --         0.3
Other .....................................       (0.4)       (0.7)       (1.2)
                                               -------    --------     -------

Effective tax rate ........................       41.3%       40.7%      (36.2)%
                                               =======    ========     =======

       The tax effects of significant  items  comprising the Company's  deferred
tax assets and (liabilities) as of December 31, 2004 and 2003 are as follows:

                                                            2004         2003
                                                          --------     --------
Deferred tax assets (liabilities) -- current
     Allowances and reserves                              $  2,604     $  9,938
     Inventory                                                  --          312
     Compensation                                              635          762
     Other                                                      86           41
                                                          --------     --------
                                                          $  3,325     $ 11,053
                                                          --------     --------
Deferred tax assets (liabilities) -- non current
     Property, plant and equipment                        $ (3,676)    $ (2,457)
     State net operating loss carryforwards                  1,356        1,427
     State taxes                                             1,652        1,296
     Intangible assets                                        (433)        (126)
     Equity investment                                       2,204        1,882
     Self insurance and other reserves                       1,185        1,466
     Contract costs                                          5,748        5,698
     Valuation allowance on deferred tax assets             (2,204)      (1,882)
                                                          --------     --------
                                                          $  5,832     $  7,304
                                                          --------     --------
Net deferred tax asset                                    $  9,157     $ 18,357
                                                          ========     ========


       At December 31, 2004 and 2003,  the Company had a valuation  allowance of
$2,204,287  and  $1,881,851,  respectively,  related  to  the  Company's  equity
investments.  The increase in the current year relates to a valuation  allowance
established  associated with the write off of the Xylos investment  discussed in
Note 7. Prior to 2003,  the Company also had a valuation  allowance  for certain
state NOL carryforwards. At December 31, 2003, the Company reduced the valuation
allowance  by  $1,059,310  related to the state NOL  carryforwards  because  the
Company  determined  that it was more likely than not that these assets would be
realized due to the improved operating results of the Company.

       The  Company  performs  an analysis  each year to  determine  whether the
Company's  expected  future  income will more likely than not be  sufficient  to
realize the recorded  deferred tax assets. At December 31, 2004, the Company had
approximately  $26.0  million  of state NOL  carryforwards  which  will begin to
expire in 2010.

15.    PREFERRED STOCK

       The  Company's  Board is  authorized  to issue,  from time to time, up to
5,000,000  shares  of  preferred  stock  in one or more  series.  The  Board  is
authorized to fix the rights and designation of each series,  including dividend
rights and rates, conversion rights, voting rights, redemption terms and prices,
liquidation preferences and


                                      F-18
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


the number of shares of each  series.  As of December  31, 2004 and 2003,  there
were no issued and outstanding shares of preferred stock.

16.    LOANS TO STOCKHOLDERS/OFFICERS

       In November  1998,  the Company  agreed to lend  $250,000 to an executive
officer  of which  $100,000  was  funded in  November  1998,  and the  remaining
$150,000  was  funded in  February  1999.  This  amount  was  recorded  in other
long-term  assets.  Such loan is payable on December 31, 2008 and bears interest
at a rate of 5.5% per annum,  payable  quarterly  in arrears.  In April 2004 and
February 2003,  $75,000 and $100,000 payments,  respectively,  were made against
this loan, leaving a balance of $75,000 as of December 31, 2004.

17.    RETIREMENT PLANS

       Effective  January 1, 2004, the Company's PDI, Inc.  401(k) Plan (the PDI
Plan)  provided  all "Safe  Harbor  Eligible"  plan  participants  with  Company
matching  contributions (Safe Harbor Matching  Contributions) in accordance with
the formula described below:

          o  Employee  contributions  of 1% to 3% of base salary will be matched
             100%; and

          o  Employee contributions which exceed 3% but do not exceed 5% will be
             matched 50%.

       Employees must meet all Safe Harbor  Matching  Contributions  eligibility
requirements as defined in the Plan in order to participate.  Employees' account
balances derived from the Safe Harbor Matching Contributions will be immediately
vested.  In addition,  the Company can make  discretionary  contributions to the
Plan.  There will  continue to be no option for employees to invest any of their
401(k) funds in the Company's  common stock.  The Company's  total  contribution
expense  related  to the  Company's  401(k)  plans for  2004,  2003 and 2002 was
approximately $1.6 million, $905,000, and $1.7 million, respectively.

       During 2003, the Company  restructured its qualified profit sharing plans
with 401(k) features.  Effective  January 1, 2003, the Company's  InServe 401(k)
Plan (the Inserve Plan) was frozen,  and  participants in the Inserve Plan began
to participate in the PDI Plan. Under the terms of the PDI Plan, the Company was
committed  to make  mandatory  cash  contributions  in an  amount  equal  to the
employee  contributions up to a maximum of 2% of each  participating  employee's
annual  base  wages.  There was no option for  employees  to invest any of their
401(k) funds in the Company's common stock.

18.    DEFERRED COMPENSATION ARRANGEMENTS

       Beginning  in 2000,  the  Company  established  a  deferred  compensation
arrangement  whereby a portion of certain  employees'  salaries is withheld  and
placed in a Rabbi  Trust.  The plan permits the  employees  to  diversify  these
assets  through a  variety  of  investment  options.  The  Company  adopted  the
provisions of EITF No. 97-14 "ACCOUNTING FOR DEFERRED  COMPENSATION  ARRANGEMENT
WHERE AMOUNTS ARE EARNED AND HELD IN A RABBI TRUST AND INVESTED"  which requires
the Company to consolidate  into its financial  statements the net assets of the
trust.  The deferred  compensation  obligation has been  classified as a current
liability  and  is  adjusted,   with  the  corresponding  charge  or  credit  to
compensation  expense,  to reflect  changes in fair value of the amounts owed to
the employee. The assets in the trust are classified as  available-for-sale.  In
2004 and 2003,  the market  value of the  investments  increased  by $57,000 and
$42,000,  respectively,  and was  recorded as a debit to  compensation  expense.
There was a credit to compensation expense due to a decrease of the market value
of the  investments  of  approximately  $95,000 in 2002.  The total value of the
Rabbi Trust was approximately $1.6 million and $1.1 million at December 31, 2004
and 2003, respectively.

       In 2000, the Company established a Long-term Incentive  Compensation Plan
whereby  certain  employees  are  required  to take a  portion  of  their  bonus
compensation in the form of restricted  Common Stock. The restricted shares vest
on the  third  anniversary  of the grant  date and are  subject  to  accelerated
vesting  and  forfeiture  under  certain  circumstances.  The  Company  recorded
deferred  compensation costs of approximately  $2.6 million,  zero, and $593,000
during  2004,  2003 and 2002,  respectively,  which are being  amortized  over a
three-year  vesting  period.  The  unamortized   compensation  costs  have  been
classified as a separate component of stockholders' equity.

19.    COMMITMENTS AND CONTINGENCIES

       Due to the nature of the  business in which the Company is engaged,  such
as  product  detailing  and  distribution  of  products,  it could be exposed to
certain risks. Such risks include,  among others, risk of liability for personal
injury

                                      F-19
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


or death to persons using products the Company  promotes or  distributes.  There
can be no assurance that substantial claims or liabilities will not arise in the
future  because of the nature of the Company's  business  activities  and recent
increases   in   litigation   related   to   healthcare   products,    including
pharmaceuticals,  increases this risk. The Company seeks to reduce its potential
liability  under its service  agreements  through  measures such as  contractual
indemnification provisions with clients (the scope of which may vary from client
to client,  and the  performances  of which are not secured) and insurance.  The
Company  could,  however,  also be held liable for errors and  omissions  of its
employees in connection with the services it performs that are outside the scope
of any indemnity or insurance policy. The Company could be materially  adversely
affected if it was required to pay damages or incur  defense costs in connection
with a claim that is outside the scope of an indemnification  agreement;  if the
indemnity,  although applicable,  is not performed in accordance with its terms;
or if the  Company's  liability  exceeds the amount of  applicable  insurance or
indemnity.

SECURITIES LITIGATION

       In January and February 2002, the Company,  its chief  executive  officer
and its chief  financial  officer  were served with three  complaints  that were
filed in the  United  States  District  Court  for the  District  of New  Jersey
alleging violations of the Securities Exchange Act of 1934 (the 1934 Act). These
complaints  were brought as purported  shareholder  class actions under Sections
10(b) and 20(a) of the 1934 Act and Rule 10b-5  established  thereunder.  On May
23,  2002,  the Court  consolidated  all  three  lawsuits  into a single  action
entitled  In re PDI  Securities  Litigation,  Master  File No.  02-CV-0211,  and
appointed lead plaintiffs (Lead Plaintiffs) and Lead Plaintiffs'  counsel. On or
about December 13, 2002, the Lead  Plaintiffs  filed a second  consolidated  and
amended  complaint (the  Consolidated and Amended  Complaint),  which superseded
their earlier complaints.

       The  Consolidated  and Amended  Complaint  names the  Company,  its chief
executive  officer and its chief  financial  officer as defendants;  purports to
state  claims  against the Company on behalf of all  persons who  purchased  the
Company's Common Stock between May 22, 2001 and August 12, 2002; and seeks money
damages in unspecified amounts and litigation expenses including  attorneys' and
experts' fees. The essence of the  allegations in the  Consolidated  and Amended
Complaint  is that  the  Company  intentionally  or  recklessly  made  false  or
misleading  public statements and omissions  concerning its financial  condition
and prospects  with respect to its  marketing of Ceftin in  connection  with the
October  2000  distribution  agreement  with GSK,  its  marketing of Lotensin in
connection with the May 2001  distribution  agreement with Novartis,  as well as
its  marketing  of Evista  in  connection  with the  October  2001  distribution
agreement with Eli Lilly.

       In February 2003, the Company filed a motion to dismiss the  Consolidated
and  Amended  Complaint.  That  motion is fully  submitted  to the court for its
decision. The Company believes that the allegations in this purported securities
class action are without merit and intends to defend the action vigorously.

BAYER-BAYCOL LITIGATION

       The Company has been named as a defendant in numerous lawsuits, including
two class action matters,  alleging claims arising from the use of Baycol(R),  a
prescription  cholesterol-lowering medication. Baycol was distributed,  promoted
and sold by Bayer Corporation  (Bayer) in the United States through early August
2001,  at which time Bayer  voluntarily  withdrew  Baycol from the United States
market.  Bayer  retained  certain  companies,  such as the  Company,  to provide
detailing  services on its behalf  pursuant to contract sales force  agreements.
The Company may be named in additional  similar  lawsuits.  To date, the Company
has defended these actions  vigorously  and has asserted a contractual  right of
indemnification  against  Bayer for all costs and  expenses  the Company  incurs
relating to these  proceedings.  In February  2003,  the Company  entered into a
joint defense and indemnification  agreement with Bayer, pursuant to which Bayer
has agreed to assume substantially all of the Company's defense costs in pending
and  prospective  proceedings  and to indemnify  the Company in these  lawsuits,
subject to certain limited  exceptions.  Further,  Bayer agreed to reimburse the
Company for all  reasonable  costs and  expenses  incurred to date in  defending
these proceedings. As of December 31, 2004, Bayer has reimbursed the Company for
approximately $1.6 million in legal expenses, the majority of which was received
in 2003 and was reflected as a credit within selling, general and administrative
expense. No amounts have been received in 2004.

 AUXILIUM PHARMACEUTICALS LITIGATION

       On January 6, 2003,  the Company  was named as a  defendant  in a lawsuit
filed by Auxilium Pharmaceuticals, Inc. (Auxilium), in the Pennsylvania Court of
Common  Pleas,  Montgomery  County.  Auxilium was seeking  monetary  damages and
injunctive relief,  including  preliminary  injunctive relief,  based on several
claims related to the

                                      F-20
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Company's  alleged breaches of a contract sales force agreement  entered into by
the  parties  on   November   20,   2002,   and  claims  that  the  Company  was
misappropriating trade secrets in connection with the Cellegy License Agreement.

       On May 8, 2003, the Company  entered into a settlement and mutual release
agreement  with Auxilium  (Settlement  Agreement),  by which the lawsuit and all
related  counter  claims were dropped  without any  admission of  wrongdoing  by
either party.  The settlement  terms included a cash payment which was paid upon
execution  of the  Settlement  Agreement  as well as  certain  other  additional
expenses.  The Company  recorded a $2.1 million  charge in the first  quarter of
2003  related to this  settlement.  Pursuant to the  Settlement  Agreement,  the
Company also agreed that it would (a) not sell, ship, distribute or transfer any
Fortigel product to any wholesalers,  chain drug stores, pharmacies or hospitals
prior to  November  1,  2003,  and (b) pay  Auxilium  an  additional  amount per
prescription to be determined based upon a specified  formula,  in the event any
prescriptions  were filled for Fortigel  prior to January 26, 2004. As discussed
above,  in July 2003,  Cellegy  received a letter from the FDA rejecting its NDA
for Fortigel. The Company has not paid and will not pay any additional amount to
Auxilium as set forth in clause (b) above since Fortigel was not approved by the
FDA prior to January 26,  2004.  The Company  does not believe that the terms of
the  Settlement  Agreement  will have any material  impact on the success of its
commercialization of Fortigel if, or when, the FDA approves it.

CELLEGY PHARMACEUTICALS LITIGATION

       On December 12, 2003,  the Company filed a complaint  against  Cellegy in
the U.S.  District  Court for the Southern  District of New York.  The complaint
alleges  that Cellegy  fraudulently  induced the Company to enter into a license
agreement  with Cellegy  regarding  Fortigel on December 31, 2002. The complaint
also alleges claims for  misrepresentation and breach of contract related to the
Cellegy  License  Agreement.  In the complaint,  the Company seeks,  among other
things,  rescission  of the Cellegy  License  Agreement  and return of the $15.0
million it paid Cellegy.  After the Company filed this lawsuit, also on December
12, 2003,  Cellegy  filed a complaint  against the Company in the U.S.  District
Court for the  Northern  District of  California.  Cellegy's  complaint  seeks a
declaration  that Cellegy did not  fraudulently  induce the Company to enter the
Cellegy  License  Agreement  and that Cellegy has not  breached its  obligations
under the  Cellegy  License  Agreement.  The  Company is unable to  predict  the
ultimate  outcome of these  lawsuits.  The trial is scheduled to commence during
the second  quarter of 2005.  Material legal expense has been and is expected to
continue to be incurred in connection with this lawsuit;  however,  at this time
the Company is not able to estimate the magnitude of the expense.

OTHER LEGAL PROCEEDINGS

       The Company is currently a party to other legal proceedings incidental to
its business.  While the Company currently believes that the ultimate outcome of
these proceedings  individually,  and in the aggregate, will not have a material
adverse effect on its consolidated  financial statements,  litigation is subject
to  inherent  uncertainties.  Were the  Company  to  settle a  proceeding  for a
material  amount  or were an  unfavorable  ruling  to occur,  there  exists  the
possibility of a material  adverse effect on the Company's  business,  financial
condition and results of operations.

       No material  amounts  have been accrued for losses under any of the above
mentioned matters, other than for the Auxilium litigation settlement reserve, as
no amounts are considered  probable or reasonably  estimable at this time. Legal
fees are expensed as incurred.

       Other than the foregoing, the Company is not currently a defendant in any
material  pending  litigation  and it is not  aware of any  material  threatened
litigation.

20.    STOCK-BASED COMPENSATION

       In June 2004, the Board and the shareholders  approved the PDI, Inc. 2004
Stock Award and Incentive Plan (the 2004 Plan).  The 2004 Plan replaced the 2000
Omnibus  Incentive  Compensation  Plan (the 2000 Plan) and the 1998 Stock Option
Plan (the 1998 Plan).  The 2004 Plan reserved an additional  893,916  shares for
new awards as well as combined  the  remaining  shares  available  under the old
plans.  The  maximum  number of shares as to which  awards or options may at any
time be  granted  under  the 2004  Plan is  approximately  2.9  million  shares.
Eligible  participants  under the 2004 Plan include officers and other employees
of the Company, members of the Board and outside consultants, as specified under
the 2004 Plan and designated by the Compensation  Committee of the Board. Unless
earlier  terminated by action of the Board,  the 2004 Plan will remain in effect
until such time as no stock remains  available for delivery  under the 2004 Plan
and the Company has no further  rights or  obligations  under the 2004 Plan with
respect to outstanding awards under the 2004 plan. No participant may be granted
more  than  the  annual  limit  of  400,000   shares  plus  the  amount  of  the
participant's unused annual limit relating

                                      F-21
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


to  share-based  awards  as of  the  close  of the  previous  year,  subject  to
adjustment for splits and other extraordinary corporate events.

       In May 2000 the Board  approved  the 2000 Plan.  The  purpose of the 2000
Plan was to provide a  flexible  framework  to permit  the Board to develop  and
implement a variety of stock-based incentive  compensation programs based on the
changing  needs  of the  Company,  its  competitive  market  and the  regulatory
climate.  The maximum  number of shares as to which  awards or options  could be
granted under the 2000 Plan was 2.2 million shares.  Eligible participants under
the 2000 Plan included  officers and other employees of the Company,  members of
the  Board  and  outside  consultants,  as  specified  under  the 2000  Plan and
designated by the Compensation Committee of the Board. The right to grant Awards
under the 2000 Plan was to  terminate  10 years after the date the 2000 Plan was
adopted.  No Participant could be granted,  in the aggregate,  more than 100,000
shares of Company common stock from all awards under the 2000 Plan.

       In March  1998,  the Board  approved  the 1998 Plan  which  reserved  for
issuance up to 750,000 shares of the Company's  common stock,  pursuant to which
officers,  directors  and key  employees of the Company and  consultants  to the
Company were eligible to receive incentive and/or  non-qualified  stock options.
The 1998  Plan,  which had an  initial  term of ten  years  from the date of its
adoption, was administered by a committee designated by the Board. The selection
of  participants,   allotment  of  shares,  determination  of  price  and  other
conditions  relating to the purchase of options was determined by the committee,
in its sole discretion.  Incentive stock options granted under the 1998 Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price  which is not less than the fair market  value of the common  stock on the
date of the grant,  except that the term of an incentive  stock  option  granted
under the 1998 Plan to a  shareholder  owning  more than 10% of the  outstanding
common  stock may not exceed five years and its  exercise  price may not be less
than 110% of the fair market value of the common stock on the date of the grant.

       Options  granted  to members of the Board vest a third upon date of grant
and then a third over the next two years. All other options granted vest a third
each year over a three-year  period.  During 2004, the Company  accelerated  the
vesting of stock option grants and restricted stock grants for certain employees
which  resulted in total  compensation  of  approximately  $275,000 for the year
ended  December  31,  2004.  The  Board has  approved  the  acceleration  of the
Company's  unvested  underwater  options.  The  maximum  number of options to be
accelerated is 520,000 and the weighted average exercise price is $25.46.

       At December 31, 2004,  options for an aggregate of 1,343,745  shares were
outstanding  under the  Company's  stock  option  plans and  options to purchase
520,946 shares of common stock had been exercised since its inception.

       The  activity for the 2004,  2000,  and 1998 Plans during the years ended
December 31, 2004, 2003 and 2002 is set forth in the table below:

<TABLE>
<CAPTION>
                                              2004                    2003                  2002
                                     --------------------------------------------------------------------
                                                  Weighted               Weighted               Weighted
                                                   Average                Average                Average
                                                  Exercise               Exercise               Exercise
                                       Shares       Price     Shares       Price     Shares       Price
                                     ----------   --------  ----------   --------  ----------   --------
<S>                                   <C>          <C>       <C>          <C>       <C>          <C>
Outstanding at beginning of year      1,037,599    $27.33    1,514,297    $39.23    1,125,313    $53.60

Granted                                 520,000     25.46      115,303     16.13      596,812     14.81

Exercised                              (144,686)    16.38      (42,373)    13.06       (6,520)    16.00

Terminated                              (69,168)    15.10     (549,628)    58.86     (201,308)    49.91
                                     ----------    ------   ----------    ------   ----------    ------
Outstanding at end of year            1,343,745    $27.86    1,037,599    $27.33    1,514,297    $39.23
                                     ==========    ======   ==========    ======   ==========    ======

Options exercisable at end of year      691,798    $32.58      608,811    $31.87      611,871    $46.04
                                     ==========    ======   ==========    ======   ==========    ======
</TABLE>

       The  following   table   summarizes   information   about  stock  options
outstanding at December 31, 2004:

                                      F-22
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                    Options Outstanding                   Options Exercisable
--------------------------------------------------------------------------------
                                   Remaining
                     Number of     weighted    Weighted   Number of     Weighted
  Exercise price      options     contractual  exercise    options      exercise
    per share       outstanding  life (years)   price    exercisable     price
--------------------------------------------------------------------------------
$ 5.21 - $ 9.15         44,334         7.9      $ 6.69       27,332      $ 7.28
$14.16 - $18.38        411,035         6.8       15.88      277,757       15.84
$21.10 - $31.62        691,137         8.3       25.76      189,470       27.06
$59.50                 149,289         6.1       59.50      149,289       59.50
$80.00 - $93.75         47,950         6.2       82.02       47,950       82.02
                     ----------------------------------  ----------------------
                     1,343,745         7.5      $27.86      691,798      $32.58
                     ==================================  ======================

       In March 2003, the Company  initiated an option exchange program pursuant
to  which  eligible   employees,   which  excluded  certain  members  of  senior
management,  were  offered an  opportunity  to exchange an  aggregate of 357,885
outstanding  stock options with  exercise  prices of $30.00 and above for either
cash or shares of restricted stock, depending upon the number of options held by
an  eligible  employee.  The offer  exchange  period  expired  on May 12,  2003.
Approximately  310,403 shares of common stock  underlying  eligible options were
tendered  by  eligible  employees  and  accepted  by the  Company.  This  number
represents  approximately  87% of the total  shares of common  stock  underlying
eligible options. A total of approximately 120 eligible  participants elected to
exchange an  aggregate  of  approximately  59,870  shares of common  stock under
eligible  options and received  cash in the  aggregate  amount of  approximately
$67,000  (which  amount  includes  applicable  withholding  taxes).  A total  of
approximately  145  eligible  participants  elected to exchange an  aggregate of
approximately  250,533  shares of common stock  underlying  eligible  options in
exchange for an aggregate of  approximately  49,850 shares of restricted  stock.
All tendered  options have been canceled and are eligible for re-issuance  under
the Company's  option plans. The restricted stock is subject to three-year cliff
vesting and is being  amortized on a  straight-line  basis over that  three-year
period.  The shares are subject to  forfeiture  upon  termination  of employment
other  than in the  event of the  recipient's  death or  disability.  The  total
compensation  expense related to the option exchange  program was  approximately
$96,000 in 2004 and $178,000 in 2003.

       Approximately  47,500  options,  which  were  offered  to,  but  did  not
participate in, the option exchange program, are subject to variable accounting.
As such, the Company may record compensation  expense if the market price of the
Company's  common stock exceeds the exercise price of the  non-tendered  options
until these options are  terminated,  exercised or forfeited.  The  non-tendered
options have exercise  prices ranging from $59.50 to $80.00 and a remaining life
of 5.8 to 6.1 years.

21.    GOODWILL AND INTANGIBLE ASSETS

       Goodwill is evaluated for  impairment  on at least an annual  basis.  The
Company has  established  reporting  units for purposes of testing  goodwill for
impairment. Goodwill has been assigned to the reporting units to which the value
of the goodwill  relates.  The Company  performed the required annual impairment
tests in the  fourth  quarter  of 2004,  2003  and 2002 and  determined  that no
impairments   existed  during  any  of  these  periods.   These  tests  involved
determining  the fair market value of each of the reporting units with which the
goodwill was associated and comparing the estimated fair market value of each of
the reporting units with its carrying amount. The Company's  goodwill,  which is
not subject to  amortization,  totaled  $23.8  million  and $11.1  million as of
December 31, 2004 and December 31, 2003, respectively.  Goodwill attributable to
the  InServe  acquisition  is $7.8  million.  If the  businesses  related to the
Inserve goodwill do not achieve forecasted revenue and profitability  targets in
the near term, some or all of this goodwill may become impaired.

       As a result of the acquisition of Pharmakon  (discussed in Note 5), there
was an  additional  $12.7  million  added to the carrying  amount of goodwill in
2004.  The  Company  has  determined  that  no  event  has  occurred  since  the
acquisition date that would indicate  impairment of the goodwill associated with
the Pharmakon acquisition.



                                      F-23
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                                     Sales     Marketing
                                   services     services       PPG        Total
                                   --------    ---------    --------     -------
Balance as of January 1, 2003       $11,132     $    --     $     --     $11,132
Amortization                             --          --           --          --
Goodwill additions                       --          --           --          --
                                    -------     -------     --------     -------
Balance as of December 31, 2003     $11,132     $    --     $     --     $11,132
                                    =======     =======     ========     =======

Balance as of January 1, 2004       $11,132     $    --     $     --     $11,132
Amortization                             --          --           --          --
Goodwill additions                       --      12,659           --      12,659
                                    -------     -------     --------     -------
Balance as of December 31, 2004     $11,132     $12,659     $     --     $23,791
                                    =======     =======     ========     =======

       All identifiable  intangible  assets recorded as of December 31, 2004 are
being amortized on a straight-line basis over the lives of the intangibles which
range from 5 to 15 years.  The weighted average  amortization  period for all of
the identifiable intangible assets is approximately 13.9 years.

<TABLE>
<CAPTION>
                                 As of December 31, 2004               As of December 31, 2003
                            ---------------------------------     -------------------------------

                            Carrying    Accumulated               Carrying   Accumulated
                             Amount    Amortization     Net        Amount   Amortization    Net
                            ---------------------------------     -------------------------------
<S>                          <C>          <C>         <C>          <C>         <C>         <C>
Covenant not to compete      $ 1,826      $1,126      $   700      $1,686      $  780      $  906

Customer relationships        17,508       1,163       16,345       1,208         559         649

Corporate tradename            2,672         169        2,503         172          79          93
                             -------      ------      -------      ------      ------      ------
    Total                    $22,006      $2,458      $19,548      $3,066      $1,418      $1,648
                             =======      ======      =======      ======      ======      ======
</TABLE>

       Amortization expense for the years ended December 31, 2004, 2003 and 2002
was approximately $1.0 million, $613,000, and $613,000, respectively.  Estimated
amortization expense for the next five years is as follows:

                  2005    $ 1,895
                          =======
                  2006      1,703
                          =======
                  2007      1,281
                          =======
                  2008      1,281
                          =======
                  2009      1,272
                          =======


22.    RESTRUCTURING AND OTHER RELATED EXPENSES

       During the third  quarter of 2002,  the Company  adopted a  restructuring
plan, the objectives of which were to consolidate operations in order to enhance
operating efficiencies (the 2002 Restructuring Plan). This plan was primarily in
response to the general decrease in demand within the Company's  markets for the
sales and marketing  services  segment  (defined in 2004 as a combination of the
current sales services and marketing  services  segments),  and the  recognition
that the  infrastructure  that  supported  these  business units was larger than
required.  The Company originally  estimated that the restructuring would result
in annualized SG&A savings of approximately $14.0 million, based on the level of
SG&A spending at the time it initiated the restructuring. However, these savings
have been partially offset by incremental SG&A expenses the Company has incurred
in  subsequent  periods as the  Company has been  successful  in  expanding  its
business  platforms for its  segments.  Substantially  all of the  restructuring
activities have been completed as of December 31, 2004, except for the remaining
lease payments.

       In connection  with this plan, the Company  originally  estimated that it
would incur total  restructuring  expenses of approximately $5.4 million,  other
non-recurring   expenses  of   approximately   $0.1  million,   and  accelerated
depreciation of approximately $0.8 million. Excluding $0.1 million, all of these
expenses were recognized in 2002. The $0.1 million  recognized in 2003 consisted
of $0.4 million in  additional  expense  incurred for  severance  and other exit
costs  partially  offset by the  receipt  of $0.3  million  for  subletting  the
Cincinnati, Ohio facility.

       The primary items comprising the $5.4 million in  restructuring  expenses
were  $3.7  million  in  severance  expense  consisting  of  cash  and  non-cash
termination   payments  to  employees  in  connection  with  their   involuntary
termination,  and $1.7  million in other  restructuring  exit costs  relating to
leased facilities and other contractual obligations.

                                      F-24
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

       During the year ended  December  31, 2003,  the Company  recognized a net
reduction  in the  restructuring  accrual of  $197,000,  of which  $143,000  was
recorded as additional  expense in SG&A and $340,000 was recorded as a credit to
program  expenses  consistent with the original  recording of the  restructuring
changes. For the year ended December 31, 2004, there were no such adjustments.


       The  accrual  for  restructuring  and exit  costs  totaled  approximately
$161,000 at December 31,  2004,  and is recorded in current  liabilities  on the
consolidated balance sheet.

       A roll  forward of the  activity  for the 2002  Restructuring  Plan is as
follows:

                            BALANCE AT                               BALANCE AT
                           DECEMBER 31,                             DECEMBER 31,
      (IN THOUSANDS)           2003       ADJUSTMENTS    PAYMENTS       2004
------------------------   ------------   -----------    --------   ------------
Administrative severance      $ 285          $  --       $ (272)      $    13
Exit costs                      459             --         (311)          148
                              -----          -----       ------       -------
                                744             --         (583)          161
                              -----          -----       ------       -------
Sales force severance            --             --           --            --
                              -----          -----       ------       -------
   TOTAL                      $ 744          $  --       $ (583)      $   161
                              =====          =====       ======       =======


23.    SEGMENT INFORMATION

       During  the  fourth  quarter  of  2004,  as a  result  of  the  Company's
acquisition  of  Pharmakon,   the  Company   restructured   certain   management
responsibilities  and changed its internal financial  reporting.  As a result of
these changes the Company  determined that its reporting  segments were required
to be amended.  Accordingly,  the Company now reports under the following  three
segments:

          o  Sales services segment - includes the Company's  dedicated,  shared
             and MD&D CSO units and the  Company's  MD&D  clinical  teams.  This
             segment  uses teams to deliver  services to a wide base;  they have
             similar long-term average gross margins,  contract terms,  types of
             clients and regulatory  environments.  One segment manager oversees
             the  operations of all of these units and  regularly  discusses the
             results of  operations,  forecasts  and  activities of this segment
             with the chief operating decision maker;

          o  Marketing  services  segment -  includes  the  Company's  marketing
             research and medical  education and  communication  services.  This
             segment is project  driven;  the units  comprising  it have a large
             number of smaller  contracts,  share  similar gross  margins,  have
             similar  clients,  and have low barriers to entry for  competition.
             There are many discrete  offerings within this segment,  including:
             accredited  continuing medical education (CME), content development
             for CME,  promotional  medical  education,  marketing  research and
             communications.  One segment manager oversees the operations of all
             of these units and regularly  discusses the results of  operations,
             forecasts and  activities of this segment with the chief  operating
             decision maker; and

          o  PDI products  group (PPG) - includes  revenues  earned  through the
             Company's  licensing and  copromotion  of  pharmaceutical  and MD&D
             products.  One segment  manager  oversees the  operations of all of
             this unit  and  regularly  discusses  the   results of  operations,
             forecasts and  activities of this segment with the chief  operating
             decision maker.



                                      F-25

<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


       All segments have changed since the Company's December 31, 2003 financial
presentation.  The segment  information from prior periods has been reclassified
to conform to the current period's presentation.

       The  accounting  policies  of the  segments  are  described  in  Note  1.
Corporate  charges are allocated to each of the operating  segments on the basis
of total salary costs. Corporate charges include corporate headquarter costs and
certain  depreciation  expense.  Certain corporate capital expenditures have not
been allocated from the sales services  segment to the other operating  segments
since it is impracticable to do so.

                                                        For the Year
                                                     Ended December 31,
                                            -----------------------------------
                                               2004         2003         2002
                                            ---------    ---------    ---------
                                                      (in thousands)
Revenue
   Sales services ........................  $ 332,431    $ 271,210    $ 185,386
   Marketing services ....................     29,057       29,436       26,284
   PPG ...................................      2,956       43,884       96,205
                                            ---------    ---------    ---------
       Total .............................  $ 364,444    $ 344,530    $ 307,875
                                            =========    =========    =========

Income (loss) from operations
   Sales services ........................  $  64,737    $  48,891    $  14,096
   Marketing services ....................      3,122        4,493        1,083
   PPG ...................................       (169)     (16,403)     (48,821)
   Corporate charges .....................    (32,499)     (17,391)     (16,533)
                                            ---------    ---------    ---------
       Total .............................  $  35,191    $  19,590    $ (50,175)
                                            =========    =========    =========

Corporate allocations
   Sales services ........................  $ (30,719)   $ (14,000)   $  (9,351)
   Marketing services ....................     (1,587)        (926)        (793)
   PPG ...................................       (193)      (2,465)      (6,389)
   Corporate charges .....................     32,499       17,391       16,533
                                            ---------    ---------    ---------
     Total ...............................  $      --    $      --    $      --
                                            =========    =========    =========

Income (loss) from operations,
  less corporate allocations
   Sales services ........................  $  34,018    $  34,891    $   4,745
   Marketing services ....................      1,535        3,567          290
   PPG ...................................       (362)     (18,868)     (55,210)
   Corporate charges .....................         --           --           --
                                            ---------    ---------    ---------
     Total ...............................  $  35,191    $  19,590    $ (50,175)
                                            =========    =========    =========

Reconciliation of income (loss) from
  operations to income (loss) before
  provision for income taxes
    Total income (loss) from operations
     for operating groups ................  $  35,191    $  19,590    $ (50,175)
    Other income, net ....................        779        1,073        1,967
                                            ---------    ---------    ---------
     Income (loss) before provision
       for income taxes ..................  $  35,970    $  20,663    $ (48,208)
                                            =========    =========    =========

Capital expenditures
   Sales services ........................  $   7,671    $   1,750    $   3,397
   Marketing services ....................        433           54          398
   PPG ...................................         --           25          217
                                            ---------    ---------    ---------
       Total .............................  $   8,104    $   1,829    $   4,012
                                            =========    =========    =========

Depreciation expense
   Sales services ........................  $   4,222    $   3,935    $   3,896
   Marketing services ....................        627          522          587
   PPG ...................................         27        1,173        2,277
                                            ---------    ---------    ---------
       Total .............................  $   4,876    $   5,630    $   6,760
                                            =========    =========    =========


                                      F-26
<PAGE>


                                    PDI, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                                                        For the Year
                                                     Ended December 31,
                                            -----------------------------------
                                               2004         2003         2002
                                            ---------    ---------    ---------
                                                       (in thousands)


Total Assets
   Sales services ........................  $ 179,754    $ 151,768
   Marketing services ....................     44,516       10,949
   PPG ...................................        435       56,906
                                            ---------    ---------
       Total .............................  $ 224,705    $ 219,623
                                            =========    =========

                                      F-27
<PAGE>


                                   SCHEDULE II

                                    PDI, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

<TABLE>
<CAPTION>
                                                              BALANCE AT    ADDITIONS        (1)          BALANCE AT
                                                              BEGINNING     CHARGED TO    DEDUCTIONS          END
DESCRIPTION                                                   OF PERIOD     OPERATIONS      OTHER         OF PERIOD
                                                             -----------   -----------   ------------    -----------
<S>                                                          <C>           <C>           <C>             <C>
Against trade and note receivables--
Year ended December 31, 2002
  Allowance for doubtful accounts ........................   $ 3,692,047   $   366,125   $ (2,994,695)   $ 1,063,477
Year ended December 31, 2003
  Allowance for doubtful accounts ........................     1,063,477     1,526,626     (1,840,762)       749,341
Year ended December 31, 2004
  Allowance for doubtful accounts ........................   $   749,341   $ 1,154,903   $ (1,330,660)   $   573,584

Against taxes--
Year ended December 31, 2002
  Tax valuation allowance ................................   $ 1,808,046   $ 1,133,115   $         --    $ 2,941,161
Year ended December 31, 2003
  Tax valuation allowance ................................     2,941,161            --     (1,059,310)     1,881,851
Year ended December 31, 2004
  Tax valuation allowance ................................   $ 1,881,851   $   322,436   $         --    $ 2,204,287

Against inventory--
Year ended December 31, 2002
  Inventory valuation allowance ..........................   $        --   $        --   $         --    $        --
Year ended December 31, 2003
  Inventory valuation allowance ..........................            --       835,448        (17,583)       817,865
Year ended December 31, 2004
  Inventory valuation allowance ..........................   $   817,865   $        --   $   (817,865)   $        --

Against product rebates, sales discounts and returns--
Year ended December 31, 2002
  Accrued product rebates, sales discounts and returns ...   $68,402,828   $25,446,424   $(77,349,392)   $16,499,861
Year ended December 31, 2003
  Accrued product rebates, sales discounts and returns ...    16,499,861    12,000,000     (5,689,035)    22,810,826
Year ended December 31, 2004
  Accrued product rebates, sales discounts and returns ...   $22,810,826   $ 1,676,000   $(20,171,058)   $ 4,315,768
</TABLE>

------------
(1)    Includes  payments and actual write offs, as well as changes in estimates
       in the reserves and the impact of acquisitions.

                                      F-28