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

                                   FORM 10-K/A
                               AMENDMENT NO. 1 TO

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


                   For the fiscal year ended December 31, 2003


                         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, 2003 was approximately $88,875,889.

      The number of shares  outstanding of the registrant's  common stock,  $.01
par value, as of March 1, 2004 was 14,456,735 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III of this Report, to the extent not set
forth  herein,  is  incorporated  herein  by  reference  from  the  registrant's
definitive proxy statement  relating to the annual meeting of shareholders to be
held in  2004,  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.

<PAGE>


                                Explanatory Note

      This Amendment No. 1 on Form 10-K/A (this Amendment)  amends the Company's
Annual  Report on Form 10-K for the year ended  December 31, 2003 (the  Original
Filing),  and is being filed to include  direct  reimbursements  received by the
Company from its clients for certain  costs  incurred as part of revenue with an
identical  increase  to cost of goods and  services,  rather  than being  netted
against  cost of goods and  services.  Revenue and cost of goods and services is
being increased by $27.1 million, $23.9 million, and $20.2 million for the years
ended December 31, 2003, 2002 and 2001, respectively. Subsequent to the issuance
of its  consolidated  financial  statements for the year ended December 31, 2003
and the quarters ended March 31, 2004 and June 30, 2004, the Company  determined
that its  accounting  for  reimbursable  costs should be restated to  reclassify
these costs as revenue  rather than a reduction of cost of goods and services in
accordance with Emerging Issues Task Force (EITF) No. 01-14,  "INCOME  STATEMENT
CHARACTERIZATION  OF  REIMBURSEMENTS   RECEIVED  FOR  'OUT-OF-POCKET'   EXPENSES
INCURRED."

      A description of these  adjustments  and a summary showing their effect on
the restated consolidated statements of operations is provided in Note 1B to the
consolidated financial statements. This Amendment has no effect on the Company's
gross profit,  operating  income,  net income,  earnings per share,  cash flows,
liquidity  or  financial   condition  as  presented  in  the  Original   Filing.
Additionally,  this Amendment has no effect on the consolidated  balance sheets,
consolidated   statements   of  cash  flows  or   consolidated   statements   of
stockholders' equity as presented in the Original Filing.

      The Company is filing this report in order to amend certain information in
Item 1 of Part I;  Items 6, 7, 8 and 9a of Part  II;  Part IV;  to  reflect  the
restatement of the 2003  consolidated  statements of operations and the notes to
the  consolidated  financial  statements  attached  hereto  solely to the extent
necessary  to  reflect  the  adjustments  described  herein;  and the  principal
executive  officer and principal  financial officer  certifications  pursuant to
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing
items, no other information in the Original Filing is revised by this Amendment.
Items not being amended are presented  for the  convenience  of the reader only.
This report continues to be presented as of the date of the Original Filing, and
the  Company  has not  updated  the  disclosure  in this report to a later date.
Therefore,  this Amendment should be read together with other documents that the
Company has filed with the Securities and Exchange Commission  subsequent to the
filing of the Original Filing. Information in such reports and documents updates
and supersedes certain  information  contained in this Amendment.  The filing of
this Amendment shall not be deemed an admission that the Original  Filing,  when
made,  included  any known,  untrue  statement  of material  fact,  or knowingly
omitted to state a material fact necessary to make a statement not misleading.

      The Company is not amending any reports affected by the restatement  prior
to the Original Filing;  therefore,  the consolidated  financial  statements and
related  financial  information  included  in such  reports  should no longer be
relied upon and are hereby superseded.

                                        1
<PAGE>


                                    PDI, INC.

                            FORM 10-K/A ANNUAL REPORT

                                TABLE OF CONTENTS


                                                                            PAGE
PART I.........................................................................3
   Item 1.     Business........................................................3
   Item 2.     Properties.....................................................19
   Item 3.     Legal Proceedings..............................................19
   Item 4.     Submission of Matters to a Vote of Security Holders............21
PART II.......................................................................22
   Item 5.     Market for our Common Equity and Related Stockholder Matters...22
   Item 6.     Selected Financial Data........................................22
   Item 7.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations......................................24
   Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.....42
   Item 8.     Financial Statements and Supplementary Data....................42
   Item 9.     Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosures......................................42
   Item 9A.    Controls and Procedures........................................42
PART III......................................................................44
   Item 10.    Directors and Executive Officers...............................44
   Item 11.    Executive Compensation.........................................47
   Item 12.    Security Ownership of Certain Beneficial Owners and Management.47
   Item 13.    Certain Relationship and Related Transactions..................47
   Item 14.    Principal Accounting Fees and Services.........................47
PART IV.......................................................................48
   Item 15.    Exhibits and Financial Statement Schedules.....................48


                      FORWARD LOOKING STATEMENT INFORMATION

            VARIOUS  STATEMENTS  MADE IN THIS  ANNUAL  REPORT ON FORM 10-K/A 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/A,  AND (III)
SET FORTH IN THE  COMPANY'S  PERIODIC  REPORTS ON FORMS 10-Q,  10-Q/A AND 8-K AS
FILED WITH THE  SECURITIES  AND EXCHANGE  COMMISSION  SINCE  JANUARY 1, 2003. WE
UNDERTAKE  NO  OBLIGATION  TO  REVISE  OR UPDATE  PUBLICLY  ANY  FORWARD-LOOKING
STATEMENTS FOR ANY REASON.

                                        2
<PAGE>


PART 1

ITEM 1.  BUSINESS

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

      We  have  restated  our  previously  issued  consolidated   statements  of
operations  for the years ended  December  31, 2003,  2002 and 2001,  to include
previously excluded  reimbursable costs incurred on behalf of our clients within
revenue. As a result of the restatement, the reimbursement of those costs, which
were  previously  netted against those costs,  is now properly  included in both
revenue and cost of goods and services.

      See Notes  1B,  12 and 23 to the  consolidated  financial  statements  for
additional information.

      As  a  result  of  the  restatement  of  the  consolidated  statements  of
operations for the years ended December 31, 2003, 2002 and 2001, we will also be
amending the periodic reports on Form 10-Q for the quarters ended March 31, 2004
and June 30, 2004 to reflect the restatement of quarterly results for 2004.

SUMMARY OF BUSINESS

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

      We create and execute  sales and marketing  campaigns  intended to improve
the profitability of pharmaceutical and MD&D products.  We do this by partnering
with companies who own the  intellectual  property  rights to these products and
recognize our ability to  commercialize  these products and maximize their sales
performance.  We have a variety of  agreement  types that we enter into with our
partner companies. In these agreements, we have leveraged our experience in:

      o  sales,
      o  brand management and product marketing,
      o  marketing research,
      o  medical education,
      o  medical affairs, and
      o  managed markets and to a limited extent, trade relations

to help our partners  meet  strategic and  financial  objectives  and to provide
incremental value for product sales.

      We have  assembled our commercial  capabilities  through  acquisition  and
internal  expansion and 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.  Our capabilities  enable us
to  take,   where   appropriate,   total  sales,   marketing  and   distribution
responsibility for pharmaceutical and MD&D products.

      It is important for us to form strong  partnerships  with companies within
the  biopharmaceutical  and MD&D industries.  We assign an account  executive to
each partner to ensure the  partnership is working to the mutual benefit of both
parties.  Our focus is to  achieve  operational  excellence  that  delivers  the
desired product sales results.

REPORTING SEGMENTS AND OPERATING GROUPS

      We  operate  under  three  reporting  segments:  PDI Sales  and  Marketing
Services Group,  PDI  Pharmaceutical  Products Group and PDI Medical Devices and
Diagnostics Group.

PDI SALES AND MARKETING SERVICES GROUP (SMSG)

      We are among the leaders in outsourced  pharmaceutical 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,   GlaxoSmithKline,   Novartis   and   Aventis   as  well  as  small
pharmaceutical  companies  and  more  than  20  other  specialty  pharmaceutical
companies.  We have  relationships  built on consistent  performance and program
results.

                                        3
<PAGE>


      Our  clients  engage us on a  contractual  basis to design  and  implement
promotional  programs for both prescription and over-the-counter  products.  The
programs in the PDI Sales and Marketing  Services Group 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.

      This  segment,  which  includes  contract  sales,  marketing  research and
medical education and communications,  represents 83.2% of consolidated  revenue
for 2003.

o     Contract Sales
      --------------

      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.

      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.

      Our shared sales teams sell multiple brands from different  pharmaceutical
manufacturers.  Through them, we make a face-to-face  selling resource available
to those clients that want an  alternative  to a dedicated  team. The PDI Shared
Sales teams are leading providers 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     Marketing Research
      ------------------

      Employing   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 which includes studies to identify
the most impactful business strategy, profile, positioning,  message, execution,
implementation,  and post implementation for a product.  Correctly  implemented,
our marketing  research  model  improves the knowledge  clients obtain about how
physicians and other healthcare professionals will likely react to products.

      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.

o     Medical Education and Communications
      ------------------------------------

      Our medical education and communications  group 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

                                        4
<PAGE>


expanding market leadership.

PDI PHARMACEUTICAL PRODUCTS GROUP (PPG)

      The   goal   of  our   pharmaceutical   products   group   is  to   source
biopharmaceutical   products  in  the  U.S.  through   licensing,   copromotion,
acquisition or integrated commercialization services arrangements.  This segment
represents 12.3% of consolidated revenue for 2003.

      Licensing,  copromotion  and  acquisition  arrangements  contain a greater
level of risk when  compared to fee for service  agreements,  however,  there is
potential for  generating  greater  revenue at higher  margins with  longer-term
visibility  on  revenue.  PPG's  arrangements  may be  longer  in  duration  and
potentially less prone to sudden termination than SMSG agreements.

o     Licensing
      ---------

      Typically,  under  a  licensing  arrangement,   we  undertake  the  sales,
marketing and  distribution  responsibility  for a product while another company
maintains ownership of the intellectual  property and the patent on the product.
The  company  from  which  we  license  the  product  would   typically   retain
responsibility for manufacturing the product. In a licensing arrangement, we may
make upfront payments and/or royalty payments to our partner company.

      We conduct the sales, marketing and distribution functions for the product
and we record the product sales in this  reporting  segment.  Typically,  we are
also responsible for medical affairs, certain clinical and regulatory affairs as
well as managed care and trade relations.  Examples of the licensing  agreements
that we have entered into are described in the CONTRACTS section of this report.

o     Copromotion
      -----------

      Copromotion   arrangements,   a  frequently   used  strategy   within  the
biopharmaceutical  industry,  occur when two companies agree to mutually promote
the same product. Each party contributes expenses and resources toward the sales
and  marketing  effort,  with  the  financial  risks  and  rewards  shared  on a
predetermined basis.

      Typically,  our  partner  company  will  manufacture  and  distribute  the
product,  and be  responsible  for  regulatory  and  medical  affairs as well as
managed care and trade relations.  We may exercise  significant control over the
sales and  marketing  strategy  for the  product.  Examples  of the  copromotion
agreements  that we have entered into are described in the CONTRACTS  section of
this report.

o     Acquisition
      -----------

      To date we have not acquired any products;  however, if we were to acquire
a product we would own the  product  outright  and would most  likely have total
commercial  responsibility,   inclusive  of  manufacturing,   sales,  marketing,
distribution, intellectual property defense and clinical and regulatory affairs.

o     Integrated Commercialization Services
      -------------------------------------

      Given the broad  array of our  service  offerings,  we are able to provide
complete product  commercialization  capabilities (Integrated  Commercialization
Services) to pharmaceutical  companies on a fee for service basis. The execution
of these product  sales,  marketing and  commercialization  activities  would be
substantially similar to those we perform in a copromotion, licensing or product
acquisition  transaction;  however,  our fee structure and risk profile would be
markedly different.

       We believe that Integrated  Commercialization  Services may be attractive
to pharmaceutical companies for products within their portfolio that they are no
longer  actively  promoting,  but which our analysis  indicates would respond to
promotion. Pharmaceutical companies may own products that are not being actively
promoted  because  resources  are being  focused  on higher  revenue  generating
products,  or because  the  product is nearing the end of its life cycle and the
company has decided to concentrate its promotional  efforts on other products in
its  portfolio.  The  decision  not to promote a product  often leads to reduced
demand  and  may  also  result  in  lower  product   revenue.   Our   Integrated
Commercialization  Services  enable our  clients to  continue  to promote  these
products and generate from them higher levels of revenue,  while  focusing their
limited internal resources on the higher growth products in their portfolios.

                                        5
<PAGE>


      Our  Integrated  Commercialization  Services  can also be used by research
based  biotechnology  companies  that own a  product  on the  verge of coming to
market,  or a product  that has been on the market but is not  performing  up to
expectations.  In this instance,  we may be able to utilize our  capabilities to
launch or relaunch the product with the objective of increasing  the return that
the product delivers to our client.  Research based biotechnology  companies may
not have a well established sales and marketing  infrastructure to deliver their
products to market and therefore may be attracted to our ability to provide such
infrastructure on a fee for service basis.

MEDICAL DEVICES AND DIAGNOSTICS (MD&D)

      Our MD&D group  provides an array of sales and  marketing  services to the
MD&D industry.  Our core service is the provision of clinical  sales teams.  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.

      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.

      In October  2002,  we  partnered  with Xylos  Corporation  (Xylos) for the
exclusive U.S.  commercialization  rights to the Xylos XCell(TM) Cellulose Wound
Dressing (XCell) wound care products,  by entering into an agreement pursuant to
which 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  enough  to  sustain  our
continued role as  commercialization  partner for the product.  Our  promotional
activities  in support of the brand  concluded in January 2004 and the agreement
will terminate  effective May 16, 2004. We do not currently  anticipate entering
into similar commercialization agreements in the MD&D market.

      This segment represents 4.6% of consolidated revenue for 2003.

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.
The addition of TVG provided us with incremental growth potential as a result of
the additional capabilities available to support our service offerings.

      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 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.

                                        6
<PAGE>


      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.
This was the case in October 2000,  when we entered into a sales,  marketing and
distribution  agreement with GlaxoSmithKline (GSK) in support of Ceftin(R).  The
Ceftin agreement  enabled us to add capabilities that we did not then have, such
as distribution,  medical affairs, regulatory affairs and managed care and trade
relations.

      The Ceftin agreement was terminated  earlier than  anticipated  because of
the unexpected  introduction of a generic equivalent into the market in February
2002.  Notwithstanding this event, the Ceftin agreement successfully facilitated
our growth from a pure service  provider to a commercial  partner with  expanded
capabilities and service offerings for the pharmaceutical industry.

      From 2001  through  2003,  we  continued  to  identify  other  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 products decreased.

      During this period,  we entered into a number of  copromotion  agreements,
including our agreements with Novartis  Pharmaceuticals  Corporation (Novartis).
Our  copromotion  agreement  with Eli Lilly and Company (Eli Lilly)  resulted in
significant  operating  losses.  While  copromotion  agreements  remain a viable
business arrangement with pharmaceutical companies, we now have a more stringent
set of  parameters  that must be met in order for us to consider an  opportunity
favorably.

      In the fourth quarter of 2002, we entered into two licensing arrangements,
one with Xylos and one with Cellegy Corporation (Cellegy). The Xylos arrangement
was for the sales,  marketing and  distribution  rights for the XCell wound care
products. This product line achieved only modest sales during 2003, considerably
below expectations,  and on January 2, 2004, we gave Xylos notice of termination
of the Xylos  agreement  effective May 16, 2004.  The Cellegy  agreement was for
exclusive North American rights for Fortigel(TM), a testosterone gel product. In
July 2003, Cellegy was notified by the U.S. Food and Drug  Administration  (FDA)
that  Fortigel was not  approved.  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 believe that there are opportunities for us:

         o  to partner with companies that lack the necessary  infrastructure to
            commercialize their brands; and

         o  to take over the promotion of products that are no longer  receiving
            sales and marketing support.

CORPORATE STRATEGY

      Our strategy is to source  biopharmaceutical and MD&D products that we can
sell,  market or  commercialize.  We do this by entering  into  agreements  with
companies  that own the rights to the  product(s)  and require our  expertise in
generating product sales. We are compensated either through a fee for service or
by sharing in the product sales we generate. Also, we intend to focus on growing
our existing teams business and to seek acquisition opportunities within SMSG.

CONTRACTS

      Given the  customized  nature of our  business,  we  utilize a variety  of
contract structures.

      Contracts  within  the  sales and  marketing  services  group  are  almost
exclusively fee for service.  These contracts for dedicated teams,  shared teams
and marketing research and medical education,  contain specific  activities that
we provide in return for a fee. They may contain operational benchmarks, such as
a minimum  amount of  activity or  delivery  within a specified  amount of time.
These contracts can include  incentive  payments should our activities  generate
results that meet or exceed predetermined performance targets.

      The majority of our revenue in the sales and marketing services segment 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

                                        7
<PAGE>


majority  of these  contracts,  however,  are  terminable  by the client for any
reason upon 30 to 90 days' notice.  These contracts  typically,  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.  Contracts may also be terminated for cause
or we may  incur  specific  penalties  if we  fail to  meet  stated  performance
benchmarks.

      Our  marketing   research  and  consulting   and  medical   education  and
communications  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 or results of operations.

      The  contracts  within  the  pharmaceutical  products  group 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(R),  Lotensin HCT(R) and
Lotrel(R).  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(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 contract without cause,
effective March 16, 2004. We will continue 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 are still entitled to receive 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(R) 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 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  will  terminate
effective May 16, 2004.

      On December 31, 2002,  we entered  into an exclusive  licensing  agreement
with Cellegy 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 FDA in June 2002. In July 2003, Cellegy received a letter from
the FDA  rejecting  its  NDA for  Fortigel.  Cellegy  has  told us that it is in
discussions with the FDA to determine the appropriate course of action needed to
meet deficiencies cited by the FDA in its determination.  We cannot predict with
any certainty that the FDA will ultimately approve Fortigel for

                                        8
<PAGE>


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  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
license  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 have also partnered with 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 our full range of services and our reputation as a
high  quality  sales and  marketing  organization.  Our tactical  plan  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 across the  organization  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.

      For our service  offerings,  the competition  includes  in-house sales and
marketing  departments  of  biopharmaceutical   and  MD&D  companies,   emerging
companies within these segments and other contract sales  organizations  (CSOs).
Companies  that  compete  with us from the  perspective  of  having  diversified
service  offerings  include  Innovex (a subsidiary of Quintiles  Transnational),
Ventiv Health,  Nelson  Professional Sales (a division of Publicis) and Cardinal
Health, Inc.

      The  competition  for sourcing  products  into our PPG is primarily  other
companies  seeking  to sell and market  pharmaceutical  products.  Competing  to
copromote,   license  and/or  acquire  brands  involves  risks  in  identifying,
assessing and contracting  effectively for products in addition to the marketing
and distribution risks of the products we obtain.

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

                                        9
<PAGE>


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 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 (CMC)  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

                                       10
<PAGE>


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.

      WE  CONTINUE  TO LOOK FOR  OPPORTUNITIES  TO  DEVELOP  THE  PHARMACEUTICAL
PRODUCTS  GROUP  SEGMENT OF OUR  BUSINESS,  WHICH MAY  INCLUDE  COPROMOTION  AND
EXCLUSIVE DISTRIBUTION ARRANGEMENTS, AS WELL AS LICENSING AND BRAND OWNERSHIP OF
PRODUCTS,  AND MOST RECENTLY,  INTEGRATED  COMMERCIALIZATION  SERVICES (ICS). WE
CANNOT ASSURE YOU THAT WE CAN SUCCESSFULLY DEVELOP THIS BUSINESS.

      Notwithstanding  the  fact  that  we  had  no  product  revenue  from  the
pharmaceutical  products  group segment of our business in 2003, we believe that
one area for our  future  growth  is  potentially  to  acquire  copromotion  and
distribution  rights to  pharmaceutical  products and  potentially to license or
acquire these 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  pharmaceutical  product  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 agreement is 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 for fraudulently
inducing us to enter the Cellegy  License  Agreement and for  breaching  certain
obligations under the License Agreement.  (SEE Item 3 - Legal Proceedings,  Note
19 - Commitments and  Contingencies,  and the Risk Factor describing the Cellegy
litigation  in this section,  below.) Since we filed the lawsuit,  Cellegy is no
longer in regular contact with us regarding Fortigel.  Thus, for example, we are
unaware of the

                                       11
<PAGE>


FDA  status  regarding  Fortigel  (as of  December  31,  2003,  it had not  been
approved) and are unaware of what steps  Cellegy is taking to develop  Fortigel,
to  obtain  FDA  approval  for  Fortigel,  and/or  to  arrange  for a  party  to
manufacture  Fortigel.  We have requested this information from Cellegy but have
not received it.  Accordingly,  we may not possess the most current and reliable
information  concerning the current status of, or future prospects  relating to,
Fortigel.  The  issuance  of the  non-approvable  letter  by the FDA  concerning
Fortigel, however, casts significant doubt upon Fortigel's prospects and whether
it will ever be approved.  There can thus be no assurances  that we will recover
the $15.0  million  license  fee or that we will ever  receive  any  revenue  in
connection with the Cellegy license agreement.

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

      On December 12, 2003, we filed a complaint  against  Cellegy in the United
States  District  Court for the  Southern  District of New York.  The  complaint
alleges that Cellegy  fraudulently  induced us to enter into the Cellegy license
agreement. The complaint also sets forth claims for misrepresentation and breach
of contract related to the license agreement.  In the complaint,  we seek, among
other  remedies,  rescission  of the license  agreement  and return of the $15.0
million  license  fee we paid  Cellegy.  After we filed  this  lawsuit,  also on
December 12, 2003,  Cellegy  filed a complaint  against us in the United  States
District  Court for the Northern  District of  California.  Cellegy's  complaint
seeks a declaration  that Cellegy did not  fraudulently  induce us to enter into
the license  agreement and that Cellegy has not breached its  obligations  under
the agreement. Cellegy has sought to stay, dismiss or transfer our suit in favor
of its action in the  California  courts.  We have  sought to stay,  transfer or
dismiss  Cellegy's lawsuit in favor of its action in the New York courts. We are
unable to predict the ultimate outcome of these lawsuits.

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,  our  agreement  with
Cellegy  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.  Since we filed a lawsuit  against  Cellegy  as  described  above,
Cellegy is no longer in regular  contact  with us  regarding  its  manufacturing
capabilities  to produce  Fortigel.  Accordingly,  we may not  possess  the most
current  and  reliable  information  concerning  PanGeo  or other  manufacturing
arrangements  for  Fortigel  that may have been  established  by  Cellegy.  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.

                                       12
<PAGE>


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 our license agreement with Cellegy,  we are required to make certain
minimum royalty payments to Cellegy once the product is approved,  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.

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 our agreement
with Cellegy, 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;

                                       13
<PAGE>


         o  competitive products;

         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  products  will  achieve  commercial
success, regardless of how effective they may be.

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.

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

      We may require additional funds in order to:

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

         o  pursue regulatory approvals;

         o  develop incremental marketing and sales capabilities;

         o  pursue  other  business   opportunities  or  meet  future  operating
            requirements; and

         o  acquire other services businesses.

      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.

OUR CONTRACT SALES  BUSINESS  DEPENDS 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.

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

                                       14
<PAGE>


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.

PRODUCT LIABILITY CLAIMS COULD HARM OUR BUSINESS.

      We could face substantial  product  liability claims in the event users of
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.

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 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  type  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.

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

      We  have  the   opportunity   to  analyze  and  sometimes  to  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. 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.  Our 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,  $28.9
million  from  operating  activities  and $6.2  million  in unused  sales  force
capacity. This contract was terminated effective December 31, 2002.

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 2003,
we had two major  clients  that  accounted  for  approximately  33.3% and 33.2%,
respectively,  or a total of 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

                                       15
<PAGE>


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 February 2004, we announced the early termination of
our fee for service  contract  arrangement  with  Novartis for the  promotion of
Diovan and Lotrel. As a result,  $28.9 million of anticipated revenue associated
with the Novartis  contract in 2004 will not be realized.  In February  2002, we
announced the termination of our fee for service contract arrangement with Bayer
and as a result, our 2002 revenues were reduced by approximately $20.0 million.

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 and
many may be terminated by the client at any time for any reason. For example, as
discussed  above,  as a result of the early  termination  of our fee for service
contract arrangements with Bayer and Novartis, our 2002 revenues were reduced by
approximately  $20.0 million due to the Bayer  contract  termination,  and $28.9
million of anticipated  revenue  associated  with the Novartis  contract in 2004
will not be realized.  The termination 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 terminated, unless we
can  immediately  transfer the related  sales force to a new program,  we either
must  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.

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.  We believe  that
meritorious  defenses exist to the allegations asserted in these lawsuits and we
intend to  vigorously  defend  these  actions.  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 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  services  include  in-house sales and
marketing  departments  of  pharmaceutical   companies,   other  CSOs  and  drug
wholesalers. We also compete for the licensing and acquisition of pharmaceutical
and MD&D products with other larger pharmaceutical and MD&D companies. 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 price and other forms of competition

                                       16
<PAGE>


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.

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.  As 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.

IF WE ARE UNABLE TO ATTRACT KEY EMPLOYEES AND  CONSULTANTS,  WE MAY BE UNABLE TO
DEVELOP OUR EMERGING BUSINESS MODEL.

      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  WILL  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,  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,  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 34% 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.

      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

                                       17
<PAGE>


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.

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, copromotion,  exclusive
            marketing, licenses;

         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.

OUR STOCK PRICE IS VOLATILE  AND COULD BE FURTHER  AFFECTED BY EVENTS NOT WITHIN
OUR CONTROL. 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 development;

         o  regulatory developments;

         o  changes in product 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.

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

      We have restated our previously issued consolidated  financial  statements
for the years ended  December 31,  2003,  2002 and 2001 (the  previously  issued
financial  statements)  to apply the  provisions  of Emerging  Issues Task Force
(EITF) Issue No. 01-14,  "INCOME  STATEMENT  CHARACTERIZATION  OF  REIMBURSEMENT
RECEIVED FOR `OUT-OF-POCKET'  EXPENSES INCURRED." The revisions became necessary
once we  determined  that  we  should  have  been  applying  EITF  01-14  to the
previously issued financial  statements.  In accordance with EITF 01-14,  direct
reimbursements received by us from our clients for certain costs incurred should
have been  included  as part of revenue  with an  identical  increase to cost of
goods and services, rather than being netted against cost of goods and services.
Revenue  and cost of goods  and  services  in the  previously  issued  financial
statements were increased by $27.1 million, $23.9 million, and $20.2 million for
the years ended  December 31,  2003,  2002 and 2001,  respectively.  EITF 01-14,
which was issued in late 2001, was  applicable for years  beginning in 2002, and
also required reclassification of all previous periods for comparative purposes.
We were not aware of the applicability of EITF 01-14 until September 2004.

                                       18
<PAGE>


       This  restatement  does not affect our previously  reported gross profit,
operating  income,  net income,  earnings  per share,  cash flows,  liquidity or
financial  condition.  Additionally,  there  is no  effect  on the  consolidated
balance sheets, consolidated statements of cash flows or consolidated statements
of stockholders' equity for the previously issued financial statements.

      On September 29, 2004 the Audit  Committee of our board of directors  (the
Audit  Committee)  discussed with  PricewaterhouseCoopers  LLP, our  independent
auditors (PwC), the matters discussed  herein.  PwC informed the Audit Committee
that it concurs with our conclusion as stated above.  On September 29, 2004, the
Audit  Committee  concluded  that the relevant  financial  statements  should no
longer be relied on and that we would restate the relevant financial statements.

EMPLOYEES

      As of December 31, 2003, we had 3,884  employees.  Included in that amount
are 420 part-time field representatives employed by InServe, the number of which
vary from time to time based on project demand. We are not party to a collective
bargaining  agreement  with a labor union and 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/A.  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 Securities and Exchange Commission.

      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 Upper Saddle River, New Jersey,
in a 48,600 square foot  facility.  The lease for all but  approximately  10,000
square feet of this space  expires in the fourth  quarter of 2004.  The lease on
the  remaining  space  expires in the second  quarter  of 2004.  We have  leased
approximately  84,000  square  feet in Saddle  River,  New  Jersey for a term of
approximately 12 years. We expect to relocate our corporate headquarters to this
location during the second quarter of 2004.

      TVG  operates  out of a 48,000  square foot  facility in Fort  Washington,
Pennsylvania, under a lease that expires in the third quarter of 2005.

      InServe   operates  out  of  a  9,100  square  foot  facility  in  Novato,
California, under a lease which expires in the second quarter of 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

                                       19
<PAGE>


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,  Lead  Plaintiffs  filed a
second  consolidated  and amended  complaint  ("Second  Consolidated and Amended
Complaint"), which superseded their earlier complaints.

      The  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
Second 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  GlaxoSmithKline,
our marketing of Lotensin in connection with the May 2001 distribution agreement
with Novartis Pharmaceuticals Corporation, 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 Second Consolidated and
Amended Complaint under the Private Securities Litigation Reform Act of 1995 and
Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. 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 February 20, 2004 Bayer has reimbursed us for  approximately  $1.6 million
in legal expenses,  almost all of which was received in 2003 and is reflected as
a credit within selling, general and administrative expense.

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 our exclusive license agreement with Cellegy.

      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 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 the  product  if, or when,  the FDA
approves it.

                                       20
<PAGE>


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 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 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
license  agreement and that Cellegy has not breached its  obligations  under the
license  agreement.  We are  unable to  predict  the  ultimate  outcome of these
lawsuits.

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  consolidated  financial  statements,  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.


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

     None.

                                       21
<PAGE>


                                     PART II

ITEM 5.    MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      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
                                                                ----       ---
         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

         2002
         ----
      First quarter.........................................    22.410    13.300
      Second quarter........................................    20.000    14.130
      Third quarter.........................................    14.900     4.070
      Fourth quarter .......................................    10.790     3.040


      We  believe  that,  as of  March  1,  2004,  we  had  approximately  3,000
beneficial stockholders.

                                        EQUITY COMPENSATION PLAN INFORMATION
                                            YEAR ENDED DECEMBER 31, 2003

<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
   (2000 Omnibus Incentive
   Compensation Plan and 1998
   Stock Option Plan)................              1,037,599                  $27.33                     939,611
Equity compensation plans not
   approved by security holders(1)...                     --                         --                          --
                                             =======================    ====================    ==========================

Total................................              1,037,599                  $27.33                     939,611
                                             =======================    ====================    ==========================
</TABLE>

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

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, 2003, 2002 and  2001  are  derived  from  our  audited
consolidated    financial   statements    and   the   accompanying   notes.  Our
consolidated financial statements for 1999 reflect our acquisition of TVG in May
1999, which was accounted for as a pooling of interests, on a pro forma basis as
if TVG had been owned by the Company  the entire  period.  Consolidated  balance
sheets at December 31, 2003 and 2002 and consolidated  statements of operations,
stockholders' equity and cash flows for the three years ended December 31, 2003,
2002 and 2001 and the related notes are included elsewhere in this Annual Report
on Form 10-K/A and have been audited by PricewaterhouseCoopers  LLP, independent
Registered Public  Accounting Firm. The selected  financial data set forth below
should be read together

                                       22
<PAGE>


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,
                                                                           ------------------------------------------------------
                                                                           2003 (3)    2002 (3)    2001 (3)   2000 (3)   1999 (3)
                                                                           --------    --------    --------   --------   --------
                                                                                   (in thousands, except per share data)
                                                                          (Restated)  (Restated)  (Restated) (Restated) (Restated)
<S>                                                                        <C>         <C>         <C>        <C>        <C>
Revenue
   Service .............................................................   $356,143    $301,437    $301,447   $338,038   $183,776
   Product, net ........................................................    (11,613)      6,438     415,314    101,008         --
                                                                           --------    --------    --------   --------   --------
     Total revenue .....................................................    344,530     307,875     716,761    439,046    183,776
                                                                           --------    --------    --------   --------   --------

Cost of goods and services
   Program expenses ....................................................    254,162     278,002     252,349    257,526    138,995
   Cost of goods sold ..................................................      1,287          --     328,629     68,997         --
                                                                           --------    --------    --------   --------   --------
     Total cost of goods and services ..................................    255,449     278,002     580,978    326,523    138,995
                                                                           --------    --------    --------   --------   --------

Gross profit ...........................................................     89,081      29,873     135,783    112,523     44,781

Operating expenses
   Compensation expense ................................................     36,901      32,670      39,263     32,820     19,611
   Other selling, general and administrative expenses ..................     30,347      44,163      83,815     38,827      9,448
   Restructuring and other related expenses ............................        143       3,215          --         --         --
   Litigation settlement ...............................................      2,100          --          --         --         --
   Acquisition and related expenses ....................................         --          --          --         --      1,246
                                                                           --------    --------    --------   --------   --------
    Total operating expenses ...........................................     69,491      80,048     123,078     71,647     30,305
                                                                           --------    --------    --------   --------   --------
Operating income (loss) ................................................     19,590     (50,175)     12,705     40,876     14,476
Other income, net ......................................................      1,073       1,967       2,275      4,864      3,471
                                                                           --------    --------    --------   --------   --------
Income (loss) before provision (benefit) for income taxes ..............     20,663     (48,208)     14,980     45,740     17,947
Provision (benefit) for income taxes ...................................      8,405     (17,447)      8,626     18,712      7,539
                                                                           --------    --------    --------   --------   --------
Net income (loss) ......................................................   $ 12,258    $(30,761)    $ 6,354   $ 27,028   $ 10,408
                                                                           ========    ========    ========   ========   ========


Basic net income (loss) per share(1) ...................................   $   0.86    $  (2.19)   $   0.46   $   2.00   $   0.87
                                                                           ========    ========    ========   ========   ========
Diluted net income (loss) per share(1) .................................   $   0.85    $  (2.19)   $   0.45   $   1.96   $   0.86
                                                                           ========    ========    ========   ========   ========
Basic weighted average number of shares outstanding(1) .................     14,231      14,033      13,886     13,503     11,958
                                                                           ========    ========    ========   ========   ========
Diluted weighted average number of shares outstanding(1) ...............     14,431      14,033      14,113     13,773     12,167
                                                                           ========    ========    ========   ========   ========


                                                                                          YEARS ENDED DECEMBER 31,
                                                                                   (in thousands, except per share data)   1999
PRO FORMA DATA (UNAUDITED)                                                                                               --------
Income before provision for income taxes ...............................                                                 $ 17,947
Pro forma provision for income taxes (2) ...............................                                                    7,677
                                                                                                                         --------
Pro forma net income (2) ...............................................                                                 $ 10,270
                                                                                                                         ========
Pro forma basic net income per share (2) ...............................                                                 $   0.86
                                                                                                                         ========
Pro forma diluted net income per share (2) .............................                                                 $   0.84
                                                                                                                         ========
Basic weighted average number of shares outstanding (1) ................                                                   11,958
                                                                                                                         ========
Pro forma diluted weighted average number of shares outstanding (1) ....                                                   12,167
                                                                                                                         ========

BALANCE SHEET DATA:

<CAPTION>
                                                                                              AS OF DECEMBER 31,
                                                                           ------------------------------------------------------
                                                                             2003        2002        2001       2000       1999
                                                                           --------    --------    --------   --------   --------
                                                                                                (in thousands)
<S>                                                                        <C>         <C>         <C>        <C>        <C>
Cash and cash equivalents ..............................................   $113,288    $ 66,827    $160,043   $109,000   $ 57,787
Working capital ........................................................    100,009      81,854     113,685    120,720     53,144
Total assets ...........................................................    219,623     190,939     302,671    270,225    102,960
Total long-term debt ...................................................         --          --          --         --         --
Stockholders' equity ...................................................    138,448     123,211     150,935    138,110     60,820
</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.

(2)  Prior to our initial public offering,  we were an S corporation and had not
     been subject to Federal or New Jersey corporate income taxes,  other than a
     New Jersey state  corporate  income tax of  approximately  2%. In addition,
     TVG, a 1999  acquisition  accounted for as a pooling of interest,  was also
     taxed  as an S  corporation  from  January  1997  to May  1999.  Pro  forma
     provision for income taxes,  pro forma net income and basic and diluted net
     income per share for 1999 reflect a provision for income taxes as if we and
     TVG had been taxed at the statutory tax rates in effect for C  corporations
     for all periods.

(3)  The selected  financial data for 1999,  2000,  2001, 2002 and 2003 has been
     restated to reflect the effect of the Company's restatement as discussed in
     Note  1B,  "Restatement  of  Consolidated  Financial  Statements",  to  the
     audited consolidated financial statements. The selected financial data  for
     1999 and  2000 includes an  adjustment  of $8.9 million and $22.2  million,
     respectively.

                                       23
<PAGE>


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


CAUTIONARY STATEMENT  IDENTIFYING  IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL
RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS.

      PURSUANT  TO  THE  "SAFE  HARBOR"  PROVISIONS  OF THE  PRIVATE  SECURITIES
LITIGATION  REFORM ACT OF 1995,  READERS OF THIS  REPORT ARE  ADVISED  THAT THIS
DOCUMENT  CONTAINS  BOTH  STATEMENTS  OF  HISTORICAL  FACTS AND FORWARD  LOOKING
STATEMENTS.  FORWARD LOOKING  STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES,
WHICH COULD CAUSE OUR ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM THOSE INDICATED
BY THE  FORWARD  LOOKING  STATEMENTS.  EXAMPLES  OF FORWARD  LOOKING  STATEMENTS
INCLUDE,  BUT ARE NOT LIMITED TO (I)  PROJECTIONS  OF REVENUES,  INCOME OR LOSS,
EARNINGS PER SHARE, CAPITAL EXPENDITURES, DIVIDENDS, CAPITAL STRUCTURE AND OTHER
FINANCIAL ITEMS,  (II) STATEMENTS  REGARDING OUR PLANS AND OBJECTIVES  INCLUDING
PRODUCT  ENHANCEMENTS,  OR ESTIMATES  OR  PREDICTIONS  OF ACTIONS BY  CUSTOMERS,
SUPPLIERS,  COMPETITORS OR REGULATORY  AUTHORITIES,  (III)  STATEMENTS OF FUTURE
ECONOMIC  PERFORMANCE,  AND (IV)  STATEMENTS  OF  ASSUMPTIONS  UNDERLYING  OTHER
STATEMENTS.

      This report also identifies  important factors that could cause our actual
results  to differ  materially  from  those  indicated  by the  forward  looking
statements.  These risks and uncertainties  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/A,  and (iii) set forth in the  Company's  periodic
reports on Forms 10-Q,  10-Q/A and 8-K as filed with the Securities and Exchange
Commission since January 1, 2003.

        Except as described  in the  Explanatory  Note at the  beginning of this
annual report on Form 10-K/A,  this  Amendment No. 1 (this  Amendment)  does not
modify  or  update  disclosures  presented  in the  original  Form  10-K  filing
(Original Filing).  Thus, all forward looking statements  contained in this Form
10-K/A speak as of March 3, 2004, the date of the Original Filing,  and have not
been updated to reflect subsequent events. This is the case even with respect to
forward  looking  statements that purport to indicate our "current" or "present"
expectations or forecasts;  in such cases,  the words  "current,"  "present" and
similar  expressions  should be understood to relate back to our expectations as
of March 3, 2004.  Therefore,  this  Amendment  should be read together with the
other  documents  the  Company  has  filed  with  the  Securities  and  Exchange
Commission  (SEC),  including our quarterly reports on Form 10-Q for the periods
ended  March 31,  2004 and June 30,  2004 filed  previously;  and our  quarterly
reports on Form  10-Q/A for the  periods  ended March 31, 2004 and June 30, 2004
which are being  filed  with the SEC on the date  hereof;  and in our  quarterly
report on Form 10-Q for the period ended September 30, 2004, which is also being
filed with the SEC on the date hereof.

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

      We have restated our previously issued consolidated  financial  statements
for the years ended  December 31,  2003,  2002 and 2001 (the  previously  issued
financial  statements)  to apply the  provisions  of Emerging  Issues Task Force
(EITF) Issue No. 01-14,  "Income  Statement  Characterization  of  Reimbursement
Received for `Out-of-Pocket' Expenses Incurred" (EITF 01-14). In September 2004,
we became aware that we should have been applying  EITF 01-14 to the  previously
issued   financial   statements.   In   accordance   with  EITF  01-14,   direct
reimbursements received by us from our clients for certain costs incurred should
have been  included  as part of revenue  with an  identical  increase to cost of
goods and services, rather than being netted against cost of goods and services.
Revenue  and cost of goods  and  services  in the  previously  issued  financial
statements were increased by $27.1 million, $23.9 million, and $20.2 million for
the years ended  December 31,  2003,  2002 and 2001,  respectively.  EITF 01-14,
which was issued in late 2001, was  applicable for years  beginning in 2002, and
also required reclassification of all previous periods for comparative purposes.

        This  restatement  does not affect  previously  reported  gross  profit,
operating  income,  net income,  earnings  per share,  cash flows,  liquidity or
financial  condition.  Additionally,  there  is no  effect  on our  consolidated
balance sheets, consolidated statements of cash flows or consolidated statements
of  stockholders'  equity for the  previously  issued  financial  statements.  A
summary of the effects of the  restatement  to  reclassify  these  amounts is as
follows:

                                       24
<PAGE>


<TABLE>
<CAPTION>
                                              YEAR ENDED                 YEAR ENDED                YEAR ENDED
                                          DECEMBER 31, 2003          DECEMBER 31, 2002         DECEMBER 31, 2001
                                      ------------------------    -----------------------   -----------------------

                                          AS                          AS                        AS
                                      PREVIOUSLY        AS        PREVIOUSLY       AS       PREVIOUSLY       AS
                                       REPORTED      RESTATED      REPORTED     RESTATED     REPORTED     RESTATED
                                      ----------    ----------    ----------   ----------   ----------   ----------
<S>                                   <C>           <C>           <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
  Service revenue                     $  329,061    $  356,143    $  277,575   $  301,437   $  281,269   $  301,447
  Product revenue                        (11,613)      (11,613)        6,438        6,438      415,314      415,314
                                      ----------    ----------    ----------   ----------   ----------   ----------
   TOTAL REVENUE                         317,448       344,530       284,013      307,875      696,583      716,761
                                      ----------    ----------    ----------   ----------   ----------   ----------
  Program expenses                       227,080       254,162       254,140      278,002      232,171      252,349

  Cost of goods sold                       1,287         1,287            --           --      328,629      328,629
                                      ----------    ----------    ----------   ----------   ----------   ----------
   TOTAL COST OF GOODS AND SERVICES      228,367       255,449       254,140      278,002      560,800      580,978
                                      ----------    ----------    ----------   ----------   ----------   ----------
   TOTAL GROSS PROFIT                  $  89,081      $ 89,081    $   29,873   $   29,873   $  135,783   $  135,783
                                      ----------    ----------    ----------   ----------   ----------   ----------
</TABLE>

      The following Management's  Discussion and Analysis of Financial Condition
and Results of Operations has been amended to reflect the reclassification  made
to the  consolidated  financial  statements  as  further  discussed  in Note 1B,
"Restatement of Consolidated  Financial  Statements." This information should be
read in conjunction with the information contained in the consolidated financial
statements, and notes thereto, appearing elsewhere in this Annual Report on Form
10-K/A.

OVERVIEW

      We  are  a   healthcare   sales  and   marketing   company   serving   the
biopharmaceutical  and medical devices and  diagnostics  (MD&D)  industries.  We
create and  execute  sales and  marketing  campaigns  intended  to  improve  the
profitability of pharmaceutical and MD&D products. We do this by partnering with
companies  who own the  intellectual  property  rights  to  these  products  and
recognize our ability to  commercialize  these products and maximize their sales
performance.  We have a variety of  agreement  types that we enter into with our
partner companies,  from fee for service arrangements to equity investments in a
product or company.

DESCRIPTION OF REPORTING SEGMENTS AND NATURE OF CONTRACTS

      Our business is organized into three reporting segments:

      o  PDI SALES AND MARKETING SERVICES GROUP (SMSG), COMPRISED OF:

         o  DEDICATED CONTRACT SALES SERVICES (CSO);

         o  SHARED CONTRACT SALES SERVICES (CSO);

         o  MARKETING RESEARCH AND CONSULTING SERVICES (MR&C); AND

         o  MEDICAL EDUCATION AND COMMUNICATION SERVICES (EDCOMM).

      o  PDI PHARMACEUTICAL PRODUCTS GROUP (PPG), COMPRISED OF:

         o  COPROMOTION;

         o  LICENSING;

         o  ACQUISITIONS; AND

         o  INTEGRATED COMMERCIALIZATION SERVICES.

      o  PDI MEDICAL DEVICES AND DIAGNOSTICS GROUP (MD&D), COMPRISED OF:

         o  CONTRACT SALES SERVICES (CSO);

         o  CLINICAL SALES TEAMS;

         o  COPROMOTION;

         o  LICENSING; AND

         o  ACQUISITIONS.

      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.

PDI SALES AND MARKETING SERVICES GROUP

        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

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<PAGE>


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  typically,  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 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.  As an
example, in February 2004, Novartis notified us that it was exercising its right
to terminate its contract  with us without cause and as a result,  $28.9 million
of anticipated revenue associated with the Novartis contract in 2004 will not be
realized. This contract was to run through December 31, 2004. Contracts may also
be terminated for cause if we fail to meet stated  performance  benchmarks.  The
loss or termination of a large contract or the loss of multiple  contracts would
have a material adverse effect on our business,  financial condition and results
of operations.

      Our MR&C and EdComm  contracts  generally  are for  projects  lasting from
three to six months.  The contracts are 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 typical size
of the projects,  it is unlikely the loss or termination of any individual  MR&C
or EdComm  contract  would  have a  material  adverse  effect  on our  business,
financial condition and results of operations.

PDI PHARMACEUTICAL PRODUCTS GROUP

      The  contracts  within  the  pharmaceutical  products  group 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
Pharmaceuticals  Corporation  (Novartis)  for  the  U.S.  sales,  marketing  and
promotion rights for Lotensin(R),  Lotensin HCT(R) and Lotrel(R). 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(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  contract  without cause,  effective March 16, 2004
and, as a result,  $28.9  million of  anticipated  revenue  associated  with the
Lotrel-Diovan  contract  in 2004 will not be  realized.  We will  continue to be
compensated under the terms of the agreement  through the effective  termination
date.  Even though the Lotensin  agreement ended December 31, 2003, we are still
entitled to receive royalty  payments on the sales of Lotensin  through December
31, 2004. 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.  The revenue resulting
from the efforts of the Novartis sales force  responsible for  Lotrel-Diovan was
classified in the SMSG segment in 2003 instead of the PPG segment,  where it was
classified  in 2002,  due to the fact that 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 and Company
(Eli Lilly) to copromote  Evista(R) 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

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<PAGE>


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 21, 2002.

      On December 31, 2002,  we entered  into an exclusive  licensing  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 it is in  discussions
with the FDA to  determine  the  appropriate  course  of  action  needed to meet
deficiencies cited by the FDA in its determination.  Since we filed the lawsuit,
Cellegy is no longer in regular  contact with us regarding  Fortigel.  Thus, for
example, we are unaware of the FDA status regarding Fortigel (as of December 31,
2003, it had not been  approved) and are unaware of what steps Cellegy is taking
to develop Fortigel, to obtain FDA approval for Fortigel,  and/or to arrange for
a party to manufacture Fortigel. We have requested this information from Cellegy
but have not received it.  Accordingly,  we may not possess the most current and
reliable  information  concerning  the  current  status of, or future  prospects
relating  to,  Fortigel.  The issuance of the  non-approvable  letter by the FDA
concerning Fortigel,  however, casts significant doubt upon Fortigel's prospects
and  whether it will ever be  approved.  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 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  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.

PDI MEDICAL DEVICES AND DIAGNOSTICS GROUP

      Our MD&D group  provides an array of sales and  marketing  services to the
MD&D industry.  Our core service is the provision of clinical  sales teams.  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.

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

      In October  2002,  we  partnered  with Xylos  Corporation  (Xylos) for the
exclusive U.S.  commercialization  rights to the Xylos XCell(TM) Cellulose Wound
Dressing (XCell) wound care products,  by entering into an agreement pursuant to
which 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  will  terminate
effective May 16, 2004. We provided a short-term  loan in the amount of $250,000
to Xylos in February 2004. Under the terms of the loan agreement, we may provide
another $250,000, if requested by Xylos.

      On May 29, 2003,  we entered into an agreement  with  Organogenesis,  Inc.
(Organogenesis)  whereby we agreed to provide  sales,  marketing,  and  clinical
support for Apligraf(R),  Organogenesis' living,  bi-layered skin substitute. We
leveraged our wound care sales force to provide  marketing  resources in support
of Apligraf.  PDI InServe also

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<PAGE>


utilized its current team of wound care nurses to provide  after-sales  clinical
support for practitioners.  Under the terms of the agreement,  we received a fee
with the potential to earn incentives  based on performance.  However,  Apligraf
sales did not  result in us  earning  any  significant  incentive  payments.  On
October 14, 2003, we and  Organogenesis  simultaneously  exercised our rights to
terminate  the  agreement,  and our wound  care  sales  force  ceased  marketing
Apligraf as of January 12, 2004.  We do not believe that this  termination  will
have a material adverse effect on our business,  financial  condition or results
of operations.

      We currently do not  anticipate  entering  into similar  commercialization
agreements in the MD&D market.

CRITICAL ACCOUNTING POLICIES

      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.  We believe  that the  following
represent  our  critical  accounting  policies.  For a  summary  of  all  of our
significant  accounting  policies,  including the critical  accounting  policies
discussed  below,  see  Note 1 to the  consolidated  financial  statements.  Our
management  and  our  independent   accountants   have  discussed  our  critical
accounting policies with the audit committee of the board of directors.  Because
of the  uncertainty  of factors  surrounding  the  estimates or judgments in the
preparation of the consolidated financial statements, particularly as it relates
to a number of the judgmental  items  discussed in this section,  actual results
may vary materially from these estimates.

REVENUE RECOGNITION AND ASSOCIATED COSTS

      The paragraphs  that follow  describe the guidelines  that we adhere to in
accordance with GAAP when recognizing  revenue and cost of goods and services in
our 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, we have derived a significant portion of our 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,  we are likely to continue to experience  significant
client  concentration in future periods.  For the years ended December 31, 2003,
2002 and 2001, our largest  clients,  who each  individually  represented 10% or
more of our service revenue, accounted for approximately 66.5%, 61.9% and 52.3%,
respectively, of our 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 we distribute are recorded as a selling

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<PAGE>


expense and are included in other selling,  general and administrative  expenses
in the consolidated statements of operations.

      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 we are reimbursed at
cost from our 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),  it is required
that   reimbursements   received   for   out-of-pocket   expenses   incurred  be
characterized  as revenue and an  identical  amount be included as cost of goods
and services in the consolidated statements of operations.

      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 we receive a specific contract payment from a client upon commencement of a
product detailing program expressly to compensate us 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 we do not receive a specific contract payment for training,  all
revenue is deferred and recognized over the life of the contract.

      As a result  of the  revenue  recognition  and  program  expense  policies
described  above, we may incur  significant  initial direct program costs before
recognizing revenue under a particular product detailing program.  Our inability
to  specifically  negotiate for payments that are  specifically  attributable to
recruiting, hiring or training services in our product detailing contracts could
adversely impact our operating results for periods in which the costs associated
with the product detailing services are incurred.

      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 year ended  December 31,
2003 was negative,  primarily from the adjustment to the Ceftin 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.  Inventory is valued at
the lower of cost or  market  value.  Cost is  determined  using  the  first-in,
first-out  costing  method.  Inventory to date has  consisted  of only  finished
goods.

ESTIMATES FOR ACCRUED REBATES, DISCOUNTS AND SALES ALLOWANCES

      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  our Ceftin  product are  permitted  to return  unused
product,  after approval from us, 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 us prior to the Ceftin  agreement  termination date of February
28, 2002 have expiration  dates through June 2004. As discussed in Note 3 to the
consolidated  financial statements,  there was a $12.0 million adjustment to the
Ceftin returns  reserve in 2003.  This adjustment was recorded as a reduction to
revenue  consistent  with the initial  recognition of the returns  allowance and
resulted in us reporting  net negative  product  revenue in 2003.  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 us for quantity discounts.  Furthermore,  we are obligated to issue rebates
under the federally  administered Medicaid program. In each instance we have the
historical data and access to other information,  including the total demand for
the drug we distribute,  our market share, the recent or pending introduction of
new drugs or generic  competition,  the inventory practices of our customers and
the resales by our customers to end-users having contracts with us, necessary to
reasonably  estimate  the  amount of such  returns  or  allowances,  and  record
reserves for such returns or allowances at

                                       29
<PAGE>


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.  As we settle these  liabilities in future  periods,  we will
continue to monitor all appropriate information and determine if any positive or
negative adjustments are required in that period. Any adjustments for changes in
estimates are recorded through revenue in that period.

CONTRACT LOSS PROVISIONS

      Provisions  for losses to be incurred on contracts are  recognized in full
in the period in which it is determined that a loss will result from performance
of the contractual  arrangement.  Performance based contracts have the potential
for higher  returns but also an increased  risk of contract  loss as compared to
the traditional fee for service CSO contracts.  As discussed in Notes 2 and 3 to
the consolidated financial statements, we recognized contract losses in 2002 and
2001 related to the Evista and Ceftin contracts, respectively.

FINANCIAL INSTRUMENTS

      Our  consolidated  balance sheets reflect  various  financial  instruments
including cash and cash equivalents and investments. We do not engage in trading
activities or off-balance  sheet financial  instruments.  As a matter of policy,
excess cash and deposits  are held by major banks or in high quality  short-term
liquid instruments. We have investments,  mainly in equity instruments, that are
carried at fair market value. We do not use derivative instruments such as swaps
or forward  contracts.  As  discussed  in Note 7 to the  consolidated  financial
statements,  we have certain investments accounted for under the cost method and
certain investments  accounted for under the equity method. We review our equity
investments  for  impairment on an ongoing basis based on our  determination  of
whether the decline in market value of the  investment  below its carrying value
is other than temporary.

DEFERRED TAXES - VALUATION ALLOWANCE

      We  evaluate  the need for a deferred  tax asset  valuation  allowance  by
assessing  whether it is more likely than not that we will  realize our deferred
tax assets in the future. The assessment of whether or not a valuation allowance
is required often requires significant judgment including the forecast of future
taxable income and the calculation of tax planning  initiatives.  Adjustments to
the  deferred  tax  allowance  are made to  earnings  in the  period  when  such
determination is made.

GOODWILL IMPAIRMENT ANALYSIS

      We adopted  Statement of Financial  Accounting  Standards  (SFAS) No. 142,
"GOODWILL AND OTHER  INTANGIBLE  ASSETS" in fiscal year 2002. The effect of this
adoption on us is that  goodwill is no longer  amortized  but is  evaluated  for
impairment on at least an annual basis. We have 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.  We completed  the
first step of the transitional  goodwill  impairment test and determined that no
impairment existed at January 1, 2002. We evaluate 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.  We performed the required  annual  impairment
tests in the  fourth  quarters  of both  2003 and  2002 and  determined  that no
impairment existed at either December 31, 2003 or December 31, 2002.

RESTRUCTURING AND OTHER RELATED EXPENSES

      In  order  to  consolidate  operations,  downsize  and  improve  operating
efficiencies,  we  have  recorded  restructuring  charges.  The  recognition  of
restructuring  charges  requires  estimates  and  judgments  regarding  employee
termination  benefits and other exit costs to be incurred when the restructuring
actions take place.  Actual results can vary from these  estimates which results
in adjustments in the period of the change in estimate.

CONTINGENCIES

      In the normal course of business, we are subject to contingencies, such as
legal  proceedings and tax matters.  In accordance with SFAS No. 5,  "ACCOUNTING
FOR  CONTINGENCIES,"  we  record  accruals  for  such  contingencies  when it is
probable  that a liability  will be  incurred  and the amount of the loss can be
reasonably estimated.  For a discussion of legal contingencies,  please refer to
Note 19 to the consolidated financial statements.

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<PAGE>


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.

<TABLE>
<CAPTION>
AS RESTATED                                                                 Years Ended December 31,
                                                              ---------------------------------------------------
OPERATING DATA                                                 2003        2002        2001       2000       1999
                                                              -----       -----       -----      -----      -----
<S>                                                           <C>          <C>         <C>        <C>       <C>
Revenue
   Service                                                    103.4%       97.9%       42.1%      77.0%     100.0%
   Product, net                                                (3.4)        2.1        57.9       23.0         --
                                                              -----       -----       -----      -----      -----
      Total revenue, net                                      100.0       100.0       100.0      100.0      100.0
                                                              -----       -----       -----      -----      -----
Cost of goods and services
   Program expenses                                            73.8        90.3        35.3       58.6       75.6
   Cost of goods sold                                           0.4          --        45.8       15.8         --
                                                              -----       -----       -----      -----      -----
      Total cost of goods and services                         74.2        90.3        81.1       74.4       75.6
                                                              -----       -----       -----      -----      -----

Gross profit                                                   25.8         9.7        18.9       25.6       24.4

Operating expenses
   Compensation expense                                        10.7        10.6         5.5        7.5       10.7
   Other selling, general and administrative expenses           8.8        14.3        11.7        8.8        5.1
   Restructuring and other related expenses                     0.1         1.0          --         --         --
   Litigation settlement                                        0.6          --          --         --         --
   Acquisition and related expenses                              --          --          --         --        0.7
                                                              -----       -----       -----      -----      -----
        Total operating expenses                               20.2        25.9        17.2       16.3       16.5
                                                              -----       -----       -----      -----      -----
Operating income (loss)                                         5.7       (16.2)        1.7        9.3        7.9
Other income, net                                               0.3         0.6         0.3        1.1        1.9
                                                              -----       -----       -----      -----      -----
Income (loss) before provision (benefit) for income taxes       6.0       (15.6)        2.0       10.4        9.8
Provision (benefit) for income taxes                            2.4        (5.6)        1.2        4.3        4.1
                                                              -----       -----       -----      -----      -----
Net income (loss)                                               3.6%      (10.0)%       0.8%       6.1%       5.7%
                                                              =====       =====       =====      =====      =====

PRO FORMA DATA (UNAUDITED)
Income (loss) before pro forma provision for income taxes                                                     9.8%
Pro forma provision for income taxes                                                                          4.2
                                                                                                            -----
Pro forma net income (loss)                                                                                   5.6%
                                                                                                            =====
</TABLE>

      COMPARISON OF 2003 AND 2002

<TABLE>
<CAPTION>
    REVENUE (IN THOUSANDS) - AS RESTATED
    --------------------------------------------------------------------------------------------------------------------------
                                       Service                                                  Product
                -----------------------------------------------------  -------------------------------------------------------
                                            VARIANCE                                                VARIANCE
                     2003        2002      FAV/(UNFAV)    % CHANGE         2003          2002      FAV/(UNFAV)     % CHANGE
                     ----        ----      ----------     --------         ----          ----      ----------      --------
<S>             <C>          <C>            <C>             <C>          <C>           <C>          <C>               <C>
    SMSG        $ 286,489    $ 198,993      $ 87,496        44.0%        $     --      $     --     $     --          0.0%
    PPG            54,349       89,767       (35,418)      (39.5)%        (12,000)        6,438      (18,438)      (286.4)%
    MD&D           15,305       12,677         2,628        20.7%             387            --          387          0.0%
                -----------------------------------------------------  -------------------------------------------------------
       TOTAL    $ 356,143    $ 301,437      $ 54,706        18.0%        $(11,613)     $  6,438     $(18,051)       (280.4)%
    -----------------------------------------------------------------  -------------------------------------------------------
</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 18.0% from the

                                       31
<PAGE>


$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 was negative $11.6
million as a result of a $12.0 million  increase in the Ceftin accrual which was
recorded in the fourth quarter of 2003;  this increase was  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.)  This was partially  offset by Xylos product sales of approximately
$387,000.  Reimbursable costs recognized in revenue were $27.1 million and $23.9
million for the years ended December 31, 2003 and 2002,  respectively.  For 2003
reimbursable costs of $23.5 million,  zero and $3.6 million were incurred in the
SMSG  segment,  PPG  segment and MD&D  segment,  respectively.  For 2002,  $19.9
million,  $1.3 million and $2.7 million of  reimbursable  costs were incurred in
the SMSG segment, PPG segment and MD&D segment, respectively.

      The SMSG  segment had $286.5  million in revenue for 2003,  an increase of
$87.5  million  over  2002.  This  increase  is  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. As discussed in the PDI PHARMACEUTICAL PRODUCTS GROUP section of the MD&A,
the Novartis sales force  responsible  for  Lotrel-Diovan  was classified in the
SMSG  segment in 2003  instead of the PPG segment,  where it was  classified  in
2002,  due to the fact that during 2002,  we were reliant on the  attainment  of
performance incentives,  whereas in 2003 this contract was basically a fixed fee
arrangement.  As discussed  previously,  in February  2004,  we were notified by
Novartis of its intent to terminate  the  Lotrel-Diovan  contract  without case,
and, as a result,  $28.9  million of  anticipated  revenue  associated  with the
Lotrel-Diovan contract in 2004 will not be realized.

      The PPG segment had service revenue of $54.3 million,  mainly attributable
to the  results  on  behalf  of  Lotensin.  We were  able to  maintain  Lotensin
prescription  levels relatively stable throughout the year, which resulted in us
earning  additional  revenue under the terms of the  agreement.  The decrease of
$35.4 million from the comparable prior year period can be primarily  attributed
to the Lotrel-Diovan revenue reclassification discussed above.

      Revenues  for MD&D were $15.7  million  for 2003 versus  $12.7  million in
2002, an increase of 23.8%.  MD&D service revenue  increased by $2.6 million and
there was product revenue of  approximately  $387,000 related to the sale of the
Xylos product. As discussed in Note 2 to the consolidated  financial statements,
we gave Xylos notice of termination  of the Xylos  agreement on January 2, 2004,
effective May 16, 2004.

<TABLE>
<CAPTION>
    COST OF GOODS AND SERVICES (IN THOUSANDS) - AS RESTATED
    --------------------------------------------------------------------------------------------------------------------------
                                       Service                                                  Product
                -----------------------------------------------------  -------------------------------------------------------
                                            VARIANCE                                                VARIANCE
                     2003        2002      FAV/(UNFAV)    % CHANGE         2003          2002      FAV/(UNFAV)     % CHANGE
                     ----        ----      ----------     --------         ----          ----      ----------      --------
<S>             <C>          <C>            <C>             <C>          <C>           <C>          <C>               <C>
    SMSG        $ 205,693    $ 153,039      $(52,654)      (34.4)%       $     --      $     --     $     --          0.0%
    PPG            36,364      114,979        78,615        68.4%              23            --          (23)         0.0%
    MD&D           12,105        9,984        (2,121)      (21.2)%          1,264            --       (1,264)         0.0%
                -----------------------------------------------------  -------------------------------------------------------
    TOTAL        $254,162     $278,002      $ 27,060         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
25.9%  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%.  During 2002 the Evista  contract  resulted in a
$34.7  million  negative  gross  profit.  Excluding  the  effect  of the  Evista
contract,  the gross profit  percentage for 2002 would have been 21.0%. For 2003
reimbursable costs of $23.5 million,  zero and $3.6 million were incurred in the
SMSG  segment,  PPG  segment and MD&D  segment,  respectively.  For 2002,  $19.9
million,  $1.3 million and $2.7 million of  reimbursable  costs were incurred in
the SMSG segment, PPG segment and MD&D segment, respectively.

      The SMSG  segment had gross  profit of $80.8  million  with a gross profit
percentage of 28.2%, a substantial  increase over the $45.9 million gross profit
and 23.1% gross profit percentage  achieved in 2002,  primarily due to the three
new significant contracts entered into during the current year.  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 PPG  segment  had $6.0  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  $18.0  million  in gross  profit  with a gross  profit
percentage of 33.0%. 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 from an adjusted 16.6% to an adjusted 33.0% resulted
from our success on the  Lotensin  program.  We were able to  maintain  Lotensin
prescription  levels relatively stable throughout the year, which resulted in us
earning additional revenue under the terms of the agreement.

      The MD&D  segment  earned a gross  profit of $2.3 million and $2.7 million
for the years ended 2003 and 2002, respectively.

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

           --------------------------------------------------------------------
           COMPENSATION EXPENSE (EXCLUDING RESTRUCTURING EXPENSE) (IN THOUSANDS)
           --------------------------------------------------------------------
                         % OF                  % OF
             2003      REVENUE      2002      REVENUE   $ INC/(DEC)  % INC/(DEC)
           --------------------------------------------------------------------
SMSG       $ 22,362        7.8%   $ 19,645        9.9%   $  2,717         13.8%
PPG          10,187       24.1%     10,353       10.8%       (166)        (1.7)%
MD&D          4,352       27.7%      2,672       21.1%      1,680         62.9%
           --------------------------------------------------------------------
   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 the  accrual  for  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  prior  year   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 SMSG segment decreased but increased for the MD&D and
PPG  segments.  The increase in expense,  as a percent of revenue for the latter
two segments,  reflects the  investment of additional  management  effort during
2003 toward our  investigation  of  opportunities  for  licensing  or  acquiring
products for those segments.

<TABLE>
<CAPTION>
                                  ------------------------------------------------------------------------
                                  OTHER SG&A (EXCLUDING RESTRUCTURING EXPENSE AND LITIGATION EXPENSE)
                                  (IN THOUSANDS)
                                  ------------------------------------------------------------------------
                                                  % OF                   % OF
                                    2003        REVENUE    2002         REVENUE $ INC/(DEC)    % INC/(DEC)
                                  ------------------------------------------------------------------------
<S>                               <C>             <C>    <C>              <C>    <C>               <C>
SMSG                              $ 16,836        5.9%   $ 15,796         7.9%   $  1,040          6.6%
PPG                                  7,081       16.7%     25,700        26.7%    (18,619)       (72.4)%
MD&D                                 6,430       41.0%      2,658        21.0%      3,772       141.9%
                                  ------------------------------------------------------------------------
   TOTAL                          $ 30,347        8.8%   $ 44,154        14.3%   $(13,807)       (31.3)%
                                  ------------------------------------------------------------------------

Less: Cellegy licensing fee             --         --      15,000        15.6%    (15,000)      (100.0)%
                                  ------------------------------------------------------------------------
                 ADJUSTED TOTAL   $ 30,347        8.8%   $ 29,154         9.5%   $  1,193          4.1%
                                  ------------------------------------------------------------------------
</TABLE>


      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  agreement.  Other SG&A expense as a percent of revenue for the SMSG
and PPG segments  decreased but increased for the MD&D segment.  There was a net
decrease  in  expense as a percent  of  revenue  for the PPG  segment in 2003 as
compared to 2002.  During  2002,  we  incurred a $15.0  million (or 15.6% of net
PPG  revenue)  Cellegy  license  fee  payment  and  the larger 2002 field  teams
required  greater  administrative  resources  than in 2003.  This  increase as a
percent of revenue for the MD&D segment was primarily  attributable to the sales
force related costs and other marketing  costs  associated with the marketing of
our wound care products, which began in January 2003.

                                       33
<PAGE>


      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.
During 2003, our initial accrual was adjusted to reflect the following:

         o  a $270,000 reduction in the restructuring accrual due to negotiating
            higher sublease  proceeds than  originally  estimated for the leased
            facility in Cincinnati, Ohio;

         o  $133,000  of  additional  restructuring  expense  due to higher than
            expected contractual  termination costs. This additional expense was
            recorded in program expenses  consistent with the original recording
            of the restructuring charges;

         o  a $473,000 reduction in the restructuring  accrual due to lower than
            expected  sales  force  severance  costs.  Greater  success  in  the
            reassignment  of sales  representatives  to other  programs  and the
            voluntary  departure  of other  sales  representatives  combined  to
            reduce the  requirement  for severance  costs.  This  adjustment was
            recorded in program expenses  consistent with the original recording
            of the restructuring charges;

         o  $413,000 of additional  restructuring  expense as a result of higher
            than  expected exit costs and corporate  employee  severance  costs.
            This adjustment was recorded in other SG&A expenses  consistent with
            the original recording of the restructuring charges.

      As of December 31, 2003, the restructuring accrual is $744,000, consisting
of  remaining  lease  and  corporate  severance   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  and
mutual release  agreement with Auxilium  (Settlement  Agreement).  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 audited
consolidated financial statements).


     -----------------------------------------------------------------
     OPERATING INCOME (LOSS)
     (IN THOUSANDS)
     -----------------------------------------------------------------
                                               VARIANCE
                     2003           2002      FAV/(UNFAV)
                  ----------------------------------------------------
      SMSG         $ 40,240      $  7,908      $ 32,333
      PPG           (11,970)      (55,210)       43,240
      MD&D           (8,680)       (2,873)       (5,808)
                  ----------------------------------------------------
         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, an increase of
$69.8 million. The 2002 period operating loss was primarily the result of losses
generated  by the Evista  contract and from the $15.0  million in licensing  fee
expenses  associated with the Cellegy  agreement.  Operating income for 2003 for
the SMSG  segment  was $40.2  million,  or 408.9%  more than the SMSG  operating
income  for 2002 of $7.9  million.  As a  percentage  of  revenue  from the SMSG
segment,  operating  income for that segment  increased to 14.0% for 2003,  from
4.0% for 2002. There was an operating loss for the PPG segment for 2003 of $12.0
million  entirely  attributable to the $12.0 million Ceftin accrual  recorded in
the fourth quarter of 2003. As discussed in Note 3 to the consolidated financial
statements,  the  additional  Ceftin accrual is  attributable  to the changes in
estimates related to the allowance for sales returns recorded on previous Ceftin
sales.  This  compares to an operating  loss of $55.2  million in 2002,  most of
which  was  attributable  to the $35.1  million  operating  loss for the  Evista
contract and the $15.0 million initial licensing fee associated with the Cellegy
agreement.  There was an  operating  loss for 2003 for the MD&D  segment of $8.7
million  compared to an operating loss of $2.9 million in the prior period.  The
2003 loss was due primarily to the 2003 Xylos product launch and the slower than
anticipated sales of that product.

      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

                                       34
<PAGE>


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 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 and
the effect of non-deductible routinely incurred expenses. 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.

      COMPARISON OF 2002 AND 2001

      REVENUE.  Revenue for 2002 was $307.9 million,  57.0% less than revenue of
$716.8  million for the prior year period.  This decrease of $408.9  million was
almost  entirely  due to the  mutual  termination  of the  marketing  sales  and
distribution  contract  with  GSK for  Ceftin;  this  product  lost  its  patent
protection  in early 2002 and as a result we recorded  only $6.4  million of net
product  revenue in 2002, of which $5.7 million was  attributable  to changes in
estimates  related to sales returns,  discounts and rebates recorded on previous
Ceftin sales.  Service revenue was $301.4 million in 2002,  essentially the same
as the  $301.4  million  recorded  in 2001.  There was a $71.3  million  revenue
reduction for the SMSG segment,  primarily  attributable  to the loss of several
significant  dedicated CSO  contracts and the general  decrease in demand within
our markets for sales and  marketing  services.  This  unfavorable  variance was
almost  totally  offset by the revenue  increase  for the PPG segment  which had
revenues of $89.8 million in 2002  compared to $27.7 million in 2001;  the major
reason for this  increase was our Novartis  contracts  through which we provided
services for Lotensin and Lotrel for all of 2002 and through  which we added the
Diovan  products to our service  base in May 2002.  Revenues for MD&D were $12.7
million for 2002 versus $3.5 million in 2001 due to the fact we recorded revenue
for InServe  for the entire  year of 2002 as opposed to only three and  one-half
months in 2001, and we earned modest revenue of $1.7 million from the initiation
of our MD&D contract sales unit in 2002. For 2002,  $19.9 million,  $1.3 million
and $2.7 million of  reimbursable  costs were incurred in the SMSG segment,  PPG
segment and MD&D segment,  respectively.  For 2001, $19.5 million, zero and $0.7
million of reimbursable costs were incurred in the SMSG segment, PPG segment and
MD&D segment, respectively.

      COSTS OF GOODS  AND  SERVICES.  Cost of goods  and  services  for 2002 was
$278.0  million,  which was $303.0  million or 52.1% less than cost of goods and
services  of $581.0  million  for 2001.  The  mutual  termination  of the Ceftin
contract  resulted in a $328.6  million  reduction in cost of goods and services
for the product  category.  During 2002 the cost of goods and  services  for the
service  category was $278.0 million,  an increase of $25.7 million  compared to
2001,  and the gross profit for the  category  was $23.4  million in 2002 versus
$49.1 million in 2001. Despite the 26.4% revenue reduction for the SMSG segment,
the group maintained its gross profit percentage, achieving a 23.1% gross profit
percentage in 2002 compared to 23.6% in 2001.  PPG has suffered a negative gross
profit for both years. During 2001, the negative gross profit for PPG service of
$15.4 million was mostly due to startup expenses and lower than expected product
performance  on the  Novartis  contracts.  During  2002 the  Novartis  contracts
achieved a positive  gross  profit but the Evista  contract  resulted in a $34.7
million negative gross profit.  Excluding the Evista  contract,  total PPG would
have earned a positive  gross profit of $16.0  million and a 16.6% gross margin,
which is lower than the SMSG margin by 6.5 percentage points.  Performance based
contracts can achieve a gross profit  percentage  above our historical  averages
for  contract  sales  programs if the  performance  of the  product(s)  meets or
exceeds  expectations,  but can be below normal  gross  profit  standards if the
performance of the product(s) falls short of baselines.  The Evista contract was
terminated as of December 31, 2002 and therefore did not adversely  affect 2003.
The MD&D segment  earned a modest gross  profit in both years.  For 2002,  $19.9
million,  $1.3 million and $2.7 million of  reimbursable  costs were incurred in
the SMSG segment,  PPG segment and MD&D segment,  respectively.  For 2001, $19.5
million,  zero and $0.7 million of reimbursable  costs were incurred in the SMSG
segment, PPG segment and MD&D segment, respectively.

                                       35
<PAGE>


      COMPENSATION  EXPENSE.  Compensation  expense for 2002 was $32.7  million,
16.8%  less than $39.3  million  for the  comparable  prior  year  period.  As a
percentage of total revenue,  compensation  expense  increased to 10.6% for 2002
from 5.5% for 2001.  Compensation expense for 2002 attributable to the sales and
marketing services segment was $19.6 million compared to $28.6 million for 2001.
As a  percentage  of  revenue  from the sales and  marketing  services  segment,
compensation  expense  decreased  slightly to 9.9% for 2002 from 10.6% for 2001.
Compensation expense for 2002 attributable to the PPG segment was $10.4 million,
or 10.8% of PPG net  revenue,  compared to $10.1  million,  or 2.3% in the prior
year period.  Compensation expense for 2002 attributable to the MD&D segment was
$2.7 million,  or 21.1% of MD&D net revenue,  compared to $0.6 million for three
and one-half months of 2001.

      OTHER  SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Total other SG&A
expenses were $44.2 million for 2002, 47.3% less than other selling, general and
administrative  expenses of $83.8 million (of which $46.9 million was related to
Ceftin activities) for 2001. As a percentage of total revenue,  total other SG&A
expenses  increased to 14.3% for 2002 from 11.7% for 2001.  Other SG&A  expenses
attributable  to the sales and  marketing  services  segment for 2002 were $15.8
million,   $2.8  million  less  than  other  SG&A   expenses  of  $18.6  million
attributable  to that  segment  for  the  comparable  prior  year  period.  As a
percentage of net revenue from the sales and marketing  services segment,  other
SG&A expenses were 7.9% and 6.9% for 2002 and 2001, respectively. Other selling,
general and  administrative  expenses  attributable  to the PPG segment for 2002
were  $25.7  million;  included  in this  amount was the $15.0  million  initial
licensing fee expense  associated with the Cellegy  agreement.  For 2001,  other
selling,  general and  administrative  expenses  attributable to the PPG segment
were  $64.6  million.   Excluding  $46.9  million  in  Ceftin  field  and  other
promotional  expenses,  other selling,  general and administrative  expenses for
2001 were $17.7 million.  Other SG&A expenses  attributable  to MD&D segment for
2002 were $2.7  million,  $2.1  million  more than other SG&A  expenses  of $0.6
million for three and one-half  months of 2001.  As a percentage of revenue from
the MD&D  segment,  other SG&A  expenses were 21.0% and 17.0% for 2002 and 2001,
respectively.

      Both compensation and other selling,  general and administrative  expenses
were  higher as a  percentage  of revenue in the 2002  period  than they were in
2001,  even  after  excluding  the SG&A  expenses  associated  with  the  Ceftin
contract. This factor, considered with management's overall assessment of market
conditions  and our cost  structure,  prompted us to  undertake  cost  reduction
initiatives (see "Restructuring and Other Related Expenses").

      OPERATING  LOSS.  There was an operating  loss for 2002 of $50.2  million,
compared  to  operating  income  of $12.7  million  for  2001.  The 2002  period
operating  loss was  primarily  the  result of losses  generated  by the  Evista
contract and from recording  $15.0 million in licensing fee expenses  associated
with  the  Cellegy  agreement.  Operating  income  for 2002  for the  sales  and
marketing  services  segment was $7.9 million,  or 52.0% less than the sales and
marketing services  operating income for 2001 of $16.5 million.  As a percentage
of revenue from the sales and marketing  services segment,  operating income for
that  segment  decreased  to 4.0% for 2002,  from  6.1% for  2001.  There was an
operating  loss for the PPG segment for 2002 of $55.2  million  almost  entirely
attributable to the $35.1 million operating loss for the Evista contract and the
$15.0 million initial licensing fee associated with the Cellegy agreement. There
was an operating loss for 2002 for the MD&D segment of $2.9 million  compared to
an  operating  loss of $0.2 million in the prior  period.  The 2002 loss was due
primarily to startup  costs in  preparation  for the January 2003 Xylos  product
launch and the initial efforts of the MD&D CSO unit.

      OTHER INCOME,  NET. Other income,  net, for 2002 and 2001 was $2.0 million
and $2.3  million,  respectively.  For 2002,  other  income,  net, was primarily
comprised of $2.5 million in other income and net interest income. The reduction
in 2002 was  primarily due to  significantly  lower  interest  rates and reduced
investments in 2002,  which was partially  offset by losses on  investments  and
securities of approximately $0.5 million.

      BENEFIT FOR INCOME TAXES. There was an income tax benefit of $17.4 million
for 2002,  compared to an income tax  provision of $8.6 million for 2001,  which
consisted of Federal and state corporate income taxes. The effective tax benefit
rate for 2002 was 36.2%,  compared to an  effective  tax rate of 57.6% for 2001.
During  2002,  the  benefit  rate was lower than the  target  rate of 41% to 42%
primarily  as a result  of the  effect of  current  state  valuation  allowances
recorded for certain states where the benefit from the net operating  losses may
not be realized and the effect of non-deductible  routinely  incurred  expenses.
During 2001, the increase in the effective tax rate was  attributable to several
specific  transactions  or situations that when applied to our lower than normal
pretax earnings  created a large  deviation from our target  effective tax rate.
For example,  certain  nondeductible  expenses  which are routinely  incurred in
relatively consistent amounts had a significantly higher impact on the effective
tax rate in 2001,  compared  to prior  years,  due to the lower  level of pretax
profits.

      NET LOSS. There was a net loss for 2002 of $30.8 million,  compared to net
income of $6.4 million for 2001 due to the factors discussed above.

                                       36
<PAGE>


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 general decrease in demand within our markets for the sales and marketing
services  segment,  and the recognition that the  infrastructure  that supported
these 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 incurred in the current  period as we have been  successful in
expanding  our business  platforms for our  segments.  Substantially  all of the
restructuring activities have been completed as of December 31, 2003.

      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  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.

      During  the  quarter  ended  March 31,  2003,  we  recognized  a  $270,000
reduction in to the  restructuring  accrual due to negotiating  higher  sublease
proceeds than originally estimated for the leased facility in Cincinnati, Ohio.

      During the quarter ended June 30, 2003, we incurred approximately $133,000
of  additional  restructuring  expense due to higher than  expected  contractual
termination  costs.  This  additional  expense was recorded in program  expenses
consistent with the original recording of the restructuring charges.

      Also during the quarter  ended June 30,  2003,  we  recognized  a $473,000
reduction in the  restructuring  accrual due to lower than expected  sales force
severance costs. Greater success in the reassignment of sales representatives to
other  programs  and the  voluntary  departure  of other  sales  representatives
combined to reduce the  requirement  for severance  costs.  This  adjustment was
recorded in program  expenses  consistent  with the  original  recording  of the
restructuring charges.

      During the quarter  ended  December  31, 2003,  we recorded  approximately
$413,000  in  additional  restructuring  expense  due to  higher  than  expected
severance and other exit costs.  This adjustment was recorded in SG&A consistent
with the original recording of the restructuring charges.

      The  accrual  for  restructuring  and  exit  costs  totaled  approximately
$744,000 at December 31,  2003,  and is recorded in current  liabilities  on the
balance sheet included in the accompanying consolidated financial statements.

      A roll  forward  of the  activity  for the  2002  Restructuring  Plan  (in
thousands) is as follows:

<TABLE>
<CAPTION>
                                    BALANCE AT                                                         BALANCE AT
                                   DECEMBER 31,                                      WRITE OFFS/      DECEMBER 31,
                                       2002         ACCRUALS        ADJUSTMENTS        PAYMENTS          2003
                                   -----------     -----------      -----------      -----------      -----------
<S>                                <C>             <C>              <C>              <C>              <C>
      Administrative severance     $     1,670     $        58      $        --      $    (1,443)     $       285
      Exit costs                         1,288             488             (270)          (1,047)             459
                                   -----------     -----------      -----------      -----------      -----------
                                   $     2,958     $       546      $      (270)     $    (2,490)     $       744
                                   -----------     -----------      -----------      -----------      -----------
      Sales force severance              1,741              --             (473)          (1,268)              --
                                   -----------     -----------      -----------      -----------      -----------
         TOTAL                     $     4,699     $       546      $      (743)     $    (3,758)     $       744
                                   ===========     ===========      ===========      ===========      ===========
</TABLE>

                                       37
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

      As of December 31, 2003, we had cash and cash equivalents of approximately
$113.3 million and working capital of $100.0 million,  compared to cash and cash
equivalents of approximately  $66.8 million and working capital of approximately
$81.9 million at December 31, 2002.

      For the year ended  December  31,  2003,  net cash  provided by  operating
activities  was  $41.6  million,  compared  to $89.0  million  net cash  used in
operating  activities in 2002. The main components of cash provided by operating
activities were:

         o  cash provided from other changes in assets and  liabilities of $23.7
            million, primarily due to the receipt of a federal income tax refund
            of $20.7 million in August 2003;

         o  net income of approximately $12.3 million; and

         o  add back of depreciation and amortization of other intangible assets
            of approximately $6.2 million.

      At December 31, 2003, the Company has a remaining reserve of $22.8 million
related to Ceftin sales  returns.  The Company  estimates  that it will pay this
amount  beginning in 2004,  using  available  cash on hand and cash  provided by
operations.

      In the third quarter of 2003, a valuation reserve of $835,000 was recorded
to reduce  the value of the  inventory  associated  with our  XCell  wound  care
products to its net realizable  value of  approximately  $174,000 as a result of
management's  determination  that  the  sales  potential  for this  product  has
diminished  materially.  The  December  31,  2003  balance  of  the  reserve  is
approximately  $818,000.  On January 2, 2004 we gave Xylos notice of termination
of the Xylos  agreement,  effective  May 16,  2004.  We  continue to hold a $1.0
million  investment  of  preferred  stock of Xylos.  In  addition  we provided a
short-term  loan to Xylos in February  2004 of $250,000.  Under the terms of the
agreement,  we may provide another short-term loan of $250,000,  if requested by
Xylos.

      As of December 31, 2003, we had $3.6 million of unearned  contract revenue
and $4.0 million of unbilled costs and accrued profits. 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. When services
are  performed in advance of billing,  the value of such services is recorded as
unbilled costs and accrued profits.  Substantially all costs and accrued profits
are earned and billed within 12 months from the end of the respective period.

      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,  the  initiation and  termination  of contracts,  contract terms and
other timing issues; these variations may change in size and direction with each
reporting period.

      For the year ended  December  31,  2003,  net cash  provided by  investing
activities  was  $2.8  million  which   consisted  of  the  sale  of  short-term
investments  of $4.6 million,  partially  offset by $1.8 million in purchases of
property and equipment.

      For the year ended  December  31,  2003,  net cash  provided by  financing
activities  was $2.0  million.  This  amount  is  attributable  to net  proceeds
received from the employee  stock purchase plan of $1.3 million and $0.7 million
in proceeds received from the exercise of stock options by employees.

      Capital  expenditures  during the periods ended December 31, 2003 and 2002
were $1.8 million and $4.0 million, respectively, and were funded from available
cash.  In the second  quarter of 2004 we are  anticipating  moving our corporate
headquarters  to a new facility;  in connection with that move, we are expecting
to incur capital expenditures of approximately $3.0 million to $4.0 million.

      Due to the ability to carry back net  operating  losses  incurred  for the
year  ended  December  31,  2002,  we  received  a Federal  income tax refund of
approximately $20.7 million in August 2003.

      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, 2003,  we had two major  clients  that  accounted  for
approximately 33.3% and 33.2%, respectively,  or a total of 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, or a decrease in demand for our services, could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

                                      38
<PAGE>


      Under our licensing  agreement  with  Cellegy,  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. 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  licensing
agreement,  we will 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.  We believe that these royalty payments will be offset
by  product  revenue.  In July  2003,  Cellegy  received  a letter  from the FDA
rejecting  its NDA for Fortigel.  Cellegy has told us that it is in  discussions
with the FDA to  determine  the  appropriate  course  of  action  needed to meet
deficiencies  cited by the FDA in its  determination.  Since we filed a  lawsuit
against  Cellegy  (see below),  Cellegy is no longer in regular  contact with us
regarding  Fortigel.  Thus,  for  example,  we are  unaware  of the  FDA  status
regarding  Fortigel (as of December 31, 2003, it had not been  approved) and are
unaware of what  steps  Cellegy  is taking to  develop  Fortigel,  to obtain FDA
approval for Fortigel, and/or to arrange for a party to manufacture Fortigel. We
have  requested  this  information  from  Cellegy  but  have  not  received  it.
Accordingly,  we may not  possess  the most  current  and  reliable  information
concerning the current status of, or future prospects relating to, Fortigel. The
issuance of the non-approvable  letter by the FDA concerning Fortigel,  however,
casts  significant  doubt upon Fortigel's  prospects and whether it will ever be
approved.  We cannot predict with any certainty  whether the FDA will ultimately
approve Fortigel for sale in the U.S. Since the drug remains unapproved, we were
not required to pay Cellegy the $10.0 million  incremental license fee milestone
payment in 2003,  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 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.

      The  restatement of the  consolidated  financial  statements for the years
ended  December 31,  2003,  2002 and 2001 as discussed in Note 1B to the audited
consolidated financial statements has no effect on our cash balances,  liquidity
or financial condition.

      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  foreseeable  future.  We continue to evaluate  and review
financing  opportunities  and  acquisition  candidates in the ordinary course of
business.  We are  evaluating  the  need for a credit  facility  which  would be
secured by our current assets for the purpose of increasing liquidity.

CONTRACTUAL OBLIGATIONS

      As of December 31, 2003,  the aggregate  minimum  future  rental  payments
required by  non-cancelable  operating  leases with initial or  remaining  lease
terms exceeding one year are as follows (in thousands):

                                  2004    2005    2006    2007    2008   TOTAL
                                ------  ------  ------  ------  ------  -------

Operating leases
  Minimum lease payments        $3,084  $2,576  $2,319  $2,167  $2,166  $12,312
  Less minimum sublease rentals   (135)    (34)     --      --      --     (169)
                                -----------------------------------------------
    Net minimum lease payments  $2,949  $2,542  $2,319  $2,167  $2,166  $12,143
                                ================================================

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

                                       39
<PAGE>


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.

      The following tables set forth quarterly operating results as reported and
as restated for the eight quarters ended December 31, 2003:

<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                           --------------------------------------------------------------------------------------
                                            Mar 31,     Mar 31,    Jun 30,   Jun 30,   Sep 30,   Sep 30,    Dec 31,      Dec 31,
                                              2003       2003       2003       2003      2003     2003       2003         2003
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
                                          (Reported)  (Restated) (Reported) (Restated)(Reported) (Restated) (Reported)  (Restated)
                                                                           (in thousands except per share data)
                                                                                        (unaudited)
<S>                                        <C>         <C>         <C>       <C>       <C>       <C>       <C>          <C>
Revenue
  Service                                  $ 67,511    $ 73,099    $71,177   $77,543   $86,200   $94,470   $ 104,173    $ 111,031
  Product, net                                   34          34         82        82        81        81     (11,810)     (11,810)
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
     Total revenue                           67,545      73,133     71,259    77,625    86,281    94,551      92,363       99,221
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
Cost of goods and services
  Program expenses                           49,881      55,469     50,307    56,673    61,815    70,085      65,077       71,935
  Cost of goods sold                             62          62         83        83       952       952         190          190
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
     Total cost of goods and services        49,943      55,531     50,390    56,756    62,767    71,037      65,267       72,125
                                           --------    --------    -------   -------   -------   -------   ---------    ---------

Gross profit (loss)                          17,602      17,602     20,869    20,869    23,514    23,514      27,096       27,096

Operating expenses
  Compensation expense                        8,874       8,874      9,123     9,123     9,297     9,297       9,607        9,607
  Other selling, general and
    administrative expenses                   5,833       5,833      7,206     7,206     7,676     7,676       9,632        9,632
  Restructuring and other
    related expenses                           (270)       (270)        --        --        --        --         413          413
  Litigation settlement                       2,100       2,100         --        --        --        --          --           --
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
       Total operating expenses              16,537      16,537     16,329    16,329    16,973    16,973      19,562       19,562
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
Operating income (loss)                       1,065       1,065      4,540     4,540     6,541     6,541       7,444        7,444
Other income, net                               269         269        226       226       246       246         332          332
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
Income (loss) before provision for taxes      1,334       1,334      4,766     4,766     6,787     6,787       7,776        7,776
Provision (benefit) for income taxes            556         556      1,954     1,954     2,605     2,605       3,290        3,290
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
Net income (loss)                          $    778    $    778    $ 2,812   $ 2,812   $ 4,182   $ 4,182   $   4,486    $   4,486
                                           ========    ========    =======   =======   =======   =======   =========    =========

                                                                                QUARTER ENDED
                                           --------------------------------------------------------------------------------------
                                            Mar 31,     Mar 31,    Jun 30,   Jun 30,   Sep 30,   Sep 30,    Dec 31,      Dec 31,
                                              2003       2003       2003       2003      2003     2003       2003         2003
                                           --------    --------    -------   -------   -------   -------   ---------    ---------
                                          (Reported)  (Restated) (Reported) (Restated)(Reported) (Restated) (Reported)  (Restated)
                                                                           (in thousands except per share data)
                                                                                        (unaudited)

Basic net income (loss) per share          $   0.05    $   0.05    $  0.20   $  0.20   $  0.29   $  0.29   $    0.31    $    0.31
                                           ========    ========    =======   =======   =======   =======   =========    =========
Diluted net income (loss) per share        $   0.05    $   0.05    $  0.20   $  0.20   $  0.29   $  0.29   $    0.31    $    0.31
                                           ========    ========    =======   =======   =======   =======   =========    =========

Weighted average number of shares:
     Basic                                   14,166      14,166     14,188    14,188    14,252    14,252      14,320       14,320
                                           ========    ========    =======   =======   =======   =======   =========    =========
     Diluted                                 14,237      14,237     14,266    14,266    14,543    14,543      14,677       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.

NOTE:  THE QUARTERLY  RESULTS OF OPERATIONS FOR 2003 AND 2002 HAVE BEEN RESTATED
TO REFLECT THE EFFECT OF THE  COMPANY'S  RESTATEMENT  AS  DISCUSSED  IN NOTE 1B,
"RESTATEMENT  OF  CONSOLIDATED  FINANCIAL   STATEMENTS",   TO  THE  ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS.

                                       40
<PAGE>


<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                           ---------------------------------------------------------------------------------------
                                            Mar 31,     Mar 31,    Jun 30,   Jun 30,   Sep 30,    Sep 30,    Dec 31,      Dec 31,
                                              2002       2002       2002       2002      2002      2002       2002         2002
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
                                          (Reported)  (Restated) (Reported) (Restated)(Reported) (Restated) (Reported)  (Restated)
                                                                           (in thousands except per share data)
                                                                                        (unaudited)
<S>                                        <C>         <C>         <C>       <C>       <C>        <C>       <C>          <C>
Revenue
   Service                                 $ 68,160    $ 73,312    $66,033   $73,019   $64,353    $70,837   $  79,029    $  84,269
   Product, net                               5,723       5,723        500       500       215        215          --           --
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
      Total revenue                          73,883      79,035     66,533    73,519    64,568     71,052      79,029       84,269
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
Cost of goods and services
   Program expenses                          67,277      72,429     65,721    72,707    67,475     73,959      53,667       58,907
   Cost of goods sold                            --          --         --        --        --         --          --           --
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
      Total cost of goods and services       67,277      72,429     65,721    72,707    67,475     73,959      53,667       58,907
                                           --------    --------    -------   -------   -------   --------   ---------    ---------

Gross profit (loss)                           6,606       6,606        812       812    (2,907)    (2,907)     25,362       25,362

Operating expenses
   Compensation expense                       7,759       7,759      9,294     9,294     9,157      9,157       6,459        6,459
   Other selling, general and
     administrative expenses                  3,325       3,325      6,450     6,450     9,433      9,433      24,956       24,956
   Restructuring and other
     related expenses                            --          --         --        --       972        972       2,243        2,243
   Litigation settlement                         --          --         --        --        --         --          --           --
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
        Total operating expenses             11,084      11,084     15,744    15,744    19,562     19,562      33,658       33,658
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
Operating income (loss)                      (4,478)     (4,478)   (14,932)  (14,932)  (22,469)   (22,469)     (8,296)      (8,296)
Other income, net                               889         889        356       356       459        459         263          263
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
Income (loss) before provision for taxes     (3,589)     (3,589)   (14,576)  (14,576)  (22,010)   (22,010)     (8,033)      (8,033)
Provision (benefit) for income taxes         (1,322)     (1,322)    (5,385)   (5,385)   (7,696)    (7,696)     (3,044)      (3,044)
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
Net income (loss)                          $ (2,267)   $ (2,267)   $(9,191)  $(9,191)  $(14,314) $(14,314)  $  (4,989)   $  (4,989)
                                           ========    ========    =======   =======   =======   ========   =========    =========
<CAPTION>

                                                                                 QUARTER ENDED
                                           ---------------------------------------------------------------------------------------
                                            Mar 31,     Mar 31,    Jun 30,   Jun 30,   Sep 30,    Sep 30,    Dec 31,      Dec 31,
                                              2002       2002       2002       2002      2002      2002       2002         2002
                                           --------    --------    -------   -------   -------   --------   ---------    ---------
                                          (Reported)  (Restated) (Reported) (Restated)(Reported) (Restated) (Reported)  (Restated)
                                                                           (in thousands except per share data)
                                                                                        (unaudited)
<S>                                        <C>         <C>         <C>       <C>       <C>        <C>       <C>          <C>
Basic net income (loss) per share          $  (0.16)   $  (0.16)   $ (0.66)  $ (0.66)  $ (1.02)   $ (1.02)  $   (0.35)   $   (0.35)
                                           ========    ========    =======   =======   =======    =======   =========    =========
Diluted net income (loss) per share        $  (0.16)   $  (0.16)   $ (0.66)  $ (0.66)  $ (1.02)   $ (1.02)  $   (0.35)   $   (0.35)
                                           ========    ========    =======   =======   =======    =======   =========    =========

Weighted average number of shares:
     Basic                                   13,969      13,969     14,003    14,003    14,063     14,063      14,097       14,097
                                           ========    ========    =======   =======   =======    =======   =========    =========
     Diluted                                 13,969      13,969     14,003    14,003    14,063     14,063      14,097       14,097
                                           ========    ========    =======   =======   =======    =======   =========    =========
</TABLE>

NOTE:  THE QUARTERLY  RESULTS OF OPERATIONS FOR 2003 AND 2002 HAVE BEEN RESTATED
TO REFLECT THE EFFECT OF THE  COMPANY'S  RESTATEMENT  AS  DISCUSSED  IN NOTE 1B,
"RESTATEMENT  OF  CONSOLIDATED  FINANCIAL   STATEMENTS",   TO  THE  ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS.


EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

      In January 2003, the FASB issued  Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES" (FIN 46). FIN 46 requires a variable interest entity
(VIE) to be consolidated by a company,  if that company is subject to a majority
of the risk of loss from the VIE's  activities or entitled to receive a majority
of the entity's  residual  returns or both. In December  2003, the FASB issued a
revision to the FIN 46 (FIN46R)  which  partially  delayed the effective date of
the  interpretation  to March 31, 2004 and added  additional  scope  exceptions.
Adoption of FIN46R is not  expected to have a material  impact on our  business,
financial position or results of operations.

      In December  2003,  the Staff of the  Securities  and Exchange  Commission
issued Staff Accounting Bulletin No. 104 (SAB 104), "REVENUE RECOGNITION," which
supercedes SAB 101,  "REVENUE  RECOGNITION IN FINANCIAL  STATEMENTS."  SAB 104's
primary purpose is to rescind  accounting  guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of EITF 00-21, "ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES."
Additionally,  SAB 104  rescinds  the SEC's  "REVENUE  RECOGNITION  IN FINANCIAL
STATEMENTS FREQUENTLY ASKED QUESTIONS AND ANSWERS" (the FAQ) issued with SAB 101
that had been  codified  in SEC Topic 13,  "REVENUE  RECOGNITION."  The  revenue
recognition  principles  provided  for in both  SAB 101 and  EITF  00-21  remain
largely unchanged.  As a result, the adoption of SAB 104 is not expected to have
a material impact on our business, financial position and results of operations.

                                       41
<PAGE>


USE OF NON-GAAP FINANCIAL INFORMATION

      This Form  10-K/A  contains  non-GAAP  financial  information  adjusted to
exclude  certain  costs,  expenses,  gains and losses  and other  non-comparable
items.   This   information  is  intended  to  enhance  an  investor's   overall
understanding  of our  past  financial  performance  and our  prospects  for the
future.  For example,  non-GAAP  financial  information  is an indication of our
baseline performance before items that are considered by us to be not reflective
of our operational  results. In addition,  this information is among the primary
indicators  we use as a basis for planning and  forecasting  of future  periods.
This  information  is  not  intended  to  be  considered  in  isolation  or as a
substitute for financial information prepared in accordance with GAAP.


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

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      The  Company  became  aware  of  the   applicability   of  the  accounting
pronouncement,  EITF 01-14, to the Company's  financial  statements in September
2004. EITF 01-14 should have been applied to such financial statements beginning
with first quarter of 2002. Due to the non-application of EITF 01-14 since 2002,
the Company  discovered  certain errors in the  classification  of  reimbursable
costs in its  consolidated  statements  of  operations  since  2002,  which  are
described in Note 1B to these consolidated  financial  statements.  As a result,
the  Company  determined  that a  material  weakness  existed  in its  financial
reporting and  disclosure  controls  regarding the selection and  application of
generally  accepted  accounting   principles  (GAAP),  and  preparation  of  the
consolidated financial statements.  Accordingly, the Company has determined that
its internal  controls  over  financial  reporting and  disclosure  controls and
procedures were not effective as of December 31, 2003.

      The Company  considered the impact of the material weakness as of December
31,  2003  and  determined  that  the  magnitude  of  any  actual  or  potential
misstatement was limited to an increase by identical amounts in revenue and cost
of goods and services in the relevant  financial  statements  with no changes to
gross profit,  operating income, net income, or earnings per share, nor is there
any effect on the consolidated balance sheets,  consolidated  statements of cash
flows, or consolidated statements of changes in stockholders' equity.

      Since  September 2004, the Company has taken a series of steps designed to
improve the control  processes  regarding the selection and  application of GAAP
and  preparation   and  review  of  the   consolidated   financial   statements.
Specifically,  key  personnel  involved  in the  Company's  financial  reporting
processes have enhanced the process through which authoritative guidance will be
monitored on a regular basis. Review of both authoritative guidance and industry
practices  will be  conducted  in order to ensure that all new guidance is being
complied  with  in  the  preparation  of  the  financial   statements,   related
disclosures and periodic  filings with the SEC.  Additionally,  when the Company
became  aware of the  non-application  of EITF  01-14,  all  prior  consolidated
financial  statements  which were  filed  with the SEC since 2002 were  reviewed
internally and by an outside  consultant for compliance  with all  authoritative
guidance and the  application of GAAP and such filings were  determined to be in
compliance.

                                       42
<PAGE>


CHANGES IN INTERNAL CONTROLS

Except as described above in "Evaluation of Disclosure Controls and Procedures,"
there  has been no change  in the  Company's  internal  control  over  financial
reporting and disclosure controls (as such terms are defined in Rules 13a-15(e),
13a-15(f),  15d-15(e) and 15d-15(f)  under the Exchange Act) that was identified
in  connection  with  management's  evaluation,  as  described  above,  that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


                                       43
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

      The  following  table  sets  forth the names,  ages and  positions  of our
directors, executive officers and key employees:

NAME                          AGE   POSITION

John P. Dugan                  68   Chairman  of  the  board  of  directors  and
                                    director of strategic planning
Charles T. Saldarini           40   Chief executive officer and vice chairman of
                                    the board of directors
Steven K. Budd                 47   President,   global   sales  and   marketing
                                    services group
Bernard C. Boyle               59   Chief  financial  officer,   executive  vice
                                    president and treasurer
Stephen Cotugno                44   Executive   vice   president   --  corporate
                                    development and investor relations
Beth R. Jacobson               43   Executive vice  president,  general  counsel
                                    and corporate secretary
Alan L. Rubino                 49   Executive vice president and general manager
                                    - sales teams business
Deborah Schnell                48   Executive   vice   president   --   business
                                    development
Christopher Tama                    45  Executive  vice  president  and  general
                                    manager -- pharmaceutical products
Joseph T. Curti(1)(3)(4)       65   Director
Larry Ellberger(1)(2)          56   Director
John C. Federspiel (1)(3)      49   Director
Gerald J. Mossinghoff(2)(3)    67   Director
John M. Pietruski(2)(3)        70   Director
Frank J. Ryan(1)(2)            64   Director
Jan Martens Vecsi              60   Director

----------
(1) Member of audit committee.
(2) Member of compensation and management development committee.
(3) Member of nominating and corporate governance committee.
(4) Member of science and technology committee.

      John P.  Dugan is our  founder,  chairman  of the board of  directors  and
director of strategic planning.  He served as our president from inception until
January 1995 and as our chief  executive  officer from inception  until November
1997. In 1972,  Mr. Dugan founded Dugan  Communications,  a medical  advertising
agency that later became known as Dugan Farley  Communications  Associates  Inc.
and served as its  president  until 1990. We were a  wholly-owned  subsidiary of
Dugan Farley in 1990 when Mr. Dugan became our sole stockholder. Mr. Dugan was a
founder  and  served  as  the  president  of  the  Medical   Advertising  Agency
Association  from 1983 to 1984.  Mr. Dugan also served on the board of directors
of the Pharmaceutical Advertising Council (now known as the Healthcare Marketing
Communications Council, Inc.) and was its president from 1985 to 1986. Mr. Dugan
received an M.B.A. from Boston University in 1964.

      Charles T.  Saldarini is our vice  chairman and chief  executive  officer.
Joining  PDI  in  1987,   Mr.   Saldarini  has  held   positions  of  increasing
responsibility,  becoming  president  of PDI in January  1995,  chief  executive
officer in November  1997,  and vice  chairman in June 2000.  In his 17 years at
PDI, his  contributions  have spanned the full range of our  development.  He is
responsible for making PDI the largest  contract sales  organization in the U.S.
Prior to PDI, Mr. Saldarini worked at Merrill Dow Pharmaceuticals. He received a
B.A. in political science from Syracuse University in 1985.

      Steven  K.  Budd has  served  as our  global  president  of the  sales and
marketing  services  group  since  September  2003.  Prior to  that,  he was our
president and chief operating officer, a position he filled since June 2000. Mr.
Budd joined us in April 1996 as vice  president,  account group sales. He became
executive vice president in July 1997, chief operating  officer in January 1998,
and our president in June 2000.  From January 1994 through April 1995,  Mr. Budd
was employed by Innovex,  Inc.,  as director of new business  development.  From
1989 through  December 1993, he was employed by Professional  Detailing  Network
(now known as Nelson  Professional  Sales,  a  division  of  Publicis),  as vice
president with responsibility for building sales teams and developing  marketing
strategies.  Mr. Budd received a B.A. in history and education from  Susquehanna
University in 1978.

      Bernard C. Boyle has served as our chief financial officer, executive vice
president  and  treasurer  since  March 1997.  In 1990,  Mr.  Boyle  founded BCB
Awareness,  Inc., a firm that provided management advisory services,  and served
as its president  until March 1997.  During that period he was also a partner in
Boyle &  Palazzolo,  Partners,  an  accounting  firm.  From 1982 through 1990 he
served as controller and then chief  financial  officer and treasurer of

                                       44
<PAGE>


William Douglas McAdams,  Inc., an advertising  agency.  From 1966 through 1971,
Mr. Boyle was employed by the national  accounting  firm then known as Coopers &
Lybrand L.L.P. as supervisor/senior  audit staff. Mr. Boyle received a B.B.A. in
accounting  from Manhattan  College in 1965 and an M.B.A.  in corporate  finance
from New York University in 1972.

      Stephen P.  Cotugno  became  our  executive  vice  president  -  corporate
development and investor relations in January 2000. He joined us as a consultant
in 1997 and in January  1998 he was hired full time as vice  president-corporate
development.  Prior to joining  us, Mr.  Cotugno  was an  independent  financial
consultant.  He received a B.A. in finance and economics from Fordham University
in 1981.

      Beth R. Jacobson  joined us in November 2002 as executive vice  president,
general counsel and corporate secretary. Previously, she was with Skadden, Arps,
Slate,  Meagher & Flom, LLP for 15 years, where she practiced corporate law. She
received  a B.A.  from  Wesleyan  University  in 1983  and a J.D.  from New York
University Law School in 1987.

      Alan L. Rubino joined us in January 2004 as executive  vice  president and
general  manager of our sales teams  business.  He was most recently senior vice
president  of  the  Pharmaceuticals  Technology  and  Services  Division  within
Cardinal  Health.  He joined Cardinal Health as part of the acquisition of BLPG,
Inc., a healthcare  marketing services company,  where he was the executive vice
president and managing  director.  Prior to joining BLPG, he had a distinguished
career in key executive  positions in  marketing,  sales and  operations  within
Hoffmann-LaRoche, most recently holding the position of vice president, business
operations. He received a B.A. in Economics from Rutgers University in 1976 with
a minor in  biology  and  chemistry.  Mr.  Rubino has also  attended  management
courses at Harvard Business School.

      Deborah  Schnell is our executive vice  president - business  development.
She was one of the  founders  of  ProtoCall  which was  acquired by PDI in 1999.
Prior to joining  ProtoCall,  Ms. Schnell spent  approximately 20 years with IBM
Corporation  where  she  worked  across  a  broad  range  of  areas,   including
manufacturing,  distribution  and  healthcare.  She  received  a B.A.  in speech
pathology and audiology from Miami of Ohio University in 1976.

      Christopher Tama joined us as executive vice president and general manager
in January 2000. Mr. Tama is responsible for PDI  Pharmaceutical  Products Group
involving the commercialization of prescription  pharmaceutical products secured
through  licensing  and  acquisition.  Prior to joining  PDI,  Mr. Tama was vice
president of marketing at Novartis  Pharmaceuticals  from 1996 through 2000. His
previous experience also includes the position of vice president of marketing at
G.D.  Searle  U.S.  Operations  and various  marketing  and sales  positions  of
increasing  responsibility during his 13 years with Pharmacia. His marketing and
sales experience range many different  therapeutic  areas with both domestic and
global responsibility. He received a B.A. in economics from Villanova University
in 1981.

      Dr.  Joseph T. Curti became a director in August 2003.  Dr. Curti was most
recently  president and chief executive  officer of Ferring  Pharmaceuticals  in
Tarrytown,  NY. He previously held the position of president and chief executive
officer of Neurochem, Inc. in Kingston,  Ontario and President of North American
Operations of Searle in Skokie,  Ill. He spent 19 years at Pfizer in a number of
senior positions, both domestically and internationally, directing clinical drug
development,  drug  regulatory,   licensing  and  marketing  activities.  He  is
currently a member of the board of trustees and executive committee of Morehouse
School of Medicine in Atlanta,  GA. Dr. Curti received a B.S. from St.  Joseph's
University in Philadelphia in 1959 and an M.D. from Thomas Jefferson  University
in Philadelphia in 1963.

      Larry  Ellberger  became a director in February 2003.  Mr.  Ellberger is a
founder and partner in Healthcare Ventures  Associates,  Inc., a consulting firm
to pharmaceutical,  biotech,  vaccines and medical device companies.  Until July
2003  Mr.  Ellberger  was  Senior  Vice  President,   Corporate  Development  at
PowderJect,  PLC, a London Stock Exchange listed vaccines company. He had been a
member of PowderJect's Board of Directors since 1997. From November 1996 through
May 1999, Mr.  Ellberger  served as Chief  Financial  Officer of W. R. Grace and
from May 1999  through  November  1999 he  served  as Senior  Vice  President  -
Corporate  Development  of W. R.  Grace.  Mr.  Ellberger  is a Director of Avant
Immunotherapeutics  and The Jewish Children's  Museum.  Mr. Ellberger received a
B.A.  in  economics  from  Columbia  College  in  1968  and a B.S.  in  chemical
engineering from Columbia School of Engineering in 1969.

      John C.  Federspiel  became a director in October 2001. Mr.  Federspiel is
president of Hudson Valley Hospital Center, a 120-bed,  short-term,  acute care,
not-for-profit hospital in Westchester County, New York. Prior to joining

                                       45
<PAGE>


Hudson Valley Hospital in 1987, Mr.  Federspiel  spent an additional 10 years in
health  administration,  during which he held a variety of executive  leadership
positions.  Mr.  Federspiel is an appointed  Member of the State Hospital Review
and Planning  Council,  and has served as chairman of the Northern  Metropolitan
Hospital Association,  as well as other affiliations.  Mr. Federspiel received a
B.S.  degree  from  Ohio  State  University  in 1975  and a M.B.A.  from  Temple
University in 1977.

      Gerald J. Mossinghoff  became a director in May 1998. Mr. Mossinghoff is a
former  Assistant   Secretary  of  Commerce  and  Commissioner  of  Patents  and
Trademarks of the  Department of Commerce (1981 to 1985) and served as President
of Pharmaceutical Research and Manufacturers of America from 1985 to 1996. Since
1997 he has been senior  counsel to the law firm of Oblon,  Spivak,  McClelland,
Maier and Newstadt of Arlington,  Virginia.  Mr. Mossinghoff has been a visiting
professor of Intellectual  Property Law at the George Washington  University Law
School since 1997 and Adjunct Professor of Law at George Mason University School
of Law since 1997. Mr. Mossinghoff  served as U.S.  Ambassador to the Diplomatic
Conference  on the  Revision  of the Paris  Convention  from 1982 to 1985 and as
Chairman  of the  General  Assembly  of the United  Nations  World  Intellectual
Property  Organization  from 1983 to 1985.  He is also a former  Deputy  General
Counsel of the National Aeronautics and Space Administration (1976 to 1981). Mr.
Mossinghoff received an electrical  engineering degree from St. Louis University
in 1957  and a juris  doctor  degree  with  honors  from the  George  Washington
University  Law School in 1961. He is a member of the Order of the Coif and is a
Fellow in the National Academy of Public Administration.  He is the recipient of
many honors,  including NASA's Distinguished  Service Medal and the Secretary of
Commerce Award for Distinguished Public Service.

      John M. Pietruski  became a director in May 1998. Since 1990 Mr. Pietruski
has been the  chairman of the board of Encysive  Corporation,  a  pharmaceutical
research  and  development  company.  He is a retired  chairman of the board and
chief  executive  officer of Sterling Drug Inc.  where he was employed from 1977
until  his  retirement  in 1988.  Mr.  Pietruski  is a member  of the  boards of
directors of First Energy Corp. and Xylos Corporation.  Mr. Pietruski  graduated
Phi Beta Kappa with a B.S. in business  administration  with honors from Rutgers
University in 1954.

      Frank J. Ryan  became a director  in  November  2002.  Mr.  Ryan's  career
includes a 38-year tenure with Johnson & Johnson.  Mr. Ryan recently  retired as
Company Group Chairman with  responsibility for worldwide Ethicon franchises and
Johnson & Johnson  Canada.  In  addition,  Mr.  Ryan was a member of the Medical
Devices  and  Diagnostics  Operating  Group and  Leader for the Group in Process
Excellence (Six Sigma) and IT.  Throughout the years, Mr. Ryan held positions of
increasing responsibility,  including Worldwide President of Chicopee, President
of Johnson and Johnson Hospital Services Co. and President of Ethicon,  Inc. Mr.
Ryan  received  a B.S.  degree  in  mechanical  engineering  from  the  Illinois
Institute of  Technology  in 1965 and a M.B.A.  from the  University  of Chicago
Graduate School of Business in 1969.

      Jan  Martens  Vecsi  became  a  director  in May  1998.  Ms.  Vecsi is the
sister-in-law  of John P.  Dugan,  our  chairman.  Ms.  Vecsi  was  employed  by
Citibank,  N.A.  from 1967 through  1996 when she retired.  Starting in 1984 she
served as the senior human resources  officer and vice president of the Citibank
Private Bank. Ms. Vecsi  received a B.A. in psychology and elementary  education
from Immaculata College in 1965.

BOARD OF DIRECTORS AND COMMITTEES

      Our board of  directors  is  divided  into  three  classes.  Each year the
stockholders  elect the members of one of the three classes to a three-year term
of office.  Messrs. Dugan and Mossinghoff and Dr. Curti serve in the class whose
term expires in 2004; Ms. Vecsi and Messrs.  Federspiel  and Ellberger  serve in
the class whose term expires in 2005; and Messrs. Saldarini,  Pietruski and Ryan
serve in the class whose term expires in 2006.

      Our  board  of  directors  has an  audit  committee,  a  compensation  and
management   development   committee,  a  nominating  and  corporate  governance
committee and a science and technology  committee.  The audit committee  reviews
the  scope  and  results  of  the  audit  and  other  services  provided  by our
independent   accountants  and  our  internal  controls.  The  compensation  and
management development committee is responsible for the approval of compensation
arrangements  for our  officers  and the  review of our  compensation  plans and
policies  and  development  of our  management.  The  nominating  and  corporate
governance committee is responsible for selecting individuals qualified to serve
as directors and on committees of the board, to advise the board with respect to
board  composition,  procedures  and  committees  and with  respect to corporate
governance  principles  applicable  to us and to oversee the  evaluation  of the
board and our  management.  The science and technology  committee is responsible
for  advising  the  board on  scientific  matters  and to  periodically  examine
management's  direction regarding the acquisition or licensing of pharmaceutical
products and our technology initiatives. Each committee member is a non-employee
director of

                                       46
<PAGE>


ours who meets the independence requirements of Nasdaq and applicable law.

      AUDIT  COMMITTEE  FINANCIAL  EXPERT.  The  Board has  determined  that the
chairman of the audit committee, Mr. Ellberger, is an "audit committee financial
expert,"  as that  term is  defined  in  Item  401(h)  of  Regulation  S-K,  and
"independent"  for  purposes  of current  and  recently-adopted  Nasdaq  listing
standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors,  and persons who own more than ten percent of a registered  class
of our equity securities,  to file reports of ownership and changes in ownership
with the  Securities  and Exchange  Commission  (SEC).  Officers,  directors and
greater than ten-percent  stockholders are required by SEC regulation to furnish
us with copies of all Section  16(a) forms they file.  Based solely on review of
the copies of such forms  furnished  to us, or written  representations  that no
Forms 5 were  required,  we believe that all Section  16(a) filing  requirements
applicable to our officers and directors were complied with,  except that a Form
4 filing  on  behalf  of each of  Messrs.  Ellberger,  Federspiel,  Mossinghoff,
Pietruski and Ryan, and Ms. Vecsi,  relating to the stock options  automatically
granted  to each of them as  outside  directors  on the date of the 2003  annual
stockholders meeting, was not timely filed.

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 and is filed as Exhibit 14.1
to this report.

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
2004 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 2004 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 2004 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 2004 annual meeting of stockholders  and such information is
incorporated by reference herein.

                                       47
<PAGE>


PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      The following documents are filed as part of this report:

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

   (a) (2)  FINANCIAL STATEMENT SCHEDULE

            Schedule II: Valuation and Qualifying Accounts

      Schedules  not listed  above have been  omitted  because  the  information
required to be set forth therein is not  applicable or is included  elsewhere in
the financial statements or notes thereto.

   (a) (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)

         10.3      Office   Lease  for  Upper   Saddle   River,   NJ   corporate
                   headquarters(1)

         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)

         14.1      Code of Conduct(7)

         21.1      Subsidiaries of the Registrant(4)

         23.1      Consent of PricewaterhouseCoopers LLP(7)

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

                                       48
<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.

(b)   REPORTS ON FORM 8-K

During the three months ended December 31, 2003, the Company filed the following
reports on Form 8-K:


       DATE            ITEM(S)               DESCRIPTION
------------------   ---------- ------------------------------------------------
November 6, 2003      7 and 12   Press Release: PDI Reports Third Quarter
                                   Financial Results
December 11, 2003     5 and 7    Press Release: PDI Reports Preliminary Earnings
                                   Guidance for 2004
December 15, 2003     5 and 7    Press Release: PDI Files Action Against Cellegy
                                   Pharmaceuticals
December 24, 2003     5 and 7    Press Release: PDI Announces Contract
                                   with Novartis

                                       49
<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/A to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 3rd day of November, 2004.

                                             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/A has been signed by the following persons on behalf of
the Registrant  and in the capacities  indicated and on the 3rd day of November,
2004.


         Signature                              Title
         ---------                              -----

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

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

/s/ Bernard C. Boyle           Chief Financial Officer and Treasurer
---------------------------    (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


                                       50
<PAGE>


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES


PDI, INC.                                                                   PAGE

      Report of Independent Registered Public Accounting Firm                F-2

      Consolidated Balance Sheets                                            F-3

      Consolidated Statements of Operations (Restated)                       F-4

      Consolidated Statements of Cash Flows                                  F-5

      Consolidated Statements of Stockholders' Equity                        F-6

      Notes to Consolidated Financial Statements (Restated)                  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.:


In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 15(a)(1)  present fairly,  in all material  respects,
the financial  position of PDI, Inc. and its  subsidiaries  at December 31, 2003
and 2002,  and the results of their  operations and their cash flows for each of
the three  years in the  period  ended  December  31,  2003 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). An audit 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.

As  discussed  in Note 1B,  the  consolidated  financial  statements  have  been
restated to increase  revenues  and cost of services  for the  reimbursement  of
certain out-of-pocket expenses.



PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ
March 3, 2004, except for Note 1B as to which the date is November 3, 2004


                                       F-2
<PAGE>


                                    PDI, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                                DECEMBER 31,
                                                            -------------------
                                                              2003       2002
                                                            --------   --------
ASSETS                                                        (in thousands)
Current assets:
  Cash and cash equivalents ..............................  $113,288   $ 66,827
  Short-term investments .................................     1,344      5,834
  Inventory, net of obsolescence reserve of $818 and
     $0 as of December 31, 2003 and 2002, respectively ...        43        646
  Accounts receivable, net of allowance for doubtful
     accounts of $749 and $1,063 as of December 31,
     2003 and 2002, respectively .........................    40,885     40,729
  Unbilled costs and accrued profits on contracts
     in progress .........................................     4,041      3,360
  Deferred training ......................................     1,643      1,106
  Prepaid income tax .....................................        --     18,856
  Other current assets ...................................     8,847      4,804
  Deferred tax asset .....................................    11,053      7,420
                                                            --------   --------
Total current assets .....................................   181,144    149,582
  Net property and equipment .............................    14,494     18,295
  Deferred tax asset .....................................     7,304      7,820
  Goodwill ...............................................    11,132     11,132
  Other intangible assets ................................     1,648      2,261
  Other long-term assets .................................     3,901      1,849
                                                            --------   --------
Total assets .............................................  $219,623   $190,939
                                                            ========   ========


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable .......................................  $  8,689   $  5,374
  Accrued rebates, sales discounts and returns ...........    22,811     16,500
  Accrued incentives .....................................    20,486     11,758
  Accrued salaries and wages .............................     9,031      6,617
  Unearned contract revenue ..............................     3,604      9,473
  Restructuring accruals .................................       744      4,699
  Other accrued expenses .................................    15,770     13,307
                                                            --------   --------
Total current liabilities ................................    81,135     67,728
                                                            --------   --------
Long-term liabilities ....................................        --         --
                                                            --------   --------
Total liabilities ........................................  $ 81,135   $ 67,728
                                                            --------   --------

Commitments and Contingencies

Stockholders' equity:
   Common stock, $.01 par value; 100,000,000 shares
     authorized; shares issued and outstanding,
     2003 - 14,387,126; 2002 - 14,165,880; restricted
     $.01 par value; shares issued and outstanding,
     2003- 136,178; 2002 - 44,325 ........................  $    145   $    142
   Preferred stock, $.01 par value; 5,000,000 shares
     authorized, no shares issued and outstanding ........        --         --
Additional paid-in capital (includes restricted of
     $2,361and $1,547 in 2003 and 2002, respectively) ....   109,531    106,673
Retained earnings ........................................    29,505     17,247
Accumulated other comprehensive income (loss) ............        25       (100)
Unamortized compensation costs ...........................      (608)      (641)
Treasury stock, at cost: 5,000 shares at December 31,
     2003 and 2002 .......................................      (110)      (110)
                                                            --------   --------
Total stockholders' equity ...............................  $138,488   $123,211
                                                            --------   --------
Total liabilities & stockholders' equity .................  $219,623   $190,939
                                                            ========   --------


                   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,
                                                                ---------------------------------------
                                                                   2003          2002           2001
                                                                ---------      ---------      ---------
                                                              (in thousands, except for per share data)
                                                                (Restated)     (Restated)     (Restated)
<S>                                                             <C>            <C>            <C>
Revenue
   Service ................................................     $ 356,143      $ 301,437      $ 301,447
   Product, net ...........................................       (11,613)         6,438        415,314
                                                                ---------      ---------      ---------
      Total revenue .......................................       344,530        307,875        716,761
                                                                ---------      ---------      ---------
Cost of goods and services
   Program expenses (including related party amounts of
     $983, $516 and $1,057 for the periods ended
     December 31, 2003, 2002 and 2001, respectively) ......       254,162        278,002        252,349
   Cost of goods sold .....................................         1,287             --        328,629
                                                                ---------      ---------      ---------
      Total cost of goods and services ....................       255,449        278,002        580,978
                                                                ---------      ---------      ---------

Gross profit ..............................................        89,081         29,873        135,783

Operating expenses
   Compensation expense ...................................        36,901         32,670         39,263
   Other selling, general and administrative expenses .....        30,347         44,163         83,815
   Restructuring and other related expenses ...............           143          3,215             --
   Litigation settlement ..................................         2,100             --             --
                                                                ---------      ---------      ---------
      Total operating expenses ............................        69,491         80,048        123,078
                                                                ---------      ---------      ---------
Operating income (loss) ...................................        19,590        (50,175)        12,705
Other income, net .........................................         1,073          1,967          2,275
                                                                ---------      ---------      ---------
Income (loss) before provision (benefit) for taxes ........        20,663        (48,208)        14,980
Provision (benefit) for income taxes ......................         8,405        (17,447)         8,626
                                                                ---------      ---------      ---------
Net income (loss) .........................................     $  12,258      $ (30,761)     $   6,354
                                                                =========      =========      =========

Basic net income (loss) per share .........................     $    0.86      $   (2.19)     $    0.46
                                                                =========      =========      =========
Diluted net income (loss) per share .......................     $    0.85      $   (2.19)     $    0.45
                                                                =========      =========      =========
Basic weighted average number of shares outstanding .......        14,231         14,033         13,886
                                                                =========      =========      =========
Diluted weighted average number of shares outstanding .....        14,431         14,033         14,113
                                                                =========      =========      =========
</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,
                                                                             ---------------------------------------
                                                                                2003           2002           2001
                                                                             ---------      ---------      ---------
                                                                                          (in thousands)
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from operations ......................................     $  12,258      $ (30,761)     $   6,354
      Adjustments to reconcile net income to net cash
        provided by operating activities:
          Depreciation and amortization ................................         6,243          7,374          4,676
          Loss on disposal of asset ....................................            --             --            858
          Amortized compensation costs .................................           554            443            318
          Deferred taxes, net ..........................................        (3,117)         8,501        (19,411)
          Reserve for inventory obsolescence and bad debt ..............         1,939         (2,080)         2,995
          Loss on other investments ....................................            --            379          1,863
      Other changes in assets and liabilities, net of acquisitions:
          (Increase) decrease in accounts receivable ...................        (1,277)        13,991         31,304
          (Increase) decrease  in inventory ............................          (216)          (203)        35,066
          (Increase) decrease in unbilled costs ........................          (681)         3,538         (3,703)
          (Increase) decrease in deferred training .....................          (537)         4,463           (639)
          Decrease (increase) in other current assets ..................        14,813        (15,559)          (477)
          (Increase) decrease in other long-term assets ................        (2,052)         4,385         (2,071)
          Increase (decrease) in accounts payable ......................         3,316         (4,119)       (21,969)
          Increase (decrease) in accrued rebates and sales discounts ...         6,311        (51,903)        44,026
          (Decrease) increase in accrued contract losses ...............            --        (12,256)        12,256
          Increase (decrease) in accrued liabilities ...................        11,957        (10,398)         6,411
          (Decrease) in unearned contract revenue ......................        (5,869)        (1,404)       (12,939)
          Increase (decrease) in other current liabilities .............         1,943         (3,371)        (4,623)
          (Decrease) in other deferred compensation ....................            --             --           (169)
          (Decrease) in restructuring liability ........................        (3,954)            --             --
                                                                             ---------      ---------      ---------
Net cash provided by (used in) operating activities ....................        41,631        (88,980)        80,126
                                                                             ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES
          Sale of short-term investments ...............................         4,614          1,532          6,225
          Purchase of short-term investments ...........................            --             --         (8,750)
          Investments in Xylos, In2Focus, and iPhysicianNet ............            --         (1,379)        (1,103)
          Purchase of property and equipment ...........................        (1,829)        (4,012)       (15,560)
          Cash paid for acquisition, net of cash acquired ..............            --         (2,735)       (11,902)
                                                                             ---------      ---------      ---------
Net cash provided by (used in) investing activities ....................         2,785         (6,594)       (31,090)
                                                                             ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES

          Net proceeds from employee stock purchase plan
            and the exercise of stock options ..........................         2,045          2,358          2,117
          Purchase of treasury stock ...................................            --             --           (110)
                                                                             ---------      ---------      ---------
Net cash provided by financing activities ..............................         2,045          2,358          2,007
                                                                             ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents ...................        46,461        (93,216)        51,043
Cash and cash equivalents - beginning ..................................        66,827        160,043        109,000
                                                                             ---------      ---------      ---------
Cash and cash equivalents - ending .....................................     $ 113,288      $  66,827      $ 160,043
                                                                             =========      =========      =========

Cash paid for interest .................................................     $      25      $      33      $      59
                                                                             =========      =========      =========
Cash paid for taxes ....................................................     $   9,619      $   4,827      $  18,023
                                                                             =========      =========      =========
</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>
                                                                                    Accumu-
                                                                                     lated
                                                                                     Other
                                                               Addi-                Compre-                    Unamortized
                              Common Stock   Treasury Stock   tional                hensive  Deferred            Compen-
                             -------------- ---------------   Paid in   Retained    Income    Compen-  Loan to   sation
                             Shares  Amount  Shares  Amount   Capital   Earnings    (Loss)    sation   Officer    Costs      Total
                             ------  ------  ------  ------   -------   --------   --------   ------   -------  ---------- --------
<S>                          <C>     <C>     <C>     <C>      <C>        <C>       <C>        <C>      <C>       <C>       <C>
Balance - December 31, 2000  13,845  $  138      --  $   --   $ 97,162   $ 41,654  $    (34)  $   --   $    --   $  (810)  $138,110

Net income for the year
  ended December 31, 2001                                                   6,354                                             6,354
Unrealized investment
  holding losses, net of tax                                                            (56)                                    (56)
                                                                                                                            --------
Comprehensive income                                                                                                          6,298
Issuance of common stock         90       1                      1,408                                                        1,409
Issuance of employees'
  restricted common stock         7                                737                                                          737
Purchase of treasury stock                        5    (110)                                                                   (110)
Exercise of common
  stock options                  41       1                        709                                                          710
Tax benefit of nonqualified
  option exercise                                                3,695                                                        3,695
Realized loss on sale of
  investment holdings                                                                    11                                      11
Amortization of deferred
  compensation costs                                                                                                 318        318
Deferred compensation costs                                                                                         (243)      (243)
                             ------  ------  ------  ------   --------  --------   --------    ------   -------  -------   --------
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
                             ======  ======  ======  ======   ========  ========   ========    ======   =======  =======   ========
</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  accrued  contract  losses,  accrued  incentives  payable  to
employees,  valuation  allowances  related to  deferred  taxes,  allowances  for
doubtful accounts and inventory  obsolescence,  sales returns,  and accruals for
sales rebates.

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, 2003, 2002 and 2001, the Company's  largest clients,  who each  individually
represented  10% or more of its service  revenue,  accounted  for  approximately
66.5%, 61.9% and 52.3%, 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.

      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 year ended  December 31,
2003 was negative,  primarily from the adjustment to the Ceftin 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, DISCOUNTS AND SALES ALLOWANCES

      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 are 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 have expiration  dates through June 2004.
As discussed in Note 3 to the  consolidated  financial  statements,  there was a
$12.0 million  adjustment to the Ceftin returns reserve in 2003. This adjustment
was 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 2003. 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.  As the Company settles these liabilities in future periods, it will
continue to monitor all appropriate information and determine if any positive or
negative adjustments are required in that period. 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


CONTRACT LOSS PROVISIONS

      Provisions  for losses to be incurred on contracts are  recognized in full
in the period in which it is determined that a loss will result from performance
of the contractual  arrangement.  Performance based contracts have the potential
for higher  returns but also an increased  risk of contract  loss as compared to
the traditional fee for service CSO contracts. The Company did not recognize any
contract  losses  in 2003.  As  discussed  in Notes 2 and 3 to the  consolidated
financial  statements,  the Company recognized  contract losses in 2002 and 2001
related to the Evista and Ceftin contracts, respectively.

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  investments   under  Statement  of  Financial
Accounting Standards (SFAS) No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES." 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 also has certain other  investments which
are accounted for under the cost method,  which are included in other  long-term
assets.  Lastly,  the Company has certain other  investments which are accounted
for under the  equity  method of  accounting,  which  requires  the  Company  to
recognize  its  share  of  both  profits  and  losses  of  the  investee.  These
investments are also included in other long-term assets. The Company reviews its
equity   investments   for  impairment  on  an  ongoing  basis,   based  on  its
determination  of whether a decline in the fair value of the  investments  below
the Company's carrying value is other than temporary. See Note 7.

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.

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


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.  Effective  January 1, 2002,
the Company began accounting for impairments under SFAS No. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".  Prior to the adoption of this
standard, impairments were accounted for using SFAS No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF  LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF"
which was superceded by SFAS No. 144. No  impairments of long-lived  assets were
recorded in 2003, 2002, or 2001.

GOODWILL AND OTHER INTANGIBLE ASSETS

      The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142,  "GOODWILL AND OTHER INTANGIBLE  ASSETS" in fiscal year 2002. The effect of
this  adoption on the Company is that  goodwill  is no longer  amortized  but 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  completed the first step of the transitional  goodwill  impairment test
and  determined  that no  impairment  existed at January  1, 2002.  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 both
2003 and 2002 and determined  that no impairment  existed at either December 31,
2003 or December 31, 2002.

STOCK-BASED COMPENSATION

      As  of  December  31,  2003  the  Company  has  two  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.  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,
                                                    2003      2002       2001
                                                  --------  --------   --------
                                                         (in thousands,
                                                     except per share data)

Net income (loss), as reported .................. $ 12,258  $(30,761)  $  6,354
Add: Stock-based employee compensation
expense included in reported net income (loss),
net of related tax effects ......................      368       283        134

Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of related
tax effects .....................................   (6,133)   (8,137)    (5,769)
                                                  --------  --------   --------
Pro forma net income (loss) ..................... $  6,493  $(38,615)  $    719
                                                  ========  ========   ========

Earnings (loss) per share
    Basic--as reported .......................... $   0.86  $  (2.19)  $   0.46
                                                  ========  ========   ========
    Basic--pro forma ............................ $   0.46  $  (2.75)  $   0.05
                                                  ========  ========   ========

    Diluted--as reported ........................ $   0.85  $  (2.19)  $   0.45
                                                  ========  ========   ========
    Diluted--pro forma .......................... $   0.45  $  (2.75)  $   0.05
                                                  ========  ========   ========

                                       F-10
<PAGE>


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


      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 3.25%,
4.49% and 5.01% at December 31, 2003, 2002 and 2001, respectively; (ii) expected
life of five years for 2003,  2002 and 2001;  (iii) expected  dividends - $0 for
2003, 2002 and 2001; and (iv) volatility of 100% for 2003, 100% for 2002 and 90%
for 2001. The weighted  average fair value of options  granted during 2003, 2002
and 2001 was $11.23, $14.92 and $43.56, respectively.

ADVERTISING

      The Company  recognizes  advertising costs as incurred.  The total amounts
charged  to  advertising  expense  were  approximately  $555,000,  $259,000  and
$547,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

INCOME TAXES

      The Company  applies an asset and  liability  approach to  accounting  for
income  taxes.  Deferred  tax  assets and  liabilities  are  recognized  for the
expected future tax consequences of temporary  differences between the financial
statement  and tax bases of assets and  liabilities  using  enacted tax rates in
effect for the years in which the  differences  are  expected  to  reverse.  The
Company  evaluates  the need for a deferred  tax asset  valuation  allowance  by
assessing  whether it is more likely than not that the Company  will realize its
deferred tax assets in the future.  The assessment of whether or not a valuation
allowance is required often requires significant judgment including the forecast
of future  taxable  income  and the  calculation  of tax  planning  initiatives.
Adjustments  to the  deferred tax  allowance  are made to earnings in the period
when such determination is made.

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 estimated  economic life of the  underlying
product. See Note 2.

RECLASSIFICATIONS

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

NEW ACCOUNTING PRONOUNCEMENTS

      In January 2003, the FASB issued  Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES" (FIN 46). FIN 46 requires a variable interest entity
(VIE) to be consolidated by a company,  if that company is subject to a majority
of the risk of loss from the VIE's  activities or entitled to receive a majority
of the entity's  residual  returns or both. In December  2003, the FASB issued a
revision to the FIN 46 (FIN46R)  which  partially  delayed the effective date of
the  interpretation  to March 31, 2004 and added  additional  scope  exceptions.
Adoption of FIN46 did not, and the adoption of FIN46R is not expected to, have a
material  impact on the  Company's  business,  financial  position or results of
operations.

      In December  2003,  the Staff of the  Securities  and Exchange  Commission
issued Staff Accounting Bulletin No. 104 (SAB 104), "REVENUE RECOGNITION," which
supercedes SAB 101,  "REVENUE  RECOGNITION IN FINANCIAL  STATEMENTS."  SAB 104's
primary purpose is to rescind  accounting  guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of EITF 00-21, "ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES."
Additionally,  SAB 104  rescinds  the SEC's  "REVENUE  RECOGNITION  IN FINANCIAL
STATEMENTS FREQUENTLY ASKED QUESTIONS AND ANSWERS" (the FAQ) issued with SAB 101
that had been  codified  in SEC Topic 13,  "REVENUE  RECOGNITION."  The  revenue
recognition  principles  provided  for in both  SAB 101 and  EITF  00-21  remain
largely unchanged.  As a result, the adoption of SAB 104 is not expected to have
a material impact on the Company's  business,  financial position and results of
operations.

1B.   RESTATEMENT OF CONSOLIDATED STATEMENTS OF OPERATIONS

      The Company has  restated its  previously  issued  consolidated  financial
statements for the years ended December 31, 2003,  2002 and 2001 (the previously
issued  financial  statements)  to apply the  provisions of EITF 01-14,  "Income
Statement   Characterization  of  Reimbursement   Received  for  `Out-of-Pocket'
Expenses  Incurred".  In September 2004, the Company became aware that it should
have been applying EITF 01-14 to the previously issued financial

                                      F-11
<PAGE>


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


statements. In accordance with EITF 01-14, direct reimbursements received by the
Company from its clients for certain costs incurred should have been included as
part of revenue with an identical increase to cost of goods and services, rather
than being netted against cost of goods and services.  Revenue and cost of goods
and services in the previously  issued  financial  statements  were increased by
$27.1 million, $23.9 million, and $20.2 million for the years ended December 31,
2003, 2002 and 2001,  respectively.  EITF 01-14,  which was issued in late 2001,
was applicable for years  beginning in 2002, and also required  reclassification
of all previous periods for comparative purposes.

      This  restatement  does  not  affect  previously  reported  gross  profit,
operating income, net income,  cash flows from operations or earnings per share.
Additionally,   there  is  no  effect  on  the   consolidated   balance  sheets,
consolidated   statements   of  cash  flows  or   consolidated   statements   of
stockholders' equity for the previously issued financial  statements.  A summary
of the effects of the restatement to reclassify these amounts is as follows:

<TABLE>
<CAPTION>
                                                YEAR ENDED                  YEAR ENDED                YEAR ENDED
                                            DECEMBER 31, 2003           DECEMBER 31, 2002         DECEMBER 31, 2001
                                         ------------------------    -----------------------   -----------------------

                                             AS                          AS                        AS
                                         PREVIOUSLY        AS        PREVIOUSLY       AS       PREVIOUSLY       AS
                                          REPORTED      RESTATED      REPORTED     RESTATED     REPORTED     RESTATED
                                         ----------    ----------    ----------   ----------   ----------   ----------
<S>                                      <C>           <C>           <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
  Service revenue                        $  329,061    $  356,143    $  277,575   $  301,437   $  281,269   $  301,447
  Product revenue                           (11,613)      (11,613)        6,438        6,438      415,314      415,314
                                         ----------    ----------    ----------   ----------   ----------   ----------
     TOTAL REVENUE                          317,448       344,530       284,013      307,875      696,583      716,761
                                         ----------    ----------    ----------   ----------   ----------   ----------
  Program expenses                          227,080       254,162       254,140      278,002      232,171      252,349

  Cost of goods sold                          1,287         1,287            --           --      328,629      328,629
                                         ----------    ----------    ----------   ----------   ----------   ----------
     TOTAL COST OF GOODS AND SERVICES       228,367       255,449       254,140      278,002      560,800      580,978
                                         ----------    ----------    ----------   ----------   ----------   ----------
     TOTAL GROSS PROFIT                  $   89,081    $   89,081    $   29,873   $   29,873   $  135,783   $  135,783
                                         ----------    ----------    ----------   ----------   ----------   ----------
</TABLE>


2.    CURRENT 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),  Lotensin  HCT(R) and  Lotrel(R),  which
agreement  terminated  December 31, 2003.  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
contract,  without cause, effective March 16, 2004. The Company will continue to
be  compensated   under  the  terms  of  the  agreement  through  the  effective
termination  date.  Even though the Lotensin  agreement ended December 31, 2003,
the  Company is still  entitled  to  receive  royalty  payments  on the sales of
Lotensin through December 31, 2004.

      In October 2002, the Company  entered into an agreement with Xylos for the
exclusive U.S.  commercialization  rights to the Xylos XCell(TM) Cellulose Wound
Dressing  (XCell) 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,  initial 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.  The
Company  recorded a reserve for  potential  excess  inventory  during  2003.  As
discussed in Note 7, the Company continues to have an investment in Xylos.

      On December 31, 2002, the Company entered into a licensing  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

                                      F-12
<PAGE>


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


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 the Company that it is in discussions with the FDA to
determine the appropriate  course of action needed to meet deficiencies cited by
the FDA in its  determination.  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 licensing 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  will
range from 20% to 30% of net sales.

      As discussed in Note 19, in May 2003,  the Company  settled a lawsuit with
Auxilium Pharmaceuticals,  Inc. which sought to enjoin its performance under the
Cellegy agreement.  Additionally,  the Company filed a complaint against Cellegy
in December 2003, that alleges,  among other things,  that Cellegy  fraudulently
induced the Company to enter into the licensing agreement,  and seeks the return
of the $15.0 million initial  licensing fee, plus  additional  damages caused by
Cellegy's conduct.

3.    HISTORIC PERFORMANCE BASED CONTRACTS

      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 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 contract 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  contract.  There  was no  remaining
accrual as of December 31, 2002 as the Company had no further obligations due to
the  termination  of the  contract.  Operating  losses of $35.1 million and $6.8
million were  recognized  under this  contract for the years ended  December 31,
2002 and December 31, 2001.

      Ceftin
      ------

      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

                                      F-13
<PAGE>


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


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 are 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 have expiration dates
through June 2004. The Company also maintains  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.  Only minimal credits have been issued for returns of product sold by
the Company to date.

      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.

      The Company has since  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,  are being held by them in inventory.  The Company believes
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.  The Company is in the process of
determining the reasons its lots were not sold. Based upon this information, the
Company  increased its returns  reserve as of December 31, 2003 by $12.0 million
to a total reserve of $22.8 million.  Product held by one  wholesaler  currently
accounts for approximately two-thirds of this amount. This $22.8 million reserve
reflects the Company's estimated liability for all identified product that could
potentially be returned and an estimate of the Company's  liability with respect
to remaining, but not yet identified,  product sold by the Company that is still
being held in the trade.

      The reserve has been  calculated  based on reimbursing  the wholesalers at
the  amount  that they  purchased  the  product  from the  Company.  In  certain
instances, the wholesalers have requested reimbursement at an amount higher than
the original purchase price. The difference is approximately  $3.3 million.  The
reserve  as  recorded  by  the  Company  is  its  best  estimate  based  on  its
interpretation  of the  contracts.  The  Company  will  continue  to assess  the
adequacy of its reserves  until the Company's  obligations  for  processing  any
returned  products ceases on December 31, 2004. The Company expects that it will
begin to pay these amounts in 2004.

4.    REPURCHASE PROGRAM

      On September 21, 2001,  the Company  announced that its Board of Directors
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, 2003.

                                      F-14
<PAGE>


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


5.    ACQUISITION

      On September 10, 2001,  the Company  acquired 100% of the capital stock of
InServe in a  transaction  treated  as an asset  acquisition  for tax  purposes.
InServe is a nationwide supplier of supplemental field-staffing programs for the
MD&D industry.  The  acquisition  has been accounted for as a purchase.  The net
assets of InServe on the date of acquisition  were  approximately  $1.3 million.
The Company  made  payments to InServe  shareholders  (the Seller) at closing of
$8.5 million, net of cash acquired.  Additionally,  the Company put $3.0 million
in escrow related to additional  amounts  payable during 2002 if certain defined
benchmarks were achieved.  In April 2002, $1.2 million of the escrow was paid to
the Seller and $265,265 was returned to the Company due to  non-achievement of a
performance  benchmark.  In September 2002,  substantially  all of the remaining
$1.5  million  in  escrow  was paid to the  Seller.  In  connection  with  these
transactions,  the Company recorded $7.8 million in goodwill,  which is included
in other  long-term  assets,  and the remaining  purchase price was allocated to
identifiable tangible and intangible assets and liabilities acquired.

      The following unaudited pro forma results of operations for the year ended
December  31, 2001  assume that the Company and InServe 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 which would have occurred
if the acquisition had been consummated as of the dates indicated,  nor are they
necessarily indicative of future operating results.

                                         YEAR ENDED DECEMBER 31,
                                 -----------------------------------------
                                                   2001
                                 -----------------------------------------
                                 (in thousands, except for per share data)
                                                (unaudited)

Revenue - pro forma                             $  723,136
                                                ==========
Net income - pro forma                          $    6,440
                                                ==========
Pro forma diluted earnings per share            $     0.46
                                                ==========

6.    SHORT-TERM INVESTMENTS

      At December 31, 2003, short-term investments were $1.3 million,  including
approximately  $1.1  million of  investments  classified  as  available-for-sale
securities.  At December 31, 2002,  short-term  investments  were $5.8  million,
including    approximately   $1.1   million   of   investments   classified   as
available-for-sale  securities.  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). All other
short-term investments are stated at cost, which approximates fair value.

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. Although Xylos recognized  operating losses in 2003, the
Company  believes  that,  based on current  market  conditions and activities at
Xylos,  its  investment  in Xylos is not impaired as of December  31,  2003.  In
addition,  the Company  provided a short-term  loan in the amount of $250,000 to
Xylos in February 2004.  Under the terms of the loan agreement,  the Company may
provide another $250,000, if requested by Xylos.

      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 and no losses  were  recorded in the 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, 2003 and December 31, 2002, the Company had  approximately
$43,000  and  $646,000,  respectively,  in  finished  goods  inventory,  net  of
reserves,  relating to the products being marketed and distributed in accordance
with the Xylos agreement  discussed in Note 2. In the third quarter, 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. The December 31, 2003 balance of the reserve is
approximately  $818,000.  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 will  therefore  discontinue  sales of the XCell product after the effective
date.

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, 2003,  2002 and
2001 is as follows:

                                                     Years Ended December 31,
                                                  ----------------------------
                                                   2003       2002       2001
                                                  ------     ------     ------
                                                         (in thousands)
      Basic weighted average number of common
         shares outstanding                       14,231     14,033     13,886
      Dilutive effect of stock options               200         --        227
                                                  ------     ------     ------

      Diluted weighted average number of
         common shares outstanding                14,431     14,033     14,113
                                                  ======     ======     ======

      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.  Outstanding
options at December 31, 2001 to purchase  1,003,162  shares of common stock with
exercise prices of $27.00 to $98.70 were not included in the 2001 computation of
historical  and pro forma  diluted  net income per share  because to do so would
have been antidilutive.

10.   PROPERTY AND EQUIPMENT

      Property and equipment  consisted of the following as of December 31, 2003
and 2002:

                                                                December 31,
                                                           --------------------
                                                             2003        2002
                                                           --------    --------
                                                              (in thousands)
Furniture and fixtures .................................   $  3,288    $  3,644
Office equipment .......................................      3,204       3,177
Computer equipment .....................................     13,494      11,981
Computer software ......................................     13,685      13,937
Leasehold improvements .................................      1,905       1,703
                                                           --------    --------
Total property and equipment ...........................     35,576      34,442

  Less accumulated depreciation and amortization .......    (21,082)    (16,147)
                                                           --------    --------

Property and equipment, net ............................   $ 14,494    $ 18,295
                                                           ========    ========

Depreciation  expense was  approximately  $5.6 million,  $6.8 million,  and $4.0
million for December 31, 2003, 2002 and 2001, 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
2016.  Lease expense  under these  agreements  for the years ended  December 31,
2003, 2002 and 2001 was approximately  $21.3 million,  $26.1 million,  and $28.4
million,  respectively,  of which $18.0 million in 2003,  $21.2 million in 2002,
and $24.8 million in 2001 related to automobiles leased for employees for a term
of one-year from the date of delivery.

      As of December 31, 2003,  the aggregate  minimum  future  rental  payments
required by  non-cancelable  operating  leases with initial or  remaining  lease
terms exceeding one year are as follows (in thousands):

<TABLE>
<CAPTION>
                                    2004       2005       2006      2007      2008       TOTAL
                                   ------     ------     ------    ------    ------    --------
<S>                                <C>        <C>        <C>       <C>       <C>       <C>
Operating leases
  Minimum lease payments           $3,084     $2,576     $2,319    $2,167    $2,166    $ 12,312
  Less minimum sublease rentals      (135)       (34)        --        --        --        (169)
                                   ------     ------     ------    ------    ------    --------
    Net minimum lease payments     $2,949     $2,542     $2,319    $2,167    $2,166    $ 12,143
                                   ======     ======     ======    ======    ======    ========
</TABLE>

12.   SIGNIFICANT CUSTOMERS

SERVICE

      During 2003, 2002 and 2001 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 net service  revenue during each of
the periods presented.

                                             Years Ended December 31,
                                        --------------------------------
        CUSTOMERS                         2003        2002        2001
        ---------                       --------    --------    --------
                                       (Restated)  (Restated)  (Restated)
                                                (in thousands)

      A ............................    $118,713    $ 96,456    $ 94,981
      B ............................     118,291      90,238          --
      C ............................          --          --      62,631

      At December 31, 2003 and 2002, two customers  represented 69.2% and 62.0%,
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.

Product
-------

      Excluding the effects of the  adjustment  to the Ceftin  reserve for sales
returns and rebates in 2003 and 2002 for changes in estimates,  product  revenue
from the sale of the Xylos wound care product was approximately $387,000 in 2003
and product revenue from the sale of Ceftin was approximately  $716,000 in 2002.
Due to the  immateriality  of the product  sales per  customer in 2003 and 2002,
those sales are not shown in the chart below.

      During 2001,  the Company had several  significant  customers for which it
provided  products  related  to  its  distribution  arrangement  with  GSK.  The
following  sets forth the product  revenue  generated by customers who accounted
for  more  than 10% of the  Company's  product  revenue  during  the year  ended
December 31, 2001.

                                      Years Ended December 31,
                                      ------------------------
      Customers                                2001
      ---------                                ----
                                          (in thousands)

          A ............................    $157,541
          B ............................     122,063
          C ............................      53,392


                                       F-17
<PAGE>


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


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  $983,000,  $516,000,  and $1.1 million for the
years ended December 31, 2003, 2002 and 2001.

14.   INCOME TAXES

      The provision  (benefit) for income taxes for the years ended December 31,
2003, 2002 and 2001 are summarized as follows:

                                               2003         2002         2001
                                             --------     --------     --------
                                                       (in thousands)
Current:
    Federal .............................    $ 10,308     $(26,972)    $ 23,346
    State ...............................       1,181        1,024        4,691
                                             --------     --------     --------
    Total current .......................      11,489      (25,948)      28,037
Deferred ................................      (3,084)       8,501      (19,411)
                                             --------     --------     --------
Provision (benefit) for income taxes ....    $  8,405     $(17,447)    $  8,626
                                             ========     ========     ========

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

                                               2003         2002         2001
                                             --------     --------     --------
Federal statutory rate ..................        35.0%       (35.0)%       35.0%
State income tax rate, net of
  Federal benefit .......................         6.1         (1.1)         9.8
Meals and entertainment .................         0.3          0.8          6.7
Valuation allowance .....................          --          0.3          4.8
Other ...................................        (0.7)        (1.2)         1.3
                                             --------     --------     --------

Effective tax rate ......................        40.7%       (36.2)%       57.6%
                                             ========     ========     ========


      The tax effects of significant items comprising the Company's deferred tax
assets and (liabilities) as of December 31, 2003 and 2002 are as follows:

                                                              2003        2002
                                                            -------     -------
Deferred tax assets (liabilities) -- current
      Allowances and reserves ..........................    $ 9,938     $ 6,378
      Inventory ........................................        312          --
      Compensation .....................................        762       1,042
      Other ............................................         41          --
                                                            -------     -------
                                                            $11,053     $ 7,420
                                                            -------     -------
Deferred tax assets (liabilities) -- non current
      Property, plant and equipment ....................    $(2,457)    $(1,778)
      State net operating loss carryforwards ...........      1,427       2,994
      State taxes ......................................      1,296       1,178
      Intangible assets ................................       (126)         58
      Equity investment ................................      1,882       1,941
      Self insurance and other reserves ................      1,466         548
      Contract costs ...................................      5,698       5,820
      Valuation allowance on deferred tax assets .......     (1,882)     (2,941)
                                                            -------     -------
                                                            $ 7,304     $ 7,820
                                                            -------     -------
Net deferred tax asset .................................    $18,357     $15,240
                                                            =======     =======

      At  December  31,  2003,  a valuation  allowance  of  $1,881,851  has been
recorded related to the Company's equity investments.  At December 31, 2002, the
Company had a valuation  allowance of  $2,941,161  related to certain  state net
operating loss (NOL)  carryforwards  and the Company's  equity  investments.  At
December 31, 2003, the Company reduced the valuation allowance by $1,059,310 for
state NOL  carryforwards  that it believes will more likely than not be realized
prior to expiration.  The future  realization of the deferred tax assets related
to the state NOL  carryforwards  is contingent upon the Company's future results
of operations.  The Company performs an

                                      F-18
<PAGE>


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


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 2003, the Company had  approximately  $47.2 million of
state NOL carryforwards which will begin to expire in 2010.

15.   PREFERRED STOCK

      The  Company's  board of directors 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 the number of shares of each series. As
of December 31, 2003 and 2002,  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 February  2003,
$100,000 of this loan was repaid leaving a balance of $150,000.

17.   RETIREMENT PLANS

      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 Company's  PDI, Inc.  401(k) Plan (the "PDI Plan").  Under
the terms of the PDI Plan,  the  Company is  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 is 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
2003, 2002 and 2001 was approximately  $905,000, $1.7 million, and $1.6 million,
respectively.

      Effective  January 1, 2004,  the PDI Plan shall  provide 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.

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 Emerging  Issues Task Force (EITF) 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 2003 the market  value of the  investments  increased by
$42,000, recorded as a debit to compensation expense. The credit to compensation
expense  due  to  a  decrease  of  the  market  value  of  the  investments  was
approximately $95,000 and $30,000 during 2002 and 2001, respectively.  The total
value of the Rabbi Trust was approximately  $1.1 million at each of December 31,
2003 and 2002.

      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  $349,000 and $243,000 during

                                      F-19
<PAGE>


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


2002  and  2001,  respectively,  which is being  amortized  over the  three-year
vesting  period.  There were no deferred  compensation  costs during  2003.  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  that the Company is engaged in, 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
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, Lead Plaintiffs filed a second consolidated and amended
complaint (Second  Consolidated and Amended  Complaint),  which superseded their
earlier complaints.

      The 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 Second 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  Second
Consolidated  and  Amended  Complaint  under the Private  Securities  Litigation
Reform Act of 1995 and Rules 9(b) and  12(b)(6)  of the  Federal  Rules of Civil
Procedure.   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(R)  was  distributed,
promoted  and sold by Bayer  Corporation  (Bayer) in the United  States  through
early August 2001, at which time Bayer voluntarily  withdrew  Baycol(R) 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 February 20, 2004 Bayer has reimbursed the
Company for  approximately  $1.6

                                      F-20
<PAGE>


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


million  in legal  expenses,  almost  all of which was  received  in 2003 and is
reflected as a credit within selling, general and administrative expense.

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  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 its exclusive
license agreement with Cellegy.

      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 are filled for Fortigel prior to January 26, 2004. As discussed in
Note 4, in July 2003,  Cellegy  received a letter from the FDA rejecting its NDA
for Fortigel.  The Company 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 the product 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 December  2002
license agreement with Cellegy regarding  Fortigel  ("License  Agreement").  The
complaint  also  alleges  claims for  misrepresentation  and breach of  contract
related to the License  Agreement.  In the complaint,  the Company seeks,  among
other  things,  rescission  of the  License  Agreement  and  return of the $15.0
million  initial  licensing  fee 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 License Agreement and that Cellegy has not breached its
obligations  under the License  Agreement.  The Company is unable to predict the
ultimate outcome of these lawsuits.

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 impact on the Company's  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.

      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 May 2000 the Board of Directors (the Board) approved the PDI, Inc. 2000
Omnibus  Incentive  Compensation  Plan (the 2000 Plan).  The purpose of the 2000
Plan is to provide a flexible  framework  that will  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

                                      F-21
<PAGE>


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


options may at any time be granted  under the 2000 Plan is 2.2  million  shares.
Eligible  participants  under the 2000 Plan include 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 will terminate 10 years after the date
the 2000 Plan was adopted. No Participant may 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 Stock  Option Plan (the 1998
Plan) which reserves 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  are  eligible  to  receive  incentive  and/or
non-qualified  stock options.  The 1998 Plan, which has a term of ten years from
the date of its  adoption,  is  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 is 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.

      At December  31, 2003,  options for an aggregate of 1,037,599  shares were
outstanding  under the  Company's  stock  option  plans and  options to purchase
376,260 shares of common stock had been exercised since its inception.

      The activity  for the 2000 and 1998 Plans during the years ended  December
31, 2003, 2002 and 2001 is set forth in the table below:

<TABLE>
<CAPTION>
                                                   2003                       2002                      2001
                                          -----------------------    -----------------------    -----------------------
                                                        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 .....    1,514,297     $   39.23    1,125,313     $   53.60      653,921     $   46.60
Granted ..............................      115,303         16.13      596,812         14.81      548,848         71.17
Exercised ............................      (42,373)        13.06       (6,520)        16.00      (40,733)        17.41
Terminated ...........................     (549,628)        58.86     (201,308)        49.91      (36,723)        63.06
                                          ---------     ---------    ---------     ---------    ---------     ---------
Outstanding at end of year ...........    1,037,599     $   27.33    1,514,297     $   39.23    1,125,313     $   53.60
                                          =========     =========    =========     =========    =========     =========

Options exercisable at end of year ...      608,811     $   31.87      611,871     $   46.04      361,584     $   37.11
                                          =========     =========    =========     =========    =========     =========
</TABLE>

            The  following  table  summarizes  information  about stock  options
      outstanding at December 31, 2003:

                   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 - $ 9.56       63,334         8.9        $ 7.28       10,999      $ 8.35
$14.16 - $18.38      563,042         7.9         15.87      246,687       14.77
$21.10 - $29.88      203,312         6.2         26.64      195,401       26.82
$59.50               155,561         7.1         59.50      103,707       59.50
$80.00 - $93.75       52,350         7.1         81.85       52,017       81.77
                   -------------------------------------  ----------------------
                   1,037,599         7.5        $27.33      608,811      $31.87
                   =====================================  ======================

                                      F-22
<PAGE>


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


      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 subject to forfeiture upon  termination of employment  other than
in the event of the recipient's death or disability.

      Approximately  47,483  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 6.8 to 7.1 years.

21.   GOODWILL AND INTANGIBLE ASSETS

      Effective January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND
OTHER  INTANGIBLE  ASSETS." Under SFAS No. 142,  goodwill is no longer amortized
but is evaluated for impairment on at least an annual basis.  This resulted in a
decrease in amortization expense that would have been recorded in the year ended
December 31, 2002 of  approximately  $1.1 million.  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  completed the first step of the  transitional  goodwill  impairment
test and has  determined  that no  impairment  existed at  January 1, 2002.  The
Company performed the required annual impairment tests in the fourth quarters of
both 2003 and 2002 and determined that no impairment  existed at either December
31, 2003 or 2002. 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  total goodwill which is not subject to  amortization  is
$11.1 million as of December 31, 2003.

      The statements of operations adjusted to exclude  amortization expense for
2001 related to goodwill and related taxes are as follows:

                                                     For the Year Ended
                                                        December 31,
                                              -------------------------------
                                                            2001
                                              -------------------------------
                                              (in thousands, except per share
                                                           data)

              REPORTED NET INCOME                        $   6,354
              Add goodwill amortization                        191
                                                         ---------
              Adjusted net income                        $   6,545
                                                         =========
              BASIC EARNINGS PER SHARE:
              Reported net income per share              $    0.46
              Add: Goodwill amortization                      0.01
                                                         ---------
              Adjusted basic net income per share        $    0.47
                                                         =========
              DILUTED EARNINGS PER SHARE:
              Reported diluted net income per share      $    0.45
              Add: Goodwill amortization                      0.01
                                                         ---------
              Adjusted diluted net income per share      $    0.46
                                                         =========

                                      F-23
<PAGE>


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


      Changes in the carrying  amount of goodwill  for the years ended  December
31, 2003 and 2002, by operating segment, were as follows:

                                      SMSG        PPG         MD&D       Total

Balance as of January 1, 2002      $   3,344   $      --   $   5,067   $   8,411
Amortization                              --          --          --          --
Goodwill additions                        --          --       2,721       2,721
                                   ---------   ---------   ---------   ---------

Balance as of December 31, 2002    $   3,344   $      --   $   7,788   $  11,132
                                   =========   =========   =========   =========


Balance as of January 1, 2003      $   3,344   $      --   $   7,788   $  11,132
Amortization                              --          --          --          --
Goodwill additions                        --          --          --          --
                                   ---------   ---------   ---------   ---------

Balance as of December 31, 2003    $   3,344   $      --   $   7,788   $  11,132
                                   =========   =========   =========   =========

      All intangible  assets recorded as of December 31, 2003 and 2002 are being
amortized on a  straight-line  basis over the life of the  intangibles  which is
primarily five years.

<TABLE>
<CAPTION>
                                   As of December 31, 2003                   As of December 31, 2002
                             ------------------------------------      ------------------------------------

                             Carrying    Accumulated                   Carrying    Accumulated
                              Amount     Amortization       Net         Amount     Amortization      Net
                             ------------------------------------      ------------------------------------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>
Covenant not to compete      $  1,686      $    780      $    906      $  1,686      $    442      $  1,244
Customer relationships          1,208           559           649         1,208           318           890
Corporate tradename               172            79            93           172            45           127
                             --------      --------      --------      --------      --------      --------
    Total                    $  3,066      $  1,418      $  1,648      $  3,066      $    805      $  2,261
                             ========      ========      ========      ========      ========      ========
</TABLE>

      Amortization  expense for the years ended December 31, 2003, 2002 and 2001
was approximately $613,000,  $613,000 and $688,000,  respectively.  Amortization
expense  included  amounts  related to  goodwill  during  2001 of  approximately
$450,000. Estimated amortization expense for the next five years is as follows:

                                 2004      $613
                                           ====
                                 2005       613
                                           ====
                                 2006       422
                                           ====
                                 2007        --
                                           ====
                                 2008        --
                                           ====


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,   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  incurred in the
current  period 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, 2003.

      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


                                      F-24
<PAGE>


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


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.

      During the quarter ended March 31, 2003, the Company recognized a $270,000
reduction in to the  restructuring  accrual due to negotiating  higher  sublease
proceeds than originally estimated for the leased facility in Cincinnati, Ohio.

      During the quarter ended June 30, 2003, the Company incurred approximately
$133,000  of  additional  restructuring  expense  due to  higher  than  expected
contractual  termination  costs. This additional expense was recorded in program
expenses consistent with the original recording of the restructuring charges.

      Also during the quarter  ended June 30,  2003,  the Company  recognized  a
$473,000 reduction in the restructuring accrual due to lower than expected sales
force  severance   costs.   Greater   success  in  the   reassignment  of  sales
representatives  to other  programs and the  voluntary  departure of other sales
representatives  combined to reduce the  requirement for severance  costs.  This
adjustment  was  recorded  in  program  expenses  consistent  with the  original
recording of the restructuring charges.

      During  the  quarter  ended  December  31,  2003,  the  Company   recorded
approximately  $413,000 in additional  restructuring  expense due to higher than
expected corporate  severance and other exit costs. This adjustment was recorded
in SG&A consistent with the original recording of the restructuring charges.

      The  accrual  for  restructuring  and  exit  costs  totaled  approximately
$744,000 at December 31,  2003,  and is recorded in current  liabilities  on the
accompanying balance sheet.

      A roll  forward  of the  activity  for the  2002  Restructuring  Plan  (in
thousands) is as follows:

                         BALANCE AT                          WRITE   BALANCE AT
                        DECEMBER 31,                         OFFS/  DECEMBER 31,
                            2002     ACCRUALS  ADJUSTMENTS PAYMENTS    2003
                        -----------  --------  ----------- -------- -----------
Administrative severance  $ 1,670    $    58     $    --    $(1,443)  $   285
Exit costs                  1,288        488        (270)    (1,047)      459
                          -------    -------     -------    -------   -------
                          $ 2,958    $   546     $  (270)   $(2,490)  $   744
                          -------    -------     -------    -------   -------
Sales force severance       1,741         --        (473)    (1,268)       --
                          -------    -------     -------    -------   -------
TOTAL                     $ 4,699    $   546     $  (743)   $(3,758)  $   744
                          =======    =======     =======    =======   =======

23.   SEGMENT INFORMATION

      The  Company  operates  under  three  reporting  segments:  the  sales and
marketing services group (SMSG), pharmaceutical products group (PPG) and medical
devices and diagnostics  (MD&D),  none of which have changed since the Company's
December 31, 2002 financial  presentation.  Since the  termination of the Ceftin
contract and the  elimination  of Ceftin  product sales  effective  February 28,
2002,  the  shift in  management's  focus on the  business  has been to view the
traditional fee for service type arrangements within the pharmaceutical industry
(offered by the SMSG segment) in the aggregate and to view the performance based
contracts  for  pharmaceutical  products  -  those  for  which  the  Company  is
compensated  based  predominantly  on the performance of the products that it is
responsible  for  marketing  and/or  selling  (the  PPG  segment)  - also in the
aggregate.  Further,  all contracts within the MD&D industry,  regardless of the
nature of the  contract,  are  reported in the MD&D  segment.  The SMSG  segment
includes the Company's  contract sales (CSO) units; and the Company's  marketing
services business unit, which includes  marketing research and medical education
and communication services. The PPG segment includes revenues earned through the
Company's  licensing  and  copromotion  of  pharmaceutical   products.  The  PPG
contracts are  characterized by either  significant  management  effort required
from the Company's  product  marketing  group,  or reliance on the attainment of
performance incentives in order to fully cover the Company's costs, or both. The
Company's  MD&D  segment  includes  PDI  InServe,  contract  sales,  and product
licensing.  The segment  information from prior periods has been reclassified to
conform to the current period's presentation.

                                      F-25
<PAGE>


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


      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 SMSG  segment to the other  operating  segments  since it is
impracticable to do so.

                                                          For the Year
                                                       Ended December 31,
                                                 ------------------------------
                                                   2003       2002       2001
                                                 --------   --------   --------
                                                        (in thousands)
Revenue (RESTATED)
    Sales and marketing services group ........  $286,489   $198,993   $368,289
    Pharmaceutical products group .............    42,349     96,205    449,539
    Medical devices and diagnostics ...........    15,692     12,677      3,509
                                                 --------   --------   --------
         Total ................................  $344,530   $307,875   $821,337
                                                 ========   ========   ========

Revenue, intercompany
    Sales and marketing services group ........  $     --   $     --   $ 98,022
    Pharmaceutical products group .............        --         --      6,554
    Medical devices and diagnostics ...........        --         --         --
                                                 --------   --------   --------
         Total ................................  $     --   $     --   $104,576
                                                 ========   ========   ========

Revenue, less intercompany (RESTATED)
    Sales and marketing services group ........  $286,489   $198,993   $270,267
    Pharmaceutical products group .............    42,349     96,205    442,985
    Medical devices and diagnostics ...........    15,692     12,677      3,509
                                                 --------   --------   --------
         Total ................................  $344,530   $307,875   $716,761
                                                 ========   ========   ========

Income (loss) from operations
    Sales and marketing services group ........  $ 54,219   $ 17,247   $ 32,481
    Pharmaceutical products group .............    (9,781)   (48,821)    (2,834)
    Medical devices and diagnostics ...........    (7,457)    (2,068)       (39)
    Corporate charges .........................   (17,391)   (16,533)   (16,903)
                                                 --------   --------   --------
         Total ................................  $ 19,590   $(50,175)  $ 12,705
                                                 ========   ========   ========

Income from operations, intercompany
    Sales and marketing services group ........  $     --   $     --   $  4,284
    Pharmaceutical products group .............        --         --     (4,284)
    Medical devices and diagnostics ...........        --         --         --
    Corporate charges .........................        --         --         --
                                                 --------   --------   --------
         Total ................................  $     --   $     --   $     --
                                                 ========   ========   ========

Income (loss) from operations, less
   intercompany, before corporate allocations
    Sales and marketing services group ........  $ 54,219   $ 17,247   $ 28,197
    Pharmaceutical products group .............    (9,781)   (48,821)     1,450
    Medical devices and diagnostics ...........    (7,457)    (2,068)       (39)
    Corporate charges .........................   (17,391)   (16,533)   (16,903)
                                                 --------   --------   --------
         Total ................................  $ 19,590   $(50,175)  $ 12,705
                                                 ========   ========   ========

Corporate allocations
    Sales and marketing services group ........  $(13,979)  $ (9,339)  $(11,721)
    Pharmaceutical products group .............    (2,189)    (6,389)    (4,986)
    Medical devices and diagnostics ...........    (1,223)      (805)      (196)
    Corporate charges .........................    17,391     16,533     16,903
                                                 --------   --------   --------
       Total ..................................  $     --   $     --   $     --
                                                 ========   ========   ========

                                      F-26
<PAGE>


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


                                                          For the Year
                                                       Ended December 31,
                                                 ------------------------------
(continued)                                        2003       2002       2001
                                                 --------   --------   --------
                                                        (in thousands)
Income (loss) from operations, less
  corporate allocations
    Sales and marketing services group ........  $ 40,240   $  7,908   $ 16,476
    Pharmaceutical products group .............   (11,970)   (55,210)    (3,536)
    Medical devices and diagnostics ...........    (8,680)    (2,873)      (235)
    Corporate charges .........................        --         --         --
                                                 --------   --------   --------
       Total ..................................  $ 19,590   $(50,175)  $ 12,705
                                                 ========   ========   ========

Reconciliation of income (loss) from
  operations to income (loss) before
  provision for income taxes
    Total income (loss) from operations
      for operating groups ....................  $ 19,590   $(50,175)  $ 12,705
    Other income, net .........................     1,073      1,967      2,275
                                                 --------   --------   --------
       Income (loss) before provision
         for income taxes .....................  $ 20,663   $(48,208)  $ 14,980
                                                 ========   ========   ========

Capital expenditures
    Sales and marketing services group ........  $  1,746   $  3,735   $ 14,277
    Pharmaceutical products group .............        --        217      1,213
    Medical devices and diagnostics ...........        83         60         70
                                                 --------   --------   --------
         Total ................................  $  1,829   $  4,012   $ 15,560
                                                 ========   ========   ========

Total Assets
    Sales and marketing services group ........  $147,832   $114,742   $116,898
    Pharmaceutical products group .............    55,169     60,417    175,933
    Medical devices and diagnostics ...........    16,622     15,780      9,840
                                                 --------   --------   --------
         Total ................................  $219,623   $190,939   $302,671
                                                 ========   ========   ========

Depreciation expense
    Sales and marketing services group ........  $  4,181   $  4,318   $  2,760
    Pharmaceutical products group .............     1,029      2,277      1,199
    Medical devices and diagnostics ...........       420        165         29
                                                 --------   --------   --------
         Total ................................  $  5,630   $  6,760   $  3,988
                                                 ========   ========   ========

                                      F-27
<PAGE>


                                   SCHEDULE II

                                    PDI, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

<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 receivables--
Year ended December 31, 2001
   Allowance for doubtful accounts ......   $  250,000      $8,590,676      $(5,148,629)      $3,692,047
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

Against taxes--
Year ended December 31, 2001
   Tax valuation allowance ..............   $  989,000      $  819,046      $        --       $1,808,046
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

Against inventory--
Year ended December 31, 2001
   Inventory valuation allowance ........   $       --      $       --      $        --       $       --
Year ended December 31, 2002
   Inventory valuation allowance ........           --              --               --               --
Year ended December 31, 2003
   Inventory valuation allowance ........   $       --      $  835,448      $   (17,583)      $  817,865
</TABLE>

------------
(1)   Includes  both actual  write offs as well as changes in  estimates  in the
      reserves.

                                      F-28