UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-K




(Mark
      One)ý
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from
  ____________to_________________




Commission
file Number: 0-24249







PDI,
      Inc.(Exact
      name of registrant as specified in its charter)Delaware
            
            22-2919486(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)Saddle
      River Executive Centre
              1
      State Route 17 South, Saddle River, NJ  07458(Address
      of principal executive offices and zip code)(201)
      258-8450(Registrant's
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class
              Common Stock, par value $0.01 per
      share
            Name
      of each exchange on which registered
              The Nasdaq Stock Market
  LLCSecurities
      registered pursuant to Section 12(g) of the Act:
  None










Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No ý




Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o    No ý




Indicate
by checkmark 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 ý    No o




Indicate
by checkmark 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. ý




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


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




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




The
aggregate market value of the registrant's common stock, $0.01 par value per
share, held by non-affiliates of the registrant on June 30, 2008, the last
business day of the registrant's most recently completed second fiscal quarter,
was $63,438,954 (based on the closing sales price of the registrant's common
stock on that date). Shares of the registrant's common stock held by each
officer and director and each person who owns 10% or more of the outstanding
common stock of the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.




As
of February 27, 2009, 14,221,802 shares of the registrant's common stock, $0.01
par value per share, were issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the Proxy Statement for the 2009 Annual Meeting of Stockholders (the Proxy
Statement), to be filed within 120 days of the end of the fiscal year ended
December 31, 2008, are incorporated by reference in Part III hereof. Except
with respect to information specifically incorporated by reference in this
Annual Report on Form 10-K (the Form 10-K), the Proxy Statement is not
deemed to be filed as part hereof.















PDI,
Inc.
 Annual
Report on Form 10-K


PagePART
      IItem
      1.
            Business
            5Item
      1A.
            Risk
      Factors
            10Item
      1B.
            Unresolved
      Staff Comments
            17Item
      2.
            Properties
            17Item
      3.
            Legal
      Proceedings
            17Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            18PART
      IIItem
      5.
            Market
      for our Common Equity, Related Stockholder Matters
              and
      Issuer Purchases of Equity Securities
            18Item
      6.
            Selected
      Financial Data
            20Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            21Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            37Item
      8.
            Financial
      Statements and Supplementary Data
            37Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
            37Item
      9A.
            Controls
      and Procedures
            37Item
      9B.
            Other
      Information
            39PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            39Item
      11.
            Executive
      Compensation
            39Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            39Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            39Item
      14.
            Principal
      Accounting Fees and Services
            39PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            40Signatures
            42





3
 PDI,
Inc.
 Annual
Report on Form 10-K


FORWARD
      LOOKING STATEMENT INFORMATION




This Form
10-K contains “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act) and Section 21E of
the Securities Exchange Act of 1934 (the Exchange Act).  Statements
that are not historical facts, including statements about our plans, objectives,
beliefs and expectations, are forward-looking
statements.  Forward-looking statements include statements preceded
by, followed by or that include the words “believes,” “expects,” “anticipates,”
“plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar
words and expressions.  These forward-looking statements are contained
throughout this Form 10-K, including, but not limited to, statements found in
Part I – Item 1 – “Business,” Part II – Item 5 – “Market for our Common Equity,
Related Stockholder Matters and Issuer Purchases of Securities,” Part II – Item
7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” and “Part II – Item 7A – “Quantitative and Qualitative Disclosures
About Market Risk”.




Forward-looking
statements are only predictions and are not guarantees of future
performance.  These statements are based on current expectations and
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.  These statements also involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from those expressed or implied by any forward-looking
statement.  Many of these factors are beyond our ability to control or
predict.  Such factors include, but are not limited to, the
following:




·
            The
      effects of the current worldwide economic and financial
      crisis;


·
            Changes
      in outsourcing trends or a reduction in promotional, marketing and sales
      expenditures in the pharmaceutical, biotechnology and life sciences
      industries;


·
            Early
      termination of a significant services contract or the loss of one or more
      of our significant customers or a material reduction in service revenues
      from such customers;


·
            Our
      ability to obtain additional funds in order to implement our business
      model;


·
            Our
      ability to successfully identify, complete and integrate any future
      acquisitions and the effects of any such acquisitions on our ongoing
      business;


·
            Our
      ability to meet performance goals in incentive-based arrangements with
      customers;


·
            Competition
      in our industry;


·
            Our
      ability to attract and retain qualified sales representatives and other
      key employees and management
personnel;


·
            Product
      liability claims against us;


·
            Changes
      in laws and healthcare regulations applicable to our industry or our, or
      our customers’, failure to comply with such laws and
      regulations;


·
            The
      sufficiency of our insurance and self-insurance reserves to cover future
      liabilities;


·
            Our
      ability to successfully develop and generate sufficient revenue from
      product commercialization
opportunities;


·
            Our
      ability to increase our revenues and successfully manage the size of our
      operations;


·
            Volatility
      of our stock price and fluctuations in our quarterly revenues and
      earnings;


·
            Failure
      of, or significant interruption to, the operation of our information
      technology and communication systems;
and


·
            The
      results of any future impairment testing for goodwill and other intangible
      assets.




Please
see Part I – Item 1A – “Risk Factors” of this Form 10-K, as well as other
documents we file with the United States Securities and Exchange Commission
(SEC) from time to time, for other important factors that could cause our actual
results to differ materially from our current expectations and from the
forward-looking statements discussed in this Form 10-K.  Because of
these and other risks, uncertainties and assumptions, you should not place undue
reliance on these forward-looking statements. In addition, these statements
speak only as of the date of the report in which they are set forth and, except
as may be required by law, we undertake no obligation to revise or update
publicly any forward-looking statements for any reason.




4
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


PART
I




ITEM
      1.
            BUSINESS




Summary
      of Business




We are a
leading provider of contract sales teams to pharmaceutical companies, offering a
range of sales support services designed to achieve their strategic and
financial product objectives.  In addition to contract sales teams, we
also provide marketing research and promotional physician interaction program
services.  Our services offer customers a range of promotional options
for the commercialization of their products throughout their lifecycles, from
development through maturity.  We provide innovative and flexible service
offerings designed to drive our customers’ businesses forward and successfully
respond to a continually changing market.  Our services provide a
vital link between our customers and the medical community through the
communication of product information to physicians and other healthcare
professionals for use in the care of their patients.




We are
among the leaders in outsourced pharmaceutical sales and marketing services in
the United States.  We have evolved our commercial capabilities through
innovation, organic growth and acquisitions.  We have designed and
implemented programs for many large pharmaceutical companies as well as a
variety of emerging and specialty pharmaceutical companies.  We
recognize that our relationships with customers are dependent upon the quality
of our performance, and our focus is to flawlessly execute our customers’
programs in order to consistently deliver their desired results.




Typically,
our customers engage us on a contractual basis to design and implement
promotional programs for both prescription and over-the-counter products. 
The programs are tailored to meet the specific needs of the product and the
customer.  These services are provided predominantly on a fee-for-service
basis.  These contracts can include incentive payments that can be earned
if our activities generate results that meet or exceed performance
targets.  Contracts may generally be terminated with or without cause by
our customers.  Certain contracts provide that we may incur specific
penalties if we fail to meet stated performance benchmarks.




We
commenced operations as a contract sales organization (CSO) in 1987 and we
completed our initial public offering in May 1998.  Our executive offices
are located at Saddle River Executive Centre, 1 State Route 17 South, Saddle
River, New Jersey 07458 and our telephone number is (800) 242-7494.




Strategy




In 2007
we announced the implementation of a strategic plan, which was further refined
in early 2008 to include the following primary components:




·
            Recapture
      PDI’s position as the leading contract sales
  organization


·
            Enhance
      our commercialization capabilities in order to provide a broader base of
      services and more diversified sources of revenue
  and,


·
            Leverage
      our sales and marketing expertise to capitalize on product
      commercialization opportunities




In
November 2008, Ms. Nancy Lurker joined PDI as our new chief executive officer
and member of the Board of Directors with the full commitment of establishing
PDI as the best in class contract sales organization in the United
States.  Under Ms. Lurker’s leadership, we have intensified our focus
on strengthening all aspects of the core CSO business that we believe will most
favorably position PDI as the best in class contract sales organization in the
United States.




In
addition to concentrating our efforts on strengthening our core CSO business, we
also continue to focus on enhancing our commercialization capabilities by
aggressively promoting and broadening the depth of the value-added service
offerings of our existing marketing services businesses, TVG Marketing Research
& Consulting and Pharmakon.  However, in light of current market
conditions, we are not currently seeking to make acquisitions of other
commercialization service businesses.




As part
of our product commercialization strategic initiative, we announced in April
2008 that we had entered into our first promotional
arrangement.  However, as we re-evaluate this component of our
strategy, we are not actively pursuing any additional product commercialization
opportunities at this time although we may continue to evaluate potential
opportunities for similar types of promotional arrangements on a very selective
and opportunistic basis to the extent we are able to mitigate certain risks
relating to the investment of our resources.




5
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Reporting
      Segments and Operating Groups




For 2008,
we reported under the following three segments: Sales Services; Marketing
Services; and Product Commercialization.  For details on revenue,
operating results and total assets by segment see Note 20 to the consolidated
financial statements included in this Form 10-K.




Sales
Services




This
segment, which focuses primarily on product detailing, includes our Performance
Sales Teams and Select Accessä Teams.  This
segment represented 79% of our consolidated revenue for the year ended December
31, 2008.  Product detailing involves a sales 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.  This segment also includes a portfolio of expanded sales
services known as “PDI ON DEMAND”, which includes talent acquisition services,
pulsing teams and vacancy coverage services.  Our talent acquisition
platform provides pharmaceutical customers with an outsourced, stand-alone sales
force recruiting and on-boarding service.  Pulsing teams provide
temporary full or flex-time sales teams of any size anywhere in the United
States that are designed to help our customers increase brand impact during key
market cycles or rapidly respond to regional opportunities.  Our
vacancy coverage service provides customers with outsourced temporary full or
flex-time sales representatives to fill temporary territory vacancies created by
leaves of absence within our customers’ internal sales forces, which allows our
customers to maintain continuity of services. From time to time, we also provide
sales teams to market and promote the products and/or services of customers
outside of the pharmaceutical and life sciences industries.




Performance Sales
Teams




A
Performance Sales Team works exclusively on behalf of one
customer.  The sales team is customized to meet the customer’s
specifications with respect to sales representative profile, physician
targeting, product training, incentive compensation plans, integration with the
customers’ in-house sales forces, call reporting platform and data
integration.  Without adding permanent personnel, our customers
receive high quality, industry-standard sales teams comparable to their internal
sales force.






Select
Access




Select
Access represents a shared sales team business model where multiple
non-competing brands are represented for different pharmaceutical
companies.  Using these teams, we make a face-to-face selling resource
available to those customers who want an alternative to a dedicated
team.  We are a leading provider of this type of detailing program in
the United States.  Since costs are shared among various companies,
these programs may be less expensive for the customer than programs involving a
dedicated sales force.  With a shared sales team, our customers
receive targeted coverage of its physician audience within the representatives’
geographic territories.




Marketing
Services




This
segment, which includes our Pharmakon, TVG Marketing Research & Consulting
(TVG) and Vital Issues in Medicine business units, represented 21% of
consolidated revenue for the year ended December 31, 2008.




Pharmakon




Pharmakon’s
business is focused on the creation, design and implementation of promotional
peer interactive programming targeted to healthcare
professionals.  Each marketing program can be delivered through a
number of different venues, including; teleconferences, dinner meetings,
webcasts, satellite and other alternative media.  Within each of our
programs, we offer a number of services including strategic design, tactical
execution, technology support, audience generation, moderator services and
thought leader management.  In the last ten years, Pharmakon has
conducted over 45,000 peer interactive programs with more than 550,000
participants. In addition to our peer interactive programs, Pharmakon also
provides promotional communications activities, thought leader training and
content development.




TVG Marketing Research &
Consulting




TVG
employs leading edge, and in some instances proprietary, research methodologies
to provide qualitative and quantitative marketing research to pharmaceutical
companies with respect to healthcare providers, patients and managed care
customers worldwide.  We offer a full range of pharmaceutical
marketing research services, including studies designed to identify the highest
impact business strategy, profile, positioning, message, execution,
implementation and post implementation for a product.  We believe our
marketing research model improves our customers’ knowledge about how physicians
and other healthcare professionals will likely react to products.




6
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


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.




Vital Issues in
Medicine




Our Vital
Issues in Medicine (VIM®) business unit developed and executed continuing
medical education services funded by the biopharmaceutical and medical device
and diagnostics industries.  We are currently in the process of
winding down the operations of the VIM business unit and expect this process to
be completed during 2009.




Product
Commercialization




In March
2008, we announced a new strategic initiative to identify and take advantage of
opportunities to enter into arrangements with pharmaceutical companies to
provide sales and marketing support services and potentially limited capital in
connection with the promotion of pharmaceutical products in exchange for a
percentage of product sales above a certain threshold amount.  These
types of arrangements would typically involve a significant upfront investment
of our resources with no guaranteed return on investment and would be expected
to generate losses in the first year of the contract as program ramp up
occurs.




On April
11, 2008, we announced that we had entered into our first arrangement under our
product commercialization strategic initiative to provide sales and marketing
support services in connection with the promotion of a pharmaceutical product on
behalf of Novartis Pharmaceuticals Corporation.  See Note 1 and Note
10 the consolidated financial statements as well as “Part I – Item 1 – Business
– Contracts – Product Commercialization” and “Part I – Item 1A – Risk Factors ”
of this Form 10-K for additional information.   As we re-evaluate
this strategic initiative in conjunction with the appointment of Ms. Lurker as
our new chief executive officer, we are not actively pursuing any additional
product commercialization opportunities at this time although we will continue
to evaluate potential opportunities within this segment on a very selective and
opportunistic basis to the extent we are able to mitigate certain risks relating
to the investment of our resources.




Contracts




Set forth
below is a general description of our service contracts within our business
segments.




Sales
Services




Contracts
within our Sales Services business segment consist primarily of detailing
agreements and are nearly all fee-for-service arrangements.  The term
of these contracts is typically between one and two years which may be renewed
or extended upon mutual agreement of the parties.  The majority of
these contracts, however, are terminable by the client for any reason upon 30 to
90 days’ notice.  Certain contracts provide for termination payments
if the client terminates the contract without cause.  Typically,
however, these penalties do 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, or results of operations or cash flow.  Our Sales
Services contracts include standard mutual representations and warranties as
well as mutual confidentiality and indemnification provisions, including product
liability indemnification from our clients to us.  These contracts,
which include the Sales Services contracts with our significant customers, may
also contain performance benchmarks, such as a minimum amount of detailing
activity to a certain physician targets within a specified amount of time, and
our failure to meet these stated benchmarks may result in specific financial
penalties for us.  Certain contracts may also include incentive
payments that can be earned if our activities generate results that meet or
exceed agreed-upon performance targets.




Marketing
Services




Our
marketing services contracts generally take the form of either master service
agreements with a term of one to three years, or contracts specifically related
to particular projects with terms for the duration of the project, typically
lasting from two to six months.  These contracts include standard
representations and warranties as well as confidentiality and indemnification
obligations and are generally terminable by the customer for any
reason.  Upon termination, the customer is generally responsible for
payment for all work completed to date, plus the cost of any nonrefundable
commitments made by us on behalf of the customer.  There is
significant customer concentration in our Pharmakon business, and the loss or
termination of one or more of Pharmakon’s large master service agreements could
have a material adverse effect on our business, financial condition or results
of operations.  Due to the typical




7
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)






Product
Commercialization




In April
2008, we entered into our first contract under our product commercialization
initiative with Novartis.  See Note 1 and Note 10 to the consolidated
financial statements as well as “Part I – Item 1A – Risk Factors” of this Form
10-K for additional information regarding the terms of this
contract.  As of December 31, 2008, we made expenditures of
approximately $12.3 million in connection with our sales force activities and
promotion of the product.  To date, we have not achieved the required
sales levels necessary to receive revenue under our promotion agreement with
Novartis.  We do not currently anticipate that we will achieve the
required sales levels necessary to generate sufficient revenue to recover the
costs we have incurred and will continue to incur in connection with this
promotional program during the current term of the contract.  We
currently intend to terminate this contract at the early termination date for
this contract, which is no sooner than February 1, 2010 provided that sales of
the product remain below certain pre-determined thresholds.  At
December 31, 2008, we have accrued a loss of $10.3 million for this contract,
which represents the anticipated future loss expected to be incurred by us in
order to fulfill our minimum contractual obligations under the contract until
February 1, 2010.




As we
re-evaluate this strategic initiative in conjunction with the appointment of Ms.
Lurker as our new chief executive officer, we are not actively pursuing any
additional product commercialization opportunities at this time although we will
continue to evaluate potential opportunities within this segment on a very
selective and opportunistic basis to the extent we are able to mitigate certain
risks relating to the investment of our resources.  To the extent that
we enter into any additional product commercialization arrangements in the
future, we expect that these contracts will typically be multi-year arrangements
with limited termination rights in which we are responsible for the sales force
and potentially other marketing costs relating to the promotion of the
pharmaceutical product.  We currently expect that we will receive
revenues under the agreement only if and when product sales or prescriptions
exceed certain pre-determined thresholds.  We also expect that these
contracts will likely involve significant upfront investment of our resources
with no guaranteed return on investment and are likely to generate losses during
the initial periods of the contract as program ramp up occurs.




Significant
      Customers




We have
historically experienced a high degree of customer concentration in our
businesses.  Our three largest customers in 2008 were Pfizer Inc., F.
Hoffmann-La Roche AG and Abbott Laboratories, which accounted for approximately
28.2%, 13.6% and 10.7%, respectively, or approximately 52.5% in the aggregate,
of our revenue for the year ended December 31, 2008.  One of these
largest customers terminated a significant sales force program effective
September 30, 2008 due to generic competition.  This sales force
program accounted for approximately 9.5% of our revenue during
2008.




Marketing




Our
marketing efforts target established and emerging companies in the
biopharmaceutical and life sciences industries.  Our marketing efforts
are designed to reach the senior sales, marketing, and business development
personnel within these companies, with the goal of informing them of the
services we offer and the value we can bring to their products.  Our
tactical plan usually includes advertising in trade publications, direct mail
campaigns, presence at industry seminars and conferences and a direct selling
effort.  We have a dedicated team of business development specialists
who work within our business units to identify needs and opportunities within
the biopharmaceutical and life sciences industries that we can address. We
review possible business opportunities as identified by our business development
team and develop a customized strategy and solution for each attractive business
opportunity.




Competition




With
respect to our sales services segment, we compete with our customers’ ability to
manage their needs internally.  In addition, a small number of
providers comprise the market for outsourced pharmaceutical sales teams, and we
believe that PDI, inVentiv Health Inc., Innovex Inc. and Publicis Groupe SA
combined accounted for the majority of the U.S. outsourced sales team market
share in 2008.  Our marketing services segment operates in a highly
fragmented and competitive market.




8
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


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 customer needs, integration skills and price.  Increased
competition and/or a decrease in demand for our services may also lead to other
forms of competition.  While we believe we compete effectively with
respect to each of these factors, most 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
pricing pressures and competitive practices that could have a material adverse
effect on our market share, our ability to source new business opportunities as
well as our business, financial condition and results of
operations.




Employees




As of
February 28, 2009, we had approximately 1,100 employees, including approximately
550 full-time employees.  Approximately 85% of our employees are field
sales representatives and sales managers.  We are not party to a
collective bargaining agreement with any labor union.  We believe our
relationship with our employees is generally positive.




Available
      Information




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




The
public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 100 F Street, N.E., 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 registrants such as us that file electronically with the SEC. The
website address is www.sec.gov.




Government
and Industry Regulation




The
healthcare sector is heavily regulated by both government and industry. Various
laws, regulations and guidelines established by government, industry and
professional bodies affect, among other matters, the approval, provision,
licensing, labeling, marketing, promotion, price, sale and reimbursement of
healthcare services and products, including pharmaceutical
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.




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 Food and Drug Administration (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 promotional 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 that 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




9
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)








There are
also numerous federal and state laws pertaining to healthcare fraud and abuse as
well as increased scrutiny regarding the off-label promotion and marketing of
pharmaceutical products and devices. 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.






ITEM
1A.                      RISK
FACTORS




In
addition to the other information provided in this Form 10-K, you should
carefully consider the following factors in evaluating our business, operations
and financial condition.  Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or that are similar to
those faced by other companies in our industry or businesses 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 or results of operations.




The
current worldwide economic and financial crisis may have a material and adverse
effect on our business, financial condition and results of
operations.




The
current global financial crisis involves, among other things, significant
reductions in available capital and liquidity from banks and other providers of
credit, substantial reductions and/or fluctuations in equity and currency values
worldwide and concerns that the U.S. and global economy have entered into a
prolonged recessionary period.  Sustained downturns in the economy
generally affect the markets in which we operate.  If our customers’
access to capital or willingness to make expenditures is curtailed as a result
of the current economic and financial crisis, our business, financial condition
and results of operations could be materially and adversely
affected.  For example, certain customers within our marketing
services business segment have recently delayed the implementation or reduced
the scope of a number of marketing initiatives.  In addition, economic
conditions could affect the financial strength of our vendors and their ability
to fulfill their commitments to us, and could also affect the financial strength
of our customers and our ability to collect accounts
receivable.  Recent disruptions in the credit markets may also
negatively impact our ability to obtain additional sources of
financing.  The potential effects of the current economic and
financial crisis are difficult to forecast and mitigate and are likely to
continue to have a significant adverse impact on our customers, vendors and our
business for the next several years.




Changes
in outsourcing trends in the pharmaceutical and biotechnology industries could
materially and adversely affect our business, financial condition and results of
operations.




Our
business depends 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 PDI to conduct large sales and marketing projects on their
behalf.  However, companies may elect to perform these services
internally for a variety of reasons, including the rate of new product
development and FDA approval of those products, the number of sales
representatives employed internally in relation to demand, the need to promote
new and existing products, and competition from other
suppliers.  Recently, there has been a slow-down in the rate of
approval of new products by the FDA and this trend may continue. Additionally,
several large pharmaceutical companies have recently made changes to their
commercial model by reducing the number of sales representatives employed
internally and through outside organizations like PDI.  If the
pharmaceutical and life sciences industries reduce their tendency to outsource
these projects, our business, financial condition and results of operations
could be materially and adversely affected.




10
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




If
companies in the life sciences industries significantly reduce their
promotional, marketing and sales expenditures or significantly reduce or
eliminate the role of pharmaceutical sales representatives in the promotion of
their products, our business, financial condition and results of operations
would be materially and adversely affected.




Our revenues
depend on promotional, marketing and sales expenditures by companies in the life
sciences industries, including the pharmaceutical 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 as well as the high level of patent expiration and related
introduction of generic versions of branded medicine within the
industry.  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.  This reduction in demand for outsourced
pharmaceutical sales and marketing services could be further exacerbated by the
current economic and financial crisis occurring in the United States and
worldwide.If
companies in the life sciences industries significantly reduce their
promotional, marketing and sales expenditures or significantly reduce or
eliminate the role of pharmaceutical sales representatives in the promotion of
their products, our business, financial condition and results of operations
would be materially and adversely affected.




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 two years (certain of our
operating entities have contracts of shorter duration) and many may be
terminated by the customer at any time for any reason.  In addition,
many of our customers may internalize the contracted sales teams we provide
under the terms of the contract or otherwise significantly reduce the number of
representatives we deploy on their behalf.  The early termination or
significant reduction of a contract by one of our customers not only results in
lost revenue, but also typically causes us to incur additional costs and
expenses.  All of our sales representatives are employees rather than
independent contractors. Accordingly, when a contract is significantly reduced
or terminated, unless we can immediately transfer the related sales force to a
new program, if permitted under the contract, we must either continue to
compensate those employees, without realizing any related revenue, or terminate
their employment. If we terminate their employment, we may incur significant
expenses relating to their termination.  The loss, termination or
significant reduction of a large contract or the loss of multiple contracts
could have a material adverse effect on our business, financial condition and
results of operations.




Most
of our revenue is derived from a limited number of customers, the loss of any
one of which could materially and adversely affect our business, financial
condition or results of operations.




Our
revenue and profitability depend to a great extent on our relationships with a
limited number of large pharmaceutical companies. As of December 31, 2008, our
three largest customers accounted for approximately 28.2%, 13.6%, and 10.7%,
respectively, or approximately 52.5% in the aggregate, of our revenue for
2008.  For the year ended December 31, 2007, our three largest
customers accounted for approximately 13.7%, 12.9% and 11.3% respectively, or
approximately 37.9% in the aggregate, of our revenue for 2007.  For
the year ended December 31, 2006, our three largest customers accounted for
28.5%, 18.3% and 9.9%, respectively, or approximately 56.7% in the aggregate, of
our revenue.  We are likely to continue to experience a high degree of
customer concentration, particularly if there is further consolidation within
the pharmaceutical industry.




In order
to increase our revenues, we will need to attract additional significant
customers on an ongoing basis.  Our failure to attract a sufficient
number of such customers during a particular period, or our inability to replace
the loss of or significant reduction in business from a major customer would
have a material adverse effect on our business, financial condition and results
of operations.  For example, during 2006 and 2007, we announced the
termination and expiration of a number of significant service contracts,
including our sales force engagements with AstraZeneca, GlaxoSmithKline (GSK),
sanofi-aventis and another large pharmaceutical company
customer.  These four customers accounted for approximately $150.9
million in revenue during 2006 and $15.9 million in revenue during
2007.  In addition, another client terminated a significant sales
force program effective September 30, 2008 due to generic
competition.  This sales force program accounted for 9.5% of our
revenue during 2008.




11
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


We
have incurred and expect to continue to incur substantial losses in connection
with the product commercialization initiative we entered into with Novartis in
April 2008.  If we are unable to generate sufficient revenue from any
future product commercialization opportunities that we may pursue to offset the
costs and expenses associated with implementing and maintaining these types of
programs, our business, financial condition, results of operations and cash
flows could be materially and adversely affected.




In April
2008, we entered into our first contract under our product commercialization
initiative with Novartis.  See Note 1 and Note 10 to the consolidated
financial statements as well as “Part I – Item 1A – Risk Factors” of this Form
10-K for additional information regarding the terms of this
contract.  As of December 31, 2008, we made expenditures of
approximately $12.3 million in connection with our sales force activities and
promotion of the product.  To date, we have not achieved the required
sales levels necessary to receive revenue under our promotion agreement with
Novartis.  We do not currently anticipate that we will achieve the
required sales levels necessary to generate sufficient revenue to recover the
costs we have incurred and will continue to incur in connection with this
promotional program during the current term of the contract.  We
currently intend to terminate this contract at the early termination date for
this contract, which is no sooner than February 1, 2010 provided that sales of
the product remain below certain pre-determined thresholds.  At
December 31, 2008, we have accrued a loss of $10.3 million for this contract,
which represents the anticipated future loss expected to be incurred by us in
order to fulfill our minimum contractual obligations under the contract until
February 1, 2010.




While we
are not actively pursuing any additional product commercialization opportunities
at this time, we will continue to evaluate potential opportunities within this
segment on a very selective and opportunistic basis.  To the extent we
enter into any additional product commercialization arrangements in the future,
these types of arrangements will likely require us to make a significant upfront
investment of our resources and are likely to generate losses in the early
stages as program ramp up occurs.  In addition, any compensation we
will receive is expected to be dependent on sales of the product, and in certain
arrangements, including our arrangement with Novartis, we will not receive any
compensation unless product sales exceed certain thresholds.  There
can be no assurance that our promotional activities will generate sufficient
product sales for these arrangements to be profitable for us.  In
addition, there are a number of factors that could negatively impact product
sales during the term of a product commercialization contract, many of which are
beyond our control, including the level of promotional response to the
product,  withdrawal of the product from the market, the launch of a
therapeutically equivalent generic version of the product, the introduction of a
competing product, loss of managed care covered lives, a significant disruption
in the manufacture or supply of the product as well as other significant events
that could affect sales of the product or the prescription market for the
product.  Therefore, the revenue we receive, if any, from product
sales under these types of arrangements may not be sufficient to offset the
costs incurred by us implementing and maintaining these programs.  Our
arrangement with Novartis requires, and any future product commercialization
arrangements we may enter into may also require, that we make a certain amount
of expenditures in connection with our promotional activities for the product,
regardless of whether sufficient product sales are achieved in order for us to
generate revenue, and there are limited opportunities for us to terminate this
arrangement prior to its scheduled expiration.  In addition, if any
contractual product commercialization arrangement we enter into was to be
terminated by our customer prior to its scheduled expiration, our expected
revenue and profitability could be materially and adversely affected due to our
significant upfront investment of sales force and other promotional resources
during the ramp up period for these types of programs.




If
we do not meet performance goals established in our incentive-based arrangements
with customers, our revenue could be materially and adversely
affected.




We have
entered into a number of incentive-based arrangements with our pharmaceutical
company customers. Under incentive-based arrangements, we are typically paid a
lower fixed fee and, in addition, have an opportunity to earn additional
compensation upon achieving specific performance metrics with respect to the
products being detailed.  Typically, these performance metrics relate
to targeted sales or prescription volumes, sales force performance metrics or a
combination thereof.  These types of arrangements transfer some market
risk from our customers to us. In addition, these arrangements can result in
variability in our incentive-based earnings (and therefore our revenue) due to
seasonality of product usage, changes in market share, new product introductions
(including the introduction of competing generic products into the market),
overall promotional efforts and other market related factors.  If we
are unable to meet the performance goals established in our incentive-based
arrangements, our revenue could be materially and adversely
affected.




Additionally,
certain of our service contracts may contain penalty provisions pursuant to
which our fixed fees may be significantly reduced if we do not meet certain
minimum performance metrics, which may include number and timing of sales calls,
physician reach, territory vacancies and/or sales representative
turnover.




12
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Our
industry is highly competitive and our failure to address competitive
developments promptly will limit our ability to retain and increase our market
share.




Our
primary competitors for sales and marketing services include in-house sales and
marketing departments of pharmaceutical companies, other CSOs and providers of
marketing and related services, including marketing research
providers.  There are relatively few barriers to entry in the
businesses in which we compete and, as the industry continues to evolve, new
competitors are likely to emerge. Most 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
pricing pressures and competitive practices that could have a material adverse
effect on our market share, our ability to source new business opportunities as
well as our business, financial condition and results of
operations.




We
may require additional funds in order to implement our business
model.




We may
require additional funds in order to pursue certain business opportunities or
meet future operating requirements, develop incremental marketing and sales
capabilities; and/or acquire other services businesses.  We may seek
additional funding through public or private equity or debt financing or other
arrangements with collaborative partners.  Our ability to secure any
future debt financing on favorable terms or at all may be materially and
adversely affected by the current credit market turmoil.  In addition,
any debt financing arrangements that we enter into may require us to comply with
specified financial ratios, including ratios regarding interest coverage, total
leverage, senior secured leverage and fixed charge coverage.  Our
ability to comply with these ratios may be affected by events beyond our
control.  If we raise additional funds by issuing equity securities,
further dilution to existing stockholders may result.  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 certain, 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
strategic initiatives.




Due to the expiration and termination
of several significant contracts during 2006, 2007 and 2008, our historical
revenue and results of operations cannot be relied upon as representative of the
revenue and results of operations that we may achieve in 2009 and future
periods.




As noted
above, during 2006 and the first half of 2007, we experienced the expiration and
termination of several significant contracts, including termination of our
AstraZeneca contract sales force agreement effective as of April 30, 2006, the
termination of our contract sales force agreement with sanofi-aventis effective
as of December 1, 2006, the expiration of our contract sales force agreement
with GSK on December 31, 2006 and the expiration of our contract sales force
agreement with a large pharmaceutical company customer on May 12,
2007.  These four customers accounted for an aggregate of
approximately $150.9 million of revenue during 2006 and $15.9 million of revenue
during 2007.  In addition, another significant sales force program was
terminated which accounted for approximately $10.7 million of revenue during
2008.  Unless and until we generate sufficient new business to offset
the loss of these contracts, our financial results for previous periods will not
be duplicated in future periods, and future revenue and cash flows from
operations will be significantly less than in previous periods.  In
addition, in connection with the accrued loss on our product commercialization
contract we currently expect a significant decrease in our cash and cash
equivalents in 2009.




Our
liquidity, business, financial condition, results of operations and cash flows
could be materially and adversely affected if the financial institutions which
hold our funds fail.




We have
substantial funds held in bank deposits, money market funds and other accounts
at certain financial institutions.  A significant portion of the funds
held in these accounts exceeds the Federal Deposit Insurance Corporation’s
insurance limits.  If any of the financial institutions where we have
deposited funds were to fail, we may lose some or all of our deposited funds
that exceed the insurance coverage limit. Such a loss would have a material and
adverse effect on our liquidity, business, financial condition, results of
operations and cash flows.




Our
business may suffer if we fail to attract and retain qualified sales
representatives.




The
success and growth of our business depends in large part 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 customers have hired the sales representatives that we trained to
detail their products. We cannot assure you that we will continue to attract and
retain qualified personnel.  If we cannot attract and retain qualified
sales personnel, we will not be able to maintain or expand our sales services
business and our ability to perform under our existing sales force contracts
will be impaired.




13
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Product liability claims could harm our
business.




We could
face substantial product liability claims in the event any of the pharmaceutical
or other products we have previously marketed or market now or may in the future
market is 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 as a defendant in numerous lawsuits as a result of
our detailing of Baycolâ on behalf of Bayer
Corporation (Bayer).  Product liability claims, regardless of their
merits, could be costly and divert management's attention from our business
operations, or adversely affect our reputation and the demand for our
services.  While we rely on contractual indemnification provisions
with our customers to protect us against certain product liability related
claims, we cannot assure you that these provisions will be fully enforceable or
that they will provide adequate protection against claims intended to be
covered.  We currently have product liability insurance in the
aggregate amount of $5.0 million but cannot ensure that our insurance will be
sufficient to cover fully all potential claims.  Also, adequate
insurance coverage might not be available in the future at acceptable costs, if
at all.




If
we do not increase our revenues and successfully manage the size of our
operations, our business, financial condition and results of operations could be
materially and adversely affected.




The
majority of our operating expenses are personnel-related costs such as employee
compensation and benefits as well as the cost of infrastructure to support our
operations, including facility space and equipment.  We recently
instituted a number of cost-saving initiatives, including a reduction in
employee headcount.  In addition, we are currently seeking to sublet
unused office space in our Saddle River, New Jersey and Dresher, Pennsylvania
facilities, although there is no guarantee that we will be able to successfully
sublet this unused office space, particularly in light of the current economic
and financial crisis.  If we are unable to achieve revenue growth in
the future or fail to adjust our cost infrastructure to the appropriate level to
support our revenues, our business, financial condition and results of
operations could be materially and adversely affected.




Our
business may suffer if we are unable to hire and retain key management personnel
to fill critical vacancies.




The
success of our business also depends on our ability to attract and retain
qualified senior management who are in high demand and who often have
competitive employment options. We are currently conducting a search for a
President of our Sales Services business segment.  Our failure to
attract and retain qualified individuals could have a material adverse effect on
our business, financial condition or results of operations.




Changes
in governmental regulation could negatively impact our business
operations.




The
pharmaceutical and life sciences industries are subject to a high degree of
governmental regulation.  Significant changes in these regulations
affecting the services we provide, including pharmaceutical product promotional
and marketing research services and physician interaction programs, could result
in the imposition of additional restrictions on these types of activities,
impose additional costs on us in providing these services to our customers or
otherwise negatively impact our business operations.  In addition,
changes in governmental regulations mandating price controls and limitations on
patient access to our customers’ products could reduce, eliminate or otherwise
negatively impact our customers’ utilization of our sales and marketing
services.




Our
failure, or that of our customers, 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, licensing,
labeling, marketing, promotion, sale and distribution of healthcare services and
products, including pharmaceutical 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 assure you 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 or results of
operations. Our failure, or the failure of our customers, 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 or our customers’
current or business activities, subject us or our customers to adverse
publicity, increase the cost of regulatory compliance and insurance coverage or
subject us or our customers to monetary fines or other sanctions or
penalties.




14
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




We may experience impairment charges of our
goodwill and other intangible assets.









If
our insurance and self-insurance reserves are insufficient to cover our future
liabilities for workers compensation, automobile and general liability and
employee health care benefits, our financial condition and results of operations
could be materially and adversely affected.




We use a
combination of insurance and self-insurance to provide for potential liabilities
for workers’ compensation, automobile and general liability and employee health
care benefits.  Although we have reserved for these liabilities not
covered by insurance, our reserves are only an estimate based on actuarial data,
as well as on historical trends, and any projection of these losses is subject
to a high degree of variability and we may not be able to accurately predict the
number or value of the claims that occur in the future.  In the event
that our actual liability exceeds our reserves for any given period, or if we
are unable to control rapidly increasing health care costs, our business,
financial condition and results of operations could be materially and adversely
affected.




If
our information technology and communications systems fail or we experience a
significant interruption in their operation, our reputation, business and
results of operations could be materially and adversely affected.




The
efficient operation of our business is dependent on our information technology
and communications systems.  The failure of these systems to operate
as anticipated could disrupt our business and result in decreased revenue and
increased overhead costs.  In addition, we do not have complete
redundancy for all of our systems and our disaster recovery planning cannot
account for all eventualities.  Our information technology and
communications systems, including the information technology systems and
services that are maintained by third party vendors, are vulnerable to damage or
interruption from natural disasters, fire, terrorist attacks, malicious attacks
by computer viruses or hackers, power loss or failure of computer systems,
Internet, telecommunications or data networks.  If these systems or
services become unavailable or suffer a security breach, we may expend
significant resources to address these problems, and our reputation, business
and results of operations could be materially and adversely
affected.




We
may make acquisitions in the future which may lead to disruptions to our ongoing
business.




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




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


·
            integrate
      new personnel associated with the
acquisition;


·
            retain
      and motivate key employees;


·
            retain
      customers; and


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




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




In
addition, the current market for acquisition targets in our industry is
extremely competitive, and there can be no assurance that we will be able to
successfully identify, bid for and complete acquisitions necessary or desirable
to achieve our goals.




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:




·
            the
      commencement, delay, cancellation or completion of sales and marketing
      programs;


·
            regulatory
      developments;


15
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


·
            uncertainty
      about when, if at all, revenue from any product commercialization
      arrangements and/or other incentive-based arrangements with our customers
      will be recognized;






·
            mix
      of services provided and/or mix of programs during the
period;·
            timing
      and amount of expenses for implementing new programs and accuracy of
      estimates of resources required for ongoing programs;·
            timing
      and integration of any
acquisitions;


·
            changes
      in regulations related to pharmaceutical companies;
  and


·
            general
      economic conditions, including the current economic and financial
      crisis.




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.  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.  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. In addition, if we pursue additional product
commercialization opportunities, we will incur similar implementation expenses
and likely will not be able to recognize revenue from the contract, if any, for
an even greater period of time after commencement of these types of
programs.  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 and 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, and an investment in our common stock could suffer a decline in
value.




The
market for our common stock is volatile.  In 2008, our stock traded at
a low of $3.10 and a high of $9.40.  During 2007, our stock traded at
a low of $8.56 and a high of $12.40.    The trading price of
our common stock has been and will continue to be subject to:


·
            volatility
      in the trading markets generally, including volatility associated with the
      current economic and financial crisis in the United States and
      worldwide;


·
            significant
      fluctuations in our quarterly operating
results;


·
            significant
      changes in our cash and cash equivalent
  reserves;


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


·
            strategic
      actions by us or our competitors, such as acquisitions or
      restructurings;


·
            industry
      and/or  regulatory
developments;


·
            changes
      in revenue mix;


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


·
            changes
      in accounting standards, policies, guidance, interpretations or
      principles; and


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




Our
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 is 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.  This ownership
concentration will limit our stockholders’ ability to influence corporate
matters and, as a result, we may take actions that other stockholders do not
view as beneficial, which may adversely affect the market price of our common
stock.




16
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


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 may make it more difficult to remove our
directors and management and may adversely affect the price of our common stock.
In addition, our certificate of incorporation authorizes the issuance of "blank
check" preferred stock.  This provision could have the effect of
delaying, deterring or preventing a future takeover or a change in control,
unless the takeover or change in control is approved by our board of
directors.  We are also subject to laws that may have a similar
effect. For example, section 203 of the General Corporation Law of the State of
Delaware prohibits us from engaging in a business combination with an interested
stockholder for a period of three years from the date the person became an
interested stockholder unless certain conditions are met.  As a result
of the foregoing, it will be difficult for another company to acquire us and,
therefore, could limit the price that possible investors might be willing to pay
in the future for shares of our common stock. In addition, the rights of our
common stockholders will be subject to, and may be adversely affected by, the
rights of holders of any class or series of preferred stock that may be issued
in the future.








ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS




None.






ITEM
      2.
            PROPERTIES




Our
corporate headquarters are located in Saddle River, New Jersey where we lease
approximately 84,000 square feet.  The lease runs for a term of
approximately 12 years, which began in July 2004.  We entered into a
sublease for approximately 16,000 square feet of space in our Saddle River
facility for a term of five years which began in July 2005.  The
sublease allows the subtenant to renew for an additional term of two
years.  In July 2007, we entered into an additional sublease for
approximately 20,000 square feet of space in our Saddle River facility for the
remaining term of our lease.  TVG operates out of a 37,000 square foot
facility in Dresher, Pennsylvania under a lease that runs for a term of
approximately 12 years, which began in December 2004.  TVG entered
into two subleases in August and October of 2007, each for terms of five years,
and are approximately 3,000 and 4,700 square feet,
respectively.  Pharmakon operates out of a 6,700 square foot facility
in Schaumburg, Illinois under a lease that expires in February
2010.  We believe that our current facilities are adequate for our
current and foreseeable operations and that suitable additional space will be
available if needed.




In 2008
we had approximately $0.1 million in charges related to unused office space at
our Dresher location.  In 2007, we had approximately $1.0 million of
net charges related to unused office space capacity and asset impairments
related to the vacated space at both locations.  In 2006, we had net
charges of approximately $657,000 related to unused office space capacity at our
Saddle River, New Jersey and Dresher, Pennsylvania locations and $1.3 million in
asset impairment charges for leasehold improvements and furniture and fixtures
associated with the unused office space at those facilities.  There is
approximately 4,100 square feet of unused office space at Dresher that we are
seeking to sublease in 2009 and we are also seeking to sublease certain unused
office space in our Saddle River facility.  There can be no assurance,
however, that we will be able to successfully sublet unused office space, on
favorable terms or at all, particularly in light of the current economic and
financial crisis.




ITEM
      3.
            LEGAL
      PROCEEDINGS




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 United States until early August 2001, at which time Bayer
voluntarily withdrew Baycol from the U.S. market.  Bayer had retained
certain companies, such as PDI, 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 through such date in defending these
proceedings.  As of December 31, 2008, Bayer has reimbursed us for
approximately $1.6 million in legal expenses, the majority of which was received
in 2003 and was reflected as a credit within selling, general and administrative
expense.  We did not incur any costs or expenses relating to these
matters during 2006, 2007 or 2008.




17
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




Other Legal Proceedings




We are
currently a party to other legal proceedings incidental to our
business.  As required, we have accrued our estimate of the probable
costs for the resolution of these claims. While management currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on our business, financial
condition or results of operations, litigation is subject to inherent
uncertainties.  If we were to settle a proceeding for a material
amount or if an unfavorable ruling were to occur, there exists the possibility
of a material adverse impact on our business, financial condition or results of
operations.  Legal fees are expensed as incurred.






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




None.






PART
II




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






Market
      Information




Our
common stock is traded on the Nasdaq Global Market under the symbol
“PDII.”  The price range per share of common stock presented below
represents the highest and lowest sales price for our common stock on the Nasdaq
Global Market for the last two years by quarter:


2008
              
              
              2007HIGH
              
              
              LOW
              
              
              HIGH
              
              
              LOWFirst
      quarter
              
              $
              9.40
              
              
              $
              7.01
              
              
              $
              10.98
              
              
              $
              9.21Second
      quarter
              
              $
              9.15
              
              
              $
              7.61
              
              
              $
              11.28
              
              
              $
              9.00Third
      quarter
              
              $
              9.23
              
              
              $
              7.22
              
              
              $
              12.40
              
              
              $
              9.09Fourth
      quarter
              
              $
              7.80
              
              
              $
              3.10
              
              
              $
              10.68
              
              
              $
              8.56


Holders




We had
326 stockholders of record as of March 3, 2009.  Not reflected in the
number of record holders are persons who beneficially own shares of common stock
held in nominee or street name.




Dividends




We have
not declared any cash dividends and do not intend to declare or pay any cash
dividends in the foreseeable future.  Future earnings, if any, will be
used to finance the future operation and growth of our business.




Securities
Authorized For Issuance Under Equity Compensation Plans




We have
in effect a number of stock-based incentive and benefit programs designed to
attract and retain qualified directors, executives and management
personnel.  All equity compensation plans have been approved by
security holders.  The following table sets forth certain information
with respect to our equity compensation plans as of December 31,
2008:


18
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
              
              
              (b)
              
              
              (c)Equity
      compensation plans approved by security holders (2004 Stock Award and
      Incentive Plan, 2000 Omnibus Incentive Compensation Plan, and 1998 Stock
      Option Plan)
              
              
              304,531
              
              
              $
              23.48
              
              
              
              1,208,697Equity
      compensation plans not approved by security holders (1)
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              304,531
              
              
              $
              23.48
              
              
              
              1,208,697(1) Excludes
      restricted stock, restricted stock units and stock-settled stock
      appreciation rights.




Issuer
      Purchases of Equity Securities




From time
to time, we repurchase our common stock on the open market or in privately
negotiated transactions or both.  On November 7, 2006, we announced
that our Board of Directors authorized us to repurchase up to one million shares
of our common stock, none of which have been repurchased.  We did not
repurchase any shares of our common stock on the open market during 2007 or
2008.  Any future purchases of shares will be made from available
cash.




Comparative
Stock Performance Graph




The graph below compares the yearly percentage change in the cumulative total
stockholder return on our common stock, based on the market price of our common
stock, with the total return of companies included within the Nasdaq Composite
Index for the period commencing December 31, 2003 and ending December 31,
2008.  The calculation of total cumulative return assumes a $100
investment in our common stock and the Nasdaq Composite Index on December 31,
2003, and the reinvestment of all dividends.




19
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


ITEM
      6.
            SELECTED
      FINANCIAL DATA




The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this Form 10-K.  The operations data for the
years ended December 31, 2008, 2007, and 2006 and the balance sheet data at
December 31, 2008 and 2007 are derived from our audited consolidated financial
statements appearing elsewhere in this Form 10-K.  The operations data
for the years ended December 31, 2005 and 2004 and the balance sheet data at
December 31, 2006, 2005 and 2004 are derived from our audited consolidated
financial statements that are not included in this Form 10-K.  The
historical results are not necessarily indicative of the results to be expected
in any future period.  No cash dividends have been declared for any
period.


(in thousands, except per share
data)
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Continuing operations
      data:Total
      revenues, net
              
              $
              112,528
              
              
              $
              117,131
              
              
              $
              239,242
              
              
              $
              305,205
              
              
              $
              345,797
              (7)Gross
      profit
              
              
              4,513
              (1)
              
              
              31,615
              
              
              
              55,844
              
              
              
              52,402
              
              
              
              92,633Operating
      expenses
              
              
              40,917
              (2)
              
              
              45,853
              (3)
              
              
              49,931
              (4)
              
              
              65,064
              (5)
              
              
              58,554Asset
      impairment
              
              
              23
              
              
              
              42
              
              
              
              -
              
              
              
              6,178
              (6)
              
              
              -Total
      operating expenses
              
              
              40,940
              
              
              
              45,895
              
              
              
              49,931
              
              
              
              71,242
              
              
              
              58,554(Loss)
      income fromcontinuing
      operations
              
              $
              (34,461)
              
              
              $
              (9,974)
              
              
              $
              11,375
              
              
              $
              (11,407)
              
              
              $
              20,435Per share data from
      continuing operations:(Loss)
      income per share of common stockBasic
              
              $
              (2.46)
              
              
              $
              (0.72)
              
              
              $
              0.82
              
              
              $
              (0.80)
              
              
              $
              1.40Diluted
              
              $
              (2.46)
              
              
              $
              (0.72)
              
              
              $
              0.81
              
              
              $
              (0.80)
              
              
              $
              1.37Weighted average
      number of shares outstanding:Basic
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,859
              
              
              
              14,232
              
              
              
              14,564Diluted
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,994
              
              
              
              14,232
              
              
              
              14,893Balance sheet
      data:Cash
      and short-term investments
              
              $
              90,233
              
              
              $
              106,985
              
              
              $
              114,684
              
              
              $
              97,634
              
              
              $
              109,498Working
      capital
              
              
              81,639
              
              
              
              110,739
              
              
              
              112,186
              
              
              
              92,264
              
              
              
              96,156Total
      assets
              
              
              149,036
              
              
              
              179,554
              
              
              
              201,636
              
              
              
              200,159
              
              
              
              224,705Total
      long-term debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stockholders'
      equity
              
              
              107,107
              
              
              
              140,189
              
              
              
              149,197
              
              
              
              135,610
              
              
              
              165,425


________________


(1)
            Includes
      $10.3 million in charges related to an accrued contract
      loss.  See Note 10 to the consolidated financial statements for
      more details.


(2)
            Includes
      $1.2 million in charges for executive severance costs and $0.1 million in
      facilities realignment costs.  See Notes 15 and 16 to the
      consolidated financial statements for more
  details.


(3)
            Includes
      $1.0 million in charges for facilities realignment costs.  See
      Note 16 to the consolidated financial statements for more
      details.


(4)
            Includes
      $4.0 million in credits to legal expense related to the settlement of
      certain litigation matters and $2.0 million in charges for facilities
      realignment costs.  See Note 16 to the consolidated financial
      statements for more details.  As a result of adopting FAS 123R
      in 2006 there was an additional $290,000 recognized in stock compensation
      expense.


(5)
            Includes
      $5.7 million for executive severance costs and $2.4 million for facilities
      realignment costs.  See Notes 15 and 16 to the consolidated
      financial statements for more
details.


(6)
            Asset
      impairment charges include a $3.3 million non-cash charge for the
      impairment of the goodwill associated with the Select Access reporting
      unit; and a $2.8 million non-cash charge for the impairment of the Siebel
      sales force automation platform.


(7)
            Includes
      revenue of $4.9 million associated with the acquisition of Pharmakon on
      August 31, 2004.


20
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


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




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




OVERVIEW




We are a
leading provider of contract sales teams in the United States to pharmaceutical
companies.  Additionally, we provide marketing research and physician
interaction programs.  Our services offer customers a range of
promotional options for the commercialization of their products throughout their
lifecycles, from development through maturity.




Our
business depends in large part on demand from the pharmaceutical and life
sciences industries for outsourced sales and marketing services.  In
recent years, this demand has been adversely impacted by certain industry-wide
factors affecting pharmaceutical companies in recent years, including, among
other things, pressures on pricing and access, successful challenges to
intellectual property rights (including the introduction of competitive generic
products), a strict regulatory environment and decreased pipeline
productivity.  Recently, there has been a slow-down in the rate of
approval of new products by the FDA and this trend may
continue.  Additionally, a number of pharmaceutical companies have
recently made changes to their commercial models by reducing the number of sales
representatives employed internally and through outside organizations like
PDI.  A very significant source of our revenue is derived from our
sales force arrangements with large pharmaceutical companies, and we have
therefore been significantly impacted by cost control measures implemented by
these companies, including a substantial reduction in the number of sales
representatives deployed.  This has culminated in the expiration or
termination of a number of our significant sales force contracts during 2006 and
2007, including our sales force engagements with AstraZeneca, GlaxoSmithKline,
sanofi-aventis and another large pharmaceutical company
customer.  These four customers accounted for approximately $150.9
million in revenue during 2006 and $15.9 million in revenue during
2007.  In addition, a significant sales force program for one of our
clients was terminated, effective September 30, 2008, due to generic product
competition.  This program accounted for approximately $10.7 million
in revenue in 2008.  This reduction in demand for outsourced
pharmaceutical sales and marketing services could be further exacerbated by the
current economic and financial crisis occurring in the United States and
worldwide.  For example, certain customers within our marketing
services business segment have recently delayed the implementation or reduced
the scope of a number of marketing initiatives.  If companies in the
life sciences industries significantly reduce their promotional, marketing and
sales expenditures or significantly reduce or eliminate the role of
pharmaceutical sales representatives in the promotion of their products, our
business, financial condition and results of operations would be materially and
adversely affected.




While we
recognize that there is currently significant volatility in the markets in which
we provide services, we believe there are opportunities for growth of our sales
and marketing services businesses, which provide our pharmaceutical company
clients with the flexibility to successfully respond to a constantly changing
market and a means of controlling costs through outsourcing.  We have
recently intensified our focus on strengthening all aspects of the core CSO
business that we believe will most favorably position PDI as the best in class
contract sales organization in the United States.  In addition, we
also continue to focus on enhancing our commercialization capabilities by
aggressively promoting and broadening the depth of the value-added service
offerings of our existing marketing services businesses, TVG and
Pharmakon.






DESCRIPTION
OF REPORTING SEGMENTS




For the
year ended December 31, 2008, our three reporting segments were as
follows:


 ̈
            Sales
      Services, which is comprised of the following business
    units:


·
            Performance
      Sales Teams; and


·
            Select
      Access.


 ̈
            Marketing
      Services, which is comprised of the following business
    units:


·
            Pharmakon;


·
            TVG
      Marketing Research and Consulting (TVG);
and


·
            Vital
      Issues in Medicine (VIM)®.


 ̈
            Product
      Commercialization.




Selected
financial information for each of these segments is contained in Note 20 to the
condensed consolidated financial statements and in the discussion under “Consolidated Results of
Operations.”




21
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




CRITICAL ACCOUNTING POLICIES




We
prepare our financial statements in accordance with U.S. generally accepted
accounting principles (GAAP).  The preparation of financial statements
and related disclosures in conformity with GAAP requires our management to make
judgments, estimates and assumptions at a specific point in time that affect the
amounts reported in the consolidated financial statements and disclosed in the
accompanying notes.  These assumptions and estimates are inherently
uncertain.  Outlined below are accounting policies, which are important to
our financial position and results of operations, and require the most
significant judgments on the part of our management in their application. 
Some of those judgments can be subjective and complex.  Management’s
estimates are based on historical experience, information from third-party
professionals, facts and circumstances available at the time and various other
assumptions that are believed to be reasonable.  Actual results could
differ from those estimates.  Additionally, changes in estimates could
have a material impact on our consolidated results of operations in any one
period.  For a summary of all of our significant accounting policies,
including the accounting policies discussed below, see Note 1 to our
consolidated financial statements.




Revenue
and Associated Costs




Revenue
and associated costs under pharmaceutical detailing contracts are generally
based on the number of physician details made or the number of sales
representatives utilized.  With respect to risk-based contracts, all
or a portion of revenues earned are based on contractually defined percentages
of either product revenues or the market value of prescriptions written and
filled in a given period.  These contracts are generally for terms of
one to two years and may be renewed or extended.  The majority of
these contracts, however, are terminable by the customer for any reason upon 30
to 90 days’ notice.  Certain contracts provide for termination
payments if the customer terminates the agreement without
cause.  Typically, however, these penalties do 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 pharmaceutical detailing contract or the loss of
multiple contracts could have a material adverse effect on our business,
financial condition or results of operations.  Historically, we have
derived a significant portion of its service revenue from a limited number of
customers.  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 customer
concentration in future periods.  For the years ended December 31,
2008 and 2007, our three largest customers, who each individually represented
10% or more of our service revenue, together accounted for approximately 52.5%
and 37.9% of its service revenue, respectively.  For the year ended
December 31, 2006 our two largest customers, who each individually represented
10% or more of our service revenue, together accounted for approximately 46.8%
of our service revenue.  See Note 14 to our consolidated financial
statements.




Revenue
and associated costs under marketing service contracts are generally based on a
single deliverable such as a promotional program, accredited continuing medical
education seminar or marketing research/advisory program.  The
contracts are generally terminable by the customer for any
reason.  Upon termination, the customer is generally responsible for
payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the customer.  There is significant
customer concentration in our Pharmakon business, and the loss or termination of
one or more of Pharmakon’s large master service agreements could have a material
adverse effect on our business, financial condition or results of
operations.  Due to the typical size of most contracts of TVG and VIM,
it is unlikely the loss or termination of any individual TVG or VIM contract
would have a material adverse effect on our business, financial condition or
results of operations.




Service
revenue is recognized on product detailing programs and certain marketing,
promotional and medical education contracts as services are performed and the
right to receive payment for the services is assured. Many of the product
detailing contracts allow for additional periodic incentive fees to be earned if
certain performance benchmarks have been attained. Revenue earned from incentive
fees is recognized in the period earned and when we are reasonably assured that
payment will be made.  Under performance based contracts, revenue is
recognized when the performance based parameters are achieved.  Many
contracts also stipulate penalties if agreed upon performance benchmarks have
not been met.  Revenue is recognized net of any potential penalties
until the performance criteria relating to the penalties have been
achieved.  Commissions based revenue is recognized when performance is
completed.  Revenue from recruiting and hiring contracts is recognized
at the time the candidate begins full-time employment less a provision for sales
allowances based on contractual commitments and historical
experience.  Revenue and associated costs from marketing research
contracts are recognized upon completion of the contract.  These
contracts are generally short-term in nature typically lasting two to six
months.




22
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Under our
promotional program included in the product commercialization segment, we
recognize revenue quarterly based on a specified formula set forth in our
product commercialization agreement with Novartis related to product sales for
the quarter.  We will not receive any compensation during any quarter
in which product sales are below certain thresholds established for that quarter
as set forth in the agreement.  Revenues recognized (if any) under
this agreement will be directly impacted by prescription data provided by a
third party vendor and other information provided by
Novartis.  Additionally, we must perform a minimum number of sales
calls to designated physicians each year, and the failure to satisfy this
requirement could result in penalties being imposed on PDI or provide the
customer with the ability to terminate the agreement.




Cost of
services consist primarily of the costs associated with executing product
detailing programs, performance based contracts or other sales and marketing
services identified in the contract. Cost of services 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 cost of services, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives, sales managers and professional staff that
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.




Reimbursable
out-of-pocket expenses include those relating to travel and other similar costs,
for which the Company is reimbursed at cost by its
customers.  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 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 the
majority of the Company’s contracts, training costs are reimbursable
out-of-pocket expenses.  For contracts where the Company is
responsible for training costs, these 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.




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
contracts.  We  recognized a contract loss related to our
product commercialization agreement in 2008.  See Note 10 to our
consolidated financial statements.




Allowance
for Doubtful Accounts




We maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments.  We review a customer’s credit
history before extending credit.  We establish an allowance for
doubtful accounts based on the aging of a customer’s accounts receivable or when
we become aware of a customer’s inability to meet its financial obligations
(e.g., a bankruptcy filing).  We operate almost exclusively in the
pharmaceutical industry and to a great extent our revenue is dependent on a
limited number of large pharmaceutical companies.  We also partner
with customers in the emerging pharmaceutical sector, some of whom may have
limited financial resources.  A general downturn in the pharmaceutical
industry or a material adverse event to one or more of our emerging
pharmaceutical customers could result in higher than expected customer defaults
requiring additional allowances.




23
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Goodwill,
Intangibles and Other Long-Lived Assets




We
allocate the cost of acquired companies to the identifiable tangible and
intangible assets and liabilities acquired, with the remaining amount being
classified as goodwill.  Since the entities we have acquired do not
have significant tangible assets, a significant portion of the purchase price
has been allocated to intangible assets and goodwill.  The
identification and valuation of these intangible assets and the determination of
the estimated useful lives at the time of acquisition, as well as the completion
of annual impairment tests require significant management judgments and
estimates.  These estimates are made based on, among other factors,
consultations with an accredited independent valuation consultant, reviews of
projected future operating results and business plans, economic projections,
anticipated future cash flows and the cost of capital.  The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of goodwill and other intangible assets, and potentially result in a
different impact to our results of operations.  Further, changes in
business strategy and/or market conditions may significantly impact these
judgments thereby impacting the fair value of these assets, which could result
in an impairment of the goodwill and acquired intangible assets.




We test goodwill for
impairment at least annually and whenever events or circumstances change that
indicate impairment may have occurred.  These events or circumstances
could include a significant long-term adverse change in the business climate,
poor indicators of operating performance or a sale or disposition of a
significant portion of a reporting unit.  We test goodwill for
impairment at the reporting unit level, which is one level below its operating
segments.  Goodwill has been assigned to the reporting units to which
the value of the goodwill relates.  We currently have six reporting
units; however, only one reporting unit, Pharmakon, includes
goodwill.  Goodwill is tested by estimating the fair value of the
reporting unit using a discounted cash flow model.  The estimated fair
value of the reporting unit is then compared with the carrying value including
goodwill, to determine if any impairment exists.  In assessing the
recoverability of goodwill, projections regarding estimated future cash flows
and other factors are made to determine the fair value of the respective
reporting units.  The key estimates and factors used in the discounted
cash flow valuation include revenue growth rates and profit margins based on
internal forecasts, terminal value and the weighted-average cost of capital used
to discount future cash flows.





We review the
recoverability of long-lived assets and finite-lived intangible assets whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable.  If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized by reducing the recorded value of the asset to its
fair value measured by future discounted cash flows.  This analysis
requires estimates of the amount and timing of projected cash flows and, where
applicable, judgments associated with, among other factors, the appropriate
discount rate.  Such estimates are critical in determining whether any
impairment charge should be recorded and the amount of such charge if an
impairment loss is deemed to be necessary.  In addition, future events
impacting cash flows for existing assets could render a write-down or write-off
necessary that previously required no such write-down or write-off.




While we
use available information to prepare our estimates and to perform impairment
evaluations, actual results could differ significantly from these estimates or
related projections, resulting in impairment and losses related to recorded
goodwill or long-lived asset balances.




Contingencies




In the
normal course of business, we are subject to various
contingencies.  Contingencies are recorded in the consolidated
financial statements when it is probable that a liability will be incurred and
the amount of the loss can be reasonably estimated, or otherwise disclosed.
 We are currently involved in certain legal proceedings and, as required,
we have accrued our estimate of the probable costs for the resolution of these
claims.  These estimates are developed in consultation with outside counsel
and are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies.  Predicting the outcome of claims and
litigation, and estimating related costs and exposures, involves substantial
uncertainties that could cause actual costs to vary materially from
estimates.




Income
Taxes




We
account for income taxes using the asset and liability method.  This
method requires recognition of deferred tax assets and liabilities for expected
future tax consequences of temporary differences that currently exist between
tax bases and financial reporting bases of our assets and liabilities based on
enacted tax laws and rates.  A valuation allowance is established, when
necessary, to reduce the deferred income tax assets when it is more likely than
not that all or a portion of a deferred tax asset will not be
realized.




24
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


We
operate in multiple tax jurisdictions and provide taxes in each jurisdiction
where we conduct business and are subject to taxation.  The breadth of our
operations and the complexity of the various tax laws require assessments of
uncertainties and judgments in estimating the ultimate taxes we will
pay.  The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions, outcomes of tax
litigation and resolution of proposed assessments arising from federal and state
audits.  We have established estimated liabilities for federal and
state income tax exposures that arise.These accruals
represent accounting estimates that are subject to inherent uncertainties
associated with the tax audit process.  We adjust these accruals as facts
and circumstances change, such as the progress of a tax audit. We believe that
any potential audit adjustments will not have a material adverse effect on our
financial condition or liquidity. However, any adjustments made may be material
to our consolidated results of operations for a reporting period.




Significant
judgment is also required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax assets.  We
currently have significant deferred tax assets resulting from net operating loss
carryforwards and deductible temporary differences.  The realization
of these assets is dependent on generating future taxable income.  We
perform an analysis quarterly to determine whether the expected future income
will more likely than not be sufficient to realize the deferred tax
assets.  Our recent operating results and projections of future income
weighed heavily in our overall assessment.  The minimum amount of
future taxable income that would have to be generated to realize our net
deferred tax assets is approximately $30 million and the existing levels of
pretax earnings for financial reporting purposes are not sufficient to generate
this amount of future taxable income.  As a result, we established a
full federal and state valuation allowance for the net deferred tax assets at
December 31, 2008 and 2007 because we determined that it was more likely than
not that these assets would not be realized.




Self-Insurance
      Accruals




Prior to
October 1, 2008, we were self-insured for certain losses for claims filed and
claims incurred but not reported relating to workers’ compensation and
automobile-related liabilities for Company-leased cars.  Beginning
October 1, 2008, we are fully-insured through an outside carrier for these
losses.  Our liability for claims filed and claims incurred but not
reported prior to October 1, 2008 is estimated on an actuarial undiscounted
basis supplied by its insurance brokers and insurers using individual case-based
valuations and statistical analysis and is based upon judgment and historical
experience, however, the final cost of many of these claims may not be known for
five years or longer.  We also are self-insured for benefits paid
under employee healthcare programs.  Our liability for healthcare
claims is estimated using an underwriting determination which is based on
current year’s average lag days between when a claim is incurred to when it is
paid.  We maintain stop-loss coverage with third-party insurers to
limit our total exposure on all of these programs.  Periodically, we
evaluate the level of insurance coverage and adjust insurance levels based on
risk tolerance and premium expense.  Management reviews our
self-insurance accruals on a quarterly basis.  Actual results can vary
from these estimates, which results in adjustments in the period of the change
in estimate.




Stock
      Compensation Costs




The
estimated compensation cost associated with the granting of stock-based awards
is based on the grant date fair value of the stock award on the date of grant.
We recognize the compensation cost, net of estimated forfeitures, over the
vesting term.  Forfeitures are initially estimated based on historical
information and subsequently updated over the life of the awards to ultimately
reflect actual forfeitures.  As a result, changes in forfeiture
activity can influence the amount of stock compensation cost recognized from
period to period.




We
primarily use the Black-Scholes option pricing model to determine the fair value
of stock options and stock-based stock appreciation rights (SARs). The
determination of the fair value of stock-based payment awards is made on the
date of grant and is affected by our stock price as well as assumptions made
regarding a number of complex and subjective variables.  These
assumptions including our expected stock price volatility over the term of the
awards, actual and projected employee stock option exercise behaviors, the
risk-free interest rate, and expected dividend yield.  Our assumptions
are detailed in Note 13 to our consolidated financial statements.




Changes
in the valuation assumptions could result in a significant change to the cost of
an individual award.  However, the total cost of an award is also a
function of the number of awards granted, and as result, we have the ability to
manage the cost and value of our equity awards by adjusting the number of awards
granted.




25
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Restructuring,
Facilities Realignment and Related Costs




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






CONSOLIDATED
      RESULTS OF OPERATIONS




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




Years
      Ended December 31,Continuing
      operations data
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Revenues:Service,
      net
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.4
            %Product,
      net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.4
            %)Total
      revenues, net
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of goods and services:Cost
      of services
            
            
            96.0
            %
            
            
            73.0
            %
            
            
            76.7
            %
            
            
            82.8
            %
            
            
            73.1
            %Cost
      of goods sold
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.1
            %Total
      cost of goods and services
            
            
            96.0
            %
            
            
            73.0
            %
            
            
            76.7
            %
            
            
            82.8
            %
            
            
            73.2
            %Gross
      profit
            
            
            4.0
            %
            
            
            27.0
            %
            
            
            23.3
            %
            
            
            17.2
            %
            
            
            26.8
            %Operating
      expenses:Compensation
      expense
            
            
            20.3
            %
            
            
            20.9
            %
            
            
            11.7
            %
            
            
            8.5
            %
            
            
            8.9
            %Other
      selling, general and administrative
            
            
            14.7
            %
            
            
            17.1
            %
            
            
            9.5
            %
            
            
            9.6
            %
            
            
            7.2
            %Asset
      impairment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2.0
            %
            
            
            -Executive
      severance
            
            
            1.1
            %
            
            
            -
            
            
            
            0.2
            %
            
            
            1.9
            %
            
            
            0.1
            %Legal
      and related costs, net
            
            
            0.2
            %
            
            
            0.3
            %
            
            
            (1.4
            %)
            
            
            0.6
            %
            
            
            0.7
            %Facilities
      realignment
            
            
            0.1
            %
            
            
            0.9
            %
            
            
            0.8
            %
            
            
            0.8
            %
            
            
            -Total
      operating expenses
            
            
            36.4
            %
            
            
            39.2
            %
            
            
            20.9
            %
            
            
            23.3
            %
            
            
            16.9
            %Operating
      (loss) income
            
            
            (32.4
            %)
            
            
            (12.2
            %)
            
            
            2.5
            %
            
            
            (6.2
            %)
            
            
            9.9
            %Gain
      (loss) on investments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1.5
            %
            
            
            (0.3
            %)Interest
      income, net
            
            
            2.5
            %
            
            
            5.2
            %
            
            
            2.0
            %
            
            
            1.0
            %
            
            
            0.5
            %(Loss)
      income from continuing operationsbefore
      income taxes
            
            
            (29.8
            %)
            
            
            (7.0
            %)
            
            
            4.5
            %
            
            
            (3.7
            %)
            
            
            10.1
            %Income
      tax expense (benefit)
            
            
            0.8
            %
            
            
            1.5
            %
            
            
            (0.3
            %)
            
            
            0.1
            %
            
            
            4.2
            %(Loss)
      income from continuing operations
            
            
            (30.6
            %)
            
            
            (8.5
            %)
            
            
            4.8
            %
            
            
            (3.7
            %)
            
            
            5.9
            %


26
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Comparison
of 2008 and 2007


Revenue
      (in thousands)Year
      EndedDecember
      31,2008
              
              
              2007
              
              
              Change
      ($)
              
              
              Change
      (%)Sales
      services
              
              $
              89,656
              
              
              $
              86,766
              
              
              $
              2,890
              
              
              
              3.3
              %Marketing
      services
              
              
              23,872
              
              
              
              30,365
              
              
              
              (6,493
              )
              
              
              (21.4
              %)Product
      commercialization
              
              
              (1,000
              )
              
              
              -
              
              
              
              (1,000
              )
              
              
              -Total
              
              $
              112,528
              
              
              $
              117,131
              
              
              $
              (4,603
              )
              
              
              (3.9
              %)


The decrease in total revenues of $4.6 million, or 3.9%, was primarily related
to a decrease in revenue in the marketing services segment. The sales services
segment revenue increased by $2.9 million in 2008 compared to 2007 primarily due
to an increase in revenue within our Select Access business unit of 32.6% due to
new and expanded sales force engagements during 2008.




Revenue
for the marketing services segment decreased by approximately 21.4% as revenue
at TVG and Pharmakon was lower due in part to a decrease in new projects as well
as the curtailment or postponement of certain existing projects within these
business units.  Pharmakon revenue decreased by 28.5% as its two major
clients postponed many of their projects with Pharmakon due to budget
constraints.




The
product commercialization segment recorded negative revenue of $1.0
million.  This pertained to a non-refundable upfront payment we made
to Novartis as per the terms of our promotion agreement, which has been
recognized as negative revenue pursuant to Emerging Issues Task Force (EITF)
Issue No. 01-09, "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Product."  This segment had no revenue in 2007.





Cost
      of services (in thousands)Year
      Ended
                
                Sales
                
                
                %
      of
                
                
                Marketing
                
                
                %
      of
                
                
                Product
                
                
                %
      of
                
                
                
                
                %
      ofDecember
      31,
                
                services
                
                
                sales
                
                
                services
                
                
                sales
                
                
                commercialization
                
                
                sales
                
                
                Total
                
                sales2008
                
                $
                71,266
                
                
                
                79.5
                %
                
                $
                14,121
                
                
                
                59.2
                %
                
                $
                22,628
                
                
                
                -
                
                
                $
                108,015
                
                
                96.0
                %2007
                
                
                68,554
                
                
                
                79.0
                %
                
                
                16,962
                
                
                
                55.9
                %
                
                
                -
                
                
                
                -
                
                
                
                85,516
                
                
                73.0
                %Change
      ($)
                
                $
                2,712
                
                
                
                
                
                
                $
                (2,841
                )
                
                
                
                
                
                $
                22,628
                
                
                
                
                
                
                $
                22,499


The
increase of approximately $22.5 million in costs of services was primarily
attributed to the $22.6 million associated with our promotional program within
the product commercialization segment for the year ended December 31,
2008.  Included within that amount is $10.3 million associated with an
accrued contract loss, which represents the future loss expected to be incurred
by us to fulfill our contractual obligations under our existing product
commercialization agreement until February 1, 2010, the early termination date
for this contract.  See Note 10 for more details.  This
segment had no activity in 2007.  The sales services segment had an
increase of $2.7 million in cost of services, which is primarily attributable to
the increase in revenue at Select Access.  Cost of services within the
marketing services segment decreased approximately $2.8 million, or 16.7%
primarily due to the decrease in new projects and the curtailment or
postponement of certain existing projects at Pharmakon.




Gross
      profit (in thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              sales2008
              
              $
              18,390
              
              
              
              20.5
              %
              
              $
              9,751
              
              
              
              40.8
              %
              
              $
              (23,628
              )
              
              
              -
              
              
              $
              4,513
              
              
              4.0
              %2007
              
              
              18,212
              
              
              
              21.0
              %
              
              
              13,403
              
              
              
              44.1
              %
              
              
              -
              
              
              
              -
              
              
              
              31,615
              
              
              27.0
              %Change
      ($)
              
              $
              178
              
              
              
              
              
              
              $
              (3,652
              )
              
              
              
              
              
              $
              (23,628
              )
              
              
              
              
              
              $
              (27,102
              )







27
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Gross
profit in the sales services segment increased slightly on higher revenue for
the year ended 2008 as compared to year ended 2007.  In 2007, we
recognized $0.6 million in revenue associated with a contract with a former
emerging pharmaceutical client for services performed in
2006.  Because of the uncertainty surrounding collections, we
recognized revenue from this client on a cash basis and all costs associated
with this contract were recognized in 2006.




The
decrease in gross profit attributable to the marketing services segment was
commensurate with the decrease in revenue discussed above as total gross profit
decreased at all three business units.  The gross profit percentage
decreased to 40.8% from 44.1% in the comparable prior year period primarily due
to a decrease in margin percentage at TVG attributed to a change in product
mix.




The
product commercialization segment’s negative gross profit was attributable to
our sales force, promotional costs and contract loss accrual associated with
this program plus the $1 million non-refundable upfront payment we made to
Novartis as per the terms of our promotion agreement.




(Note:
Compensation and other Selling, General and Administrative (other SG&A)
expense amounts for each segment contain allocated corporate
overhead.)




Compensation
      expense (in thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              sales2008
              
              $
              13,176
              
              
              
              14.7
              %
              
              $
              8,361
              
              
              
              35.0
              %
              
              $
              1,301
              
              
              
              -
              
              
              $
              22,838
              
              
              20.3
              %2007
              
              
              15,973
              
              
              
              18.4
              %
              
              
              8,543
              
              
              
              28.1
              %
              
              
              -
              
              
              
              -
              
              
              
              24,516
              
              
              20.9
              %Change
      ($)
              
              $
              (2,797
              )
              
              
              
              
              
              $
              (182
              )
              
              
              
              
              
              $
              1,301
              
              
              
              
              
              
              $
              (1,678
              )




The
decrease in compensation expense was primarily a result of a reduction in
incentive compensation accrued for 2008 due to our financial performance
relative to the financial targets established for 2008 under our incentive
compensation plan.  The decrease for both sales services and marketing
services segments in 2008 can be attributed to the reason discussed
above.





The product
commercialization segment had compensation costs of $1.3
million.  This was primarily attributable to employee and sales
services support costs.  There was no compensation expense
attributable to this segment in 2007.




Other
      selling, general and administrative expenses (in
thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              sales2008
              
              $
              11,549
              
              
              
              12.9
              %
              
              $
              3,857
              
              
              
              16.2
              %
              
              $
              1,126
              
              
              
              -
              
              
              $
              16,532
              
              
              14.7
              %2007
              
              
              15,033
              
              
              
              17.3
              %
              
              
              4,990
              
              
              
              16.4
              %
              
              
              -
              
              
              
              -
              
              
              
              20,023
              
              
              17.1
              %Change
      ($)
              
              $
              (3,484
              )
              
              
              
              
              
              $
              (1,133
              )
              
              
              
              
              
              $
              1,126
              
              
              
              
              
              
              $
              (3,491
              )




Executive
severance




In 2008,
we incurred approximately $1.2 million in executive severance costs that related
to the departure of our chief executive officer and one other
executive.  In 2007, we did not have any executive severance
costs.




Legal
and related costs




In 2008
and 2007, we had legal expenses of approximately $0.3 million, respectively,
which primarily pertained to legal expenses incurred by us in the ordinary
course of business.




28
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




Facilities realignment




In 2008,
we had charges of approximately $75,000 related to the excess office space at
our Dresher, Pennsylvania location.  In 2007, we had net charges of
approximately $1.0 million primarily related to the impairment of fixed assets
and other expenses related to our exiting the computer data center space at our
Saddle River, New Jersey location in December 2007. Total charges in 2007 for
the sales services segment were approximately $1.0 million and approximately
$26,000 was credited to the marketing services segment.




Operating
      lossYear
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              %
      of
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              sales
              
              
              Total
              
              sales2008
              
              $
              (7,196
              )
              
              
              (8.0
              %)
              
              $
              (3,070
              )
              
              
              (12.9
              %)
              
              $
              (26,161
              )
              
              -
              
              
              $
              (36,427
              )
              
              (32.4
              %)2007
              
              
              (13,918
              )
              
              
              (16.0
              %)
              
              
              (362
              )
              
              
              (1.2
              %)
              
              
              -
              
              
              -
              
              
              
              (14,280
              )
              
              (12.2
              %)Change
      ($)
              
              $
              6,722
              
              
              
              
              
              
              $
              (2,708
              )
              
              
              
              
              
              $
              (26,161
              )
              
              
              
              
              $
              (22,147
              )


The increased operating
loss in 2008 is primarily attributable to the $26.2 million in negative revenue
and expenses associated with our promotional program within the product
commercialization segment.  This was partially offset by a reduction
in our total operating expenses of approximately $5.0 million, or
10.8%.




Interest
income, net




Interest
income, net, for 2008 and 2007 was approximately $2.8 million and $6.1 million,
respectively.  The decrease is primarily attributable to a decrease in
interest rates for 2008 as well as smaller available cash balances.




Provision
for income taxes




We
recorded a provision for income taxes of $0.9 million for 2008 and $1.8 million
for 2007.  Our overall effective tax rate was a provision of 2.6% and
a provision of 21.5% for 2008 and 2007, respectively.  The tax provision
for 2007 is primarily attributable to the full valuation allowance on the net
deferred tax assets except for the basis difference in
goodwill.  Federal tax attribute carryforwards at December 31, 2008,
consist primarily of approximately $29.2 million of net operating losses and
$339,000 of capital losses.  In addition, we have approximately $63.5
million of state net operating losses carryforwards.  The utilization
of the federal carryforwards as an available offset to future taxable income is
subject to limitations under federal income tax laws.  If the federal
net operating losses are not utilized, they will begin to expire in 2027 and if
the current state net operating losses are not utilized they begin to expire in
2009.  The capital losses can only be utilized against capital gains
and $339,000 will expire in 2009.




Net
loss




There was
a net loss of $34.5 million in 2008, compared to a net loss of $10.0 million in
2007, due to the factors discussed above.




Comparison
      of 2007 and 2006




Revenue
      (in thousands)Year
      EndedDecember
      31,2007
              
              
              2006
              
              
              Change
      ($)
              
              
              Change
      (%)Sales
      services
              
              $
              86,766
              
              
              $
              202,748
              
              
              $
              (115,982
              )
              
              
              (57.2
              %)Marketing
      services
              
              
              30,365
              
              
              
              36,494
              
              
              
              (6,129
              )
              
              
              (16.8
              %)Product
      commercialization
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              117,131
              
              
              $
              239,242
              
              
              $
              (122,111
              )
              
              
              (51.0
              %)


The
decrease in total revenues of $122.1, or 51.0%, was primarily related to the
termination of several large contracts in 2006.  Effective April 30,
2006, AstraZeneca terminated its contract sales force arrangement with us, which
represented approximately $43.0 million of revenue in 2006.  On
September 26, 2006, we announced that GSK would not be renewing its contract
with us when it expired on December 31, 2006.  This contract
represented $67.4 million of revenue in 2006.  On October 25, 2006, we
announced that we had received notification from




29
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




sanofi-aventis
of its intention to terminate its contract sales engagement with us effective
December 1, 2006.  This contract represented approximately $18.3
million of revenue in 2006.  Additionally, on March 21, 2007, we
announced that a large pharmaceutical company customer had notified us of its
intention not to renew its contract sales engagement with us upon its scheduled
expiration on May 12, 2007. This contract, which had a one-year term, provided
for approximately $37 million of annual revenue and represented a $7.1 million
decline in revenue when compared to 2006. The loss in revenue from those
terminated and expired contracts was partially offset by new sales force
arrangements we entered into during 2007, including a contract sales force
engagement for our Select Access business unit in March 2007, which generated
approximately $12.0 million in revenue in 2007 and a dedicated contract sales
force engagement entered into during June 2007 that generated approximately
$14.6 million in revenue in 2007.




The sales
services segment revenue decreased by $116.0 million compared to 2006 primarily
due to the contract terminations as described above.




Revenue
for the marketing services segment decreased by $6.1 million, or 16.8%, which
was attributable to a $3.9 million decrease in TVG revenue, as well as decreases
at both Pharmakon and VIM due to fewer projects at all three business
units.




The
product commercialization segment did not have any revenue in either
period.


Cost
      of services (in thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              
              sales2007
              
              $
              68,554
              
              
              
              79.0
              %
              
              $
              16,962
              
              
              
              55.9
              %
              
              $
              -
              
              
              
              -
              
              
              $
              85,516
              
              
              
              73.0
              %2006
              
              
              163,735
              
              
              
              80.8
              %
              
              
              19,663
              
              
              
              53.9
              %
              
              
              -
              
              
              
              -
              
              
              
              183,398
              
              
              
              76.7
              %Change
      ($)
              
              $
              (95,181
              )
              
              
              
              
              
              $
              (2,701
              )
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              (97,882
              )


The sales
services segment had a reduction of $95.2 million in cost of services, which is
primarily attributable to the contract terminations mentioned
above.  Cost of services within the marketing services segment
decreased approximately $2.7 million, or 13.7%, due to fewer projects at all
three business units.  The product commercialization segment had no
costs of services expense in either 2007 or 2006.




The two
primary reasons for the increase in gross profit percentage were: 1) the higher
margin businesses within marketing services were a greater portion of
consolidated revenue than they were in the prior period (25.9% in 2007 vs. 15.3%
in 2006); and 2) the gross profit percentage for Select Access increased from
15.2% in 2006 to 21.4% in 2007.  This increase was primarily a result
of fixed service costs (i.e., sales force management) being a smaller percentage
of total revenue as Select Access revenue increased approximately 63.7% in
2007.





Gross
      profit (in thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              
              sales2007
              
              $
              18,212
              
              
              
              21.0
              %
              
              $
              13,403
              
              
              
              44.1
              %
              
              $
              -
              
              
              
              -
              
              
              $
              31,615
              
              
              
              27.0
              %2006
              
              
              39,013
              
              
              
              19.2
              %
              
              
              16,831
              
              
              
              46.1
              %
              
              
              -
              
              
              
              -
              
              
              
              55,844
              
              
              
              23.3
              %Change
      ($)
              
              $
              (20,801
              )
              
              
              
              
              
              $
              (3,428
              )
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              (24,229
              )




The
increase in gross profit percentage for the sales services segment can be
primarily attributed to Select Access.  The decrease in total sales
services’ gross profit can be attributed to the contract terminations discussed
above.  The segment benefited from recognizing $550,000 in revenue and
gross profit in 2007 associated with a contract with a former emerging
pharmaceutical client for services performed in 2006.  Because of the
uncertainty surrounding collections, we recognized revenue from this client on a
cash basis.  All costs associated with this contract were recognized
in 2006.  The segment also benefited from recognizing $558,000 in
revenue and gross profit in 2007 associated with accrued penalties with a former
sales force client.  Because the likelihood of paying these penalties
was deemed remote, the accrual was reversed in the fourth quarter of 2007 and
recognized as revenue.




30
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


The
decrease in gross profit attributable to the marketing services segment was
commensurate with the decrease in revenue discussed above as total gross profit
decreased at all three business units.  The gross profit percentage
decreased to 44.1% from 46.1% in the comparable prior year period.




(Note: Compensation and other
Selling, General and Administrative (other SG&A) expense amounts for each
segment contain allocated corporate overhead.)


Compensation
      expense (in thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              
              sales2007
              
              $
              15,973
              
              
              
              18.4
              %
              
              $
              8,543
              
              
              
              28.1
              %
              
              $
              -
              
              
              
              -
              
              
              $
              24,516
              
              
              
              20.9
              %2006
              
              
              19,410
              
              
              
              9.6
              %
              
              
              8,665
              
              
              
              23.7
              %
              
              
              -
              
              
              
              -
              
              
              
              28,075
              
              
              
              11.7
              %Change
      ($)
              
              $
              (3,437
              )
              
              
              
              
              
              $
              (122
              )
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              (3,559
              )




The
decrease in compensation expense for both sales services and marketing services
segments in 2007 was the result of reduced headcount and unfilled executive
positions when compared to 2006.  As a percentage of total revenue,
compensation expense increased to 20.9% for 2007 from 11.7% in 2006 primarily
due to the decrease in revenue.


Other
      selling, general and administrative expenses (in
thousands)Year
      Ended
              
              Sales
              
              
              %
      of
              
              
              Marketing
              
              
              %
      of
              
              
              Product
              
              
              %
      of
              
              
              
              
              
              %
      ofDecember
      31,
              
              services
              
              
              sales
              
              
              services
              
              
              sales
              
              
              commercialization
              
              
              sales
              
              
              Total
              
              
              sales2007
              
              $
              15,033
              
              
              
              17.3
              %
              
              $
              4,948
              
              
              
              16.3
              %
              
              $
              -
              
              
              
              -
              
              
              $
              19,981
              
              
              
              17.1
              %2006
              
              
              18,109
              
              
              
              8.9
              %
              
              
              4,501
              
              
              
              12.3
              %
              
              
              -
              
              
              
              -
              
              
              
              22,610
              
              
              
              9.5
              %Change
      ($)
              
              $
              (3,076
              )
              
              
              
              
              
              $
              447
              
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              (2,629
              )


Total
other SG&A expenses decreased primarily due to the following: 1) a decrease
in audit and related costs of $1.5 million; 2) a decrease in facility costs of
approximately $390,000; 3) a reduction in business insurance expense of
approximately $400,000; and 4) approximately $600,000 less in marketing
expense.  These decreases were partially offset by an approximately
$550,000 accrual in state franchise taxes pertaining to one particular state’s
assessment.  As a percentage of total revenue, other SG&A expenses
increased to 17.1% from 9.5% in 2006 due to the decrease in revenue in
2007.




Executive
severance




In 2007,
we did not have any executive severance costs.  In 2006, we incurred
approximately $573,000 in executive severance costs that related to the
departure of one executive.




Legal
and related costs




In 2007,
we had legal expenses of approximately $335,000, which primarily pertained to
legal expenses incurred by us in the ordinary course of business.  In
2006, we had a net credit to legal expense of $3.3 million.  The
credit to legal expense included approximately $3.5 million in cash received in
relation to the Cellegy litigation matter and approximately $516,000 in credits
related to the reversing of the California class action lawsuit
accrual.  For details on both legal matters, see Note 9 to the
consolidated financial statements.




Facilities
realignment




In 2007,
we had net charges of approximately $1.0 million primarily related to the
impairment of fixed assets and other expenses related to our exiting the
computer data center space at our Saddle River, New Jersey location in December
2007. Total charges in 2007 for the sales services segment were approximately
$1.0 million and approximately $26,000 was credited to the marketing services
segment.  In 2006, we had net charges of approximately $657,000
related to unused office space capacity at our Saddle River, New Jersey and
Dresher, Pennsylvania locations and approximately $1.3 million in expense
related to the impairment of fixed assets associated with the unused office
space at these facilities.  Total charges in 2006 for the sales
services segment were approximately $1.3 million and approximately $675,000 was
charged to the marketing services segment.




31
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


Operating
loss (income)




The
operating loss in 2007 is primarily attributable to the decline in revenue and
gross profit in the sales services segment due to the termination of sales force
contracts mentioned previously.  There was an operating loss in 2007
for the marketing services segment of $362,000 compared to operating income of
$2.8 million in 2006.  The decrease in operating income from marketing
services segment was primarily attributable to a decrease in revenue and gross
profit at all three units due to fewer projects.  There was operating
income of $3.1 million in 2006 in the product commercialization segment which
consisted entirely of settlement payments from Cellegy, net of legal
expenses.  There was no operating income from product
commercialization in 2007.




Interest
income, net




Interest
income, net, for 2007 and 2006 was approximately $6.1 million and $4.7 million,
respectively.  The increase is primarily attributable to an increase
in interest rates for 2007 as well as larger available cash
balances.




Provision
for income taxes




We
recorded a provision for income taxes of $1.8 million for 2007, compared to a
benefit for income taxes of $724,000 for 2006.  Our overall effective
tax rate was a provision of 21.5% and a benefit of 6.8% for 2007 and 2006,
respectively.  The tax provision for 2007 was primarily attributable to the
full valuation allowance on the net deferred tax assets except for the basis
difference in goodwill.  Federal tax attribute carryforwards at
December 31, 2007, consisted primarily of approximately $9.7 million of net
operating losses and $339,000 of capital losses.  In addition, we had
approximately $47.9 million of state net operating losses
carryforwards.  The utilization of the federal carryforwards as an
available offset to future taxable income is subject to limitations under
federal income tax laws.  If the federal net operating losses are not
utilized, they will expire in 2027.  The capital losses can only be
utilized against capital gains and $339,000 will expire in 2009.




(Loss) income from continuing
operations




There was
a loss from continuing operations for 2007 of approximately $10.0 million,
compared to income from continuing operations of approximately $11.4 million for
2006.




Discontinued
operations




For the
year ended December 31, 2006, discontinued operations included revenue of
approximately $1.9 million, income before income tax of approximately $693,000
and net income of approximately $434,000.




Net
(loss) income




There was
a net loss of $10.0 million in 2007, compared to net income of $11.8 million in
2006, due to the factors discussed above.






LIQUIDITY
      AND CAPITAL RESOURCES




As of
December 31, 2008, we had cash and cash equivalents and short-term investments
of approximately $90.2 million and working capital of $81.6 million, compared to
cash and cash equivalents and short-term investments of approximately $107.0
million and working capital of approximately $110.7 million at December 31,
2007.




During
2008, net cash used in operating activities was $16.0 million as compared to net
cash used by operating activities of $6.2 million during 2007.  Net
cash used in operating activities for the year ended December 31, 2008 reflects
continuing operating losses of $34.5 million, less $6.5 million of non-cash
items charged to the consolidated statement of operations, less $11.9 million
representing the net change in our operating assets and
liabilities.  The net non-cash items consist primarily of depreciation
and amortization of $4.6 million, deferred income taxes of $0.3 million and
stock-based compensation of $1.5 million.  The net change in operating
assets and liabilities resulted primarily from decreases in accounts receivable
of $7.0 million, unbilled costs of $1.0 million and unearned contract revenue of
$4.8 million, and increase in accrued contract loss of $10.0
million.  The decreases in accounts receivable, unbilled costs and
unearned contract revenue are primarily as a result of the decline in revenue in
2008.  The increase in accrued contract loss is due to our product
commercialization agreement as discussed above.




As of
December 31, 2008, we had $2.5 million of unbilled costs and accrued profits on
contracts in progress.  When services are performed in advance of
billing, the value of such services is recorded as unbilled costs and accrued
profits on contracts in progress.  As of December 31, 2008, we had
$3.7 million of unearned contract revenue. When we bill customers for services
before the revenue has been earned, billed amounts are recorded as unearned
contract revenue, and are recorded as income when earned.  Normally,
unbilled costs and accrued profits are billed and unearned contract revenue is
earned within 12 months from the end of the respective period.




32
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


During
2008, net cash provided by investing activities was approximately $6.9 million
as compared to net cash provided by investing activities of $60.6 million during
2007.  For both periods, net cash provided by investing activities
reflects a continued movement towards investments that have greater liquidity
and shorter-term maturities.  For the year ended December 31, 2008,
net cash provided by investing activities consisted of the
following:




·
            Approximately
      $7.3 million provided by the sale of short-term investments for the year
      ended December 31, 2008; and


·
            Capital
      expenditures for the year ended December 31, 2008 of $0.4 million which
      consisted primarily of capital expenditures associated with information
      technology and other computer–related
  expenditures.




During
2008, net cash used in financing activities was approximately $62,000 as
compared to net cash used by financing activities of approximately $460,000
during 2007.  For the year ended December 31, 2008, net cash used in
financing activities represented shares that were delivered back to PDI and
included in treasury stock for the payment of taxes resulting from the vesting
of restricted stock.




We had
standby letters of credit of approximately $5.9 million and $7.3 million at
December 31, 2008 and 2007, respectively, as collateral for our existing
insurance policies and our facility leases.  Our standby letters of
credit are evergreen in that they automatically renew every year unless
cancelled in writing by PDI with consent of the beneficiary, generally not less
than 60 days before the expiry date.




We
recorded facility realignment charges totaling approximately $75,000, $1.0
million and $2.0 million during 2008, 2007 and 2006,
respectively.  These charges were for costs related to excess leased
office space at our Saddle River, New Jersey and Dresher, Pennsylvania
facilities.  In 2007, we sub-leased the excess office space at our
Saddle River, New Jersey location and also secured sub-leases for two of the
three vacant spaces at our Dresher location.  We are currently seeking
to sublease the remaining excess space at our Dresher location.  A
rollforward of the activity for the facility realignment plan is as
follows:




Balance
      as of December 31, 2006
              
              $
              2,312Accretion
              
              
              21Payments
              
              
              (1,378
              )Adjustments
              
              
              (280
              )Balance
      as of December 31, 2007
              
              $
              675Accretion
              
              
              13Payments
              
              
              (204
              )Adjustments
              
              
              75Balance
      as of December 31, 2008
              
              $
              559


In April
2008, we signed a promotion agreement with Novartis in connection with our
product commercialization initiative. See Note 10 to the consolidated financial
statements for additional information.  Under terms of the agreement,
we are providing sales representatives, at our own cost and expense, to promote
a pharmaceutical product to physicians.  In addition, we are obligated
to spend at least $7.0 million per year during the term on promotional
activities relating to this product.  In addition, we provided a $1.0
million upfront payment to Novartis in the second quarter of 2008 as per the
terms of the agreement.  Under this arrangement, we will be
compensated each quarter based on a specified formula set forth in the contract
relating to product sales during the quarter.  Therefore, if we are
unable to increase the sales of the product above a pre-determined quarterly
threshold amount, it could have a material adverse effect on our business,
financial condition and results of operations.  In 2008, we incurred
losses associated with this promotional program of approximately $23.6
million.




Our
revenue and profitability depend to a great extent on our relationships with a
limited number of large pharmaceutical companies.  Our three largest
customers in 2008 accounted for approximately 28.2%, 13.6% and 10.7%,
respectively, or approximately 52.5% in the aggregate, of our revenue for the
year ended December 31, 2008.  On September 30, 2008, a significant
sales force program for one of these clients was terminated due to generic
product competition.  This sales force program accounted for 9.5% of
our revenue for the year ended December 31, 2008 and 10.2% of our revenue for
the year ended December 31, 2007.  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.  In addition,
Select Access’ services to a significant customer are seasonal in nature,
occurring primarily in the winter season.




33
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


The
majority of our operating expenses are personnel-related costs such as employee
compensation and benefits as well as the cost of infrastructure to support our
operations, including facility space and equipment.  We recently
instituted a number of cost-saving initiatives, including a reduction in
employee headcount.  In addition, we are currently seeking to sublet
additional unused office space in our Saddle River, New Jersey and Dresher,
Pennsylvania facilities, although there is no guarantee that we will be able to
successfully sublet this unused office space, particularly in light of the
current economic and financial crisis.  If we are unable to achieve
revenue growth in the future or fail to adjust our cost infrastructure to the
appropriate level to support our revenues, our business, financial condition and
results of operations could be materially and adversely affected.




Going
Forward




Our
primary sources of liquidity are cash generated from our operations and
available cash and cash equivalents.  These sources of liquidity are
needed to fund our working capital requirements, estimated capital expenditures
in 2009 of approximately $1.0 million and remaining minimum contractual
obligations under our product commercialization agreement for which there is
approximately $10.0 million accrued at December 31, 2008.




Although
we expect to incur a net loss for the year ending December 31, 2009, we believe
that our existing cash balances and expected cash flows generated from
operations will be sufficient to meet our operating requirements for at least
the next 12 months. However, we may require alternative forms of financing if
and when we make acquisitions.




Contractual
      Obligations




We have
committed cash outflow related to operating lease agreements and other
contractual obligations. The following table summarizes our contractual
obligations and commercial commitments as of December 31, 2008.


Less
      than
                
                
                1
      to 3
                
                
                3
      to 5
                
                
                AfterTotal
                
                
                1
      Year
                
                
                Years
                
                
                Years
                
                
                5
      YearsContractual
      obligations (1)
                
                $
                1,476
                
                
                $
                859
                
                
                $
                617
                
                
                $
                -
                
                
                $
                -Purchase
      obligations (2)
                
                
                7,583
                
                
                
                7,000
                
                
                
                583
                
                
                
                -
                
                
                
                -Operating
      lease obligationsMinimum
      lease payments
                
                
                24,395
                
                
                
                3,318
                
                
                
                6,507
                
                
                
                6,564
                
                
                
                8,006Less
      minimum sublease rentals (3)
                
                
                (5,113
                )
                
                
                (1,069
                )
                
                
                (1,613
                )
                
                
                (1,239
                )
                
                
                (1,192
                )Net
      minimum lease payments
                
                
                19,282
                
                
                
                2,249
                
                
                
                4,894
                
                
                
                5,325
                
                
                
                6,814Total
                
                $
                28,341
                
                
                $
                10,108
                
                
                $
                6,094
                
                
                $
                5,325
                
                
                $
                6,814


(1)
            Amounts
      represent contractual obligations related to software license contracts,
      data center hosting, and outsourcing contracts for software system
      support.


(2)
            Represents
      minimum annualized purchase obligations associated with promotional
      spending as per the terms of our agreement with Novartis through February
      2010, which is the early termination date for this contract provided that
      sales of the product remain below certain pre-determined
      thresholds.


(3)
            In
      June 2005, we signed an agreement to sublease approximately 16,000 square
      feet of the first floor at our corporate headquarters facility in Saddle
      River, New Jersey.  The sublease is for a five-year term
      commencing July 15, 2005, and provides for approximately $2 million in
      lease payments over the five-year period.   In July 2007,
      we signed an agreement to sublease approximately 20,000 square feet of the
      second floor at our corporate headquarters.  The sublease term
      is through the remainder of our lease, which is approximately eight and
      one-half years and will provide for approximately $4.4 million in lease
      payments over that period.  Also in 2007, we signed two separate
      subleases at our facility in Dresher, Pennsylvania.  These
      subleases are for five-year terms and will provide approximately $650,000
      combined in lease payments over the five-year
  period.




As a
result of the net operating loss carryback claims which have been filed or are
expected to be filed by us, and the impact of those claims on the relevant
statue of limitations, it is not practicable to predict the amount or timing of
the impact of FIN 48 liabilities in the table above and, therefore, these
liabilities have been excluded from the table above.






Off-Balance
      Sheet Arrangements




As of
December 31, 2008, we had no off-balance sheet arrangements.




34
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)




Selected Quarterly Financial Information
(unaudited)




The
following tables set forth selected quarterly financial information for the
years ended December 31, 2008 and 2007 (in thousands except per share
data):


For
      the Quarters endedMarch
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      312008
      Quarters:Revenues,
      net
              
              $
              32,229
              
              
              $
              30,399
              
              
              $
              24,496
              
              
              $
              25,404Gross
      profit
              
              
              8,699
              
              
              
              3,590
              
              
              
              412
              
              
              
              (8,189
              )Operating
      (loss) (1)
              
              
              (1,708
              )
              
              
              (7,900
              )
              
              
              (9,589
              )
              
              
              (17,231
              )Net
      loss
              
              
              (1,060
              )
              
              
              (7,477
              )
              
              
              (9,004
              )
              
              
              (16,920
              )Loss
      per share:Basic
              
              $
              (0.08
              )
              
              $
              (0.53
              )
              
              $
              (0.64
              )
              
              $
              (1.20
              )Diluted
              
              $
              (0.08
              )
              
              $
              (0.53
              )
              
              $
              (0.64
              )
              
              $
              (1.20
              )Weighted
      average number of shares:Basic
              
              
              13,969
              
              
              
              13,986
              
              
              
              14,026
              
              
              
              14,066Diluted
              
              
              13,969
              
              
              
              13,986
              
              
              
              14,026
              
              
              
              14,066For
      the Quarters endedMarch
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      312007
      Quarters:Revenues,
      net
              
              $
              32,802
              
              
              $
              27,784
              
              
              $
              23,969
              
              
              $
              32,576Gross
      profit
              
              
              8,975
              
              
              
              7,151
              
              
              
              5,766
              
              
              
              9,723Operating
      (loss) (2)
              
              
              (2,243
              )
              
              
              (3,887
              )
              
              
              (5,250
              )
              
              
              (2,900
              )Net
      loss
              
              
              (1,901
              )
              
              
              (2,497
              )
              
              
              (4,057
              )
              
              
              (1,519
              )Loss
      per share:Basic
              
              $
              (0.14
              )
              
              $
              (0.18
              )
              
              $
              (0.29
              )
              
              $
              (0.11
              )Diluted
              
              $
              (0.14
              )
              
              $
              (0.18
              )
              
              $
              (0.29
              )
              
              $
              (0.11
              )Weighted
      average number of shares:Basic
              
              
              13,908
              
              
              
              13,931
              
              
              
              13,956
              
              
              
              13,965Diluted
              
              
              13,908
              
              
              
              13,931
              
              
              
              13,956
              
              
              
              13,965




Note:  Quarterly
and year-to-date computations of per share amounts are made independently.
Therefore, the sum of per share amounts for the quarters may not equal per share
amounts for the year.




(1)
            The
      quarter ended June 30, 2008 and September 30, 2008 includes executive
      severance costs of $0.7 million and $0.3 million,
      respectively.  The quarter ended December 31, 2008 includes
      facilities realignment costs of $0.1 million and a contract loss of $10.3
      million.




(2)
            The
      quarter ended September 30, 2007 includes facilities realignment costs of
      $0.1 million.  The quarter ended December 31, 2007 includes
      facilities realignment costs of $0.9
million.




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 contracts. 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.  Program
costs, other than training costs, are expensed as incurred. As a result, we may
incur substantial expenses associated with staffing a new detailing program
during the first two to three months of a contract without recognizing any
revenue under that contract. This could have an adverse impact on our operating
results for the quarters in which those expenses are
incurred.  Revenue related to performance incentives is recognized in
the period when the performance based parameters are achieved and payment is
assured.  A significant portion of this revenue could be recognized in
the first and fourth quarters of a year.




35
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


EFFECT
OF NEW ACCOUNTING PRONOUNCEMENTS




Recently
Issued Standards




In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (Revised 2007), “Business Combinations” (FAS 141R).  FAS 141R
continues to require the purchase method of accounting to be applied to all
business combinations, but it significantly changes the accounting for certain
aspects of business combinations.  Under FAS 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. FAS
141R will change the accounting treatment for certain specific acquisition
related items including: (1) expensing acquisition related costs as incurred;
(2) valuing noncontrolling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired
business.  FAS 141R also includes a substantial number of new
disclosure requirements.  FAS 141R is to be applied prospectively to
business combinations for which the acquisition date is on or after January 1,
2009.  We expect FAS 141R will have an impact on our accounting for
any future business combinations once adopted but the effect is dependent upon
the nature and timing of any acquisitions that may be made in the
future.




In June
2008, the FASB approved FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(FSP EITF 03-6-1) which is effective January 1, 2009.  FSP EITF
03-6-1 clarifies that share-based payment awards that entitle holders to receive
non-forfeitable dividends before they vest will be considered participating
securities and included in the basic earnings per share
calculation.  Prior to May 30, 2008, our stock award agreements
provided for nonforfeitable dividend rights to unvested restricted stock awards
and, consequently, these awards are participating securities as defined in this
FSP.  On May 31, 2008, we revised our stock award agreements for
future grants so that unvested shares are non-participating
securities.  We are currently evaluating the impact of adopting FSP
EITF 03-6-1 on our consolidated financial position and results of
operations.




Recently
Adopted Standards




SFAS No.
157, “Fair Value
Measurements” (FAS 157) defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This standard is to be applied when other standards require or permit the use of
fair value measurement of an asset or liability.  SFAS 157 was adopted
on January 1, 2008 for all financial assets and liabilities and for nonfinancial
assets and liabilities recognized or disclosed at fair value in our consolidated
financial statements on a recurring basis (at least annually). For all other
nonfinancial assets and liabilities, SFAS 157 is effective on January 1,
2009.  The initial adoption of FAS 157 had no impact on our
consolidated financial position or results of operations; however, we are now
required to provide additional disclosures as part of its financial
statements.  See Note 6, Fair Value Measurements.  We are
still in the process of evaluating this standard with respect to its effect on
nonfinancial assets and liabilities and, therefore, have not yet determined the
impact that it will have our financial statements upon full adoption in
2009.  Nonfinancial assets and liabilities for which we have not
applied the provisions of FAS 157 include those measured at fair value in
impairment testing and those initially measured at fair value in a business
combination.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement No.
115” (FAS 159).  FAS 159 permits entities to elect to measure
eligible financial instruments at fair value.  We would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date, and recognize upfront
costs and fees related to those items in earnings as incurred and not
deferred.  We adopted FAS 159 as of January 1, 2008.  We did
not apply the fair value option to any of its outstanding instruments and,
therefore, the adoption of FAS 159 did not have an impact on our financial
condition or results of operations.




36
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We are
exposed to market risk for changes in the market values of some of our
investments (investment risk) and the effect of interest rate changes (interest
rate risk).  Our financial instruments are not currently subject to
foreign currency risk or commodity price risk.  We have no financial
instruments held for trading purposes and we have no interest bearing long term
or short term debt.  At December 31, 2008, 2007, and 2006, we did not
hold any derivative financial instruments.




The
objectives of our investment activities are: to preserve capital, maintain
liquidity, and maximize returns without significantly increasing
risk.  In accordance with our investment policy, we attempt to achieve
these objectives by investing our cash in a variety of financial
instruments.  These investments are principally restricted to
government sponsored enterprises, high-grade bank obligations, investment-grade
corporate bonds, certain money market funds of investment grade debt instruments
such as obligations of the U.S. Treasury and U.S. Federal Government Agencies,
municipal bonds and commercial paper.




Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk.  Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates
fall.  Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities that have seen a decline in
market value due to changes in interest rates.   Our cash and
cash equivalents and short term investments at December 31, 2008 were composed
of the instruments described in the preceding paragraph.   If
interest rates were to increase or decrease by one percent, the fair value of
our investments would have an insignificant increase or decrease primarily due
to the quality of the investments and the relative near term
maturity.






ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




Financial
statements and the financial statement schedules specified by this Item,
together with the reports thereon of Ernst & Young LLP, are presented
following Item 15 of this report.






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




None.








ITEM
      9A.
            CONTROLS
      AND PROCEDURES




(a)
            Disclosure
      Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this Form
10-K.  Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms; and (ii) accumulated and
communicated to management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.






(b)
            Management's
      Annual Report on Internal Control over Financial
  Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Our management has concluded that, as of December 31, 2008, our
internal control over financial reporting is effective based on these criteria.
The effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in its report appearing in this
Form 10-K, which report expressed an unqualified opinion on the effectiveness of
our internal control over financial reporting as of December 31,
2008.






(c)
            Changes
      in Internal Control over Financial
Reporting




There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.




37
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


(d)                 Report
of Independent Registered Public Accounting Firm






The Board
of Directors and Stockholders of PDI, Inc.




We have
audited PDI, Inc.’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). PDI Inc.’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




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




In our
opinion, PDI, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PDI, Inc. as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008 of PDI, Inc. and our report dated March 11,
2009 expressed an unqualified opinion thereon.




/s/Ernst
      &Young LLPMetroPark,
      New JerseyMarch
      11, 2009


38
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


ITEM
      9B.
            OTHER
      INFORMATION




None.




PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Information
relating to directors and executive officers of the registrant that is
responsive to Item 10 of this Form 10-K will be included in our Proxy Statement
in connection with our 2009 annual meeting of stockholders and such information
is incorporated by reference herein.






ITEM
      11.
            EXECUTIVE
      COMPENSATION




Information
relating to executive compensation that is responsive to Item 11 of this Form
10-K will be included in our Proxy Statement in connection with our 2009 annual
meeting of stockholders and such information is incorporated by reference
herein.






ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




Information
relating to security ownership of certain beneficial owners and management that
is responsive to Item 12 of this Form 10-K will be included in our Proxy
Statement in connection with our 2009 annual meeting of stockholders and such
information is incorporated by reference herein.






ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




Information
relating to certain relationships and related transactions that is responsive to
Item 13 of this Form 10-K will be included in our Proxy Statement in connection
with our 2009 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 this Form 10-K will be included in our Proxy Statement in connection with our
2009 annual meeting of stockholders and such information is incorporated by
reference herein.




39
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


PART
IV






ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES




(a)
            The
      following documents are filed as part of this Form
  10-K:




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




(2)
            Financial
      Statement Schedule




Schedule
II:                           Valuation
and Qualifying Accounts




All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.




(3)
            Exhibits




Exhibit
      No.
            
            Description3.1
            
            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. (3)4.1
            
            Specimen
      Certificate Representing the Common Stock (1)10.1*
            
            1998
      Stock Option Plan (1)10.2*
            
            2000
      Omnibus Incentive Compensation Plan (2)10.3*
            
            2004
      Stock Award and Incentive Plan (4)10.4*
            
            Form
      of Restricted Stock Unit Agreement for Employees, filed
      herewith.10.5*
            
            Form
      of Stock Appreciation Rights Agreement for Employees, filed
      herewith.10.6*
            
            Form
      of Restricted Stock Unit Agreement for Directors, filed
      herewith.10.7*
            
            Agreement
      between the Company and John P. Dugan (1)10.8*
            
            Employment
      Separation Agreement between the Company and Nancy Lurker (9)10.9*
            
            Amended
      and Restated Employment Agreement between the Company and Jeffrey Smith
      (10)10.10*
            
            Employment
      Separation Agreement between the Company and Michael Marquard (6)10.11*
            
            Employment
      Separation Agreement between the Company and Kevin Connolly (7)10.12
            
            Saddle
      River Executive Centre Lease (5)10.13
            
            Saddle
      River Executive Centre 2005 Sublease (5)10.14
            
            Saddle
      River Executive Centre 2007 Sublease (8)


40
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)





Exhibit
      No.
            
            Description21.1
            
            Subsidiaries
      of the Registrant, filed herewith.23.1
            
            Consent
      of Ernst & Young LLP, filed herewith.31.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002, filed herewith.31.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002, filed herewith.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, filed
      herewith.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.*
            Denotes
      compensatory plan, compensation arrangement or management
      contract.(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, 2001, and incorporated herein by
reference.(4)
            Filed
      as an exhibit to our definitive proxy statement dated April 28, 2004, and
      incorporated herein by reference.(5)
            Filed
      as an exhibit to our Form 10-K for the year ended December 31, 2005, and
      incorporated herein by reference.(6)
            Filed
      as an exhibit to our Form 10-Q for the quarter ended June 30, 2006, and
      incorporated herein by reference.(7)
            Filed
      as an exhibit to our Annual Report on Form 10-K for the year ended
      December 31, 2006, and incorporated herein by
reference.(8)
            Filed
      as an exhibit to our Annual Report on Form 10-K for the year ended
      December 31, 2007, and incorporated herein by
reference.(9)
            Filed
      as an exhibit to our Current Report on Form 8-K filed on November 18,
      2008, and incorporated herein by reference.(10)
            Filed
      as an exhibit to our Current Report on Form 8-K filed on January 7, 2009,
      and incorporated herein by
reference.







41
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)


SIGNATURES


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 12th day of
March, 2009.


PDI,
      INC./s/Nancy
      LurkerNancy
      LurkerChief
      Executive Officer


POWER
OF ATTORNEY


PDI,
Inc., a Delaware Corporation, and each person whose signature appears below
constitutes and appoints each of Nancy Lurker and Jeffrey E. Smith, and either
of them, such person’s true and lawful attorney-in-fact, with full power of
substitution and resubstitution, for such person and in such person’s name,
place and stead, in any and all capacities, to sign on such person’s behalf,
individually and in each capacity stated below, any and all amendments to this
Annual Report on Form 10-K and other documents in connection therewith, and to
file the same and all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact, or any
of them, or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Form 10-K has been signed by the following persons on behalf of the Registrant
and in the capacities indicated and on the 12th day of March, 2009.


Signature
            
            Title/s/
      John P. Dugan
            
            Chairman
      of the Board of DirectorsJohn
      P. Dugan/s/Nancy
      Lurker
            
            Chief
      Executive Officer and DirectorNancy
      Lurker
            
            (principal
      executive officer)/s/
      Jeffrey E. Smith
            
            Chief
      Financial Officer and TreasurerJeffrey
      E. Smith
            
            (principal
      accounting and financial officer)/s/
      John M. Pietruski
            
            DirectorJohn
      M. Pietruski/s/
      Jan Martens Vecsi
            
            DirectorJan
      Martens Vecsi/s/
      Frank Ryan
            
            DirectorFrank
      Ryan/s/
      John Federspiel
            
            DirectorJohn
      Federspiel/s/
      Dr. Joseph T. Curti
            
            DirectorDr.
      Joseph T. Curti/s/
      Stephen J. Sullivan
            
            DirectorStephen
      J. Sullivan/s/
      Jack E. Stover
            
            DirectorJack
      E. Stover/s/
      Gerald Belle
            
            DirectorGerald
      Belle/s/
      Veronica Lubatkin
            
            DirectorVeronica
      Lubatkin


42
 PDI,
Inc.
 Index
to Consolidated Financial Statements
 and
Financial Statement Schedules


PageReport
      of Independent Registered Public Accounting Firm
            F-2Financial
      StatementsConsolidated
      Balance Sheets at December 31, 2008 and 2007
            F-3Consolidated
      Statements of Operations for each of the three yearsin
      the period ended December 31, 2008
            F-4Consolidated
      Statements of Stockholders’ Equity for each of the three
    yearsin
      the period ended December 31, 2008
            F-5Consolidated
      Statements of Cash Flows for each of the three yearsin
      the period ended December 31, 2008
            F-6Notes
      to Consolidated Financial Statements
            F-7Schedule
      II.  Valuation and Qualifying Accounts
            F-30


F-1







Report
of Independent Registered Public Accounting Firm




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




We have
audited the accompanying consolidated balance sheets of PDI, Inc. as of December
31, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on the financial statements and schedule
based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PDI, Inc. at December
31, 2008 and 2007, and the consolidated results of its  operations and
its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S.
generally  accepted  accounting  principles.  Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), PDI, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 11, 2009 expressed an
unqualified opinion thereon.







/s/Ernst
      &Young LLPMetroPark,
      New JerseyMarch
      11, 2009

















F-2




PDI, INC.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share data)December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              90,074
              
              
              $
              99,185Short-term
      investments
              
              
              159
              
              
              
              7,800Accounts
      receivable, net
              
              
              15,786
              
              
              
              22,751Unbilled
      costs and accrued profits on contracts in progress
              
              
              2,469
              
              
              
              3,481Other
      current assets
              
              
              4,511
              
              
              
              6,710Total
      current assets
              
              
              112,999
              
              
              
              139,927Property
      and equipment, net
              
              
              5,423
              
              
              
              8,348Goodwill
              
              
              13,612
              
              
              
              13,612Other
      intangible assets, net
              
              
              13,388
              
              
              
              14,669Other
      long-term assets
              
              
              3,614
              
              
              
              2,998Total
      assets
              
              $
              149,036
              
              
              $
              179,554LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              2,298
              
              
              $
              2,792Unearned
      contract revenue
              
              
              3,678
              
              
              
              8,459Accrued
      salary and bonus
              
              
              5,640
              
              
              
              7,136Accrued
      contract loss
              
              
              10,021
              
              
              
              -Other
      accrued expenses
              
              
              9,723
              
              
              
              10,801Total
      current liabilities
              
              
              31,360
              
              
              
              29,188Long-term
      liabilities
              
              
              10,569
              
              
              
              10,177Total
      liabilities
              
              
              41,929
              
              
              
              39,365Commitments
      and contingencies (Note 9)Stockholders’
      equity:Preferred
      stock, $.01 par value; 5,000,000 shares authorized, noshares
      issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; 100,000,000 shares authorized;15,272,704
      and 15,222,715 shares issued, respectively;14,223,669
      and 14,183,236 shares outstanding, respectively
              
              
              153
              
              
              
              152Additional
      paid-in capital
              
              
              121,908
              
              
              
              120,422(Accumulated
      deficit)/retained  earnings
              
              
              (1,443
              )
              
              
              33,018Accumulated
      other comprehensive (loss) income
              
              
              (16
              )
              
              
              30Treasury
      stock, at cost (1,049,035 and 1,039,479 shares,
    respectively)
              
              
              (13,495
              )
              
              
              (13,433
              )Total
      stockholders' equity
              
              
              107,107
              
              
              
              140,189Total
      liabilities and stockholders' equity
              
              $
              149,036
              
              
              $
              179,554The
      accompanying notes are an integral part of these consolidated financial
      statements
 
   F-3


PDI,
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except for per share data)For
      The Years Ended December 31,2008
              
              
              2007
              
              
              2006Revenue,
      net
              
              $
              112,528
              
              
              $
              117,131
              
              
              $
              239,242Cost
      of services
              
              
              108,015
              
              
              
              85,516
              
              
              
              183,398Gross
      profit
              
              
              4,513
              
              
              
              31,615
              
              
              
              55,844Operating
      expenses:Compensation
      expense
              
              
              22,838
              
              
              
              24,516
              
              
              
              28,075Other
      selling, general and administrative expenses
              
              
              16,532
              
              
              
              20,023
              
              
              
              22,610Executive
      severance
              
              
              1,237
              
              
              
              -
              
              
              
              573Legal
      and related costs, net
              
              
              258
              
              
              
              335
              
              
              
              (3,279
              )Facilities
      realignment
              
              
              75
              
              
              
              1,021
              
              
              
              1,952Total
      operating expenses
              
              
              40,940
              
              
              
              45,895
              
              
              
              49,931Operating
      (loss) income
              
              
              (36,427
              )
              
              
              (14,280
              )
              
              
              5,913Interest
      income, net
              
              
              2,841
              
              
              
              6,073
              
              
              
              4,738(Loss)
      income before income tax
              
              
              (33,586
              )
              
              
              (8,207
              )
              
              
              10,651Provision
      (benefit) for income tax
              
              
              875
              
              
              
              1,767
              
              
              
              (724
              )(Loss)
      income from continuing operations
              
              
              (34,461
              )
              
              
              (9,974
              )
              
              
              11,375Income
      from discontinued operations,net
      of tax
              
              
              -
              
              
              
              -
              
              
              
              434Net
      (loss) income
              
              $
              (34,461
              )
              
              $
              (9,974
              )
              
              $
              11,809(Loss)
      income per share of common stock:Basic:Continuing
      operations
              
              $
              (2.46
              )
              
              $
              (0.72
              )
              
              $
              0.82Discontinued
      operations
              
              
              -
              
              
              
              -
              
              
              
              0.03$
              (2.46
              )
              
              $
              (0.72
              )
              
              $
              0.85Assuming
      dilution:Continuing
      operations
              
              $
              (2.46
              )
              
              $
              (0.72
              )
              
              $
              0.81Discontinued
      operations
              
              
              -
              
              
              
              -
              
              
              
              0.03$
              (2.46
              )
              
              $
              (0.72
              )
              
              $
              0.84Weighted
      average number of common shares andcommon
      share equivalents outstanding:Basic
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,859Assuming
      dilution
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,994The
      accompanying notes are an integral part of these consolidated financial
      statements
 
   F-4


PDI,
      INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY(in
      thousands)For
      The Years Ended December 31,2008
              
              
              2007
              
              
              2006Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              AmountCommon
      stock:Balance
      at January 1
              
              
              15,223
              
              
              $
              152
              
              
              
              15,097
              
              
              $
              151
              
              
              
              14,948
              
              
              $
              149Common
      stock issued
              
              
              64
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      stock issued
              
              
              122
              
              
              
              1
              
              
              
              167
              
              
              
              1
              
              
              
              155
              
              
              
              2Restricted
      stock forfeited
              
              
              (136
              )
              
              
              (1
              )
              
              
              (41
              )
              
              
              -
              
              
              
              (23
              )
              
              
              -SARs
      exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              -Stock
      options exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16
              
              
              
              -Balance
      at December 31
              
              
              15,273
              
              
              
              153
              
              
              
              15,223
              
              
              
              152
              
              
              
              15,097
              
              
              
              151Treasury
      stock:Balance
      at January 1
              
              
              1,039
              
              
              
              (13,433
              )
              
              
              1,018
              
              
              
              (13,214
              )
              
              
              1,018
              
              
              
              (13,214
              )Treasury
      stock purchased
              
              
              10
              
              
              
              (62
              )
              
              
              21
              
              
              
              (219
              )
              
              
              -
              
              
              
              -Balance
      at December 31
              
              
              1,049
              
              
              
              (13,495
              )
              
              
              1,039
              
              
              
              (13,433
              )
              
              
              1,018
              
              
              
              (13,214
              )Additional
      paid-in capital:Balance
      at January 1
              
              
              
              
              
              
              120,422
              
              
              
              
              
              
              
              119,189
              
              
              
              
              
              
              
              118,325Common
      stock issued
              
              
              
              
              
              
              299
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -Restricted
      stock issued
              
              
              
              
              
              
              (1
              )
              
              
              
              
              
              
              (1
              )
              
              
              
              
              
              
              (2
              )Restricted
      stock forfeited
              
              
              
              
              
              
              (7
              )
              
              
              
              
              
              
              (164
              )
              
              
              
              
              
              
              (95
              )Stock-based
      compensation expense
              
              
              
              1,195
              
              
              
              
              
              
              
              1,640
              
              
              
              
              
              
              
              1,755Stock
      grants exercised
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              87Excess
      tax (expense) benefiton
      stock-based compensation
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              (242
              )
              
              
              
              
              
              
              23Reclassification
      of unamortized compensation
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              (904
              )Balance
      at December 31
              
              
              
              
              
              
              121,908
              
              
              
              
              
              
              
              120,422
              
              
              
              
              
              
              
              119,189(Accumulated
      deficit)retained earnings:Balance
      at January 1
              
              
              
              
              
              
              33,018
              
              
              
              
              
              
              
              42,992
              
              
              
              
              
              
              
              31,183Net
      (loss) income
              
              
              
              
              
              
              (34,461
              )
              
              
              
              
              
              
              (9,974
              )
              
              
              
              
              
              
              11,809Balance
      at December 31
              
              
              
              
              
              
              (1,443
              )
              
              
              
              
              
              
              33,018
              
              
              
              
              
              
              
              42,992Accumulated
      othercomprehensive
      (loss) income:Balance
      at January 1
              
              
              
              
              
              
              30
              
              
              
              
              
              
              
              79
              
              
              
              
              
              
              
              71Reclassification
      of realized gain, net of tax
              
              
              
              (17
              )
              
              
              
              
              
              
              (76
              )
              
              
              
              
              
              
              (33
              )Unrealized
      holding (loss)/gain, net of tax
              
              
              
              (29
              )
              
              
              
              
              
              
              27
              
              
              
              
              
              
              
              41Balance
      at December 31
              
              
              
              
              
              
              (16
              )
              
              
              
              
              
              
              30
              
              
              
              
              
              
              
              79Unamortized
      compensation costs:Balance
      at January 1
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              (904
              )Reclassification
      to additional paid-in capital
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              904Balance
      at December 31
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -Total
      stockholders' equity
              
              
              
              
              
              
              107,107
              
              
              
              
              
              
              
              140,189
              
              
              
              
              
              
              
              149,197Comprehensive
      (loss) income:Net
      (loss) income
              
              
              
              
              
              $
              (34,461
              )
              
              
              
              
              
              $
              (9,974
              )
              
              
              
              
              
              $
              11,809Reclassification
      of realized gain, net of tax
              
              
              
              (17
              )
              
              
              
              
              
              
              (76
              )
              
              
              
              
              
              
              (33
              )Unrealized
      holding gain, net of tax
              
              
              
              
              
              
              (29
              )
              
              
              
              
              
              
              27
              
              
              
              
              
              
              
              41Total
      comprehensive (loss) income
              
              
              
              
              
              $
              (34,507
              )
              
              
              
              
              
              $
              (10,023
              )
              
              
              
              
              
              $
              11,817The
      accompanying notes are an integral part of these consolidated financial
      statements
   F-5





PDI, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)For
      The Years Ended December 31,2008
              
              
              2007
              
              
              2006Cash
      Flows From Operating ActivitiesNet
      (loss) income from operations
              
              $
              (34,461
              )
              
              $
              (9,974
              )
              
              $
              11,809Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation,
      amortization and accretion
              
              
              4,613
              
              
              
              5,607
              
              
              
              5,764Deferred
      income taxes, net
              
              
              331
              
              
              
              1,113
              
              
              
              2,710(Recovery
      of) provision for bad debt, net
              
              
              31
              
              
              
              (15
              )
              
              
              (728
              )(Recovery
      of) provision for doubtful notes, net
              
              
              -
              
              
              
              (150
              )
              
              
              (250
              )Stock-based
      compensation
              
              
              1,487
              
              
              
              1,476
              
              
              
              1,660Excess
      tax expense (benefit) from stock-based compensation
              
              
              -
              
              
              
              242
              
              
              
              (23
              )Other
      (gains), losses and expenses, net
              
              
              (15
              )
              
              
              90
              
              
              
              -Non-cash
      facilities realignment
              
              
              75
              
              
              
              796
              
              
              
              1,295Other
      changes in assets and liabilities:Decrease
      in accounts receivable
              
              
              6,965
              
              
              
              2,680
              
              
              
              2,460Decrease
      in unbilled costs
              
              
              1,012
              
              
              
              743
              
              
              
              1,750Decrease
      in other current assets
              
              
              554
              
              
              
              4,858
              
              
              
              4,593Decrease
      in other long-term assets
              
              
              1,023
              
              
              
              375
              
              
              
              185Decrease
      in accounts payable
              
              
              (494
              )
              
              
              (1,123
              )
              
              
              (1,778
              )(Decrease)
      increase in unearned contract revenue
              
              
              (4,781
              )
              
              
              (5,793
              )
              
              
              1,654Decrease
      in accrued salaries and bonus
              
              
              (1,496
              )
              
              
              (3,056
              )
              
              
              (3,170
              )Increase
      in accrued contract loss
              
              
              10,021
              
              
              
              -
              
              
              
              -(Decrease)
      increase in accrued liabilities
              
              
              (829
              )
              
              
              (5,224
              )
              
              
              (8,489
              )(Decrease)
      increase in long-term liabilities
              
              
              (27
              )
              
              
              1,179
              
              
              
              243Net
      cash (used in) provided by operating activities
              
              
              (15,991
              )
              
              
              (6,176
              )
              
              
              19,685Cash
      Flows From Investing ActivitiesPurchase
      of available-for-sale investments
              
              
              -
              
              
              
              (11,700
              )
              
              
              (32,585
              )Proceeds
      from sales of available-for-sale investments
              
              
              -
              
              
              
              44,285
              
              
              
              -Purchase
      of held-to-maturity investments
              
              
              (15,050
              )
              
              
              (24,290
              )
              
              
              (61,216
              )Proceeds
      from maturities of held-to-maturity investments
              
              
              22,391
              
              
              
              53,165
              
              
              
              29,920Repayments
      from Xylos
              
              
              -
              
              
              
              150
              
              
              
              250Purchase
      of property and equipment
              
              
              (399
              )
              
              
              (1,009
              )
              
              
              (1,770
              )Net
      cash provided by (used in) investing activities
              
              
              6,942
              
              
              
              60,601
              
              
              
              (65,401
              )Cash
      Flows From Financing ActivitiesExcess
      tax (expense) benefit from stock-based compensation
              
              
              
              
              
              
              (242
              )
              
              
              23Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              87Cash
      paid for repurchase of restricted shares
              
              
              (62
              )
              
              
              (219
              )
              
              
              -Net
      cash (used in) provided by financing activities
              
              
              (62
              )
              
              
              (461
              )
              
              
              110Net
      (decrease) increase in cash and cash equivalents
              
              
              (9,111
              )
              
              
              53,964
              
              
              
              (45,606
              )Cash
      and cash equivalents – beginning
              
              
              99,185
              
              
              
              45,221
              
              
              
              90,827Cash
      and cash equivalents – ending
              
              $
              90,074
              
              
              $
              99,185
              
              
              $
              45,221Cash
      paid for interest
              
              $
              -
              
              
              $
              1
              
              
              $
              2Cash
      paid for taxes
              
              $
              211
              
              
              $
              123
              
              
              $
              640The
      accompanying notes are an integral part of these consolidated financial
      statements
 F-6
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements
 (tabular information in thousands,
except share and per share data)


1.
            Nature
      of Business and Significant Accounting
Policies




Nature
of Business




PDI, Inc.
together with its wholly-owned subsidiaries (PDI or the Company) is a
diversified sales and marketing services company serving the biopharmaceutical
and life sciences industries.  See Note 20, Segment Information, for
additional information.




Principles
of Consolidation




The
accompanying consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP).  The
consolidated financial statements include accounts of PDI and its wholly owned
subsidiaries (TVG, Inc., ProtoCall, Inc., InServe Support Solutions, and PDI
Investment Company, Inc.)  All significant intercompany balances and
transactions have been eliminated in consolidation.  In the second
quarter of 2006, the Company discontinued its Medical Device and Diagnostic
(MD&D) business. The MD&D business was part of the Company's sales
services reporting segment. The MD&D business is accounted for as a
discontinued operation under GAAP and, therefore, the MD&D business results
of operations have been removed from the Company's results of continuing
operations for 2006.  See Note 19, Discontinued
Operations.




Accounting
Estimates




The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities reported and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Management's
estimates are based on historical experience, facts and circumstances available
at the time, and various other assumptions that are believed to be reasonable
under the circumstances.  Significant estimates include incentives
earned or penalties incurred on contracts, loss contract provisions, valuation
allowances related to deferred income taxes, self-insurance loss accruals,
allowances for doubtful accounts and notes, income tax accruals and facilities
realignment accruals.  The Company periodically reviews these matters
and reflects changes in estimates as appropriate.  Actual results
could materially differ from those estimates.




Cash
and Cash Equivalents




Cash and
cash equivalents include unrestricted cash accounts, money market investments
and highly liquid investment instruments with original maturity of three months
or less at the date of purchase.




Investments
in Marketable Securities




Available-for-sale
securities are carried at fair value with the unrealized gains or losses, net of
tax, included as a component of accumulated other comprehensive income (loss) in
stockholders’ equity. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in other
income (expense), net. The fair values for marketable equity securities are
based on quoted market prices.  Held-to-maturity investments are
stated at amortized cost.  Interest income is accrued as
earned.  Realized gains and losses are computed based upon specific
identification and included in interest income, net in the consolidated
statement of operations.  The Company does not have any investments
classified as “trading.”




Receivables
and Allowance for Doubtful Accounts




Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  Management reviews a customer’s credit history before
extending credit.  The Company has recorded a provision for estimated
losses resulting from the inability of its customers to make required payments
based on historical experience and periodically adjusts these provisions to
reflect actual experience.  Additionally, the Company will establish a
specific allowance for doubtful accounts when the Company becomes aware of a
specific customer’s inability or unwillingness to meet its financial obligations
(e.g., bankruptcy filing).  Allowance for doubtful accounts was $0 as
of December 31, 2008 and 2007, respectively.  The Company operates
almost exclusively in the pharmaceutical industry and to a great extent its
revenue is dependent on a limited number of large pharmaceutical
companies.  The Company also partners with customers in the emerging
pharmaceutical sector, some of whom may have limited financial
resources.  A general downturn in the pharmaceutical industry or
adverse material event to one or more of the Company’s emerging pharmaceutical
customers could result in higher than expected customer defaults and additional
allowances may be required.




F-7
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


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 customers have not been
billed.  These amounts are classified as a current
asset.  Normally, in the case of detailing contracts, the customers
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.




Loans
and Investments in Privately Held Entities




From time
to time, the Company makes investments in and/or loans to privately-held
companies.  The Company determines whether the fair values of any
investments in privately held entities have declined below their carrying value
whenever adverse events or changes in circumstances indicate that recorded
values may not be recoverable.  If the Company considers any such
decline to be other than temporary (based on various factors, including
historical financial results, and the overall health of the investee’s
industry), a write-down is recorded to estimated fair value.  On a
quarterly basis, the Company reviews outstanding loans receivable to determine
if a provision for doubtful notes is necessary.  These reviews include
discussions with senior management of the investee, and evaluations of, among
other things, the investee’s progress against its business plan, its product
development activities and customer base, industry market conditions, historical
and projected financial performance, expected cash needs and recent funding
events.  The Company records interest income on the impaired loans;
however, that amount is fully reserved if the investee is not making its
interest payments.  Subsequent cash receipts on the outstanding
interest would be applied against the outstanding interest receivable balance
and the corresponding allowance.  The Company’s assessments of value
are highly subjective given that these companies may be at an early stage of
development and rely regularly on their investors for cash
infusions.  At December 31, 2008 and 2007, the allowance for doubtful
notes was approximately $500,000.  See Note 5, Loans and Investments
in Privately-Held Entities, for additional information.




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 and computer equipment and ten years
for phone systems.  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.  As the prices of computer desktops and
laptops continue to decline, more of these computer purchases are falling short
of the Company’s minimum price threshold for capitalization and are being
expensed.




Software
Costs




It is the
Company’s policy to capitalize certain costs incurred in connection with
developing or obtaining internal-use software.  Capitalized software
costs are included in property and equipment on the consolidated balance sheet
and amortized over the software's useful life, generally three to seven
years.  Software costs that do not meet capitalization criteria are
expensed immediately.




Concentration
of Credit Risk




Financial
instruments that potentially subject the Company to a significant concentration
of credit risk consist primarily of cash and cash equivalents and investments in
marketable securities. The Company maintains deposits in federally insured
financial institutions.  The Company also holds investments in
Treasury money market funds that maintain an average portfolio maturity under 90
days and, under the temporary guarantee program for money market funds, are
insured by the United States Treasury.  Deposits held with financial
institutions may exceed the amount of insurance provided on such deposits;
however, management believes the Company is not exposed to significant credit
risk due to the financial position of the financial institutions in which those
deposits are held and the nature of the investments.




F-8
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Fair
Value of Financial Instruments




The
Company considers carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses to approximate fair value due to the short-term
nature of these financial instruments.  Marketable securities
classified as “available for sale” are carried at fair
value.   Marketable securities classified as “held-to-maturity”
are carried at amortized cost, which approximates fair value.  The
fair value of letters of credit is determined to be $0 as management does not
expect any material losses to result from these instruments because performance
is not expected to be required.




Goodwill
and Other Intangible Assets




The
Company allocates the cost of acquired companies to the identifiable tangible
and intangible assets and liabilities acquired, with the remaining amount being
classified as goodwill.  Since the entities the Company has acquired
do not have significant tangible assets, a significant portion of the purchase
price has been allocated to intangible assets and goodwill.  The
identification and valuation of these intangible assets and the determination of
the estimated useful lives at the time of acquisition, as well as the completion
of annual impairment tests require significant management judgments and
estimates.  These estimates are made based on, among other factors,
consultations with an accredited independent valuation consultant, reviews of
projected future operating results and business plans, economic projections,
anticipated future cash flows and the cost of capital.  The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of goodwill and other intangible assets, and potentially result in a
different impact to the Company’s results of operations.  Further,
changes in business strategy and/or market conditions may significantly impact
these judgments thereby impacting the fair value of these assets, which could
result in an impairment of the goodwill and acquired intangible
assets.




The
Company tests goodwill for impairment at least annually and whenever events or
circumstances change that indicate impairment may have
occurred.  These events or circumstances could include a significant
long-term adverse change in the business climate, poor indicators of operating
performance or a sale or disposition of a significant portion of a reporting
unit.  The Company tests goodwill for impairment at the reporting unit
level, which is one level below its operating segments.  Goodwill has
been assigned to the reporting units to which the value of the goodwill
relates.  The Company currently has six reporting units; however, only
one reporting unit, Pharmakon, includes goodwill.  Goodwill is tested
by estimating the fair value of the reporting unit using a discounted cash flow
model.  The estimated fair value of the reporting unit is then
compared with the carrying value including goodwill, to determine if any
impairment exists.  In assessing the recoverability of goodwill,
projections regarding estimated future cash flows and other factors are made to
determine the fair value of the respective reporting units.  The key
estimates and factors used in the discounted cash flow valuation include revenue
growth rates and profit margins based on internal forecasts, terminal value and
the weighted-average cost of capital used to discount future cash
flows.  While the Company uses available information to prepare
estimates and to perform impairment evaluations, actual results could differ
significantly from these estimates or related projections, resulting in
impairment related to recorded goodwill balances.




The
testing performed as of December 31, 2008 and 2007, indicated an excess of
estimated fair value over book value for Pharmakon. This unit had goodwill of
$13.6 million, carrying value of $25.4 million and estimated fair value of $27.2
million.  If the Company’s projected long-term sales growth rate,
profit margins, or terminal rate are considerably lower, and/or the assumed
weighted average cost of capital is considerably higher, future testing may
indicate impairment in this reporting unit and, as a result, the related
goodwill may also be impaired.  See Note 4, Goodwill and Other
Intangible Assets, for additional information.




Long-Lived
Assets




The
Company reviews the recoverability of long-lived assets and finite-lived
intangible assets whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable.  If the sum of
the expected future undiscounted cash flows is less than the carrying amount of
the asset, an impairment loss is recognized by reducing the recorded value of
the asset to its fair value measured by future discounted cash
flows.  This analysis requires estimates of the amount and timing of
projected cash flows and, where applicable, judgments associated with, among
other factors, the appropriate discount rate.  Such estimates are
critical in determining whether any impairment charge should be recorded and the
amount of such charge if an impairment loss is deemed to be
necessary.  In addition, future events impacting cash flows for
existing assets could render a write-down or write-off necessary that previously
required no such write-down or write-off.




F-9
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


In 2007
the Company recorded a non-cash charge of approximately $1.1 million related to
computer equipment, furniture and leasehold improvements primarily due to the
outsourcing of the Company’s computer data center space at its Saddle River, New
Jersey location.  In December 2007, the Company relocated its data
center to a secured, hosted facility.  See Note 16, Facilities
Realignment, for additional information.  Additionally, in 2007, the
Company recorded a non-cash charge of approximately $42,000 related to the
impairment of certain capitalized software development costs associated with one
of its web portals.  In 2006, the Company recorded a non-cash charge
of approximately $1.3 million for furniture and leasehold improvements related
to the excess leased space at its Saddle River, New Jersey and Dresher,
Pennsylvania locations.  See Note 16, Facilities Realignment, for
additional information.




Self-Insurance
Accruals




Prior to
October 1, 2008, the Company was self-insured for certain losses for claims
filed and claims incurred but not reported relating to workers’ compensation and
automobile-related liabilities for Company-leased cars.  Beginning
October 1, 2008, the Company is fully-insured through an outside carrier for
these losses.  The Company’s liability for claims filed and claims
incurred but not reported prior to October 1, 2008 is estimated on an actuarial
undiscounted basis supplied by its insurance brokers and insurers using
individual case-based valuations and statistical analysis and is based upon
judgment and historical experience, however, the final cost of many of these
claims may not be known for five years or longer.  The Company also is
self-insured for benefits paid under employee healthcare
programs.  The Company’s liability for healthcare claims is estimated
using an underwriting determination which is based on current year’s average lag
days between when a claim is incurred to when it is paid.  The Company
maintains stop-loss coverage with third-party insurers to limit its total
exposure on all of these programs.  Periodically, the Company
evaluates the level of insurance coverage and adjusts insurance levels based on
risk tolerance and premium expense.  Management reviews its
self-insurance accruals on a quarterly basis.  At December 31, 2008
and 2007, self-insurance accruals totaled $1.9 million and $2.9 million,
respectively, and are included in other accrued expenses on the balance
sheet.




Contingencies




In the
normal course of business, the Company is subject to various
contingencies.  Contingencies are recorded in the consolidated
financial statements when it is probable that a liability will be incurred and
the amount of the loss can be reasonably estimated, or otherwise
disclosed.  The Company is currently involved in certain legal
proceedings and, as required, the Company has accrued its estimate of the
probable costs for the resolution of these claims. These estimates are
developed in consultation with outside counsel and are based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies.  Predicting the outcome of claims and litigation, and
estimating related costs and exposures, involves substantial uncertainties that
could cause actual costs to vary materially from estimates.




Revenue
and Associated Costs




Revenue
and associated costs under pharmaceutical detailing contracts are generally
based on the number of physician details made or the number of sales
representatives utilized.  With respect to risk-based contracts, all
or a portion of revenues earned are based on contractually defined percentages
of either product revenues or the market value of prescriptions written and
filled in a given period.  These contracts are generally for terms of
one to two years and may be renewed or extended.  The majority of
these contracts, however, are terminable by the customer for any reason upon 30
to 90 days’ notice.  Certain contracts provide for termination
payments if the customer terminates the agreement without
cause.  Typically, however, these penalties do not offset the revenue
the Company could have earned under the contract or the costs the Company may
incur as a result of its termination.




The loss
or termination of a large pharmaceutical detailing contract or the loss of
multiple contracts could have a material adverse effect on the Company’s
business, financial condition or results of operations.  Historically,
the Company has derived a significant portion of its service revenue from a
limited number of customers.  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 customer concentration in future periods.  For
the years ended December 31, 2008 and 2007, the Company’s three largest
customers, who each individually represented 10% or more of its service revenue,
together accounted for approximately 52.5% and 37.9% of its service revenue,
respectively.  For the year ended December 31, 2006 the Company’s two
largest customers, who each individually represented 10% or more of its service
revenue, together accounted for approximately 46.8% of its service
revenue. See Note 14, Significant Customers.




F-10
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Revenue
and associated costs under marketing service contracts are generally based on a
single deliverable such as a promotional program, accredited continuing medical
education seminar or marketing research/advisory program.  The
contracts are generally terminable by the customer for any
reason.  Upon termination, the customer is generally responsible for
payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the customer.  There is significant
customer concentration in the Company’s Pharmakon business, and the loss or
termination of one or more of Pharmakon’s large master service agreements could
have a material adverse effect on the Company’s business, financial condition or
results of operations.  Due to the typical size of most contracts of
TVG Marketing Research and Consulting (TVG) and Vital Issues in Medicine (VIM)®,
it is unlikely the loss or termination of any individual TVG or VIM contract
would have a material adverse effect on the Company’s business, financial
condition or results of operations.




Service
revenue is recognized on product detailing programs and certain marketing,
promotional and medical education contracts as services are performed and the
right to receive payment for the services is assured. Many of the product
detailing contracts allow for additional periodic incentive fees to be earned if
certain performance benchmarks have been attained. Revenue earned from incentive
fees is recognized in the period earned and when the Company is reasonably
assured that payment will be made.  Under performance based contracts,
revenue is recognized when the performance based parameters are
achieved.  Many contracts also stipulate penalties if agreed upon
performance benchmarks have not been met.  Revenue is recognized net
of any potential penalties until the performance criteria relating to the
penalties have been achieved.  Commissions based revenue is recognized
when performance is completed.  Revenue from recruiting and hiring
contracts is recognized at the time the candidate begins full-time employment
less a provision for sales allowances based on contractual commitments and
historical experience.  Revenue and associated costs from marketing
research contracts are recognized upon completion of the
contract.  These contracts are generally short-term in nature
typically lasting two to six months.




Under its
promotional program included in the product commercialization segment, the
Company recognizes revenue quarterly based on a specified formula set forth in
our product commercialization agreement with Novartis related to product sales
for the quarter.  The Company will not receive any compensation during
any quarter in which product sales are below certain thresholds established for
that quarter as set forth in the agreement.  Revenues recognized (if
any) under this agreement will be directly impacted by prescription data
provided by a third party vendor and other information provided by
Novartis.  Additionally, the Company must perform a minimum number of
sales calls to designated physicians each year, and the failure to satisfy this
requirement could result in penalties being imposed on PDI or provide the
customer with the ability to terminate the agreement.




Cost of
services consist primarily of the costs associated with executing product
detailing programs, performance based contracts or other sales and marketing
services identified in the contract. Cost of services 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 cost of services, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives, sales managers and professional staff that
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.




Reimbursable
out-of-pocket expenses include those relating to travel and other similar costs,
for which the Company is reimbursed at cost by its
customers.  Reimbursements received for out-of-pocket expenses
incurred are characterized as revenue and an identical amount is included as
cost of goods and services in the consolidated statements of
operations.  For the years ended December 31, 2008, 2007 and 2006,
reimbursable out-of-pocket expenses were $12.6 million, $14.3 million and $25.3
million, respectively.




F-11
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


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 the
majority of the Company’s contracts, training costs are reimbursable
out-of-pocket expenses.  For contracts where the Company is
responsible for training costs, these 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.




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 contracts.  The Company
recognized a contract loss related to its existing product commercialization
agreement in 2008.  See Note 10 for more details.




Treasury
Stock




Treasury
stock purchases are accounted for under the cost method whereby the entire cost
of the acquired stock is recorded as treasury stock.  Upon reissuance
of shares, the Company records any difference between the weighted-average cost
of such shares and any proceeds received as an adjustment to additional paid-in
capital.




Stock-Based
Compensation




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, (Revised 2004) “Share-Based Payment” (FAS
123R), using the modified prospective approach. Under the modified prospective
approach, the amount of compensation cost recognized includes: (i) compensation
cost for all share-based payments granted before but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” (FAS No.123) and (ii) compensation cost for all share-based
payments granted or modified subsequent to January 1, 2006, based on the
estimated fair value at the date of grant or subsequent modification date in
accordance with the provisions of FAS 123R.  Prior to January 1, 2006,
the Company accounted for stock-based employee compensation using the intrinsic
value method under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees.”




FAS 123R
requires any income tax benefits realized upon the exercise of stock options or
issuance of restricted share awards in excess of that which is associated with
the expense recognized for financial reporting purposes be presented as a
financing activity rather than as an operating activity in the consolidated
statement of cash flows.  FAS 123R also requires that the Company
recognize compensation expense for only the portion of stock options,
stock-settled stock appreciation rights (SARs) or restricted shares that are
expected to vest.  Therefore, the Company applies estimated forfeiture
rates that are derived from historical employee termination
behavior.  The Company applied a forfeiture rate to certain grants in
2007 and 2006.  If the actual number of forfeitures differs from those
estimated by management, adjustments to compensation expense might be required
in future periods.




The
Company had no cumulative effect adjustment upon adoption of FAS 123R under the
modified prospective method.  As a result of adopting FAS 123R on
January 1, 2006, net income and net income per share for the year ended December
31, 2006 were $290,000 and $0.02 lower, respectively, than if the Company had
continued to account for stock-based compensation under APB 25.  See
Note 13, Stock-Based Compensation, for further information regarding the
Company’s stock-based compensation assumptions and expenses.




Rent
Expense




Minimum
rental expenses are recognized over the term of the lease.  The
Company recognizes minimum rent starting when possession of the property is
taken from the landlord, which normally includes a construction period prior to
occupancy.  When a lease contains a predetermined fixed escalation of
the minimum rent, the Company recognizes the related rent expense on a
straight-line basis and records the difference between the recognized rental
expense and the amounts payable under the lease as deferred lease
credits.  The Company also may receive tenant allowances including
cash or rent abatements, which are reflected in other accrued expenses and
long-term liabilities on the consolidated balance sheet and are amortized as a
reduction to rent expense over the term of the lease.  Certain leases
provide for contingent rents that are not measurable at
inception.  These contingent rents are primarily based upon use of
utilities and the landlord’s operating expenses.  These amounts are
excluded from minimum rent and are included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is
reasonably estimable.




F-12
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Advertising




The
Company recognizes advertising costs as incurred.  The total amounts
charged to advertising expense, which is included in other SG&A, were
approximately $378,000, $290,000 and $825,000 for the years ended December 31,
2008, 2007 and 2006, respectively.




Income
taxes




The
Company adopted Financial Accounting Standards Board (FASB) Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement 109”
(FIN 48) on January 1, 2007.  FIN 48 prescribes a recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken in tax returns. In
addition, FIN 48 provides guidance on derecognition, classification and
disclosure of tax positions, as well as the accounting for related interest and
penalties.  The Company’s adoption of FIN 48 did not have a material
effect on its financial position or results of operations.




The
Company accounts for income taxes using the asset and liability
method.  This method requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences that
currently exist between tax bases and financial reporting bases of the Company’s
assets and liabilities based on enacted tax laws and rates.  A
valuation allowance is established, when necessary, to reduce the deferred
income tax assets when it is more likely than not that all or a portion of a
deferred tax asset will not be realized.




The
Company operates in multiple tax jurisdictions and provides taxes in each
jurisdiction where it conducts business and is subject to
taxation.  The breadth of the Company’s operations and the complexity
of the tax law require assessments of uncertainties and judgments in estimating
the ultimate taxes the Company will pay.  The final taxes paid are
dependent upon many factors, including negotiations with taxing authorities in
various jurisdictions, outcomes of tax litigation and resolution of proposed
assessments arising from federal and state audits.  Uncertain tax
positions are accounted for under FIN 48.  FIN 48 requires that a
position taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not (i.e., a likelihood of more
than fifty percent) that the position would be sustained upon examination by tax
authorities that have full knowledge of all relevant information. A recognized
tax position is then measured at the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company adjusts accruals for unrecognized tax benefits as facts and
circumstances change, such as the progress of a tax audit. The Company believes
that any potential audit adjustments will not have a material adverse effect on
its financial condition or liquidity. However, any adjustments made may be
material to the Company’s consolidated results of operations or cash flows for a
reporting period.




Significant
judgment is also required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax
assets.  Deferred tax assets are regularly reviewed for
recoverability.  The Company currently has significant deferred tax
assets resulting from net operating loss carryforwards and deductible temporary
differences, which should reduce taxable income in future
periods.  The realization of these assets is dependent on generating
future taxable income.




Comprehensive
Income




Comprehensive
income includes net income and the net unrealized gains and losses on investment
securities, net of tax.  Other comprehensive income is net of
reclassification adjustments to adjust for items currently included in net
income, such as realized gains and losses on investment
securities.  The deferred tax benefit for unrealized holding losses
arising from investment securities during the year ended December 31, 2008 was
$11,000.  The deferred tax expense for unrealized holding gains
arising from investment securities during the year ended December 31, 2007 and
2006 was $18,000 and $26,000, respectively.  The deferred tax expense
for reclassification adjustments for gains included in net income on investment
securities during the years ended December 31, 2008, 2007 and 2006 was $11,000,
$48,000 and $20,000, respectively.




Reclassifications




The
Company reclassified certain prior period financial statements balances to
conform to the current year presentation.




F-13
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Recently
Issued Standards




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (FAS
141R).  FAS 141(R) requires the use of the acquisition method of
accounting, defines the acquirer, establishes the acquisition date and broadens
the scope to all transactions and other events in which one entity obtains
control over one or more other businesses. FAS 141R will change the accounting
treatment for certain specific acquisition related items including: (1)
expensing acquisition related costs as incurred; (2) valuing noncontrolling
interests at fair value at the acquisition date; and (3) expensing restructuring
costs associated with an acquired business.  FAS 141R also includes a
substantial number of new disclosure requirements.  This statement is
effective for business combinations or transactions entered into for fiscal
years beginning on or after December 15, 2008.  The Company expects
FAS 141R will have an impact on accounting for business combinations once
adopted but the effect is dependent upon acquisitions at that time.




In June
2008, the FASB approved FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(FSP EITF 03-6-1) which is effective January 1, 2009.  FSP EITF
03-6-1 clarifies that share-based payment awards that entitle holders to receive
non-forfeitable dividends before they vest will be considered participating
securities and included in the basic earnings per share
calculation.  Prior to May 30, 2008, the Company’s stock award
agreements provided for nonforfeitable dividend rights to unvested restricted
stock awards and, consequently, these awards are participating securities as
defined in this FSP.  On May 31, 2008, the Company revised its stock
award agreements for future grants so that unvested shares are non-participating
securities.  The Company is currently evaluating the impact of
adopting FSP EITF 03-6-1 on its consolidated financial position and results
of operations.




Recently
Adopted Standards




SFAS No.
157, “Fair Value Measurements”(FAS 157) defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This standard is
to be applied when other standards require or permit the use of fair value
measurement of an asset or liability.  SFAS 157 was adopted on January
1, 2008 for all financial assets and liabilities and for nonfinancial assets and
liabilities recognized or disclosed at fair value in the Company’s consolidated
financial statements on a recurring basis (at least annually). For all other
nonfinancial assets and liabilities, SFAS 157 is effective on January 1,
2009.  The initial adoption of FAS 157 had no impact on the Company’s
consolidated financial position or results of operations; however, the Company
is now required to provide additional disclosures as part of its financial
statements.  See Note 11, Fair Value Measurements.  The
Company is still in the process of evaluating this standard with respect to its
effect on nonfinancial assets and liabilities and, therefore, has not yet
determined the impact that it will have on the Company’s financial statements
upon full adoption in 2009.  Nonfinancial assets and liabilities for
which the Company has not applied the provisions of FAS 157 include those
measured at fair value in impairment testing and those initially measured at
fair value in a business combination.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement No.
115” (FAS 159).  FAS 159 permits entities to elect to measure
eligible financial instruments at fair value.  The Company would
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize
upfront costs and fees related to those items in earnings as
incurred.  The Company adopted FAS 159 as of January 1,
2008.  The Company did not apply the fair value option to any of its
outstanding instruments.






2.
            Investments
      in Marketable Securities




The
Company’s available-for-sale investments are carried at fair value and consist
of assets in a rabbi trust associated with its deferred compensation plan at
December 31, 2008 and 2007.  Marketable securities classified as
available-for-sale are carried at fair value.  At December 31, 2008
and 2007, the carrying value of available-for-sale securities was approximately
$159,000 and $459,000, respectively, which are included in short-term
investments.  The available-for-sale securities within the Company’s
deferred compensation plan at December 31, 2008 and 2007 consisted of
approximately $103,000 and $198,000 respectively, in money market accounts, and
approximately $56,000 and $261,000, respectively, in mutual funds.  At
December 31, 2008 and 2007, included in accumulated other comprehensive income
were gross unrealized gains of approximately $0 and $51,000, respectively, and
gross unrealized losses of approximately $27,000 and $2,000,
respectively.  In years ended December 31, 2008 and 2007,
included in other income, net were gross realized gains of approximately $29,000
and $126,000, respectively, and no gross realized losses.




F-14
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
Company’s other marketable securities consist of investment grade debt
instruments such as obligations of U.S. Treasury and U.S. Federal Government
agencies.  These investments are categorized as held-to-maturity
because the Company’s management has the intent and ability to hold these
securities to maturity.  Marketable securities classified as
held-to-maturity are carried at amortized cost which approximates fair
value. Certain held-to-maturity investments are maintained in separate
accounts to support the Company’s letters of credit.  The Company has
standby letters of credit of approximately $5.9 million and $7.3 million at
December 31, 2008 and 2007, respectively, as collateral for its existing
insurance policies and its facility leases.




At
December 31, 2008 and 2007, held-to-maturity investments were included in
short-term investments (approximately $0 million and $7.3 million,
respectively), other current assets (approximately $2.2 million and $4.3
million, respectively) and other long-term assets (approximately $3.6 million
and $3.0 million, respectively).  At December 31, 2008 and 2007,
held-to-maturity investments included:


Maturing
              
              
              
              
              
              MaturingDecember
      31,
              
              
              within
              
              
              1
      year
              
              
              December
      31,
              
              
              within
              
              
              1
      year2008
              
              
              1
      year
              
              
              to
      3 years
              
              
              2007
              
              
              1
      year
              
              
              to
      3 yearsShort-term
      investments:Corporate
      debt securities
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,340
              
              
              $
              7,340
              
              
              $
              -Investments
      supporting letters of credit:Cash/money
      market accounts
              
              
              733
              
              
              
              733
              
              
              
              -
              
              
              
              2,390
              
              
              
              2,390
              
              
              
              -US
      Treasury securities
              
              
              2,043
              
              
              
              1,000
              
              
              
              1,043
              
              
              
              1,498
              
              
              
              500
              
              
              
              998Government
      agency securities
              
              
              3,071
              
              
              
              500
              
              
              
              2,571
              
              
              
              3,400
              
              
              
              1,400
              
              
              
              2,0005,847
              
              
              
              2,233
              
              
              
              3,614
              
              
              
              7,288
              
              
              
              4,290
              
              
              
              2,998Total
              
              $
              5,847
              
              
              $
              2,233
              
              
              $
              3,614
              
              
              $
              14,628
              
              
              $
              11,630
              
              
              $
              2,998






3.
            Property
      and Equipment




Property
and equipment consisted of the following as of December 31, 2008 and
2007:




December
      31,2008
              
              
              2007Furniture
      and fixtures
              
              $
              3,281
              
              
              $
              3,281Office
      equipment
              
              
              1,306
              
              
              
              1,465Computer
      equipment
              
              
              4,800
              
              
              
              4,773Computer
      software
              
              
              9,580
              
              
              
              9,496Leasehold
      improvements
              
              
              6,036
              
              
              
              6,02325,003
              
              
              
              25,038Less
      accumulated depreciation
              
              
              (19,580
              )
              
              
              (16,690
              )$
              5,423
              
              
              $
              8,348


Depreciation
expense was approximately $3.3 million, $3.1 million and $3.3 million, for the
years ended December 31, 2008, 2007 and 2006, respectively.  Included
in depreciation expense is amortization expense for capitalized computer
software cost of approximately $0.9 million, $1.2 million and $1.1 million,
respectively.




In 2007,
the Company recorded a non-cash charge of approximately $1.0 million for
furniture and leasehold improvements related to the excess leased space at its
Saddle River, New Jersey and Dresher, Pennsylvania locations.  See
Note 14, Facilities Realignment, for additional information.






4.
            Goodwill
      and Other Intangible Assets




There
have been no changes in the carrying amount of goodwill of $13.6 million for the
years ended December 31, 2008 and 2007.




F-15
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


All
intangible assets recorded as of December 31, 2008 are attributable to the
acquisition of Pharmakon and are being amortized on a straight-line basis over
the lives of the intangibles, which range from 5 to 15 years.  The net
carrying value of the identifiable intangible assets for the years ended
December 31, 2008 and 2007 is as follows:


As
      of December 31, 2008
              
              
              As
      of December 31, 2007Carrying
              
              
              Accumulated
              
              
              
              
              
              Carrying
              
              
              AccumulatedAmount
              
              
              Amortization
              
              
              Net
              
              
              Amount
              
              
              Amortization
              
              
              NetCovenant
      not to compete
              
              $
              140
              
              
              $
              121
              
              
              $
              19
              
              
              $
              140
              
              
              $
              93
              
              
              $
              47Customer
      relationships
              
              
              16,300
              
              
              
              4,709
              
              
              
              11,591
              
              
              
              16,300
              
              
              
              3,622
              
              
              
              12,768Corporate
      tradename
              
              
              2,500
              
              
              
              722
              
              
              
              1,778
              
              
              
              2,500
              
              
              
              556
              
              
              
              1,944Total
              
              $
              18,940
              
              
              $
              5,552
              
              
              $
              13,388
              
              
              $
              18,940
              
              
              $
              4,271
              
              
              $
              14,669




Amortization expense
related to continuing operations for the years ended December 31, 2008, 2007 and
2006 was approximately $1.3 million for each of the three years,


2009
              
              2010
              
              2011
              
              2012
              
              2013$      1,272
              
              $      1,253
              
              $      1,253
              
              $      1,253
              
              $      1,253




5.
            Loans
      and Investments in Privately-Held
Entities




In
October 2002, the Company acquired $1.0 million of preferred stock of Xylos
Corporation (Xylos). In addition, the Company provided Xylos with short-term
loans totaling $500,000 in the first half of 2004. The Company determined its
$1.0 million investment and $500,000 short-term loan to Xylos were impaired as
of December 31, 2004.  The Company wrote its $1.0 million investment
down to zero and established an allowance for credit losses against the $500,000
short-term loan.  Xylos made loan payments totaling $150,000,
$250,000, and $100,000 in 2007, 2006 and 2005, respectively and the loan has
been repaid in full. These payments were recorded as credits to bad debt expense
in the periods in which they were received.




In May
2004, the Company entered into a loan agreement with TMX Interactive, Inc.
(TMX), a provider of sales force effectiveness technology.  Pursuant
to the loan agreement, the Company provided TMX with a term loan facility of
$500,000 and a convertible loan facility of $500,000, both of which were due on
November 26, 2005.  In 2005, due to TMX’s continued losses and
uncertainty regarding its future prospects, the Company established an allowance
for credit losses against the TMX loans.  From 2005 to 2007, TMX
provided services to the Company valued at $500,000 and the receipt of services
in lieu of cash payment was recorded as a credit to bad debt expense and a
reduction of the receivable in the respective periods.  At December
31, 2008, the loan receivable has a balance of $500,000, which is fully
reserved.






6.
            Retirement
      Plans




The
Company offers an employee 401(k) saving plan.  Under the PDI, Inc.
401(k) Plan, employees may contribute up to 25% of their pre-tax
compensation.  Effective January 1, 2004, the Company makes a safe
harbor non-elective contribution in an amount equal to 100% of the participant’s
base salary contributed up to 3% plus 50% of the participant’s base salary
contributed exceeding 3% but not more than 5%.  Prior to January 1,
2004, the Company made cash contributions in an amount equal to 100% of the
participant’s base salary contributed up to 2%.  Participants are not
allowed 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 2008, 2007 and 2006 was approximately $0.8 million,
$0.7 million, and $1.3 million, respectively.




7.
            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 participants to diversify these assets
through a variety of investment options.  Members of the Company’s
Board of Directors (Board) also have the opportunity to defer their compensation
through this arrangement.  The Company includes the net assets of the
trust in its financial statements.  The deferred compensation
obligation has been classified as a current liability and the net assets in the
trust are classified as available-for-sale securities and are included in
short-term investments.




F-16
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


8.
            Long-term
      Liabilities




Long-term
liabilities consisted of the following as of December 31, 2008 and
2007:




December
      31,2008
              
              
              2007Deferred
      tax
              
              $
              1,443
              
              
              $
              1,113Rent
      payable
              
              
              2,736
              
              
              
              2,959Accrued
      income taxes
              
              
              6,003
              
              
              
              5,765Other
              
              
              387
              
              
              
              340$
              10,569
              
              
              $
              10,177




9.
            Commitments
      and Contingencies




The
Company leases facilities, automobiles and certain equipment under agreements
classified as operating leases, which expire at various dates through
2016.  Substantially all of the property leases provide for increases
based upon use of utilities and landlord’s operating expenses.  Lease
and auto expense under these agreements for the years ended December 31, 2008,
2007 and 2006 was approximately $4.9 million, $5.0 million, and $15.0 million,
respectively, of which $2.9 million in 2008, $2.9 million in 2007, and $12.7
million in 2006 related to automobiles leased for use by employees for a term of
one year from the date of delivery with yearly annual renewal
options.




As of
December 31, 2008, contractual obligations with terms exceeding one year and
estimated minimum future rental payments required by non-cancelable operating
leases with initial or remaining lease terms exceeding one year are as
follows:




Less
      than
            
            
            1
      to 3
            
            
            3
      to 5
            
            
            AfterTotal
            
            
            1
      Year
            
            
            Years
            
            
            Years
            
            
            5
      YearsContractual
      obligations (1)
            
            $
            1,476
            
            
            $
            859
            
            
            $
            617
            
            
            $
            -
            
            
            $
            -Purchase
      obligations (2)
            
            
            7,583
            
            
            
            7,000
            
            
            
            583
            
            
            
            -
            
            
            
            -Operating
      lease obligationsMinimum
      lease payments
            
            
            24,395
            
            
            
            3,318
            
            
            
            6,507
            
            
            
            6,564
            
            
            
            8,006Less
      minimum sublease rentals (3)
            
            
            (5,113
            )
            
            
            (1,069
            )
            
            
            (1,613
            )
            
            
            (1,239
            )
            
            
            (1,192
            )Net
      minimum lease payments
            
            
            19,282
            
            
            
            2,249
            
            
            
            4,894
            
            
            
            5,325
            
            
            
            6,814Total
            
            $
            28,341
            
            
            $
            10,108
            
            
            $
            6,094
            
            
            $
            5,325
            
            
            $
            6,814





(1)
            Amounts
      represent contractual obligations related to software license contracts,
      data center hosting, and outsourcing contracts for software system
      support.




(2)
            Represents
      minimum annualized purchase obligations associated with promotional
      spending as per the terms of the Company’s agreement with Novartis through
      February 2010, which is the early termination date for this contract
      provided that sales of the product remain below certain pre-determined
      thresholds.




(3)
            In
      June 2005, we signed an agreement to sublease approximately 16,000 square
      feet of the first floor at our corporate headquarters facility in Saddle
      River, New Jersey.  The sublease is for a five-year term
      commencing July 15, 2005, and provides for approximately $2 million in
      lease payments over the five-year period.   In July 2007,
      we signed an agreement to sublease approximately 20,000 square feet of the
      second floor at our corporate headquarters.  The sublease term
      is through the remainder of our lease, which is approximately eight and
      one-half years and will provide for approximately $4.4 million in lease
      payments over that period.  Also in 2007, we signed two separate
      subleases at our facility in Dresher, Pennsylvania.  These
      subleases are for five-year terms and will provide approximately $650,000
      combined in lease payments over the five-year
  period.




Letters
of Credit




As of
December 31, 2008, the Company has $5.9 million in letters of credit outstanding
as required by its existing insurance policies and its facility
leases.




F-17
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Litigation




Due to
the nature of the businesses in which the Company is engaged, such as product
detailing and in the past, the 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 due to the nature of the Company’s business activities and recent
increases in litigation related to healthcare products, including
pharmaceuticals. 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 were 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.




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, a prescription
cholesterol-lowering medication.  Baycol was distributed, promoted and
sold by Bayer AG (Bayer) in the U.S. through early August 2001, at which time
Bayer voluntarily withdrew Baycol from the U.S. market.  Bayer had
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 defense and indemnification against Bayer for all costs and expenses
that it 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 through such date in defending these
proceedings.  As of December 31, 2008, Bayer has reimbursed the
Company for approximately $1.6 million in legal expenses, the majority of which
was received in 2003 and was reflected as a credit within selling, general and
administrative expense.  The Company did not incur any costs or
expenses relating to these matters during 2005, 2006, 2007, or
2008.






10.
            Product
      Commercialization Contract




On April
11, 2008, the Company announced the signing of a promotion agreement with
Novartis Pharmaceuticals Corporation (Novartis).  Pursuant to the
agreement, the Company has the co-exclusive right to promote on behalf of
Novartis the pharmaceutical product Elidel® (pimecrolimus) Cream 1% (the
Product) to physicians in the United States. Under terms of the agreement, the
Company is providing sales representatives to promote the Product to
physicians.  The Company must perform a minimum number of sales calls
to designated physicians each year, and the failure to satisfy this requirement
could result in penalties being imposed on the Company.  In addition,
the Company is obligated to spend at least $7.0 million per year during the term
on promotional activities relating to the Product.  Finally, as
required under the agreement, the Company paid an up-front nonrefundable fee of
$1.0 million.  This fee was paid during the second quarter of 2008 and
has been recognized as negative revenue pursuant to Emerging Issues Task Force
Issue No. 01-09, "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Product."




In
exchange for its promotional and sales force activities, the Company will be
compensated each quarter based on a specified formula set forth in the agreement
relating to Product sales for the quarter.  Under the terms of the
contract, any shortfall between actual sales and the pre-determined threshold
from the previous quarter is added to the current quarter’s threshold amount
that the Company must achieve in order to generate revenue. It is possible
that the Company may not receive any compensation if Product sales are below
certain thresholds set forth in the agreement.








F-18
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)






As of
December 31, 2008, the Company made expenditures of approximately $12.3 million
in connection with our sales force activities and promotion of the
product.  To date, the Company has not achieved the required sales
levels necessary to receive revenue under its promotion agreement with
Novartis.  The Company does not anticipate that it will achieve the
required sales levels necessary to generate sufficient revenue to recover the
costs it incurred or will incur in connection with this promotional program
during the term of the contract.  The Company intends to terminate
this contract at the early termination date for the contract, which is no sooner
than February 1, 2010 provided that sales of the product remain below certain
pre-determined thresholds.




At
December 31, 2008, the Company accrued a contract loss of approximately $10.3
million, representing the anticipated future loss expected to be incurred by the
Company to fulfill its contractual obligations under this product
commercialization agreement until February 2010, the early termination date for
this contract.  The loss contract provision for this product
commercialization agreement includes cost of the sales force needed to deliver
the minimum number of sales calls and promotional program costs, including the
cost of samples and other promotional costs net of anticipated
revenue.  In determining the amount of the loss contract provision,
projections regarding estimated future cash flows are made to estimate the
expected loss.  The use of alternative estimates and assumptions could
increase or decrease the estimated loss and potentially result in a different
impact to the Company’s results of operations.  Further, changes in
business strategy and/or market conditions may significantly impact these
judgments.  Actual results could materially differ from this
estimate.




11.
            Fair
      Value Measurements








As
discussed in Note 2, the Company adopted FAS 157 for all financial assets and
liabilities and for nonfinancial assets and liabilities recognized or disclosed
at fair value in the Company’s consolidated financial statements on a recurring
basis (at least annually).  Broadly, the FAS 157 framework requires
fair value to be determined based on the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants.  FAS 157 establishes market or observable
inputs as the preferred source of values, followed by assumptions based on
hypothetical transactions in the absence of market inputs.  The
valuation techniques required by FAS 157 are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s market
assumptions. These two types of inputs create the following three-tier fair
value hierarchy: Level 1, defined as observable inputs such as quoted prices in
active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore,
requiring the Company to develop its own assumptions.




The
Company’s adoption of FAS 157 was limited to its investment in marketable
securities.  See Note 2, Investments in Marketable Securities, for
additional information.  The fair values for these securities are
based on quoted market prices.




F-19
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
following table presents financial assets and liabilities measured at fair value
at December 31, 2008:


Fair
      MarketCarrying
              
              
              Fair
              
              
              Measurements
      at December 31, 2008Amount
              
              
              Value
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Available-for-sale
      securities
              
              $
              159
              
              
              $
              159
              
              
              $
              159
              
              
              $
              -
              
              
              $
              -Held-to-maturity
      securities
              
              
              5,847
              
              
              
              5,970
              
              
              
              5,970
              
              
              
              -
              
              
              
              -Total
              
              $
              6,006
              
              
              $
              6,129
              
              
              $
              6,129
              
              
              $
              -
              
              
              $
              -






12.
            Preferred
      Stock




The
Company's Board is authorized to issue, from time to time, up to 5,000,000
shares of preferred stock in one or more series.  The Board is
authorized to fix the rights and designation of each series, including dividend
rights and rates, conversion rights, voting rights, redemption terms and prices,
liquidation preferences and the number of shares of each series.  As
of December 31, 2008 and 2007, there were no issued and outstanding shares of
preferred stock.




13.
            Stock-Based
      Compensation








On
January 1, 2006, the Company adopted FAS 123R.  See Note 1, Nature of
Business and Significant Accounting Policies, for a description of the adoption
of FAS 123R.  The Company’s stock-incentive program is a long term
retention program that is intended to attract, retain and provide incentives for
talented employees, officers and directors, and to align stockholder and
employee interests.  The Company considers its stock-incentive program
critical to its operations and productivity.  Currently, the Company
grants options, SARs and restricted shares from the PDI, Inc. 2004 Stock Award
and Incentive Plan (the 2004 Plan), which is described below.




The
Company primarily uses the Black-Scholes option pricing model to determine the
fair value of stock options and SARs. The determination of the fair value of
stock-based payment awards on the date of grant using an option-pricing model is
affected by the Company’s stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include the Company’s
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and
expected dividends.  Expected volatility was based on historical
volatility.  As there is no trading volume for the Company’s options,
implied volatility was not representative of the Company’s current volatility so
the historical volatility was determined to be more indicative of the Company’s
expected future stock performance.  The expected life was determined
using the safe-harbor method permitted by Securities Exchange Commission’s Staff
Accounting Bulletin (SAB) No. 107 (SAB 107). The Company expects to use this
simplified method for valuing employee SARs grants as permitted by the
provisions of SAB 107 until more detailed information about exercise behavior
becomes available over time.  The Company bases the risk-free interest
rate on U.S. Treasury zero-coupon issues with remaining terms similar to the
expected term on the options or SARs.  The Company does not anticipate
paying any cash dividends in the foreseeable future and therefore uses an
expected dividend yield of zero in the option valuation model. The Company is
required to estimate forfeitures at the time of grant and revise those estimates
in subsequent periods if actual forfeitures differ from those estimates. The
Company uses historical data to estimate pre-vesting option forfeitures and
records stock-based compensation expense only for those awards that are expected
to vest.  The Company recognizes compensation cost, net of estimated
forfeitures, arising from the issuance of stock options and SARs on a
straight-line basis over the vesting period of the grant.




The
estimated compensation cost associated with the granting of restricted stock and
restricted stock units is based on the fair value of the Company’s common stock
on the date of grant. The Company recognizes the compensation cost, net of
estimated forfeitures, arising from the issuance of restricted stock and
restricted stock units on a straight-line basis over the vesting period of the
grant.




F-20
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
following table provides the weighted average assumptions used in determining
the fair value of the non-performance based stock-based awards granted during
the years ended December 31, 2008, 2007, and 2006 respectively:


2008
              
              2007
              
              2006Risk-free
      interest rate
              2.25%
              
              4.54%
              
              4.81%Expected
      life
              3.5
      years
              
              3.5
      years
              
              3.5
      yearsExpected
      volatility
              41.31%
              
              50.87%
              
              66.12%


Stock
Incentive Plan




In June
2004, the Board and stockholders approved the 2004 Plan.  The 2004
Plan replaced the 1998 Stock Option Plan (the 1998 Plan) and the 2000 Omnibus
Incentive Compensation Plan (the 2000 Plan).  The 2004 Plan reserved
an additional 893,916 shares for new awards as well as combined the remaining
shares available under the 1998 Plan and 2000 Plan.  The maximum
number of shares that can be granted under the 2004 Plan is approximately 2.9
million shares.  Eligible participants under the 2004 Plan include
officers and other employees of the Company, members of the Board and outside
consultants, as specified under the 2004 Plan and designated by the Compensation
and Management Development Committee of the Board.  Unless earlier
terminated by action of the Board, the 2004 Plan will remain in effect until
such time as no stock remains available for delivery under the 2004 Plan and the
Company has no further rights or obligations under the 2004 Plan with respect to
outstanding awards under the 2004 plan.  No participant may be granted
more than the annual limit of 400,000 shares plus the amount of the
participant's unused annual limit relating to share-based awards as of the close
of the previous year, subject to adjustment for splits and other extraordinary
corporate events.




Historically,
stock options were generally granted with an exercise price equal to the market
value of the common stock on the date of grant, expired 10 years from the date
they are granted, and generally vested over a two-year period for members of the
Board of Directors and three-year period for employees.  Upon
exercise, new shares are issued by the Company.  The Company has not
issued stock options since 2005.  SARs are generally granted with a
grant price equal to the market value of the common stock on the date of grant,
vest one-third each year on the anniversary of the date of grant and expire five
years from the date of grant.  The restricted shares and restricted
stock units generally have vesting periods that range from eighteen months to
three years and are subject to accelerated vesting and forfeiture under certain
circumstances.




In
November 2008, the Company’s chief executive officer was granted 140,000
restricted stock units and 280,000 performance contingent SARs.  The
restricted stock units will vest into shares of the Company’s common stock,
equally in five installments, with the initial 20% of the units vesting
immediately on the grant date and an additional 20% of the units vesting on each
anniversary of the grant date over a four year period. The performance
contingent SARs have an exercise price of $4.28, a seven year term to
expiration, and a weighted average fair value of $0.86.  The fair
value estimate of the performance contingent SARs was calculated by an
accredited independent valuation consultant using a Monte Carlo Simulation
model.  The performance contingent SARs are subject to the same
vesting schedule as the restricted stock units but are only exercisable if the
following stock performance-based conditions are satisfied: (1) with respect to
the initial 94,000 performance contingent SARs, the closing price of the
Company’s common stock is at least $10.00 per share for 60 consecutive trading
days anytime within five years from the grant date; (2) with respect to the next
93,000 performance contingent SARs, the closing price of the Company’s common
stock is at least $15.00 per share for 60 consecutive trading days anytime
within five years from the grant date; and (3) with respect to the final 93,000
performance contingent SARs, the closing price of the Company’s common stock is
at least $20.00 per share for 60 consecutive trading days anytime within five
years from the grant date.




The
weighted average fair value of non-performance based SARs granted during the
years ended December 31, 2008, 2007 and 2006 was estimated to be $2.54, $3.97
and $6.31 respectively.  For the year ended December 31, 2006 the
aggregate intrinsic values of options and SARs exercised under the Company’s
stock option plans was approximately $130,000 determined as of the date of
exercise.  There were no exercises in 2007 or 2008.  As of
December 31, 2008, there was $2.0 million of total unrecognized compensation
cost, net of estimated forfeitures, related to unvested SARs and restricted
stock that are expected to be recognized over a weighted-average period of
approximately 2.5 years.  Cash received from options exercised under
the Company’s stock option plans for the years ended December 31, 2006 was
$87,000.  Historically, shares issued upon the exercise of options
have been new shares and have not come from treasury shares.




F-21
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
impact of stock options, SARs, performance shares and restricted stock on net
(loss) income and cash flow for 2008, 2007 and 2006 was as follows:


2008
              
              
              2007
              
              
              2006Stock
      options and SARs
              
              $
              259
              
              
              $
              455
              
              
              $
              361Conditional
      grant
              
              
              -
              
              
              
              -
              
              
              
              104Common
      stock awards
              
              
              300
              
              
              
              -
              
              
              
              -Performance
      awards
              
              
              9
              
              
              
              11
              
              
              
              (60
              )Restricted
      stock
              
              
              1,052
              
              
              
              1,163
              
              
              
              1,1981,620
              
              
              
              1,629
              
              
              
              1,603Acceleration
      of vesting - restricted stock
              
              
              8
              
              
              
              54
              
              
              
              233Forfeitures
              
              
              (141
              )
              
              
              (207
              )
              
              
              (176
              )Total
      stock-based compensation expense
              
              
              1,487
              
              
              
              1,476
              
              
              
              1,660Tax
      impact
              
              
              (583
              )
              
              
              (565
              )
              
              
              (408
              )Reduction
      to net income
              
              $
              904
              
              
              $
              911
              
              
              $
              1,252Increase
      (reduction) in cash flowfrom
      operating activies
              
              $
              -
              
              
              $
              242
              
              
              $
              (23
              )(Reduction)
      increase in cash flowfrom
      financing activies
              
              $
              -
              
              
              $
              (242
              )
              
              $
              23


A summary
of option and SARs activity for the year ended December 31, 2008 and changes
during the year then ended is presented below:


Weighted-Average
              
              
              Contractual
              
              
              IntrinsicShares
              
              
              Grant
      Price
              
              
              Period
      (in years)
              
              
              ValueOutstanding
      at January 1, 2008
              
              
              646,825
              
              
              $
              18.18
              
              
              
              4.18
              
              
              $
              19Granted
              
              
              474,538
              
              
              
              5.69
              
              
              
              6.21
              
              
              
              -Forfeited
      or expired
              
              
              (323,986
              )
              
              
              12.54Outstanding
      at December 31, 2008
              
              
              797,377
              
              
              
              13.04
              
              
              
              4.77
              
              
              
              -Exercisable
      at December 31, 2008
              
              
              370,378
              
              
              $
              21.40
              
              
              
              3.58
              
              
              $
              -


A summary
of the status of the Company’s nonvested SARs for the year ended December 31,
2008 and changes during the year ended December 31, 2008 is presented
below:


Shares
              
              
              Weighted-
      Average Grant Date Fair ValueNonvested
      at January 1, 2008
              
              
              198,990
              
              
              $
              4.71Granted
              
              
              474,538
              
              
              
              1.55Vested
              
              
              (130,055
              )
              
              
              3.19Forfeited
              
              
              (172,925
              )
              
              
              3.37Nonvested
      at December 31, 2008
              
              
              370,548
              
              
              $
              1.82


A summary
of the Company’s outstanding shares of restricted stock and restricted stock
units for the year ended December 31, 2008 and changes during the year then
ended is presented below:




F-22
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Weighted-
              
              
              Average
              
              
              AggregateAverage
              
              
              Remaining
              
              
              IntrinsicGrant
      Date
              
              
              Vesting
              
              
              ValueShares
              
              
              Fair
      Value
              
              
              Period
      (in years)
              
              
              (in
      thousands)Outstanding
      at January 1, 2008
              
              
              213,964
              
              
              $
              10.71
              
              
              
              2.07
              
              
              $
              2,005Granted
              
              
              298,388
              
              
              
              6.33
              
              
              
              2.90
              
              
              
              1,197Vested
              
              
              (79,668
              )
              
              
              11.15Forfeited
              
              
              (108,259
              )
              
              
              8.83Outstanding
      at December 31, 2008
              
              
              324,425
              
              
              $
              7.20
              
              
              
              2.56
              
              
              $
              1,301






14.
            Significant
      Customers




During
2008, 2007 and 2006 the Company had several significant customers for which it
provided services under specific contractual arrangements.  The
following sets forth the net revenue generated by customers who accounted for
more than 10% of the Company's revenue during each of the periods
presented.





Years
      Ended December 31,Customer
              
              
              2008
              
              
              2007
              
              
              2006A
              
              
              $
              31,697
              
              
              $
              15,155
              
              
              $
              -B
              
              
              
              15,304
              
              
              
              -
              
              
              
              -C
              
              
              
              12,072
              
              
              
              13,259
              
              
              
              -D
              
              
              
              
              
              
              
              15,992E
              
              
              
              -
              
              
              
              -
              
              
              
              68,240F
              
              
              
              -
              
              
              
              -
              
              
              
              43,603


For all
the customers listed above, excluding customer A, the Company recorded revenue
in both segments.  For customer A, all the revenue was in the sales
services segment.




For the
years ended December 31, 2008, and 2007, the Company’s three largest customers,
who each individually represented 10% or more of its revenue, accounted for in
the aggregate, approximately 52.5% and 37.9% respectively, of its
revenue.  For the year ended December 31, 2006 the Company’s two
largest customers, each of whom represented 10% or more of its revenue,
accounted for, in the aggregate, approximately 46.8% of its
revenue.




At
December 31, 2008 and 2007, the Company’s three largest customers represented
71.7% and 21.4%, respectively, of the aggregate of outstanding accounts
receivable and unbilled services.




On March
21, 2007, the Company announced that a large pharmaceutical company customer had
notified them of its intention not to renew its contract sales engagement with
the Company upon its scheduled expiration on May 12, 2007.  This
contract, which had a one-year term, represented approximately $37 million in
annual revenue.




On
February 28, 2006, the Company announced that it has been notified by
AstraZeneca that its fee-for-service agreements with the Company would be
terminated effective April 30, 2006, reducing revenue by approximately $63.8
million in 2006.  On September 26, 2006, the Company announced that it
had received verbal notification from GSK of its intention not to renew its
contract sales engagement with the Company for 2007. The contract, which
represented approximately $65 million to $70 million in revenue on an annual
basis, expired as scheduled on December 31, 2006. On October 25, 2006, the
Company also announced that it had received notification from sanofi-aventis of
its intention to terminate its contract sales engagement with the Company
effective December 1, 2006. The contract, which represented approximately $18
million to $20 million in revenue on an annual basis, was previously scheduled
to expire on December 31, 2006.






15.
            Executive
      Severance




On June
20, 2008, the Company announced the retirement of Michael J. Marquard as chief
executive officer and as a member of the board of directors. In connection with
his retirement, the Company recorded approximately $0.9 million in compensation
expense in 2008.  During 2008, the Company also announced the
departure of one other executive vice president for which it
incurred




F-23
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


approximately
$0.3 million in additional compensation expense.




The
Company recognized charges of approximately $0.6 million related to executive
resignations/settlements in 2006.  There were no executive severance
charges for the year ended December 31, 2007.




16.
            Facilities
      Realignment






The
Company recorded facility realignment charges totaling approximately $75,000,
$1.0 million and $2.0 million during 2008, 2007 and 2006,
respectively.  These charges were for costs related to excess leased
office space the Company has at its Saddle River, New Jersey and Dresher,
Pennsylvania facilities.  In 2007, the Company sub-leased the excess
office space at its Saddle River, New Jersey location and also secured
sub-leases for two of the three vacant spaces at its Dresher
location.  The Company is currently seeking to sublease the remaining
excess space at its Dresher location.  A summary of the significant
components of the facility realignment charges for the years ended December 31,
2006, 2007 and 2008 by segment is as follows:


Sales
              
              
              Marketing2006:
              
              Services
              
              
              Services
              
              
              TotalFacility
      lease obligations
              
              $
              803
              
              
              $
              (146
              )
              
              $
              657Asset
      impairments (1)
              
              
              474
              
              
              
              821
              
              
              
              1,295Total
      facility realignment charge
              
              $
              1,277
              
              
              $
              675
              
              
              $
              1,9522007:Facility
      lease obligations
              
              $
              (198
              )
              
              $
              (82
              )
              
              $
              (280
              )Asset
      impairments (1)
              
              
              1,020
              
              
              
              56
              
              
              
              1,076Related
      charges
              
              
              225
              
              
              
              -
              
              
              
              225Total
      facility realignment charge
              
              $
              1,047
              
              
              $
              (26
              )
              
              $
              1,0212008:Facility
      lease obligations
              
              $
              -
              
              
              $
              75
              
              
              $
              75Total
      facility realignment charge
              
              $
              -
              
              
              $
              75
              
              
              $
              75(1)
      The asset impairments resulted in charges to the accumulated depreciation
      balance


The
following table presents a reconciliation of the restructuring charges in 2007
and 2008 to the balance at December 31, 2008 and 2007, which is included in
other accrued expenses ($0.2 million and $0.3 million, respectively) and in
long-term liabilities ($0.4 million and $0.4 million,
respectively):


Sales
              
              
              MarketingServices
              
              
              Services
              
              
              TotalBalance
      as of December 31, 2006
              
              $
              1,549
              
              
              $
              763
              
              
              $
              2,312Accretion
              
              
              11
              
              
              
              10
              
              
              
              21Adjustments
              
              
              (198
              )
              
              
              (82
              )
              
              
              (280
              )Payments
              
              
              (1,089
              )
              
              
              (289
              )
              
              
              (1,378
              )Balance
      as of December 31, 2007
              
              $
              273
              
              
              $
              402
              
              
              $
              675Accretion
              
              
              6
              
              
              
              7
              
              
              
              13Adjustments
              
              
              -
              
              
              
              75
              
              
              
              75Payments
              
              
              (87
              )
              
              
              (117
              )
              
              
              (204
              )Balance
      as of December 31, 2008
              
              $
              192
              
              
              $
              367
              
              
              $
              559


Charges
for facility lease obligations relate to real estate lease contracts where the
Company has exited certain space and is required to make payments over the
remaining lease term (January 2016 and November 2016 for the Saddle River, New
Jersey facility and for the Dresher, Pennsylvania facility,
respectively).  All lease termination amounts are shown net of
projected sublease income.  The charges in 2008 pertained to a change
in the estimated time it will take to sublet the remaining Dresher
space.  The charges in 2007 were primarily related to the exiting of
the computer data center space at its Saddle River location as the Company
is now outsourcing that capability. The charges in 2006 reflected additional
space exited as well as additional charges to reflect the softness of the real
estate market in both areas as neither sublet despite actively marketing the
spaces.  Additionally, in 2006, the Company recorded an impairment
charge related to leasehold improvements in both spaces as it was unlikely that
the Company will be able to recover the carrying value of these
assets.




F-24
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)




17.
            Income
      Taxes




Deferred
tax assets and liabilities are determined based on the estimated future tax
effects of temporary differences between the financial statements and tax bases
of assets and liabilities, as measured by the current enacted tax
rates.  Deferred tax expense (benefit) is the result of changes in the
deferred tax asset and liability.




The
provision (benefit) for income taxes from continuing operations for the years
ended December 31, 2008, 2007 and 2006 is comprised of the
following:


2008
              
              
              2007
              
              
              2006Current:Federal
              
              $
              278
              
              
              $
              465
              
              
              $
              (1,520
              )State
              
              
              266
              
              
              
              189
              
              
              
              (1,914
              )Total
      current
              
              
              544
              
              
              
              654
              
              
              
              (3,434
              )Deferred:Federal
              
              
              314
              
              
              
              1,058
              
              
              
              2,592State
              
              
              17
              
              
              
              55
              
              
              
              118Total
      deferred
              
              
              331
              
              
              
              1,113
              
              
              
              2,710Provision
      for income taxes
              
              $
              875
              
              
              $
              1,767
              
              
              $
              (724
              )


Total
income tax expense in 2008, 2007 and 2006, including taxes associated with
discontinued operations was $0.9 million, $1.8 million, and ($0.5) million,
respectively.




The tax
effects of significant items comprising the Company’s deferred tax assets and
(liabilities) as of December 31, 2008 and 2007 are as follows:


2008
              
              
              2007Current
      deferred tax assets (liabilities)included
      in other current assets:Allowances
      and reserves
              
              $
              4,931
              
              
              $
              1,402Compensation
              
              
              3,022
              
              
              
              905Valuation
      allowance on deferred tax assets
              
              
              (7,953
              )
              
              
              (2,307
              )-
              
              
              
              -Noncurrent
      deferred tax assets (liabilities)included
      in other long-term assets:State
      net operating loss carryforwards
              
              
              3,171
              
              
              
              2,221Federal
      net operating loss carryforwards
              
              
              10,218
              
              
              
              3,148State
      taxes
              
              
              1,052
              
              
              
              1,066Compensation
              
              
              (474
              )
              
              
              -Equity
      investment
              
              
              135
              
              
              
              128Self
      insurance and other reserves
              
              
              1,736
              
              
              
              1,940Property,
      plant and equipment
              
              
              978
              
              
              
              178Intangible
      assets
              
              
              (681
              )
              
              
              (291
              )Other
      reserves - restructuring
              
              
              25
              
              
              
              (64
              )Valuation
      allowance on deferred tax assets
              
              
              (17,603
              )
              
              
              (9,439
              )(1,443
              )
              
              
              (1,113
              )Net
      deferred tax liability
              
              $
              (1,443
              )
              
              $
              (1,113
              )


The
Company performs an analysis each year to determine whether the expected future
income will more likely than not be sufficient to realize the deferred tax
assets.  The Company's recent operating results and projections of
future income weighed heavily in the Company's overall assessment.  As
a result, the Company established a full federal and state valuation allowance
for the net deferred tax assets at December 31, 2008 and 2007 because the
Company determined that it was more likely than not that these assets would not
be realized.  At December 31, 2008 and 2007, the Company had a
valuation allowance of approximately $25.6 million and $11.7 million,
respectively, related to the Company's net deferred tax assets.




F-25
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
noncurrent net deferred tax liability relates to tax amortization of the tax
basis in goodwill associated with the Pharmakon acquisition.  Prior to
2007, the Company included in net deferred tax assets, the deferred tax
liability related to the Pharmakon acquisition. In the first quarter of 2007 the
Company determined that this deferred tax liability would not be realizable for
an indeterminate time in the future and consequently should not be included in
net deferred tax assets for purposes of calculating the valuation allowance in
any period. As a result, the Company increased the valuation allowance by
$882,000 in the first quarter of 2007.  The Company did not believe
this increase was material to the results of operations or its financial
position in 2007.  The Company also believes that the additional
valuation allowance that would have resulted as of December 31, 2006 was not
material to the results of operations or the financial position of the Company
in those years.




Federal
tax attribute carryforwards at December 31, 2008, consist primarily of
approximately $29.2 million of net operating losses and $339,000 of capital
losses.  In addition, the Company has approximately $63.5 million of
state net operating losses carryforwards.  The utilization of the
federal carryforwards as an available offset to future taxable income is subject
to limitations under federal income tax laws.  If the federal net
operating losses are not utilized, they begin to expire in 2027, and if the
current state net operating losses are not utilized they begin to expire in
2009.  The capital losses can only be utilized against capital gains
and $339,000 will expire in 2009.




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





2008
              
              2007
              
              2006Federal
      statutory rate
              (35.0%)
              
              (35.0%)
              
              35.0%State
      income tax rate, netof
      Federal tax benefit
              1.8%
              
              1.0%
              
              (11.0%)Meals
      and entertainment
              0.1%
              
              0.4%
              
              0.3%Valuation
      allowance
              34.1%
              
              46.8%
              
              (26.9%)Other
      non-deductible
              0.9%
              
              0.2%
              
              (2.0%)Tax
      exempt income
              0.0%
              
              (2.7%)
              
              (6.0%)Net
      change in Federal and state reserves
              0.7%
              
              10.8%
              
              3.8%Effective
      tax rate
              2.6%
              
              21.5%
              
              (6.8%)





The
Company adopted the provisions of FIN48 on January 1, 2007.  As a
result of the implementation of FIN 48, the Company recognized no material
adjustment in the liability for unrecognized income tax benefits. At the
adoption date of January 1, 2007, the Company had $4.0 million of unrecognized
tax benefits, all of which would affect its effective tax rate if recognized. At
December 31, 2007, the Company had $4.1 million of unrecognized tax benefits,
all of which would affect its effective tax rate if recognized.




Upon
adoption of FIN 48, the Company’s income tax liabilities as of January 1, 2007
included a total of $4.0 million for unrecognized tax benefits, excluding
approximately $925,000 of related accrued interest, and approximately $300,000
of related penalties. A reconciliation of the beginning and ending amount of
unrecognized tax benefits, excluding accrued interest and penalties, is as
follows:





UnrecognizedTax
      BenefitsBalance
      of unrecognized benefits as of January 1, 2007
              
              $
              4,027Additions
      for tax positions related to the current year
              
              
              11Additions
      for tax positions of prior years
              
              
              209Reductions
      for tax positions of prior years
              
              
              (137
              )Balance
      as of December 31, 2007
              
              $
              4,110Reductions
      for tax positions of prior years
              
              
              (157
              )Balance
      as of December 31, 2008
              
              $
              3,953





F-26
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


The
Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in income tax expense. As of December 31, 2008, the Company recognized
approximately $504,000, respectively, of such interest expense as a component of
its “Provision (benefit) for income taxes."  The liability for
unrecognized tax benefits included accrued interest of $1.8 million and $1.4
million at December 31, 2008 and January 1, 2008, respectively.  The
Company has approximately $265,000 and $300,000 of accrued liabilities or
expense for penalties related to unrecognized tax benefits for the years ended
December 31, 2008 and 2007, respectively.




The
Company and its subsidiaries file a U.S. Federal consolidated income tax return
and consolidated and separate income tax returns in numerous state and local tax
jurisdictions.  The following tax years remain subject to examination
as of December 31, 2008:




Jurisdiction
            Tax
      YearsFederal
            2003-2007State
      and Local
            2002-2007


The
Company reached an agreement with the Internal Revenue Service (IRS) examiner in
regards to the audit of the 2003, 2004 and 2005 tax years.  The
adjustments are not material to the Company's financial position, results of
operations or cash flows.  The Company does not anticipate a
significant change to the total amount of unrecognized tax benefits within the
next 12 months.




The
Company is currently in the examination phase of a state and local income tax
audit for the years 2003 through 2006, and expects this audit to be completed
within the next 12 months with no material adjustments.




18.
            Historical
      Basic and Diluted Net (Loss)/Income per
      Share






Historical
basic and diluted net (loss)/income 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, 2008, 2007 and 2006 is as follows:




Years
      Ended December 31,2008
              
              
              2007
              
              
              2006Basic
      weighted average number of common shares
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,859Dilutive
      effect of stock options, SARs, andrestricted
      stock
              
              
              -
              
              
              
              -
              
              
              
              135Diluted
      weighted average numberof
      common shares
              
              
              14,012
              
              
              
              13,940
              
              
              
              13,994


Outstanding
options at December 31, 2008 to purchase 304,531 of common stock with exercise
prices of $7.70 to $83.69 were not included in the computation of historical and
pro forma diluted net income per share because to do so would have been
antidilutive, as a result of the Company’s net loss in 2008.  In
addition, there were 492,846 SARs outstanding with exercise prices $4.28 to
$20.15 that were not included in the computation of earnings per share as a
result of the Company’s net loss.




Outstanding
options at December 31, 2007 to purchase 372,441 shares of common stock with
exercise prices of $7.70 to $83.69 were not included in the computation of
historical and pro forma diluted net income per share because to do so would
have been antidilutive, as a result of the Company’s net loss in
2007.  In addition, there were 274,384 outstanding SARs with exercise
prices $9.52 to $20.15 that were not included in the computation of earnings per
share as a result of the Company’s net loss.




Outstanding
options at December 31, 2006 to purchase 734,404 shares of common stock with
exercise prices of $14.16 to $93.75 were not included in the 2006 computation of
historical and pro forma diluted net income per share because the exercise
prices of the options were greater than the average market price per share of
the common stock and therefore, the effect would have been antidilutive. In
addition, there were 81,856 outstanding SARs with exercise prices $12.52 to
$20.15 that were not included in the 2006 computation of historical and pro
forma diluted net income per share because the exercise prices of the options
were greater than the average market price per share of the common stock and
therefore, the effect would have been antidilutive.




F-27
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)





19.
            Discontinued
      Operations




The
Company discontinued its MD&D business in the second quarter of
2006.  The MD&D business included the Company’s MD&D contract
sales and clinical sales teams and was previously reported in the sales services
reporting segment.  There was no activity within discontinued
operations in 2007 or 2008.  Summarized selected financial information
for the discontinued operations is as follows:





For
      the Year Ended December 31, 2006Revenue,
      net
              
              $
              1,876Income
      from discontinuedoperations
      before income tax
              
              $
              693Income
      tax expense
              
              
              259Net
      income fromdiscontinued
      operations
              
              $
              434




20.
            Segment
      Information






The
accounting policies followed by the segments are described in Note 1, Nature of
Business and Significant Accounting Policies.  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
expenses. Certain corporate capital expenditures have not been allocated from
the sales services segment to the other operating segments since it is
impracticable to do so.




The
Company reports under the following three segments:




Sales
services segment – includes the Company’s Performance and Select Access
teams.  This segment uses teams to deliver services to a wide base;
they have similar long-term average gross margins, contract terms, types of
customers and regulatory environments. One segment manager oversees the
operations of all of these units and regularly discusses the results of
operations, forecasts and activities of this segment with the chief operating
decision maker;




Marketing
services segment – includes the Company’s marketing research and medical
education and communication services. This segment is project driven; the units
comprising it have a large number of smaller contracts, share similar gross
margins, have similar customers, and have low barriers to entry for
competition.  There are many discrete offerings within this segment,
including: accredited continuing medical education (CME), content development
for CME, promotional medical education, marketing research and
communications.  The CME portion of this segment will be discontinued
in 2009.  Two unit managers oversee the operations of these units and
regularly discuss the results of operations, forecasts and activities of this
segment with the chief operating decision maker; and




Product
commercialization segment – includes revenues and expenses associated with the
Company’s licensing and co-promotion of pharmaceutical products.  In
2008, this segment consisted of our current promotional agreement with
Novartis.  Any business opportunities are reviewed by the chief
executive officer and other members of senior management.




F-28
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)


Sales
            
            
            Marketing
            
            
            ProductServices
            
            
            Services
            
            
            Commercialization
            
            
            ConsolidatedFor
      the year ended December 31, 2008:Revenue
            
            $
            89,656
            
            
            $
            23,872
            
            
            $
            (1,000
            )
            
            $
            112,528Operating
      loss
            
            
            (7,196
            )
            
            
            (3,070
            )
            
            
            (26,161
            )
            
            
            (36,427
            )Capital
      expenditures
            
            
            339
            
            
            
            60
            
            
            
            -
            
            
            
            399Depreciation
      expense
            
            
            2,570
            
            
            
            652
            
            
            
            97
            
            
            
            3,319Total
      assets
            
            
            112,469
            
            
            
            36,567
            
            
            
            -
            
            
            
            149,036For
      the year ended December 31, 2007:Revenue
            
            $
            86,766
            
            
            $
            30,365
            
            
            $
            -
            
            
            $
            117,131Operating
      loss
            
            
            (13,918
            )
            
            
            (362
            )
            
            
            -
            
            
            
            (14,280
            )Capital
      expenditures
            
            
            870
            
            
            
            139
            
            
            
            -
            
            
            
            1,009Depreciation
      expense
            
            
            3,477
            
            
            
            828
            
            
            
            -
            
            
            
            4,305Total
      assets
            
            
            140,161
            
            
            
            39,393
            
            
            
            -
            
            
            
            179,554For
      the year ended December 31, 2006:Revenue
            
            $
            202,748
            
            
            $
            36,494
            
            
            $
            -
            
            
            $
            239,242Operating
      income
            
            
            33
            
            
            
            2,798
            
            
            
            3,082
            
            
            
            5,913Capital
      expenditures
            
            
            1,508
            
            
            
            262
            
            
            
            -
            
            
            
            1,770Depreciation
      expense
            
            
            3,671
            
            
            
            679
            
            
            
            -
            
            
            
            4,350Total
      assets
            
            
            157,750
            
            
            
            43,886
            
            
            
            -
            
            
            
            201,636


F-29


PDI,
      INC.VALUATION
      AND QUALIFYING ACCOUNTSYEARS
      ENDED DECEMBER 31, 2006, 2007 AND 2008Balance
      at
              
              
              Additions
              
              
              
              (1)
              
              
              Balance
      atBeginning
              
              
              Charged
      to
              
              
              Deductions
              
              
              endDescription
              
              of
      Period
              
              
              Operations
              
              
              Other
              
              
              of
      Period2006Allowance
      for doubtful accounts
              
              $
              778,407
              
              
              $
              35,713
              
              
              $
              (778,407
              )
              
              $
              35,713Allowance
      for doubtful notes
              
              
              1,242,378
              
              
              
              38,051
              
              
              
              (495,837
              )
              
              
              784,592Tax
      valuation allowance
              
              
              9,820,101
              
              
              
              -
              
              
              
              (3,035,884
              )
              
              
              6,784,217Accrued
      product rebates, salesdiscounts
      and returns
              
              
              230,859
              
              
              
              -
              
              
              
              -
              
              
              
              230,8592007Allowance
      for doubtful accounts
              
              $
              35,713
              
              
              $
              -
              
              
              $
              (35,713
              )
              
              $
              -Allowance
      for doubtful notes
              
              
              784,592
              
              
              
              30,416
              
              
              
              (159,163
              )
              
              
              655,845Tax
      valuation allowance
              
              
              6,784,217
              
              
              
              -
              
              
              
              4,960,586
              
              
              
              11,744,803Accrued
      product rebates, salesdiscounts
      and returns
              
              
              230,859
              
              
              
              -
              
              
              
              -
              
              
              
              230,8592008Allowance
      for doubtful accounts
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Allowance
      for doubtful notes
              
              
              655,845
              
              
              
              30,500
              
              
              
              -
              
              
              
              686,345Tax
      valuation allowance
              
              
              11,744,803
              
              
              
              -
              
              
              
              13,811,001
              
              
              
              25,555,804Accrued
      product rebates, salesdiscounts
      and returns
              
              
              230,859
              
              
              
              -
              
              
              
              -
              
              
              
              230,859(1) 
      Includes payments and actual write offs, as well as changes in estimates
      in the reserves andthe
      impact of
acquisitions.


F-30