**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 1934****For
                the fiscal year ended December 31, 2005****OR**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****For
                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
                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:
                None****Securities
                registered pursuant to Section 12(g) of the Act: Common
                Stock**







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 or a non-accelerated filer See definition of “accelerated
      filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (check
      one):




Large
                accelerated filero
            Accelerated
                filerý
            Non-accelerated
                filero


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, 2005, the last
      business day of the registrant's most recently completed second fiscal quarter,
      was $96,053,154 (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 5% 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 March 1, 2006,
      13,922,434 shares of the registrant's common stock, $.01 par value per share,
      were issued and outstanding.






**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Proxy Statement for the 2006 Annual Meeting of Stockholders (the "Proxy
      Statement"), to be filed within 120 days of the end of the fiscal year
      ended December 31, 2005, are incorporated by reference in Part III hereof.
      Except with respect to information specifically incorporated by reference in
      this Form 10-K, the Proxy Statement is not deemed to be filed as part
      hereof.

























PDI
            Inc.Annual Report on Form 10-KTable of
            Contents





PagePART
                IItem
                1.
            Business
            5Item
                1A.
            Risk
                Factors
            9Item
                1B.
            Unresolved
                Staff Comments
            14Item
                2.
            Properties
            14Item
                3.
            Legal
                Proceedings
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            16PART
                IIItem
                5.
            Market
                for our Common Equity, Related Stockholder Matters
              and
                Issuer Purchases of Equity Securities
            16Item
                6.
            Selected
                Financial Data
            18Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            19Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            35Item
                8.
            Financial
                Statements and Supplementary Data
            35Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            35Item
                9A.
            Controls
                and Procedures
            36Item
                9B.
            Other
                Information
            37PART
                IIIItem
                10.
            Directors
                and Executive Officers
            37Item
                11.
            Executive
                Compensation
            37Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            37Item
                13.
            Certain
                Relationship and Related Transactions
            37Item
                14.
            Principal
                Accounting Fees and Services
            38PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules
            38Signatures
            40


























































3
 **PDI,
            INC.** **Annual
            Report on Form 10-K (Continued)**





**FORWARD
      LOOKING STATEMENT INFORMATION**




Various
      statements made in this Annual Report on Form 10-K are “forward-looking
      statements” (within the meaning of the Private Securities Litigation Reform Act
      of 1995) regarding the plans and objectives of management for future operations.
      These statements involve known and unknown risks, uncertainties and other
      factors that may cause our actual results, performance or achievements to be
      materially different from any future results, performance or achievements
      expressed or implied by these forward-looking statements. The forward-looking
      statements included in this report are based on current expectations that
      involve numerous risks and uncertainties. Our plans and objectives are based,
      in
      part, on assumptions involving judgments about, among other things, future
      economic, competitive and market conditions, and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond our control. Some of the important factors that could cause actual
      results to differ materially from those indicated by the forward-looking
      statements are general economic conditions, the termination of or material
      reduction in the size of any of our customer contracts, changes in our operating
      expenses, adverse patent rulings, FDA, legal or accounting developments,
      competitive pressures, failure to meet performance benchmarks in significant
      contracts, changes in customer and market requirements and standards, the impact
      of any stock repurchase programs, the adequacy of the reserves we have taken,
      the financial viability of certain companies whose debt and equity securities
      we
      hold, the outcome of certain litigations and our ability to implement our
      current and future business plans. Although we believe that our assumptions
      underlying the forward-looking statements are reasonable, any of these
      assumptions could prove inaccurate and, therefore, we cannot assure you that
      the
      forward-looking statements included in this report will prove to be accurate.
      In
      light of the significant uncertainties inherent in the forward-looking
      statements included in this report, the inclusion of these statements should
      not
      be interpreted by anyone that our objectives and plans will be achieved. Factors
      that could cause actual results to differ materially and adversely from those
      expressed or implied by forward-looking statements include, but are not limited
      to, the factors, risks and uncertainties (i) identified or discussed herein,
      and
      (ii) set
      forth
      under the headings “Business” and “Risk Factors” in Part I, Items 1 and 1A,
      respectively, Item 1; “Legal Proceedings” in Part I, Item 3; and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in
      Part II, Item 7, of this Annual Report on Form 10-K .
      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
      diversified sales and marketing services company serving the biopharmaceutical
      and medical devices and diagnostics (MD&D) industries. We commenced
      operations as a contract sales organization in 1987 and we completed our initial
      public offering in May 1998.




We
      create
      and execute sales and marketing programs for our clients with the goal of
      demonstrating our ability to add value to their products and maximize their
      sales performance. We have a variety of agreement types that we enter into
      with
      our clients. **** In these
      agreements, we leverage our experience in sales, medical education and marketing
      research to help our clients meet strategic and financial
      objectives.




We
      have
      assembled our commercial capabilities through organic growth, acquisitions
      and
      internal expansion. Our portfolio of services enables us to provide a wide
      range
      of marketing and promotional options that can benefit many different products
      throughout the various stages of their life cycles.




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




We
      are
      among the leaders in outsourced sales and marketing services in the U.S. We
      have
      designed and implemented programs for many of the major pharmaceutical companies
      serving the U.S. market. Our clients include AstraZeneca, Eli Lilly,
      GlaxoSmithKline (GSK), Novartis Pharmaceutical Corporation (Novartis), Pfizer
      and Sanofi-Aventis, as well as many emerging and specialty pharmaceutical
      companies such as Allergan and Ferring Pharmaceuticals. Our relationships are
      built on the quality of our performance and program results delivered.




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




**Reporting
      Segments and Operating Groups**




During
      the fourth quarter of 2004, as a result of our acquisition of Pharmakon LLC,
      we
      restructured certain management responsibilities and changed our internal
      financial reporting. As a result of these changes we determined that our
      reporting segments required modification. Accordingly, we now report under
      the
      following three segments: Sales Services, Marketing Services and PDI Products
      Group (PPG). As a result of our de-emphasis of the PPG Segment, we do not plan
      to report the PPG activity as a separate segment beginning in 2006.




*Sales
      Services*




This
      segment includes our Dedicated Teams and Select Access ’ Teams
      (formerly referred to as Shared Teams), medical device and diagnostics
      (MD&D) contract sales and MD&D InServe clinical teams. This segment,
      which focuses on product detailing, represented 89.1% of consolidated revenue
      for the year ended December 31, 2005.




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




Dedicated
      Teams




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










5
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





Select
      Access TM




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
      clients that want an alternative to a dedicated team. PDI Select Access is
      a
      leading provider of these detailing programs in the U.S. Since costs are shared
      among various companies, these programs may be less expensive for the client
      than programs involving a dedicated sales force. With a shared sales team,
      the
      client still gets targeted coverage of its physician audience within the
      representatives’ geographic territories.




MD&D
      Contract Sales and Clinical Teams




We
      also
      provide contract sales services within the MD&D market. We leveraged our
      knowledge from years of providing sales forces to the pharmaceutical industry
      and applied it to our MD&D business. As a result, we offer the provision of
      contract sales forces as one of the services that we market to the MD&D
      industry to assist our clients in improving product sales. Our Clinical Teams
      group provides an array of sales and marketing services to the MD&D
      industry. Its core service is the provision of clinical after sales support
      teams. Our clinical after sales support teams employ nurses, medical
      technologists, and other clinicians who train and provide hands-on clinical
      education and after sales support to the medical staff of hospitals and clinics
      that recently purchased our clients’ equipment. We will be winding down the
      operations of our MD&D Clinical Teams during the first half of 2006 and we
      will not be offering these services thereafter. We continue to offer contract
      sales services to MD&D companies through our Dedicated Teams business
      unit.




*Marketing
      Services*




This
      segment, which includes Pharmakon, TVG Marketing Research and Consulting and
      PDI
      Education and Communication, represented 10.9% of
      consolidated revenue for 2005.




Pharmakon




Pharmakon’s
      emphasis is on the creation, design and implementation of promotional
      interactive peer persuasion programs. Each marketing program can be offered
      through a number of different venues, including teleconferences, dinner
      meetings, “lunch and learns,” and web casts. Within each of our programs, we
      offer a number of services including strategic design, tactical execution,
      technology support, audience recruitment, moderator services and thought leader
      management. In the last five years, Pharmakon has conducted over 20,000 peer
      persuasion programs with more than 250,000 participants. Pharmakon’s peer
      programs can be designed as promotional or marketing research/advisory programs.
      We acquired Pharmakon in August 2004.




TVG
      Marketing Research and Consulting




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




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.




PDI
      Education and Communication




Our
      PDI
      Education and Communication (EdComm) business unit was comprised of Vital Issues
      in Medicine (VIM), which offered continuing medical education (CME) services;
      and a division that offered promotional communications activities. During 2006,
      VIM will operate as a separate business unit, and the promotional communication
      activities will be managed by Pharmakon.







6
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





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




*PDI
      Products Group (PPG)*




The
      PPG
      segment engages in the sourcing of biopharmaceutical products in the U.S.
      through licensing, copromotion, acquisition or integrated commercialization
      services arrangements. This segment did not have any revenue in 2005. As a
      result of our continuing de-emphasis of these activities, we do not plan to
      report these activities as a separate segment for 2006.




**Corporate
      Strategy**




We
      are a
      diversified sales and marketing services company, serving the biopharmaceutical
      and MD&D industries. We intend to grow our business through concentrated
      business development and marketing efforts, and expansion of our service
      offerings by internal development or acquisitions.




**Contracts**




Our
      contracts are nearly all fee for service. They may contain operational
      benchmarks, such as a minimum amount of activity within a specified amount
      of
      time. These contracts can include incentive payments that can be earned if
      our
      activities generate results that meet or exceed performance targets. Contracts
      may be terminated with or without cause by our clients. Certain contracts
      provide that we may incur specific penalties if we fail to meet stated
      performance benchmarks. Occasionally, our contracts may require us to meet
      certain financial covenants, such as maintaining a specified minimum amount
      of
      working capital.




*Sales
      Services*




The
      majority of our revenue is generated by contracts for dedicated sales teams.
      These contracts are generally for terms of one to three years and may be renewed
      or extended. The majority of these contracts, however, are terminable by the
      client for any reason upon 30 to 90 days’ notice. Certain contracts provide for
      termination payments if the client terminates us 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.




*Marketing
      Services*




Our
      marketing services contracts generally are for projects lasting from two to
      six
      months. The contracts are generally terminable by the client for any reason.
      Upon termination, the client is generally responsible for payment for all work
      completed to date, plus the cost of any nonrefundable commitments made on behalf
      of the client. Due to the typical size of these contracts, it is unlikely the
      loss or termination of any individual contract would have a material adverse
      effect on our business, financial condition or results of
      operations.




**Significant
      Customers**




For
      the
      year ended December 31, 2005 our three largest clients, each of whom represented
      10% or more of our service revenue, accounted for, in the aggregate,
      approximately 70.3% of our service revenue. For the years ended December 31,
      2004, and 2003, our two largest clients, each of whom individually represented
      10% or more of our service revenue, accounted for, in the aggregate,
      approximately 63.0% and 66.5% respectively, of our service revenue. On February
      28, 2006, we announced that AstraZeneca is terminating its contract sales force
      arrangement with us effective April 30, 2006. The termination affects
      approximately 800 field representatives. The revenue impact is projected to
      be
      approximately $65 to $70 million in 2006. See Note 15 to our consolidated
      financial statements.







7
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





**Marketing**




Our
      marketing efforts target established and emerging companies in the
      biopharmaceutical and MD&D 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 industry which
      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**




There
      are
      relatively few barriers to entry into the businesses in which we operate and,
      as
      the industry continues to evolve, new competitors are likely to emerge. We
      compete on the basis of such factors as reputation, service quality, management
      experience, performance record, customer satisfaction, ability to respond to
      specific client needs, integration skills and price. We believe we compete
      effectively with respect to each of these factors. Increased competition and/or
      a decrease in demand for our services may lead to price and other forms of
      competition.




**Employees**




As
      of
      December 31, 2005, we had approximately 2,800 employees, including approximately
      2,450 full-time employees. Approximately 90% of our employee population is
      comprised of field sales representatives and sales managers. The profile of
      these sales professionals includes targeted bio-pharma, and business to
      business, industry experience. We are not party to a collective bargaining
      agreement with any labor union. Relationships with our employees are generally
      positive.




Given
      the
      nature of our business, our employees are our most valuable asset. Our brand
      and
      our reputation, as well as those of our clients, are based on our ability to
      attract, develop and retain high performing talent. Our goal is to create a
      team
      of committed professionals with the knowledge, skills and ability required
      to
      deliver expected performance.




**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 annual report on Form 10-K. We make
      available free of charge through our website our annual report on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
      to those reports as soon as reasonably practicable after such material is
      electronically filed with or furnished to the SEC.




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




**Government
      and Industry Regulation**




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







8
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





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




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




There
      are
      also numerous federal and state laws pertaining to healthcare fraud and abuse.
      In particular, certain federal and state laws prohibit manufacturers, suppliers
      and providers from offering, giving or receiving kickbacks or other remuneration
      in connection with ordering or recommending the purchase or rental of healthcare
      items and services. The federal anti-kickback statute imposes both civil and
      criminal penalties for, among other things, offering or paying any remuneration
      to induce someone to refer patients to, or to purchase, lease or order (or
      arrange for or recommend the purchase, lease or order of) any item or service
      for which payment may be made by Medicare or other federally-funded state
      healthcare programs ( *e.g.* ,
      Medicaid). This statute also prohibits soliciting or receiving any remuneration
      in exchange for engaging in any of these activities. The prohibition applies
      whether the remuneration is provided directly or indirectly, overtly or
      covertly, in cash or in kind. Violations of the statute can result in numerous
      sanctions, including criminal fines, imprisonment and exclusion from
      participation in the Medicare and Medicaid programs.




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






**ITEM
      1A.**  **RISK
      FACTORS**




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




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




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







9
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





**Our
      service businesses depend on expenditures by companies in the life sciences
      industries.**




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




**Most
      of our service revenue is derived from a limited number of clients, the loss
      of
      any one of which could materially 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. In 2005, we had three major
      clients that accounted for approximately 33.6%, 21.7% and 15.0%, respectively,
      or a total of approximately 70.3% of our service revenue. In 2004, our two
      major
      clients accounted for a total of approximately 63.0% of our service revenue.
      We
      are likely to continue to experience a high degree of client concentration,
      particularly if there is further consolidation within the pharmaceutical
      industry. The loss or a significant reduction of business from any of our major
      clients could have a material adverse effect on our business, financial
      condition or results of operations. For example, in December 2004, we announced
      a reduction in the aggregate number of representatives that we deployed for
      AstraZeneca. This reduction decreased revenue generated from AstraZeneca in
      2005
      by approximately $45.8 million from revenues generated in 2004. Further, as
      announced on February 28, 2006, AstraZeneca is terminating its contract sales
      force arrangement with us effective April 30, 2006. The termination affects
      approximately 800 field representatives. The revenue impact is projected to
      be
      approximately $65 to $70 million in 2006.




**Our
      service contracts are generally short-term agreements and are cancelable at
      any
      time, which may result in lost revenue and additional costs and
      expenses.**




Our
      service contracts are generally for a term of one to three years (certain of
      our
      operating entities have contracts of shorter duration) and many may be
      terminated by the client at any time for any reason. Additionally, certain
      of
      our clients have the ability to significantly reduce the number of
      representatives we deploy on their behalf. For example, as discussed above,
      as a
      result of the reduction in the number of representatives we deployed for
      AstraZeneca, we generated approximately $45.8 million less revenue from our
      AstraZeneca relationship in 2005 than we realized in 2004. Further, as announced
      on February 28, 2006, AstraZeneca is terminating its contract sales force
      arrangement with us effective April 30, 2006. The termination affects
      approximately 800 field representatives. The revenue impact is projected to
      be
      approximately $65 to $70 million in 2006.




The
      termination or significant reduction of a contract by one of our major clients
      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 or
      results of operations.




**Product
      liability claims could harm our business.**




We
      could
      face substantial product liability claims in the event any of the pharmaceutical
      or medical device products we market now or in the future are alleged to cause
      negative reactions or adverse side effects or in the event any of these products
      causes injury, is alleged to be unsuitable for its intended purpose or is
      alleged to be otherwise defective. For example, we have been named in numerous
      lawsuits as a result of our detailing of Baycol â on
      behalf of Bayer Corporation (Bayer). Product liability claims, regardless of
      their merits, could be costly and divert management's attention, or adversely
      affect our reputation and the demand for our services or products. We rely
      on
      contractual indemnification provisions with our clients to protect us against
      certain product liability related claims. There is no assurance 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 we cannot assure
      that our insurance will be sufficient to cover fully all potential claims for
      which the aforementioned indemnification provisions do not protect against.
      Also, adequate insurance coverage might not be available in the future at
      acceptable costs, if at all.







10
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





**If
      we do not meet performance goals set in our incentive-based and revenue sharing
      arrangements, our profits could suffer.**




We
      sometimes enter into incentive-based and revenue sharing arrangements with
      pharmaceutical companies. Under incentive-based arrangements, we are typically
      paid a fixed fee and, in addition, have an opportunity to increase our earnings
      based on the market performance of the products being detailed in relation
      to
      targeted sales volumes, sales force performance metrics or a combination
      thereof. Additionally, certain of our service contracts may contain penalty
      provisions pursuant to which our fees may be significantly reduced if we do
      not
      meet certain performance metrics, for example number and timing of sales calls,
      physician reach, territory vacancies and/or sales representative turnover.
      Under
      revenue sharing arrangements, our compensation is based on the market
      performance of the products being detailed, usually expressed as a percentage
      of
      product sales. These types of arrangements transfer some market risk from our
      clients to us. In addition, these arrangements can result in variability in
      revenue and earnings due to seasonality of product usage, changes in market
      share, new product introductions, overall promotional efforts and other market
      related factors.




**If
      we pursue a strategy that includes copromotion and exclusive distribution
      arrangements, and/or licensing and brand ownership of products, we cannot assure
      you that we can successfully develop this business.**




We
      may in
      the future pursue a strategy which includes copromotion, distribution
      arrangements, and/or licensing and brand ownership of products. These types
      of
      arrangements can significantly increase our operating expenditures in the
      short-term. Typically, these agreements require significant “upfront” payments,
      minimum purchase requirements, minimum royalty payments, payments to third
      parties for production, inventory maintenance and control, distribution services
      and accounts receivable administration, as well as sales and marketing
      expenditures. In addition, particularly where we license or acquire products
      before they are approved for commercial use, we may be required to incur
      significant expense to gain and maintain the required regulatory approvals.
      However, regulatory approval does not ensure commercial success. As a result,
      our working capital balance and cash flow position could be materially and
      adversely affected until the products in question become commercially viable,
      if
      ever. The risks that we face in developing this segment of our business, if
      we
      choose to pursue it, may increase in proportion with:




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


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


·
            the
                incidence of adverse patent and other intellectual property developments
                relating to our product portfolio;
                and


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




In
      the
      event that we pursue a strategy which includes the copromotion, distribution,
      and/or licensing and brand ownership of products, there is no assurance that
      we
      will be able to successfully implement this strategy.




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




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




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


·
            integrate
                new personnel due to 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. For example,
      during 2005, we wrote down goodwill and intangible assets associated with our
      MD&D business unit in the amount of $8.2 million and goodwill for our Select
      Access business unit in the amount of $3.3 million, both of which were acquired
      businesses.







11
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





**We,
      a current officer, and a former officer are defendants in a class action
      shareholder lawsuit which could divert our time and attention from more
      productive activities.**




Beginning
      on January 24, 2002, several purported class action complaints were filed in
      the
      U.S. District Court for the District of New Jersey, against us and certain
      of
      our officers on behalf of persons who purchased our common stock during the
      period between May 22, 2001 and August 12, 2002. On May 23, 2002 the court
      consolidated these suits into a single class action lawsuit and on August 22,
      2005, in response to our motion, the court dismissed the complaint without
      prejudice. On October 21, 2005, the lead plaintiff filed a third consolidated
      and amended complaint. On December 21, 2005, we filed a motion to dismiss the
      third amended and consolidated complaint. On February 24, 2006, the lead
      plaintiff filed a memorandum of law in opposition to our motion to dismiss.
      We
      believe that meritorious defenses exist to the allegations asserted in this
      lawsuit and we intend to vigorously defend this action. Although we currently
      maintain director and officer liability insurance coverage, there is no
      assurance that we will continue to maintain such coverage or that any such
      coverage will be adequate to offset potential damages.




**Our
      failure, or that of our clients, to comply with applicable healthcare
      regulations could limit, prohibit or otherwise adversely impact our business
      activities.**




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




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




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




**Our
      stock price is volatile and could be further affected by events not within
      our
      control. In 2005, our stock traded at a low of $11.12 and a high of $22.26.
      In
      2004, our stock traded at a low of $18.84 and a high of $33.23.**




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




·
            volatility
                in the trading markets generally;


·
            significant
                fluctuations in our quarterly operating
                results;


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


·
            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; 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.







12
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**










**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:




·
            commencement,
                delay, cancellation or completion of programs;


·
            regulatory
                developments;


·
            uncertainty
                related to compensation based on achieving performance benchmarks;


·
            mix
                of services provided and /or mix of programs, i.e., contract sales,
                medical education, marketing research;


·
            timing
                and amount of expenses for implementing new programs and accuracy
                of
                estimates of resources required for ongoing programs;


·
            timing
                and integration of acquisitions;


·
            changes
                in regulations related to pharmaceutical companies; and


·
            general
                economic conditions.




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




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




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




**If
      we are unable to attract key employees, we may be unable to support the growth
      of our business.**




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




**Our
      business will 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, and experienced financial executives who are in
      high demand and who often have competitive employment options. Currently, we
      have two significant vacancies in our senior management. Charles T. Saldarini,
      our former chief executive officer and vice chairman of our board of directors
      resigned effective October 21, 2005 and has been replaced as chief executive
      officer on an interim basis by Larry Ellberger. Also, in August 2005, Bernard
      C.
      Boyle, our chief financial officer, announced his intention to retire effective
      March 31, 2006. We are currently engaged in an active search to fill these
      vacancies. Our failure to fill these positions with qualified individuals could
      have a material adverse effect on our business, financial condition or results
      of operations.







13
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





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




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




**Our
      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 35% of our outstanding
      common stock. As a result, Mr. Dugan will be able to exercise substantial
      control over the election of all of our directors, and to determine the outcome
      of most corporate actions requiring stockholder approval, including a merger
      with or into another company, the sale of all or substantially all of our assets
      and amendments to our certificate of incorporation.




**We
      have anti-takeover defenses that could delay or prevent an acquisition and
      could
      adversely affect the price of our common stock.**




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






**ITEM
      1B.**  **UNRESOLVED
      STAFF COMMENTS**




None.






**ITEM
      2.**  **PROPERTIES**




Our
      corporate headquarters are located in Saddle River, NJ, in an 84,000 square
      foot
      facility. 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 the Saddle River facility for a term of five years which began in
      July
      2005. The sublease allows the subtenant a renewal option for an additional
      term
      of two years. TVG operates out of a 37,000 square foot facility in Dresher,
      PA
      under a lease that runs for a term of approximately twelve years which began
      in
      January 2005. 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
      the
      fourth quarter of 2005, we took charges of approximately $2.4 million related
      to
      unused office space capacity at our Saddle River, NJ and Dresher, PA locations.
      There was a non-cash charge of approximately $1.1 million recorded in the sales
      services segment and a non-cash charge of approximately $1.3 million was
      recorded in the marketing services segment. There is approximately 7,300 and
      11,600 square feet of unused office space at Saddle River and Dresher,
      respectively, which we anticipate sub-leasing in the second half of
      2006.







14
 **PDI,
            INC.Annual
            Report on Form 10-K
            (Continued)**





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




**Securities
      Litigation**




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




In
      February 2003, we filed a motion to dismiss the Second Consolidated and Amended
      Complaint. On or about August 22, 2005, the U.S. District Court for the District
      of New Jersey dismissed the Second Consolidated and Amended Complaint without
      prejudice to plaintiffs.




On
      October 21, 2005, Lead Plaintiffs filed a third consolidated and amended
      complaint (Third Consolidated and Amended Complaint). Like its predecessor,
      the
      Third Consolidated and Amended Complaint names us, our former chief executive
      officer and our chief financial officer as defendants; purports to state claims
      against us on behalf of all persons who purchased our common stock between
      May
      22, 2001 and August 12, 2002; and seeks money damages in unspecified amounts
      and
      litigation expenses including attorneys’ and experts’ fees. The essence of the
      allegations in the Third Consolidated and Amended Complaint is that we
      intentionally or recklessly made false or misleading public statements and
      omissions concerning our financial condition and prospects with respect to
      its
      marketing of Ceftin in connection with the October 2000 distribution agreement
      with GSK, our marketing of Lotensin in connection with the May 2001 distribution
      agreement with Novartis, as well as our marketing of Evista in connection with
      the October 2001 distribution agreement with Eli Lilly and Company.




On
      December 21, 2005, we filed a motion to dismiss the Third Consolidated and
      Amended Complaint under the Private Securities Litigation Reform Act of 1995
      and
      Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. On February
      24,
      2006, Lead Plaintiffs filed a memorandum of law in opposition of our motion
      to
      dismiss the Third Consolidated and Amended Complaint. We believe that the
      allegations in this purported securities class action are without merit and
      we
      intend to defend the action vigorously.




**Bayer-Baycol
      Litigation**




We
      have
      been named as a defendant in numerous lawsuits, including two class action
      matters, alleging claims arising from the use of Baycol, a prescription
      cholesterol-lowering medication. Baycol was distributed, promoted and sold
      by
      Bayer in the U.S. through early August 2001, at which time Bayer voluntarily
      withdrew Baycol from the U.S. market. Bayer had retained certain companies,
      such
      as us, to provide detailing services on its behalf pursuant to contract sales
      force agreements. We may be named in additional similar lawsuits. To date,
      we
      have defended these actions vigorously and have asserted a contractual right
      of
      defense and indemnification against Bayer for all costs and expenses we incur
      relating to these proceedings. In February 2003, we entered into a joint defense
      and indemnification agreement with Bayer, pursuant to which Bayer has agreed
      to
      assume substantially all of our defense costs in pending and prospective
      proceedings and to indemnify us in these lawsuits, subject to certain limited
      exceptions. Further, Bayer agreed to reimburse us for all reasonable costs
      and
      expenses incurred through such date in defending these proceedings. As of
      December 31, 2005, 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 2004 or 2005.




**Cellegy
      Litigation**




On
      April
      11, 2005, we settled a lawsuit which was pending in the U.S. District Court
      for
      the Northern District of California against Cellegy Pharmaceuticals, Inc.
      (Cellegy), which was set to go to trial in May 2005 (PDI, Inc. v. Cellegy
      Pharmaceuticals, Inc., Case No. C 03-05602 (SC)). We had claimed (i) that we
      were fraudulently induced to enter into a December 31, 2002 license agreement
      with Cellegy (the License Agreement) to market the product Fortigel and (ii)
      that Cellegy had otherwise breached the License Agreement by failing, inter
      alia, to provide us with full information about Fortigel or to take all
      necessary steps to obtain expeditious FDA approval of Fortigel. We sought return
      of our $15 million upfront payment, other damages and an order rescinding the
      License Agreement.







15
 PDI,
          INC.Annual
          Report on Form 10-K (Continued)





Under
      the
      terms of the settlement, in exchange for our executing a stipulation of
      dismissal with prejudice of the lawsuit, Cellegy agreed to and did deliver
      to
      us: (i) a cash payment in the amount of $2,000,000; (ii) a Secured Promissory
      Note in the principal amount of $3,000,000, with a maturity date of October
      11,
      2006; (iii) a Security Agreement, granting us a security interest in certain
      collateral; and (iv) a Nonnegotiable Convertible Senior Note, with a face value
      of $3,500,000, with a maturity date of April, 11, 2008.




On
      December 1, 2005, we commenced a breach of contract action against Cellegy
      in
      the U.S. District Court for the Southern District of New York (PDI, Inc. v.
      Cellegy Pharmaceuticals, Inc., 05 Civ. 10137 (PKL)). We allege that Cellegy
      breached the terms of the Security Agreement and Secured Promissory Note we
      received in connection with the settlement. We further allege that to secure
      its
      debt to us, Cellegy granted us a security interest in certain "Pledged
      Collateral," which is broadly defined in the Security Agreement to include,
      among other things, 50% of licensing fees, royalties or "other payments in
      the
      nature thereof" received by Cellegy in connection with then-existing or future
      agreements for Cellegy's drugs Rectogesic® and Tostrex® outside of the United
      States, Mexico, and Canada. Upon receipt of such payments, Cellegy agreed to
      make prompt payment to us. We allege that we are owed 50% of a $2,000,000
      payment received by Cellegy in connection with the renegotiation of its license
      and distribution agreement for Rectogesic® in Europe, and that Cellegy's failure
      to pay us constitutes an event of default under the Security Agreement and
      the
      related Nonnegotiable Convertible Senior Note. For Cellegy's breach of contract,
      we seek damages in the total amount of $6,400,000 plus default interest from
      Cellegy.




On
      December 27, 2005, Cellegy filed an answer to our complaint, denying the
      allegations contained therein, and asserting affirmative defenses. The parties
      exchanged initial disclosures in the case on February 3, 2006. We served our
      first request for the production of documents on Cellegy on February 10, 2006.
      Discovery is ongoing, and pursuant to a scheduling order entered by the court,
      is to be completed by November 21, 2006.




**California
      Class Action Litigation**




On September
      26, 2005, we were served with a complaint in a
      purported class action lawsuit that was commenced against us **** in
      the
      Superior Court of the State of California for the County of San Francisco on
      behalf of certain of our current and former employees, alleging violations
      of
      certain sections of the California Labor Code.  During the quarter ended
      September 30, 2005, we accrued approximately $3.3 million for potential
      penalties and other settlement costs relating to both asserted and unasserted
      claims relating to this matter. In October 2005, we filed an answer generally
      denying the allegations set forth in the complaint. **** In
      December 2005, we reached a tentative settlement of this action, subject to
      court approval. As a result, we have reduced the reserve relating to asserted
      and unasserted claims relating to this matter to $600,000. However,
      there can be no assurance that the court will approve our tentative settlement,
      that the reserve will be adequate to cover potential liability, or that the
      ultimate outcome of this action will not **** have
      a
      material adverse effect on our business, financial condition or results of
      operations.




**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. Were we to settle
      a
      proceeding for a material amount or were an unfavorable ruling to occur, there
      exists the possibility of a material adverse impact on our business, financial
      condition 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 MATTERS**




**AND
      ISSUER PURCHASES OF EQUITY** **SECURITIES**




**Market
      Information:**




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







16
 PDI,
          INC.Annual
          Report on Form 10-K (Continued)





2005
              
              2004HIGH
              
              LOW
              
              HIGH
              
              LOWFirst
                  quarter
              $
                  21.45
              
              $
                  19.00
              
              $
                  31.77
              
              $
                  23.29Second
                  quarter
              $
                  20.77
              
              $
                  11.27
              
              $
                  32.06
              
              $
                  24.40Third
                  quarter
              $
                  15.99
              
              $
                  12.36
              
              $
                  29.98
              
              $
                  21.60Fourth
                  quarter
              $
                  15.24
              
              $
                  12.38
              
              $
                  31.55
              
              $
                  21.78


**Holders:**




We
      had
      348 shareholders of record as of March 3, 2006. Not reflected in the number
      of
      record holders are persons who beneficially own shares of common stock held
      in
      nominee or street name.




**Dividend:**




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, 2005:




(c)(a)
              
              (b)
              
              Number
                  of securitiesNumber
                  of securities to
              
              Weighted-average
              
              remaining
                  available forbe
                  issued upon exercise
              
              exercise
                  price of
              
              future
                  issuanceof
                  outstanding options,
              
              of
                  outstanding options,
              
              (excluding
                  securitiesPlan
                  Category
              
              warrants
                  and rights
              
              warrants
                  and rights
              
              reflected
                  in column (a))Equity
                  compensation plansapproved by security holders
              1,271,890
              
              $
                  27.19
              
              1,028,453Equity
                  compensation plans notapproved by security holders
              
              -
              
              -
              
              -Total
              
              1,271,890
              
              $
                  27.19
              
              1,028,453




**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. The following table sets forth
      certain information with respect to these repurchases:


(c)
              
              (d)Total
                  Number
              
              Maximum
                  Number(a)
              
              (b)
              
              of
                  Shares
              
              (or
                  Dollar Value)Total
                  Number
              
              Average
              
              Purchased
                  as
              
              of
                  Shares that Mayof
                  Shares
              
              Price
                  Paid
              
              Part
                  of Publicly
              
              Yet
                  Be PurchasedPeriod
              
              Purchased
              
              per
                  Share
              
              Announced
                  Plans
              
              Under
                  the PlansSeptember
                  1-30, 2001(1)
              5,000
              
              $
                  22.00
              
              5,000
              
              $                                
                  -May
                  1 - 31, 2005(2)
              
              226,900
              
              $
                  12.36
              
              226,900
              
              773,100
                  sharesJune
                  1 - 30, 2005(2)
              
              353,330
              
              $
                  11.92
              
              353,330
              
              419,770
                  sharesJuly
                  1 - 31, 2005(2)
              
              315,570
              
              $
                  13.77
              
              315,570
              
              104,200
                  sharesAugust
                  1 - 31, 2005(2)
              
              101,100
              
              $
                  14.39
              
              101,100
              
              3,100
                  sharesDecember
                  1 - 31, 2005(3)
              16,106
              
              $
                  15.00
              
              -
              
              -Total
              
              1,018,006




17
 PDI,
            INC.Annual
            Report on Form 10-K (Continued)


(1)
            On
                September 21, 2001, we announced that our Board of Directors had
                unanimously authorized the repurchase of up to $7.5 million of our
                common
                stock. Subject to availability, the transactions were authorized
                to be
                made from time to time in the open market or directly from stockholders
                at
                prevailing market prices. This plan was terminated on April 27,
                2005.




(2)
            On
                May 2, 2005, we announced that our Board of Directors had unanimously
                authorized the repurchase of up to one million shares of our common
                stock.
                Subject to availability, the transactions may be made from time to
                time in
                the open market or directly from stockholders at prevailing market
                prices.
                The plan has no expiration date.




(3)
            Represents
                shares delivered back to us for the payment of taxes resulting from
                the
                vesting of restricted stock.




On
      July
      6, 2005, we announced that our Board of Directors had authorized the repurchase
      of an additional one million shares. At our discretion, we may continue to
      repurchase shares on the open market or in privately negotiated transactions
      or
      both depending on cash flow expectations and other uses of cash. Some or all
      of
      the repurchases may be made pursuant to a 10(b)5-1 Plan. All purchases, if
      any,
      will be made from our available cash.






**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, 2005, 2004, and 2003 and the balance sheet data at December 31,
      2005 and 2004 are derived from our audited consolidated financial statements
      appearing elsewhere in this Form 10-K. The operations data for the years ended
      December 31, 2002 and 2001 and the balance sheet data at December 31, 2003,
      2002
      and 2001 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.


(in
                  thousands, except per share data)
              
              **2005**
              
              
              
              **2004**
              
              
              
              **2003**
              
              
              
              **2002**
              
              
              
              **2001**Operations
                  data:Total
                  revenue, net
              
              $
              319,415
              
              
              
              
              $
              364,444
              
              
              (3
              )
              $
              344,530
              
              
              (4
              )
              $
              307,875
              
              
              (4
              )
              $
              716,761
              (6
              )Gross
                  profit
              
              
              61,936
              
              
              
              
              
              98,830
              
              
              
              
              
              89,081
              
              
              
              
              
              29,873
              
              
              
              
              
              135,783
              (6
              )Operating
                  expenses
              
              
              74,472
              
              
              (1
              )
              
              63,639
              
              
              
              
              
              69,491
              
              
              
              
              
              80,048
              
              
              (5
              )
              
              123,078
              (7
              )Asset
                  impairment
              
              
              14,351
              
              
              (2
              )
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Total
                  operating expenses
              
              
              88,823
              
              
              
              
              
              63,639
              
              
              
              
              
              69,491
              
              
              
              
              
              80,048
              
              
              
              
              
              123,078Net
                  (loss) income
              
              $
              (19,454
              )
              
              
              
              $
              21,132
              
              
              
              
              $
              12,258
              
              
              
              
              $
              (30,761
              )
              
              
              
              $
              6,354Per
                  share data:(Loss)
                  income per share of common stock:Basic
              
              $
              (1.37
              )
              
              
              
              $
              1.45
              
              
              
              
              $
              0.86
              
              
              
              
              $
              (2.19
              )
              
              
              
              $
              0.46Diluted
              
              $
              (1.37
              )
              
              
              
              $
              1.42
              
              
              
              
              $
              0.85
              
              
              
              
              $
              (2.19
              )
              
              
              
              $
              0.45Weighted
                  average number of shares outstanding:Basic
              
              
              14,232
              
              
              
              
              
              14,564
              
              
              
              
              
              14,231
              
              
              
              
              
              14,033
              
              
              
              
              
              13,886Diluted
              
              
              14,232
              
              
              
              
              
              14,893
              
              
              
              
              
              14,431
              
              
              
              
              
              14,033
              
              
              
              
              
              14,113Balance
                  sheet data:Cash
                  and cash equivalents
              
              $
              90,827
              
              
              
              
              $
              81,000
              
              
              
              
              $
              113,288
              
              
              
              
              $
              64,086
              
              
              
              
              $
              158,948Working
                  capital
              
              
              86,430
              
              
              
              
              
              96,156
              
              
              
              
              
              100,009
              
              
              
              
              
              81,854
              
              
              
              
              
              113,685Total
                  assets
              
              
              200,306
              
              
              
              
              
              224,705
              
              
              
              
              
              219,623
              
              
              
              
              
              190,939
              
              
              
              
              
              302,671Total
                  long-term debt
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Stockholders'
                  equity
              
              
              135,610
              
              
              
              
              
              165,425
              
              
              
              
              
              138,488
              
              
              
              
              
              123,211
              
              
              
              
              
              150,935




18
 PDI,
            INC.Annual
            Report on Form 10-K (Continued)


(1)
            Includes
                $5.7 million for executive severance costs and $2.4 million for facilities
                realignment costs. See Notes 17 and 18 to the consolidated financial
                statements for more details.




(2)
            Asset
                impairment charges include an $8.2 million non-cash charge for impairment
                of goodwill and other intangible assets associated with the 2006
                closing
                of the MD&D reporting unit;: 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. See Notes 4 and 5 to the consolidated
                financial statements for more
                details.




(3)
            Includes
                revenue of $4.9 million associated with the acquisition of Pharmakon
                on
                August 31, 2004.




(4)
            Includes
                product revenue of negative $11.6 million in 2003 for the Ceftin
                returns
                reserve, which we began selling in the fourth quarter of 2000. For
                2002,
                it includes product revenue of $6.4 million that related to Ceftin.
                See
                Note 16 to the consolidated financial statements for more details.




(5)
            Includes
                $15.0 million for the initial licensing fee associated with the Cellegy
                License Agreement, and $3.2 million associated with our 2002
                restructuring.




(6)
            Includes
                product revenue and gross profit of $415.3 million and $86.7 million,
                respectively, that pertained to sales of Ceftin. Includes $2.8 million
                of
                service revenue associated with the InServe acquisition on September
                10,
                2001.




(7)
            Includes
                $46.9 million in Ceftin sales force and promotional costs.






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




We
      make
      forward-looking statements that involve risks, uncertainties, and assumptions
      in
      this report. Actual results may differ materially from those anticipated in
      these forward-looking statements as a result of various factors, including,
      but
      not limited to, those presented under “Forward-Looking Statement Information” on
      page 4.




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




**OVERVIEW**




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




**DESCRIPTION
      OF REPORTING SEGMENTS AND NATURE OF CONTRACTS**




During
      the fourth quarter of 2004, as a result of our acquisition of Pharmakon (as
      described in Note 2 to the consolidated financial statements) we restructured
      certain management responsibilities and changed our internal financial
      reporting. Our segments remained the same for all of 2005. In the fourth quarter
      of 2005, we announced that we would be discontinuing our MD&D business unit.
      For the 2006 reporting periods, the MD&D business unit will be reported as
      discontinued operations. Additionally, we will no longer report the PPG segment
      beginning in 2006 as we do not anticipate PPG having any costs or revenues
      associated with it. For the year ended December 31, 2005, our reporting segments
      are as follows:




 ̈;  Sales
      Services:


·
            dedicated
                contract sales (CSO);


·
            shared
                contract sales (Select Access);


·
            medical
                devices and diagnostics (MD&D) contract sales and clinical sales teams


 ̈
            Marketing
                Services:


·
            Education
                and communication (EdComm);


·
            Pharmakon;
                and


·
            TVG
                Marketing Research and Consulting
                (TVG)




 ̈  PDI
      Products Group (PPG)







19
 PDI,
              INC.Annual
              Report on Form 10-K
              (Continued)





An
      analysis of these reporting segments and their results of operations is
      contained in Note 24 to the consolidated financial statements and in the *Consolidated
      Results of Operations* discussion below.




*Description
      of Businesses*




**Sales
      Services:**




Dedicated
      Teams




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




Select
      Access (formerly Shared Sales Teams)




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




MD&D
      Contract Sales and Clinical Sales Teams (Will be
      discontinued in 2006)




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




**Marketing
      Services:**




Edcomm




PDI
      Edcomm provides medical education and promotional communications to the
      biopharmaceutical and MD&D industries. Using an expert-driven, customized
      approach, we provide our clients with integrated advocacy development, CME
      promotions, publication services and interactive sales initiatives to generate
      incremental value for products. We create custom designed programs focusing
      on
      optimizing the informed use of our clients’ products. Our services are executed
      through a customized, integrated plan that can be leveraged across the product’s
      entire life cycle. We can meet a wide range of objectives, including advocacy
      during pre-launch, communicating disease state awareness, supporting a product
      launch, helping an under-performing brand, fending off new competition and
      expanding market leadership.




Pharmakon




Pharmakon’s
      emphasis is on the creation, design and implementation of interactive peer
      persuasion programs. Pharmakon’s peer programs can be designed as promotional,
      CME or marketing research/advisory programs. We acquired Pharmakon in August
      2004. Each marketing program can be offered through a number of different
      venues, including: teleconferences, dinner meetings, “lunch and learns” and
      webcasts. Within each of our programs, we offer a number of services including
      strategic design, tactical execution, technology support, moderator services
      and
      thought leader management.




TVG
      Marketing Research and Consulting




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







20
 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.




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




*Nature
      of Contracts by Segment*




Our
      contracts are nearly all fee for service. They may contain operational
      benchmarks, such as a minimum amount of activity within a specified amount
      of
      time. These contracts can include incentive payments that can be earned if
      our
      activities generate results that meet or exceed performance targets. Contracts
      may be terminated with or without cause by our clients. Certain contracts
      provide that we may incur specific penalties if we fail to meet stated
      performance benchmarks. Occasionally,
      our contracts may require us to meet certain financial covenants, such as
      maintaining a specified minimum amount of working capital.




**Sales
      Services**




The
      majority of our revenue is generated by contracts for dedicated sales teams.
      These contracts are generally for terms of one
      to three years and may be renewed or extended. The majority of these contracts,
      however, are terminable by the client for any reason upon 30 to 90 days’ notice.
      Certain contracts provide for termination payments if the client terminates
      us
      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.




**Marketing
      Services**




Our
      marketing services contracts generally are for projects lasting from two to
      six
      months. The contracts are generally terminable by the client for any reason.
      Upon termination, the client is generally responsible for payment for all work
      completed to date, plus the cost of any nonrefundable commitments made on behalf
      of the client. Due to the typical size of these contracts, it is unlikely the
      loss or termination of any individual contract would have a material adverse
      effect on our business, financial condition or results of
      operations.






**CRITICAL
      ACCOUNTING POLICIES**




We
      prepare our financial statements in accordance with U.S. generally accepted
      accounting principles (US GAAP).  The preparation of financial statements
      and related disclosures in conformity with US 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
      the
      consolidated financial statements.




*Revenue
      Recognition*




Revenue
      and associated costs under pharmaceutical detailing contracts are generally
      based on the number of physician calls 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 three years
      and
      may be renewed or extended. The majority of these contracts, however, are
      terminable by the client for any reason upon 30 to 90 days’ notice. Certain
      contracts provide for termination payments if the client terminates us 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.







21
 PDI,
              INC.Annual
              Report on Form 10-K
              (Continued)





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 client for any reason. Upon termination, the client
      is generally responsible for payment for all work completed to date, plus the
      cost of any nonrefundable commitments made on behalf of the client. Due to
      the
      typical size of marketing service contracts, it is unlikely the loss or
      termination of any individual contract would have a material adverse effect
      on
      our business, financial condition or results of operations.




Service
      revenue is recognized on product detailing programs and other marketing and
      promotional 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 once 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.




Reimbursable
      costs including those relating to travel and out-of-pocket expenses, sales
      force
      bonuses tied to individual or product revenues, and other similar costs, are
      included in revenue and an equivalent amount of reimbursable expenses
      is included in cost of services in the period in which such amounts have been
      finalized.




*Loans
      and Investments in Privately Held Entities*




From
      time
      to time, we make investments in and/or loans to privately-held companies. We
      consider 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 we
      considered 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 would be recorded to estimated fair
      value.  Additionally, on a quarterly basis, we review outstanding loans
      receivable to determine if a provision for doubtful accounts is necessary. 
Our review includes 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.  Our assessments of value are highly subjective
      given that these companies may be at an early stage of development and rely
      regularly on their investors for cash infusions.




*Goodwill,
      Intangibles and Other Long-Lived Assets*




We
      account for our purchases of acquired companies in accordance with SFAS No.
      141, *"Business
      Combinations"* (SFAS
      141) and account for the related goodwill and other identifiable definite and
      indefinite-lived acquired intangible assets in accordance with SFAS No. 142, *“Goodwill
      and Other Intangible Assets”* (SFAS
      142).  Additionally, we review our lived-assets for recoverability in
      accordance with SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets.”*




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 others, consultations
      with an accredited independent valuation consultant, reviews of projected future
      cash flows and statutory regulations.  In accordance with SFAS 141, we
      allocate the cost of the acquired companies to the identifiable tangible and
      intangible assets and liabilities acquired, with the remaining amount being
      classified as goodwill.  Since the entities we have acquired do not have
      significant tangible assets, a significant portion of the purchase price has
      been allocated to intangible assets and goodwill.  The use of alternative
      estimates and assumptions could increase or decrease the estimated fair value
      of
      our 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
      have
      elected to do the annual tests for indications of goodwill impairment as of
      December 31  of
      each
      year.  We utilize a discounted cash flow model to determine fair value in
      the goodwill impairment evaluation. 
      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.







22
 PDI,
              INC.Annual
              Report on Form 10-K
              (Continued)





We
      review
      the carrying value of long-lived assets for impairment 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.




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 asse t
      balances.




*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. Initially, we establish an
      allowance for doubtful accounts based on the overall aging of accounts
      receivable based on historical trends and other information.  This initial
      estimate is periodically adjusted when we become aware of a specific customer’s
      inability to meet its financial obligations (e.g., 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.
      A general downturn in the pharmaceutical industry or an adverse material event
      to one or more of our major clients could result in higher than expected
      customer defaults and additional allowances may be required.




*Contingencies*




In
      the
      normal course of business, we are subject to various contingencies.
 Contingencies are recorded in the consolidated financial statements when
      it is probable that a liability will be incurred and the amount of the loss
      can
      be reasonably estimated, or otherwise disclosed, in accordance with SFAS No.
      5,
“ *Accounting
      for Contingencies”* (SFAS
      5) *.* 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*




In
      accordance with the provisions of SFAS No. 109, “ *Accounting
      for Income Taxes,”* we
      account for income taxes using the asset and liability method. This method
      requires recognition of deferred tax assets and liabilities for expected future
      tax consequences of temporary differences that currently exist between tax
      bases
      and financial reporting bases of our assets and liabilities based on enacted
      tax
      laws and rates.




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 tax law 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 and meet the criteria for accrual under SFAS 5. ** These
      accruals represent accounting estimates that are subject to inherent
      uncertainties associated with the tax audit process.  We adjust these
      accruals as facts and circumstances change, such as the progress of a tax audit.
      We believe that any potential audit adjustments will not have a material adverse
      effect on our financial condition or liquidity. However, any adjustments made
      may be material to our consolidated results of operations 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.  We currently have
      significant deferred tax assets resulting from the current year net operating
      loss and deductible temporary differences, which should reduce taxable income
      in
      future periods.  The realization of these assets is dependent on generating
      future taxable income, as well as successful implementation of various tax
      planning strategies.  A valuation allowance is required when it is more
      likely than not that all or a portion of a deferred tax asset will not be
      realized.







23
 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 selected statement of
      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,**Operating
                  data**
              2005
              
              2004
              
              2003
              
              2002
              
              2001RevenueService,
                  net
              100.0%
              
              100.4%
              
              103.4%
              
              97.9%
              
              42.1%Product,
                  net
              0.0%
              
              (0.4%)
              
              (3.4%)
              
              2.1%
              
              57.9%Total
                  revenue, net
              100.0%
              
              100.0%
              
              100.0%
              
              100.0%
              
              100.0%Cost
                  of goods and servicesProgram
                  expenses
              80.6%
              
              72.8%
              
              73.8%
              
              90.3%
              
              35.3%Cost
                  of goods sold
              0.0%
              
              0.1%
              
              0.4%
              
              0.0%
              
              45.8%Total
                  cost of goods and services
              80.6%
              
              72.9%
              
              74.2%
              
              90.3%
              
              81.1%Gross
                  profit
              19.4%
              
              27.1%
              
              25.8%
              
              9.7%
              
              18.9%Operating
                  expensesCompensation
                  expense
              9.2%
              
              9.3%
              
              10.7%
              
              10.6%
              
              5.5%Other
                  selling, general and administrative
              11.1%
              
              7.4%
              
              8.8%
              
              14.3%
              
              11.5%Facilities
                  realignment
              0.7%
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%Executive
                  severance
              1.8%
              
              0.1%
              
              0.0%
              
              0.0%
              
              0.0%Legal
                  and related costs
              0.5%
              
              0.6%
              
              0.7%
              
              1.0%
              
              0.2%Asset
                  impairment
              4.5%
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%Total
                  operating expenses
              27.8%
              
              17.4%
              
              20.2%
              
              25.9%
              
              17.2%Operating
                  (loss) income
              (8.4%)
              
              9.7%
              
              5.7%
              
              (16.2%)
              
              1.7%(Loss)
                  gain on investments
              1.4%
              
              (0.3%)
              
              0.0%
              
              0.0%
              
              0.0%Interest
                  income, net
              1.0%
              
              0.5%
              
              0.3%
              
              0.6%
              
              0.3%(Loss)
                  income before income taxes
              (6.0%)
              
              9.9%
              
              6.0%
              
              (15.6%)
              
              2.0%Provision
                  for income taxes
              0.1%
              
              4.1%
              
              2.4%
              
              (5.6%)
              
              1.2%Net
                  (loss) income
              (6.1%)
              
              5.8%
              
              3.6%
              
              (10.0%)
              
              0.8%







24
 PDI,
            INC.Annual
            Report on Form 10-K (Continued)





**Comparison
      of 2005 and 2004**


*Revenue
                  (in thousands)*Change
              
              Change2005
              
              2004
              
              ($)
              
              (%)Sales
                  services
              
              $
              284,629
              
              $
              332,431
              
              $
              (47,802
              )
              
              (14.4
              %)Marketing
                  services
              
              
              34,786
              
              
              29,057
              
              
              5,729
              
              
              19.7
              %PPG
              
              
              -
              
              
              2,956
              
              
              (2,956
              )
              
              (100.0
              %)**Total**
              
              **$**
              **319,415**
              
              **$**
              **364,444**
              
              **$**
              **(45,029**
              **)**
              
              **(12.4**
              **%)**




Total
      revenue for 2005 was $319.4 million, a decrease of $45.0 million or 12.4% from
      revenue of $364.4 million for 2004. The decrease was primarily related to the
      reduction in the AstraZeneca sales force for 2005 by a monthly average of
      approximately 375 sales reps as compared to 2004. Service revenue was $319.4
      million, a decrease of $46.6 million or 12.7% from revenue of $366.0 million
      in
      2004. Product net revenue for 2004 was negative $1.5 million primarily as a
      result of a $1.7 million increase in the Ceftin reserve (See Note 16 to the
      consolidated financial statements).




The
      sales
      services segment generated $284.6 million in revenue for 2005, a decrease of
      $47.8 million compared to 2004. This decrease is primarily related to the
      AstraZeneca sales force reduction for 2005 mentioned above. Sales services
      revenue from the AstraZeneca contracts in 2005 was approximately $45.8 million
      less when compared to the comparable prior year period. While our business
      development efforts yielded several contracts that were either new or of
      increased size, those revenue increases were offset by decreases in other
      contracts that were either reduced in size or closed-out.




On
      February 28, 2006 we announced that AstraZeneca is terminating its contract
      sales force arrangement with us effective April 30, 2006. This termination
      impacts approximately 800 sales representatives and is expected to lead
      to a
      reduction in revenue of approximately $65.0 to $70.0 million from what had
      been
      contracted for 2006.




The
      marketing services segment generated $34.8 million in revenue in 2005, an
      increase of $5.7 million or 19.7% from revenue of $29.1 million in 2004. This
      increase is attributable to having Pharmakon results for twelve months in 2005
      versus four months in 2004; Pharmakon was acquired on August 31, 2004. The
      additional revenue generated by Pharmakon was partially offset by declines
      in
      revenue at both the MR&C and EdComm units.




The
      PPG
      segment did not have any revenue in 2005 and the segment will no longer be
      reported in 2006. The PPG segment generated net revenue of $3.0 million in
      2004,
      which consisted of $4.5 million in service revenue offset by negative product
      revenue of $1.5 million. The service revenue of $4.5 million was generated
      almost entirely by revenue from Lotensin royalties; the negative product revenue
      of $1.5 million was primarily related to the increase in the Ceftin sales
      returns reserve. As our responsibility to accept product returns ended December
      31, 2004, no further material increases to this reserve are likely.









*Cost
                of goods and services (in thousands)*Change
            
            Change2005
            
            2004
            
            ($)
            
            (%)Sales
                services
            
            $
            236,444
            
            $
            249,131
            
            $
            (12,687
            )
            
            (5.1
            %)Marketing
                services
            
            
            21,035
            
            
            16,352
            
            
            4,683
            
            
            28.6
            %PPG
            
            
            -
            
            
            131
            
            
            (131
            )
            
            (100.0
            %)**Total**
            
            **$**
            **257,479**
            
            **$**
            **265,614**
            
            **$**
            **(8,135**
            **)**
            
            **(3.1**
            **%)**










·
            A
                decrease in incentive payments ($2.6 million) received in 2005 as
                compared
                to 2004;


·
            Higher
                amount of net penalties accrued in 2005 ($2.0 million) as compared
                to
                2004;


·
            Lower
                contractual margins for some of our 2005 contract
                renewals;


·
            Market
                conditions that led to increases in field compensation and other
                field
                costs (i.e. gas, travel) that were, in some cases, higher than the
                rates
                specified in our contracts; and





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





·
              No
                  PPG revenues or gross profit earned in 2005 as compared to 2004
                  when
                  revenue was $3.0 million and gross profit was $2.8
                  million.




The
      sales
      services segment had gross profit of $48.2 million in 2005, with a gross profit
      percentage of 16.9%; during 2004 this segment had gross profit of $83.3 million
      and a gross profit percentage of 25.1%. The decrease of $35.1 million is
      primarily attributable to the reduction in the AstraZeneca sales force as well
      as the factors mentioned directly above.




The
      marketing services segment earned gross profit of $13.8 million and $12.7
      million for 2005 and 2004, respectively. The increase in gross profit
      attributable to the marketing services segment is due to the increase in gross
      profit associated with Pharmakon; this was partially offset by decreases in
      gross profit at both the MR&C and EdComm units. The gross percentage
      declined slightly from 43.7% in 2004 to 39.5% in 2005.




The
      PPG
      segment had no gross profit in 2005. The PPG segment had $2.8 million in gross
      profit for 2004 which was entirely attributable to the Lotensin royalties
      received in 2004, partially offset by the negative gross profit
      associated with the
      increase in the Ceftin reserve.




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


*Compensation
                  Expense (in thousands)*%
                  of
              
              
              
              %
                  of
              
              Change
              
              Change2005
              
              revenue
              
              2004
              
              revenue
              
              ($)
              
              (%)Sales
                  services
              
              $
              21,867
              
              
              7.7
              %
              $
              25,022
              
              
              7.5
              %
              $
              (3,155
              )
              
              (12.6
              %)Marketing
                  services
              
              
              7,499
              
              
              21.6
              %
              
              7,367
              
              
              25.4
              %
              
              132
              
              
              1.8
              %PPG
              
              
              1
              
              
              0.0
              %
              
              1,441
              
              
              48.7
              %
              
              (1,440
              )
              
              (99.9
              %)**Total**
              
              **$**
              **29,367**
              
              
              **9.2**
              **%**
              **$**
              **33,830**
              
              
              **9.3**
              **%**
              **$**
              **(4,463**
              **)**
              
              **(13.2**
              **%)**




Compensation
      expense for 2005 was $29.4 million, a decrease of $4.5 million or 13.2% less
      than the $33.8 million for the comparable prior year period. This decrease
      can
      be primarily attributed to an overall decrease in the amount of incentive
      compensation in 2005. As a percentage of total revenue, compensation expense
      decreased to 9.2% for 2005 from 9.3% in 2004.




Compensation
      expense for the sales services segment was $21.9 million, a decrease of $3.2
      million from the comparable prior year period. This decrease can be attributable
      to the reduction in incentive compensation mentioned above.




Compensation
      expense for the marketing services segment was $7.5 million in 2005, a 1.8%
      increase over $7.4 million in the comparable prior year period.




The
      PPG segment
      did not have any compensation expense in 2005. Compensation expense associated
      with the PPG segment in 2004 was $1.4 million and was primarily for severance
      related activities associated with the de-emphasis of that segment beginning
      in
      2004.




*Other
                  SG&A (in thousands)*%
                  of
              
              
              
              %
                  of
              
              Change
              
              Change2005
              
              revenue
              
              2004
              
              revenue
              
              ($)
              
              (%)Sales
                  services
              
              $
              29,545
              
              
              10.4
              %
              $
              21,986
              
              
              6.6
              %
              $
              7,559
              
              
              34.4
              %Marketing
                  services
              
              
              5,775
              
              
              16.6
              %
              
              3,686
              
              
              12.7
              %
              
              2,089
              
              
              56.7
              %PPG
              
              
              10
              
              
              0.0
              %
              
              1,244
              
              
              42.1
              %
              
              (1,234
              )
              
              (99.2
              %)**Total**
              
              **$**
              **35,330**
              
              
              **11.1**
              **%**
              **$**
              **26,916**
              
              
              **7.4**
              **%**
              **$**
              **8,414**
              
              
              **31.3**
              **%**




Total
      other SG&A expenses were $35.3 million in 2005, versus $26.9 million in
      2004, an increase of $8.4 million or 31.3%. This increase is mainly attributable
      to the following: an increase in marketing spend of $1.2 million; an increase
      in
      compliance costs of $1.0 million; an increase in outsourcing and consulting
      costs of $2.6 million; and the rollout of our new sales force automation
      platform of $3.1 million. As a percentage of total revenue, other SG&A
      expenses increased to 11.1% from 7.4% in 2004.







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





Other
      SG&A expenses associated with the sales services segment were $29.5 million,
      an increase of $7.6 million or 34.4%. This increase is primarily attributable
      to
      the reasons mentioned above.




Other
      SG&A for the marketing services segment increased by $2.1 million or 56.7%.
      Approximately $800,000 was related to costs involved in moving to TVG’s new
      facility. Amortization expense increased by approximately $850,000 as result
      of
      having a full twelve months of amortization associated with Pharmakon as opposed
      to four months in 2004.




Other
      SG&A in the PPG segment was approximately $10,000 for 2005, as compared to
      $1.2 million in 2004. In 2004, those
      costs were primarily related to closeout activities associated with that
      segment.




*Asset
      impairment*




We
      recognized asset impairment charges of $14.4 million for the year ended December
      31, 2005. The charges related to InServe goodwill and other intangible asset
      impairment - $8.2 million in the fourth quarter of 2005; Select Access goodwill
      impairment - $3.3 million in the fourth quarter of 2005; and $2.8 million
      associated with the write-down of our Siebel sales force automation software
      in
      the second quarter of 2005. See Notes 4 and 5 to the consolidated financial
      statements for more details on these asset impairments.




*Executive
      severance*




In
      2005,
      we incurred approximately $5.7 million in executive severance and related costs
      as compared to approximately $495,000 in the comparable prior year period.
      These
      expenses were primarily attributable to the announced departures of our CEO
      -
      $2.8 million in the fourth quarter of 2005, and our CFO - $1.6 million as
      disclosed and recorded in the third quarter of 2005. The remaining costs
      pertained to other executives who resigned during the year or for which
      settlements were reached during that period. In 2004, the expense pertained
      to
      the departure of one executive.




*Legal
      and related costs*




In
      2005,
      we incurred approximately $1.7 million in legal expenses as compared to $2.4
      million in the comparable prior year period. Included in 2005 is a $600,000
      litigation accrual related to the California class action lawsuit. For details
      on this lawsuit, see Note 9 to the consolidated financial
      statements. ** In
      2004,
      the legal costs of $2.4 were primarily related to the Cellegy litigation.




*Facilities
      realignment*




In
      the
      fourth quarter of 2005, we took charges of approximately $2.4 million related
      to
      unused office space capacity at our Saddle River, NJ and Dresher, PA locations.
      There was a charge of approximately $1.1 million recorded in the sales services
      segment and a charge of approximately $1.3 million recorded in the marketing
      services segment. There is approximately 7,300 and 11,600 square feet of unused
      office space at Saddle River and Dresher, respectively, which we anticipate
      sub-leasing in the second half of 2006.




*Operating
                  Income (Loss) (in thousands)*%
                  of
              
              
              
              %
                  of
              
              Change
              
              Change2005
              
              revenue
              
              2004
              
              revenue
              
              ($)
              
              (%)Sales
                  services
              
              $
              (25,434
              )
              
              -8.9
              %
              $
              34,018
              
              
              10.2
              %
              $
              (59,452
              )
              
              (174.8
              %)Marketing
                  services
              
              
              (1,185
              )
              
              -3.4
              %
              
              1,535
              
              
              5.3
              %
              
              (2,720
              )
              
              (177.2
              %)PPG
              
              
              (268
              )
              
              0.0
              %
              
              (362
              )
              
              (12.2
              %)
              
              94
              
              
              (26.0
              %)**Total**
              
              **$**
              **(26,887**
              **)**
              
              **-8.4**
              **%**
              **$**
              **35,191**
              
              
              **9.7**
              **%**
              **$**
              **(62,078**
              **)**
              
              **(176.4**
              **%)**




There
      was
      an operating loss of $26.9 million in 2005 as compared to operating income
      for
      2004 of $35.2 million. This large decrease can be attributed to several factors,
      including the reduction in the size of the dedicated contract sales force and
      lower gross profit margins (as discussed above); the asset impairments and
      executive severance costs mentioned above; and facility realignment costs.
      There
      was an operating loss for the sales services segment of $25.4 million as
      compared to operating income of $34.0 million in 2004 and was primarily due
      to
      the factors discussed above. There was an operating loss in 2005 for the
      marketing services segment of $1.2 million compared to operating income of
      $1.5
      million in the comparable prior year period. The loss in 2005 was primarily
      attributable to the facilities realignment expenses associated with this
      segment. There was an operating loss for the PPG segment in 2005 of $268,000
      that was attributable to Cellegy litigation expenses, net of settlements
      received. In 2004, PPG had an operating loss of $362,000 that primarily related
      to the closing out of that segment.







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





*Gain/loss
      on investment*




In
      2005,
      we recognized a gain on sale of our In2Focus investment of approximately $4.4
      million in the second quarter of 2005. **  In
      2004,
      our investment in Xylos of $1.0 million was found to be impaired and was written
      down to zero in the fourth quarter of 2004.




*Interest
      income, net*




Interest
      income, net, for 2005 and 2004 was approximately $3.2 million and $1.8 million,
      respectively. The increase is primarily attributable to an increase in interest
      rates for 2005.




*Provision
      for income taxes*




We
      recorded a provision for income taxes of $201,000 for 2005, compared to $14.8
      million for 2004. Our overall effective tax rate was 1.1% and 41.3% for 2005
      and
      2004, respectively. The 2005 rate includes a
      release
      of $1.7 million valuation allowance on capital loss carryforwards, which
      corresponds to a rate benefit of 8.8%; as well as $9.3
      million (or 48.4%) federal and state valuation allowances on net deferred tax
      assets since management believes it is more likely than not that these deferred
      tax assets will not be realized. Without
      these valuation allowance items, we would have a 38.5% rate benefit in
      2005.




*Net
      (loss) income*




There
      was
      a net loss of $19.5 million in 2005, compared to net income for 2004 of $21.1
      million, due to the factors discussed above.






**Comparison
      of 2004 and 2003**




*Revenue
                  (in thousands)*Change
              
              Change2004
              
              2003
              
              ($)
              
              (%)Sales
                  services
              
              $
              332,431
              
              $
              271,210
              
              $
              61,221
              
              
              22.6
              %Marketing
                  services
              
              
              29,057
              
              
              29,436
              
              
              (379
              )
              
              (1.3
              %)PPG
              
              
              2,956
              
              
              43,884
              
              
              (40,928
              )
              
              (93.3
              %)**Total**
              
              **$**
              **364,444**
              
              **$**
              **344,530**
              
              **$**
              **19,914**
              
              
              **5.8**
              **%**




Total
      revenue for 2004 was $364.4 million, an increase of $19.9 million or 5.8% from
      revenue of $344.5 million for 2003. Service revenue was $366.0 million in 2004,
      an increase of $9.8 million or 2.8% from the $356.1 million recorded in 2003.
      Product net revenue for 2004 was negative $1.5 million primarily as a result
      of
      a $1.7 million increase in the Ceftin reserve; this increase was mainly
      attributable to the changes in estimate related to the allowance for sales
      returns recorded on previous Ceftin sales. (See Note 16 to the consolidated
      financial statements.)




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




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




The
      PPG
      segment generated net revenue of $3.0 million in 2004, which consisted of $4.5
      million in service revenue offset by negative product revenue of $1.5 million.
      The service revenue of $4.5 million was generated almost entirely
      by revenue from Lotensin royalties; the negative product revenue of $1.5 million
      was primarily related to the increase in the Ceftin sales returns reserve.
      As
      our responsibility to accept product returns ended December 31, 2004, no further
      material increases to this reserve are likely. We continued to pay those returns
      during 2005. In 2003, the PPG segment had service revenue of $55.5 million
      almost entirely from Lotensin and this was offset by negative product revenue
      of
      $11.6 million which was mainly attributable to the $12.0 million increase in
      the
      Ceftin reserve. The Lotensin contract was effectively completed December 31,
      2003, but we continued to earn Lotensin royalties through December 31, 2004.










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





*Cost
                  of goods and services (in thousands)*Change
              
              Change2004
              
              2003
              
              ($)
              
              (%)Sales
                  services
              
              $
              249,131
              
              $
              201,059
              
              $
              48,072
              
              
              23.9
              %Marketing
                  services
              
              
              16,352
              
              
              15,674
              
              
              678
              
              
              4.3
              %PPG
              
              
              131
              
              
              38,716
              
              
              (38,585
              )
              
              (99.7
              %)**Total**
              
              **$**
              **265,614**
              
              **$**
              **255,449**
              
              **$**
              **10,165**
              
              
              **4.0**
              **%**




Cost
      of
      goods and services for 2004 was $265.6 million, which was $10.2 million or
      4.0%
      more than cost of goods and services of $255.4 million for 2003. During 2004
      the
      gross profit percentage was 27.1% compared to 25.8% in the comparable prior
      year
      period. The gross profit margins were similar in 2004 and 2003 for each of
      the
      segments, and the service revenue gross profit percentages were 27.5% and 28.6%
      for 2004 and 2003, respectively.




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




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




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




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




*Compensation
                  Expense (in thousands)*%
                  of
              
              
              
              %
                  of
              
              Change
              
              Change2004
              
              revenue
              
              2003
              
              revenue
              
              ($)
              
              (%)Sales
                  services
              
              $
              25,022
              
              
              7.5
              %
              $
              17,783
              
              
              6.6
              %
              $
              7,239
              
              
              40.7
              %Marketing
                  services
              
              
              7,367
              
              
              25.4
              %
              
              7,463
              
              
              25.4
              %
              
              (96
              )
              
              (1.3
              %)PPG
              
              
              1,441
              
              
              48.7
              %
              
              11,865
              
              
              27.0
              %
              
              (10,424
              )
              
              (87.9
              %)**Total**
              
              **$**
              **33,830**
              
              
              **9.3**
              **%**
              **$**
              **37,111**
              
              
              **10.8**
              **%**
              **$**
              **(3,281**
              **)**
              
              **(8.8**
              **%)**




Compensation
      expense for 2004 was $33.8 million, a decrease of $3.3 million or 7.0% less
      than
      the $37.1 million for the comparable prior year period. This decrease can be
      primarily attributed to an overall decrease in the amount of incentive
      compensation in 2004. As a percentage of total revenue, compensation expense
      decreased to 9.3% for 2004 from 10.8% for 2003. Compensation expense for the
      sales services segment increased $7.2 million or 40.7%. Conversely, the
      compensation expense associated with the PPG segment decreased by $10.4 million
      or 87.9%. The changes in both the sales services and PPG segments reflect the
      changes in how management’s time and effort was being concentrated on a
      year-over-year basis. Compensation expense associated with the marketing
      services segment remained virtually the same, decreasing by 1.3%
      overall.




*Other
                  SG&A (in thousands)*%
                  of
              
              %
                  of
              Change
              Change2004
              revenue
              2003
              revenue
              ($)
              (%)Sales
                  services
              $
                  21,986
              6.6%
              $
                  16,004
              5.9%
              $
                  5,982
              37.4%Marketing
                  services
              3,686
              12.7%
              2,590
              8.8%
              1,096
              42.3%PPG
              1,244
              42.1%
              11,357
              25.9%
              (10,113)
              (89.0%)**Total**
              **$
                  26,916**
              **7.4%**
              **$
                  29,951**
              **8.7%**
              **$
                  (3,035)**
              **(10.1%)**







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





Total
      other SG&A expenses were $26.9 million in 2004, versus $30.0 million in
      2003. Even though total other SG&A for 2004 did decrease overall, included
      is $500,000 in bad debt expense associated with the write off of the Xylos
      loan
      discussed previously, which was recorded in the fourth quarter of 2004. As
      a
      percent of revenue, other SG&A expenses decreased slightly to 7.4% in 2004
      from 8.8% in 2003. Other SG&A expenses associated with the sales services
      segment increased $6.0 million or 37.4%. In the PPG segment, other SG&A
      decreased by $10.1 million or 89.0% as the majority of management’s time and
      efforts as well as the associated resources were concentrated on the other
      two
      segments. Other SG&A for the marketing services segment increased by $1.1
      million or 42.3%. This increase is partially attributable to the Pharmakon
      acquisition and the amortization expense associated with the acquisition.




*Restructuring
      and litigation settlement expenses*




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




*Operating
                  Income (Loss) (in thousands)*%
                  of
              
              
              
              %
                  of
              
              Change
              
              Change2004
              
              revenue
              
              2003
              
              revenue
              
              ($)
              
              (%)Sales
                  services
              
              $
              34,018
              
              
              10.2
              %
              $
              34,891
              
              
              12.9
              %
              $
              (873
              )
              
              (2.5
              %)Marketing
                  services
              
              
              1,535
              
              
              5.3
              %
              
              3,567
              
              
              12.1
              %
              
              (2,032
              )
              
              (57.0
              %)PPG
              
              
              (362
              )
              
              -12.2
              %
              
              (18,868
              )
              
              -43.0
              %
              
              18,506
              
              
              (98.1
              %)**Total**
              
              **$**
              **35,191**
              
              
              **9.7**
              **%**
              **$**
              **19,590**
              
              
              **5.7**
              **%**
              **$**
              **15,601**
              
              
              **79.6**
              **%**




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




*Other
      income, net*




Other
      income, net, for 2004 and 2003 was approximately $779,000 and $1.1 million,
      respectively. For 2004, other income, net, was comprised primarily of interest
      income of $1.8 million, partially offset by the loss on the preferred stock
      investment in Xylos (see Note 6) of $1.0 million. For 2003, other income, net,
      was primarily comprised of interest income. The increase in interest income
      is
      primarily attributed to higher interest rates and larger average cash balances
      in 2004.




*Provision
      for income taxes*




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




*Net
      income*




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







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





**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      December 31, 2005, we had cash and cash equivalents and short-term investments
      of approximately $97.6 million and working capital of $86.4 million, compared
      to
      cash and cash equivalents and short-term investments of approximately $109.5
      million and working capital of approximately $96.2 million at December 31,
      2004.




For
      the
      year ended December 31, 2005, net cash provided by operating activities was
      $3.1
      million, compared to $29.0 million net cash provided by operating activities
      in
      2004. The main components of cash provided by operating activities during
      2005 were:




·
            decrease
                in the net deferred tax asset of $6.4
                million;


·
            depreciation
                and other non-cash expense of $23.3 million which
                included:


o
            asset
                impairments of $14.4 million associated with InServe, Select Access,
                and
                our former sales force automation software -
                Siebel,


o
            bad
                debt expense of $1.4 million, which includes the $755,000 associated
                with
                the write off of the TMX loan,


o
            stock
                compensation expense of $1.5
                million,


o
            amortization
                of intangible assets of approximately $1.9 million,
                and


o
            loss
                on disposal or sale of assets of approximately
                $269,000.




Each
      item
      was charged to SG&A, offset by a net loss of $19.5 million and a net cash
      decrease in “other changes in assets and liabilities” of $2.7
      million.




The
      net
      changes in the “other changes in assets and liabilities” section of the
      consolidated statement of cash flows may fluctuate depending on a number of
      factors, including the number and size of programs, contract terms and other
      timing issues; these variations may change in size and direction with each
      reporting period.




As
      of
      December 31, 2005, we had $6.0 million of unbilled costs and accrued profits
      on
      contracts in progress. When services are performed in advance of billing, the
      value of such services is recorded as unbilled costs and accrued profits on
      contracts in progress. Normally, all unbilled costs and accrued profits are
      earned and billed within 12 months from the end of the respective period. As
      of
      December 31, 2005, we had $12.6 million of unearned contract revenue. When
      we
      bill clients for services before the revenue has been earned, billed amounts
      are
      recorded as unearned contract revenue, and are recorded as income when earned.




For
      the
      year ended December 31, 2005, net cash provided by investing activities was
      $18.5 million. The main components consisted of the following:




·
            Approximately
                $21.7 million received from the sale of short-term investments. Our
                investments consist of a laddered portfolio of investment grade debt
                instruments such as obligations of the U.S. Treasury and U.S. Federal
                Government agencies, municipal bonds and commercial paper. We are
                focused
                on preserving capital, maintaining liquidity, and maximizing returns,
                in
                accordance with our investment criteria.




·
            Approximately
                $4.4 million received on the sale of our investment in
                In2Focus.




·
            Capital
                expenditures for the year ended December 31, 2005 of $5.8 million,
                which
                consisted primarily of capital expenditures associated with the relocation
                of our offices within the Marketing Services group and for costs
                associated with the rollout of our new sales force automation software.
                There was approximately $8.1 million in capital expenditures for
                the year
                ended December 31, 2004, which consisted primarily of costs for furniture
                and information technology associated with moving to our new corporate
                headquarters. For both periods, all capital expenditures were funded
                out
                of available cash.




·
            Cash
                disbursed for the Pharmakon acquisition for the year ended December
                31,
                2005 of approximately $1.9 million.




On
      August
      31, 2004, we acquired substantially all of the assets of Pharmakon, LLC in
      a
      transaction treated as an asset acquisition for tax purposes. The acquisition
      has been accounted for as a purchase, subject to the provisions of SFAS No.
      141.
      We made payments to the members of Pharmakon, LLC on August 31, 2004 of $27.4
      million, of which $1.5 million was deposited into an escrow account, and we
      assumed approximately $2.6 million in net liabilities. As of December 31, 2005,
      $500,000 is still held in escrow, which is recorded in other assets on our
      balance sheet and will be paid out during 2006, subject to certain working
      capital adjustments. Approximately $1.1 million in direct costs of the
      acquisition were also capitalized. Based upon the attainment of annual profit
      targets agreed upon at the date of acquisition, the members of Pharmakon, LLC
      received approximately $1.4 million in additional payments on April 1, 2005
      for
      the year ended December 31, 2004.







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





No
      additional payments will be received in 2006 since the Pharmakon business did
      not exceed the specified 2005 performance benchmark. The members of Pharmakon,
      LLC can still earn up to an additional $3.3 million in cash based upon
      achievement of certain annual profit targets through December 2006. In
      connection with this transaction, we have recorded $13.1 million in goodwill
      and
      $18.9 million in other identifiable intangibles through December 31, 2005.
      The
      identifiable intangible assets have a weighted average remaining amortization
      period of 13.6 years.




For
      the
      year ended December 31, 2005, net cash used in financing activities was
      approximately $11.8 million. Approximately $13.1 million was used in the
      repurchasing of shares of our common stock. This was partially offset by
      proceeds from the exercise of stock options and the issuance of shares under
      the
      employee stock purchase plan of $1.3 million. The employee stock purchase plan
      was discontinued in 2005.




On
      April
      27, 2005, our Board of Directors authorized us to repurchase up to one million
      shares of our common stock. On July 6, 2005, we announced that our Board of
      Directors had authorized the repurchase of an additional one million shares.
      As
      of December 31, 2005 we had repurchased approximately one million shares and
      made cash payments of approximately $12.9 million. An additional 16,106 shares
      were placed in treasury as they were shares surrendered to us to satisfy tax
      withholding obligations in connection with the vesting of restricted
      stock.




At
      our
      discretion, we may continue to repurchase shares on the open market or in
      privately negotiated transactions, or both, depending on cash flow expectations
      and other uses of cash. Some or all of the repurchases will be made
      pursuant to a Company 10(b)5-1 Plan. All purchases will be made from our
      available cash. A reconciliation of the number of shares repurchased on the
      open
      market as of December 31, 2005 is as follows:




Average.
                  Price
              
              SharesPeriod
              
              Per
                  Share
              
              PurchasedSeptember
                  2001
              
              $
                  22.00
              
              5,000May
                  2005
              
              $
                  12.36
              
              226,900June
                  2005
              
              $
                  11.92
              
              353,330July
                  2005
              
              $
                  13.77
              
              315,570August
                  2005
              
              $
                  14.39
              
              101,100Total
              
              $
                  12.90
              
              1,001,900




Our
      revenue and profitability depend to a great extent on our relationships with
      a
      limited number of large pharmaceutical companies. For the year ended December
      31, 2005, we had three major clients that accounted for approximately 33.6%,
      21.7% and 15.0%, respectively, or a total of 70.3% of our service revenue.
      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 or results of operations. On
      February 28, 2006, we
      announced that AstraZeneca is terminating its contract sales force arrangement
      with us effective April 30, 2006. The
      termination affects approximately 800 field representatives. The revenue impact
      is projected to be approximately $65 to $70 million in 2006. The
      loss
      of this revenue as well as the potential severance and other sales force
      closeout costs will have a material adverse effect on our business, financial
      condition and results of operations for 2006.




In
      the
      fourth quarter of 2005, we accrued facility realignment expenses of
      approximately $2.4 million that related to excess office space we have at both
      our Saddle River, NJ and Dresher, PA offices. The excess office spaces amounted
      to approximately 7,300 square feet in Saddle River and approximately 11,600
      square feet in Dresher. We are expecting to sub-lease both these spaces in
      the
      second half of 2006 and are expecting to have capital expenditures of
      approximately $1.3 million in the preparation of these spaces for subletting.




We
      have
      federal and state income tax receivables of approximately $6.2 million on our
      balance sheet as of December 31,
      2005. We received a federal refund of approximately $800,000 in February of
      2006
      and we are expecting to receive an additional federal refund of $5.0 million
      in
      the fourth quarter of 2006. We expect to receive state refunds totaling
      approximately $400,000 in the fourth quarter of 2006 and 2007.




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




**Contractual
      Obligations**




We
      have
      committed cash outflow related to operating lease agreements, and other
      contractual obligations. Minimum payments for these long-term obligations are:







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





Less
                  than
              
              1
                  to 3
              
              3
                  to 5
              
              After(in
                  thousands)
              
              Total
              
              1
                  Year
              
              Years
              
              Years
              
              5
                  YearsContractrual
                  obligations(1)
              
              $
              11,406
              
              $
              5,576
              
              $
              5,830
              
              $
              -
              
              $
              -Operating
                  Lease ObligationsMinimum
                  lease payments
              
              
              33,488
              
              
              3,090
              
              
              6,155
              
              
              6,334
              
              
              17,909Less
                  minimum sublease rentals(2)
              
              
              (1,852
              )
              
              (401
              )
              
              (801
              )
              
              (650
              )
              
              -Net
                  minimum lease payments
              
              
              31,636
              
              
              2,689
              
              
              5,354
              
              
              5,684
              
              
              17,909Total
              
              $
              43,042
              
              $
              8,265
              
              $
              11,184
              
              $
              5,684
              
              $
              17,909




(1)
            Amounts
                represent contractual obligations related to software license contracts,
                IT consulting contracts and outsourcing contracts for employee benefits
                administration and software system
                support.




(2)
            On
                June 21, 2005, we signed an agreement to sublease our first floor
                at our
                corporate headquarters facility in Saddle River, NJ, for approximately
                16,000 square feet. The sublease is for a five-year term commencing
                on
                July 15, 2005, and provides for approximately $2 million in lease
                payments
                over the five-year period.






**Off-Balance
      Sheet Arrangements**




As
      of
      December 31, 2005, we had no off-balance sheet arrangements.






**Selected
      Quarterly Financial Information (unaudited)**




The
      following table set forth selected quarterly financial information for the
      years
      ended December 31, 2005 and 2004 (in thousands except per share
      data):




For
                  the Quarters endedMarch
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  312005
                  Quarters:Total
                  revenue, net
              
              $
              82,024
              
              $
              79,615
              
              $
              76,486
              
              $
              81,290Gross
                  profit
              
              
              18,043
              
              
              15,287
              
              
              12,560
              
              
              16,046Operating
                  (loss) income(1)
              
              
              (775
              )
              
              4
              
              
              (8,250
              )
              
              (17,866
              )Net
                  (loss) income
              
              
              (62
              )
              
              4,513
              
              
              (4,184
              )
              
              (19,721
              )(Loss)
                  income per share:Basic
              
              $
              (0.00
              )
              $
              0.31
              
              $
              (0.30
              )
              $
              (1.43
              )Diluted
              
              $
              (0.00
              )
              $
              0.31
              
              $
              (0.30
              )
              $
              (1.43
              )Weighted
                  average number of shares:Basic
              
              
              14,675
              
              
              14,605
              
              
              13,867
              
              
              13,797Diluted
              
              
              14,849
              
              
              14,695
              
              
              13,867
              
              
              13,7972004
                  Quarters:Total
                  revenue, net(2)
              
              $
              92,648
              
              $
              91,388
              
              $
              92,522
              
              $
              87,812Gross
                  profit(2)
              
              
              26,515
              
              
              21,816
              
              
              24,385
              
              
              26,112Operating
                  income(2)
              
              
              9,809
              
              
              8,235
              
              
              9,035
              
              
              8,112Net
                  income(2)
              
              
              5,975
              
              
              5,043
              
              
              5,467
              
              
              4,647Income
                  per share:Basic
              
              $
              0.41
              
              $
              0.35
              
              $
              0.37
              
              $
              0.32Diluted
              
              $
              0.40
              
              $
              0.34
              
              $
              0.37
              
              $
              0.31Weighted
                  average number of shares:Basic
              
              
              14,461
              
              
              14,533
              
              
              14,621
              
              
              14,641Diluted
              
              
              14,767
              
              
              14,918
              
              
              14,933
              
              
              14,922





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





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 March 31, 2005 includes a $1.2 million charge for employee
                severance costs and a $0.2 million charge for executive severance
                costs.
                The quarter ended June 30, 2005 includes a $2.8 million charge for
                the
                impairment of the Siebel sales force automation platform and a $0.4
                million charge for executive severance costs; the quarter ended September
                30, 2005 includes a $1.7 million charge for executive severance costs.
                The
                quarter ended December 31, 2005 includes a $3.4 million charge for
                executive severance costs; a $2.4 million charge for facilities
                realignment costs; an $8.2 million charge for impairment of goodwill
                and
                other intangible asset associated with the 2006 closing of the MD&D
                reporting unit; a $3.3 million charge for the impairment of the goodwill
                associated with the Select Access reporting unit.




(2)
            On
                August 31, 2004, the Company acquired Pharmakon
                LLC.




Our
      results of operations have varied, and are expected to continue to vary, from
      quarter to quarter. These fluctuations result from a number of factors
      including, among other things, the timing of commencement, completion or
      cancellation of major programs. In the future, our revenue may also fluctuate
      as
      a result of a number of additional factors, including the types of products
      we
      market and sell, delays or costs associated with acquisitions, government
      regulatory initiatives and conditions in the healthcare industry generally.
      Revenue, generally, is recognized as services are performed. 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 fourth quarter of a year. Costs of goods
      sold
      are expensed when products are shipped.






**EFFECT
      OF NEW ACCOUNTING PRONOUNCEMENTS**




The
      following represent recently issued accounting pronouncements that will affect
      reporting and disclosures in future periods. See Note 1 to consolidated
      financial statements for a further discussion of each item.




**Accounting
      Changes and Error Corrections:**




In
      May
      2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
      “Accounting Changes and Error Corrections,” which changes the requirements for
      the accounting and reporting of a change in accounting principle. SFAS No.
      154
      is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. This Statement does not change the
      transition provisions of any existing accounting pronouncements, including
      those
      that are in a transition phase as of the effective date of the Statement.




**Share-Based
      Payment Transactions:**




In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment,” (SFAS 123R) that will require compensation costs related to
      share-based payment transactions to be recognized in the financial statements.
      The amount of the compensation cost will be measured based on the grant-date
      fair value of the equity or liability instruments issued. In addition, liability
      awards will be remeasured each reporting period. Compensation cost will be
      recognized over the period that an employee provides service in exchange for
      the
      award. This Statement will apply to all awards outstanding on its effective
      date, or awards granted, modified, repurchased or cancelled after that date.
      In
      April 2005, the Securities and Exchange Commission (SEC) deferred the effective
      date of this Statement until the first fiscal year beginning after June 15,
      2005. The
      additional compensation expense to be incurred in 2006 due to the adoption
      of
      SFAS 123R for the remaining unvested grants as of December 31, 2005 is
      approximately $230,000. The
      impact of additional future grants in 2006 and beyond cannot be predicted at
      this time because it is dependent on the fair value and number of share-based
      awards granted in the future. See Note 1 to the consolidated financial
      statements.







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





**Exchanges
      of Nonmonetary Assets:**




In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an Amendment of APB Opinion No. 29,” which replaces the exception
      from fair value measurement in APB Opinion No. 29, “Accounting for
      Nonmonetary Transactions,” for nonmonetary exchanges of similar productive
      assets with a general exception from fair value measurement for exchanges of
      nonmonetary assets that do not have commercial substance. A nonmonetary exchange
      has commercial substance if the future cash flows of the entity are expected
      to
      change significantly as a result of the exchange. This Statement is to be
      applied prospectively and is effective for nonmonetary asset exchanges occurring
      in fiscal periods beginning after June 15, 2005. We believe that the
      adoption of SFAS 153 in 2006 will not have a material impact on our consolidated
      financial statements.




**Accounting
      Changes and Error Corrections:**




In
      May
      2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
      “Accounting Changes and Error Corrections,” which changes the requirements for
      the accounting and reporting of a change in accounting principle. SFAS No.
      154
      is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. This Statement does not change the
      transition provisions of any existing accounting pronouncements, including
      those
      that are in a transition phase as of the effective date of the Statement.






**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, we have no long term debt and we have no interest bearing
      short term debt. At December 31, 2005, 2004, 2003, 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, high-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, 2005 were composed of the instruments described
      in
      the preceding paragraph. All of those investments will mature within 90 days
      after December 31, 2005. 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 near term
      maturity.






**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**




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






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




None.







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





**ITEM
      9A. CONTROLS AND PROCEDURESInc.**






**(a)**  **Disclosure
      Controls and Procedures**




Based
      on
      their evaluation as of December 31, 2005, our Chief Executive Officer and Chief
      Financial Officer, have concluded that our disclosure controls and procedures
      (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were
      sufficiently effective to ensure that the information required to be disclosed
      by us in this Annual Report on Form 10-K was recorded, processed, summarized
      and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and instructions for Form 10-K.




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      does not expect that our disclosure controls and procedures or our internal
      controls will prevent all error and all fraud. A control system, no matter
      how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the control system are met. Further, the design
      of a control system must reflect the fact that there are resource constraints
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, within PDI Inc. have been detected.






**(b)**  **Management's
      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
      Securities Exchange Act of 1934, as amended). Our management assessed the
      effectiveness of our internal control over financial reporting as of December
      31, 2005. 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, 2005, our internal control over financial reporting is effective
      based on these criteria. Our independent registered public accounting firm,
      Ernst & Young LLP, has issued an audit report on our assessment of our
      internal control over financial reporting, which is included herein.






**(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, 2005 that have materially affected, or are reasonably
      likely to materially affect our internal controls over financial reporting.






**(d)**  **Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Shareholders of PDI, Inc.




We
      have
      audited management’s assessment, included in the accompanying Management's
      Annual Report on Internal Control Over Financial Reporting, that PDI, Inc.
      maintained effective internal control over financial reporting as of December
      31, 2005, 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. Our
      responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.







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





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, management’s assessment that PDI, Inc. maintained effective internal
      control over financial reporting as of December 31, 2005 is fairly stated,
      in
      all material respects, based on the COSO criteria. Also, in our opinion, PDI,
      Inc. maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2005, based on **** the
      COSO
      criteria **.**




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the accompanying consolidated balance sheet
      of
      PDI, Inc. as of December 31, 2005, and the related consolidated statement of
      operations, shareholders’ equity, and cash flows of PDI, Inc. for the year ended
      December 31, 2005 and our report
      dated March 15, 2006 expressed an unqualified opinion thereon.




/s/Ernst
                &Young LLPNew
                York, NYMarch
                15, 2006




**ITEM
      9B.**  **OTHER
      INFORMATION**




None.




**PART
      III**




**ITEM
      10.**  **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**




Information
      relating to directors and executive officers of the registrant that is
      responsive to Item 10 of Form 10-K will be included in our Proxy Statement
      in
      connection with our 2006 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 Form 10-K
      will be included in our Proxy Statement in connection with our 2006 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 Form 10-K will be included in our Proxy Statement
      in
      connection with our 2006 annual meeting of stockholders and such information
      is
      incorporated by reference herein.






**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




Information
      relating to certain relationships and related transactions that is responsive
      to
      Item 13 of Form 10-K will be included in our Proxy Statement in connection
      with
      our 2006 annual meeting of stockholders and such information is incorporated
      by
      reference herein.







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





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTING FEES AND SERVICES**




Information
      relating to principal accounting fees and services that is responsive to Item
      14
      of Form 10-K will be included in our Proxy Statement in connection with our
      2006
      annual meeting of stockholders and such information is incorporated by reference
      herein.




**PART
      IV**






**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**




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




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




(2)  Financial
      Statement Schedule




Schedule
      II:  Valuation
      and Qualifying Accounts




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.**
            
            **Description**3.1
            
            Certificate
                of Incorporation of PDI, Inc.(1)3.2
            
            By-Laws
                of PDI, Inc .(1)3.3
            
            Certificate
                of Amendment of Certificate of Incorporation of PDI, Inc.(4)4.1
            
            Specimen
                Certificate Representing the Common Stock(1)10.1*
            
            Form
                of 1998 Stock Option Plan(1)10.2*
            
            Form
                of 2000 Omnibus Incentive Compensation Plan(2)10.4*
            
            Form
                of Employment Agreement between the Company and Charles T. Saldarini(4)10.5*
            
            Agreement
                between the Company and John P. Dugan(1)10.6*
            
            Form
                of Amended and Restated Employment Agreement between the Company
                and
                Steven K. Budd(4)10.7*
            
            Form
                of Amended and Restated Employment Agreement between the Company
                and
                Bernard C. Boyle(4)10.8*
            
            Form
                of Employment Agreement between the Company and Christopher Tama(5)10.9*
            
            Form
                of Amended and Restated Employment Agreement between the Company
                and
                Stephen Cotugno(4)10.10*
            
            Form
                of Employment Agreement between the Company and Beth Jacobson(5)10.11*
            
            Form
                of Employment Agreement between the Company and Alan Rubino(7)10.12*
            
            Form
                of Loan Agreement between the Company and Steven K. Budd(3)10.13*
            
            Exclusive
                License Agreement between the Company and Cellegy Pharmaceuticals,
                Inc.(5)(6)10.14
            
            Saddle
                River Executive Centre Lease, as amended filed herewith





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








**Exhibit
                No.**
            
            **Description**10.15*
            
            2004
                Stock Award and Incentive Plan(8)10.16*
            
            Form
                of Agreement between the Company and Larry Ellberger filed
                herewith10.17*
            
            Form
                of Agreement between the Company and Bernard C. Boyle filed
                herewith10.18*
            
            Memorandum
                of Understanding between the Company and Bernard C. Boyle filed
                herewith10.19
            
            Saddle
                River Executive Centre Sublease Agreement filed
                herewith14.1
            
            Code
                of Conduct(7)21.1
            
            Subsidiaries
                of the Registrant(4)23.1
            
            Consent
                of Ernst & Young LLP filed herewith.23.2
            
            Consent
                of PricewaterhouseCoopers 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, 1999, and incorporated herein by reference(4)
            Filed
                as an exhibit to our Annual Report on Form 10-K for the year ended
                December 31, 2001, and incorporated herein by reference(5)
            Filed
                as an exhibit to our Annual Report on Form 10-K for the year ended
                December 31, 2002, and incorporated herein by reference(6)
            The
                Securities and Exchange Commission granted the Registrant’s application
                for confidential treatment, pursuant to Rule 24b-2 under the Exchange
                Act,
                of certain portions of this exhibit. These portions of the exhibit
                have
                been redacted from the exhibit as filed(7)
            Filed
                as an exhibit to our Annual Report on Form 10-K for the year ended
                December 31, 2003, and incorporated herein by reference(8)
            Filed
                as an Exhibit to our definitive proxy statement dated April 28, 2004,
                and
                incorporated herein by reference.










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





(b)
            We
                have filed, as exhibits to this annual report on Form 10-K, the exhibits
                required by Item 601 of the Regulation
                S-K.




(c)
            We
                have filed, as financial statements schedules to this annual report
                on
                Form 10-K, the financial statements required by Regulation S-X, which
                are
                excluded from the annual report to shareholders by Rule
                14a-3(b).






**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 16th day of
      March, 2006.




**PDI,
                INC.****/s/**Larry
                EllbergerLarry
                EllbergerChief
                Executive Officer


Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      Form 10-K has been signed by the following persons on behalf of the Registrant
      and in the capacities indicated and on the 16th day of March, 2006.




Signature
            
            Title/s/
                John P. Dugan
            
            Chairman
                of the Board of DirectorsJohn
                P. Dugan**/s/**Larry
                Ellberger
            
            Chief
                Executive OfficerLarry
                Ellberger/s/
                Bernard C. Boyle
            
            Chief
                Financial Officer and TreasurerBernard
                C. Boyle
            
            (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 Stover
            
            DirectorJack
                Stover











40
 **PDI,
              Inc.** **Index
              to Consolidated Financial Statementsand Financial Statement
              Schedules**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Report
                of Independent Registered Public Accounting Firm
            F-3Financial
                StatementsConsolidated
                Balance Sheets at December 31, 2005 and 2004
            F-4Consolidated
                Statements of Operations for each of the three yearsin
                the period ended December 31, 2005
            F-5Consolidated
                Statements of Stockholders’ Equity for each of the three
                yearsin
                the period ended December 31, 2005
            F-6Consolidated
                Statements of Cash Flows for each of the three yearsin
                the period ended December 31, 2005
            F-7Notes
                to Consolidated Financial Statements
            F-8Schedule
                II. Valuation and Qualifying Accounts
            F-31








F-1
 **PDI,
              Inc.**
 **Notes
              to the Consolidated Financial Statements -
              continued**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






The
      Board
      of Directors and Shareholders of PDI, Inc.




We
      have
      audited the accompanying consolidated balance sheet of PDI, Inc. as of December
      31, 2005, and the related consolidated statement of operations, shareholders’
equity, and cash flows for the year ended December 31, 2005. Our audit also
      included the financial statement schedule listed in the Index at Item 15(a)
      (2).
      The 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 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 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 audit provides 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, 2005, and the consolidated results of their operations and their cash flows
      for the year ended December 31, 2005, 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), the effectiveness of PDI, Inc.’s internal
      control over financial reporting as of December 31, 2005, 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
      15, 2006 expressed an unqualified opinion on management's assessment and an
      unqualified opinion thereon.







/s/Ernst
                &Young LLPNew
                York, NYMarch
                15, 2006




















F-2





**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and




Shareholders
      of PDI, Inc.:




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






PricewaterhouseCoopers
      LLP Florham
      Park, NJ


March
      11,
      2005



















F-3


**PDI,
                  INC.****CONSOLIDATED
                  BALANCE SHEETS**(in
                  thousands, except share and per share data)**December
                  31,**
              
              **December
                  31,****2005**
              
              **2004****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              90,827
              
              $
              81,000Short-term
                  investments
              
              
              6,807
              
              
              28,498Accounts
                  receivable, net of allowance for doubtful accounts of$778
                  and $74 as of December 31, 2005 and 2004, respectively
              
              
              27,148
              
              
              26,662Unbilled
                  costs and accrued profits on contracts in progress
              
              
              5,974
              
              
              3,393Income
                  tax refund receivable
              
              
              6,292
              
              
              -Other
                  current assets
              
              
              14,078
              
              
              15,883Total
                  current assets
              
              
              151,126
              
              
              155,436Property
                  and equipment, net
              
              
              16,053
              
              
              17,170Goodwill
              
              
              13,112
              
              
              23,791Other
                  intangible assets, net
              
              
              17,305
              
              
              19,548Other
                  long-term assets
              
              
              2,710
              
              
              8,760Total
                  assets
              
              $
              200,306
              
              $
              224,705**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              5,693
              
              $
              7,217Income
                  taxes payable
              
              
              6,805
              
              
              5,263Unearned
                  contract revenue
              
              
              12,598
              
              
              6,924Accrued
                  returns
              
              
              231
              
              
              4,316Accrued
                  incentives
              
              
              12,028
              
              
              16,282Accrued
                  payroll and related benefits
              
              
              7,556
              
              
              8,414Other
                  accrued expenses
              
              
              19,785
              
              
              10,864Total
                  current liabilities
              
              
              64,696
              
              
              59,280Commitments
                  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;
                  14,947,771and
                  14,820,499 shares issued at December 31, 2005 and 2004, respectively;13,929,765
                  and 14,815,499 shares outstanding at December 31, 2005 and2004,
                  respectively
              
              
              149
              
              
              148Additional
                  paid-in capital
              
              
              118,325
              
              
              116,737Retained
                  earnings
              
              
              31,183
              
              
              50,637Accumulated
                  other comprehensive income
              
              
              71
              
              
              76Unamortized
                  compensation costs
              
              
              (904
              )
              
              (2,063
              )Treasury
                  stock, at cost: 1,018,006 and 5,000 sharesat
                  December 31, 2005 and 2004, respectively
              
              
              (13,214
              )
              
              (110
              )Total
                  stockholders' equity
              
              $
              135,610
              
              $
              165,425Total
                  liabilities & stockholders' equity
              
              $
              200,306
              
              $
              224,705*The
                  accompanying notes are an integral part of these consolidated financial
                  statements*





F-4


**PDI,
                  INC.****CONSOLIDATED
                  STATEMENTS OF OPERATIONS**(in
                  thousands, except for per share data)**For
                  The Years Ended December 31,****2005**
              
              **2004**
              
              **2003**RevenueService,
                  net
              
              $
              319,415
              
              $
              365,965
              
              $
              356,143Product,
                  net
              
              
              -
              
              
              (1,521
              )
              
              (11,613
              )Total
                  revenue, net
              
              
              319,415
              
              
              364,444
              
              
              344,530Cost
                  of goods and servicesProgram
                  expenses (including related party amounts of$0,
                  $180, and $983 for the periods endedDecember
                  31, 2005, 2004 and 2003, respectively)
              
              
              257,479
              
              
              265,360
              
              
              254,162Cost
                  of goods sold
              
              
              -
              
              
              254
              
              
              1,287Total
                  cost of goods and services
              
              
              257,479
              
              
              265,614
              
              
              255,449Gross
                  profit
              
              
              61,936
              
              
              98,830
              
              
              89,081Compensation
                  expense
              
              
              29,367
              
              
              33,830
              
              
              37,111Other
                  selling, general and administrative expenses
              
              
              35,330
              
              
              26,916
              
              
              29,951Asset
                  impairment
              
              
              14,351
              
              
              -
              
              
              -Executive
                  severance
              
              
              5,730
              
              
              495
              
              
              -Legal
                  and related costs
              
              
              1,691
              
              
              2,398
              
              
              2,429Facilities
                  realignment
              
              
              2,354
              
              
              -
              
              
              -Total
                  operating expenses
              
              
              88,823
              
              
              63,639
              
              
              69,491Operating
                  (loss) income
              
              
              (26,887
              )
              
              35,191
              
              
              19,590Gain
                  (loss) on investments
              
              
              4,444
              
              
              (1,000
              )
              
              -Interest
                  income, net
              
              
              3,190
              
              
              1,779
              
              
              1,073(Loss)
                  income before income tax
              
              
              (19,253
              )
              
              35,970
              
              
              20,663Provision
                  for income tax
              
              
              201
              
              
              14,838
              
              
              8,405Net
                  (loss) income
              
              $
              (19,454
              )
              $
              21,132
              
              $
              12,258Net
                  (loss) income per share of common stock:Basic
              
              $
              (1.37
              )
              $
              1.45
              
              $
              0.86Assuming
                  dilution
              
              $
              (1.37
              )
              $
              1.42
              
              $
              0.85Weighted
                  average number of common shares andcommon
                  share equivalents outstanding:Basic
              
              
              14,232
              
              
              14,564
              
              
              14,231Assuming
                  dilution
              
              
              14,232
              
              
              14,893
              
              
              14,431*The
                  accompanying notes are an integral part of these consolidated financial
                  statements*





F-5
   **PDI,
                  INC.****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY**(in
                  thousands)**2005**
              
              **2004**
              
              **2003****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount****Common
                  stock:**Balance
                  at January 1,
              
              
              14,820
              
              $
              148
              
              
              14,523
              
              $
              145
              
              
              14,210
              
              $
              142Common
                  stock issued
              
              
              68
              
              
              1
              
              
              68
              
              
              1
              
              
              143
              
              
              1Restricted
                  stock issued
              
              
              43
              
              
              -
              
              
              98
              
              
              1
              
              
              129
              
              
              1Restricted
                  stock forfeited
              
              
              (24
              )
              
              -
              
              
              (14
              )
              
              -
              
              
              -
              
              
              -Stock
                  options exercised
              
              
              41
              
              
              -
              
              
              145
              
              
              1
              
              
              41
              
              
              1Balance
                  at December 31,
              
              
              14,948
              
              
              149
              
              
              14,820
              
              
              148
              
              
              14,523
              
              
              145**Treasury
                  stock:**Balance
                  at January 1,
              
              
              5
              
              
              (110
              )
              
              5
              
              
              (110
              )
              
              5
              
              
              (110
              )Treasury
                  stock purchased
              
              
              1,013
              
              
              (13,104
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Balance
                  at December 31,
              
              
              1,018
              
              
              (13,214
              )
              
              5
              
              
              (110
              )
              
              5
              
              
              (110
              )**Additional
                  paid-in capital:**Balance
                  at January 1,
              
              
              
              
              
              116,737
              
              
              
              
              
              109,531
              
              
              
              
              
              106,673Common
                  stock issued
              
              
              
              
              
              699
              
              
              
              
              
              1,511
              
              
              
              
              
              1,326Restricted
                  stock issued
              
              
              
              
              
              533
              
              
              
              
              
              2,626
              
              
              
              
              
              814Restricted
                  stock forfeited
              
              
              
              
              
              (494
              )
              
              
              
              
              (174
              )
              
              
              
              
              -Stock-based
                  compensation issued
              
              
              
              
              
              259
              
              
              
              
              
              -
              
              
              
              
              
              -Stock
                  options exercised
              
              
              
              
              
              591
              
              
              
              
              
              2,369
              
              
              
              
              
              526Tax
                  benefit on options exercised
              
              
              
              
              
              -
              
              
              
              
              
              641
              
              
              
              
              
              192Acceleration
                  of stock option vesting
              
              
              
              
              
              
              
              
              
              
              
              233
              
              
              
              
              
              -Balance
                  at December 31,
              
              
              
              
              
              118,325
              
              
              
              
              
              116,737
              
              
              
              
              
              109,531**Retained
                  earnings:**Balance
                  at January 1,
              
              
              
              
              
              50,637
              
              
              
              
              
              29,505
              
              
              
              
              
              17,247Net
                  (loss) income
              
              
              
              
              
              (19,454
              )
              
              
              
              
              21,132
              
              
              
              
              
              12,258Balance
                  at December 31,
              
              
              
              
              
              31,183
              
              
              
              
              
              50,637
              
              
              
              
              
              29,505**Accumulated
                  other****comprehensive
                  income (loss):**Balance
                  at January 1,
              
              
              
              
              
              76
              
              
              
              
              
              25
              
              
              
              
              
              (100
              )Reclassification
                  of realized (gain) loss, net of tax
              
              (49
              )
              
              
              
              
              21
              
              
              
              
              
              80Unrealized
                  holding gain, net of tax
              
              
              
              
              
              44
              
              
              
              
              
              30
              
              
              
              
              
              45Balance
                  at December 31,
              
              
              
              
              
              71
              
              
              
              
              
              76
              
              
              
              
              
              25**Unamortized
                  compensation costs:**Balance
                  at January 1,
              
              
              
              
              
              (2,063
              )
              
              
              
              
              (608
              )
              
              
              
              
              (641
              )Restricted
                  stock issued
              
              
              
              
              
              (533
              )
              
              
              
              
              (2,627
              )
              
              
              
              
              (521
              )Restricted
                  stock forfeited
              
              
              
              
              
              494
              
              
              
              
              
              137
              
              
              
              
              
              -Restricted
                  stock vested
              
              
              
              
              
              1,198
              
              
              
              
              
              1,035
              
              
              
              
              
              554Balance
                  at December 31,
              
              
              
              
              
              (904
              )
              
              
              
              
              (2,063
              )
              
              
              
              
              (608
              )**Total
                  stockholders' equity**
              
              
              
              
              
              135,610
              
              
              
              
              
              165,425
              
              
              
              
              
              138,488**Comprehensive
                  income:**Net
                  (loss) income
              
              
              
              
              $
              (19,454
              )
              
              
              
              $
              21,132
              
              
              
              
              $
              12,258Reclassification
                  of realized (gain) loss, net of tax
              
              (49
              )
              
              
              
              
              21
              
              
              
              
              
              80Unrealized
                  holding gain, net of tax
              
              
              
              
              
              44
              
              
              
              
              
              30
              
              
              
              
              
              45Total
                  comprehensive income
              
              
              
              
              $
              (19,459
              )
              
              
              
              $
              21,183
              
              
              
              
              $
              12,383*The
                  accompanying notes are an integral part of these consolidated financial
                  statements*





F-6





**PDI,
                  INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**(in
                  thousands)**For
                  The Years Ended December 31,****2005**
              
              **2004**
              
              **2003****Cash
                  Flows From Operating Activities**Net
                  (loss) income from operations
              
              $
              (19,454
              )
              $
              21,132
              
              $
              12,258Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              5,820
              
              
              5,916
              
              
              6,243(Gain)
                  loss on investment
              
              
              (4,444
              )
              
              1,000
              
              
              -Asset
                  impairment
              
              
              14,351
              
              
              -
              
              
              -Loss
                  on disposal of assets
              
              
              269
              
              
              622
              
              
              -Stock
                  compensation costs
              
              
              1,457
              
              
              1,232
              
              
              554Deferred
                  income taxes, net
              
              
              6,447
              
              
              9,199
              
              
              (3,117
              )Provision
                  for bad debt
              
              
              1,385
              
              
              683
              
              
              1,939Other
                  changes in assets and liabilities, net of acquisitions:(Increase)
                  decrease in accounts receivable
              
              
              (1,229
              )
              
              15,807
              
              
              (1,277
              )(Increase)
                  decrease in unbilled costs
              
              
              (2,581
              )
              
              648
              
              
              (681
              )(Increase)
                  in income tax refund receivable
              
              
              (6,292
              )
              
              -
              
              
              -Decrease
                  (increase) in inventory
              
              
              -
              
              
              43
              
              
              (216
              )Decrease
                  (increase) in other current assets
              
              
              448
              
              
              (33
              )
              
              14,276Decrease
                  (increase) in other long-term assets
              
              
              218
              
              
              (28
              )
              
              (2,052
              )(Decrease)
                  increase in accounts payable
              
              
              (41
              )
              
              (3,439
              )
              
              3,316Increase
                  (decrease) in income taxes payable
              
              
              1,542
              
              
              (3,529
              )
              
              7,071Increase
                  (decrease) in unearned contract revenue
              
              
              5,674
              
              
              507
              
              
              (5,869
              )(Decrease)
                  increase in accrued returns
              
              
              (4,085
              )
              
              (18,495
              )
              
              6,311(Decrease)
                  increase in accrued incentives
              
              
              (4,254
              )
              
              (4,204
              )
              
              9,543(Decrease)
                  increase in accrued payroll and related benefits
              
              
              (858
              )
              
              (617
              )
              
              2,414Increase
                  (decrease) in accrued liabilities
              
              
              8,742
              
              
              2,538
              
              
              (9,082
              )Net
                  cash provided by operating activities
              
              
              3,115
              
              
              28,982
              
              
              41,631**Cash
                  Flows From Investing Activities**Sales
                  (purchases) of short-term investments, net
              
              
              21,686
              
              
              (27,103
              )
              
              7,355Proceeds
                  from sale of investment
              
              
              4,444
              
              
              -
              
              
              -Repayments
                  from (loans to) Xylos and TMX
              
              
              100
              
              
              (1,500
              )
              
              -Purchase
                  of property and equipment
              
              
              (5,832
              )
              
              (8,104
              )
              
              (1,829
              )Proceeds
                  from sale of assets
              
              
              63
              
              
              -
              
              
              -Cash
                  paid for acquisition, including acquisition costs
              
              
              (1,936
              )
              
              (28,443
              )
              
              -Net
                  cash provided by (used in) investing activities
              
              
              18,525
              
              
              (65,150
              )
              
              5,526**Cash
                  Flows From Financing Activities**Net
                  proceeds from employee stock purchase planand
                  the exercise of stock options
              
              
              1,291
              
              
              3,880
              
              
              2,045Cash
                  paid to repurchase shares
              
              
              (13,104
              )
              
              -
              
              
              -Net
                  cash (used in) provided by financing activities
              
              
              (11,813
              )
              
              3,880
              
              
              2,045Net
                  increase (decrease) in cash and cash equivalents
              
              
              9,827
              
              
              (32,288
              )
              
              49,202Cash
                  and cash equivalents - beginning
              
              
              81,000
              
              
              113,288
              
              
              64,086Cash
                  and cash equivalents - ending
              
              $
              90,827
              
              $
              81,000
              
              $
              113,288Cash
                  paid for interest
              
              $
              2
              
              $
              3
              
              $
              25Cash
                  paid for taxes
              
              $
              1,513
              
              $
              7,389
              
              $
              9,619*The
                  accompanying notes are an integral part of these consolidated financial
                  statements*





F-7
 **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 (the Company) is a sales and
      marketing services company serving the biopharmaceutical and medical devices
      and
      diagnostics (MD&D) industries. See Note 24 for segment
      information.




*Principles
      of Consolidation*




The
      accompanying consolidated financial statements have been prepared in accordance
      with U.S. generally accepted accounting principles (U.S. GAAP). The consolidated
      financial statements include accounts of PDI and its wholly owned subsidiaries
      TVG, Inc. (TVG), ProtoCall, Inc. (ProtoCall), InServe Support Solutions
      (InServe), and PDI Investment Company, Inc. (PDII). All significant intercompany
      balances and transactions have been eliminated in consolidation.




*Accounting
      Estimates*




The
      preparation of consolidated financial statements in conformity with U.S. GAAP
      requires management to make estimates and assumptions that affect the amounts
      reported of assets and liabilities 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. Actual results could differ
      from those estimates. Significant estimates include incentives earned or
      penalties incurred on contracts, valuation allowances related to deferred income
      taxes, self-insurance loss accruals, allowances for doubtful accounts and notes,
      fair value of assets, income tax accruals, facilities realignment accruals
      and
      sales returns.




*Reclassifications*




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




*Revision
      in the Classification of Certain Securities*




In
      connection with the preparation of its consolidated financial statements, the
      Company concluded that it was appropriate to classify certain securities
      maturing within three months of the balance sheet date as short-term
      investments. Previously, such securities have been classified as cash and cash
      equivalents. Accordingly, the Company has revised the classification of these
      securities totaling $15.4 million, to short-term investments on its consolidated
      balance sheet as of December 31, 2004. The Company has also made corresponding
      adjustments to its consolidated statement of cash flows for the years ended
      December 31, 2004 and 2003 to reflect the purchases and sales of these
      securities as investing activities rather than as a component of cash and cash
      equivalents. This change in classification did not affect cash flows from
      operations or from financing activities in previously reported consolidated
      statements of cash flows or net income in previously reported consolidated
      statements of operations for any period.




*Cash
      and Cash Equivalents*




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




*Investments
      in Marketable Securities*




The
      Company classifies its investments in marketable securities as
“available-for-sale” or “held-to-maturity” in accordance with Statement of
      Financial Accounting Standards (SFAS) No. 115, “ *Accounting
      for Certain Investments in Debt and Equity Securities* ”
(SFAS
      115). The Company does not have any investments classified as “trading.”
Available-for-sale investments are carried at fair market value based on quoted
      market values with the unrealized gain or loss, net of taxes reported as a
      component of accumulated other comprehensive income. Realized gains and losses
      are computed based upon specific identification. The Company’s other short-term
      investments consist of a laddered portfolio of investment grade debt instruments
      such as obligations of the U.S. Treasury and U.S. Federal Government agencies,
      municipal bonds and commercial paper. These investments are categorized as
      held-to-maturity because the Company’s management has the intent and ability to
      hold these securities to maturity. Held-to-maturity investments are stated
      at
      amortized cost.







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





*Receivables
      and Allowance for Doubtful Accounts*




Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest. The
      Company maintains allowances for doubtful accounts for estimated losses
      resulting from the inability of its customers to make required payments.
      Management reviews a customer’s credit history before extending credit.
      Initially, the Company establishes an allowance for doubtful accounts based
      on
      the overall aging of accounts receivable based on historical trends and other
      information. This initial estimate is periodically adjusted when the Company
      becomes aware of a specific customer’s inability to meet its financial
      obligations (e.g., bankruptcy filing). 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. A general downturn in the
      pharmaceutical industry or adverse material event to one or more of the
      Company’s major clients could result in higher than expected customer defaults
      and additional allowances may be required. Allowance for doubtful accounts
      was
      approximately $778,000 and $74,000 as of December 31, 2005 and 2004,
      respectively.




*Unbilled
      Costs and Accrued Profits and Unearned Contract Revenue*




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




*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 considers 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. For the year ended December 31, 2004, the Company recorded
      a loss on investments of $1.0 million to write-down investments to their fair
      value. Additionally, on a quarterly basis, the Company reviews outstanding
      loans
      receivable to determine if a provision for doubtful accounts 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’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, 2005
      and 2004, the allowance for doubtful notes was approximately $1.2 million and
      $500,000, respectively. The Company does not recognize interest income on
      impaired loans. See Note 6 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 three to seven years for computer software.
      Leasehold improvements are amortized over the shorter of the estimated service
      lives or the terms of the related leases. Repairs and maintenance are charged
      to
      expense as incurred. Upon disposition, the asset and related accumulated
      depreciation are removed from the related accounts and any gains or losses
      are
      reflected in operations. Purchased computer software is capitalized and
      amortized over the software's useful life, unless the amounts are immaterial
      in
      which case the Company expenses it immediately.




*Fair
      Value of Financial Instruments*




The
      Company considers carrying amounts of cash, accounts receivable, accounts
      payable and accrued expenses to approximately fair value due to the short-term
      nature of these financial instruments. Marketable securities classified as
      “available for sale” are carried at fair value. Market securities classified as
“held-to-maturity” are carried at amortized cost. The fair value of
      held-to-maturity securities as of December 31, 2005 was $4.9 million. The fair
      value of letters of credit is determined to be zero as management does not
      expect any material losses to result from these instruments because performance
      is not expected to be required.







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





*Goodwill
      and Other Intangible Assets*




The
      Company accounts for purchases of acquired companies in accordance with SFAS
      No.
      141, *"Business
      Combinations"* (SFAS
      141) and accounts for the related goodwill and other identifiable definite
      and
      indefinite-lived acquired intangible assets in accordance with SFAS No. 142, *“Goodwill
      and Other Intangible Assets”* (SFAS
      142). 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 cash flows and statutory regulations. In accordance with SFAS
      141, the Company allocates the cost of the acquired companies to the
      identifiable tangible and intangible assets and liabilities acquired, with
      the
      remaining amount being classified as goodwill. Since the entities 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
      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 has elected to do the annual tests for indications of goodwill
      impairment as of December 31  of
      each
      year. The Company utilizes discounted cash flow models to determine fair value
      in the goodwill impairment evaluation. In assessing the recoverability of
      goodwill, projections regarding estimated future cash flows and other factors
      are made to determine that fair value of the respective reporting units. 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 2005 evaluation indicated that goodwill recorded in
      the
      MD&D and Select Access reporting units was impaired and accordingly, the
      Company recognized non-cash charges of approximately $7.8 million and $3.3
      million, respectively, in 2005. See Note 5 for additional
      information.




*Long-Lived
      Assets*




In
      accordance with SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of 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. In 2005, the Company recorded a non-cash charge of approximately
      $2.8 million related to the impairment of its Siebel sales force automation
      software and a non-cash charge of approximately $349,000 related to the
      impairment of the InServe intangible assets. See Note 4 and 5, respectively,
      for
      additional information.




*Self-Insurance
      Accruals*




The
      Company is self-insured for certain losses relating to workers’ compensation and
      automobile-related liabilities for Company-leased cars for claims filed and
      claims incurred but not reported. The Company’s liability is estimated on an
      actuarial undiscounted basis using individual case-based valuations and
      statistical analysis supplied by its insurance brokers and insurers 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 maintains
      stop-loss coverage with third-party insurers to limit its total exposure on
      these programs. Management reviews these accruals on a quarterly basis. At
      December 31, 2005 and 2004, self-insurance accruals totaled $3.8 million and
      $4.1 million, respectively.




*Accrued
      Sales Returns*




For
      product sales, provision is made at the time of sale for all discounts and
      estimated sales allowances. Upon approval from the Company, customers who
      purchased the Company’s Ceftin product were permitted to return unused product
      up to six months before, and one year after the expiration date for the product,
      but no later than December 31, 2004. As discussed in Note 16, there were $1.7
      million and $12.0 million adjustments for changes in estimates to the Ceftin
      returns reserve in 2004 and 2003, respectively. There were no adjustments in
      2005. These adjustments were recorded as a reduction to revenue consistent
      with
      the initial recognition of the returns allowance and resulted in the Company
      reporting net negative product revenue in 2004 and 2003.







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





*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. Gains and losses on the
      subsequent reissuances of shares are credited or charged to additional paid-in
      capital using the average cost method.




*Revenue
      Recognition 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 three years
      and
      may be renewed or extended. The majority of these contracts, however, are
      terminable by the client for any reason upon 30 to 90 days’ notice. Certain
      contracts provide for termination payments if the client terminates us without
      cause. Typically, however, these penalties do not offset the revenue the Company
      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 the Company’s business, financial condition or results of operations.




Revenue
      and associated costs under marketing service contracts are generally based
      on a
      single deliverable such as promotional program, accredited continuing medical
      education seminar or marketing research/advisory program. The contracts are
      generally terminable by the client for any reason. Upon termination, the client
      is generally responsible for payment for all work completed to date, plus the
      cost of any nonrefundable commitments made on behalf of the client. Due to
      the
      typical size of marketing service contracts, it is unlikely the loss or
      termination of any individual 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 other marketing and
      promotional 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 bench marks have not been met. Revenue
      is
      recognized net of any potential penalties until the performance criteria
      relating to the penalties have been achieved.




Historically,
      the Company has derived a significant portion of its service revenue from a
      limited number of clients. Concentration of business in the pharmaceutical
      services industry is common and the industry continues to consolidate. As a
      result, the Company is likely to continue to experience significant client
      concentration in future periods. For the year ended December 31, 2005, the
      Company’s three largest clients and for 2004 and 2003, the Company’s two largest
      clients, who each individually represented 10% or more of its service revenue,
      accounted for approximately 70.3%, 63.0% and 66.5%, respectively, of its service
      revenue.




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







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





Reimbursable
      out-of-pocket expenses include those relating to travel and out-of pocket
      expenses and other similar costs, for which the Company is reimbursed at cost
      by
      its clients. In accordance with the requirements of Emerging Issues Task Force
      No. 01-14, *“Income
      Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
      Incurred”* (EITF
      01-14), reimbursements received for out-of-pocket expenses incurred are
      characterized as revenue and an identical amount is included as cost of goods
      and services in the consolidated statements of operations. For the years ended
      December 31, 2005, 2004 and 2003, reimbursable out-of-pocket expenses were
      $35.2
      million, $22.8 million and $27.1 million, respectively.




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




Product
      revenue is recognized when products are shipped and title is transferred to
      the
      customer. Product revenue for the years ended December 31, 2004 and 2003 was
      negative, primarily from the adjustments to the Ceftin sales returns reserve,
      as
      discussed in Note 16, net of the sale of the Xylos wound care products.




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




*Stock-Based
      Compensation*




The
      Company accounts for employee stock options and share awards under the
      intrinsic-value method prescribed by Accounting Principles Board Opinion No.
      25,
“Accounting for Stock Issued to Employees”, as interpreted (APB 25).
      Accordingly, compensation cost for stock options and restricted stock is
      measured as the excess, if any, of the quoted market price of the Company’s
      common stock at the date of the grant over the exercise price an employee must
      pay to acquire the stock. The Company recognizes compensation cost arising
      from
      the issuance of stock options and restricted stock over the vesting period
      of
      the grant. The Company has a number of share-based employee compensation plans,
      which are described more fully in Note 11.




Stock
      options are generally granted with an exercise price equal to the market value
      of the common stock on the date of grant, expire 10 years from the date they
      are
      granted, and generally vest over a two-year period for members of the Board
      of
      Directors and three-year period for employees. The restricted shares have
      vesting periods that range from eighteen months to three years and are subject
      to accelerated vesting and forfeiture under certain circumstances.




On
      March
      29, 2005, the Compensation and Management Development Committee of the Company’s
      Board of Directors approved the 2005 PDI, Inc. Long-Term Incentive Plan (the
      LTI
      Plan), which is described more fully in Note 11. To provide each participant
      with an equity stake in the Company, and the potential to create or increase
      his
      or her stock ownership in the Company, awards under the LTI Plan will be made
      through the following two methods: (i) stock-settled appreciation rights (SARs);
      and (ii) performance contingent shares of Company common stock (Performance
      Contingent Shares). SARs are generally granted with an exercise price equal
      to
      the market value of the common stock on the date of grant, expire 5 years from
      the date they are granted, and generally vest over a three-year period. Any
      Performance Contingent Shares awarded under the LTI Plan will be issued upon
      completion of the three (3) year Performance Period. Under
      the terms of the LTI Plan, each participant’s target award of Performance
      Contingent Shares could increase by fifty percent (50%) if a pre-determined
      superior level of achievement is attained as of the end of the Performance
      Period. Although the measurement date for the performance contingent shares
      is
      not reached until the performance targets are met, the Company recognizes
      compensation expense over the performance period based on the probable number
      of
      shares to be issued and the current value of those shares.







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





SFAS
      No.
      123, “Accounting for Stock-Based Compensation,” (SFAS 123) encourages a fair
      value based method of accounting for employee stock options and similar equity
      instruments, which generally would result in the recording of additional
      compensation expense in the Company’s financial statements. The Statement also
      allows the Company to continue to account for stock-based employee compensation
      using the intrinsic value for equity instruments. The Company has adopted the
      disclosure-only provision of SFAS 123, which requires that the Company provide
      pro forma information regarding net income and income per common share as if
      the
      fair value method of accounting had been used. The Company also adopted the
      disclosure portion of SFAS No. 148, “Accounting for Stock-Based Compensation -
      Transition and Disclosure.” The following table illustrates the effect on net
      income and earnings per share if the Company had applied the fair value
      recognition provisions of SFAS No. 123 to stock-based employee
      compensation.


**For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003**Net
                  income (loss), as reported
              
              $
              (19,454
              )
              $
              21,132
              
              $
              12,258Add:
                  Stock-based employeecompensation
                  expense includedin
                  reported net income (loss),net
                  of related tax effects
              
              
              974
              
              
              721
              
              
              368Deduct:
                  Total stock-basedemployee
                  compensation expensedetermined
                  under fair value basedmethods
                  for all awards, net ofrelated
                  tax effects
              
              
              (6,670
              )
              
              (3,946
              )
              
              (6,133
              )Pro
                  forma net income (loss)
              
              $
              (25,150
              )
              $
              17,907
              
              $
              6,493Earnings
                  (loss) per shareBasic—as
                  reported
              
              $
              (1.37
              )
              $
              1.45
              
              $
              0.86Basic—pro
                  forma
              
              $
              (1.77
              )
              $
              1.23
              
              $
              0.46Diluted—as
                  reported
              
              $
              (1.37
              )
              $
              1.42
              
              $
              0.85Diluted—pro
                  forma
              
              $
              (1.77
              )
              $
              1.20
              
              $
              0.45




The
      weighted average fair value of options granted during 2005, 2004 and 2003 was
      estimated to be $9.10, $19.26 and $11.23, respectively. The fair value of each
      option granted is determined on the date of grant using the Black Scholes option
      pricing model, with the following weighted-average assumptions assuming no
      dividends paid in the foreseeable future:


2005
              
              2004
              
              2003Risk-free
                  interest rate
              3.79%
              
              3.63%
              
              4.49%Expected
                  life
              5
                  years
              
              5
                  years
              
              5
                  yearsExpected
                  volatility
              100%
              
              100%
              
              100%




*Advertising*




The
      Company recognizes advertising costs as incurred. The total amounts charged
      to
      advertising expense, which is included in other SG&A, were approximately
      $335,000, $230,000 and $555,000 for the years ended December 31, 2005, 2004
      and
      2003, respectively.




*License
      Fees*




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







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





*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 on the consolidated balance 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.




*Income
      taxes*




In
      accordance with the provisions of SFAS No. 109, “ *Accounting
      for Income Taxes,”* the
      Company accounts for income taxes using the asset and liability method. This
      method requires recognition of deferred tax assets and liabilities for expected
      future tax consequences of temporary differences that currently exist between
      tax bases and financial reporting bases of 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 that are not more likely
      than not to 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. The Company has established estimated liabilities
      for
      federal and state income tax exposures that arise and meet the criteria for
      accrual under SFAS No. 5, “ *Accounting
      for Contingencies”* (SFAS
      5). ** These
      accruals represent accounting estimates that are subject to inherent
      uncertainties associated with the tax audit process. The Company adjusts these
      accruals as facts and circumstances change, such as the progress of a tax audit.
      The Company believes that any potential audit adjustments will not have a
      material adverse effect on its financial condition or liquidity. However, any
      adjustments made may be material to our 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 the current year net operating
      loss and deductible temporary differences, which should reduce taxable income
      in
      future periods. The realization of these assets is dependent on generating
      future taxable income, as well as successful implementation of various tax
      planning strategies. A valuation allowance is required when it is more likely
      than not that all or a portion of a deferred tax asset will not be realized.
      The
      Company’s 2005 net loss weighed heavily in its overall assessment. As a result
      of the assessment, the Company established a full federal and state valuation
      allowance for the net deferred tax assets at December 31, 2005 that cannot
      be
      carried back.




*New
      Accounting Pronouncements*




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29,”
which replaces the exception from fair value measurement in APB Opinion No.
      29,
“Accounting for Nonmonetary Transactions,” for nonmonetary exchanges of similar
      productive assets with a general exception from fair value measurement for
      exchanges of nonmonetary assets that do not have commercial substance. A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. This
      Statement is to be applied prospectively and is effective for nonmonetary asset
      exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
      believes that the adoption of SFAS 153 in 2006 will not have a material impact
      on its consolidated financial statements.







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





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment,” (SFAS 123R) that will require compensation costs related to
      share-based payment transactions to be recognized in the financial statements.
      The amount of the compensation cost will be measured based on the grant-date
      fair value of the equity or liability instruments issued. In addition, liability
      awards will be remeasured each reporting period. Compensation cost will be
      recognized over the period that an employee provides service in exchange for
      the
      award. This Statement will apply to all awards outstanding on its effective
      date, or awards granted, modified, repurchased or cancelled after that date.
      In
      April 2005, the Securities and Exchange Commission (SEC) deferred the effective
      date of this Statement until the first fiscal year beginning after June 15,
      2005. The Company will adopt this standard using the modified prospective method
      in the first quarter of 2006. The Company will apply the Black-Scholes valuation
      model in determining the fair value of share-based payments to employees, which
      will then be amortized on a straight-line basis over the requisite service
      period. The additional compensation expense to be incurred in 2006 due to the
      adoption of SFAS 123R for the remaining unvested grants as of December 31,
      2005
      is approximately $230,000. The impact of additional future grants in 2006 and
      beyond cannot be predicted at this time because it is dependent on the fair
      value and number of share-based award granted in the future.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which changes the requirements for the accounting and reporting of a change
      in
      accounting principle. SFAS No. 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      This Statement does not change the transition provisions of any existing
      accounting pronouncements, including those that are in a transition phase as
      of
      the effective date of the Statement.






**2.**
            **Acquisition**




On
      August
      31, 2004, the Company acquired substantially all of the assets of Pharmakon,
      LLC
      in a transaction treated as an asset acquisition for tax purposes. The
      acquisition has been accounted for as a purchase, subject to the provisions
      of
      SFAS No. 141. The Company made payments to the members of Pharmakon, LLC on
      August 31, 2004 of $27.4 million, of which $1.5 million was deposited into
      an
      escrow account, and the Company assumed approximately $2.6 million in net
      liabilities. As of December 31, 2005, $500,000 is still held in the escrow
      account, which is recorded in other current assets on the Company’s balance
      sheet and will be paid out during 2006, subject to certain working capital
      adjustments. Approximately $1.1 million in direct costs of the acquisition
      were
      also capitalized. Based upon the attainment of annual profit targets agreed
      upon
      at the date of acquisition, the members of Pharmakon, LLC received approximately
      $1.4 million in additional payments on April 1, 2005 for the year ended December
      31, 2004. No additional payments will be received in 2006 since the Pharmakon
      business did not exceed its specified 2005 performance benchmark. The members
      of
      Pharmakon, LLC can still earn up to an additional $3.3 million in cash based
      upon achievement of certain annual profit targets through December 2006. In
      connection with this transaction, the Company has recorded $13.1 million in
      goodwill and $18.9 million in other identifiable intangibles through December
      31, 2005. The identifiable intangible assets have a weighted average remaining
      amortization period of 13.6 years.




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


Year
                  ended December 31,2004
              
              2003Revenue
              
              $
              377,577
              
              $
              361,687Net
                  income
              
              
              22,842
              
              
              14,713Earnings
                  per share
              
              $
              1.53
              
              $
              1.02






**3.**
            **Investments
                in Marketable Securities**




The
      following is a summary of the carrying values of available-for-sale and
      held-to-maturity securities at December 31, 2005 and 2004:







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





2005
              
              2004Available-for-saleCash/money
                  accounts
              
              $
              1,076
              
              $
              921Mutual
                  funds
              
              
              811
              
              
              6371,887
              
              
              1,558Held-to-maturityCash/money
                  accounts
              
              
              1,953
              
              
              3,530Certificate
                  of deposit
              
              
              2,131Municipal
                  bonds
              
              
              2,620
              
              
              26,847US
                  Treasury obligations
              
              
              987
              
              
              498Government
                  agency obligations
              
              
              7,742
              
              
              5,07515,433
              
              
              35,950Total
              
              $
              17,320
              
              $
              37,508




The
      available-for-sale securities consist primarily of assets held by the Company
      in
      a Rabbi Trust associated with its deferred compensation plan (see Note 8).
      At
      December 31, 2005 and 2004, included in accumulated other comprehensive income
      were gross unrealized gains of approximately $98,000 and $101,000, respectively,
      and gross unrealized losses of approximately $28,000 and $22,000, respectively.




Held-to-maturity
      securities are maintained in separate accounts and primarily support the
      Company’s standby letters of credit. The Company has standby letters of credit
      of approximately $10.5 million and $9.0 million at December 31, 2005 and 2004,
      respectively, as collateral for its existing insurance policies and its facility
      leases. At December 31, 2005 and 2004, held-to-maturity securities were included
      in short-term investments (approximately $4.9 million and $26.9 million,
      respectively), other current assets (approximately $7.8 million and $6.2
      million, respectively) and other assets (approximately $2.7 million and $2.8
      million, respectively).






**4.**
            **Property
                and Equipment**




The
      Company had a $2.8 million write-down in the second quarter of 2005 of its
      Siebel sales force automation software. Due to the migration of the Company’s
      sales force automation software to the Dendrite platform, it was determined
      during the second quarter of 2005 that the Company’s Siebel sales force
      automation software was impaired and a write-down of the asset was necessary.
      The non-cash charge was included in operating expense in the sales services
      segment.




Property
      and equipment consisted of the following as of December 31, 2005 and 2004:


**December
                  31,****2005**
              
              **2004**Furniture
                  and fixtures
              
              $
              3,925
              
              $
              3,942Office
                  equipment
              
              
              1,663
              
              
              3,787Computer
                  equipment
              
              
              7,402
              
              
              5,727Computer
                  software
              
              
              9,350
              
              
              13,674Leasehold
                  improvements
              
              
              5,730
              
              
              4,56528,070
              
              
              31,695Less
                  accumulated depreciation
              
              
              (12,017
              )
              
              (14,525
              )$
              16,053
              
              $
              17,170




Depreciation
      expense was approximately $3.9 million, $4.9 million, and $5.6 million, for
      the
      years ended December 31, 2005, 2004 and 2003, respectively.







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







**5.**
            **Goodwill
                and Other Intangible
                Assets**




In
      December 2005 and 2004, the Company performed its annual goodwill impairment
      evaluation. Goodwill has been assigned to the reporting units to which the
      value
      of the goodwill relates. The 2005 evaluation indicated that goodwill recorded
      in
      the MD&D and Select Access reporting units was impaired and accordingly, the
      Company recognized non-cash charges of approximately $7.8 million and $3.3
      million, respectively, in 2005. On December 4, 2005 the Company announced it
      was
      discontinuing its MD&D business unit. (See Note 22 for additional
      information.) The Company’s MD&D business unit is expected to cease
      operations in the first quarter of 2006. As a result of this decision and the
      expected cash flows that the unit will generate in 2006, an impairment charge
      of
      $7.8 million was recorded in operating expense in the sales services segment,
      which represented all of the goodwill associated with the InServe acquisition.
      The loss of a key client that historically represented between 25% - 35% of
      revenue and the lack of new business materializing within Select Access were
      the
      main factors for the goodwill impairment. The 2004 evaluation indicated that
      there was no impairment of goodwill.




Additionally,
      due to the pending discontinuation of the MD&D business unit, the Company
      evaluated the recoverability of MD&D long-lived assets and determined that
      these assets were impaired. The Company recorded a non-cash charge of
      approximately $349,000. This was also recorded in operating expense in the
      sales
      services segment. The Company’s MD&D business unit has approximately $73,000
      remaining of other intangible assets that will be amortized through March 31,
      2006.




The
      Company had a net increase in goodwill associated with the marketing services
      segment for the year ended December 31, 2005. Acquisition costs and additional
      payments from escrow were partially offset by a reduction in the accrued
      earn-out payment.




Changes
      in the carrying amount of goodwill for the years ended December 31, 2005 and
      2004, by operating segment, were as follows:


Sales
              
              MarketingServices
              
              Services
              
              PPG
              
              TotalBalance
                  as of December 31, 2004
              
              $
              11,132
              
              $
              12,659
              
              $
              -
              
              $
              23,791Amortization
              
              
              -
              
              
              -
              
              
              -
              
              
              -Goodwill
                  additions
              
              
              -
              
              
              568
              
              
              -
              
              
              568Goodwill
                  deductions
              
              
              -
              
              
              (115
              )
              
              -
              
              
              (115
              )Goodwill
                  impairments
              
              
              (11,132
              )
              
              -
              
              
              -
              
              
              (11,132
              )Balance
                  as of December 31, 2005
              
              $
              -
              
              $
              13,112
              
              $
              -
              
              $
              13,112




All
      identifiable intangible assets recorded as of December 31, 2005 are being
      amortized on a straight-line basis over the lives of the intangibles, which
      range from three months to 15 years. The weighted average amortization period
      for all of the identifiable intangible assets is approximately 13.6 years.
      Amortization expense for the years ended December 31, 2005, 2004 and 2003 was
      approximately $1.9 million, $1.0 million, and $613,000, respectively. Estimated
      amortization expense for the next five years is as follows:


2006
              
              2007
              
              2008
              
              2009
              
              2010$
                  1,354
              
              $
              1,281
              
              $
              1,281
              
              $
              1,272
              
              $
              1,253




The
      net
      carrying value of the identifiable intangible assets for the years ended
      December 31, 2005 and 2004 is as follows:







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





As
                  of December 31, 2005
              
              As
                  of December 31, 2004Carrying
              
              Accumulated
              
              
              
              Carrying
              
              AccumulatedAmount
              
              Amortization
              
              Net
              
              Amount
              
              Amortization
              
              NetCovenant
                  not to compete
              
              $
              1,634
              
              $
              1,491
              
              $
              143
              
              $
              1,826
              
              $
              1,126
              
              $
              700Customer
                  relationships
              
              
              17,371
              
              
              2,491
              
              
              14,880
              
              
              17,508
              
              
              1,163
              
              
              16,345Corporate
                  tradename
              
              
              2,652
              
              
              370
              
              
              2,282
              
              
              2,672
              
              
              169
              
              
              2,503Total
              
              $
              21,657
              
              $
              4,352
              
              $
              17,305
              
              $
              22,006
              
              $
              2,458
              
              $
              19,548




**6.**
            **Loans
                and Investments in Privately-Held
                Entities**




In
      June
      2005, the Company sold its approximate 12% ownership interest in In2Focus,
      Inc.
      (In2Focus), a United Kingdom contract sales company. The Company’s original
      investment of $1.9 million had been written down to zero in the fourth quarter
      of 2001. The Company received approximately $4.4 million, net of transaction
      costs, which isincluded in gain (loss) on investments at December 31, 2005.




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 to be repaid
      on
      November 26, 2005. Through December 31, 2005, TMX provided services to the
      Company valued at $245,000. The receipt of these services was used as payment
      towards the loan and the balance of the loan receivable at December 31, 2005
      is
      $755,000. In the second quarter of 2005, due to the continued losses in 2005
      and
      uncertainty regarding future prospects, the Company established an allowance
      for
      doubtful notes of $755,000 against the TMX loans.




In
      October 2002, the Company acquired $1.0 million of preferred stock of Xylos
      Corporation (Xylos). In addition, the Company provided 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 and the Company recorded a non-cash charge to write down its investment
      of $1.0 million and established an allowance for doubtful accounts of $500,000.
      Xylos made two loan payments of $50,000 in each of the second and third quarters
      of 2005. These payments were recorded as credits to bad debt expense in the
      periods in which they were received.






**7.**
            **Retirement
                Plans**




The
      Company offers an employee 401(k) saving plan. Under the PDI, Inc. 401(k) Plan
      (the 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 2005, 2004 and 2003 was approximately
      $2.1 million, $1.6 million, and $905,000, respectively.






**8.**
            **Deferred
                Compensation Arrangements**




Beginning
      in 2000, the Company established a deferred compensation arrangement whereby
      a
      portion of certain employees’ salaries is withheld and placed in a Rabbi Trust.
      The plan permits the employees to diversify these assets through a variety
      of
      investment options. The Company adopted the provisions of EITF No. 97-14
      " *Accounting
      for Deferred Compensation Arrangement Where Amounts are Earned and Held in
      a
      Rabbi Trust and Invested* ”
which
      requires the Company to consolidate into its financial statements the net assets
      of the trust. The deferred compensation obligation has been classified as a
      current liability and the net assets in the trust are classified as
      available-for-sale and are included in short-term investments.







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







**9.**
            **Commitments
                and Contingencies**




The
      Company leases facilities, automobiles and certain equipment under agreements
      classified as operating leases, which expire at various dates through 2017.
      Substantially all of the property leases provide for increases based upon use
      of
      utilities and landlord’s operating expenses. Lease expense under these
      agreements for the years ended December 31, 2005, 2004 and 2003 was
      approximately $22.9 million, $24.4 million, and $21.3 million, respectively,
      of
      which $19.3 million in 2005, $21.2 million in 2004, and $18.0 million in 2003
      related to automobiles leased for employees for a term of one-year from the
      date
      of delivery.




As
      of
      December 31, 2005, 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
                  YearsContractrual
                  obligations(1)
              
              $
              11,406
              
              $
              5,576
              
              $
              5,830
              
              $
              -
              
              $
              -Operating
                  Lease ObligationsMinimum
                  lease payments
              
              
              33,488
              
              
              3,090
              
              
              6,155
              
              
              6,334
              
              
              17,909Less
                  minimum sublease rentals(2)
              
              
              (1,852
              )
              
              (401
              )
              
              (801
              )
              
              (650
              )
              
              -Net
                  minimum lease payments
              
              
              31,636
              
              
              2,689
              
              
              5,354
              
              
              5,684
              
              
              17,909Total
              
              $
              43,042
              
              $
              8,265
              
              $
              11,184
              
              $
              5,684
              
              $
              17,909




(1)
            Amounts
                represent contractual obligations related to software license contracts,
                IT consulting contracts and outsourcing contracts for employee benefits
                administration and software system
                support.




(2)
            On
                June 21, 2005, the Company signed an agreement to sublease the first
                floor
                at its corporate headquarters facility in Saddle River, NJ. (approximately
                16,000 square feet) The sublease is for a five-year term commencing
                on
                July 15, 2005, and provides for approximately $2 million in lease
                payments
                over the five-year period.




Due
      to
      the nature of the business 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 was required to pay damages or incur defense costs in connection
      with a claim that is outside the scope of an indemnification agreement; if
      the
      indemnity, although applicable, is not performed in accordance with its terms;
      or if the Company’s liability exceeds the amount of applicable insurance or
      indemnity.




*Securities
      Litigation*




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







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





In
      February 2003, the Company filed a motion to dismiss the Second Consolidated
      and
      Amended Complaint. On or about August 22, 2005, the U.S. District Court for
      the
      District of New Jersey dismissed the Second Consolidated and Amended Complaint
      without prejudice to plaintiffs.




On
      October 21, 2005, Lead Plaintiffs filed a third consolidated and amended
      complaint (Third Consolidated and Amended Complaint). Like its predecessor,
      the
      Third Consolidated and Amended Complaint names the Company, its former chief
      executive officer and its chief financial officer as defendants; purports to
      state claims against the Company on behalf of all persons who purchased its
      common stock between May 22, 2001 and August 12, 2002; and seeks money damages
      in unspecified amounts and litigation expenses including attorneys’ and experts’
fees. The essence of the allegations in the Third Consolidated and Amended
      Complaint is that the Company intentionally or recklessly made false or
      misleading public statements and omissions concerning its financial condition
      and prospects with respect to its marketing of Ceftin in connection with the
      October 2000 distribution agreement with GSK, its marketing of Lotensin in
      connection with the May 2001 distribution agreement with Novartis, as well
      as
      its marketing of Evista in connection with the October 2001 distribution
      agreement with Eli Lilly and Company.




On
      December 21, 2005, the Company filed a motion to dismiss the Third Consolidated
      and Amended Complaint under the Private Securities Litigation Reform Act of
      1995
      and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. On February
      24, 2006, Lead Plaintiffs filed a memorandum of law in opposition of the motion
      to dismiss the Third Consolidated and Amended Complaint. The Company believes
      that the allegations in this purported securities class action are without
      merit
      and intends to defend the action vigorously.




*Bayer-Baycol
      Litigation*




The
      Company has been named as a defendant in numerous lawsuits, including two class
      action matters, alleging claims arising from the use of Baycol, a prescription
      cholesterol-lowering medication. Baycol was distributed, promoted and sold
      by
      Bayer in the U.S. through early August 2001, at which time Bayer voluntarily
      withdrew Baycol from the U.S. market. Bayer 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, 2005, 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
      2004 or 2005.




*Cellegy
      Litigation*




On
      April
      11, 2005, the Company settled a lawsuit which was pending in the U.S. District
      Court for the Northern District of California against Cellegy Pharmaceuticals,
      Inc. (Cellegy), which was set to go to trial in May of 2005 (PDI, Inc. v.
      Cellegy Pharmaceuticals, Inc., Case No. C 03-05602 (SC)). The Company had
      claimed (i) that it was fraudulently induced to enter into a December 31, 2002
      license agreement with Cellegy (the License Agreement) to market the product
      Fortigel, and (ii) that Cellegy had otherwise breached the License Agreement
      by
      failing, inter alia, to provide it with full information about Fortigel or
      to
      take all necessary steps to obtain expeditious FDA approval of Fortigel. The
      Company sought return of its $15 million upfront payment, other damages and
      an
      order rescinding the License Agreement. Under the terms of the settlement,
      in
      exchange for executing a stipulation of dismissal with prejudice of the lawsuit,
      Cellegy agreed to and did deliver to the Company: (i) a cash payment in the
      amount of $2,000,000; (ii) a Secured Promissory Note in the principal amount
      of
      $3,000,000, with a maturity date of October 11, 2006; (iii) a Security
      Agreement, granting the Company a security interest in certain collateral;
      and
      (iv) a Nonnegotiable Convertible Senior Note, with a face value of $3,500,000,
      with a maturity date of April, 11, 2008.







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





On
      December 1, 2005, the Company commenced a breach of contract action against
      Cellegy in the U.S. District Court for the Southern District of New York (PDI,
      Inc. v. Cellegy Pharmaceuticals, Inc., 05 Civ. 10137 (PKL)). The Company alleges
      that Cellegy breached the terms of the Security Agreement and Secured Promissory
      Note that it received in connection with the settlement. The Company further
      alleges that to secure its debt to it, Cellegy granted the Company a security
      interest in certain "Pledged Collateral," which is broadly defined in the
      Security Agreement to include, among other things, 50% of licensing fees,
      royalties or "other payments in the nature thereof" received by Cellegy in
      connection with then-existing or future agreements for Cellegy's drugs
      Rectogesic® and Tostrex® outside of the U.S., Mexico, and Canada. Upon receipt
      of such payments, Cellegy agreed to make prompt payment to the Company. The
      Company alleges that it is owed 50% of a $2,000,000 payment received by Cellegy
      in connection with the renegotiation of its license and distribution agreement
      for Rectogesic® in Europe, and that Cellegy's failure to pay the Company
      constitutes an event of default under the Security Agreement and a related
      Nonnegotiable Convertible Senior Note. For Cellegy's breach of contract, the
      Company seeks damages in the total amount of $6,400,000 plus Default Interest
      from Cellegy. On December 27, 2005, Cellegy filed an answer to the Company’s
      complaint, denying the allegations contained therein, and asserting affirmative
      defenses. The parties exchanged initial disclosures in the case on February
      3,
      2006. The Company served its first request for the production of documents
      on
      Cellegy on February 10, 2006. Discovery is ongoing, and pursuant to a scheduling
      order entered by the court, is to be completed by November 21,
      2006.




*California
      Class Action Litigation*




On
      September 26, 2005, the Company was served with a complaint in a purported
      class
      action lawsuit that was commenced against the Company in the Superior Court
      of
      the State of California for the County of San Francisco on behalf of certain
      of
      the Company’s current and former employees, alleging violations of certain
      sections of the California Labor Code. During the quarter ended September 30,
      2005, the Company accrued approximately $3.3 million for potential penalties
      and
      other settlement costs relating to both asserted and unasserted claims relating
      to this matter. In October 2005, the Company filed an answer generally denying
      the allegations set forth in the complaint. In December 2005, the Company
      reached a tentative settlement of this action, subject to court approval. As
      a
      result, the Company has reduced its reserve relating to asserted and unasserted
      claims relating to this matter to $600,000. However, there can be no assurance
      that the court will approve the tentative settlement, that the reserve will
      be
      adequate to cover potential liability, or that the ultimate outcome of this
      action will not have a material adverse effect on the Company’s business,
      financial condition and results of operations.




*Letters
      of Credit*




As
      of
      December 31, 2005, the Company has $10.5 million in letters of credit
      outstanding as required by its existing insurance policies and as required
      by
      its facility leases.






**10.**
            **Preferred
                Stock**




The
      Company's Board of Directors (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, 2005 and 2004, there were no issued and outstanding shares of preferred
      stock.






**11.**
            **Stock-Based
                Compensation**




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







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





In
      May
      2000 the Board and the shareholders approved the 2000 Omnibus Incentive
      Compensation Plan (the 2000 Plan). The maximum number of shares as to which
      awards or options could be granted under the 2000 Plan was 2.2 million shares.
      Eligible participants under the 2000 Plan included officers and other employees
      of the Company, members of the Board and outside consultants, as specified
      under
      the 2000 Plan and designated by the Compensation and Management Development
      Committee (the Compensation Committee) of the Board. The right to grant awards
      under the 2000 Plan was to terminate 10 years after the date the 2000 Plan
      was
      adopted. No participant could be granted, in the aggregate, more than 100,000
      shares of Company common stock from all awards under the 2000 Plan.




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




On
      March
      29, 2005, under the terms of the 2004 Plan, the Compensation Committee of the
      Board created the 2005 PDI, Inc. Long Term Incentive Plan (the LTI Plan), which
      permits the issuance of certain equity and equity-based incentive awards. Under
      the provisions of the LTI Plan, the Company seeks to provide its eligible
      employees with equity awards based, in part, upon the attainment of certain
      financial performance goals during a three (3) year period (the Performance
      Period). The amount of these long-term incentive awards, which may be earned
      over the Performance Period, will be based, in part, on the Company’s financial
      performance and the attainment of related individual performance goals during
      the prior calendar year. To provide each participant with an equity stake in
      the
      Company, and the potential to create or increase his or her stock ownership
      in
      the Company, awards under the LTI Plan will be consist of: (i) stock-settled
      appreciation rights (SARs); and (ii) performance contingent shares of Company
      common stock (Performance Contingent Shares).




*SARs*




The
      Company issued 175,487 SARS in 2005 with grant prices that ranged from $11.27
      to
      $20.15. The SARs have a five-year life. They were granted as part of the
      Company’s LTI plan and as sign-on grants for certain employees. As of December
      31, 2005 there were 109,206 SARs outstanding with a weighted average life of
      4.4
      years and a weighted average exercise price of $14.72. On December 30, 2005
      the
      Compensation Committee accelerated the vesting of 97,706 SARs which had a
      weighted average exercise price of $14.79 and exercise prices that ranged form
      $11.27 to $20.15 and placed a restriction on the transfer or sale of the common
      stock received upon the exercise of the SARs that matched the original vesting
      schedule of the SARs. With the adoption of 123R effective for 2006, the Company
      accelerated the SARs to avoid recognizing expense in future financial
      statements. The Company recognized approximately $132,000 in expense related
      to
      SARs in 2005, $86,000 of which related to the accelerated vesting of the SARS
      for which the grant price was below the stock price on the date of acceleration.




*Performance
      Shares*




Based
      upon the target performance goals set by the Company under the LTI Plan as
      of
      March 29, 2005, a total of 54,903 Performance Contingent Shares could be
      required to be issued by the Company upon the attainment of all LTI Plan
      performance goals by all eligible LTI Plan participants. Any Performance
      Contingent Shares awarded under the LTI Plan will be issued upon completion
      of
      the three year Performance Period that commenced on March 29, 2005. The target
      number of Performance Contingent Shares which may be issued under the LTI Plan
      was estimated by dividing one-half of the total value of the award amount for
      each participant, as approved by the Compensation Committee, by the average
      market price for a share of Company common stock for the three month period
      immediately preceding the commencement date of the Performance Period, which
      was
      calculated to be $20.13. Under
      the terms of the LTI Plan, each participant’s target award of Performance
      Contingent Shares could increase by fifty percent (50%) if a pre-determined
      superior level of achievement is attained as of the end of the Performance
      Period.







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





As
      of
      December 31, 2005 the number of Performance Contingent Shares remaining that
      could be issued was 17,763. The amount of expense recognized by the Company
      in
      2005 relating to Performance Contingent Shares was approximately
      $60,000.




*Restricted
      Stock*




Under
      the
      2004 Plan, the Company issued 42,568 restricted shares with a grant price of
      $12.52 on November 30, 2005 to non-executive employees as a retention bonus.
      These shares are subject to cliff vesting after an eighteen-month period over
      which the total cost of these grants will be expensed. The Company has 112,723
      shares of restricted stock outstanding as of December 31, 2005 and recognized
      approximately $1.2 million in compensation expense related to restricted shares
      during 2005. The restricted shares issued in previous years have a three-year
      vesting period. All restricted shares issued are subject to accelerated vesting
      and forfeiture under certain circumstances.




*Stock
      Options*




On
      February 9, 2005, with the approval of the Company’s Board, the Company
      accelerated the vesting of all outstanding unvested options for which the
      exercise price was greater than the fair market value of the Company ’s
      common
      shares on that date. In anticipation of the adoption of FAS 123R, the Company
      accelerated the options to avoid recognizing expense in future financial
      statements. The total number of shares accelerated was 473,334 and they all
      pertained to grants that were issued during 2004. The weighted average exercise
      price of the accelerated options was $25.27, with exercise prices ranging from
      $24.61 to $31.62. During 2004, the Company accelerated the vesting of stock
      option grants and restricted stock grants for certain employees that resulted
      in
      total compensation expense of approximately $275,000.




The
      Company granted 62,500 stock options in 2005 to the Company’s Board of Directors
      with a weighted average exercise price of $11.96. Options granted to members
      of
      the Board vest a third upon date of grant and then a third over each of the
      next
      two years. All options granted to employees vest a third each year over a
      three-year period.




During
      2004, the Company accelerated the vesting of stock option grants and restricted
      stock grants for certain employees which resulted in total compensation of
      approximately $275,000 for the year ended December 31, 2004.




In
      March
      2003, the Company initiated an option exchange program pursuant to which
      eligible employees, which excluded certain members of senior management and
      members of the Board of Directors, were offered an opportunity to exchange
      an
      aggregate of 357,885 outstanding stock options with exercise prices of $30.00
      and above for either cash or shares of restricted stock, depending upon the
      number of options held by an eligible employee. The offer exchange period
      expired on May 12, 2003. Approximately 310,403 shares of common stock underlying
      eligible options were tendered by eligible employees and accepted by the
      Company. This number represents approximately 87% of the total shares of common
      stock underlying eligible options. A total of approximately 120 eligible
      participants elected to exchange an aggregate of approximately 59,870 shares
      of
      common stock under eligible options and received cash in the aggregate amount
      of
      approximately $67,000 (which amount includes applicable withholding taxes).
      A
      total of approximately 145 eligible participants elected to exchange an
      aggregate of approximately 250,533 shares of common stock underlying eligible
      options in exchange for an aggregate of approximately 49,850 shares of
      restricted stock. All tendered options have been canceled and are eligible
      for
      re-issuance under the Company’s option plans. The restricted stock is subject to
      three-year cliff vesting and is being amortized on a straight-line basis over
      that three-year period. The shares are subject to forfeiture upon termination
      of
      employment other than in the event of the recipient’s death or disability. The
      total compensation expense related to the option exchange program was
      approximately $41,000 in 2005, $96,000 in 2004 and $178,000 in 2003. As of
      December 31, 2005, 26,665 restricted shares remained outstanding from this
      grant.




At
      December 31, 2005, options for an aggregate of 1,271,890 shares were outstanding
      under the Company’s stock option plans and options to purchase 562,237 shares of
      common stock had been exercised since its inception. The activity for the 2004,
      2000, and 1998 Plans during the years ended December 31, 2005, 2004 and 2003
      is
      set forth in the table below:












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




2005
              
              2004
              
              2003Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageExercise
              
              
              
              Exercise
              
              
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
                  balanceat
                  beginning of year
              
              
              1,343,745
              
              $
              27.86
              
              
              1,037,599
              
              $
              27.33
              
              
              1,514,297
              
              $
              39.23Granted
              
              
              62,500
              
              
              11.96
              
              
              520,000
              
              
              25.46
              
              
              115,303
              
              
              16.13Exercised
              
              
              (41,291
              )
              
              14.33
              
              
              (144,686
              )
              
              16.38
              
              
              (42,373
              )
              
              13.06Terminated
              
              
              (93,064
              )
              
              32.39
              
              
              (69,168
              )
              
              15.10
              
              
              (549,628
              )
              
              58.86Outstanding
                  balanceat
                  end of year
              
              
              1,271,890
              
              $
              27.19
              
              
              1,343,745
              
              $
              27.86
              
              
              1,037,599
              
              $
              27.33Options
                  exercisableat
                  end of year
              
              
              1,229,889
              
              $
              27.71
              
              
              691,798
              
              $
              32.58
              
              
              608,811
              
              $
              31.87




The
      following table summarizes information about stock options outstanding at
      December 31, 2005:


Options
                  Outstanding
              
              Options
                  ExercisableRemainingNumber
                  of
              
              weighted
              
              Weighted
              
              Number
                  of
              
              WeightedExercise
                  price
              
              options
              
              contractual
              
              exercise
              
              options
              
              exerciseper
                  share
              
              outstanding
              
              life
                  (years)
              
              price
              
              exercisable
              
              price$
                  5.21 - $ 9.15
              
              
              38,668
              
              
              6.9
              
              $
              6.89
              
              
              38,668
              
              $
              6.89$11.49
                  - $18.38
              
              
              391,686
              
              
              6.5
              
              
              15.28
              
              
              349,685
              
              
              15.67$21.10
                  - $31.62
              
              
              667,990
              
              
              7.4
              
              
              25.74
              
              
              667,990
              
              
              25.74$59.50
              
              
              137,196
              
              
              5.1
              
              
              59.50
              
              
              137,196
              
              
              59.50$80.00
                  - $93.75
              
              
              36,350
              
              
              5.1
              
              
              81.90
              
              
              36,350
              
              
              81.901,271,890
              
              
              6.8
              
              $
              27.19
              
              
              1,229,889
              
              $
              27.71




As
      part
      of the employment separation agreement with its interim Chief Executive Officer
      (CEO), the Company modified the expiration date on 32,500 options that had
      been
      awarded to the interim CEO while he was a member of the Board. The awards were
      modified to expire three years from his employee termination date, which as
      per
      his current agreement is expected to be March 31, 2007. As a result of this
      modification, the Company recorded compensation expense of approximately
      $57,000. Additionally, the interim CEO was awarded 50,000 shares of common
      stock
      conditional on the performance of the Company’s share price at the end of the
      performance period which has been designated as August 15, 2005 through March
      31, 2007. The actual award will be determined as follows: (1) 50,000 shares
      if
      the stock price of the Company’s common stock is $36.00 or higher; or 16,780
      shares plus 20.78 shares for each cent ($0.01) above $20.00 stock price if
      the
      stock price of the Company’s common stock is between $20.00 and $35.99; or zero
      shares if the stock price of the Company’s common stock is below $20.00.
      Finally, in December 2005, under a separate agreement, the interim CEO was
      awarded $100,000 in cash and 5,000 shares of the Company’s common
      stock.




**12.**
            **Loans
                to Stockholders/Officers**




In
      November 1998, the Company agreed to lend $250,000 to an executive officer
      of
      which $100,000 was funded in November 1998, and the remaining $150,000 was
      funded in February 1999. This amount was recorded in other long-term assets.
      Such loan was payable on December 31, 2008 and bore interest at a rate of 5.5%
      per annum, payable quarterly in arrears. Payments of $100,000, $75,000 and
      $75,000, respectively, were made in February 2003, April 2004 and March 2005,
      and the loan was fully repaid as of March 2005.






**13.**
            **Related
                Party Transactions**




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







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







**14.**
            **Treasury
                Stock**




On
      April
      27, 2005, the Company terminated its original 2001 stock repurchase plan. On
      May
      2, 2005, the Company announced plans to repurchase up to a million of its
      outstanding shares of common stock as authorized by its Board of Directors.
      The
      Company has repurchased 996,900 shares under this plan. On July 6, 2005, the
      Company announced that its Board of Directors had authorized the repurchase
      of
      another million shares, bringing the total the Board of Directors has authorized
      to two million shares. A plan has not been formalized for repurchasing the
      second million shares. At its discretion, t he
      Company may continue to repurchase shares on the open market or in privately
      negotiated transactions, or both, depending on cash flow expectations and other
      uses of cash. The current plan does not have an expiration date. A
      reconciliation of the number of shares repurchased as of December 31, 2005
      is as
      follows:


Average.
                  Price
              
              SharesPeriod
              
              Per
                  Share
              
              PurchasedSeptember
                  2001
              
              $
              22.00
              
              
              5,000May
                  2005
              
              $
              12.36
              
              
              226,900June
                  2005
              
              $
              11.92
              
              
              353,330July
                  2005
              
              $
              13.77
              
              
              315,570August
                  2005
              
              $
              14.39
              
              
              101,100Total
              
              $
              12.90
              
              
              1,001,900




An
      additional 16,106 shares were delivered back to the Company and included in
      treasury stock for the payment of taxes resulting from the vesting of restricted
      stock.






**15.**
            **Significant
                Customers**




During
      2005, 2004 and 2003 the Company had several significant customers for which
      it
      provided services under specific contractual arrangements. The following sets
      forth the net service revenue generated by customers who accounted for more
      than
      10% of the Company's service revenue during each of the periods presented.




Years
                  Ended December 31,Customers
              
              2005
              
              2004
              
              2003A
              
              $
              107,260
              
              $
              153,801
              
              $
              118,713B
              
              
              69,452
              
              
              76,744
              
              
              -C
              
              
              48,051
              
              
              -
              
              
              -D
              
              
              -
              
              
              -
              
              
              118,291




For
      the
      year ended December 31, 2005 the Company’s three largest clients, each of whom
      represented 10% or more of its service revenue, accounted for, in the aggregate,
      approximately 70.3% of its service revenue. For the years ended December 31,
      2004, and 2003, the Company had two large clients, who each individually
      represented 10% or more of its service revenue; these clients accounted for
      in
      the aggregate, approximately 63.0% and 66.5% respectively, of its service
      revenue.




At
      December 31, 2005 and 2004, two customers represented 56.6% and 55.0%,
      respectively, of the aggregate of outstanding service accounts receivable and
      unbilled services.




The
      loss
      of any one of the foregoing customers could have a material adverse effect
      on
      the Company's business, financial position, results of operations and cash
      flows. See Note 23 for a subsequent event related to a significant
      customer.







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







**16.**
            **Performance
                Based Contracts**




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




In
      October 2000, the Company entered into an agreement (the Ceftin Agreement)
      with
      GlaxoSmithKline (GSK) for the exclusive U.S. sales, marketing and distribution
      rights for Ceftin ® Tablets
      and Ceftin ® for Oral
      Suspension, two dosage forms of a cephalosporin antibiotic, which agreement
      was
      terminated in February 2002 by mutual agreement of the parties. From October
      2000 through February 2002, the Company marketed Ceftin to physicians and sold
      the products primarily to wholesale drug distributors, retail chains and managed
      care providers. Pursuant to the termination agreement, the Company agreed to
      perform marketing and distribution services through February 28, 2002. Customers
      who purchased the Company’s Ceftin product were permitted to return unused
      product, after approval from the Company, up to six months before and one year
      after the expiration date for the product, but no later than December 31, 2004.
      On March 31, 2004, the Company signed an agreement and waiver with a large
      wholesaler by which the Company agreed to pay that wholesaler $10.0 million,
      and
      purchase $2.5 million worth of services from that wholesaler by March 31, 2006,
      in exchange for that wholesaler waiving, to the fullest extent permitted by
      law,
      all rights with respect to any additional returns of Ceftin to the
      Company.




The
      Company’s accrual for returns of $231,000 at December 31, 2005 consists almost
      entirely of amounts owed to that wholesaler which the Company was able to
      negotiate in lieu of purchasing the $2.5 million worth of services as described
      above. The accrual as recorded by the Company is its best estimate based on
      its
      understanding of its obligations.






**17.**
            **Changes
                in Executive Management**




On
      October 21, 2005, the Company announced the resignation of Charles T. Saldarini
      as Vice Chairman and CEO. Mr. Saldarini also resigned as a member of the
      Company’s Board. As per the terms of his employment agreement, Mr. Saldarini was
      entitled to approximately $2.8 million in cash and stock compensation, which
      was
      recognized in the fourth quarter of 2005. Also effective that date, Larry
      Ellberger was named interim CEO. Mr. Ellberger was formerly Executive Vice
      President and Chief Administrative Officer of the Company.




On
      August
      10, 2005, the Company announced that Bernard C. Boyle, the Company’s Chief
      Financial Officer would resign from his position with the Company effective
      December 31, 2005. Pursuant to a September 23, 2005 Memo of Understanding
      between the Company and Mr. Boyle, the Company agreed, among other things,
      to
      continue to pay him his salary through December 31, 2005 and make certain
      additional payments to Mr. Boyle upon the termination of his employment.
      Accordingly, the Company recognized approximately $1.6 million in additional
      compensation expense in the third quarter of 2005. Effective December 31, 2005,
      the Company entered into an amendment to the Memo of Understanding, pursuant
      to
      which Mr. Boyle deferred his resignation until March 31, 2006.




The
      Company also announced the resignation of three other executive vice-presidents
      during the year. The Company has recognized approximately $5.7 million in
      expense related to executive resignations/settlements in 2005. This amount
      is
      shown separately within operating expenses on the consolidated statement of
      operations for the year ended December 31, 2005.







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







**18.**
            **Facility
                Realignment**




In
      the
      fourth quarter of 2005, the Company took charges of approximately $2.4 million
      related to unused office space capacity at their Saddle River, NJ and Dresher,
      PA locations. There was a charge of approximately $1.1 million recorded in
      the
      sales services segment and a charge of approximately $1.3 million recorded
      in
      the marketing services segment. There are approximately 7,300 and 11,600 square
      feet of excess office space at Saddle River and Dresher, respectively, which
      the
      Company is anticipating to sub-lease in the second-half of 2006.






**19.**
            **Restructuring
                and Other Related Expenses**




During
      the third quarter of 2002, the Company adopted a restructuring plan, the
      objectives of which were to consolidate operations in order to enhance operating
      efficiencies. In connection with this plan, the Company incurred $5.4 million
      in
      restructuring expenses of which $3.7 million related to severance payments
      and
      $1.7 million in other exit costs related to leased facilities and contractual
      obligations. All of the restructuring activities have been completed as of
      December 31, 2005. For the years ended December 31, 2005 and 2004, there were
      no
      adjustments to the restructuring accrual. During the year ended December 31,
      2003, the Company recognized a net reduction in the restructuring accrual of
      $197,000, of which $143,000 was recorded as additional expense in SG&A and
      $340,000 was recorded as a credit to program expenses consistent with the
      original recording of the restructuring charges. A roll forward of the activity
      for this restructuring plan is as follows:


Balance
                  at
              
              
              
              Balance
                  atDecember
                  31,
              
              
              
              December
                  31,2004
              
              Payments
              
              2005Severance
              
              $
              13.00
              
              $
              (13.00
              )
              $
              -Exit
                  costs
              
              
              148.00
              
              
              (148.00
              )
              
              -Total
              
              $
              161.00
              
              $
              (161.00
              )
              $
              -




**20.**
            **Income
                Taxes**




The
      provision for income taxes for the years ended December 31, 2005, 2004 and
      2003
      are summarized as follows:


**2005**
              
              **2004**
              
              **2003**Current:Federal
              
              $
              (5,867
              )
              $
              3,709
              
              $
              10,308State
              
              
              (379
              )
              
              1,930
              
              
              1,181Total
                  current
              
              
              (6,246
              )
              
              5,639
              
              
              11,489Federal
              
              
              3,662
              
              
              8,039
              
              
              (3,856
              )State
              
              
              2,785
              
              
              1,160
              
              
              772Total
                  deferred
              
              
              6,447
              
              
              9,199
              
              
              (3,084
              )Provision
                  for income taxes
              
              $
              201
              
              $
              14,838
              
              $
              8,405




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




**2005**
              
              **2004**
              
              **2003**Federal
                  statutory rate
              
              
              (35.0
              %)
              
              35.0
              %
              
              35.0
              %State
                  income tax rate, netof
                  Federal tax benefit
              
              
              9.4
              %
              
              5.6
              %
              
              6.1
              %Meals
                  and entertainment
              
              
              0.4
              %
              
              0.2
              %
              
              0.3
              %Valuation
                  allowance
              
              
              26.3
              %
              
              0.9
              %
              
              0.0
              %Other
              
              
              0.0
              %
              
              (0.4
              %)
              
              (0.7
              %)Effective
                  tax rate
              
              
              1.10
              %
              
              41.30
              %
              
              40.70
              %





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





The
      deferred income taxes reflect the net tax effects of temporary differences
      between the bases of assets and liabilities for financial reporting purposes
      and
      their bases for income tax purposes. The tax effects of significant items
      comprising the Company’s deferred tax assets and (liabilities) as of December
      31, 2005 and 2004 are as follows:




**2005**
              
              **2004**Current
                  deferred tax assets (liabilities)included
                  in other current assets:Allowances
                  and reserves
              
              $
              2,001
              
              $
              2,604Contract
                  costs
              
              
              2,394
              
              
              -Compensation
              
              
              717
              
              
              635Valuation
                  allowance on deferred tax assets
              
              
              (2,402
              )
              
              -Other
              
              
              -
              
              
              862,710
              
              
              3,325Noncurrent
                  deferred tax assets (liabilities)included
                  in other long-term assets:Property,
                  plant and equipment
              
              
              (1,631
              )
              
              (3,676
              )State
                  net operating loss carryforwards
              
              
              1,955
              
              
              1,356State
                  taxes
              
              
              1,731
              
              
              1,652Intangible
                  assets
              
              
              3,088
              
              
              (433
              )Equity
                  investment
              
              
              509
              
              
              2,204Self
                  insurance and other reserves
              
              
              1,766
              
              
              1,185Contract
                  costs
              
              
              -
              
              
              5,748Valuation
                  allowance on deferred tax assets
              
              
              (7,418
              )
              
              (2,204
              )-
              
              
              
              
              
              5,832Net
                  deferred tax asset
              
              $
              2,710
              
              $
              9,157




At
      December 31, 2005 and 2004, the Company had a valuation allowance of $9,820,101
      and $2,204,287, respectively, related to the Company's net deferred tax assets
      at December 31, 2005 that cannot be carried back and a capital loss carryforward
      on equity investments on December 31, 2004.




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 2005 net loss 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, 2005 in
      excess of the amount that can be realized as a net operating loss carryback
      because the Company determined that it was more likely than not that these
      assets would not be realized. The increase in the current year valuation
      allowance is as a result of this assessment, which was offset by a $1.7 million
      valuation allowance release for capital loss carryforwards utilized in
      2005.




At
      December 31, 2005, the Company has approximately $14.3 million of federal net
      operating losses which will be carried back to December 31, 2003 and will result
      in an income tax refund of $5.0 million, which was recorded as a receivable
      at
      December 31, 2005. In addition, the Company has approximately $37.1 million
      of
      state net operating loss carryforwards, which has a full valuation allowance
      at
      December 31, 2005. These state operating losses will begin to expire in
      2010.






**21.**
            **Historical
                Basic and Diluted Net (Loss)/Inocme 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, 2005, 2004 and 2003 is as follows:












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





Years
                  Ended December 31,2005
              
              2004
              
              2003Basic
                  weighted average number of common
              
              
              14,232
              
              
              14,564
              
              
              14,231Dilutive
                  effect of stock options, SARs,and
                  restricted atock
              
              
              -
              
              
              329
              
              
              200Diluted
                  weighted average numberof
                  common shares
              
              
              14,232
              
              
              14,893
              
              
              14,431




Outstanding
      options at December 31, 2005 to purchase 1,271,890 shares of common stock with
      exercise prices of $5.21 to $93.75 per share were not included in the 2005
      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
      2005. Additionally, 109,206 SARs were outstanding at December 31, 2005, and
      were
      not included in the computation of earnings per share as a result of the
      Company’s net loss.




Outstanding
      options at December 31, 2004 to purchase 409,182 shares of common stock with
      exercise prices of $27.00 to $93.75 were not included in the 2004 computation
      of
      historical and pro forma diluted net income per share because 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.
      Outstanding options at December 31, 2003 to purchase 380,493 shares of common
      stock with exercise prices of $27.00 to $93.75 were not included in the 2003
      computation of historical and pro forma diluted net income per share because
      to
      do so would have been antidilutive.




**22.**
            **MD&D
                Discontinuation**




On
      December 4, 2005, the Company announced that that it was discontinuing its
      MD&D reporting unit as part of its plan to return the Company to
      profitability and to focus on its core business of servicing the pharmaceutical
      industry. During 2005, the MD&D reporting unit did not perform to forecasted
      revenue and profitability targets. In the second quarter of 2005, the Company
      began an intensive review of the MD&D reporting unit in order to redefine
      the business strategy. After exploring the possibilities of a significant
      repricing of services provided and expanding business with existing clients,
      it
      was determined that it would not be possible to grow the MD&D business
      enough to provide the Company with a meaningful return on investment. The
      Company decided to abandon the MD&D business through the “run-off” of
      operations (i.e., to cease accepting new business but to continue to provide
      service under existing remaining contracts until they expire or are terminated).
      All of the current MD&D contracts include a 60-day notice period to
      terminate the contract. All customers were notified in writing in December
      2005
      that the Company intends to stop servicing these contracts effective March
      31,
      2006. SFAS 144 requires that operations must be abandoned prior to reporting
      them as discontinued operations. Therefore, the MD&D business will be
      reported in continuing operations


until
      all
      operations, including run-off operations, cease in the first quarter of
      2006.




**23.**
            **Subsequent
                Event**




On
      February 10, 2006, the Company announced that it was engaged in discussions
      with
      AstraZeneca regarding the status of their fee for service contract sales
      engagements. On February 28, 2006, the Company announced that it has been
      notified by AstraZeneca that its fee-for-service agreements with the Company
      will be terminated effective April 30, 2006. The termination affects
      approximately 800 field representatives. The revenue impact is projected to
      be
      approximately $65 to $70 million in 2006.






**24.**
            **Segment
                Information**




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




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




F-29
 **PDI,
          Inc.**
 **Notes
          to the Consolidated Financial Statements (Continued)**
 **(tabular
          information in thousands, except share and per share data** **)**


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




PDI
      products group (PPG) - includes revenues that were earned through the Company’s
      licensing and copromotion of pharmaceutical and MD&D products. There are
      currently no ongoing operations in this segment. Any business opportunities
      are
      reviewed by interim CEO and other senior management.




All
      segments remain the same since the Company’s December 31, 2004 financial
      presentation. The accounting policies of the segments are described in Note
      1.
      Corporate charges are allocated to each of the operating segments on the basis
      of total salary costs. Corporate charges include corporate headquarter costs
      and
      certain depreciation expense. Certain corporate capital expenditures have not
      been allocated from the sales services segment to the other operating segments
      since it is impracticable to do so.




**For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003**Revenue:Sales
                  services
              
              $
              284,629
              
              $
              332,431
              
              $
              271,210Marketing
                  services
              
              
              34,786
              
              
              29,057
              
              
              29,436PPG
              
              
              -
              
              
              2,956
              
              
              43,884Total
              
              $
              319,415
              
              $
              364,444
              
              $
              344,530Operating
                  (loss) income:Sales
                  services
              
              $
              (25,434
              )
              $
              34,018
              
              $
              34,891Marketing
                  services
              
              
              (1,185
              )
              
              1,535
              
              
              3,567PPG
              
              
              (268
              )
              
              (362
              )
              
              (18,868
              )Total
              
              $
              (26,887
              )
              $
              35,191
              
              $
              19,590Reconciliation
                  of (loss) income from operations to(loss)
                  income before income taxes:Total
                  (loss) income from operationsfor
                  operating groups
              
              $
              (26,887
              )
              $
              35,191
              
              $
              19,590Gain
                  (loss) on investments
              
              
              4,444
              
              
              (1,000
              )
              
              -Other
                  income, net
              
              
              3,190
              
              
              1,779
              
              
              1,073(Loss)
                  income before income taxes
              
              $
              (19,253
              )
              $
              35,970
              
              $
              20,663Capital
                  expenditures:Sales
                  services
              
              $
              2,951
              
              $
              7,671
              
              $
              1,750Marketing
                  services
              
              
              2,881
              
              
              433
              
              
              54PPG
              
              
              -
              
              
              -
              
              
              25Total
              
              $
              5,832
              
              $
              8,104
              
              $
              1,829Depreciation
                  expense:Sales
                  services
              
              $
              3,375
              
              $
              4,222
              
              $
              3,935Marketing
                  services
              
              
              550
              
              
              627
              
              
              522PPG
              
              
              -
              
              
              27
              
              
              1,173Total
              
              $
              3,925
              
              $
              4,876
              
              $
              5,630Total
                  assetsSales
                  services
              
              $
              148,789
              
              $
              179,754
              
              $
              151,768Marketing
                  services
              
              
              51,517
              
              
              44,516
              
              
              10,949PPG
              
              
              -
              
              
              435
              
              
              56,906Total
              
              $
              200,306
              
              $
              224,705
              
              $
              219,623










F-30


**Schedule
                  II****PDI,
                  INC.****VALUATION
                  AND QUALIFYING ACCOUNTS****YEARS
                  ENDED DECEMBER 31, 2002, 2003 AND 2004**Balance
                  at
              
              Additions
              
              (1)
              
              Balance
                  atBeginning
              
              Charged
                  to
              
              Deductions
              
              endDescription
              
              of
                  Period
              
              Operations
              
              Other
              
              of
                  Period**2003**Allowance
                  for doubtful accounts
              
              $
              1,063,477
              
              $
              1,526,626
              
              $
              (1,840,762
              )
              $
              749,341Tax
                  valuation allowance
              
              
              2,941,161
              
              
              -
              
              
              (1,059,310
              )
              
              1,881,851Inventory
                  valuation allowance
              
              
              -
              
              
              835,448
              
              
              (17,583
              )
              
              817,865Accrued
                  product rebates, salesdiscounts
                  and returns
              
              
              16,499,861
              
              
              12,000,000
              
              
              (5,689,035
              )
              
              22,810,826$
              3,692,047
              
              $
              366,125
              
              $
              (2,994,695
              )
              $
              1,063,477**2004**Allowance
                  for doubtful accounts
              
              $
              749,341
              
              $
              654,903
              
              $
              (1,330,660
              )
              $
              73,584Allowance
                  for doubtful notes
              
              
              -
              
              
              500,000
              
              
              -
              
              
              500,000Tax
                  valuation allowance
              
              
              1,881,851
              
              
              322,436
              
              
              -
              
              
              2,204,287Inventory
                  valuation allowance
              
              
              817,865
              
              
              -
              
              
              (817,865
              )
              
              -Accrued
                  product rebates, salesdiscounts
                  and returns
              
              
              22,810,826
              
              
              1,676,000
              
              
              (20,171,058
              )
              
              4,315,768**2005**Allowance
                  for doubtful accounts
              
              $
              73,584
              
              $
              713,669
              
              $
              (8,847
              )
              $
              778,407Allowance
                  for doubtful notes
              
              
              500,000
              
              
              842,378
              
              
              (100,000
              )
              
              1,242,378Tax
                  valuation allowance
              
              
              2,204,287
              
              
              9,318,890
              
              
              (1,703,076
              )
              
              2,204,287Accrued
                  product rebates, salesdiscounts
                  and returns
              
              
              4,315,768
              
              
              31,551
              
              
              (4,116,460
              )
              
              230,859(1) 
                  Includes payments and actual write offs, as well as changes in
                  estimates
                  in the reserves andthe
                  impact of acquisitions.





F-31