UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10-K
  (Mark
      One)ý
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2007ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from
  ____________to_________________
  Commission
file Number: 0-24249
  
  PDI,
      Inc.(Exact
      name of registrant as specified in its charter)Delaware
              
              22-2919486(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)Saddle
      River Executive Centre
                1
      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:Common Stock, par value $0.01 per
      share
              The Nasdaq Stock Market
  LLC(Title
      of each class)
              (Name
      of each exchange on which registered)Securities
      registered pursuant to Section 12(g) of the Act:
  None
  
  
  Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No 
ý
  Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o    No ý
  Indicate
by checkmark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ý    No o
  Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ý
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.   See definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in rule 12b-2 of the
Exchange Act.  (check one):
  Large
      accelerated filer  o
              Accelerated
      filer  ý
              Non-accelerated
      filer o
              Smaller
      reporting company  o(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o    No ý
  The
aggregate market value of the registrant's common stock, $0.01 par value per
share, held by non-affiliates of the registrant on June 29, 2007, the last
business day of the registrant's most recently completed second fiscal quarter,
was $73,621,933 (based on the closing sales price of the registrant's common
stock on that date). Shares of the registrant's common stock held by each
officer and director and each person who owns 10% or more of the outstanding
common stock of the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of February 29,
2008, 14,292,220 shares of the registrant's common stock, $0.01 par value per
share, were issued and outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders (the Proxy
Statement), to be filed within 120 days of the end of the fiscal year ended
December 31, 2007, are incorporated by reference in Part III hereof. Except
with respect to information specifically incorporated by reference in this
Annual Report on Form 10-K (the Form 10-K), the Proxy Statement is not
deemed to be filed as part hereof.
  
 
 
  
 PDI,
Inc.
 Annual
Report on Form 10-K
  PagePART
      IItem
      1.
              Business
              5Item
      1A.
              Risk
      Factors
              9Item
      1B.
              Unresolved
      Staff Comments
              15Item
      2.
              Properties
              15Item
      3.
              Legal
      Proceedings
              16Item
      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
              17Item
      6.
              Selected
      Financial Data
              19Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      7A.
              Quantitative
      and Qualitative Disclosures about Market Risk
              36Item
      8.
              Financial
      Statements and Supplementary Data
              37Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
              37Item
      9A.
              Controls
      and Procedures
              37Item
      9B.
              Other
      Information
              39PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              39Item
      11.
              Executive
      Compensation
              39Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              39Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              39Item
      14.
              Principal
      Accounting Fees and Services
              39PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              40Signatures
              42
 
 
  
  
  
  
  
  
  
  
  
   3
 PDI,
Inc.
 Annual
Report on Form 10-K
  FORWARD
      LOOKING STATEMENT INFORMATION
  
 This Form
10-K contains “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act) and Section 21E of
the Securities Exchange Act of 1934 (the Exchange Act).  Statements
that are not historical facts, including statements about our plans, objectives,
beliefs and expectations, are forward-looking
statements.  Forward-looking statements include statements preceded
by, followed by or that include the words “believes,” “expects,” “anticipates,”
“plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar
words and expressions.  These forward-looking statements are contained
throughout this Form 10-K, including, but not limited to, statements found in
Part I – Item 1 – “Business,” Part II – Item 5 – “Market for our Common Equity,
Related Stockholder Matters and Issuer Purchases of Securities,” Part II – Item
7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” and “Part II – Item 7A – “Quantitative and Qualitative Disclosures
About Market Risk”.
  Forward-looking
statements are only predictions and are not guarantees of future
performance.  These statements are based on current expectations and
assumptions involving judgments about, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control.  These statements also involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from those expressed or implied by any forward-looking
statement.  Many of these factors are beyond our ability to control or
predict.  Such factors include, but are not limited to, the
following:
  ·
              Changes
      in outsourcing trends or a reduction in promotional, marketing and sales
      expenditures in the
 pharmaceutical,
      biotechnology and life sciences
industries;
 ·
              Loss
      of one or more of our significant customers or a material reduction in
      service revenues from such
customers;
 ·
              Our
      ability to fund and successfully implement our long-term strategic
      plan;
 ·
              Our
      ability to successfully develop product commercialization
      opportunities;
 ·
              Our
      ability to successfully identify, complete and integrate any future
      acquisitions and the effects of any
 such
      acquisitions on our ongoing
business;
 ·
              Our
      ability to meet performance goals in incentive-based and revenue sharing
      arrangements with
 customers;
 ·
              Competition
      in our industry;
 
 ·
              Our
      ability to attract and retain qualified sales representatives and other
      key employees and management
personnel;
 ·
                Product
      liability claims against us;
  ·
              Changes
      in laws and healthcare regulations applicable to our industry or our, or
      our customers’, failure to
 comply
      with such laws and regulations;
 ·
              Volatility
      of our stock price and fluctuations in our quarterly revenues and
      earnings;
 ·
              Potential
      liabilities associated with insurance claims;
  and
 ·
              Failure
      of, or significant interruption to, the operation of our information
      technology and communications
 systems.
 
  Please
see Part I – Item 1A – “Risk Factors” of this Form 10-K, as well as other
documents we file with the United States Securities and Exchange Commission
(SEC) from time to time, for other important factors that could cause our
actual results to differ materially from our current expectations and from the
forward-looking statements discussed in this Form 10-K.  Because of
these and other risks, uncertainties and assumptions, you should not place undue
reliance on these forward-looking statements. In addition, these statements
speak only as of the date of the report in which they are set forth and, except
as may be required by law, we undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
  
  
   4
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  PART
I
  ITEM
      1.
              BUSINESS
  Summary
      of Business
  We are a
leading provider of contract sales teams to pharmaceutical companies, offering a
range of sales support services designed to achieve their strategic and
financial product objectives.  In addition to contract sales teams, we also
provide marketing research, physician interaction and medical education
programs.  Our services offer customers a range of promotional and
educationaloptions
for the commercialization of their products throughout their lifecycles, from
development through maturity.  We provide innovative and flexible service
offerings designed to drive our customers’ businesses forward and successfully
respond to a continually changing market.  Our services provide a
vital link between our customers and the medical community through the
communication of product information to physicians and other healthcare
professionals for use in the care of their patients.
  We
are among the leaders in outsourced pharmaceutical sales and marketing services
in the United States.  We have evolved our commercial capabilities through
innovation, organic growth and acquisitions.  We have designed and
implemented programs for many large pharmaceutical companies as well as a
variety of emerging and specialty pharmaceutical companies.  We
recognize that our relationships with customers are dependent upon the quality
of our performance, and our focus is to flawlessly execute our customers’
programs in order to consistently deliver their desired results.
  Typically,
our customers engage us on a contractual basis to design and implement
promotional and educational programs for both prescription and over-the-counter
products.  The programs are tailored to meet the specific needs of the
product and the customer.  These services are provided predominantly on a
fee-for-service basis.  These contracts can include incentive payments that
can be earned if our activities generate results that meet or exceed performance
targets.  Contracts may be terminated with or without cause by our
customers.  Certain contracts provide that we may incur specific penalties
if we fail to meet stated performance benchmarks.
  We
commenced operations as a contract sales organization (CSO) in 1987 and we
completed our initial public offering in May 1998.  Our executive offices
are located at Saddle River Executive Centre, 1 Route 17 South, Saddle River,
New Jersey 07458 and our telephone number is (800) 242-7494.
  Strategy
 
 In 2007
we initiated the implementation of a five-year strategic plan that is intended
to drive revenue growth, diversify the sources of our revenue, increase profit
margins, and further enhance our competitiveness in the markets we
serve.  We further refined this strategic plan in the first quarter of
2008.  The primary components of this strategic plan include the
following:
 
 ·
              Recapture
      our position as the leading contract sales
      organization.  We endeavor to restore our position as the
      number one contract sales organization in the U.S.  In order to
      achieve this goal, we have strengthened our business development strategy,
      process and implementation through the expansion of these capabilities and
      the development of relationships with alternate business development
      channels, including a focus on opportunities in the emerging
      pharmaceutical market.  Furthermore, we are actively building a
      corporate culture that fosters continuous innovation with the purpose of
      creating new and differentiated offerings that enable emerging and
      established pharmaceutical companies to address their evolving business
      needs. One such example is our “PDI ON DEMAND” suite of sales support
      services, which we introduced during
2007.
 
 ·
              Enhance our
      commercialization capabilities in order to provide a broader base of
      services and more diversified sources of revenue.  We
      believe that it is critical to the growth of our business to identify and
      build internally and/or acquire complementary commercialization services
      that add-value and even greater depth to the already robust suite of
      services we presently offer.  We intend to focus our efforts
      adding services that strengthen our core business, expand the scope of our
      current service offerings and/or provide our customers alternative methods
      for physician and healthcare professional engagement.  We
      believe that these complementary services will provide us with additional
      avenues for revenue growth and increased profit margins while
      simultaneously increasing our ability to meet the particular demands of
      emerging pharmaceutical companies that typically seek a broad range of
      outsourced commercialization services from a single
    supplier.
  5
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  
 ·
              Leverage
      our sales and marketing expertise to capitalize on product
      commercialization opportunities.  We intend to identify
      and take advantage of attractive opportunities to enter into arrangements
      with pharmaceutical companies to provide sales and marketing support
      services and potentially limited capital in connection with the promotion
      of pharmaceutical products in exchange for a percentage of product
      sales.  These types of arrangements will likely involve a
      significant upfront investment of our resources with no guaranteed return
      on investment and are expected to generate losses in the first year of the
      contract as program ramp up occurs.  However, these
      opportunities are intended to provide us with the ability to extend our
      revenue streams through multi-year arrangements and with profit margins
      that are significantly higher than typical fee for service arrangements
      over the term of the contract.
 
 Reporting
      Segments and Operating Groups
  For 2007,
we reported under the following three segments: Sales Services, Marketing
Services and PDI Products Group (PPG).  For details on revenue,
operating results and total assets by segment, see Note 18 to the consolidated
financial statements.
  Sales
Services
  This
segment, which focuses primarily on product detailing, includes our Performance
Sales Teams and Select Accessä Teams (formerly referred
to as Shared Teams).  This segment, which focuses on product
detailing, represented 74.1% of our consolidated revenue for the year ended
December 31, 2007.
  Product
detailing involves a sales representative meeting face-to-face with targeted
physicians and other healthcare decision makers to provide a technical review of
the product being promoted.  Contract sales teams can be deployed on
either a dedicated or shared basis.
  This
segment also includes a portfolio of expanded sales services known as “PDI ON
DEMAND”, which includes talent acquisition services, pulsing teams and vacancy
coverage services.  Our talent acquisition platform provides
pharmaceutical customers with an outsourced, stand-alone sales force recruiting
and on-boarding service.  Pulsing teams provide temporary full or
flex-time sales teams of any size anywhere in the United States which are
designed to help our customers increase brand impact during key market cycles or
rapidly respond to regional opportunities.  Our vacancy coverage
service provides customers with outsourced temporary full or flex-time sales
representatives to fill temporary territory vacancies created by leaves of
absence within our customers’ internal sales forces, which allows our customers
to maintain continuity of services.
  Performance Sales
Teams
  A
performance contract sales team works exclusively on behalf of one
customer.  The sales team is customized to meet the customer’s
specifications with respect to sales representative profile, physician
targeting, product training, incentive compensation plans, integration with the
customers’ in-house sales forces, call reporting platform and data
integration.  Without adding permanent personnel, our customer gets a
high quality, industry-standard sales team comparable to its internal sales
force.
   Select
Access
  Select
Access represents a shared sales team business model where multiple
non-competing brands are represented for different pharmaceutical
companies.  Using these teams, we make a face-to-face selling resource
available to those customers who want an alternative to a dedicated
team.  We are a leading provider of this type of detailing program in
the United States.  Since costs are shared among various companies,
these programs may be less expensive for the customer than programs involving a
dedicated sales force.  With a shared sales team, our customers
receive targeted coverage of its physician audience within the representatives’
geographic territories.
  Marketing
Services
  This
segment, which includes our Pharmakon, TVG Marketing Research & Consulting
and Vital Issues in Medicine business units, represented 25.9% of consolidated
revenue for the year ended December 31, 2007.
  Pharmakon
  Pharmakon’s
emphasis is on the creation, design and implementation of promotional physician
interaction programs.  Each marketing program can be offered through a
number of different media and 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, audience recruitment, moderator
   6
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  services
and thought leader management.  In the last ten years, Pharmakon has
conducted over 45,000 physician interaction programs with more than 550,000
participants.  Pharmakon’s peer programs can be designed as
promotional or marketing research/advisory programs.  In addition to
physician interaction programs, Pharmakon also provides promotional
communications activities.  We acquired Pharmakon in August
2004.
  TVG Marketing Research &
Consulting
  TVG
Marketing Research & Consulting (TVG) employs leading edge, and in some
instances proprietary, research methodologies to provide qualitative and
quantitative marketing research to pharmaceutical companies with respect to
healthcare providers, patients and managed care customers in the United States
and globally.  We offer a full range of pharmaceutical marketing
research services, including studies designed to identify the highest impact
business strategy, profile, positioning, message, execution, implementation and
post implementation for a product.  We believe our marketing research
model improves our customers’ knowledge about how physicians and other
healthcare professionals will likely react to products.
  We
utilize a systematic approach to pharmaceutical marketing
research.  Recognizing that every marketing need, and therefore every
marketing research solution, is unique, we have developed our marketing model to
help identify the work that needs to be done in order to identify critical paths
to marketing goals.  At each step of the marketing model, we can offer
proven research techniques, proprietary methodologies and customized study
designs to address specific product needs.
  Vital Issues in
Medicine
  Our Vital
Issues in Medicine (VIM®) business unit develops and executes continuing
medical education services funded by the biopharmaceutical and medical device
and diagnostics industries.  Using an expert-driven, customized approach,
we provide faculty development/advocacy, continuing medical education activities
in a wide variety of formats, and interactive initiatives to generate additional
value to our customers' portfolios.
  PDI
Products Group (PPG)
  In the
past, the goal of the PPG segment was to source biopharmaceutical products in
the United States through licensing, co-promotion, acquisition or integrated
commercialization services arrangements. This segment did not have any revenue
for the years ended December 31, 2007 and 2006.  We are no longer
pursuing licensing or acquisition of pharmaceutical products.
  However,
we currently contemplate that any product commercialization arrangements
described above under “—Strategy” that we may engage in will be included within
this segment.
  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 agreed
performance targets.  Contracts may generally 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.
 Sales
Services
  Historically,
the majority of our revenue has been generated by contracts for dedicated sales
teams.  These contracts are generally for terms of one to two years
and may be renewed or extended.  The majority of these contracts,
however, are terminable by the client for any reason upon 30 to 90 days’
notice.  Certain contracts provide for termination payments if the
client terminates the contract without cause.  Typically, however,
these penalties do not offset the revenue we could have earned under the
contract or the costs we may incur as a result of its
termination.  The loss or termination of a large contract or the loss
of multiple contracts could have a material adverse effect on our business,
financial condition, or results of operations or cash
flow.
 Marketing
Services
  Our
marketing services contracts generally take the form of either master service
agreements with a term of one to three years, or contracts specifically related
to particular projects with terms for the duration of the project, typically
lasting from two to six months.  These contracts are generally
terminable by the customer for any reason.  Upon termination, the
customer is generally responsible for payment for all work completed to date,
plus the cost of any nonrefundable commitments made on behalf of the
customer.  There is significant customer concentration in our
Pharmakon business, and the loss or termination of one or more of Pharmakon’s
large master service agreements could have a material adverse effect on our
business, financial condition or results of operations.  Due to the
typical
   7
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  size of
most of TVG’s and VIM’s contracts, it is unlikely the loss or termination of any
individual TVG or VIM contract would have a material adverse effect on our
business, financial condition, results of operations, or cash flow.
  Significant
      Customers
  Our three
largest customers as of December 31, 2007 accounted for 13.7%, 12.9% and 11.3%,
respectively, or approximately 37.9% in the aggregate, of our revenue for the
year ended December 31, 2007. On March 21, 2007, we announced that a large
pharmaceutical company customer had notified us of its intention not to renew
its contract sales engagement with us upon its scheduled expiration on May 12,
2007.  This contract accounted for 12.8% of our revenue in
2007.
  Marketing
  Our
marketing efforts target established and emerging companies in the
biopharmaceutical and life sciences industries.  Our marketing efforts
are designed to reach the senior sales, marketing, and business development
personnel within these companies, with the goal of informing them of the
services we offer and the value we can bring to their products.  Our
tactical plan usually includes advertising in trade publications, direct mail
campaigns, presence at industry seminars and conferences and a direct selling
effort.  We have a dedicated team of business development specialists
who work within our business units to identify needs and opportunities within
the biopharmaceutical and life sciences industries that we can address. We
review possible business opportunities as identified by our business development
team and develop a customized strategy and solution for each attractive business
opportunity.
  Competition
  With
respect to our sales services segment, we compete with our customers’ ability to
manage their needs internally.  In addition, a small number of
providers comprise the market for outsourced pharmaceutical sales teams, and we
believe that PDI, inVentiv Health Inc., Innovex Inc. and Publicis Groupe SA
combined accounted for the majority of the U.S. outsourced sales team market
share in 2007.  Our marketing services segment operates in a highly
fragmented and competitive market.
  There are
relatively few barriers to entry into the businesses in which we operate and, as
the industry continues to evolve, new competitors are likely to emerge. We
compete on the basis of such factors as reputation, service quality, management
experience, performance record, customer satisfaction, ability to respond to
specific customer needs, integration skills and price.  Increased
competition and/or a decrease in demand for our services may also lead to other
forms of competition.  While we believe we compete effectively with
respect to each of these factors, most of our current and potential competitors
are larger than we are and have substantially greater capital, personnel and
other resources than we have.  Increased competition may lead to
pricing pressures and competitive practices that could have a material adverse
effect on our market share, our ability to source new business opportunities as
well as our business, financial condition and results of
operations.
  Employees
  As of
February 29, 2008, we had approximately 1,100 employees, including approximately
550 full-time employees.  Approximately 85% of our employees are field
sales representatives and sales managers.  We are not party to a
collective bargaining agreement with any labor union.  We believe our
relationship with our employees is generally positive.
  Available
      Information
  Our
website address is www.pdi-inc.com.  We
are not including the information contained on our website as part of, or
incorporating it by reference into, this Form 10-K.  We make available
free of charge through our website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the SEC.
  The
public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.  The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding registrants such as us that file electronically with the SEC. The
website address is www.sec.gov.
   8
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Government
and Industry Regulation
 The
healthcare sector is heavily regulated by both government and industry. Various
laws, regulations and guidelines established by government, industry and
professional bodies affect, among other matters, the approval, provision,
licensing, labeling, marketing, promotion, price, sale and reimbursement of
healthcare services and products, including pharmaceutical
products.  The federal government has extensive enforcement powers
over the activities of pharmaceutical manufacturers, including authority to
withdraw product approvals, commence actions to seize and prohibit the sale of
unapproved or non-complying products, to halt manufacturing operations that are
not in compliance with good manufacturing practices, and to impose or seek
injunctions, voluntary recalls, and civil, monetary, and criminal
penalties.
  The Food,
Drug and Cosmetic Act, as supplemented by various other statutes, regulates,
among other matters, the approval, labeling, advertising, promotion, sale and
distribution of drugs, including the practice of providing product samples to
physicians. Under this statute, the Food and Drug Administration (FDA) regulates
all promotional activities involving prescription drugs.  The
distribution of pharmaceutical products is also governed by the Prescription
Drug Marketing Act (PDMA), which regulates promotional activities at both the
federal and state level.  The PDMA imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product handling and
facility storage and security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.  Under the PDMA
and its implementing regulations, states are permitted to require registration
of manufacturers and distributors who provide pharmaceutical products even if
such manufacturers or distributors have no place of business within the
state.  States are also permitted to adopt regulations limiting the
distribution of product samples to licensed practitioners and require extensive
record keeping and labeling of such samples for tracing purposes.  The
sale or distribution of pharmaceutical products is also governed by the Federal
Trade Commission Act.
  Some of
the services that we currently perform or that we may provide in the future may
also be affected by various guidelines established by industry and professional
organizations. For example, ethical guidelines established by the American
Medical Association (AMA) govern, among other matters, the receipt by physicians
of gifts from health-related entities. These guidelines govern honoraria and
other items of economic value that AMA member physicians may receive, directly
or indirectly, from pharmaceutical companies. Similar guidelines and policies
have been adopted by other professional and industry organizations, such as
Pharmaceutical Research and Manufacturers of America, an industry trade
group.  In addition, the Office of the Inspector General has also issued
guidance for pharmaceutical manufacturers and the Accreditation Council for
Continuing Medical Education has issued guidelines for providers of continuing
medical education.
  There are
also numerous federal and state laws pertaining to healthcare fraud and abuse as
well as increased scrutiny regarding the off-label promotion and marketing of
pharmaceutical products and devices. In particular, certain federal and state
laws prohibit manufacturers, suppliers and providers from offering, giving or
receiving kickbacks or other remuneration in connection with ordering or
recommending the purchase or rental of healthcare items and services. The
federal anti-kickback statute imposes both civil and criminal penalties for,
among other things, offering or paying any remuneration to induce someone to
refer patients to, or to purchase, lease or order (or arrange for or recommend
the purchase, lease or order of) any item or service for which payment may be
made by Medicare or other federally-funded state healthcare programs (e.g., Medicaid). This statute
also prohibits soliciting or receiving any remuneration in exchange for engaging
in any of these activities. The prohibition applies whether the remuneration is
provided directly or indirectly, overtly or covertly, in cash or in kind.
Violations of the statute can result in numerous sanctions, including criminal
fines, imprisonment and exclusion from participation in the Medicare and
Medicaid programs.  Several states also have referral, fee splitting
and other similar laws that may restrict the payment or receipt of remuneration
in connection with the purchase or rental of medical equipment and supplies.
State laws vary in scope and have been infrequently interpreted by courts and
regulatory agencies, but may apply to all healthcare items or services,
regardless of whether Medicare or Medicaid funds are involved.
   ITEM
      1A.
              RISK
      FACTORS
  In
addition to the other information provided in this Form 10-K, you should
carefully consider the following factors in evaluating our business, operations
and financial condition.  Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or that are similar to
those faced by other companies in our industry or businesses in general, such as
competitive conditions, may also impair our business operations.  The
occurrence of any of the following risks could have a material adverse effect on
our business, financial condition or results of operations.
  Changes
in outsourcing trends in the pharmaceutical and biotechnology industries could
materially and
   9
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  adversely
affect our business, financial condition and results of operations.
  Our
business depends in large part on demand from the pharmaceutical and life
sciences industries for outsourced marketing and sales services.  The
practice of many companies in these industries has been to hire outside
organizations like us to conduct large sales and marketing projects on their
behalf.  However, companies may elect to perform these services
internally for a variety of reasons, including the rate of new product
development and FDA approval of those products, the number of sales
representatives employed internally in relation to demand 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. Additionally,
several large pharmaceutical companies have recently made changes to their
commercial model by reducing the number of sales representatives employed
internally and through outside organizations like us.  If the
pharmaceutical and life sciences industries reduce their tendency to outsource
these projects, our business, financial condition and results of operations
could be materially and adversely affected.
  If
companies in the life sciences industries significantly reduce their
promotional, marketing and sales expenditures or significantly reduce or
eliminate the role of pharmaceutical sales representatives in the promotion of
their products, our business, financial condition and results of operations
would be materially and adversely affected.
  Our
revenues depend on promotional, marketing and sales expenditures by companies in
the life sciences industries, including the pharmaceutical and biotechnology
industries.  Promotional, marketing and sales expenditures by
pharmaceutical manufacturers have in the past been, and could in the future be,
negatively impacted by, among other things, governmental reform or private
market initiatives intended to reduce the cost of pharmaceutical products or by
governmental, medical association or pharmaceutical industry initiatives
designed to regulate the manner in which pharmaceutical manufacturers promote
their products. 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.  If companies in the life sciences
industries significantly reduce their promotional, marketing and sales
expenditures or significantly reduce or eliminate the role of pharmaceutical
sales representatives in the promotion of their products, our business,
financial condition and results of operations would be materially and adversely
affected.
  Our
service contracts are generally short-term agreements and are cancelable at any
time, which may result in lost revenue and additional costs and
expenses.
  Our
service contracts are generally for a term of one to two years (certain of our
operating entities have contracts of shorter duration) and many may be
terminated by the customer at any time for any reason.  In addition,
our customers may significantly reduce the number of representatives we deploy
on their behalf.  The early termination or significant reduction of a
contract by one of our customers not only results in lost revenue, but also
typically causes us to incur additional costs and expenses.  All of
our sales representatives are employees rather than independent contractors.
Accordingly, when a contract is significantly reduced or terminated, unless we
can immediately transfer the related sales force to a new program, if permitted
under the contract, we must either continue to compensate those employees,
without realizing any related revenue, or terminate their employment. If we
terminate their employment, we may incur significant expenses relating to their
termination.  The loss, termination or significant reduction of a
large contract or the loss of multiple contracts could have a material adverse
effect on our business, financial condition and results of
operations.
  Most
of our revenue is derived from a limited number of customers, the loss of any
one of which could materially and adversely affect our business, financial
condition or results of operations.
  Our
revenue and profitability depend to a great extent on our relationships with a
limited number of large pharmaceutical companies. As of December 31, 2007, our
three largest customers accounted for approximately 13.7%, 12.9% and 11.3%
respectively, or approximately 37.9% in the aggregate, of our revenue for the
year ended December 31, 2007.  For the year ended December 31, 2006,
our three largest customers accounted for 28.5%, 18.3% and 9.9%, respectively,
or approximately 56.7% in the aggregate, of our revenue.  For the year
ended December 31, 2005, our three largest customers, each of whom represented
10% or more of our revenue, accounted for, in the aggregate, approximately 73.6%
of our revenue.  We are likely to continue to experience a high degree
of customer concentration, particularly if there is further consolidation within
the pharmaceutical industry.
  The loss
or a significant reduction of business from any of our major customers could
have a material adverse effect on our business, financial condition or results
of operations.  For example, during 2006 and 2007, we announced the
termination and expiration of a number of significant service contracts,
including our sales force engagements with AstraZeneca, GlaxoSmithKline (GSK),
sanofi-aventis and another large pharmaceutical company
   10
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  customer.  These
four customers accounted for approximately $150.9 million in revenue during 2006
and $15.9 million in revenue during 2007.
  Our
senior management team is currently in the process of implementing our long-term
strategic plan. There can be no assurance that we will successfully implement
this plan.
  In May
2006, Michael Marquard and Jeffrey Smith joined us as our chief executive
officer and chief financial officer, respectively.  In 2007, we
initiated the implementation of a five-year strategic plan that was further
refined in the first quarter of 2008.  In order to implement our
strategic plan, we may seek to do one or more of the following:
  ·
              introduce
      new sales support services that provide greater flexibility to our
      customers;
 ·
              organically
      develop or acquire complementary commercialization services in order to
      expand our portfolio of service offerings to the biopharmaceutical and
      life sciences industries and to strengthen our contract sales offerings;
      and
 ·
              explore
      attractive product commercialization
  opportunities.
  While we
expect to expend significant funds and other resources implementing this
strategy, there can be no assurance that we will successfully implement this
strategy or be able to expand our market share, increase revenue, yield a return
on investment and/or improve stockholder value.
  If
we pursue product commercialization opportunities as part of our long-term
strategic plan, we cannot assure you that we can successfully develop this
business.
  In
accordance with our strategic plan, we intend to explore opportunities to enter
into arrangements with biopharmaceutical companies to provide sales and
marketing support services and potentially limited capital in connection with
the promotion of pharmaceutical products in exchange for a percentage of product
sales.  It is likely that these types of arrangements will require us
to make a significant upfront investment of our resources and are expected to
generate losses in the first year of the contract as program ramp up
occurs.  In addition, we envision that these types of contracts will
have limited termination rights and the compensation we will receive is expected
to consist entirely of a percentage of sales of the product, and in certain
arrangements we may not receive any compensation unless product sales exceed an
agreed upon baseline.  There can be no assurance that our forecasts
relating to product sales will prove to be accurate.  In addition,
there are a number of factors that could negatively impact product sales during
the term of the contract, including withdrawal of the product from the market,
the launch of a therapeutically equivalent generic version of the product, the
introduction of a competing product, loss of managed care covered lives, a
significant disruption in the manufacture or supply of the product as well as
other significant events that could affect sales of the product or the
prescription market for the product.  Therefore, the revenue we
receive, if any, from product sales under these types of arrangements may not be
sufficient to offset the costs incurred by us implementing and maintaining these
programs.
  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 our strategic plan contemplates
pursuing 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 associated with the
acquisition;
 ·
              retain
      and motivate key employees;
 ·
              retain
      customers; and
 ·
              minimize
      the diversion of management’s attention from other business
      concerns.
  In the
event that the operations of an acquired business do not meet our performance
expectations, we may have to restructure the acquired business or write-off the
value of some or all of the assets of the acquired business, including goodwill
and other intangible assets identified at time of acquisition.
  In
addition, the current market for acquisition targets in our industry is
extremely competitive, and there can be no assurance that we will be able to
successfully identify, bid for and complete acquisitions necessary or desirable
to achieve our goals.
  If
we do not meet performance goals established in our incentive-based arrangements
with customers, our revenue could be materially and adversely
affected.
  We have
entered into a number of incentive-based arrangements with our pharmaceutical
company customers,
   11
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  and our
strategic plan contemplates an increased focus on these types of arrangements.
Under incentive-based arrangements, we are typically paid a lower fixed fee and,
in addition, have an opportunity to earn additional compensation upon achieving
specific performance metrics with respect to the products being
detailed.  Typically, these performance metrics relate to targeted
sales or prescription volumes, sales force performance metrics or a combination
thereof. These types of arrangements transfer some market risk from our
customers to us. In addition, these arrangements can result in variability in
our incentive-based earnings (and therefore our revenue) due to seasonality of
product usage, changes in market share, new product introductions (including the
introduction of competing generic products into the market), overall promotional
efforts and other market related factors.  If we are unable to meet
the performance goals established in our incentive-based arrangements, our
revenue could be materially and adversely affected.
  Additionally,
certain of our service contracts may contain penalty provisions pursuant to
which our fixed fees may be significantly reduced if we do not meet certain
minimum performance metrics, which may include number and timing of sales calls,
physician reach, territory vacancies and/or sales representative
turnover.
  Our
industry is highly competitive and our failure to address competitive
developments promptly will limit our ability to retain and increase our market
share.
  Our
primary competitors for sales and marketing services include in-house sales and
marketing departments of pharmaceutical companies, other CSOs and providers of
marketing and related services, including 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. Most of our current and potential competitors
are larger than we are and have substantially greater capital, personnel and
other resources than we have.  Increased competition may lead to
pricing pressures and competitive practices that could have a material adverse
effect on our market share, our ability to source new business opportunities as
well as our business, financial condition and results of
operations.
  Due to the expiration and termination
of several significant contracts during 2006 and 2007 and the implementation of
our new long-term strategic plan, our historical revenue and results of
operations cannot be relied upon as representative of the revenue and results of
operations that we may achieve in 2008 and future periods.
  As noted
above, during 2006 and the first half of 2007, we experienced the expiration and
termination of several significant contracts, including termination of our
AstraZeneca contract sales force agreement effective as of April 30, 2006, the
termination of our contract sales force agreement with sanofi-aventis effective
as of December 1, 2006, the expiration of our contract sales force agreement
with GSK on December 31, 2006 and the expiration of our contract sales force
agreement with a large pharmaceutical company customer on May 12,
2007.  These four customers accounted for an aggregate of
approximately $150.9 million of revenue during 2006 and $15.9 million of revenue
during 2007.  Unless and until we generate sufficient new business to
offset the loss of these contracts, our financial results for previous periods
will not be duplicated in future periods, and future revenue and cash flows from
operations will be significantly less than in previous periods.  In
addition, we expect to incur a net loss for 2008 and may incur net losses in
future periods.  Our senior management is also in the process of
implementing our long-term strategic plan.  This plan includes, in
part, a focus on supplementing our current service offerings with complementary
commercialization service offerings to the biopharmaceutical and life sciences
industries.  To the extent this element of our strategic plan is
realized during 2008 and in future periods, these may constitute new service
offerings for which there were no comparable financial results during 2006 or
2007.  We may also make significant expenditures in connection with
any acquisitions that we may pursue in connection with our strategic
plan.  Additionally, if we pursue product commercialization
opportunities as contemplated by our strategic plan, these types of arrangements
will require us to incur significant costs with no guarantee that any revenue we
would receive from product sales would be sufficient to offset such
costs.
  We
may require additional funds in order to implement our strategic plan and
evolving business model.
  In
accordance with our strategic plan discussed above, 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.  As a condition to providing us with additional funds, future
investors may demand, and may be granted, rights superior to those of existing
stockholders.  In addition, any future debt financing we may enter
into may require us to comply with specified financial ratios, including
ratios
   12
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  regarding
interest coverage, total leverage, senior secured leverage and fixed charge
coverage.  Our ability to comply with these ratios may be affected by
events beyond our control.
  We cannot
be certain; however, that additional financing will be available from any of
these sources or, if available, will be available on acceptable or affordable
terms.  If adequate additional funds are not available, we may be
required to delay, reduce the scope of, or eliminate one or more of our
strategic initiatives.
  Product
liability claims could harm our business.
  We could
face substantial product liability claims in the event any of the pharmaceutical
or other products we have previously marketed or market now or may in the future
market 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 as a defendant in numerous lawsuits as a result of
our detailing of Baycolâ on behalf of Bayer
Corporation (Bayer).  Product liability claims, regardless of their
merits, could be costly and divert management's attention, or adversely affect
our reputation and the demand for our services or products.  While we
rely on contractual indemnification provisions with our customers to protect us
against certain product liability related claims, we cannot assure you that
these provisions will be fully enforceable or that they will provide adequate
protection against claims intended to be covered.  We currently have
product liability insurance in the aggregate amount of $5.0 million but cannot
assure you that our insurance will be sufficient to cover fully all potential
claims.  Also, adequate insurance coverage might not be available in
the future at acceptable costs, if at all.
  Our
business may suffer if we are unable to hire and retain key management personnel
to fill critical vacancies.
  The
success of our business also depends on our ability to attract and retain
qualified senior management and experienced financial executives who are in high
demand and who often have competitive employment options. Currently, we have a
significant vacancy in our executive management.  Steven K. Budd, the
former president of our sales services segment, resigned effective April 6,
2007.  Michael J. Marquard, our Chief Executive Officer, is currently
assuming these responsibilities as we engage in a process to identify Mr. Budd’s
successor.  Our failure to attract and retain qualified individuals
could have a material adverse effect on our business, financial condition or
results of operations.
  Our
business may suffer if we fail to attract and retain qualified sales
representatives.
  The
success and growth of our business depends in large part on our ability to
attract and retain qualified pharmaceutical sales
representatives.  During 2006 and 2007, we experienced an unusually
high turnover rate among our sales representatives due to the expiration and
early termination of a number of significant sales force
arrangements.  There is intense competition for pharmaceutical sales
representatives from CSOs and pharmaceutical companies.  On occasion, our
customers have hired the sales representatives that we trained to detail their
products. We cannot assure you that we will continue to attract and retain
qualified personnel.  If we cannot attract and retain qualified sales
personnel, we will not be able to maintain or expand our sales services business
and our ability to perform under our existing sales force contracts will be
impaired.
  Changes
in governmental regulation could negatively impact our business
operations.
  The
pharmaceutical and life sciences industries are subject to a high degree of
governmental regulation.  Significant changes in these regulations
affecting the services we provide, including pharmaceutical product promotional
and marketing research services, physician interaction programs and medical
educational services, could result in the imposition of additional restrictions
on these types of activities, impose additional costs on us in providing these
services to our customers or otherwise negatively impact our business
operations.  For example, the Accreditation Council for Continuing
Medical Education (ACCME) has several new policies, including a revision to
ACCME’s definition of “commercial interests”, which may restrict the medical
education services provided by our VIM business unit and/or could require us to
incur additional time and expense in order to comply with these policies upon
becoming effective.
  Our
failure, or that of our customers, to comply with applicable healthcare
regulations could limit, prohibit or otherwise adversely impact our business
activities.
  Various
laws, regulations and guidelines established by government, industry and
professional bodies affect, among other matters, the provision 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
   13
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  acceptance
of kickbacks or other remuneration in return for the purchase or lease of
products that are paid for by Medicare or Medicaid. Sanctions for violating
these laws include civil and criminal fines and penalties and possible exclusion
from Medicare, Medicaid and other federal or state healthcare programs. Although
we believe our current business arrangements do not violate these federal and
state fraud and abuse laws, we cannot assure you that our business practices
will not be challenged under these laws in the future or that a challenge would
not have a material adverse effect on our business, financial condition or
results of operations. Our failure, or the failure of our customers, to comply
with these laws, regulations and guidelines, or any change in these laws,
regulations and guidelines may, among other things, limit or prohibit our or our
customers’ current or business activities, subject us or our customers to
adverse publicity, increase the cost of regulatory compliance and insurance
coverage or subject us or our customers to monetary fines or other sanctions or
penalties.
  If
our insurance and self-insurance reserves are insufficient to cover our future
liabilities for workers compensation, automobile and general liability and
employee health care benefits, our financial condition and results of operations
could be materially and adversely affected.
  We use a
combination of insurance and self-insurance to provide for potential liabilities
for workers’ compensation, automobile and general liability and employee health
care benefits.  Although we have reserved for these liabilities not
covered by insurance, our reserves are only an estimate based on actuarial data,
as well as on historical trends, and any projection of these losses is subject
to a high degree of variability and we may not be able to accurately predict the
number or value of the claims that occur in the future.  In the event
that our actual liability exceeds our reserves for any given period, or if we
are unable to control rapidly increasing health care costs, our business,
financial condition and results of operations could be materially and adversely
affected.
  If
our information technology and communications systems fail or we experience a
significant interruption in their operation, our reputation, business and
results of operations could be materially and adversely affected.
  The
efficient operation of our business is dependent on our information technology
and communications systems.  The failure of these systems to operate
as anticipated could disrupt our business and result in decreased revenue and
increased overhead costs.  In addition, we do not have complete
redundancy for all of our systems and our disaster recovery planning cannot
account for all eventualities.  Our information technology and
communications systems, including the information technology systems and
services that are maintained by third party vendors, are vulnerable to damage or
interruption from natural disasters, fire, terrorist attacks, malicious attacks
by computer viruses or hackers, power loss or failure of computer systems,
Internet, telecommunications or data networks.  If these systems or
services become unavailable or suffer a security breach, we may expend
significant resources to address these problems, and our reputation, business
and results of operations could be materially and adversely
affected.
  Our
stock price is volatile and could be further affected by events not within our
control, and an investment in our common stock could suffer a decline in
value.
  The
market for our common stock is volatile.  During 2007, our stock
traded at a low of $8.56 and a high of $12.40.  In 2006, our stock
traded at a low of $9.37 and a high of $15.69, and in
2005, our stock traded at a low of $11.12 and a high of $22.26.  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;
 ·
              significant
      changes in our cash and cash equivalent
  reserves;
 ·
              announcements
      regarding our business or the business of our
  competitors;
 ·
              strategic
      actions by us or our competitors, such as acquisitions or
      restructurings;
 ·
              industry
      and/or  regulatory
developments;
 ·
              changes
      in revenue mix;
 ·
              changes
      in revenue and revenue growth rates for us and for our industry as a
      whole;
 ·
              changes
      in accounting standards, policies, guidance, interpretations or
      principles; and
 ·
              statements
      or changes in opinions, ratings or earnings estimates made by brokerage
      firms or industry analysts relating to the markets in which we operate or
      expect to operate.
  Our
quarterly revenues and operating results may vary, which may cause the price of
our common stock to fluctuate.
  Our
quarterly operating results may vary as a result of a number of factors,
including:
 ·
              the
      commencement, delay, cancellation or completion of sales and marketing
      programs;
   14
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
 ·
              regulatory
      developments;
  ·
              uncertainty
      about when, if at all, revenue from any product commercialization
      arrangements and/or other incentive-based arrangements with our customers
      will be recognized;
 ·
              mix
      of services provided and/or mix of programs during the
      period;
 ·
              timing
      and amount of expenses for implementing new programs and accuracy of
      estimates of resources required for ongoing
  programs;
 ·
              timing
      and integration of any
acquisitions;
 ·
              changes
      in regulations related to pharmaceutical companies;
    and
 ·
              general
      economic conditions.
       In
addition, in the case of revenue related to service contracts, we recognize
revenue as services are performed, while program costs, other than training
costs, are expensed as incurred.  For all contracts, training costs
are deferred and amortized on a straight-line basis over the shorter of the life
of the contract to which they relate or 12 months.  As a result,
during the first two to three months of a new contract, we may incur substantial
expenses associated with implementing that new program without recognizing any
revenue under that contract. In addition, if we pursue product commercialization
opportunities as contemplated by our strategic plan, we will incur similar
implementation expenses and likely will not be able to recognize revenue from
the contract, if any, for an even greater period of time after commencement of
these types of programs.  This could have a material adverse impact on
our operating results and the price of our common stock for the quarters in
which these expenses are incurred.  For these and other reasons, we
believe that quarterly comparisons of our financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Fluctuations in quarterly results could materially and adversely affect the
market price of our common stock in a manner unrelated to our long-term
operating performance.
  Our
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 is able to exercise substantial
control over the election of all of our directors and to determine the outcome
of most corporate actions requiring stockholder approval, including a merger
with or into another company, the sale of all or substantially all of our assets
and amendments to our certificate of incorporation.  This ownership
concentration will limit our stockholders ability to influence corporate matters
and, as a result, we may take actions that other stockholders do not view as
beneficial, which may adversely affect the market price of our common
stock.
  We
have anti-takeover defenses that could delay or prevent an acquisition and could
adversely affect the price of our common stock.
  Our
certificate of incorporation and bylaws include provisions, such as providing
for three classes of directors, which may make it more difficult to remove our
directors and management and may adversely affect the price of our common stock.
In addition, our certificate of incorporation authorizes the issuance of "blank
check" preferred stock.  This provision could have the effect of
delaying, deterring or preventing a future takeover or a change in control,
unless the takeover or change in control is approved by our board of
directors.  We are also subject to laws that may have a similar
effect. For example, section 203 of the General Corporation Law of the State of
Delaware prohibits us from engaging in a business combination with an interested
stockholder for a period of three years from the date the person became an
interested stockholder unless certain conditions are met.  As a result
of the foregoing, it will be difficult for another company to acquire us and,
therefore, could limit the price that possible investors might be willing to pay
in the future for shares of our common stock. In addition, the rights of our
common stockholders will be subject to, and may be adversely affected by, the
rights of holders of any class or series of preferred stock that may be issued
in the future.
  ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
   None.
  ITEM
      2.
              PROPERTIES
  Our
corporate headquarters are located in Saddle River, New Jersey where we lease
approximately 84,000 square feet.  The lease runs for a term of
approximately 12 years, which began in July 2004.  We entered into a
sublease for approximately 16,000 square feet of space in our Saddle River
facility for a term of five years which began in July 2005.  The
sublease allows the subtenant to renew for an additional term of two
years.  In July 2007, we entered into an additional sublease for
approximately 20,000 square feet of space in our Saddle River facility
for
   15
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  the
remaining term of our lease, approximately eight and one-half
years.  TVG operates out of a 37,000 square foot facility in Dresher,
Pennsylvania under a lease that runs for a term of approximately twelve years;
which began in January 2005.  TVG entered into two subleases in 2007,
beginning in August and October, each for terms of five years, and are
approximately 3,000 and 4,700 square feet, respectively.  Pharmakon
operates out of a 6,700 square foot facility in Schaumburg, Illinois, under a
lease that expires in February 2010.  We believe that our current
facilities are adequate for our current and foreseeable operations and that
suitable additional space will be available if needed.
  In 2007,
we had approximately $1.0 million of net charges related to unused office space
capacity and asset impairments related to the vacated space.  In 2006,
we had net charges of approximately $657,000 related to unused office space
capacity at our Saddle River, New Jersey and Dresher, Pennsylvania locations and
$1.3 million in asset impairment charges for leasehold improvements and
furniture and fixtures associated with the unused office space at those
facilities.  In the fourth quarter of 2005, we recorded charges of
approximately $2.4 million related to unused office space capacity at our Saddle
River and Dresher locations.  There is approximately 4,100 square feet
of unused office space at Dresher that we are seeking to sublease in
2008.
   ITEM
      3.
              LEGAL
      PROCEEDINGS
  Bayer-Baycol
Litigation
  We have
been named as a defendant in numerous lawsuits, including two class action
matters, alleging claims arising from the use of Baycol, a prescription
cholesterol-lowering medication.  Baycol was distributed, promoted and
sold by Bayer in the United States until early August 2001, at which time Bayer
voluntarily withdrew Baycol from the U.S. market.  Bayer had retained
certain companies, such as 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, 2007, 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  2005, 2006 or 2007.
 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.  In
October 2006, we received preliminary settlement approval from the court and the
final approval hearing was held in January 2007. Pursuant to the settlement, we
have made all payments to the class members, their counsel and the California
Labor and Workforce Development Agency in an aggregate amount of approximately
$50,000, and the lawsuit was dismissed with prejudice in May
2007.
 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.
   16
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  PART
II
  ITEM
      5.
              MARKET
      FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND
      ISSUER PURCHASES OF EQUITY
SECURITIES
    Market
      Information
  Our
common stock is traded on the Nasdaq Global Market under the symbol
“PDII.”  The price range per share of common stock presented below
represents the highest and lowest sales price for our common stock on the Nasdaq
Global Market for the last two years by quarter:
  2007
                  
                  
                  2006HIGH
                  
                  
                  LOW
                  
                  
                  HIGH
                  
                  
                  LOWFirst
      quarter
                  
                  $
                  10.98
                  
                  
                  $
                  9.21
                  
                  
                  $
                  15.11
                  
                  
                  $
                  9.37Second
      quarter
                  
                  $
                  11.28
                  
                  
                  $
                  9.00
                  
                  
                  $
                  14.98
                  
                  
                  $
                  9.87Third
      quarter
                  
                  $
                  12.40
                  
                  
                  $
                  9.09
                  
                  
                  $
                  15.69
                  
                  
                  $
                  10.15Fourth
      quarter
                  
                  $
                  10.68
                  
                  
                  $
                  8.56
                  
                  
                  $
                  11.97
                  
                  
                  $
                  9.50
 Holders
  We had
327 stockholders of record as of February 29, 2008.  Not reflected in
the number of record holders are persons who beneficially own shares of common
stock held in nominee or street name.
  Dividends
  We have
not declared any cash dividends and do not intend to declare or pay any cash
dividends in the foreseeable future.  Future earnings, if any, will be
used to finance the future operation and growth of our business.
  Securities
      Authorized For Issuance Under Equity Compensation
  Plans
  We have
in effect a number of stock-based incentive and benefit programs designed to
attract and retain qualified directors, executives and management
personnel.  All equity compensation plans have been approved by
security holders.  The following table sets forth certain information
with respect to our equity compensation plans as of December 31,
2007:
 
 Number
      of securitiesremaining
      available forNumber
      of securities to
                
                Weighted-average
                
                future
      issuancebe
      issued upon exercise
                
                exercise
      price of
                
                (excluding
      securitiesPlan
      Category
                
                of
      outstanding options (a)(1)
                
                outstanding
      options (b)
                
                reflected
      in column (a)) (1)Equity
      compensation plansapproved
      by security holders(2004
      Stock Award andIncentive
      Plan, 2000 OmnibusIncentive
      Compensation Plan,and
      1998 Stock Option Plan)
                
                372,441
                
                $                                   23.37
                
                1,519,043Equity
      compensation plans notapproved
      by security holders
                -
                
                -
                
                -Total
                
                372,441
                
                $                                   23.37
                
                1,519,043(1)  Excludes
      restricted stock and stock-settled stock appreciation
    rights.
  Issuer
      Purchases Of Equity Securities
  From time
to time, we repurchase our common stock on the open market or in privately
negotiated transactions or both.  On November 7, 2006 we announced
that our Board of Directors authorized us to repurchase up to one million shares
of our common stock, none of which have been repurchased.  We did not
repurchase any shares of our common stock on the open market during
2007.  Purchases, if any, will be made from available
cash.
  Comparative
Stock Performance Graph
   17
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  The graph
below compares the yearly percentage change in the cumulative total stockholder
return on our common stock, based on the market price of our common stock, with
the total return of companies included within the Nasdaq Composite Index for the
period commencing December 31, 2002 and ending December 31, 2007.  The
calculation of total cumulative return assumes a $100 investment in our common
stock and the Nasdaq Composite Index on December 31, 2002, and the reinvestment
of all dividends.
   
   18
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
   ITEM
      6.
              SELECTED
      FINANCIAL DATA
  The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this Form 10-K.  The operations data for the
years ended December 31, 2007, 2006, and 2005 and the balance sheet data at
December 31, 2007 and 2006 are derived from our audited consolidated financial
statements appearing elsewhere in this Form 10-K.  The operations data
for the years ended December 31, 2004 and 2003 and the balance sheet data at
December 31, 2005, 2004 and 2003 are derived from our audited consolidated
financial statements that are not included in this Form 10-K.  The
historical results are not necessarily indicative of the results to be expected
in any future period.  No cash dividends have been declared for any
period.
  (in thousands, except per share
data)
                
                2007
                
                2006
                
                2005
                
                2004
                
                2003Continuing operations data:Total
      revenues, net
                
                $
      117,131
                
                $
      239,242
                
                $
      305,205
                
                $
      345,797
                (5)
                $
      330,547Gross
      profit
                
                31,615
                
                55,844
                
                52,402
                
                92,633
                
                84,960Operating
      expenses
                
                45,853
                (1)
                49,931
                (2)
                65,064
                (3)
                58,554
                
                65,897Asset
      impairment
                
                42
                
                -
                
                6,178
                (4)
                -
                
                -Total
      operating expenses
                
                45,895
                
                49,931
                
                71,242
                
                58,554
                
                65,897(Loss)
      income fromcontinuing
      operations
                
                $   (9,974)
                
                $   11,375
                
                $
      (11,407)
                
                $   20,435
                
                $   11,931Per share data from continuing
      operations:(Loss)
      income per share of common stockBasic
                
                $     (0.72)
                
                $       0.82
                
                $     (0.80)
                
                $       1.40
                
                $       0.84Diluted
                
                $     (0.72)
                
                $       0.81
                
                $     (0.80)
                
                $       1.37
                
                $       0.83Weighted average number of shares
      outstanding:Basic
                
                13,940
                
                13,859
                
                14,232
                
                14,564
                
                14,231Diluted
                
                13,940
                
                13,994
                
                14,232
                
                14,893
                
                14,431Balance sheet data:Cash
      and short-term investments
                $
      106,985
                
                $
      114,684
                
                $   97,634
                
                $
      109,498
                
                $
      114,632Working
      capital
                
                111,587
                
                112,186
                
                92,264
                
                96,156
                
                100,009Total
      assets
                
                179,554
                
                201,636
                
                200,159
                
                224,705
                
                219,623Total
      long-term debt
                
                -
                
                -
                
                -
                
                -
                
                -Stockholders'
      equity
                
                140,189
                
                149,197
                
                135,610
                
                165,425
                
                138,488
 (1)
              Includes
      $1.0 million in charges for facilities realignment costs.  See
      Note 14 to the consolidated financial statements for more
      details.
  (2)
              Includes
      $4.0 million in credits to legal expense related to settlements in the
      Cellegy litigation matter and the California class action lawsuit and $2.0
      million in charges for facilities realignment costs.  See Note 9
      and Note 14 to the consolidated financial statements for more
      details.  As a result of adopting FAS 123R in 2006 there was an
      additional $290,000 recognized in stock compensation
    expense.
  (3)
              Includes
      $5.7 million for executive severance costs and $2.4 million for facilities
      realignment costs.  See Notes 13 and 14 to the consolidated
      financial statements for more
details.
  (4)
              Asset
      impairment charges include a $3.3 million non-cash charge for the
      impairment of the goodwill associated with the Select Access reporting
      unit; and a $2.8 million non-cash charge for the impairment of the Siebel
      sales force automation platform.  See Note 1 to the consolidated
      financial statements for more
details.
  (5)
              Includes
      revenue of $4.9 million associated with the acquisition of Pharmakon on
      August 31, 2004.
  (6)
              Includes
      product revenue of negative $11.6 million in
  2003.
   19
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
   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 Form 10-K. Actual results may differ materially from those anticipated by
these forward-looking statements as a result of various factors, including, but
not limited to, those presented under the captions “Forward-Looking Statement
Information” and “Risk Factors” contained elsewhere in this Form
10-K.
  The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements and the related notes appearing elsewhere in this Form
10-K.
  OVERVIEW
  We are a
leading provider of contract sales teams to pharmaceutical companies, offering a
range of sales support services designed to achieve their strategic and
financial product objectives.  In addition to contract sales teams, we also
provide marketing research, physician interaction and medical education
programs.  Our services offer customers a range of promotional and
educationaloptions
for the commercialization of their products throughout their lifecycles, from
development through maturity.  We provide innovative and flexible service
offerings designed to drive our customers’ businesses forward and successfully
respond to a continually changing market.  Our services provide a
vital link between our customers and the medical community through the
communication of product information to physicians and other healthcare
professionals for use in the care of their patients.
  DESCRIPTION
      OF REPORTING SEGMENTS AND NATURE OF
CONTRACTS
  At
December 31, 2007, our reporting segments were as follows:
   ̈
              Sales
      Services:
 ·
              Performance
      Sales Teams; and
 ·
              Select
      Access.
 
  ̈
              Marketing
      Services:
 ·
              Pharmakon;
 ·
              TVG
      Marketing Research and Consulting (TVG);
and
 ·
              Vital
      Issues in Medicine (VIM)®.
   ̈
              PDI
      Products Group (PPG).
  In the
fourth quarter of 2005, we announced that we would be discontinuing our medical
devices and diagnostics (MD&D) business unit.  Beginning in the
second quarter of 2006, the MD&D business unit was reported as discontinued
operations.  An analysis of these reporting segments and their results
of operations are contained in Note 18 to our consolidated financial statements
and in the Consolidated
Results of Operations discussion below.
  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 may 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
customers.  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
  During
fiscal 2007, approximately half of our revenue was generated by contracts for
Performance Sales teams.  These contracts are generally for a term of
one to two years and may be renewed or extended.  The majority of
these contracts, however, are terminable by the customer for any reason upon 30
to 90 days’ notice.  Certain contracts provide for termination
payments if the customer terminates the contract without
cause.  Typically, however, these penalties do not offset the revenue
we could have earned under the contract or the costs we may incur as a result of
its termination.  The loss or termination of a large contract or the
loss of multiple contracts could have a material adverse effect on our business,
financial condition or results of operations.
   20
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Marketing
Services
  Our
marketing services contracts generally take the form of either master service
agreements with a term of one to three years or contracts specifically related
to particular projects with terms typically lasting from two to six
months.  These contracts are generally terminable by the customer for
any reason.  Upon termination, the customer is generally responsible
for payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the customer.  There is significant
customer concentration in our Pharmakon business, and the loss or termination of
one or more of Pharmakon’s large master service agreements could have a material
adverse effect on our business, financial condition or results of
operations.  Due to the typical size of most of TVG’s and VIM’s
contracts, it is unlikely the loss or termination of any individual TVG or VIM
contract would have a material adverse effect on our business, financial
condition or results of operations.
  PPG
  The
contracts within the products group were either performance based or fee for
service and may have required sales, marketing and distribution of a product. In
performance based contracts, we typically provided and financed a portion, if
not all, of the commercial activities in support of a brand in return for a
percentage of product sales. An important performance parameter was normally the
level of sales or prescriptions attained by the product during the period of our
marketing or promotional responsibility, and in some cases, for periods after
our promotional activities have ended.
  CRITICAL
      ACCOUNTING POLICIES
  We
prepare our financial statements in accordance with U.S. generally accepted
accounting principles (GAAP).  The preparation of financial statements
and related disclosures in conformity with GAAP requires our management to make
judgments, estimates and assumptions at a specific point in time that affect the
amounts reported in the consolidated financial statements and disclosed in the
accompanying notes.  These assumptions and estimates are inherently
uncertain.  Outlined below are accounting policies, which are important to
our financial position and results of operations, and require the most
significant judgments on the part of our management in their application. 
Some of those judgments can be subjective and complex.  Management’s
estimates are based on historical experience, information from third-party
professionals, facts and circumstances available at the time and various other
assumptions that are believed to be reasonable.  Actual results could
differ from those estimates.  Additionally, changes in estimates could
have a material impact on our consolidated results of operations in any one
period.  For a summary of all of our significant accounting policies,
including the accounting policies discussed below, see Note 1 to our
consolidated financial statements.
  Revenue
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 two years and may be renewed or extended.  The majority of
these contracts, however, are terminable by the customer for any reason upon 30
to 90 days’ notice.  Certain contracts provide for termination
payments if the customer terminates 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.
  Revenue
and associated costs under marketing service contracts are generally based on a
single deliverable such as a promotional program, accredited continuing medical
education seminar or marketing research/advisory program.  The
contracts are generally terminable by the customer for any
reason.  Upon termination, the customer is generally responsible for
payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the customer.  There is significant
customer concentration in our Pharmakon business, and the loss or termination of
one or more of Pharmakon’s large master service agreements would have a material
adverse on our business, financial condition or results of
operations.  Due to the typical size of most contracts of TVG and VIM,
it is unlikely the loss or termination of any individual TVG or VIM contract
would have a material adverse effect on our business, financial condition or
results of operations.
   21
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Revenue
is recognized on product detailing programs and certain marketing, promotional
and medical education contracts as services are performed and the right to
receive payment for the services is assured. Many of the product detailing
contracts allow for additional periodic incentive fees to be earned if certain
performance benchmarks have been attained. Revenue earned from incentive fees
are recognized in the period earned and when we are reasonably assured that
payment will be made.  Under performance based contracts, revenue is
recognized when the performance based parameters are achieved.  Many
contracts also stipulate penalties if agreed upon performance benchmarks have
not been met.  Revenue is recognized net of any potential penalties
until the performance criteria relating to the penalties have been
achieved.  Commissions based revenue is recognized when performance is
completed less an allowance for estimated cancellations based on contractual
commitments and experience.
  Revenue
and associated costs from marketing research contracts are recognized upon
completion of the contract.  These contracts are generally short-term
in nature, typically lasting two to six months.
  Cost of
services consists primarily of the costs associated with executing product
detailing programs, performance based contracts or other sales and marketing
services identified in the contract. Cost of services includes personnel costs
and other costs associated with executing a product detailing or other marketing
or promotional program, as well as the initial direct costs associated with
staffing a product detailing program. Such costs include, but are not limited
to, facility rental fees, honoraria and travel expenses, sample expenses and
other promotional expenses.
  Personnel
costs, which constitute the largest portion of cost of services, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives and sales managers and professional staff
that are directly responsible for executing a particular program. Initial direct
program costs are those costs associated with initiating a product detailing
program, such as recruiting, hiring, and training the sales representatives who
staff a particular product detailing program. All personnel costs and initial
direct program costs, other than training costs, are expensed as incurred for
service offerings.
  Reimbursable
out-of-pocket expenses include those relating to travel and other similar costs,
for which we are reimbursed at cost by our customers.   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 services
in the consolidated statements of operations.
  Training
costs include the costs of training the sales representatives and managers on a
particular product detailing program so that they are qualified to properly
perform the services specified in the related contract. For all contracts,
training costs are deferred and amortized on a straight-line basis over the
shorter of the life of the contract to which they relate or 12
months.  When we receive a specific contract payment from a customer
upon commencement of a product detailing program expressly to compensate us for
recruiting, hiring and training services associated with staffing that program,
such payment is deferred and recognized as revenue in the same period that the
recruiting and hiring expenses are incurred and amortization of the deferred
training is expensed.  When we do not receive a specific contract
payment for training, all revenue is deferred and recognized over the life of
the contract.
  Allowance
for Doubtful Accounts
  We maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments.  We review a customer’s credit history
before extending credit.  We establish an allowance for doubtful
accounts based on the aging of a customer’s accounts receivable or when we
become aware of a customer’s inability to meet its financial obligations (e.g.,
a bankruptcy filing).  We operate almost exclusively in the
pharmaceutical industry and to a great extent our revenue is dependent on a
limited number of large pharmaceutical companies.  We also partner
with customers in the emerging pharmaceutical sector, some of whom may have
limited financial resources.  A general downturn in the pharmaceutical
industry or a material adverse event to one or more of our emerging
pharmaceutical customers could result in higher than expected customer defaults
requiring additional allowances.
   22
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Goodwill,
Intangibles and Other Long-Lived Assets
  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
identification and valuation of these intangible assets and the determination of
the estimated useful lives at the time of acquisition, as well as the completion
of annual impairment tests require significant management judgments and
estimates.  These estimates are made based on, among other factors,
consultations with an accredited independent valuation consultant, reviews of
projected future operating results and business plans, economic projections,
anticipated future cash flows and the cost of capital.  The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of goodwill and other intangible assets, and potentially result in a
different impact to the Company’s results of operations.  Further,
changes in business strategy and/or market conditions may significantly impact
these judgments thereby impacting the fair value of these assets, which could
result in an impairment of the goodwill and acquired intangible
assets.
  We have
elected to do the annual tests for indications of goodwill impairment as of
December 31of
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.
  We review
the recoverability of long-lived assets and finite-lived intangible assets
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable.  If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized by reducing the recorded value of the asset to its
fair value measured by future discounted cash flows.  This analysis
requires estimates of the amount and timing of projected cash flows and, where
applicable, judgments associated with, among other factors, the appropriate
discount rate.  Such estimates are critical in determining whether any
impairment charge should be recorded and the amount of such charge if an
impairment loss is deemed to be necessary.  In addition, future events
impacting cash flows for existing assets could render a write-down or write-off
necessary that previously required no such write-down or write-off.
  While we
use available information to prepare our estimates and to perform impairment
evaluations, actual results could differ significantly from these estimates or
related projections, resulting in impairment and losses related to recorded
goodwill or long-lived asset balances.
  Self-Insurance
      Accruals
  We are
self-insured for certain losses for claims filed and claims incurred but not
reported relating to workers’ compensation and automobile-related losses for our
company-leased cars.  Our liability for these losses is estimated on
an actuarial undiscounted basis using individual case-based valuations and
statistical analysis supplied by our 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.  In 2007, we
also were self-insured for certain benefits paid under our employee healthcare
programs.  Our liability for medical claims is estimated using an
underwriting determination that is based on current year’s average number of
days between when a claim is incurred and when it is paid; however, the final
cost of medical claims incurred in 2007 may not be known until second quarter of
2008.
  We
maintain stop-loss coverage with third-party insurers to limit our total
exposure on these programs.  Periodically, we evaluate the level of
insurance coverage and adjust insurance levels based on risk tolerance and
premium expense.  Management reviews these accruals on a quarterly
basis.  At December 31, 2007 and 2006, self-insurance accruals totaled
$2.9 million and $2.5 million, respectively.
  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.
   23
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Income
Taxes
  We
account for income taxes using the asset and liability method.  This
method requires recognition of deferred tax assets and liabilities for expected
future tax consequences of temporary differences that currently exist between
tax bases and financial reporting bases of our assets and liabilities based on
enacted tax laws and rates.  A valuation allowance is established, when
necessary, to reduce the deferred income tax assets when it is more likely than
not that all or a portion of a deferred tax asset will not be
realized.
  We
operate in multiple tax jurisdictions and provide taxes in each jurisdiction
where we conduct business and are subject to taxation.  The breadth of our
operations and the complexity of the various tax laws require assessments of
uncertainties and judgments in estimating the ultimate taxes we will
pay.  The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions, outcomes of tax
litigation and resolution of proposed assessments arising from federal and state
audits.  We have established estimated liabilities for federal and
state income tax exposures that arise and meet the criteria for accrual under
FIN 48.These
accruals represent accounting estimates that are subject to inherent
uncertainties associated with the tax audit process.  We adjust these
accruals as facts and circumstances change, such as the progress of a tax audit.
We believe that any potential audit adjustments will not have a material adverse
effect on our financial condition or liquidity. However, any adjustments made
may be material to our consolidated results of operations for a reporting
period.
  Significant
judgment is also required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax assets.  We
currently have significant deferred tax assets resulting from net operating loss
carryforwards and deductible temporary differences.  The realization
of these assets is dependent on generating future taxable income.  We
perform an analysis quarterly to determine whether the expected future income
will more likely than not be sufficient to realize the deferred tax
assets.  Our recent operating results and projections of future income
weighed heavily in our overall assessment.  The minimum amount of
future taxable income that would have to be generated to realize our net
deferred tax assets is approximately $30 million and the existing levels of
pretax earnings for financial reporting purposes are not sufficient to generate
this amount of future taxable income.  As a result, we established a
full federal and state valuation allowance for the net deferred tax assets at
December 31, 2007 and 2006 because we determined that it was more likely than
not that these assets would not be realized.  At December 31, 2007 and
2006, we had a valuation allowance of approximately $11.7 million and $6.8
million, respectively, related to our net deferred tax assets that cannot be
carried back.
  Stock
      Compensation Costs
 The
estimated compensation cost associated with the granting of stock-based awards
is based on the grant date fair value of the stock award on the date of grant.
We recognize the compensation cost, net of estimated forfeitures, over the
vesting term.  Forfeitures are initially estimated based on historical
information and subsequently updated over the life of the awards to ultimately
reflect actual forfeitures.  As a result, changes in forfeiture activity
can influence the amount of stock compensation cost recognized from period to
period.
  We use
the Black-Scholes option pricing model to determine the fair value of stock
options and stock-based stock appreciation rights (SARs). The determination of
the fair value of stock-based payment awards is made on the date of grant and is
affected by our stock price as well as assumptions made regarding a number of
complex and subjective variables.  These assumptions including our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, the risk-free interest rate,
and expected dividend yield.  Our assumptions are detailed in Note 11
to our consolidated financial statements.
  Changes
in the valuation assumptions could result in a significant change to the cost of
an individual award.  However, the total cost of an award is also a
function of the number of awards granted, and as result, we have the ability to
manage the cost and value of our equity awards by adjusting the number of awards
granted.
  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.
   PDI,
Inc.
 Annual
Report on Form 10-K (continued)
   CONSOLIDATED
      RESULTS OF OPERATIONS
  The
following table sets forth for the periods indicated below selected statement of
continuing operations data as a percentage of revenue.  The trends
illustrated in this table may not be indicative of future operating
results.
 Years
      Ended December 31,Continuing
      operations data
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003Revenues:Service,
      net
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.4
                %
                
                
                103.5
                %Product,
      net
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (0.4
                %)
                
                
                (3.5
                %)Total
      revenues, net
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of goods and services:Cost
      of services
                
                
                73.0
                %
                
                
                76.7
                %
                
                
                82.8
                %
                
                
                73.1
                %
                
                
                73.9
                %Cost
      of goods sold
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0.1
                %
                
                
                0.4
                %Total
      cost of goods and services
                
                
                73.0
                %
                
                
                76.7
                %
                
                
                82.8
                %
                
                
                73.2
                %
                
                
                74.3
                %Gross
      profit
                
                
                27.0
                %
                
                
                23.3
                %
                
                
                17.2
                %
                
                
                26.8
                %
                
                
                25.7
                %Operating
      expenses:Compensation
      expense
                
                
                20.9
                %
                
                
                11.7
                %
                
                
                8.5
                %
                
                
                8.9
                %
                
                
                10.6
                %Other
      selling, general and administrative
                
                
                17.1
                %
                
                
                9.5
                %
                
                
                9.6
                %
                
                
                7.2
                %
                
                
                8.6
                %Asset
      impairment
                
                
                0.1
                %
                
                
                -
                
                
                
                2.0
                %
                
                
                -
                
                
                
                -Executive
      severance
                
                
                -
                
                
                
                0.2
                %
                
                
                1.9
                %
                
                
                0.1
                %
                
                
                -Legal
      and related costs, net
                
                
                0.3
                %
                
                
                (1.4
                %)
                
                
                0.6
                %
                
                
                0.7
                %
                
                
                0.7
                %Facilities
      realignment
                
                
                0.9
                %
                
                
                0.8
                %
                
                
                0.8
                %
                
                
                -
                
                
                
                -Total
      operating expenses
                
                
                39.2
                %
                
                
                20.9
                %
                
                
                23.3
                %
                
                
                16.9
                %
                
                
                19.9
                %Operating
      (loss) income
                
                
                (12.2
                %)
                
                
                2.5
                %
                
                
                (6.2
                %)
                
                
                9.9
                %
                
                
                5.8
                %Gain
      (loss) on investments
                
                
                -
                
                
                
                -
                
                
                
                1.5
                %
                
                
                (0.3
                %)
                
                
                -Interest
      income, net
                
                
                5.2
                %
                
                
                2.0
                %
                
                
                1.0
                %
                
                
                0.5
                %
                
                
                0.3
                %(Loss)
      income from continuing operationsbefore
      income taxes
                
                
                (7.0
                %)
                
                
                4.5
                %
                
                
                (3.7
                %)
                
                
                10.1
                %
                
                
                6.1
                %Income
      tax expense (benefit)
                
                
                1.5
                %
                
                
                (0.3
                %)
                
                
                0.1
                %
                
                
                4.2
                %
                
                
                2.5
                %(Loss)
      income from continuing operations
                
                
                (8.5
                %)
                
                
                4.8
                %
                
                
                (3.7
                %)
                
                
                5.9
                %
                
                
                3.6
                %
 Comparison
      of 2007 and 2006
  Revenue
      (in thousands)Change
                
                
                Change2007
                
                
                2006
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                86,766
                
                
                $
                202,748
                
                
                $
                (115,982
                )
                
                
                (57.2
                %)Marketing
      services
                
                
                30,365
                
                
                
                36,494
                
                
                
                (6,129
                )
                
                
                (16.8
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                117,131
                
                
                $
                239,242
                
                
                $
                (122,111
                )
                
                
                (51.0
                %)
  The
decrease in total revenues of $122.1 or 51.0% was primarily related to the
termination of several large contracts in 2006.
  25
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Effective
April 30, 2006, AstraZeneca terminated its contract sales force arrangement with
us, which represented approximately $43.0 million in revenue in
2006.  On September 26, 2006, we announced that GSK would not be
renewing its contract with us when it expired on December 31,
2006.  This contract represented $67.4 million in revenue in
2006.  On October 25, 2006, we announced that we had received
notification from sanofi-aventis of its intention to terminate its contract
sales engagement with us effective December 1, 2006.  This contract
represented approximately $18.3 million in revenue in
2006.  Additionally, on March 21, 2007, we announced that a large
pharmaceutical company customer had notified us of its intention not to renew
its contract sales engagement with us upon its scheduled expiration on May 12,
2007. This contract, which had a one-year term, provided for approximately $37
million in annual revenue and represented a $7.1 million decline in revenue when
compared to 2006. The loss in revenue from those terminated and expired
contracts was partially offset by new sales force arrangements we entered into
during 2007, including a contract sales force engagement for our Select Access
business unit in March 2007, which generated approximately $12.0 million in
revenue in 2007 and a dedicated contract sales force engagement entered into
during June 2007 which generated approximately $14.6 million in revenue in
2007.
  The sales
services segment revenue decreased by $116.0 million compared to 2006 primarily
due to the contract terminations.
  Revenue
for the marketing services segment decreased by $6.1 million or 16.8% which was
attributable to a $3.9 million decrease in TVG revenue, as well as decreases at
both Pharmakon and VIM due to fewer projects at all three business
units.
  The PPG
segment did not have any revenue in either period.
  Cost
      of services (in thousands)Change
                
                
                Change2007
                
                
                2006
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                68,554
                
                
                $
                163,735
                
                
                $
                (95,181
                )
                
                
                (58.1
                %)Marketing
      services
                
                
                16,962
                
                
                
                19,663
                
                
                
                (2,701
                )
                
                
                (13.7
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                85,516
                
                
                $
                183,398
                
                
                $
                (97,882
                )
                
                
                (53.4
                %)
 The sales
services segment had a reduction of $95.2 million in cost of services, which is
primarily attributable to the contract terminations mentioned
above.  Cost of services within the marketing services segment
decreased approximately $2.7 million, or 13.7% due to fewer projects at all
three business units.  The PPG segment had no costs of services
expense in either 2007 or 2006.
  Gross
      profit (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2007
                
                
                revenue
                
                
                2006
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                18,212
                
                
                
                21.0
                %
                
                $
                39,013
                
                
                
                19.2
                %
                
                $
                (20,801
                )
                
                
                (53.3
                %)Marketing
      services
                
                
                13,403
                
                
                
                44.1
                %
                
                
                16,831
                
                
                
                46.1
                %
                
                
                (3,428
                )
                
                
                (20.4
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                31,615
                
                
                
                27.0
                %
                
                $
                55,844
                
                
                
                23.3
                %
                
                $
                (24,229
                )
                
                
                (43.4
                %)
 The two
primary reasons for the increase in gross profit percentage were: 1) the higher
margin businesses within marketing services were a greater portion of
consolidated revenue than they were in the prior period (25.9% in 2007 vs. 15.3%
in 2006); and 2) the gross profit percentage for Select Access increased from
15.2% in 2006 to 21.4% in 2007.  This increase was primarily a result
of fixed service costs (i.e. sales force management) being a smaller percentage
of total revenue as Select Access revenue increased approximately 63.7% in
2007.
  The
increase in gross profit percentage for the sales services segment can be
primarily attributed to Select Access.  The decrease in total sales
services’ gross profit can be attributed to the contract terminations discussed
above.  The segment benefited from recognizing $550,000 in revenue and
gross profit in 2007 associated with a contract with a former emerging
pharmaceutical client for services performed in 2006.  Because of the
uncertainty surrounding collections, we recognized revenue from this client on a
cash basis.  All costs associated with this
   26
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  contract
were recognized in 2006.  The segment also benefited from recognizing
$558,000 in revenue and gross profit in 2007 associated with accrued penalties
with a former sales force client.  Because the likelihood of paying
these penalties was deemed remote, the accrual was reversed in the fourth
quarter of 2007 and recognized as revenue.
  The
decrease in gross profit attributable to the marketing services segment was
commensurate with the decrease in revenue discussed above as total gross profit
decreased at all three business units.  The gross profit percentage
decreased to 44.1% from 46.1% in the comparable prior year period.
  The PPG
segment had no gross profit in 2007 or 2006.
  (Note:
Compensation and other Selling, General and Administrative (other SG&A)
expense amounts for each segment contain allocated corporate
overhead.)
  Compensation
      expense (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2007
                
                
                revenue
                
                
                2006
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                15,973
                
                
                
                18.4
                %
                
                $
                19,410
                
                
                
                9.6
                %
                
                $
                (3,437
                )
                
                
                (17.7
                %)Marketing
      services
                
                
                8,543
                
                
                
                28.1
                %
                
                
                8,665
                
                
                
                23.7
                %
                
                
                (122
                )
                
                
                (1.4
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                24,516
                
                
                
                20.9
                %
                
                $
                28,075
                
                
                
                11.7
                %
                
                $
                (3,559
                )
                
                
                (12.7
                %)
 The
decrease in compensation expense for both sales services and marketing services
segments in 2007 was the result of reduced headcount and unfilled executive
positions when compared to 2006.  As a percentage of total revenue,
compensation expense increased to 20.9% for 2007 from 11.7% in 2006 primarily
due to the decrease in revenue.
  The PPG
segment did not have any compensation expense in 2007 or 2006.
  Other
      SG&A (in thousands)%
      of
              
              
              
              
              
              %
      of
              
              
              Change
              
              
              Change2007
              
              
              revenue
              
              
              2006
              
              
              revenue
              
              
              ($)
              
              
              (%)Sales
      services
              
              $
              15,033
              
              
              
              17.3
              %
              
              $
              18,109
              
              
              
              8.9
              %
              
              $
              (3,076
              )
              
              
              (17.0
              %)Marketing
      services
              
              
              4,948
              
              
              
              16.3
              %
              
              
              4,501
              
              
              
              12.3
              %
              
              
              447
              
              
              
              9.9
              %PPG
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              19,981
              
              
              
              17.1
              %
              
              $
              22,610
              
              
              
              9.5
              %
              
              $
              (2,629
              )
              
              
              (11.6
              %)




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


Executive
severance
  In 2007,
we did not have any executive severance costs.  In 2006, we incurred
approximately $573,000 in executive severance costs that related to the
departure of one executive.
  Legal
and related costs
  In 2007,
we had legal expenses of approximately $335,000, which primarily pertained to
legal expenses incurred by us in the ordinary course of business.  In
2006, we had a net credit to legal expense of $3.3 million.  The
credit to legal expense included approximately $3.5 million in cash received in
relation to the Cellegy litigation matter and approximately $516,000 in credits
related to the reversing of the California class action lawsuit
accrual.  For details on both legal matters, see Note 9 to the
consolidated financial statements.
   27
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Facilities
realignment
  In 2007,
we had net charges of approximately $1.0 million primarily related to the
impairment of fixed assets and other expenses related to our exiting the
computer data center space at our Saddle River, New Jersey location in December
2007. Total charges in 2007 for the sales services segment were approximately
$1.0 million and approximately $26,000 was credited to the marketing services
segment.  In 2006, we had net charges of approximately $657,000
related to unused office space capacity at our Saddle River, New Jersey and
Dresher, Pennsylvania locations and approximately $1.3 million in expense
related to the impairment of fixed assets associated with the unused office
space at these facilities.  Total charges in 2006 for the sales
services segment were approximately $1.3 million and approximately $675,000 was
charged to the marketing services segment.
  Operating
      (loss) income (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2007
                
                
                revenue
                
                
                2006
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                (13,918
                )
                
                
                (16.0
                %)
                
                $
                33
                
                
                
                0.0
                %
                
                $
                (13,951
                )
                
                
                42,275.8
                %Marketing
      services
                
                
                (362
                )
                
                
                (1.2
                %)
                
                
                2,798
                
                
                
                7.7
                %
                
                
                (3,160
                )
                
                
                112.9
                %PPG
                
                
                -
                
                
                
                -
                
                
                
                3,082
                
                
                
                -
                
                
                
                (3,082
                )
                
                
                100.0
                %Total
                
                $
                (14,280
                )
                
                
                (12.2
                %)
                
                $
                5,913
                
                
                
                2.5
                %
                
                $
                (20,193
                )
                
                
                341.5
                %
 The
operating loss in 2007 is primarily attributable to the decline in revenue and
gross profit in the sales services segment due to the termination of sales force
contracts mentioned previously. There was an operating loss in 2007 for the
marketing services segment of $362,000 compared to operating income of $2.8
million in 2006.  The decrease in operating income from marketing
services segment was primarily attributable to a decrease in revenue and gross
profit at all three units due to fewer projects.  There was operating
income of $3.1 million in 2006 in the PPG segment which consisted entirely of
settlement payments from Cellegy, net of legal expenses.  There was no
operating income from PPG in 2007.
 Interest
income, net
  Interest
income, net, for 2007 and 2006 was approximately $6.1 million and $4.7 million,
respectively.  The increase is primarily attributable to an increase
in interest rates for 2007 as well as larger available cash
balances.
  Provision
for income taxes
  We
recorded a provision for income taxes of $1.8 million for 2007, compared to a
benefit for income taxes of $724,000 for 2006.  Our overall effective
tax rate was a provision of 21.5% and a benefit of 6.8% for 2007 and 2006,
respectively.  The tax provision for 2007 is primarily attributable to the
full valuation allowance on the net deferred tax assets except for the basis
difference in goodwill.  Federal tax attribute carryforwards at
December 31, 2007, consist primarily of approximately $9.7 million of net
operating losses and $339,000 of capital losses.  In addition, we have
approximately $47.9 million of state net operating losses
carryforwards.  The utilization of the federal carryforwards as an
available offset to future taxable income is subject to limitations under
federal income tax laws.  If the federal net operating losses are not
utilized, they will expire in 2027.  The capital losses can only be
utilized against capital gains and $339,000 will expire in 2009.
  (Loss) income from continuing
operations
  There was
a loss from continuing operations for 2007 of approximately $10.0 million,
compared to income from continuing operations of approximately $11.4 million for
2006.
  Discontinued
operations
  Revenue
from discontinued operations for 2006 was approximately $1.9
million.  There was income from discontinued operations before income
tax for 2006 of $693,000.  Income from discontinued operations, net of
tax, for 2006 was approximately $434,000.
  Net
(loss) income
  There was
a net loss of $10.0 million in 2007, compared to net income of $11.8 million in
2006, due to the factors discussed above.
   28
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Comparison
      of 2006 and 2005
 Revenue
      (in thousands)Change
                
                
                Change2006
                
                
                2005
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                202,748
                
                
                $
                270,420
                
                
                $
                (67,672
                )
                
                
                (25.0
                %)Marketing
      services
                
                
                36,494
                
                
                
                34,785
                
                
                
                1,709
                
                
                
                4.9
                %PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                239,242
                
                
                $
                305,205
                
                
                $
                (65,963
                )
                
                
                (21.6
                %)
 The
decrease in revenue was primarily related to the termination of the AstraZeneca
sales force effective April 30, 2006, which consisted of approximately 800
representatives.   The AstraZeneca termination accounted for
approximately $63.8 million of the decrease.
  The
decrease in revenue from the sales services segment was primarily related to the
AstraZeneca sales force arrangement termination mentioned above.
  On
September 26, 2006, we announced that we had received verbal notification from
GSK of its intention not to renew its contract sales engagement with us for
2007. The contract, which represented approximately $65 million to $70 million
in revenue on an annual basis, expired as scheduled on December 31,
2006.
  On
October 25, 2006, we also announced that we had received notification from
sanofi-aventis of its intention to terminate its contract sales engagement with
us effective December 1, 2006. The contract, which represented approximately $18
million to $20 million in revenue on an annual basis, was previously scheduled
to expire on December 31, 2006.
  The
marketing services segment generated increased revenues of $1.7 million or 4.9%
in which was attributable to a $4.7 million increase in Pharmakon revenue,
partially offset by declines in revenue at both the TVG and VIM
units.
  The PPG
segment did not have any revenue in 2006.
  Cost
      of services (in thousands)Change
                
                
                Change2006
                
                
                2005
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                163,735
                
                
                $
                231,768
                
                
                $
                (68,033
                )
                
                
                (29.4
                %)Marketing
      services
                
                
                19,663
                
                
                
                21,035
                
                
                
                (1,372
                )
                
                
                (6.5
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                183,398
                
                
                $
                252,803
                
                
                $
                (69,405
                )
                
                
                (27.5
                %)
 The sales
services segment had a reduction of $68.0 million in cost of services, which was
primarily attributable to the reduction in the size of the sales force due to
the AstraZeneca termination mentioned above.  Cost of services within
the marketing services segment decreased approximately $1.4 million, or 6.5%
primarily due to lower sales volume at TVG and VIM.  The PPG segment
had no costs of services expense in either 2006 or 2005.
  Gross
      profit (in thousands)%
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  Change
                  
                  
                  Change2006
                  
                  
                  revenue
                  
                  
                  2005
                  
                  
                  revenue
                  
                  
                  ($)
                  
                  
                  (%)Sales
      services
                  
                  $
                  39,013
                  
                  
                  
                  19.2
                  %
                  
                  $
                  38,652
                  
                  
                  
                  14.3
                  %
                  
                  $
                  (361
                  )
                  
                  
                  0.9
                  %Marketing
      services
                  
                  
                  16,831
                  
                  
                  
                  46.1
                  %
                  
                  
                  13,750
                  
                  
                  
                  39.5
                  %
                  
                  
                  (3,081
                  )
                  
                  
                  22.4
                  %PPG
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  55,844
                  
                  
                  
                  23.3
                  %
                  
                  $
                  52,402
                  
                  
                  
                  17.2
                  %
                  
                  $
                  (3,442
                  )
                  
                  
                  6.6
                  %
  29
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  The
primary reasons for the increase in gross profit percentage for sales services
segment were as follows:
  ·
              an
      increase in incentive revenue earned - $3.2 million greater in 2006 than
      2005;
 ·
              the
      higher margin businesses within marketing services were a greater portion
      of consolidated revenue than they were in the prior period (15.3% in 2006
      vs. 11.4% in 2005); and
 ·
              the
      gross profit percentage from our two largest customers was higher in 2006
      than in 2005.  The primary reasons for this improvement were: 1)
      greater incentive revenue earned; 2) fewer net contractual penalties
      incurred for failing to meet stated performance benchmarks; and 3) more
      stable service costs.  In 2005, the sharp increase in fuel and
      travel costs was greater than the rates specified in our contracts, which
      lowered our gross profit percentages; whereas in 2006 there was not a
      large disparity in fuel and travel costs when compared to our contractual
      reimbursements.
  The
increase in gross profit attributable to the marketing services segment was due
to the increase in gross profit associated with Pharmakon which had greater
revenue in 2006.  The gross profit percentage increased to 46.1% from
39.5% in the comparable prior year period due primarily to the increase in gross
profit at Pharmakon as well as an increase in gross profit percentage at
VIM.
  The PPG
segment had no gross profit in 2006 or 2005.
  (Note:
Compensation and other Selling, General and Administrative (other SG&A)
expense amounts for each segment contain allocated corporate
overhead.)
  Compensation
      expense (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2006
                
                
                revenue
                
                
                2005
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                19,410
                
                
                
                9.6
                %
                
                $
                18,397
                
                
                
                6.8
                %
                
                $
                1,013
                
                
                
                5.5
                %Marketing
      services
                
                
                8,665
                
                
                
                23.7
                %
                
                
                7,499
                
                
                
                21.6
                %
                
                
                1,166
                
                
                
                15.5
                %PPG
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                -
                
                
                
                (1
                )
                
                
                (100.0
                %)Total
                
                $
                28,075
                
                
                
                11.7
                %
                
                $
                25,897
                
                
                
                8.5
                %
                
                $
                2,178
                
                
                
                8.4
                %
 The
increase in compensation expense was primarily attributed to an increase in
incentive compensation accruals in 2006 as compared to 2005 due to our improved
performance of the company as compared to the incentive compensation accrued in
2005.  Increases in incentive accruals were partially offset by
decreases in salaries of approximately $2.9 million and the absence of a
national managers meeting, which cost approximately $800,000 in
2005.  As a percentage of total revenue, compensation expense
increased to 11.7% for 2006 from 8.5% in 2005 primarily due to the decrease in
revenue.
  The
increase in compensation expense for the marketing services segment was
primarily due to the increased amount of incentives accrued within the segment
in 2006.
  The PPG
segment did not have any compensation expense in 2006 or 2005.
  Other
      SG&A (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2006
                
                
                revenue
                
                
                2005
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                18,109
                
                
                
                8.9
                %
                
                $
                23,607
                
                
                
                8.7
                %
                
                $
                (5,498
                )
                
                
                (23.3
                %)Marketing
      services
                
                
                4,501
                
                
                
                12.3
                %
                
                
                5,775
                
                
                
                16.6
                %
                
                
                (1,274
                )
                
                
                (22.1
                %)PPG
                
                
                -
                
                
                
                -
                
                
                
                10
                
                
                
                -
                
                
                
                (10
                )
                
                
                (100.0
                %)Total
                
                $
                22,610
                
                
                
                9.5
                %
                
                $
                29,392
                
                
                
                9.6
                %
                
                $
                (6,782
                )
                
                
                (23.1
                %)
 Total
other SG&A decreased due to: 1) a decrease in facility costs of
approximately $1.2 million; 2) a reduction in bad debt expense of $1.8 million,
$755,000 of which was recorded in 2005 that pertained to the TMX loan (see Note
5 to the consolidated financial statements for further information); and 3) a
reduction in miscellaneous office operations expense of $1.9
million.  Some of the main categories within office operations expense
are business insurance, software licenses and maintenance, and telephone and
Internet charges.  As a percentage of total revenue, other SG&A
expenses decreased to 9.5% from 9.6% in 2005.
   30
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Other
SG&A expenses in the PPG segment were zero in 2006 and approximately $10,000
in 2005.
  Asset
impairment
  We
recognized asset impairment charges of $6.2 million for 2005.  The
charges related to 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 1 and 4 to the consolidated financial statements for
more details on these asset impairments.
  Executive
severance
  In 2006,
we incurred approximately $573,000 in executive severance costs that related to
the departure of one executive.  In 2005 we incurred approximately
$5.7 million in executive severance costs.  These expenses were
primarily attributable to resignations of our CEO - $2.8 million, and our CFO -
$1.6 million.  The remaining costs pertained to other executives who
resigned during the year or for which settlements were reached during that
period.
  Legal
and related costs
  In 2006,
we had a net credit to legal expense of $3.3 million as compared to $1.7 million
in expense in 2005.  The credit to legal expense included
approximately $3.5 million in cash received in relation to the Cellegy
litigation matter and approximately $516,000 in credits related to the reversing
of the California class action lawsuit accrual.  For details on both
legal matters, see Note 9 to the consolidated financial statements.In 2005, legal expense
primarily consisted oflegal fees associated
with the Cellegy litigation matter, net of any settlement payments received and
$566,000 that was accrued for the California class action lawsuit.
  Facilities
realignment
  In 2006,
we had net charges of approximately $657,000 related to unused office space
capacity at our Saddle River, New Jersey and Dresher, Pennsylvania locations and
approximately $1.3 million in expense related to the impairment of fixed assets
associated with the unused office space at these facilities.  Total
charges in 2006 for the sales services segment were approximately $1.3 million
and approximately $675,000 was charged to the marketing services
segment.  In 2005, we took charges of approximately $2.4 million
related to unused office space capacity at our Saddle River and Dresher
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.
  Operating
      income (loss) (in thousands)%
      of
                
                
                
                
                
                %
      of
                
                
                Change
                
                
                Change2006
                
                
                revenue
                
                
                2005
                
                
                revenue
                
                
                ($)
                
                
                (%)Sales
      services
                
                $
                33
                
                
                
                0.0
                %
                
                $
                (17,386
                )
                
                
                (6.4
                %)
                
                $
                17,419
                
                
                
                100.2
                %Marketing
      services
                
                
                2,798
                
                
                
                7.7
                %
                
                
                (1,186
                )
                
                
                (3.4
                %)
                
                
                3,984
                
                
                
                335.9
                %PPG
                
                
                3,082
                
                
                
                0.0
                %
                
                
                (268
                )
                
                
                0.0
                %
                
                
                3,350
                
                
                
                1,250.0
                %Total
                
                $
                5,913
                
                
                
                2.5
                %
                
                $
                (18,840
                )
                
                
                (6.2
                %)
                
                $
                24,753
                
                
                
                131.4
                %
  The large
increase in operating income  was attributable to several factors,
including the following: 1) a reduction in corporate overhead; 2) an improved
contribution from the marketing services segment; 3) net $3.1 million in
operating income that pertained primarily to the settling of the Cellegy
litigation matter; 4) asset impairments totaling $6.2 million that impacted
2005; and 5) improved performance of Select Access, which showed a $4.4 million
increase in gross profit that led to higher operating income.  The
asset impairments in 2005 and the improved performance of Select Access were two
of the main factors for this increase.  The loss in marketing services
segment in 2005 was primarily attributable to the facilities realignment
expenses associated with this segment.   There was operating
income of $3.1 million in 2006 in the PPG segment, which consisted entirely of
settlement payments from Cellegy, net of legal expenses.  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.
  Gain/loss
on investment
  We
recognized a gain on sale of our In2Focus investment of approximately $4.4
million in the second quarter of 2005.
   31
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Interest
income, net
  Interest
income, net, for 2006 and 2005 was approximately $4.7 million and $3.2 million,
respectively.  The increase was primarily attributable to an increase
in interest rates for 2006 as well as larger available cash
balances.
  Provision
for income taxes
  We
recorded a benefit for income taxes of $724,000 for 2006, compared to a
provision for income taxes of $201,000 for 2005.  Our overall
effective tax rate was a benefit of 6.8% and a provision of 1.8% for 2006 and
2005, respectively.  The 2006 rate included: 1) a reduction in valuation
allowance of $2.9 million related to deferred tax assets realized in 2006 which
corresponded to a rate benefit of 26.9%; 2) tax-exempt income of $1.8 million
that corresponded to a rate benefit of 6.0%; and 3) state tax benefits of $1.2
million that corresponded to a rate benefit of 11.3%.  Without those items,
we would have had a 37.4% effective tax rate in
2006.
 Income
(loss) from continuing operations
  There was
income from continuing operations for 2006 of approximately $11.4 million,
compared to a loss from continuing operations of approximately $11.4 million for
2005.
  Discontinued
operations
  Revenue
from discontinued operations for 2006 and 2005 was approximately $1.9 million
and $14.2 million, respectively.  There was income from discontinued
operations before income tax for 2006 of $693,000 and a loss from discontinued
operations before income tax for 2005 of $8.0 million.  Income from
discontinued operations, net of tax, for 2006 was approximately
$434,000.  There was a loss from discontinued operations for 2005 of
approximately $8.0 million, primarily attributable to the write-off of MD&D
goodwill.
  Net
income (loss)
  There was
net income of $11.8 million in 2006, compared to a net loss for 2005 of $19.5
million, due to the factors discussed above.
   LIQUIDITY
      AND CAPITAL RESOURCES
  As of
December 31, 2007, we had cash and cash equivalents and short-term investments
of approximately $107.0 million and working capital of $111.6 million, compared
to cash and cash equivalents and short-term investments of approximately $114.7
million and working capital of approximately $112.2 million at December 31,
2006.
  During
2007, net cash used in operating activities was $6.2 million as compared to net
cash provided by operating activities of $19.7 million during
2006.  The primarily use of cash was to fund operations due to the
decline in operating revenue in all segments in 2007.  Additionally,
unearned revenue declined by $5.8 million due to the decline in revenue and a
significant customer revising its procurement policy (we can no longer pre-bill
for services), partially offset by the collection of accounts receivable of $2.7
million and receipt of a Federal income tax refund of $1.9
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, 2007, we had $3.5 million of unbilled costs and accrued profits on
contracts in progress.  When services are performed in advance of
billing, the value of such services is recorded as unbilled costs and accrued
profits on contracts in progress.  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, 2007, we had $8.5 million of
unearned contract revenue. When we bill customers for services before the
revenue has been earned, billed amounts are recorded as unearned contract
revenue, and are recorded as income when earned.
  For the
year ended December 31, 2007, net cash provided by investing activities was
$60.6 million.  The main components consisted of the
following:
  ·
              Approximately
      $61.5 million provided by the sale of short-term investments for the year
      ended December 31, 2007 as compared to $63.9 million used in the purchase
      of short term investments for the year ended December 31,
      2006.  This reflected a movement towards investments that have
      greater liquidity and shorter-term maturities when compared to the prior
      year period.
   32
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  ·
              Capital
      expenditures for the year ended December 31, 2007 of $1.0 million and for
      the year ended December 31, 2006 of $1.8 million, which consisted
      primarily of capital expenditures associated with information technology
      and other computer–related expenditures in both
  years.
  For the
year ended December 31, 2007, net cash used in financing activities was
approximately $460,000.  Approximately $219,000 represents shares that
were delivered back to us and included in treasury stock for the payment of
taxes resulting from the vesting of restricted stock.  Approximately
$241,000 represents the excess tax expense on stock compensation.  For
the year ended December 31, 2006, net cash provided by financing activities
consisted of $110,000 related to the exercise of stock options, net of related
tax effects.
  We had
standby letters of credit of approximately $7.3 million and $9.7 million at
December 31, 2007 and 2006, respectively, as collateral for our existing
insurance policies and our facility leases.  Our standby letters of credit
are evergreen in that they automatically renew every year unless cancelled in
writing by us with consent of the beneficiary, generally not less than 60 days
before the expiry date.
  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, 2007, we had three major customers that accounted for approximately 13.7%,
12.9% and 11.3%, respectively, or a total of 37.9% of our service revenue. We
are likely to continue to experience a high degree of customer concentration,
particularly if there is further consolidation within the pharmaceutical
industry. The loss or a significant reduction of business from any of our major
customers, or a decrease in demand for our services, could have a material
adverse effect on our business, financial condition or results of operations.
For example, on March 21, 2007, we announced that a large pharmaceutical company
customer – our largest in 2007, had notified us of its intention not to renew
its contract sales engagement with us upon its scheduled expiration on May 12,
2007.
  In 2007,
we had net charges of approximately $1.0 million primarily related to the
impairment of fixed assets and other expenses related to exiting our computer
data center space at our Saddle River, New Jersey location.  In 2006,
we had net charges of approximately $657,000 related to unused office space
capacity at our Saddle River, New Jersey and Dresher, Pennsylvania locations and
$1.3 million in asset impairment charges for leasehold improvements and
furniture and fixtures associated with the unused office space at those
facilities.  In 2007, we entered into subleases for the remaining
space at Saddle River as well as two of the three vacant spaces at
Dresher.  There is approximately 4,100 square feet of unused office
space at Dresher which we are seeking to sublease in 2008.  We do not
anticipate any significant capital expenditures or charges related to the
remaining unused office space in 2008.  A rollforward of the activity
for the facility realignment plan is as follows:
  Balance
      as of December 31, 2005
                
                $
                2,335Accretion
                
                
                51Payments
                
                
                (680
                )Adjustments
                
                
                606Balance
      as of December 31, 2006
                
                $
                2,312Accretion
                
                
                21Payments
                
                
                (1,378
                )Adjustments
                
                
                (280
                )Balance
      as of December 31, 2007
                
                $
                675
  Cash
flows from discontinued operations are included in the consolidated statement of
cash flows for the years ended December 31, 2006 and 2005.  The
absence of cash flows from the discontinued operations has had no material
impact on cash flows.  We are not expecting any material cash outlays
with regards to this discontinued operation in the future.
  As
discussed above under “Business – Strategy”, in connection with the
implementation of our long-term strategic plan, we intend to explore product
commercialization opportunities in which we would enter into arrangements with
biopharmaceutical companies to provide sales and marketing support services and
potentially limited capital in connection with the promotion of pharmaceutical
products in exchange for a percentage of product sales.  Due to the
structure of these types of arrangements, it is likely that we will incur
substantial losses in the first year of the contract as program ramp up
occurs.  While we expect to achieve increased profit margins over the
duration of the contract, there can be no assurance that any revenue under these
types of arrangements will be sufficient to offset the significant costs
associated with implementing and maintaining these programs.
   33
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Acquisitions
are a part of our corporate strategy.  Although we expect to incur a
net loss for the year ending December 31, 2008 we believe that our existing cash
balances and expected cash flows generated from operations will be sufficient to
meet our operating requirements for at least the next 12
months.  However, we may require alternative forms of financing if and
when we make acquisitions.
  Contractual
      Obligations
  We have
committed cash outflow related to operating lease agreements, and other
contractual obligations. Minimum payments for these long-term obligations
are:
 Less
      than
                
                
                1
      to 3
                
                
                3
      to 5
                
                
                AfterTotal
                
                
                1
      Year
                
                
                Years
                
                
                Years
                
                
                5
      YearsContractual
      obligations (1)
                
                $
                3,977
                
                
                $
                2,545
                
                
                $
                1,432
                
                
                $
                -
                
                
                $
                -Operating
      lease obligationsMinimum
      lease payments
                
                
                27,573
                
                
                
                3,226
                
                
                
                6,529
                
                
                
                6,526
                
                
                
                11,292Less
      minimum sublease rentals(2)
                
                
                (6,171
                )
                
                
                (1,058
                )
                
                
                (1,992
                )
                
                
                (1,357
                )
                
                
                (1,764
                )Net
      minimum lease payments
                
                
                21,402
                
                
                
                2,168
                
                
                
                4,537
                
                
                
                5,169
                
                
                
                9,528Total
                
                $
                25,379
                
                
                $
                4,713
                
                
                $
                5,969
                
                
                $
                5,169
                
                
                $
                9,528
 (1)
              Amounts
      represent contractual obligations related to software license contracts,
      data center hosting, and outsourcing contracts for software system
      support.
  (2)
              In
      June 2005, we signed an agreement to sublease approximately 16,000 square
      feet of the first floor at our corporate headquarters facility in Saddle
      River, New Jersey.  The sublease is for a five-year term
      commencing July 15, 2005, and provides for approximately $2 million in
      lease payments over the five-year period.   In July 2007,
      we signed an agreement to sublease approximately 20,000 square feet of the
      second floor at our corporate headquarters.  The sublease term
      is through the remainder of our lease, which is approximately eight and
      one-half years and will provide for approximately $4.4 million in lease
      payments over that period.  Also in 2007, we signed two separate
      subleases at our facility in Dresher, Pennsylvania.  These
      subleases are for five-year terms and will provide approximately $650,000
      combined in lease payments over the five-year
  period.
  As a
result of the net operating loss carryback claims which have been filed or are
expected to be filed by us, and the impact of those claims on the relevant
statue of limitations, it is not practicable to predict the amount or timing of
the impact of FIN 48 liabilities in the table above and, therefore, these
liabilities have been excluded from the table above.
   Off-Balance
      Sheet Arrangements
  As of
December 31, 2007, we had no off-balance sheet arrangements.
   34
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  Selected
      Quarterly Financial Information
(unaudited)
  The
following table set forth selected quarterly financial information for the years
ended December 31, 2007 and 2006 (in thousands except per share
data):
 For
      the Quarters endedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      312007 Quarters:Revenues,
      net
                
                $
                32,802
                
                
                $
                27,784
                
                
                $
                23,969
                
                
                $
                32,576Gross
      profit
                
                
                8,975
                
                
                
                7,151
                
                
                
                5,766
                
                
                
                9,723Operating
      (loss) (1)
                
                
                (2,243
                )
                
                
                (3,887
                )
                
                
                (5,250
                )
                
                
                (2,900
                )Net
      loss
                
                
                (1,901
                )
                
                
                (2,497
                )
                
                
                (4,057
                )
                
                
                (1,519
                )Loss
      per share:Basic
                
                $
                (0.14
                )
                
                $
                (0.18
                )
                
                $
                (0.29
                )
                
                $
                (0.11
                )Diluted
                
                $
                (0.14
                )
                
                $
                (0.18
                )
                
                $
                (0.29
                )
                
                $
                (0.11
                )Weighted
      average number of shares:Basic
                
                
                13,908
                
                
                
                13,931
                
                
                
                13,956
                
                
                
                13,965Diluted
                
                
                13,908
                
                
                
                13,931
                
                
                
                13,956
                
                
                
                13,965For
      the Quarters endedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      312006 Quarters:Total
      revenues, net
                
                $
                77,144
                
                
                $
                54,951
                
                
                $
                51,317
                
                
                $
                55,830Gross
      profit
                
                
                18,704
                
                
                
                11,958
                
                
                
                12,403
                
                
                
                12,779Operating
      income (loss) (2)
                
                
                7,504
                
                
                
                37
                
                
                
                (611
                )
                
                
                (1,017
                )Income
      fromcontinuing
      operations
                
                
                5,422
                
                
                
                707
                
                
                
                409
                
                
                
                4,837Income
      (loss) from discontinuedoperations,
      net of tax
                
                
                199
                
                
                
                188
                
                
                
                54
                
                
                
                (7
                )Net
      income
                
                
                5,621
                
                
                
                895
                
                
                
                463
                
                
                
                4,830Income
      (loss) per share:BasicContinuing
      operations
                
                $
                0.39
                
                
                $
                0.05
                
                
                $
                0.03
                
                
                $
                0.35Discontinued
      operations
                
                
                0.01
                
                
                
                0.01
                
                
                
                0.00
                
                
                
                (0.00
                )$
                0.41
                
                
                $
                0.06
                
                
                $
                0.03
                
                
                $
                0.35DilutedContinuing
      operations
                
                $
                0.39
                
                
                $
                0.05
                
                
                $
                0.03
                
                
                $
                0.35Discontinued
      operations
                
                
                0.01
                
                
                
                0.01
                
                
                
                0.00
                
                
                
                (0.00
                )$
                0.40
                
                
                $
                0.06
                
                
                $
                0.03
                
                
                $
                0.35Weighted
      average number of shares:Basic
                
                
                13,824
                
                
                
                13,857
                
                
                
                13,871
                
                
                
                13,883Diluted
                
                
                13,914
                
                
                
                13,953
                
                
                
                13,987
                
                
                
                13,995
 Note:
Quarterly information in 2006 reflects our results of operations shown excluding
the MD&D unit, which was reported as a discontinued operation beginning in
the second quarter of 2006.  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 September 30, 2007 includes facilities realignment costs of
      $0.1 million.  The quarter ended December 31, 2007 includes
      facilities realignment costs of $0.9
million.
  (2)
              The
      quarter ended June 30, 2006 includes facilities realignment costs of $0.3
      million.  The quarter ended December 31, 2006 includes a $2.5
      million credit to expense as a result of the Cellegy litigation
      settlement;
   35
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  $1.6
      million in facilities realignment costs; and $0.6 million in executive
      severance costs.
  Our
results of operations have varied, and are expected to continue to vary, from
quarter to quarter. These fluctuations result from a number of factors
including, among other things, the timing of commencement, completion or
cancellation of major contracts. In the future, our revenue may also fluctuate
as a result of a number of additional factors, including the types of products
we market and sell, delays or costs associated with acquisitions, government
regulatory initiatives and conditions in the healthcare industry generally.
Revenue, generally, is recognized as services are performed.  Program
costs, other than training costs, are expensed as incurred. As a result, we may
incur substantial expenses associated with staffing a new detailing program
during the first two to three months of a contract without recognizing any
revenue under that contract. This could have an adverse impact on our operating
results for the quarters in which those expenses are
incurred.  Revenue related to performance incentives is recognized in
the period when the performance based parameters are achieved and payment is
assured.  A significant portion of this revenue could be recognized in
the first and fourth quarters of a year.  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 the consolidated
financial statements for a further discussion of each item.
  We
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109” (FIN 48) on
January 1, 2007.  FIN 48 prescribes a recognition threshold and
measurement attributes for financial statement recognition and measurement of
tax positions taken or expected to be taken in tax returns. In addition, FIN 48
provides guidance on derecognition, classification and disclosure of tax
positions, as well as the accounting for related interest and
penalties.  Our adoption of FIN 48 did not have a material effect on
our financial position or results of operations.
  In
September 2006, the FASB issued SFAS No. 157 (FAS 157), “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This standard is
to be applied when other standards require or permit the use of fair value
measurement of an asset or liability.  The statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within that fiscal year. However, on February 12, 2008, the
FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No.
157” (FSP 157-2), which delays the effective date of FAS 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). FSP 157-2 defers the effective date of FAS 157
to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of FSP 157-2. We adopted
the required provision of FAS 157 as of January 1, 2008. We do not expect
the adoption of FAS 157 to have a material impact on its consolidated financial
position or results of operations.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement
No. 115” (FAS 159).  FAS 159 permits entities to elect to
measure eligible financial instruments at fair value.  An entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize
upfront costs and fees related to those items in earnings as incurred and not
deferred.  The provisions of this standard will be effective for our
2008 fiscal year.  Although we adopted SFAS 159 as of January 1,
2008, we have not yet elected the fair value option for any items permitted
under SFAS 159.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (Revised 2007) (SFAS 141R), Business Combinations. SFAS
141R will change the accounting for business combinations. Under SFAS 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS 141R will have an impact on accounting
for business combinations once adopted but the effect is dependent upon
acquisitions at that time.
  
 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
   36
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  foreign
currency risk or commodity price risk.  We have no financial
instruments held for trading purposes and we have no interest bearing long term
or short term debt.  At December 31, 2007, 2006, and 2005, we did not
hold any derivative financial instruments.
  The
objectives of our investment activities are: to preserve capital, maintain
liquidity, and maximize returns without significantly increasing
risk.  In accordance with our investment policy, we attempt to achieve
these objectives by investing our cash in a variety of financial
instruments.  These investments are principally restricted to
government sponsored enterprises, high-grade bank obligations, investment-grade
corporate bonds, certain money market funds of investment grade debt instruments
such as obligations of the U.S. Treasury and U.S. Federal Government Agencies,
municipal bonds and commercial paper.
  Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk.  Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates
fall.  Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities that have seen a decline in
market value due to changes in interest rates.   Our cash and
cash equivalents and short term investments at December 31, 2007 were composed
of the instruments described in the preceding paragraph.   All of
those investments mature by June 2008, with the majority maturing within the
first four months of 2008.  If interest rates were to increase or
decrease by one percent, the fair value of our investments would have an
insignificant increase or decrease primarily due to the quality of the
investments and the relative near term maturity.
   ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
  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.
  ITEM
      9A.
              CONTROLS
      AND PROCEDURES
    (a)
              Disclosure
      Controls and Procedures
  Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this Form
10-K.  Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms; and (ii) accumulated and
communicated to management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
  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 errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. 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
      Annual Report on Internal Control over Financial
  Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. 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, 2007, our
internal control over financial reporting is effective based on these criteria.
The effectiveness of our internal control over financial reporting as of
December 31, 2007 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in its report appearing in this
Form 10-K, which report expressed an unqualified opinion
   37
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  on the
effectiveness of our internal control over financial reporting as of December
31, 2007.
   (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, 2007 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 Stockholders of PDI, Inc.
  We have
audited PDI, Inc.’s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). PDI Inc.’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  In our
opinion, PDI, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO
criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PDI, Inc. as
of December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2007 of PDI, Inc. and our report dated March 7,
2008 expressed an unqualified opinion thereon.
  /s/Ernst
      &Young LLPIselin,
      New JerseyMarch
      7, 2008
  
   38
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
   ITEM
      9B.
              OTHER
      INFORMATION
  None.
  PART
III
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Information
relating to directors and executive officers of the registrant that is
responsive to Item 10 of this Form 10-K will be included in our Proxy Statement
in connection with our 2008 annual meeting of stockholders and such information
is incorporated by reference herein.
   ITEM
      11.
              EXECUTIVE
      COMPENSATION
  Information
relating to executive compensation that is responsive to Item 11 of this Form
10-K will be included in our Proxy Statement in connection with our 2008 annual
meeting of stockholders and such information is incorporated by reference
herein.
   ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  Information
relating to security ownership of certain beneficial owners and management that
is responsive to Item 12 of this Form 10-K will be included in our Proxy
Statement in connection with our 2008 annual meeting of stockholders and such
information is incorporated by reference herein.
   ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  Information
relating to certain relationships and related transactions that is responsive to
Item 13 of this Form 10-K will be included in our Proxy Statement in connection
with our 2008 annual meeting of stockholders and such information is
incorporated by reference herein.
  ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
  Information
relating to principal accounting fees and services that is responsive to Item 14
of this Form 10-K will be included in our Proxy Statement in connection with our
2008 annual meeting of stockholders and such information is incorporated by
reference herein.
   39
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  PART
IV
   ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
  (a)
              The
      following documents are filed as part of this Form
  10-K:
  (1)
              Financial
      Statements – See Index to Financial Statements on page F-1 of this
      report.
  (2)
              Financial
      Statement Schedule
  Schedule
II:                           Valuation
and Qualifying Accounts
  All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
  (3)
              Exhibits
  Exhibit
      No.
              
              Description3.1
              
              Certificate
      of Incorporation of PDI, Inc. (1)3.2
              
              By-Laws
      of PDI, Inc. (1)3.3
              
              Certificate
      of Amendment of Certificate of Incorporation of PDI, Inc. (3)4.1
              
              Specimen
      Certificate Representing the Common Stock (1)10.1*
              
              Form
      of 1998 Stock Option Plan (1)10.2*
              
              Form
      of 2000 Omnibus Incentive Compensation Plan (2)10.3*
              
              Agreement
      between the Company and John P. Dugan (1)10.4*
              
              Form
      of Employment Separation Agreement between the Company and Steven K. Budd,
      filed herewith10.5*
              
              Form
      of Amended and Restated Employment Agreement between the Company and
      Stephen Cotugno (3)10.6
              
              Saddle
      River Executive Centre Lease (5)10.7*
              
              2004
      Stock Award and Incentive Plan (4)10.8*
              
              Form
      of Agreement between the Company and Larry Ellberger (5)10.9*
              
              Form
      of Agreement between the Company and Bernard C. Boyle (5)10.10*
              
              Memorandum
      of Understanding between the Company and Bernard C. Boyle (5)10.11*
              
              Amendment
      to Memorandum of Understanding between the Company and Bernard C. Boyle
      (5)10.12
              
              Saddle
      River Executive Centre 2005 Sublease Agreement (5)10.13*
              
              Form
      of Agreement between the Company and Michael J. Marquard (6)10.14*
              
              Form
      of Agreement between the Company and Jeffrey E. Smith (6)10.15*
              
              Form
      of Agreement between the Company and Kevin Connolly(7)10.16
              
              Saddle
      River Executive Centre 2007 Sublease Agreement, filed
    herewith21.1
              
              Subsidiaries
      of the Registrant (3)23.1
              
              Consent
      of Ernst & Young LLP filed
herewith.
  40
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  
 Exhibit
      No.
              
              Description31.1
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 filed herewith.31.2
              
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 filed herewith.32.1
              
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed
      herewith.32.2
              
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed
      herewith.*
              Denotes
      compensatory plan, compensation arrangement or management
      contract.(1)
              Filed
      as an exhibit to our Registration Statement on Form S-1 (File No
      333-46321), and incorporated herein by reference.(2)
              Filed
      as an exhibit to our definitive proxy statement dated May 10, 2000, and
      incorporated herein by reference.(3)
              Filed
      as an exhibit to our Annual Report on Form 10-K for the year ended
      December 31, 2001, and incorporated herein by
reference.(4)
              Filed
      as an exhibit to our definitive proxy statement dated April 28, 2004, and
      incorporated herein by reference.(5)
              Filed
      as an exhibit to our Form 10-K for the year ended December 31, 2005, and
      incorporated herein by reference.(6)
              Filed
      as an exhibit to our Form 10-Q for the quarter ended June 30, 2006, and
      incorporated herein by reference.(7)
              Filed
      as an exhibit to our Form 10-K for the year ended December 31, 2006,
      and incorporated herein by
reference.
 
  (b)
              We
      have filed, as exhibits to this Form 10-K, the exhibits required by Item
      601 of the Regulation S-K.
   41
 PDI,
Inc.
 Annual
Report on Form 10-K (continued)
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 13th day of
March, 2008.
   PDI,
      INC./s/Michael J.
      MarquardMichael
      J. MarquardChief
      Executive Officer
 POWER
OF ATTORNEY
  PDI,
Inc., a Delaware Corporation, and each person whose signature appears below
constitutes and appoints each of Michael J. Marquard and Jeffrey E. Smith, and
either of them, such person’s true and lawful attorney-in-fact, with full power
of substitution and resubstitution, for such person and in such person’s name,
place and stead, in any and all capacities, to sign on such person’s behalf,
individually and in each capacity stated below, any and all amendments to this
Annual Report on Form 10-K and other documents in connection therewith, and to
file the same and all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact, or any
of them, or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Form 10-K has been signed by the following persons on behalf of the Registrant
and in the capacities indicated and on the 13th day of March, 2008.
  Signature
              
              Title/s/
      John P. Dugan
              
              Chairman
      of the Board of DirectorsJohn
      P. Dugan/s/Michael J.
      Marquard
              
              Chief
      Executive Officer and DirectorMichael
      J. Marquard
              
              (principal
      executive officer)/s/
      Jeffrey E. Smith
              
              Chief
      Financial Officer and TreasurerJeffrey
      E. Smith
              
              (principal
      accounting and financial officer)/s/
      John M. Pietruski
              
              DirectorJohn
      M. Pietruski/s/
      Jan Martens Vecsi
              
              DirectorJan
      Martens Vecsi/s/
      Frank Ryan
              
              DirectorFrank
      Ryan/s/
      John Federspiel
              
              DirectorJohn
      Federspiel/s/
      Dr. Joseph T. Curti
              
              DirectorDr.
      Joseph T. Curti/s/
      Stephen J. Sullivan
              
              DirectorStephen
      J. Sullivan/s/
      Jack E. Stover
              
              DirectorJack
      E. Stover
  42
 PDI,
Inc.
 Index
to Consolidated Financial Statements
 and
Financial Statement Schedules
  PageReport
      of Independent Registered Public Accounting Firm
              F-2Financial
      StatementsConsolidated
      Balance Sheets at December 31, 2007 and 2006
              F-3Consolidated
      Statements of Operations for each of the three yearsin
      the period ended December 31, 2007
              F-4Consolidated
      Statements of Stockholders’ Equity for each of the three
    yearsin
      the period ended December 31, 2007
              F-5Consolidated
      Statements of Cash Flows for each of the three yearsin
      the period ended December 31, 2007
              F-6Notes
      to Consolidated Financial Statements
              F-7Schedule
      II.  Valuation and Qualifying Accounts
              F-30
  F-1
  
  Report
of Independent Registered Public Accounting Firm
  The
      Board of Directors and Stockholders of PDI,
  Inc.:
  We have
audited the accompanying consolidated balance sheets of PDI, Inc. as of December
31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2007. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on the financial statements and schedule
based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PDI, Inc. at December
31, 2007 and 2006, and the consolidated results of its  operations and
its cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S.
generally  accepted  accounting  principles.  Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), PDI, Inc.’s internal control over financial
reporting as of December 31, 2007, 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 7, 2008 expressed an
unqualified opinion thereon.
  
 /s/Ernst
      &Young LLPIselin,
      New JerseyMarch
      7, 2008
 
 
 
 
 
  F-2
  PDI, INC.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share data)December
      31,
                
                
                December
      31,2007
                
                
                2006ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                99,185
                
                
                $
                45,221Short-term
      investments
                
                
                7,800
                
                
                
                69,463Accounts
      receivable, net of allowance for doubtful accounts of$0
      and $36, respectively
                
                
                22,751
                
                
                
                25,416Unbilled
      costs and accrued profits on contracts in progress
                
                
                3,481
                
                
                
                4,224Other
      current assets
                
                
                7,558
                
                
                
                12,416Total
      current assets
                
                
                140,775
                
                
                
                156,740Property
      and equipment, net
                
                
                8,348
                
                
                
                12,809Goodwill
                
                
                13,612
                
                
                
                13,612Other
      intangible assets, net
                
                
                14,669
                
                
                
                15,950Other
      long-term assets
                
                
                2,150
                
                
                
                2,525Total
      assets
                
                $
                179,554
                
                
                $
                201,636LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                2,792
                
                
                $
                3,915Unearned
      contract revenue
                
                
                8,459
                
                
                
                14,252Accrued
      incentives
                
                
                5,953
                
                
                
                9,009Other
      accrued expenses
                
                
                11,984
                
                
                
                17,378Total
      current liabilities
                
                
                29,188
                
                
                
                44,554Long-term
      liabilities
                
                
                10,177
                
                
                
                7,885Total
      liabilities
                
                
                39,365
                
                
                
                52,439Commitments
      and contingencies (Note 9)Stockholders’
      equity:Preferred
      stock, $.01 par value; 5,000,000 shares authorized, noshares
      issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $.01 par value; 100,000,000 shares authorized;15,222,715
      and 15,096,976 shares issued, respectively;14,183,236
      and 14,078,970 shares outstanding, respectively
                
                
                152
                
                
                
                151Additional
      paid-in capital
                
                
                120,422
                
                
                
                119,189Retained
      earnings
                
                
                33,018
                
                
                
                42,992Accumulated
      other comprehensive income
                
                
                30
                
                
                
                79Treasury
      stock, at cost (1,039,479 and 1,018,006 shares,
    respectively)
                
                
                (13,433
                )
                
                
                (13,214
                )Total
      stockholders' equity
                
                
                140,189
                
                
                
                149,197Total
      liabilities and stockholders' equity
                
                $
                179,554
                
                
                $
                201,636The
      accompanying notes are an integral part of these consolidated financial
      statements
  F-3
  PDI,
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except for per share data)For
      The Years Ended December 31,2007
              
              
              2006
              
              
              2005Revenue,
      net
              
              $
              117,131
              
              
              $
              239,242
              
              
              $
              305,205Cost
      of services
              
              
              85,516
              
              
              
              183,398
              
              
              
              252,803Gross
      profit
              
              
              31,615
              
              
              
              55,844
              
              
              
              52,402Operating
      expenses:Compensation
      expense
              
              
              24,516
              
              
              
              28,075
              
              
              
              25,897Other
      selling, general and administrative expenses
              
              
              19,981
              
              
              
              22,610
              
              
              
              29,392Asset
      impairment
              
              
              42
              
              
              
              -
              
              
              
              6,178Executive
      severance
              
              
              -
              
              
              
              573
              
              
              
              5,730Legal
      and related costs, net
              
              
              335
              
              
              
              (3,279
              )
              
              
              1,691Facilities
      realignment
              
              
              1,021
              
              
              
              1,952
              
              
              
              2,354Total
      operating expenses
              
              
              45,895
              
              
              
              49,931
              
              
              
              71,242Operating
      (loss) income
              
              
              (14,280
              )
              
              
              5,913
              
              
              
              (18,840
              )Gain
      on investments
              
              
              -
              
              
              
              -
              
              
              
              4,444Interest
      income, net
              
              
              6,073
              
              
              
              4,738
              
              
              
              3,190(Loss)
      income before income tax
              
              
              (8,207
              )
              
              
              10,651
              
              
              
              (11,206
              )Provision
      (benefit) for income tax
              
              
              1,767
              
              
              
              (724
              )
              
              
              201(Loss)
      income from continuing operations
              
              
              (9,974
              )
              
              
              11,375
              
              
              
              (11,407
              )Income
      (loss) from discontinued operations,net
      of tax
              
              
              -
              
              
              
              434
              
              
              
              (8,047
              )Net
      (loss) income
              
              $
              (9,974
              )
              
              $
              11,809
              
              
              $
              (19,454
              )(Loss)
      income per share of common stock:Basic:Continuing
      operations
              
              $
              (0.72
              )
              
              $
              0.82
              
              
              $
              (0.80
              )Discontinued
      operations
              
              
              -
              
              
              
              0.03
              
              
              
              (0.57
              )$
              (0.72
              )
              
              $
              0.85
              
              
              $
              (1.37
              )Assuming
      dilution:Continuing
      operations
              
              $
              (0.72
              )
              
              $
              0.81
              
              
              $
              (0.80
              )Discontinued
      operations
              
              
              -
              
              
              
              0.03
              
              
              
              (0.57
              )$
              (0.72
              )
              
              $
              0.84
              
              
              $
              (1.37
              )Weighted
      average number of common shares andcommon
      share equivalents outstanding:Basic
              
              
              13,940
              
              
              
              13,859
              
              
              
              14,232Assuming
      dilution
              
              
              13,940
              
              
              
              13,994
              
              
              
              14,232The
      accompanying notes are an integral part of these consolidated financial
      statements
    F-4
  PDI,
      INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY(in
      thousands)For
      The Years Ended December 31,2007
                
                
                2006
                
                
                2005Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                AmountCommon
      stock:Balance
      at January 1
                
                
                15,097
                
                
                $
                151
                
                
                
                14,948
                
                
                $
                149
                
                
                
                14,820
                
                
                $
                148Common
      stock issued
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                68
                
                
                
                1Restricted
      stock issued
                
                
                167
                
                
                
                1
                
                
                
                155
                
                
                
                2
                
                
                
                43
                
                
                
                -Restricted
      stock forfeited
                
                
                (41
                )
                
                
                -
                
                
                
                (23
                )
                
                
                -
                
                
                
                (24
                )
                
                
                -SARs
      exercised
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      options exercised
                
                
                -
                
                
                
                -
                
                
                
                16
                
                
                
                -
                
                
                
                41
                
                
                
                -Balance
      at December 31
                
                
                15,223
                
                
                
                152
                
                
                
                15,097
                
                
                
                151
                
                
                
                14,948
                
                
                
                149Treasury
      stock:Balance
      at January 1
                
                
                1,018
                
                
                
                (13,214
                )
                
                
                1,018
                
                
                
                (13,214
                )
                
                
                5
                
                
                
                (110
                )Treasury
      stock purchased
                
                
                21
                
                
                
                (219
                )
                
                
                -
                
                
                
                -
                
                
                
                1,013
                
                
                
                (13,104
                )Balance
      at December 31
                
                
                1,039
                
                
                
                (13,433
                )
                
                
                1,018
                
                
                
                (13,214
                )
                
                
                1,018
                
                
                
                (13,214
                )Additional
      paid-in capital:Balance
      at January 1
                
                
                
                
                
                
                119,189
                
                
                
                
                
                
                
                118,325
                
                
                
                
                
                
                
                116,737Common
      stock issued
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                699Restricted
      stock issued
                
                
                
                
                
                
                (1
                )
                
                
                
                
                
                
                (2
                )
                
                
                
                
                
                
                533Restricted
      stock forfeited
                
                
                
                
                
                
                (164
                )
                
                
                
                
                
                
                (95
                )
                
                
                
                
                
                
                (494
                )Stock-based
      compensation expense
                
                
                
                1,640
                
                
                
                
                
                
                
                1,755
                
                
                
                
                
                
                
                259Stock
      grants exercised
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                87
                
                
                
                
                
                
                
                591Excess
      tax (expense) benefiton
      stock-based compensation
                
                
                
                (242
                )
                
                
                
                
                
                
                23
                
                
                
                
                
                
                
                -Reclassification
      of unamortized compensation
                
                
                -
                
                
                
                
                
                
                
                (904
                )
                
                
                
                
                
                
                -Balance
      at December 31
                
                
                
                
                
                
                120,422
                
                
                
                
                
                
                
                119,189
                
                
                
                
                
                
                
                118,325Retained
      earnings:Balance
      at January 1
                
                
                
                
                
                
                42,992
                
                
                
                
                
                
                
                31,183
                
                
                
                
                
                
                
                50,637Net
      (loss) income
                
                
                
                
                
                
                (9,974
                )
                
                
                
                
                
                
                11,809
                
                
                
                
                
                
                
                (19,454
                )Balance
      at December 31
                
                
                
                
                
                
                33,018
                
                
                
                
                
                
                
                42,992
                
                
                
                
                
                
                
                31,183Accumulated
      othercomprehensive
      income (loss):Balance
      at January 1
                
                
                
                
                
                
                79
                
                
                
                
                
                
                
                71
                
                
                
                
                
                
                
                76Reclassification
      of realized gain, net of tax
                
                
                
                (76
                )
                
                
                
                
                
                
                (33
                )
                
                
                
                
                
                
                (49
                )Unrealized
      holding gain, net of tax
                
                
                
                27
                
                
                
                
                
                
                
                41
                
                
                
                
                
                
                
                44Balance
      at December 31
                
                
                
                
                
                
                30
                
                
                
                
                
                
                
                79
                
                
                
                
                
                
                
                71Unamortized
      compensation costs:Balance
      at January 1
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                (904
                )
                
                
                
                
                
                
                (2,063
                )Restricted
      stock issued
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                (533
                )Restricted
      stock forfeited
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                494Restricted
      stock vested
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                1,198Reclassification
      to additional paid-in capital
                
                
                -
                
                
                
                
                
                
                
                904
                
                
                
                
                
                
                
                -Balance
      at December 31
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                (904
                )Total
      stockholders' equity
                
                
                
                
                
                
                140,189
                
                
                
                
                
                
                
                149,197
                
                
                
                
                
                
                
                135,610Comprehensive
      income (loss):Net
      (loss) income
                
                
                
                
                
                $
                (9,974
                )
                
                
                
                
                
                $
                11,809
                
                
                
                
                
                
                $
                (19,454
                )Reclassification
      of realized gain, net of tax
                
                
                
                (76
                )
                
                
                
                
                
                
                (33
                )
                
                
                
                
                
                
                (49
                )Unrealized
      holding gain, net of tax
                
                
                
                27
                
                
                
                
                
                
                
                41
                
                
                
                
                
                
                
                44Total
      comprehensive (loss) income
                
                
                
                
                
                $
                (10,023
                )
                
                
                
                
                
                $
                11,817
                
                
                
                
                
                
                $
                (19,459
                )The
      accompanying notes are an integral part of these consolidated financial
      statements
 F-5
  PDI, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)For
      The Years Ended December 31,2007
                
                
                2006
                
                
                2005Cash
      Flows From Operating ActivitiesNet
      (loss) income from operations
                
                $
                (9,974
                )
                
                $
                11,809
                
                
                $
                (19,454
                )Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation,
      amortization and accretion
                
                
                5,607
                
                
                
                5,764
                
                
                
                5,820Deferred
      income taxes, net
                
                
                1,113
                
                
                
                2,710
                
                
                
                6,447(Recovery
      of) provision for bad debt, net
                
                
                (15
                )
                
                
                (728
                )
                
                
                730(Recovery
      of) provision for doubtful notes, net
                
                
                (150
                )
                
                
                (250
                )
                
                
                655Stock-based
      compensation
                
                
                1,476
                
                
                
                1,660
                
                
                
                1,457Excess
      tax expense (benefit) from stock-based compensation
                
                
                242
                
                
                
                (23
                )
                
                
                -Loss
      on disposal of assets
                
                
                48
                
                
                
                -
                
                
                
                269Asset
      impairment
                
                
                42
                
                
                
                -
                
                
                
                14,351Non-cash
      facilities realignment
                
                
                796
                
                
                
                1,295
                
                
                
                -Gain
      on investment
                
                
                -
                
                
                
                -
                
                
                
                (4,444
                )Other
      changes in assets and liabilities:Decrease
      (increase) in accounts receivable
                
                
                2,680
                
                
                
                2,460
                
                
                
                (1,229
                )Decrease
      (increase) in unbilled costs
                
                
                743
                
                
                
                1,750
                
                
                
                (2,581
                )Decrease
      (increase) in other current assets
                
                
                4,858
                
                
                
                4,593
                
                
                
                (5,697
                )Decrease
      in other long-term assets
                
                
                375
                
                
                
                185
                
                
                
                218Decrease
      in accounts payable
                
                
                (1,123
                )
                
                
                (1,778
                )
                
                
                (41
                )(Decrease)
      increase in unearned contract revenue
                
                
                (5,793
                )
                
                
                1,654
                
                
                
                5,674Decrease
      in accrued incentives
                
                
                (3,056
                )
                
                
                (3,170
                )
                
                
                (5,470
                )(Decrease)
      increase in accrued liabilities
                
                
                (5,224
                )
                
                
                (8,489
                )
                
                
                1,869Increase
      in long-term liabilities
                
                
                1,179
                
                
                
                243
                
                
                
                4,541Net
      cash (used in) provided by operating activities
                
                
                (6,176
                )
                
                
                19,685
                
                
                
                3,115Cash
      Flows From Investing ActivitiesSales
      (purchases) of short-term investments, net
                
                
                61,460
                
                
                
                (63,881
                )
                
                
                21,686Repayments
      from Xylos
                
                
                150
                
                
                
                250
                
                
                
                100Purchase
      of property and equipment
                
                
                (1,009
                )
                
                
                (1,770
                )
                
                
                (5,832
                )Cash
      paid for acquisition, including acquisition costs
                
                
                -
                
                
                
                -
                
                
                
                (1,936
                )Proceeds
      from sale of assets and investments
                
                
                -
                
                
                
                -
                
                
                
                4,507Net
      cash provided by (used in) investing activities
                
                
                60,601
                
                
                
                (65,401
                )
                
                
                18,525Cash
      Flows From Financing ActivitiesExcess
      tax (expense) benefit from stock-based compensation
                
                
                (242
                )
                
                
                23
                
                
                
                -Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                87
                
                
                
                1,291Cash
      paid for repurchase of shares
                
                
                -
                
                
                
                -
                
                
                
                (13,104
                )Cash
      paid for repurchase of restricted shares
                
                
                (219
                )
                
                
                -
                
                
                
                -Net
      cash (used in) provided by financing activities
                
                
                (461
                )
                
                
                110
                
                
                
                (11,813
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                53,964
                
                
                
                (45,606
                )
                
                
                9,827Cash
      and cash equivalents – beginning
                
                
                45,221
                
                
                
                90,827
                
                
                
                81,000Cash
      and cash equivalents – ending
                
                $
                99,185
                
                
                $
                45,221
                
                
                $
                90,827Cash
      paid for interest
                
                $
                1
                
                
                $
                2
                
                
                $
                2Cash
      paid for taxes
                
                $
                123
                
                
                $
                640
                
                
                $
                1,513The
      accompanying notes are an integral part of these consolidated financial
      statements
  F-6
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements
 (tabular information in thousands,
except share and per share data)
  1.
              Nature
      of Business and Significant Accounting
Policies
  Nature
of Business
  PDI, Inc.
together with its wholly-owned subsidiaries (PDI or the Company) is a
diversified sales and marketing services company serving the biopharmaceutical
and life sciences industries.  See Note 18, Segment Information, for
additional information.
  Principles
of Consolidation
  The
accompanying consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP).  The
consolidated financial statements include accounts of PDI and its wholly owned
subsidiaries (TVG, Inc., ProtoCall, Inc., InServe Support Solutions (InServe),
and PDI Investment Company, Inc.)  All significant intercompany
balances and transactions have been eliminated in consolidation.  In
the second quarter of 2006, the Company discontinued its Medical Device and
Diagnostic (MD&D) business. The MD&D business was part of the Company's
sales services reporting segment. The MD&D business is accounted for as a
discontinued operation under GAAP and, therefore, the MD&D business results
of operations have been removed from the Company's results of continuing
operations for all prior periods presented.  See Note 17, Discontinued
Operations.
  Accounting
Estimates
  The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities reported and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  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.
  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
  Available-for-sale
securities are carried at fair value with the unrealized gains or losses, net of
tax, included as a component of accumulated other comprehensive income (loss) in
stockholders’ equity. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in other
income (expense), net. The fair values for marketable equity securities are
based on quoted market prices.  Held-to-maturity investments are
stated at amortized cost.  Interest income is accrued as
earned.  Realized gains and losses are computed based upon specific
identification and included in interest income, net in the consolidated
statement of operations.  The Company does not have any investments
classified as “trading.”
  Receivables
and Allowance for Doubtful Accounts
  Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  Management reviews a customer’s credit history before
extending credit.  The Company has recorded a provision for estimated
losses resulting from the inability of its customers to make required payments
based on historical experience and periodically adjusts these provisions to
reflect actual experience.  Additionally, the Company will establish a
specific allowance for doubtful accounts when the Company becomes aware of a
specific customer’s inability or unwillingness to meet its financial obligations
(e.g., bankruptcy filing).  Allowance for doubtful accounts was $0 and
approximately $36,000 as of December 31, 2007 and 2006,
respectively.
  The
Company operates almost exclusively in the pharmaceutical industry and to a
great extent its revenue is dependent on a limited number of large
pharmaceutical companies.  The Company also partners with customers in
the emerging pharmaceutical sector, some of whom may have limited financial
resources.  A general downturn in the pharmaceutical industry or
adverse material event to one or more of the Company’s emerging pharmaceutical
customers could result in higher than expected customer defaults and additional
allowances may be required.
   F-7
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  Unbilled
Costs and Accrued Profits and Unearned Contract Revenue
  In
general, contractual provisions, including predetermined payment schedules or
submission of appropriate billing detail, establish the prerequisites for
billings.  Unbilled costs and accrued profits arise when services have
been rendered and payment is assured but customers have not been
billed.  These amounts are classified as a current
asset.  Normally, in the case of detailing contracts, the customers
agree to pay the Company a portion of the fee due under a contract in advance of
performance of services because of large recruiting and employee development
costs associated with the beginning of a contract.  The excess of
amounts billed over revenue recognized represents unearned contract revenue,
which is classified as a current liability.
  Loans
and Investments in Privately Held Entities
  From time
to time, the Company makes investments in and/or loans to privately-held
companies.  The Company determines whether the fair values of any
investments in privately held entities have declined below their carrying value
whenever adverse events or changes in circumstances indicate that recorded
values may not be recoverable.  If the Company considers any such
decline to be other than temporary (based on various factors, including
historical financial results, and the overall health of the investee’s
industry), a write-down is recorded to estimated fair
value.  Additionally, on a quarterly basis, the Company reviews
outstanding loans receivable to determine if a provision for doubtful notes is
necessary.  These reviews include discussions with senior management
of the investee, and evaluations of, among other things, the investee’s progress
against its business plan, its product development activities and customer base,
industry market conditions, historical and projected financial performance,
expected cash needs and recent funding events.  The Company records
interest income on the impaired loans; however, that amount is fully reserved if
the investee is not making their interest payments.  Subsequent cash
receipts on the outstanding interest would be applied against the outstanding
interest receivable balance and the corresponding allowance.  The
Company’s assessments of value are highly subjective given that these companies
may be at an early stage of development and rely regularly on their investors
for cash infusions.  At December 31, 2007 and 2006, the allowance for
doubtful notes was approximately $500,000 and $700,000,
respectively.  See Note 5, Loans and Investments in Privately-Held
Entities, for additional information.
  Property
and Equipment
  Property
and equipment are stated at cost less accumulated
depreciation.  Depreciation is computed using the straight-line
method, based on estimated useful lives of seven to ten years for furniture and
fixtures, three to five years for office and computer equipment and ten years
for phone systems.  Leasehold improvements are amortized over the
shorter of the estimated service lives or the terms of the related
leases.  Repairs and maintenance are charged to expense as
incurred.  Upon disposition, the asset and related accumulated
depreciation are removed from the related accounts and any gains or losses are
reflected in operations.  As the prices of computer desktops and
laptops continue to decline, more of these computer purchases are falling short
of the Company’s minimum price threshold for capitalization and are being
expensed.  The Company expects that trend to continue.
  Software
Costs
  It is the
Company’s policy to capitalize certain costs incurred in connection with
developing or obtaining internal-use software.  Capitalized software
costs are included in property and equipment on the consolidated balance sheet
and amortized over the software's useful life, generally three to seven
years.  Software costs that do not meet capitalization criteria are
expensed immediately.
  Fair
Value of Financial Instruments
  The
Company considers carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses to approximate fair value due to the short-term
nature of these financial instruments.  Marketable securities
classified as “available for sale” are carried at fair
value.   Marketable securities classified as “held-to-maturity”
are carried at amortized cost, which approximates fair value.  The
fair value of letters of credit is determined to be $0 as management does not
expect any material losses to result from these instruments because performance
is not expected to be required.
   F-8
 
 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 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 identification and valuation of these intangible assets
and the determination of the estimated useful lives at the time of acquisition,
as well as the completion of annual impairment tests require significant
management judgments and estimates.  These estimates are made based
on, among other factors, consultations with an accredited independent valuation
consultant, reviews of projected future operating results and business plans,
economic projections, anticipated future cash flows and the cost of
capital.  The use of alternative estimates and assumptions could
increase or decrease the estimated fair value of goodwill and other intangible
assets, and potentially result in a different impact to the Company’s results of
operations.  Further, changes in business strategy and/or market
conditions may significantly impact these judgments thereby impacting the fair
value of these assets, which could result in an impairment of the goodwill and
acquired intangible assets.
  The
Company has elected to do the annual tests for indications of goodwill
impairment as of December 31of
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
2007 and 2006 evaluations indicated that there was no impairment of
goodwill.  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 4, Goodwill and Other
Intangible Assets, for additional information.
  Long-Lived
Assets
  The
Company reviews the recoverability of long-lived assets and finite-lived
intangible assets whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable.  If the sum of
the expected future undiscounted cash flows is less than the carrying amount of
the asset, an impairment loss is recognized by reducing the recorded value of
the asset to its fair value measured by future discounted cash
flows.  This analysis requires estimates of the amount and timing of
projected cash flows and, where applicable, judgments associated with, among
other factors, the appropriate discount rate.  Such estimates are
critical in determining whether any impairment charge should be recorded and the
amount of such charge if an impairment loss is deemed to be
necessary.  In addition, future events impacting cash flows for
existing assets could render a write-down or write-off necessary that previously
required no such write-down or write-off.
  In 2007
the Company recorded a non-cash charge of approximately $1.1 million related to
computer equipment, furniture and leasehold improvements primarily due to the
outsourcing of the Company’s computer data center space at its Saddle River, New
Jersey location.  In December 2007, the Company relocated its data
center to a secured, hosted facility.  See Note 14, Facilities
Realignment, for additional information.  Additionally, in 2007, the
Company recorded a non-cash charge of approximately $42,000 related to the
impairment of certain capitalized software development costs associated with one
of its web portals.  In 2006, the Company recorded a non-cash charge
of approximately $1.3 million for furniture and leasehold improvements related
to the excess leased space at its Saddle River, New Jersey and Dresher,
Pennsylvania locations.  See Note 14, Facilities Realignment, for
additional information.  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 due to the migration of the Company’s sales
force automation software to the Dendrite platform.  Also in 2005, the
Company recorded a non-cash charge of approximately $349,000 related to the
impairment of the InServe intangible assets.  See Note 4, Goodwill and
Other Intangible Assets, for additional information.
  Self-Insurance
Accruals
  The
Company is self-insured for certain losses for claims filed and claims incurred
but not reported relating to workers’ compensation and automobile-related
liabilities for Company-leased cars.  The Company’s liability is
estimated on an actuarial undiscounted basis supplied by its insurance brokers
and insurers using individual case-based valuations and statistical analysis and
is based upon judgment and historical experience, however, the final cost of
many of these claims may not be known for five years or longer.  In
2007, the Company also is self-insured for benefits paid under employee
healthcare programs.  The Company’s liability for
healthcare
   F-9
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  claims is
estimated using an underwriting determination which is based on current year’s
average lag days between when a claim is incurred to when it is
paid.
  The
Company maintains stop-loss coverage with third-party insurers to limit its
total exposure on all of these programs.  Periodically, the Company
evaluates the level of insurance coverage and adjusts insurance levels based on
risk tolerance and premium expense.  Management reviews its
self-insurance accruals on a quarterly basis.  At December 31, 2007
and 2006, self-insurance accruals totaled $2.9 million and $2.5 million,
respectively, and are included in other accrued expenses on the balance
sheet.
  Treasury
Stock
  Treasury
stock purchases are accounted for under the cost method whereby the entire cost
of the acquired stock is recorded as treasury stock.  Upon reissuance
of shares of treasury stock, the Company records any difference between the
weighted-average cost of such shares and any proceeds received as an adjustment
to additional paid-in capital.
  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 two years and may be renewed or extended.  The majority of
these contracts, however, are terminable by the customer for any reason upon 30
to 90 days’ notice.  Certain contracts provide for termination
payments if the customer terminates the agreement without
cause.  Typically, however, these penalties do not offset the revenue
the Company could have earned under the contract or the costs the Company may
incur as a result of its termination.  The loss or termination of a
large pharmaceutical detailing contract or the loss of multiple contracts could
have a material adverse effect on the Company’s business, financial condition or
results of operations.   See Note 12, Significant
Customers.
  Revenue
and associated costs under marketing service contracts are generally based on a
single deliverable such as a promotional program, accredited continuing medical
education seminar or marketing research/advisory program.  The
contracts are generally terminable by the customer for any
reason.  Upon termination, the customer is generally responsible for
payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the customer.  There is significant
customer concentration in the Company’s Pharmakon business, and the loss or
termination of one or more of Pharmakon’s large master service agreements could
have a material adverse effect on the Company’s business, financial condition or
results of operations.  Due to the typical size of most contracts of
TVG Marketing Research and Consulting (TVG) and Vital Issues in Medicine (VIM)®,
it is unlikely the loss or termination of any individual TVG or VIM contract
would have a material adverse effect on the Company’s business, financial
condition or results of operations.
  Service
revenue is recognized on product detailing programs and certain marketing,
promotional and medical education contracts as services are performed and the
right to receive payment for the services is assured. Many of the product
detailing contracts allow for additional periodic incentive fees to be earned if
certain performance benchmarks have been attained. Revenue earned from incentive
fees is recognized in the period earned and when the Company is reasonably
assured that payment will be made.  Under performance based contracts,
revenue is recognized when the performance based parameters are
achieved.  Many contracts also stipulate penalties if agreed upon
performance benchmarks have not been met.  Revenue is recognized net
of any potential penalties until the performance criteria relating to the
penalties have been achieved.  Commissions based revenue is recognized
when performance is completed.  Revenue from recruiting and hiring
contracts is recognized at the time the candidate begins full-time employment
less a provision for sales allowances based on contractual commitments and
historical experience.  Revenue and associated costs from marketing
research contracts are recognized upon completion of the
contract.  These contracts are generally short-term in nature
typically lasting two to six months.
  Historically,
the Company has derived a significant portion of its service revenue from a
limited number of customers.  Concentration of business in the
pharmaceutical services industry is common and the industry continues to
consolidate.  As a result, the Company is likely to continue to
experience significant customer concentration in future periods.  For
the years ended December 31, 2007 and 2005, the Company’s three largest
customers, who each individually represented 10% or more of its service revenue,
together accounted for
   F-10
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  approximately
37.9% and 73.6% of its service revenue, respectively.  For the year
ended December 31, 2006 the Company’s two largest customers, who each
individually represented 10% or more of its service revenue, together accounted
for approximately 46.8% of its service revenue.
  Cost of
services consist primarily of the costs associated with executing product
detailing programs, performance based contracts or other sales and marketing
services identified in the contract. Cost of services include personnel costs
and other costs associated with executing a product detailing or other marketing
or promotional program, as well as the initial direct costs associated with
staffing a product detailing program. Such costs include, but are not limited
to, facility rental fees, honoraria and travel expenses, sample expenses and
other promotional expenses.
  Personnel
costs, which constitute the largest portion of cost of services, include all
labor related costs, such as salaries, bonuses, fringe benefits and payroll
taxes for the sales representatives, sales managers and professional staff that
are directly responsible for executing a particular program. Initial direct
program costs are those costs associated with initiating a product detailing
program, such as recruiting, hiring, and training the sales representatives who
staff a particular product detailing program. All personnel costs and initial
direct program costs, other than training costs, are expensed as incurred for
service offerings.
  Reimbursable
out-of-pocket expenses include those relating to travel and other similar costs,
for which the Company is reimbursed at cost by its
customers.  Reimbursements received for out-of-pocket expenses
incurred are characterized as revenue and an identical amount is included as
cost of goods and services in the consolidated statements of
operations.  For the years ended December 31, 2007, 2006 and 2005,
reimbursable out-of-pocket expenses were $14.3 million, $25.3 million and $35.2
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
customer 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.
  Stock-Based
Compensation
  On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, (Revised 2004) “Share-Based Payment” (FAS
123R), using the modified prospective approach. Under the modified prospective
approach, the amount of compensation cost recognized includes:
(i) compensation cost for all share-based payments granted before but not
yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” (FAS No.123) and (ii) compensation cost for all
share-based payments granted or modified subsequent to January 1, 2006, based on
the estimated fair value at the date of grant or subsequent modification date in
accordance with the provisions of FAS 123R. Prior to January 1, 2006, the
Company accounted for stock-based employee compensation using the intrinsic
value method under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (APB 25).
  FAS
No. 123R also required us to change the classification in the consolidated
statement of cash flows of any income tax benefits realized upon the exercise of
stock options or issuance of restricted share awards in excess of that which is
associated with the expense recognized for financial reporting purposes. These
amounts are presented as a financing activity rather than as an operating
activity in the consolidated statement of cash flows.
  FAS 123R
also requires that the Company recognize compensation expense for only the
portion of stock options, stock-settled stock appreciation rights (SARs) or
restricted shares that are expected to vest.  Therefore, the Company
applies estimated forfeiture rates that are derived from historical employee
termination behavior.  The Company applied a forfeiture rate to
certain grants in 2007 and 2006.  If the actual number of forfeitures
differs from those estimated by management, adjustments to compensation expense
might be required in future periods.
  The
Company had no cumulative effect adjustment upon adoption of FAS 123R under the
modified prospective
   F-11
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  method.  As
a result of adopting FAS 123R on January 1, 2006, net income and net income per
share for the year ended December 31, 2006 were $290,000 and $0.02 lower,
respectively, than if the Company had continued to account for stock-based
compensation under APB 25. See Note 11, Stock-Based Compensation, for
further information regarding the Company’s stock-based compensation assumptions
and expenses.
  In
accordance with APB 25, the Company did not recognize stock-based compensation
expense with respect to options granted with an exercise price equal to the
market value of the underlying common stock on the date of grant. As a result,
prior to 2006, the recognition of stock-based compensation expense was generally
limited to the expense related to restricted share awards.  The
following table illustrates the effect on the net loss and the loss per share if
the Company had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation for the year ended December 31,
2005.
  For
      the Year EndedDecember
      31, 2005Net
      loss, as reported
                
                $
                (19,454
                )Add:
      Stock-based employeecompensation
      expense includedin
      reported net loss, net ofrelated
      tax effects
                
                
                974Deduct:
      Total stock-basedemployee
      compensation expensedetermined
      under fair value basedmethods
      for all awards, net ofrelated
      tax effects
                
                
                (6,670
                )Pro
      forma net loss
                
                $
                (25,150
                )Loss
      per shareBasic—as
      reported
                
                $
                (1.37
                )Basic—pro
      forma
                
                $
                (1.77
                )Diluted—as
      reported
                
                $
                (1.37
                )Diluted—pro
      forma
                
                $
                (1.77
                )
  Rent
Expense
  Minimum
rental expenses are recognized over the term of the lease.  The
Company recognizes minimum rent starting when possession of the property is
taken from the landlord, which normally includes a construction period prior to
occupancy.  When a lease contains a predetermined fixed escalation of
the minimum rent, the Company recognizes the related rent expense on a
straight-line basis and records the difference between the recognized rental
expense and the amounts payable under the lease as deferred lease
credits.  The Company also may receive tenant allowances including
cash or rent abatements, which are reflected in other accrued expenses and
long-term liabilities on the consolidated balance sheet and are amortized as a
reduction to rent expense over the term of the lease.  Certain leases
provide for contingent rents that are not measurable at
inception.  These contingent rents are primarily based upon use of
utilities and the landlord’s operating expenses.  These amounts are
excluded from minimum rent and are included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is
reasonably estimable.
  Advertising
  The
Company recognizes advertising costs as incurred.  The total amounts
charged to advertising expense, which is included in other SG&A, were
approximately $290,000, $825,000 and $335,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
  Income
taxes
  The
Company adopted Financial Accounting Standards Board (FASB) Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement 109”
(FIN 48) on January 1, 2007.  FIN 48 prescribes a recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken in tax returns. In
addition, FIN 48 provides guidance on derecognition, classification and
disclosure of tax positions, as well as the accounting for related interest
and
   F-12
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  penalties.  The
Company’s adoption of FIN 48 did not have a material effect on the Company’s
financial position or results of operations.
  The
Company accounts for income taxes using the asset and liability
method.  This method requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences that
currently exist between tax bases and financial reporting bases of the Company’s
assets and liabilities based on enacted tax laws and rates.  A
valuation allowance is established, when necessary, to reduce the deferred
income tax assets when it is more likely than not that all or a portion of a
deferred tax asset will not be realized.
  The
Company operates in multiple tax jurisdictions and provides taxes in each
jurisdiction where it conducts business and is subject to
taxation.  The breadth of the Company’s operations and the complexity
of the tax law require assessments of uncertainties and judgments in estimating
the ultimate taxes the Company will pay.  The final taxes paid are
dependent upon many factors, including negotiations with taxing authorities in
various jurisdictions, outcomes of tax litigation and resolution of proposed
assessments arising from federal and state audits.  Uncertain tax
positions are accounted for under FIN 48.  FIN 48 requires that a position
taken or expected to be taken in a tax return be recognized in the financial
statements when it is more likely than not (i.e., a likelihood of more than
fifty percent) that the position would be sustained upon examination by tax
authorities that have full knowledge of all relevant information. A recognized
tax position is then measured at the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company adjusts accruals for unrecognized tax benefits as facts and
circumstances change, such as the progress of a tax audit. The Company believes
that any potential audit adjustments will not have a material adverse effect on
its financial condition or liquidity. However, any adjustments made may be
material to the Company’s consolidated results of operations or cash flows for a
reporting period.
  Significant
judgment is also required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax
assets.  Deferred tax assets are regularly reviewed for
recoverability.  The Company currently has significant deferred tax
assets resulting from net operating loss carryforwards and deductible temporary
differences, which should reduce taxable income in future
periods.  The realization of these assets is dependent on generating
future taxable income.
  Comprehensive
Income
  Comprehensive
income includes net income and the unrealized net gains and losses on investment
securities.  Other comprehensive income is net of reclassification
adjustments to adjust for items currently included in net income, such as
realized gains and losses on investment securities.  The deferred tax
expense for unrealized holding gains arising from investment securities during
the years ended December 31, 2007, 2006 and 2005 was $18,000, $26,000 and
$27,000, respectively.  The deferred tax expense for reclassification
adjustments for gains included in net income on investment securities during the
years ended December 31, 2007, 2006 and 2005 was $48,000, $20,000 and $30,000,
respectively.
  New
Accounting Pronouncements – Standards to be Implemented
  In
September 2006, the FASB issued SFAS No. 157 (FAS 157), “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This standard is
to be applied when other standards require or permit the use of fair value
measurement of an asset or liability.  The statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within that fiscal year. However, on February 12, 2008, the
FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No.
157” (FSP 157-2), which delays the effective date of FAS 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). FSP 157-2 defers the effective date of FAS 157
to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of FSP 157-2. The Company
adopted the required provision of FAS 157 as of January 1, 2008. The
Company does not expect the adoption of FAS 157 to have a material impact on its
consolidated financial position or results of operations.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement
No.115” (FAS
159).  FAS 159 permits entities to elect to measure eligible financial
instruments at fair value.  The Company would report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date, and recognize upfront costs and fees related
to those items in earnings as incurred and not deferred.  The Company
adopted FAS 159 as of January 1, 2008.  The Company has not
elected the fair value option for any items
   F-13
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  permitted
under FAS 159.
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (FAS
141R).  FAS 141R will change the accounting for business combinations.
Under FAS 141R, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. FAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. FAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  FAS 141R will have an impact on accounting
for business combinations once adopted but the effect is dependent upon
acquisitions at that time.
  Reclassifications
  The
Company reclassified certain prior period financial statements balances to
conform to the current year presentation.
    2.
              Investments
      in Marketable Securities
 Available-for-sale
securities are carried at fair value and consist of assets in a Rabbi Trust
associated with the Company’s deferred compensation plan.  For the
year ended December 31, 2006 available-for-sale securities also included auction
rate securities (ARSs) held by the Company.  For the years ended
December 31, 2007 and 2006, the carrying value of available-for-sale securities
was approximately $459,000 and $33.2 million, respectively, and are included in
short-term investments.  For the year ended December 31, 2006, there
was $32.6 million invested in ARSs.  The ARSs were invested in
high-grade municipal bonds that had a weighted average maturity date of 27.2
years with an average interest rate reset period of 33.5 days.  The
available-for-sale securities within the Company’s deferred compensation plan
for the years ended December 31, 2007 and 2006 consisted of approximately
$198,000 and $215,000 respectively, in money market accounts, and approximately
$261,000 and $447,000, respectively, in mutual funds.  At December 31,
2007 and 2006, included in accumulated other comprehensive income were gross
unrealized gains of approximately $51,000 and $131,000, respectively, and gross
unrealized losses of approximately $2,000 and $3,000,
respectively.  At December 31, 2007 and 2006, included in interest
income, net were gross realized gains of approximately $126,000 and $65,000,
respectively, and gross realized losses of approximately $0 and $12,000,
respectively.
  The
Company’s other marketable securities consist of a laddered portfolio of
investment grade debt instruments such as obligations of 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 securities are carried at amortized cost,
which approximates fair value, and have a weighted average maturity of 3.5
months at December 31, 2007.  The Company also maintains
held-to-maturity securities which are in separate accounts to support the
Company’s standby letters of credit.  The weighted average maturity of
those investments is 17.6 months at December 31, 2007.
  The
Company has standby letters of credit of approximately $7.3 million and $9.7
million at December 31, 2007 and 2006, respectively, as collateral for its
existing insurance policies and its facility leases.  At December 31,
2007 and 2006, held-to-maturity securities were included in short-term
investments (approximately $7.3 million and $36.2 million, respectively), other
current assets (approximately $5.1 million and $7.2 million, respectively) and
other long-term assets (approximately $2.2 million and $2.5 million,
respectively).  For the years ended December 31, 2007 and 2006
held-to-maturity securities included:
 December
      31,
                
                
                December
      31,2007
                
                
                2006Cash/money
      accounts
                
                $
                2,390
                
                
                $
                332Municipal
      securities
                
                
                -
                
                
                
                32,843US
      Treasury obligations
                
                
                1,498
                
                
                
                1,499Government
      agency obligations
                
                
                3,400
                
                
                
                8,394Other
      securities
                
                
                7,340
                
                
                
                2,879Total
                
                $
                14,628
                
                
                $
                45,947
 F-14
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
   3.
              Property
      and Equipment
  Property
and equipment consisted of the following as of December 31, 2007 and
2006:
  December
      31,2007
                
                
                2006Furniture
      and fixtures
                
                $
                3,281
                
                
                $
                3,549Office
      equipment
                
                
                1,465
                
                
                
                1,461Computer
      equipment
                
                
                4,773
                
                
                
                8,265Computer
      software
                
                
                9,496
                
                
                
                9,355Leasehold
      improvements
                
                
                6,023
                
                
                
                6,69825,038
                
                
                
                29,328Less
      accumulated depreciation
                
                
                (16,690
                )
                
                
                (16,519
                )$
                8,348
                
                
                $
                12,809
 Depreciation
expense was approximately $3.1 million, $3.3 million and $2.6 million, for the
years ended December 31, 2007, 2006 and 2005,
respectively.  Amortization expense for capitalized computer software
cost was approximately $1.2 million, $1.1 million and $1.3 million,
respectively.
  In 2007,
the Company recorded a non-cash charge of approximately $1.0 million for
furniture and leasehold improvements related to the excess leased space at its
Saddle River, New Jersey and Dresher, Pennsylvania locations.  In
2006, the Company recorded a non-cash charge of approximately $1.3 million for
furniture and leasehold improvements related to the excess leased space at its
Saddle River and Dresher locations.  See Note 14, Facilities
Realignment, for additional information.
   4.
              Goodwill
      and Other Intangible Assets
  In
December 2007, 2006 and 2005, 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 2007 and 2006
evaluation indicated that goodwill was not impaired.  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, which ceased operations in the second quarter of
2006.  (See Note 17, Discontinued Operations, for additional
information.)  As a result of that decision and the expected cash
flows that the unit was expected to 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.  That charge is currently included in discontinued
operations as MD&D is no longer part of the sales services
segment.  The loss of a key customer that historically represented
between 25% and 35% of revenue and the lack of new business projected at the
time within Select Access were the main factors for the $3.3 million goodwill
impairment charge and was recorded in the sales services segment.
  Additionally,
due to the discontinuation of the MD&D business unit, the Company evaluated
the recoverability of MD&D long-lived assets and determined that those
assets were impaired.  The Company recorded a non-cash charge of
approximately $349,000 in 2005.  This was also recorded in operating
expense to discontinued operations.
  Changes
in the carrying amount of goodwill for the years ended December 31, 2007 and
2006 were as follows:
 
 MarketingServicesBalance
      as of December 31, 2005
                
                $
                13,112Goodwill
      additions
                
                
                500Balance
      as of December 31, 2006
                
                $
                13,612Goodwill
      additions
                
                
                -Balance
      as of December 31, 2007
                
                $
                13,612
  F-15
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 The
increase in goodwill for the year ended December 31, 2006 was associated with
the final escrow payment made to the members of Pharmakon, LLC, pursuant to the
Pharmakonacquisition
agreement.
  All
intangible assets recorded as of December 31, 2007 are attributable to the
acquisition of Pharmakon and are being amortized on a straight-line basis over
the lives of the intangibles, which range from 5 to 15 years.  The net
carrying value of the identifiable intangible assets for the years ended
December 31, 2007 and 2006 is as follows:
  As
      of December 31, 2007
                
                
                As
      of December 31, 2006Carrying
                
                
                Accumulated
                
                
                
                
                
                Carrying
                
                
                AccumulatedAmount
                
                
                Amortization
                
                
                Net
                
                
                Amount
                
                
                Amortization
                
                
                NetCovenant
      not to compete
                
                $
                140
                
                
                $
                93
                
                
                $
                47
                
                
                $
                140
                
                
                $
                65
                
                
                $
                75Customer
      relationships
                
                
                16,300
                
                
                
                3,622
                
                
                
                12,678
                
                
                
                16,300
                
                
                
                2,536
                
                
                
                13,764Corporate
      tradename
                
                
                2,500
                
                
                
                556
                
                
                
                1,944
                
                
                
                2,500
                
                
                
                389
                
                
                
                2,111Total
                
                $
                18,940
                
                
                $
                4,271
                
                
                $
                14,669
                
                
                $
                18,940
                
                
                $
                2,990
                
                
                $
                15,950
 Amortization
expense related to continuing operations for the years ended December 31, 2007,
2006 and 2005 was approximately $1.3 million for each of the three years,
respectively.  Estimated amortization expense for the next five years
is as follows:
  2008
                
                
                2009
                
                
                2010
                
                
                2011
                
                
                2012$
                1,281
                
                
                $
                1,272
                
                
                $
                1,253
                
                
                $
                1,253
                
                
                $
                1,253
 5.
              Loans
      and Investments in Privately-Held
Entities
  In May
2004, the Company entered into a loan agreement with TMX Interactive, Inc.
(TMX), a provider of sales force effectiveness technology.  Pursuant
to the loan agreement, the Company provided TMX with a term loan facility of
$500,000 and a convertible loan facility of $500,000, both of which were due on
November 26, 2005.  In 2005, due to TMX’s continued losses and
uncertainty regarding its future prospects, the Company established an allowance
for credit losses against the TMX loans. For the years ended 2007, 2006 and
2005, TMX provided services to the Company valued at $9,000, $246,000, and
$245,000 respectively.   The receipt of services in lieu of cash
payment was recorded as a credit to bad debt expense and a reduction of the
receivable in the respective periods.  At December 31, 2007, the loan
receivable has a balance of $500,000, which is fully
reserved.
  In
October 2002, the Company acquired $1.0 million of preferred stock of Xylos
Corporation (Xylos). In addition, the Company provided Xylos with short-term
loans totaling $500,000 in the first half of 2004. The Company determined its
$1.0 million investment and $500,000 short-term loan to Xylos were impaired as
of December 31, 2004.  The Company wrote its $1.0 million investment
down to zero and established an allowance for credit losses against the $500,000
short-term loan.  Xylos made loan payments totaling $150,000,
$250,000, and $100,000 in 2007, 2006 and 2005, respectively and the loan has
been repaid in full. These payments were recorded as credits to bad debt expense
in the periods in which they were received.
  In June
2005, the Company sold its approximately 12% ownership share in In2Focus Sales
Development Services Limited, (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 deal costs, which was included in
gain on investments in 2005.
   6.
              Retirement
      Plans
  The
Company offers an employee 401(k) saving plan.  Under the PDI, Inc.
401(k) Plan, employees may contribute up to 25% of their pre-tax
compensation.  Effective January 1, 2004, the Company makes a safe
harbor non-elective contribution in an amount equal to 100% of the participant’s
base salary contributed up to 3% plus 50% of the participant’s base salary
contributed exceeding 3% but not more than 5%.  Prior to January 1,
2004, the Company made cash contributions in an amount equal to 100% of the
participant’s base salary contributed up to 2%.  Participants are not
allowed to invest any of their 401(k) funds in the Company’s common
stock.  The Company’s total contribution expense related to the
Company’s 401(k) plans for 2007, 2006 and 2005 was approximately $725,000, $1.3
million, and $2.1 million, respectively.
   F-16
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 7.
            Deferred
      Compensation Arrangements 
  Beginning
in 2000, the Company established a deferred compensation arrangement whereby a
portion of certain employees’ salaries is withheld and placed in a Rabbi
Trust.  The plan permits the employees to diversify these assets
through a variety of investment options.  Members of the Company’s
Board of Directors (Board) also have the opportunity to defer their compensation
through this arrangement.  The Company 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 securities and are
included in short-term investments.
  8.
              Long-term
      Liabilities
  Long-term
liabilities consisted of the following as of December 31, 2007 and
2006:
  December
      31,2007
                
                
                2006Deferred
      tax
                
                $
                1,113
                
                
                $
                -Rent
      payable
                
                
                2,959
                
                
                
                2,970Accrued
      income taxes
                
                
                5,765
                
                
                
                3,592Other
                
                
                340
                
                
                
                1,323$
                10,177
                
                
                $
                7,885
  9.
              Commitments
      and Contingencies
  The
Company leases facilities, automobiles and certain equipment under agreements
classified as operating leases, which expire at various dates through
2016.  Substantially all of the property leases provide for increases
based upon use of utilities and landlord’s operating expenses.  Lease
and auto expense under these agreements for the years ended December 31, 2007,
2006 and 2005 was approximately $5.0 million, $15.0 million, and $22.9 million,
respectively, of which $2.9 million in 2007, $12.7 million in 2006, and $19.3
million in 2005 related to automobiles leased for use by employees for a term of
one year from the date of delivery with yearly annual renewal
options.
  As of
December 31, 2007, contractual obligations with terms exceeding one year and
estimated minimum future rental payments required by non-cancelable operating
leases with initial or remaining lease terms exceeding one year are as
follows:
 Less
      than
                
                
                1
      to 3
                
                
                3
      to 5
                
                
                AfterTotal
                
                
                1
      Year
                
                
                Years
                
                
                Years
                
                
                5
      YearsContractual
      obligations (1)
                
                $
                3,977
                
                
                $
                2,545
                
                
                $
                1,432
                
                
                $
                -
                
                
                $
                -Operating
      lease obligationsMinimum
      lease payments
                
                
                27,573
                
                
                
                3,226
                
                
                
                6,529
                
                
                
                6,526
                
                
                
                11,292Less
      minimum sublease rentals(2)
                
                
                (6,171
                )
                
                
                (1,058
                )
                
                
                (1,992
                )
                
                
                (1,357
                )
                
                
                (1,764
                )Net
      minimum lease payments
                
                
                21,402
                
                
                
                2,168
                
                
                
                4,537
                
                
                
                5,169
                
                
                
                9,528Total
                
                $
                25,379
                
                
                $
                4,713
                
                
                $
                5,969
                
                
                $
                5,169
                
                
                $
                9,528
  (1)
              Amounts
      represent contractual obligations related to software license contracts,
      data center hosting, and outsourcing contracts for software system
      support.
 
 (2)
              In
      June 2005, the Company signed an agreement to sublease the first floor at
      its corporate headquarters facility in Saddle River, New Jersey
      (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 that period.  In June 2007,
      the Company signed an agreement to sublease the second floor at its
      corporate headquarters (approximately 20,000 square feet).  The
      sublease term is through January 2016 and will provide for approximately
      $4.4 million in lease payments over that period.  Also in 2007,
      the Company signed two separate subleases at its TVG facility in Dresher,
      Pennsylvania.  These subleases are for five-year terms and will
      provide approximately $650,000 combined in lease payments over that
      period.
   F-17
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
   Litigation
  Due to the
nature of the businesses in which the Company is engaged, such as product
detailing and in the past, the distribution of products, it could be exposed to
certain risks. Such risks include, among others, risk of liability for personal
injury or death to persons using products the Company promotes or distributes.
There can be no assurance that substantial claims or liabilities will not arise
in the future due to the nature of the Company’s business activities and recent
increases in litigation related to healthcare products, including
pharmaceuticals. The Company seeks to reduce its potential liability under its
service agreements through measures such as contractual indemnification
provisions with clients (the scope of which may vary from client to client, and
the performances of which are not secured) and insurance. The Company could,
however, also be held liable for errors and omissions of its employees in
connection with the services it performs that are outside the scope of any
indemnity or insurance policy. The Company could be materially adversely
affected if it were required to pay damages or incur defense costs in connection
with a claim that is outside the scope of an indemnification agreement; if the
indemnity, although applicable, is not performed in accordance with its terms;
or if the Company’s liability exceeds the amount of applicable insurance or
indemnity.
  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
its 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 December 2005, the Company reached a tentative
settlement of this action, subject to court approval.  In October
2006, the Company received preliminary settlement approval from the court and
the final approval hearing was held in January 2007.  Pursuant to the
settlement, the Company has made all payments to the class members, their
counsel and the California Labor and Workforce Development Agency in an
aggregate amount of approximately $50,000, and the lawsuit was dismissed with
prejudice in May 2007.
  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).  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
$2.0 million; (ii) a Secured Promissory Note in the principal amount of $3.0
million, 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 $3.5 million, with a
maturity date of April, 11, 2008.
  In
addition to the initial $2.0 million received on April 11, 2005, Cellegy had
paid $200,000 in 2005 and $458,500 through June 30, 2006 towards the outstanding
principal balance of the Secured Promissory Note.  These payments were
recorded as a credit to litigation expense in the periods in which they were
received.
  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 alleged
that Cellegy breached the terms of the Security Agreement and Secured Promissory
Note that it received in connection with the settlement.  For
Cellegy's breach of contract, the Company sought damages in the total amount of
$6.4 million 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.  Discovery subsequently commenced and pursuant to a
scheduling order entered by the court, was to be completed by November 21,
2006.  On June 22, 2006, the parties appeared before the court for a
status conference and agreed to a dismissal of the lawsuit without prejudice
because, among other reasons, discovery would not be complete before October 11,
2006, the maturity date of the Secured Promissory Note, at which time Cellegy
would owe the Company the entire unpaid principal balance and interest on the
Secured Promissory Note.  On July 13, 2006, the court dismissed the
December 1, 2005 breach of contract lawsuit without prejudice.  This
had no effect on the original settlement.
  On
September 27, 2006, Cellegy announced that it had entered into an asset purchase
agreement to sell its intellectual property rights and other assets relating to
certain of its products and product candidates to Strakan
   F-18
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  International
Limited (the Sale). Pursuant to a letter agreement between Cellegy and the
Company, Cellegy agreed to pay the Company $3.0 million (the Payoff Amount) in
full satisfaction of Cellegy’s obligations to the Company under the Secured
Promissory Note, which had an outstanding principal amount of approximately
$2.34 million, and the $3.5 million Nonnegotiable Convertible Senior Note.
Pursuant to the letter agreement, $500,000 of the Payoff Amount was paid to the
Company in September 2006, and the remaining $2.5 million was paid to the
Company in December 2006 upon consummation of the Sale.
  The
Company had previously established an allowance for doubtful notes for the
outstanding balance of the Notes; therefore, the Agreement did not result in the
recognition of a loss.  The $3.0 million received was recorded as a
credit to litigation expense.
  Bayer-Baycol
Litigation
  The
Company has been named as a defendant in numerous lawsuits, including two class
action matters, alleging claims arising from the use of Baycol, a prescription
cholesterol-lowering medication.  Baycol was distributed, promoted and
sold by Bayer AG (Bayer) in the U.S. through early August 2001, at which time
Bayer voluntarily withdrew Baycol from the U.S. market.  Bayer had
retained certain companies, such as the Company, to provide detailing services
on its behalf pursuant to contract sales force agreements.  The
Company may be named in additional similar lawsuits.  To date, the
Company has defended these actions vigorously and has asserted a contractual
right of defense and indemnification against Bayer for all costs and expenses
that it incurs relating to these proceedings.  In February 2003, the
Company entered into a joint defense and indemnification agreement with Bayer,
pursuant to which Bayer has agreed to assume substantially all of the Company’s
defense costs in pending and prospective proceedings and to indemnify the
Company in these lawsuits, subject to certain limited
exceptions.  Further, Bayer agreed to reimburse the Company for all
reasonable costs and expenses incurred through such date in defending these
proceedings.  As of December 31, 2007, Bayer has reimbursed the
Company for approximately $1.6 million in legal expenses, the majority of which
was received in 2003 and was reflected as a credit within selling, general and
administrative expense.  The Company did not incur any costs or
expenses relating to these matters during 2005, 2006 or 2007.
  Letters
of Credit
  As of
December 31, 2007, the Company has $7.3 million in letters of credit outstanding
as required by its existing insurance policies and its facility
leases.
  10.
              Preferred
      Stock
  The
Company's Board is authorized to issue, from time to time, up to 5,000,000
shares of preferred stock in one or more series.  The Board is
authorized to fix the rights and designation of each series, including dividend
rights and rates, conversion rights, voting rights, redemption terms and prices,
liquidation preferences and the number of shares of each series.  As
of December 31, 2007 and 2006, there were no issued and outstanding shares of
preferred stock.
 11.
              Stock-Based
      Compensation
  On
January 1, 2006, the Company adopted FAS 123R.  See Note 1, Nature of
Business and Significant Accounting Policies, for a description of the adoption
of FAS 123R.  The Company’s stock-incentive program is a long term
retention program that is intended to attract, retain and provide incentives for
talented employees, officers and directors, and to align stockholder and
employee interests.  The Company considers its stock-incentive program
critical to its operations and productivity.  Currently, the Company
grants options, SARs and restricted shares from the PDI, Inc. 2004 Stock Award
and Incentive Plan (the 2004 Plan), which is described
below.
  The
Company currently uses the Black-Scholes option pricing model to determine the
fair value of stock options and SARs. The determination of the fair value of
stock-based payment awards on the date of grant using an option-pricing model is
affected by the Company’s stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include the Company’s
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and
expected dividends.  Expected volatility was based on historical
volatility.  As there is no trading volume for the Company’s options,
implied volatility was not representative of the Company’s current volatility so
the historical volatility was determined to be more indicative of the Company’s
expected future stock performance.  The expected life was determined
using the safe-harbor method permitted by Securities Exchange Commission’s Staff
Accounting Bulletin (SAB) No. 107 (SAB 107). The Company expects to
use
  F-19
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 this
simplified method for valuing employee SARs grants as permitted by the
provisions of SAB 107 until more detailed information about exercise behavior
becomes available over time.  The Company bases the risk-free interest
rate on U.S. Treasury zero-coupon issues with remaining terms similar to the
expected term on the options or SARs.  The Company does not anticipate
paying any cash dividends in the foreseeable future and therefore uses an
expected dividend yield of zero in the option valuation model. The Company is
required to estimate forfeitures at the time of grant and revise those estimates
in subsequent periods if actual forfeitures differ from those estimates. The
Company uses historical data to estimate pre-vesting option forfeitures and
records stock-based compensation expense only for those awards that are expected
to vest.  The Company recognizes compensation cost, net of estimated
forfeitures, arising from the issuance of stock options and SARs on a
straight-line basis over the vesting period of the grant.
  The
estimated compensation cost associated with the granting of restricted stock is
based on the fair value of the Company’s common stock on the date of grant. The
Company recognizes the compensation cost, net of estimated forfeitures, over the
vesting term.
  The
Company recognizes the estimated compensation cost of performance contingent
shares, net of estimated forfeitures, based on the probability that the
performance condition will be achieved. These awards are earned upon attainment
of identified performance goals. The fair value of the awards is based on the
measurement date. The awards will be amortized over the performance
period.  Compensation cost for performance contingent shares is
estimated based on the number of awards that are expected to vest and is
adjusted for those awards that do ultimately vest.
  The
following table provides the weighted average assumptions used in determining
the fair value of the stock-based awards granted during the years ended December
31, 2007, 2006, and 2005 respectively:
   2007
                
                2006
                
                2005Risk-free
      interest rate
                4.54%
                
                4.81%
                
                3.79%Expected
      life
                3.5
      years
                
                3.5
      years
                
                5
      yearsExpected
      volatility
                50.87%
                
                66.12%
                
                100%
 Stock
Incentive Plan
  In June
2004, the Board and stockholders approved the 2004 Plan.  The 2004
Plan replaced the 1998 Stock Option Plan (the 1998 Plan) and the 2000 Omnibus
Incentive Compensation Plan (the 2000 Plan).  The 2004 Plan reserved
an additional 893,916 shares for new awards as well as combined the remaining
shares available under the 1998 Plan and 2000 Plan.  The maximum
number of shares that can be granted under the 2004 Plan is approximately 2.9
million shares.  Eligible participants under the 2004 Plan include
officers and other employees of the Company, members of the Board and outside
consultants, as specified under the 2004 Plan and designated by the Compensation
and Management Development Committee of the Board.  Unless earlier
terminated by action of the Board, the 2004 Plan will remain in effect until
such time as no stock remains available for delivery under the 2004 Plan and the
Company has no further rights or obligations under the 2004 Plan with respect to
outstanding awards under the 2004 plan.  No participant may be granted
more than the annual limit of 400,000 shares plus the amount of the
participant's unused annual limit relating to share-based awards as of the close
of the previous year, subject to adjustment for splits and other extraordinary
corporate events.
  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.  Upon exercise, new
shares are issued by the Company.  SARs are generally granted with a
grant price equal to the market value of the common stock on the date of grant,
vest one-third each year on the anniversary of the date of grant and expire five
years from the date of grant.  The restricted shares have vesting
periods that range from eighteen months to three years and are subject to
accelerated vesting and forfeiture under certain circumstances.
  On
February 9, 2005, the Company accelerated the vesting of all outstanding
unvested underwater stock options.  Accelerated stock options totaled
473,334 and impacted 43 employees and seven board members.  There was
no compensation expense recognized as a result of this
acceleration.  On December 30, 2005, prior to the adoption of FAS
123R, the Company accelerated the vesting of 97,706 SARs and placed a
restriction on the transfer or sale of the common stock received upon the
exercise of these SARs that matched the original vesting schedule of the
SARs.  This impacted 38 employees and resulted in $86,000 in
compensation expense.
   F-20
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 The
Company accelerated the vesting of all outstanding unvested underwater stock
options and SARs in 2005 to avoid recognizing compensation expense in future
periods.
  On March
29, 2005, the Company issued 54,903 performance contingent shares of its common
stock to be issued upon the attainment of all established performance goals by
March 2008.  At December 31, 2007 there are 3,602 performance
contingent shares outstanding.  There were three levels of performance
that dictate the number of shares to be issued.  Throughout 2005, the
Company had recognized compensation expense related to this award on its
expectation of the probability that the performance conditions would be
satisfied and subsequently reversed that expense in 2006 as the probability that
the performance conditions, even at the marginal level, would be satisfied was
deemed remote. The Company currently expects 539 shares to be awarded and as
such, recognized approximately $11,000 in compensation expense in
2007.
  The
weighted average fair value of options and SARs granted during the years ended
December 31, 2007, 2006 and 2005 was estimated to be $3.97, $6.31 and $9.10
respectively.  For the years ended December 31, 2006 and 2005, the
aggregate intrinsic values of options and SARs exercised under the Company’s
stock option plans were approximately $130,000 and $243,000, respectively,
determined as of the date of exercise.  There were no exercises in
2007.  As of December 31, 2007, there was $2.0 million of total
unrecognized compensation cost, net of estimated forfeitures, related to
unvested SARs and restricted stock that are expected to be recognized over a
weighted-average period of approximately 2.0 years.  Cash received
from options exercised under the Company’s stock option plans for the years
ended December 31, 2006 and 2005 was $87,000, and $591,000,
respectively.  Historically, shares issued upon the exercise of
options have been new shares and have not come from treasury
shares.
  The
impact of stock options, SARs, performance shares and restricted stock on net
(loss) income and cash flow for 2007, 2006 and 2005 was as follows:
  2007
                
                
                2006
                
                
                2005Stock
      options and SARs
                
                $
                455
                
                
                $
                361
                
                
                $
                142Conditional
      grant
                
                
                -
                
                
                
                104
                
                
                
                -Performance
      shares
                
                
                11
                
                
                
                (60
                )
                
                
                60Restricted
      stock
                
                
                1,163
                
                
                
                1,198
                
                
                
                9731,629
                
                
                
                1,603
                
                
                
                1,175Acceleration
      of vesting - restricted stock
                
                
                54
                
                
                
                233
                
                
                
                531Acceleration
      of vesting - SARs
                
                
                -
                
                
                
                -
                
                
                
                57Forfeitures
                
                
                (207
                )
                
                
                (176
                )
                
                
                (306
                )Total
      stock-based compensation expense
                
                
                1,476
                
                
                
                1,660
                
                
                
                1,457Tax
      impact
                
                
                (565
                )
                
                
                (408
                )
                
                
                (483
                )Reduction
      to net income
                
                $
                911
                
                
                $
                1,252
                
                
                $
                974Increase
      (reduction) in cash flowfrom
      operating activies
                
                $
                242
                
                
                $
                (23
                )
                
                $
                -(Reduction)
      increase in cash flowfrom
      financing activies
                
                $
                (242
                )
                
                $
                23
                
                
                $
                -
 A summary
of option and SARs activity for the year ended December 31, 2007 and changes
during the year then ended is presented below:
  Weighted-Average
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Grant
      Price
                
                
                Period
      (in years)
                
                
                ValueOutstanding
      at January 1, 2007
                
                
                1,016,618
                
                
                $
                23.44
                
                
                
                5.23
                
                
                $
                36Granted
                
                
                157,304
                
                
                
                9.52
                
                
                
                4.25
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                (527,097
                )
                
                
                25.74Outstanding
      at December 31, 2007
                
                
                646,825
                
                
                
                18.18
                
                
                
                4.18
                
                
                
                19Exercisable
      at December 31, 2007
                
                
                447,835
                
                
                $
                21.61
                
                
                
                4.28
                
                
                $
                19
  F-21
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  A summary
of the status of the Company’s nonvested options and SARs for the year ended
December 31, 2007 and changes during the year ended December 31, 2007 is
presented below:
 Shares
                
                
                Weighted-
      Average Grant Date Fair ValueNonvested
      at January 1, 2007
                
                
                150,291
                
                
                $
                6.76Granted
                
                
                157,304
                
                
                
                3.97Vested
                
                
                (46,646
                )
                
                
                7.49Forfeited
                
                
                (61,959
                )
                
                
                5.73Nonvested
      at December 31, 2007
                
                
                198,990
                
                
                $
                4.71
  A summary
of the Company’s outstanding shares of restricted stock for the year ended
December 31, 2007 and changes during the year then ended is presented
below:
  Weighted-
                
                
                Average
                
                
                AggregateAverage
                
                
                Remaining
                
                
                IntrinsicGrant
      Date
                
                
                Vesting
                
                
                ValueShares
                
                
                Fair
      Value
                
                
                Period
      (in years)
                
                
                (in
      thousands)Outstanding
      at January 1, 2007
                
                
                196,738
                
                
                $
                14.57
                
                
                
                1.31
                
                
                $
                2,286Granted
                
                
                166,603
                
                
                
                9.87
                
                
                
                2.37
                
                
                
                1,561Vested
                
                
                (107,849
                )
                
                
                16.24Forfeited
                
                
                (41,528
                )
                
                
                11.27Outstanding
      at December 31, 2007
                
                
                213,964
                
                
                $
                10.71
                
                
                
                2.07
                
                
                $
                2,005
  12.
              Significant
      Customers
  During
2007, 2006 and 2005 the Company had several significant customers for which it
provided services under specific contractual arrangements.  The
following sets forth the net revenue generated by customers who accounted for
more than 10% of the Company's revenue during each of the periods
presented.
   Years
      Ended December 31,Customer
                
                
                2007
                
                
                2006
                
                
                2005A
                
                
                $
                15,992
                
                
                $
                -
                
                
                $
                -B
                
                
                
                15,155
                
                
                
                -
                
                
                
                -C
                
                
                
                13,259
                
                
                
                -
                
                
                
                -D
                
                
                
                -
                
                
                
                68,240
                
                
                
                69,452E
                
                
                
                -
                
                
                
                43,603
                
                
                
                107,260F
                
                
                
                -
                
                
                
                -
                
                
                
                48,051
 For all
the customers listed above, excluding customer B, the Company recorded revenue
in both segments.  For customer B, all the revenue was in the sales
services segment.
  For the
years ended December 31, 2007, and 2005, the Company’s three largest customers,
who each individually represented 10% or more of its revenue, accounted for in
the aggregate, approximately 37.9% and 73.6% respectively, of its
revenue.  For the year ended December 31, 2006 the Company’s two
largest customers, each of whom represented 10% or more of its revenue,
accounted for, in the aggregate, approximately 46.8% of its
revenue.
  At
December 31, 2007 and 2006, the Company’s three and two largest customers
represented 21.4% and 11.7%, respectively, of the aggregate of outstanding
accounts receivable and unbilled services.
  On
February 28, 2006, the Company announced that it has been notified by
AstraZeneca that its fee-for-service agreements with the Company would be
terminated effective April 30, 2006, reducing revenue by approximately $63.8
million in 2006.
   F-22
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  On
September 26, 2006, the Company announced that it had received verbal
notification from GSK of its intention not to renew its contract sales
engagement with the Company for 2007. The contract, which represented
approximately $65 million to $70 million in revenue on an annual basis, expired
as scheduled on December 31, 2006.
  On
October 25, 2006, the Company also announced that it had received notification
from sanofi-aventis of its intention to terminate its contract sales engagement
with the Company effective December 1, 2006. The contract, which represented
approximately $18 million to $20 million in revenue on an annual basis, was
previously scheduled to expire on December 31, 2006.
  On March
21, 2007, the Company announced that a large pharmaceutical company customer had
notified them of its intention not to renew its contract sales engagement with
the Company upon its scheduled expiration on May 12, 2007.  This
contract, which had a one-year term, represented approximately $37 million in
annual revenue.
   13.
              Executive
      Severance
  On
October 21, 2005, the Company announced the resignation of Charles T. Saldarini
as vice chairman of the Board and chief executive officer. 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.
 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.  The Company recognized approximately $1.6 million
in additional compensation expense in the third quarter of 2005 as per the terms
of his employment agreement.  Effective December 31, 2005, the Company
entered into an amended memorandum of understanding with the Company, 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 2005, one other executive vice president during 2006 and its president of
its sales services segment during 2007.  The Company recognized
charges of approximately $5.7 million and $573,000 related to executive
resignations/settlements in 2005 and 2006, respectively.  These
amounts are shown separately within operating expenses on the consolidated
statement of operations for the years ended December 31, 2005 and
2006.  There were no executive severance charges for the year ended
December 31, 2007.
  14.
              Facilities
      Realignment
   The
Company recorded facility realignment charges totaling approximately $1.0
million, $2.0 million and $2.4 million during 2007, 2006 and 2005,
respectively.  These charges were for costs related to excess leased
office space the Company has at its Saddle River, New Jersey and Dresher,
Pennsylvania facilities.  In 2007, the Company sub-leased the excess
office space at its Saddle River, New Jersey location and also secured
sub-leases for two of the three vacant spaces at its Dresher
location.  The Company is currently seeking to sublease the remaining
excess space at its Dresher location.  A summary of the significant
components of the facility realignment charges for the years ended December 31,
2005, 2006 and 2007 by segment is as follows:
   F-23
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 Sales
                
                
                Marketing2005:
                
                Services
                
                
                Services
                
                
                TotalFacility
      lease obligations
                
                $
                1,057
                
                
                $
                1,297
                
                
                $
                2,354Total
      facility realignment charge
                
                $
                1,057
                
                
                $
                1,297
                
                
                $
                2,3542006:Facility
      lease obligations
                
                $
                803
                
                
                $
                (146
                )
                
                $
                657Asset
      impairments (1)
                
                
                474
                
                
                
                821
                
                
                
                1,295Total
      facility realignment charge
                
                $
                1,277
                
                
                $
                675
                
                
                $
                1,9522007:Facility
      lease obligations
                
                $
                (198
                )
                
                $
                (82
                )
                
                $
                (280
                )Asset
      impairments (1)
                
                
                1,020
                
                
                
                56
                
                
                
                1,076Related
      charges
                
                
                225
                
                
                
                -
                
                
                
                225Total
      facility realignment charge
                
                $
                1,047
                
                
                $
                (26
                )
                
                $
                1,021(1)
      The asset impairments resulted in changes to the accumulated depreciation
      balance
  The
following table presents a reconciliation of the restructuring charges in 2006
and 2007 to the balance at December 31, 2007 and 2006, which is included in
other accrued expenses ($305,000 and $1.0 million, respectively) and in
long-term liabilities ($370,000 and $1.3 million,
respectively):
 Balance
      as of December 31, 2005
                
                $
                2,335Accretion
                
                
                51Payments
                
                
                (680
                )Adjustments
                
                
                606Balance
      as of December 31, 2006
                
                $
                2,312Accretion
                
                
                21Payments
                
                
                (1,378
                )Adjustments
                
                
                (280
                )Balance
      as of December 31, 2007
                
                $
                675
 Charges
for facility lease obligations relate to real estate lease contracts where the
Company has exited certain space and is required to make payments over the
remaining lease term (January 2016 and November 2016 for the Saddle River, New
Jersey facility and for the Dresher, Pennsylvania facility,
respectively).  All lease termination amounts are shown net of
projected sublease income.  The charges in 2007 were primarily related
to the exiting of the computer data center space at its Saddle River
location as the Company is now outsourcing that capability. The charges in 2006
reflected additional space exited as well as additional charges to reflect the
softness of the real estate market in both areas as neither sublet despite
actively marketing the spaces.  Additionally, in 2006, the Company
recorded an impairment charge related to leasehold improvements in both spaces
as the Company determined it was unlikely that it will be able to recover the
carrying value of these assets.
 15.
              Income
      Taxes
   Deferred
tax assets and liabilities are determined based on the estimated future tax
effects of temporary differences between the financial statements and tax bases
of assets and liabilities, as measured by the current enacted tax
rates.  Deferred tax expense (credit) is the result of changes in the
deferred tax asset and liability.
  The
provision (credit) for income taxes from continuing operations for the years
ended December 31, 2007, 2006 and 2005 is comprised of the
following:
   F-24
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  2007
                
                
                2006
                
                
                2005Current:Federal
                
                $
                465
                
                
                $
                (1,520
                )
                
                $
                (5,867
                )State
                
                
                189
                
                
                
                (1,914
                )
                
                
                (379
                )Total
      current
                
                
                654
                
                
                
                (3,434
                )
                
                
                (6,246
                )Federal
                
                
                1,058
                
                
                
                2,592
                
                
                
                3,662State
                
                
                55
                
                
                
                118
                
                
                
                2,785Total
      deferred
                
                
                1,113
                
                
                
                2,710
                
                
                
                6,447Provision
      for income taxes
                
                $
                1,767
                
                
                $
                (724
                )
                
                $
                201
 Total
income tax expense in 2007, 2006 and 2005, including taxes associated with
discontinued operations was $1.8 million, ($465,000) and $201,000,
respectively.
  The tax
effects of significant items comprising the Company’s deferred tax assets and
(liabilities) as of December 31, 2007 and 2006 are as follows:
  2007
                
                
                2006Current
      deferred tax assets (liabilities)included
      in other current assets:Allowances
      and reserves
                
                $
                1,402
                
                
                $
                1,580Contract
      costs
                
                
                -
                
                
                
                31Compensation
                
                
                905
                
                
                
                835Valuation
      allowance on deferred tax assets
                
                
                (2,307
                )
                
                
                (2,446
                )-
                
                
                
                -Noncurrent
      deferred tax assets (liabilities)included
      in other long-term assets:State
      net operating loss carryforwards
                
                
                2,221
                
                
                
                2,048Federal
      net operating loss carryforwards
                
                
                3,148
                
                
                
                -State
      taxes
                
                
                1,066
                
                
                
                1,016Equity
      investment
                
                
                128
                
                
                
                505Self
      insurance and other reserves
                
                
                1,940
                
                
                
                2,703Property,
      plant and equipment
                
                
                178
                
                
                
                (1,133
                )Intangible
      assets
                
                
                (291
                )
                
                
                (172
                )Other
      reserves - restructuring
                
                
                (64
                )
                
                
                (629
                )Valuation
      allowance on deferred tax assets
                
                
                (9,439
                )
                
                
                (4,338
                )(1,113
                )
                
                
                -Net
      deferred tax liability
                
                $
                (1,113
                )
                
                $
                -
 The
Company performs an analysis each year to determine whether the expected future
income will more likely than not be sufficient to realize the deferred tax
assets.  The Company's recent operating results and projections of
future income weighed heavily in the Company's overall assessment.  As
a result, the Company established a full federal and state valuation allowance
for the net deferred tax assets at December 31, 2007 and 2006 because the
Company determined that it was more likely than not that these assets would not
be realized.  At December 31, 2007 and 2006, the Company had a
valuation allowance of approximately $11.7 million and $6.8 million,
respectively, related to the Company's net deferred tax assets that cannot be
carried back.
  The
noncurrent net deferred tax liability relates to tax amortization of the tax
basis in goodwill associated with the Pharmakon acquisition.  Prior to
2007, the Company included in net deferred tax assets, the deferred tax
liability related to the Pharmakon acquisition. In the first quarter of
2007 the Company determined that this deferred tax liability would not be
realizable for an indeterminate time in the future and consequently should not
be included in net deferred tax assets for purposes of calculating the valuation
allowance in any period. As a result, the Company increased the valuation
allowance by $882,000 in the first quarter.  The Company does not
believe this increase was material to the results of operations or its financial
position in 2007.  The Company
   F-25
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  also
believes that the additional valuation allowance that would have resulted as of
December 31, 2006 and 2005 was not material to the results of operations or the
financial position of the Company in those years.
  Federal
tax attribute carryforwards at December 31, 2007, consist primarily of
approximately $9.7 million of net operating losses and $339,000 of capital
losses.  In addition, the Company has approximately $47.9 million of
state net operating losses carryforwards.  The utilization of the
federal carryforwards as an available offset to future taxable income is subject
to limitations under federal income tax laws.  If the federal net
operating losses are not utilized, they expire in 2027.  The capital
losses can only be utilized against capital gains and $339,000 will expire in
2009.
  A
reconciliation of the difference between the federal statutory tax rates and the
Company's effective tax rate is as follows:
 
 2007
                
                
                2006
                
                
                2005Federal
      statutory rate
                
                
                (35.0
                %)
                
                
                35.0
                %
                
                
                (35.0
                %)State
      income tax rate, netof
      Federal tax benefit
                
                
                1.0
                %
                
                
                (11.0
                %)
                
                
                17.9
                %Meals
      and entertainment
                
                
                0.4
                %
                
                
                0.3
                %
                
                
                0.7
                %Valuation
      allowance
                
                
                46.8
                %
                
                
                (26.9
                %)
                
                
                18.4
                %Other
      non-deductible
                
                
                0.2
                %
                
                
                (2.0
                %)
                
                
                -Tax
      exempt income
                
                
                (2.7
                %)
                
                
                (6.0
                %)
                
                
                (2.9
                %)Net
      change in Federal and state reserves
                
                
                10.8
                %
                
                
                3.8
                %
                
                
                2.7
                %Effective
      tax rate
                
                
                21.5
                %
                
                
                (6.8
                %)
                
                
                1.80
                %
 
 The
Company adopted the provision of FIN48 on January 1, 2007.  As a
result of the implementation of FIN 48, the Company recognized no material
adjustment in the liability for unrecognized income tax benefits. At the
adoption date of January 1, 2007, the Company had $4.0 million of unrecognized
tax benefits, all of which would affect its effective tax rate if recognized. At
December 31, 2007, the Company had $4.1 million of unrecognized tax benefits,
all of which would affect its effective tax rate if recognized.
  Upon
      adoption of FIN 48, the Company’s income tax liabilities as of January 1,
      2007 included a total of $4.0 million for unrecognized tax benefits,
      excluding approximately $925,000 of related accrued interest, and
      approximately $300,000 of related penalties. A reconciliation of the
      beginning and ending amount of unrecognized tax benefits, excluding
      accrued interest and penalties, is as
follows:
 
 UnrecognizedTax
      BenefitsBalance
      of unrecognized benefits as of January 1, 2007
                
                $
                4,027Additions
      for tax positions related to the current year
                
                
                11Additions
      for tax positions of prior years
                
                
                209Reductions
      for tax positions of prior years
                
                
                (137
                )Balance
      as of December 31, 2007
                
                $
                4,110
 
 The
Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in income tax expense. As of December 31, 2007, the Company recognized
approximately $475,000, respectively, of such interest expense as a component of
its “Provision (benefit) for income taxes."  The liability for
unrecognized tax benefits included accrued interest of $1.4 million and $925,000
at December 31, 2007 and January 1, 2007, respectively.  The Company
has approximately $300,000 of accrued liabilities or expense for penalties
related to unrecognized tax benefits for the years ended December 31, 2007 and
2006.
 
 The
Company and its subsidiaries file a U.S. Federal consolidated income tax return
and consolidated and separate income tax returns in numerous state and local tax
jurisdictions.  The following tax years remain subject to examination
as of December 31, 2007:
  F-26
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
 Jurisdiction
                
                Tax
      YearsFederal
                
                2006State
      and Local
                
                2002
      - 2006
 The
Company reached an agreement with the Internal Revenue Service (IRS) examiner in
regards to the audit of the 2003, 2004 and 2005 tax years.  The
adjustments are not material to the Company's financial position, results of
operations or cash flows.  The Company does not anticipate a
significant change to the total amount of unrecognized tax benefits within the
next 12 months.
  The
Company is currently in the examination phase of a state and local income tax
audit for the years 2002 through 2006, and expects this audit to be completed
within the next 12 months with no material adjustments.
  16.
              Historical
      Basic and Diluted Net (Loss)/Income per
  Share
   Historical
basic and diluted net (loss)/income per share is calculated based on the
requirements of SFAS No. 128, “Earnings Per
Share.”  A reconciliation of the number of shares used in the
calculation of basic and diluted earnings per share for the years ended December
31, 2007, 2006 and 2005 is as follows:
 
 Years
      Ended December 31,2007
                
                
                2006
                
                
                2005(in
      thousands)
                
                
                (in
      thousands)
                
                
                (in
      thousands)Basic
      weighted average number of common shares
                
                
                13,940
                
                
                
                13,859
                
                
                
                14,232Dilutive
      effect of stock options, SARs, andrestricted
      stock
                
                
                -
                
                
                
                135
                
                
                
                -Diluted
      weighted average numberof
      common shares
                
                
                13,940
                
                
                
                13,994
                
                
                
                14,232
 Outstanding
options at December 31, 2007 to purchase 372,441 shares of common stock with
exercise prices of $7.70 to $83.69 were not included in the computation of
historical and pro forma diluted net income per share because to do so would
have been antidilutive, as a result of the Company’s net loss in
2007.  In addition, there were 274,384 outstanding SARs with exercise
prices $9.52 to $20.15 that were not included in the computation of earnings per
share as a result of the Company’s net loss.
  Outstanding
options at December 31, 2006 to purchase 734,404 shares of common stock with
exercise prices of $14.16 to $93.75 were not included in the 2006 computation of
historical and pro forma diluted net income per share because the exercise
prices of the options were greater than the average market price per share of
the common stock and therefore, the effect would have been antidilutive. In
addition, there were 81,856 outstanding SARs with exercise prices $12.52 to
$20.15 that were not included in the 2006 computation of historical and pro
forma diluted net income per share because the exercise prices of the options
were greater than the average market price per share of the common stock and
therefore, the effect would have been antidilutive.
  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.
  17.
              Discontinued
      Operations
   The
Company discontinued its MD&D business in the second quarter of
2006.  The MD&D business included the Company’s MD&D contract
sales and clinical sales teams and was previously reported in the sales services
reporting segment.  The MD&D business was abandoned through the
run off of operations (i.e., to cease accepting new business but to continue to
provide service under remaining contracts until they expire or
terminate).  In accordance with FAS No. 144, operations must be
abandoned prior to reporting them as discontinued operations.  The
last active contract within MD&D ended in the second quarter of
2006.  There was no activity within discontinued operations in
2007.  All prior periods have been restated to reflect the treatment
of this unit as a discontinued operation.  Summarized selected
financial information for the discontinued operations is as
follows:
  F-27
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  For
      the Year Ended December 31,2006
                
                
                2005Revenue,
      net
                
                $
                1,876
                
                
                $
                14,210Income
      (loss) from discontinuedoperations
      before income tax
                
                $
                693
                
                
                $
                (8,047
                )Income
      tax expense
                
                
                259
                
                
                
                -Net
      income (loss) fromdiscontinued
      operations
                
                $
                434
                
                
                $
                (8,047
                )
  18.
              Segment
      Information
  The
accounting policies followed by the segments are described in Note 1, Nature of
Business and Significant Accounting Policies.  Corporate charges are
allocated to each of the operating segments on the basis of total salary costs.
Corporate charges include corporate headquarter costs and certain depreciation
expenses. Certain corporate capital expenditures have not been allocated from
the sales services segment to the other operating segments since it is
impracticable to do so.
  The
Company reports under the following three segments:
  Sales
services segment – includes the Company’s Performance and Select Access
teams.  This segment uses teams to deliver services to a wide base;
they have similar long-term average gross margins, contract terms, types of
customers and regulatory environments. One segment manager oversees the
operations of all of these units and regularly discusses the results of
operations, forecasts and activities of this segment with the chief operating
decision maker;
  Marketing
services segment – includes the Company’s marketing research and medical
education and communication services. This segment is project driven; the units
comprising it have a large number of smaller contracts, share similar gross
margins, have similar customers, and have low barriers to entry for
competition.  There are many discrete offerings within this segment,
including: accredited continuing medical education (CME), content development
for CME, promotional medical education, marketing research and
communications.  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) – included revenues that were earned through the Company’s
licensing and co-promotion of pharmaceutical and MD&D
products.  There are currently no ongoing operations in this
segment.  Any business opportunities are reviewed by the chief
executive officer and other members of senior management.
  
   F-28
 
 PDI,
Inc.
 Notes
to the Consolidated Financial Statements (Continued)
 (tabular information in thousands,
except share and per share data)
  For
      the Year Ended December 31,2007
                
                
                2006
                
                
                2005Revenue:Sales
      services
                
                $
                86,766
                
                
                $
                202,748
                
                
                $
                270,420Marketing
      services
                
                
                30,545
                
                
                
                36,494
                
                
                
                34,785PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                117,311
                
                
                $
                239,242
                
                
                $
                305,205Revenue,
      intersegment:Sales
      services
                
                $
                -
                
                
                $
                -
                
                
                $
                -Marketing
      services
                
                
                180
                
                
                
                -
                
                
                
                -PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                180
                
                
                $
                -
                
                
                $
                -Revenue,
      less intersegment:Sales
      services
                
                $
                86,766
                
                
                $
                202,748
                
                
                $
                270,420Marketing
      services
                
                
                30,365
                
                
                
                36,494
                
                
                
                34,785PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                117,131
                
                
                $
                239,242
                
                
                $
                305,205Operating
      (loss) income:Sales
      services
                
                $
                (13,918
                )
                
                $
                33
                
                
                $
                (17,386
                )Marketing
      services
                
                
                (362
                )
                
                
                2,798
                
                
                
                (1,186
                )PPG
                
                
                -
                
                
                
                3,082
                
                
                
                (268
                )Total
                
                $
                (14,280
                )
                
                $
                5,913
                
                
                $
                (18,840
                )Reconciliation
      of (loss) income from operations to(loss)
      income before income taxes:Total
      (loss) income from operationsfrom
      operating groups
                
                $
                (14,280
                )
                
                $
                5,913
                
                
                $
                (18,840
                )Gain
      on investments
                
                
                -
                
                
                
                -
                
                
                
                4,444Interest
      income, net
                
                
                6,073
                
                
                
                4,738
                
                
                
                3,190(Loss)
      income before income taxes
                
                $
                (8,207
                )
                
                $
                10,651
                
                
                $
                (11,206
                )Capital
      expenditures: (1)Sales
      services
                
                $
                870
                
                
                $
                1,508
                
                
                $
                2,901Marketing
      services
                
                
                139
                
                
                
                262
                
                
                
                2,881PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                1,009
                
                
                $
                1,770
                
                
                $
                5,782Depreciation
      expense: (1)Sales
      services
                
                $
                3,477
                
                
                $
                3,671
                
                
                $
                3,260Marketing
      services
                
                
                828
                
                
                
                679
                
                
                
                550PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                4,305
                
                
                $
                4,350
                
                
                $
                3,810Total
      assetsSales
      services
                
                $
                140,161
                
                
                $
                157,750
                
                
                $
                148,642Marketing
      services
                
                
                39,393
                
                
                
                43,886
                
                
                
                51,517PPG
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                179,554
                
                
                $
                201,636
                
                
                $
                200,159(1)
      Capital expenditures and depreciation expense do not include amounts for
      discontinued operations.
   F-29
 PDI,
      INC.VALUATION
      AND QUALIFYING ACCOUNTSYEARS
      ENDED DECEMBER 31, 2005, 2006 AND 2007Balance
      at
                
                
                Additions
                
                
                
                (1)
                
                
                Balance
      atBeginning
                
                
                Charged
      to
                
                
                Deductions
                
                
                endDescription
                
                of
      Period
                
                
                Operations
                
                
                Other
                
                
                of
      Period2005Allowance
      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
                )
                
                
                9,820,101Accrued
      sales returns
                
                
                4,315,768
                
                
                
                31,551
                
                
                
                (4,116,460
                )
                
                
                230,8592006Allowance
      for doubtful accounts
                
                $
                778,407
                
                
                $
                35,713
                
                
                $
                (778,407
                )
                
                $
                35,713Allowance
      for doubtful notes
                
                
                1,242,378
                
                
                
                38,051
                
                
                
                (495,837
                )
                
                
                784,592Tax
      valuation allowance
                
                
                9,820,101
                
                
                
                -
                
                
                
                (3,035,884
                )
                
                
                6,784,217Accrued
      sales returns
                
                
                230,859
                
                
                
                -
                
                
                
                -
                
                
                
                230,8592007Allowance
      for doubtful accounts
                
                $
                35,713
                
                
                $
                -
                
                
                $
                (35,713
                )
                
                $
                -Allowance
      for doubtful notes
                
                
                784,592
                
                
                
                30,416
                
                
                
                (159,163
                )
                
                
                655,845Tax
      valuation allowance
                
                
                6,784,217
                
                
                
                -
                
                
                
                4,960,586
                
                
                
                11,744,803Accrued
      sales returns
                
                
                230,859
                
                
                
                -
                
                
                
                -
                
                
                
                230,859(1) 
      Includes payments and actual write offs, as well as changes in estimates
      in the reserves andthe
      impact of acquisitions.
  F-30