INTERPACE BIOSCIENCES, INC. - Quarter Report: 2006 September (Form 10-Q)

PDI Third Quarter Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file Number: 0-24249


	PDI, INC.
(Exact name of registrant as specified in its charter)

	Delaware		22-2919486
	(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)

	Saddle River Executive Centre 1 Route 17 South Saddle River, New Jersey 07458
(Address of principal executive offices and zip code)

	(201) 258-8450
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q No £

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


Large accelerated filer £	Accelerated filer Q	Non-accelerated filer £

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class	Shares Outstanding November 6, 2006
Common stock, $0.01 par value	14,078,970

	PDI, INC.
	Form 10-Q for Period Ended September 30, 2006
	TABLE OF CONTENTS

		Page No.
	PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005	3

	Consolidated Statements of Operations for the three and nine month periods ended September 30, 2006 and 2005 (unaudited)	4

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2006 and 2005 (unaudited)	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26


	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	28

Item 6.	Exhibits	30

Signatures		31

PDI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

	September 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	38,976		$	90,827
Short-term investments		72,452			6,807
Accounts receivable, net of allowance for doubtful accounts of
$937 and $778, respectively		21,648			27,148
Unbilled costs and accrued profits on contracts in progress, net of
allowance for unbilled receivable of $581 and $0, respectively		3,728			5,974
Income tax receivable		5,444			6,292
Other current assets		11,028			14,078
Total current assets		153,276			151,126
Property and equipment, net		13,809			16,053
Goodwill		13,612			13,112
Other intangible assets, net		16,271			17,305
Other long-term assets		3,461			2,710
Total assets	$	200,429		$	200,306

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,878		$	5,693
Income taxes payable		7,740			6,805
Unearned contract revenue		15,514			12,598
Accrued incentives		10,840			12,179
Accrued payroll and related benefits		3,319			3,709
Other accrued expenses		16,018			23,712
Total current liabilities		56,309			64,696

Commitments and contingencies (Note 7)

Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding		-			-
Common stock, $.01 par value; 100,000,000 shares authorized;
15,096,976 and 14,947,771 shares issued, respectively;
14,078,970 and 13,929,765 shares outstanding, respectively		151			149
Additional paid-in capital		118,950			118,325
Retained earnings		38,162			31,183
Accumulated other comprehensive income		71			71
Unamortized compensation costs		-			(904	)
Treasury stock, at cost (1,018,006 shares)		(13,214	)		(13,214	)
Total stockholders' equity		144,120			135,610
Total liabilities & stockholders' equity	$	200,429		$	200,306




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

PDI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Revenue, net	$	51,317		$	72,854		$	183,412		$	226,866
Cost of services		38,914			62,813			140,347			186,924
Gross profit		12,403			10,041			43,065			39,942

Compensation expense		7,589			8,715			21,216			22,607
Other selling, general and administrative expenses		5,977			6,034			15,854			19,974
Asset impairment		-			-			-			2,833
Legal and related costs		(552	)		3,625			(936	)		3,965
Total operating expenses		13,014			18,374			36,134			49,379
Operating (loss) income		(611	)		(8,333	)		6,931			(9,437	)

Gain on investments		-			-			-			4,444
Interest income, net		1,304			783			3,495			2,133
Income (loss) from continuing operations
before income taxes		693			(7,550	)		10,426			(2,860	)
Income tax expense (benefit)		284			(3,272	)		3,888			(2,876	)

Income (loss) from continuing operations		409			(4,278	)		6,538			16

Income from discontinued operations, net of tax		54			94			441			252

Net income (loss)	$	463		$	(4,184	)	$	6,979		$	268


Income (loss) per share of common stock:
Basic:
Continuing operations	$	0.03		$	(0.31	)	$	0.47		$	0.00
Discontinued operations		0.00			0.01			0.03			0.02
	$	0.03		$	(0.30	)	$	0.50		$	0.02
Assuming dilution:
Continuing operations	$	0.03		$	(0.31	)	$	0.47		$	0.00
Discontinued operations		0.00			0.01			0.03			0.02
	$	0.03		$	(0.30	)	$	0.50		$	0.02
Weighted average number of common shares and
common share equivalents outstanding:
Basic		13,871			13,867			13,851			14,379
Assuming dilution		13,987			13,867			13,968			14,505







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

PDI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Nine Months Ended
	September 30,
	2006			2005
	(unaudited)			(unaudited)

Cash Flows From Operating Activities
Net income from operations	$	6,979		$	268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,282			4,256
Deferred income taxes, net		3,274			5,622
Provision for bad debt		(940	)		971
Stock compensation costs		1,236			1,114
Loss on disposal of assets		-			266
Asset impairment		-			2,833
Gain on sale of investment		-			(4,444	)
Other		22			-
Other changes in assets and liabilities:
Decrease in accounts receivable		6,240			368
Decrease (increase) in unbilled costs		2,246			(5,631	)
Decrease (increase) in income tax receivable		800			(8,031	)
(Increase) decrease in other current assets		(159	)		1,347
Decrease in other long-term assets		185			113
Decrease in accounts payable		(2,815	)		(1,541	)
Increase (decrease) in income taxes payable		936			(829	)
Increase in unearned contract revenue		2,916			6,220
Decrease in accrued incentives		(1,339	)		(4,961	)
Decrease in accrued payroll and related benefits		(390	)		(24	)
(Decrease) increase in accrued liabilities		(7,664	)		4,043
Net cash provided by operating activities		15,809			1,960

Cash Flows From Investing Activities
(Purchases) sales of short-term investments, net		(66,767	)		24,279
Repayments from Xylos		200			-
Purchase of property and equipment		(1,180	)		(4,415	)
Cash paid for acquisition, including acquisition costs		-			(1,936	)
Proceeds from sale of assets		-			4,504
Net cash (used in) provided by investing activities		(67,747	)		22,432

Cash Flows From Financing Activities
Net proceeds from exercise of stock options		87			1,242
Cash paid for repurchase of shares		-			(12,863	)
Net cash provided by (used in) financing activities		87			(11,621	)

Net (decrease) increase in cash and cash equivalents		(51,851	)		12,771
Cash and cash equivalents - beginning		90,827			81,000
Cash and cash equivalents - ending	$	38,976		$	93,771



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

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular information in thousands, except per share amounts)

1.	BASIS OF PRESENTATION:

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements of PDI, Inc. and its subsidiaries (we, us, the Company or PDI) and related notes as included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the SEC). The unaudited interim consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that, in the judgment of management, are necessary for a fair presentation of such financial statements. During 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 periods presented. See Note 12, Discontinued Operations. Operating results for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. Certain prior period amounts have been reclassified to conform to the current presentation with no effect on financial position, net income or cash flows.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, including, but not limited to, incentives earned or penalties incurred on contracts, accrued incentives payable to employees, receivable valuations, impairment of goodwill, valuation allowances related to deferred income taxes, restructuring costs, insurance loss accruals, fair value of assets, sales returns and litigation accruals. Management's estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances. The Company reviews these matters and reflects changes in estimates as appropriate. Actual results could materially differ from those estimates.

Basic and Diluted Net Income per Share

Basic and diluted net income per share is calculated based on the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share.” A reconciliation of the number of shares of common stock used in the calculation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 2006 and 2005 is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Basic weighted average number of		13,871		13,867		13,851		14,379
of common shares
Dilutive effect of stock options, SARs,
and restricted stock		116		-		117		126
Diluted weighted average number
of common shares		13,987		13,867		13,968		14,505

Outstanding options to purchase 742,404 and 892,717 shares of common stock at September 30, 2006 and 2005, respectively, were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. Additionally, there were 79,856 and 82,065 stock-settled stock appreciation rights (SARs) outstanding at September 30, 2006 and 2005, respectively, that were not included in the computation of earnings per share because the exercise prices of the SARs were greater than the average market price of the common shares.

New Accounting Pronouncements - Standards Implemented

Effective January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with, Financial Accounting Standards Board SFAS No. 123 - revised 2004 (SFAS 123R), “Share-Based Payment” which

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

replaced SFAS No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Under the fair value recognition provision of SFAS 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company adopted the modified prospective method of adoption, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants after the effective date and to grants that were outstanding as of the effective date and are subsequently modified. Compensation for grants that were not fully vested as of the effective date will be recognized over the remaining service period using the fair value determined in accordance with SFAS 123, which was the basis for the previous pro-forma disclosures in accordance with SFAS 123. The Company has adopted the use of the straight-line attribution method over the requisite service period for the entire award. Results of prior periods do not reflect any restated amounts, and the Company had no cumulative effect adjustment upon adoption of SFAS 123R under the modified prospective method. The adoption of SFAS 123R did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows. See Note 9 for further information regarding the Company’s stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if the Company had recorded stock-based compensation expense.

Effective January 1, 2006, the Company adopted SFAS No. 154 (SFAS 154), "Accounting Changes and Error Corrections." SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. This Statement requires retrospective applications to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. In addition, this Statement requires that a change in depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The adoption of SFAS 154 had no impact on the Company’s financial statements.

New Accounting Pronouncements - Standards to be Implemented

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting For Uncertainty In Income Taxes - an Interpretation of FASB Statement 109” (FIN 48). FIN 48 clarifies that an entity’s tax benefits recognized in tax returns must be more likely than not of being sustained prior to recording the related tax benefit in the financial statements. As required by FIN 48, the Company will adopt this new accounting standard effective January 1, 2007. The Company is currently reviewing the impact of FIN 48 on the Company’s financial statements. The Company expects to complete this evaluation before December 31, 2006.

In September 2006, the FASB issued SFAS No. 157 (SFAS 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. The Company is in the process of evaluating the impact of adopting this statement.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. It requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. The provisions of SAB 108 must be applied to annual financial statements no later than the first fiscal year ending after November 15, 2006. The Company has assessed the effect of adopting this guidance and has determined that there will be no impact on its financial statements.

3.	INVESTMENTS IN MARKETABLE SECURITIES:

Available-for-sale securities are carried at fair value and consist of assets held by the Company in a Rabbi Trust associated with its deferred compensation plan. At September 30, 2006 and December 31, 2005, the carrying value of available-for-sale securities was approximately $765,000 and $1.9 million, respectively, including approximately $213,000 and $1.1 million respectively, in money market accounts, and approximately $552,000 and $811,000, respectively, in mutual funds. At September 30, 2006 and December 31, 2005, included in accumulated other comprehensive income were gross unrealized gains of approximately $119,000 and $98,000, respectively, and gross unrealized losses of approximately $4,000 and $28,000, 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 and have a weighted average maturity of 7.3 months. Portions of these held-to-maturity securities are maintained in separate accounts to support the Company’s standby letters of credit. The Company has standby letters of credit of approximately $9.6 million and $10.5 million at September 30, 2006 and December 31, 2005, respectively, as collateral for its existing insurance policies and its

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

facility leases. At September 30, 2006 and December 31, 2005, held-to-maturity securities were included in short-term investments (approximately $71.7 million and $4.9 million, respectively), other current assets (approximately $7.1 million and $7.8 million, respectively) and other long-term assets (approximately $2.5 million and $2.7 million, respectively). At September 30, 2006 and December 31, 2005, held-to-maturity securities included:

	September 30,		December 31,
	2006		2005
Cash/money accounts	$	896	$	1,953
Certificate of deposit		2,193		2,131
Commercial paper		2,915		-
Municipal securities		57,770		2,620
US Treasury obligations		1,498		987
Government agency obligations		14,373		7,742
Other securities		1,629		-
Total	$	81,274	$	15,433

4.	GOODWILL AND OTHER INTANGIBLE ASSETS:

As of September 30, 2006, goodwill is attributable to the acquisition of Pharmakon and is reported in the marketing services operating segment. The Company increased goodwill by $500,000 for the nine months ended September 30, 2006 associated with the final escrow payment made to the members of Pharmakon, LLC, pursuant to the Pharmakon acquisition agreement.

All intangible assets recorded as of September 30, 2006 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. As of March 31, 2006, the intangible assets associated with the acquisition of InServe Support Solutions were fully amortized.

	As of September 30, 2006						As of December 31, 2005
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net

Covenant not to compete	$	140	$	58	$	82	$	1,634	$	1,491	$	143
Customer relationships		16,300		2,264		14,036		17,371		2,491		14,880
Corporate tradename		2,500		347		2,153		2,652		370		2,282
Total	$	18,940	$	2,669	$	16,271	$	21,657	$	4,352	$	17,305

Amortization expense from continuing operations for the three months ended September 30, 2006 and 2005 was $320,000. Amortization expense from continuing operations for the nine months ended September 30, 2006 and 2005 was $961,000. Estimated amortization expense for the current year and the next four years is as follows:

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

5.	OTHER ASSETS:

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 of $50,000 in each of the second and third quarters of 2005, loan payments of $75,000 in each of the first and second quarters of 2006, and a loan payment of $50,000 in the third quarter of 2006. These payments were recorded as credits to bad debt expense in the periods in which they were received.

In May 2004, the Company entered into a loan agreement with TMX Interactive, Inc. (TMX), a provider of sales force effectiveness technology. Pursuant to the loan agreement, the Company provided TMX with a term loan facility of $500,000 and a convertible loan facility of $500,000, both of which were due to be repaid on November 26, 2005. During 2006 and 2005, TMX provided services to PDI valued at $218,000 and $245,000 respectively. The receipt of these services was used as payment towards the loan and the balance of the loan receivable at September 30, 2006 is $537,000. In 2005, due to TMX’s continued losses and uncertainty regarding its future prospects, the Company established an allowance for credit

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

losses against the TMX loans. The receipt of services in lieu of cash payment was recorded as a credit to bad debt expense in 2006 and credit to loan receivable in 2005.

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 is included in gain on investments in 2005.

6.	FACILITIES REALIGNMENT:

In the fourth quarter of 2005, the Company accrued facility realignment expenses of approximately $2.4 million that related to excess leased office space it had at both its Saddle River, NJ and Dresher, PA offices. In the second quarter of 2006, the Company accrued an additional $285,000 for the excess leased space at these locations. The expense is reported in other selling, general and administrative expenses within the reporting segment that it resides in and the accrual balance is reported in other accrued expenses on the balance sheet. The Company expects to sub-lease both of these spaces. A rollforward of the activity for the facility realignment plan is as follows:

	Sales			Marketing
	Services			Services			Total

Balance as of December 31, 2005	$	1,038		$	1,297		$	2,335
Accretion		15			23			38
Payments		(236	)		(308	)		(544	)
Adjustments		208			77			285
Balance as of September 30, 2006	$	1,025		$	1,089		$	2,114

7.	COMMITMENTS AND CONTINGENCIES:

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

Securities Litigation

In January and February 2002, the Company, its former chief executive officer and its former chief financial officer were served with three complaints that were filed in the U.S. District Court for the District of New Jersey (the Court) alleging violations of the Securities Exchange Act of 1934 (the Exchange Act). These complaints were brought as purported shareholder class actions under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 established thereunder. On May 23, 2002, the Court consolidated all three lawsuits into a single action entitled In re PDI Securities Litigation, Master File No. 02-CV-0211, and appointed lead plaintiffs (Lead Plaintiffs) and Lead Plaintiffs’ counsel. On or about December 13, 2002, Lead Plaintiffs filed a second consolidated and amended complaint (Second Consolidated and Amended Complaint), which superseded their earlier complaints. In February 2003, the Company filed a motion to dismiss the Second Consolidated and Amended Complaint. On or about August 22, 2005, the Court dismissed the Second Consolidated and Amended Complaint without prejudice to plaintiffs. On October 21, 2005, Lead Plaintiffs filed a third consolidated and amended complaint (Third Consolidated and Amended Complaint). Like its predecessor, the Third Consolidated and Amended Complaint names the Company, its former chief executive officer and its former chief financial officer as defendants; purports to state claims against the Company on behalf of all persons who purchased its common stock between May 22, 2001 and August 12, 2002; and seeks money damages in unspecified amounts and litigation expenses including attorneys’ and experts’ fees. The essence of the allegations in the Third Consolidated and Amended Complaint is that the

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

Company intentionally or recklessly made false or misleading public statements and omissions concerning its prospects with respect to its marketing of Ceftin in connection with the October 2000 distribution agreement with GlaxoSmithKline (GSK), its marketing of Lotensin in connection with the May 2001 distribution agreement with Novartis, as well as its marketing of Evista in connection with the October 2001 distribution agreement with Eli Lilly and Company. On December 21, 2005, the Company filed a motion to dismiss the Third Consolidated and Amended Complaint under the Private Securities Litigation Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. On November 2, 2006, the Court issued an Opinion and Order dismissing with prejudice all claims asserted in the Third Consolidated and Amended Complaint against all defendants and denied Lead Plaintiffs’ request to amend the complaint.

Bayer-Baycol Litigation

The Company has been named as a defendant in numerous lawsuits, including two class action matters, alleging claims arising from the use of Baycol, a prescription cholesterol-lowering medication. Baycol was distributed, promoted and sold by Bayer in the U.S. through early August 2001, at which time Bayer voluntarily withdrew Baycol from the U.S. market. Bayer had retained certain companies, such as the Company, to provide detailing services on its behalf pursuant to contract sales force agreements. The Company may be named in additional similar lawsuits. To date, the Company has defended these actions vigorously and has asserted a contractual right of defense and indemnification against Bayer for all costs and expenses that it incurs relating to these proceedings. In February 2003, the Company entered into a joint defense and indemnification agreement with Bayer, pursuant to which Bayer has agreed to assume substantially all of the Company’s defense costs in pending and prospective proceedings and to indemnify the Company in these lawsuits, subject to certain limited exceptions. Further, Bayer agreed to reimburse the Company for all reasonable costs and expenses incurred through such date in defending these proceedings. As of September 30, 2006, Bayer has reimbursed the Company for approximately $1.6 million in legal expenses, the majority of which was received in 2003 and was reflected as a credit within selling, general and administrative expense. The Company did not incur any costs or expenses relating to these matters during 2004, 2005, or the first nine months of 2006.

Cellegy Litigation

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

In addition to the initial $2,000,000 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. The Company further alleged that to secure its debt to the Company, Cellegy granted the Company a security interest in certain "Pledged Collateral," which is broadly defined in the Security Agreement to include, among other things, 50% of licensing fees, royalties or "other payments in the nature thereof" received by Cellegy in connection with then-existing or future agreements for Cellegy's drugs Rectogesic® and Tostrex® outside of the U.S., Mexico, and Canada. Upon receipt of such payments, Cellegy agreed to make prompt payment to the Company. The Company alleged that it was owed 50% of a $2,000,000 payment received by Cellegy in connection with the renegotiation of its license and distribution agreement for Rectogesic® in Europe, and that Cellegy's failure to pay the Company constituted an event of default under the Security Agreement and the Secured Promissory Note. For Cellegy's breach of contract, the Company sought damages in the total amount of $6,400,000 plus default interest from Cellegy.

On December 27, 2005, Cellegy filed an answer to the Company’s complaint, denying the allegations contained therein, and asserting affirmative defenses. 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

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

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, dated as of September 26, 2006, to sell its intellectual property rights and other assets relating to certain of its products and product candidates to Strakan International Limited (the Sale). Pursuant to a letter agreement (the Agreement) between Cellegy and the Company, Cellegy has 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 with an outstanding principal amount of approximately $2.34 million and the $3.5 million Nonnegotiable Convertible Senior Note (collectively, “the Notes”). Pursuant to the Agreement, $500,000 of the Payoff Amount was paid to the Company in September 2006, and the remaining $2.5 million is payable to the Company within two business days of the consummation of the Sale. The Company had previously established an allowance for doubtful notes for the outstanding balance of the Notes, therefore, the Agreement does not result in the recognition of a loss. The $500,000 received has been recorded as a credit to litigation expense and due to the final payment being contingent on the consummation of the Sale, such payment will be recognized as a credit to litigation expense when received.

California Class Action Litigation

On September 26, 2005, the Company was served with a complaint in a purported class action lawsuit that was commenced against the Company in the Superior Court of the State of California for the County of San Francisco on behalf of certain of the Company’s current and former employees, alleging violations of certain sections of the California Labor Code. During the quarter ended September 30, 2005, the Company accrued approximately $3.3 million for potential penalties and other settlement costs relating to both asserted and unasserted claims relating to this matter. In October 2005, the Company filed an answer generally denying the allegations set forth in the complaint. In December 2005, the Company reached a tentative settlement of this action, subject to court approval. As a result, the Company reduced its accrual relating to asserted and unasserted claims relating to this matter to $600,000 during the quarter ended December 31, 2005. The balance of the accrual at September 30, 2006 is $87,000. On October 17, 2006, the court issued an order preliminarily approving the tentative settlement and scheduled a fairness hearing regarding the tentative settlement for January 2007. Notwithstanding the foregoing, there can be no assurance that the court will ultimately approve the tentative settlement, that the reserve will be adequate to cover potential liability, or that the ultimate outcome of this action will not have a material adverse effect on the Company’s business, financial condition and results of operations.

Letters of Credit

As of September 30, 2006, the Company has $9.6 million in letters of credit outstanding as required by its existing insurance policies and as required by its facility leases.

8.	OTHER COMPREHENSIVE INCOME:

A reconciliation of net income as reported in the consolidated statements of operations to other comprehensive income, net of tax, is presented in the table below.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Net income (loss)	$	463	$	(4,184	)	$	6,979		$	268
Other comprehensive income
Unrealized holding gain on
available-for-sale securities		8		56			12			97
Reclassification adjustment for
realized (losses)/gains		-		-			(12	)		7
Other comprehensive income (loss)	$	471	$	(4,128	)	$	6,979		$	372

9.	STOCK-BASED COMPENSATION:

On January 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. SFAS 123R requires all stock-based payments to employees to be recognized in the financial statements based on the grant date fair value of the award. Under the modified prospective transition method, the Company is required to record stock-based

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

Stock Incentive Plans

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

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

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

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

On March 23, 2006, under the terms of the 2004 Plan, the Compensation Committee created the 2006 PDI, Inc. Long Term Incentive Plan (the 2006 LTI Plan). This plan includes grants of SARs and restricted stock. In making recommendations for grants under this plan, the Compensation Committee considered the overall performance of the Company and the business unit of the Company for which the executive has responsibility, the individual contribution and performance level of the executive, and the need to retain key management personnel.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. In 2006 and 2005, the fair value of each grant was estimated using a Black-Scholes option pricing model. The Black-Scholes option pricing model considers a range of assumptions related to volatility, risk-free interest rate and expected life. 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 risk-free rate was based on U.S.

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

Treasury security yields at the time of grant. The dividend yield was based on historical information. The expected life was determined using the safe-harbor method permitted by Securities Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107). The Company expects to use this simplified method for valuing employee SARs grants as permitted by the provisions of SAB 107 until more detailed information about exercise behavior becomes available over time. When stock options are issued, the Company will use an expected life commensurate with their historical exercise patterns. The following table provides the weighted average assumptions used in determining the fair value of the stock-based awards granted during the three and nine months ended September 30, 2006 and 2005, respectively:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2006	2005	2006	2005
Risk-free interest rate	-	4.18%	4.81%	4.18%
Expected life	-	5 years	3.5 years	5 years
Expected dividends	-	$0	$0	$0
Expected volatility	-	100%	66.16%	100%
Foreiture rate	-	-	14.0%	-

SFAS 123R also requires that the Company recognize compensation expense for only the portion of options, SARs or restricted shares that are expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, adjustments to compensation expense might be required in future periods.

The weighted average grant date fair values of options and SARs granted during the nine months ended September 30, 2006 and 2005 were $6.31 and $10.84, respectively. There were no stock grants issued for the quarter ended September 30, 2006. The weighted average grant date fair values of options and SARs granted during the three months ended September 30, 2005 was $13.08. During the nine months ended September 30, 2006 and 2005, the aggregate intrinsic values of options exercised under the Company’s stock option plans were approximately $130,000 and $243,000, respectively, determined as of the date of option exercise. As of September 30, 2006, there was $2.1 million of total unrecognized compensation cost net of estimated forfeitures, related to unvested awards that are expected to be recognized over a weighted-average period of approximately 2.0 years. The Company reversed the balance of $904,000 of unamortized compensation costs that pertained to restricted stock as of the January 1, 2006 balance sheet date to additional paid-in capital as required by SFAS 123R.

Changes in the Company’s outstanding stock options and SARs for the nine-month period ended September 30, 2006 were as follows:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Term (in years)		(in thousands)
Outstanding at January 1, 2006		1,381,096		$	26.20		6.58	$	494
Granted		145,047			12.42		3.92		-
Exercised		(20,167	)		6.30
Forfeited or expired		(480,358	)		28.82
Outstanding at September 30, 2006		1,025,618			23.42		5.49		88

Exercisable at September 30, 2006		870,161		$	25.36		5.57	$	930

Changes in the Company’s outstanding shares of restricted stock for the nine-month period ended September 30, 2006 were as follows:

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)


				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Grant		Vesting		Value
	Shares			Price		Period (in years)		(in thousands)
Outstanding at January 1, 2006		112,723		$	17.49		1.08	$	1,522
Granted		152,918			12.35		1.99		1,777
Vested		(48,583	)		14.23
Forfeited or expired		(20,983	)		14.55
Outstanding at September 30, 2006		196,075		$	14.60		1.55	$	2,278

Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006

Prior to the adoption of SFAS 123R, the Company used the intrinsic value method of accounting for stock-based employee compensation in accordance with APB 25. Under the intrinsic value method no compensation expense was recognized in association with its stock awards which were issued with an exercise price equal to market value on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied SFAS 123 for the three and nine month periods ended September 30, 2005 using the Black-Scholes option pricing model.

	Three Months			Nine Months
	Ended September 30,			Ended September 30,
	2005			2005
Net (loss) income, as reported	$	(4,184	)	$	268
Add: Stock-based employee
compensation expense included
in reported net (loss) income,
net of related tax effects		327			723
Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards, net of
related tax effects		(402	)		(5,940	)
Pro forma net loss	$	(4,259	)	$	(4,949	)

(Loss) earnings per share
Basic—as reported	$	(0.30	)	$	0.02
Basic—pro forma	$	(0.31	)	$	(0.34	)

Diluted—as reported	$	(0.30	)	$	0.02
Diluted—pro forma	$	(0.31	)	$	(0.34	)

Prior to the adoption of SFAS 123R, the Company presented all tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions as operating cash flows on its consolidated statements of cash flows. SFAS 123R requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a component of financing cash flows, rather than as a component of operating cash flows. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

On February 9, 2005 the Company accelerated the vesting of all outstanding unvested underwater stock options. The total number of stock options that were accelerated was 473,334. On December 30, 2005, prior to the adoption of SFAS 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. The Company accelerated the vesting of the options and SARs to avoid recognizing compensation expense in future periods.

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

10.

INCOME TAXES:

The following table summarizes income tax expense from continuing operations and effective tax rate for the three and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Income tax expense (benefit)	$	284		$	(3,272	)	$	3,888		$	(2,876	)
Effective income tax (benefit) rate		41.0	%		(43.3	%)		37.3	%		(100.6	%)

The effective tax rate for the three and nine-month periods ended September 30, 2006 and the three-month period ended September 30, 2005 are in line with the Company’s historical tax rates. The effective tax rate for the nine months ended September 30, 2005 benefited from the release of a $1.7 million valuation allowance on capital loss utilized in the second quarter of 2005 as a result of the In2Focus sale. In addition, the Company recorded a one-time benefit for a $585,000 state tax refund received in the second quarter of 2005, which further reduced the effective tax rate for the nine months ended September 30, 2005.

11.

IMPAIRMENT OF LONG-LIVED ASSETS:

In the second quarter of 2005, the Company wrote off $2.8 million related to its Siebel sales force automation software. Due to the migration of the Company’s sales force automation software to the Dendrite system, it was determined that the Siebel sales force automation software was impaired and a write-off of the asset was necessary. The write-off was included in operating expense in the sales services segment.

12.

DISCONTINUED OPERATIONS:

As announced in December 2005, 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 SFAS No. 144 Accounting for the Impairment of Disposal of Long-Lived Assets, 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. 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:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
Revenue, net	$	-	$	3,632		$	1,876	$	11,259

Income from discontinued operations
before income tax	$	88	$	83		$	696	$	416
Income tax expense (benefit)		34		(11	)		255		164
Net income from discontinued
operations	$	54	$	94		$	441	$	252

13.

LOSS OF MATERIAL CONTRACTS

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. The revenue impact is projected to be approximately $60 million to $65 million less in 2006 than in 2005.

On September 26, 2006, the Company announced that it had received verbal notification from GlaxoSmithKline (GSK) of its intention not to renew its contract sales engagement with the Company for 2007. The contract, which represents approximately $65 million to $70 million in revenue on an annual basis, will expire as scheduled on December 31, 2006.

PDI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

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 represents approximately $18 million to $20 million in revenue on an annual basis, was scheduled to expire on December 31, 2006.

14.

SEGMENT INFORMATION:

The accounting policies of the segments are described in Note 1 of the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2005. Corporate charges are allocated to each of the operating segments on the basis of total salary costs. Corporate charges include corporate headquarter costs and certain depreciation expense. Certain corporate capital expenditures have not been allocated from the sales services segment to the other operating segments since it is impractical to do so.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006		2005
Revenue:
Sales services	$	43,486		$	64,763		$	157,599	$	199,944
Marketing services		7,831			8,091			25,813		26,922
PPG		-			-			-		-
Total	$	51,317		$	72,854		$	183,412	$	226,866
Operating (loss) income:
Sales services	$	(1,064	)	$	(8,492	)	$	4,225	$	(9,678	)
Marketing services		50			278			2,004		607
PPG (1)		403			(119	)		702		(366	)
Total	$	(611	)	$	(8,333	)	$	6,931	$	(9,437	)
Reconciliation of operating (loss)
income to income (loss) from
continuing operations before
income taxes
Total operating (loss) income from
operating groups	$	(611	)	$	(8,333	)	$	6,931	$	(9,437	)
Other income, net		1,304			783			3,495		6,577
Income (loss) from continuing operations
before income taxes	$	693		$	(7,550	)	$	10,426	$	(2,860	)

Capital expenditures:
Sales services	$	246		$	184		$	927	$	1,547
Marketing services		28			114			253		2,818
PPG		-			-			-		-
Total	$	274		$	298		$	1,180	$	4,365

Depreciation expense:
Sales services	$	883		$	711		$	2,744	$	2,228
Marketing services		176			144			495		392
PPG		-			-			-		-
Total	$	1,059		$	855		$	3,239	$	2,620

(1) Primarily consists of legal settlement proceeds from Cellegy offset by legal expenses.

	Three Months Ended September 30,						Nine Months Ended September 30,
Operating data	2006			2005			2006			2005
Revenue, net		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services		75.8	%		86.2	%		76.5	%		82.4	%
Gross profit		24.2	%		13.8	%		23.5	%		17.6	%
Compensation expense		14.8	%		12.0	%		11.6	%		10.0	%
Other selling, general and administrative expenses		11.6	%		8.3	%		8.6	%		8.8	%
Asset impairment		0.0	%		0.0	%		0.0	%		1.2	%
Legal and related costs		(1.1	%)		5.0	%		(0.5	%)		1.7	%
Total operating expenses		25.4	%		25.2	%		19.7	%		21.8	%
Operating (loss) income		(1.2	%)		(11.4	%)		3.8	%		(4.2	%)
Gain on investments		0.0	%		0.0	%		0.0	%		2.0	%
Interest income, net		2.5	%		1.1	%		1.9	%		0.9	%
Income (loss) from continuing operations
before income taxes		1.4	%		(10.4	%)		5.7	%		(1.3	%)
Income tax expense (benefit)		0.6	%		(4.5	%)		2.1	%		(1.3	%)
Income (loss) from continuing operations		0.8	%		(5.9	%)		3.6	%		0.0	%
Income from discontinued operations, net of tax		0.1	%		0.1	%		0.2	%		0.1	%
Net income (loss)		0.9	%		(5.7	%)		3.8	%		0.1	%

Exhibit No.		Description

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

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

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

Date: November 8, 2006		PDI, INC.
		(Registrant)

		/s/ Michael J. Marquard
		Michael J. Marquard
		Chief Executive Officer

		/s/ Jeffrey E. Smith
		Jeffrey E. Smith
		Chief Financial Officer