10-K

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

                                    FORM 10-K

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

                                   (Mark One)

  |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 2002

                                       OR

    |_| 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                     (I.R.S. Employer
     Incorporation or Organization)                    Identification No.)

                              10 Mountainview Road
                        Upper Saddle River, NJ 07458-1937
                    (Address of Principal Executive Offices)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

                          Common Stock, $.01 par value
                                (Title of class)

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 in the Act.) Yes |X|  No |_|

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 7, 2003 was approximately $89,764,902.

      The number of shares outstanding of the registrant's common stock, $.01
par value, as of March 7, 2003 was 14,210,205 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE



                                    PDI, INC.

                             Form 10-K Annual Report

                                TABLE OF CONTENTS



                                                                                                            Page
                                                                                                            ----
                                                                                                          
PART 1.........................................................................................................3
   Item 1.  Business...........................................................................................3
   Item 2.  Properties........................................................................................19
   Item 3.  Legal Proceedings.................................................................................20
   Item 4.  Submission of Matters to a Vote of Security Holders...............................................21
PART II.......................................................................................................22
   Item 5.  Market for our Common Equity and Related Stockholder Matters......................................22
   Item 6.  Selected Financial Data...........................................................................22
   Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.............24
   Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................40
   Item 8.  Financial Statements and Supplementary Data.......................................................40
   Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.............40
PART III......................................................................................................41
   Item 10. Directors and Executive Officers..................................................................41
   Item 11. Executive Compensation............................................................................44
   Item 12. Security Ownership of Certain Beneficial Owners and Management....................................48
   Item 13. Certain Relationships and Related Transactions....................................................49
   Item 14. Controls and Procedures...........................................................................49
PART IV.......................................................................................................50
   Item 15. Exhibits and Financial Statement Schedules........................................................50


                      FORWARD LOOKING STATEMENT INFORMATION

      Various statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that we can achieve our
objectives or implement our plans. Factors that could cause actual results to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the factors set forth under the headings
"Business," "Risk Factors," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."


                                       2


PART 1

ITEM 1. BUSINESS

Summary of Business

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

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

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

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

      We have assembled our commercial capabilities through acquisition and
internal expansion and they can be applied on a stand-alone or integrated basis.
This flexibility enables us to provide a wide range of marketing and promotional
options that can benefit many different products throughout the various stages
of their life cycles. Our capabilities enable us to take total sales, marketing
and distribution responsibility for pharmaceutical and MD&D brands.

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

Reporting Segments and Operating Groups

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

PDI Sales and Marketing Services Group

      We are among the leaders in the pharmaceutical sales and marketing
services industry in the U.S. We have designed and implemented programs for many
of the major pharmaceutical companies serving the U.S. market. Our clients
include AstraZeneca, Novartis, GlaxoSmithKline, Aventis, Pfizer and Pharmacia.
We have strong relationships built on consistent performance and program
results.

      Our clients engage us on a contractual basis to design and implement
product promotion programs for both prescription and over-the-counter products.
The programs in the PDI Sales and Marketing Services Group (SMSG) are designed
to increase product profitability and are tailored to meet the specific needs of
the product and the client. These services are predominantly provided on a fee
for service basis. Occasionally, there is an opportunity for us to earn a bonus
incentive if we meet or exceed predetermined performance targets.

Contract Sales

      Product detailing involves a representative meeting face-to-face with
targeted prescribers and other healthcare


                                       3


decision makers to provide a technical review of the product being promoted.
Contract sales teams can be deployed in one of two ways, either dedicated or
shared.

      A dedicated contract sales team works exclusively on behalf of one client.
The team members do not represent products of other manufacturers and often
carry the business cards of the client. The sales team is customized to meet the
specifications of our client with respect to the representative profile,
physician targeting, product training, incentive compensation plans, integration
with clients' in-house sales forces, the call reporting platform and data
integration. Without incurring the cost of additional personnel, the client gets
a high quality, industry-standard sales team comparable to its internal sales
force.

      We offer shared sales teams in order to make a face-to-face selling
resource available for those clients that want an alternative to a dedicated
team. The PDI Shared Sales teams (formerly our ProtoCall unit) are leading
providers of these detailing programs in the U.S. Each team sells multiple
brands from different pharmaceutical manufacturers. Because costs are shared
among various companies, these programs may be less expensive than programs
involving a dedicated sales force. With a shared sales team, the client still
gets targeted coverage of their physician audience within the representatives'
geographic territories.

Marketing Research

      Employing leading edge, often proprietary research methodologies, we
provide qualitative and quantitative marketing research to pharmaceutical
companies with respect to healthcare providers, patients and managed care
customers in the U.S. and globally. We offer a full range of pharmaceutical
marketing research services, which include studies to identify the most
impactful business strategy, profile, positioning, message, execution,
implementation and post implementation for a product. Correctly implemented, our
marketing research model improves the knowledge clients obtain about how
physicians and other healthcare professionals will 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 to identify critical paths to marketing goals. At
each step of the marketing model we offer proven research techniques,
proprietary methodologies and custom study designs to address specific product
needs.

Medical Education and Communications

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

      We create custom-designed programs focusing on optimizing the informed use
of our clients' products. Our services are executed through a customized,
integrated plan to be leveraged across the product's entire life cycle. We can
meet a wide range of objectives, including advocacy during pre-launch,
communicating disease state awareness, supporting a product launch, helping an
under-performing brand, fending off new competition or expanding market
leadership.

PDI Pharmaceutical Products Group

      Our pharmaceutical products group's (PPG) goal is to source pharmaceutical
products in the U.S. through licensing, copromotion or acquisition arrangements.

      We have the personnel, skills and resources needed to identify and
evaluate potential license, acquisition and copromotion opportunities. Our
evaluation includes assessing the market potential of the product opportunity
and weighing this against competitive products, the possibility of generic
entry, the resources needed to compete and the many other variables that exist
in product marketing.


                                       4


      Licensing, copromotion and acquisition arrangements contain a greater
level of risk when compared to fee for service agreements, however, there is
potential for generating greater revenue at higher margins with longer-term
visibility on revenue. PPG's arrangements may be longer in duration and
potentially less prone to sudden termination than fee for service agreements.
Our partner companies choose to work with us because we have the capabilities to
provide a complete commercial solution.

Licensing

      Licensing entails taking total commercial responsibility for a product
while another company maintains ownership of the intellectual property and the
patent on the product. The company from which we license the product would
typically retain responsibility for manufacturing the product. In a licensing
arrangement, we may make upfront payments and/or royalty payments to our partner
company.

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

Copromotion

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

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

Acquisition

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

Medical Devices and Diagnostics

      Our MD&D group provides an array of services to the MD&D industry. We have
historically provided many of these sales and marketing activities to the
pharmaceutical industry. We believe that our current infrastructure,
supplemented by our addition of several individuals with extensive MD&D
experience, can be leveraged to take advantage of opportunities in this market.

      In September 2001, we acquired InServe Support Solutions (InServe).
InServe is a leading nationwide supplier of supplemental field-staffing programs
for the MD&D industry. InServe employs nurses, medical technologists, and other
clinicians who train healthcare practitioners and provide hands-on clinical
education and after sales support to maximize product utilization and customer
satisfaction. InServe's clients include many of the leading MD&D companies,
including Becton Dickinson, Boston Scientific and Johnson & Johnson.

      The InServe acquisition helped establish our contract sales business
within the MD&D market. We took our knowledge from years of providing sales
forces to the pharmaceutical industry and applied it to the MD&D business. As a
result, we now have contract sales as one of the services that we market to the
MD&D industry, to assist a company in improving its product sales.

      A major focus of the MD&D group is product licensing and acquisition. We
believe that this market is well


                                       5


suited for strategic alliances and partnerships with companies looking to
maximize the commercial value of their products. This strategy led us to our
first commercial MD&D partnership. In October 2002, we partnered with Xylos
Corporation (Xylos) for the exclusive U.S. commercialization rights to the Xylos
XCell(TM) Cellulose Wound Dressing (XCell) wound care products, by entering into
an agreement pursuant to which we are the exclusive commercialization partner
for the sales, marketing and distribution of the product line in the U.S.

History

      We commenced operations as a contract sales organization in 1987. From
1990 to 1995 contract sales became accepted in the pharmaceutical industry as a
tactical solution for a lower cost, high quality sales team. The representatives
were principally flex-time. We were paid per call and there was very little risk
sharing.

      The expansion of pharmaceutical field forces in general and the acceptance
of contract sales by the industry were two main drivers that fueled our high
growth from 1996 to 2000. Our representatives were principally full-time
employees and we provided a compensation package that was competitive with those
of the major pharmaceutical companies in order to attract higher quality
personnel and become a better provider of contract sales services.

      We completed our initial public offering in May 1998. In May of 1999, we
acquired TVG, Inc. (TVG) which gave us one of the leading marketing research
groups in the U.S. and a scientifically focused medical education capability.
The addition of TVG provided us with incremental growth potential as a result of
the additional capabilities available to support our service offerings.

      In August 1999, we added a shared sales capability through the acquisition
of ProtoCall, now PDI Shared Sales. This addition provided us with a lower cost
product offering and increased business opportunities with existing and new
clients. This offering also supplemented our dedicated sales force capacity.

      In September 2001, we acquired InServe which provides clinical sales
support to the MD&D industry. InServe employs nurses, medical technologists, and
other clinicians who train healthcare practitioners with respect to medical
equipment. InServe informs and supports the end users of medical equipment, with
the objective of increasing satisfaction and utilization of the equipment. The
client benefits by reducing the time its sales representatives spend for
training and service, increasing the time available for sales activity.

      In June 2000, we established LifeCycle Ventures (LCV) to support our
agreements that require marketing and other commercial capabilities. Our initial
strategy, in response to the market dynamics at the time, was to identify
under-promoted brands within pharmaceutical companies' product portfolios and
put a focused promotional effort behind them, increasing product performance.
This was the case in October 2000, when we entered into a sales, marketing and
distribution agreement with GlaxoSmithKline (GSK) in support of Ceftin. The
Ceftin agreement enabled LCV to add capabilities that we did not then have, such
as distribution, medical affairs, regulatory and managed care and trade
relations.

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

      During 2001 and 2002, we continued to identify other late stage
pharmaceutical products that could benefit from focused sales and marketing
efforts. Many companies had products within their portfolios that were
underpromoted and that could benefit from focused sales and marketing efforts.
As the dynamics within the industry changed, affected by mergers and
acquisitions, a slowdown in the approval of new products, and increased generic
availability of once large brands, the willingness of pharmaceutical companies
to relinquish commercial control of products decreased.

      During this period, we entered into several financially beneficial
copromotion agreements, including with Novartis Pharmaceuticals Corporation
(Novartis). In contrast, our copromotion agreement with Eli Lilly and Company
(Eli Lilly) resulted in significant operating losses. However, copromotion
agreements remain a viable business


                                       6


arrangement with pharmaceutical companies, but we have a narrower range of
parameters that must be met in order for us to consider an opportunity
favorably.

      Our business development efforts are now focused on:

      o     products in late stage development, prior to final Food and Drug
            Administration (FDA) approval; and
      o     opportunities within the sales and marketing services group.

      We believe that there are opportunities for us:

      o     to partner with companies that lack the necessary infrastructure to
            commercialize their brands; and
      o     to take over the promotion of products that are not getting the
            level of sales and marketing support needed to maximize the return
            to the brand owner.

Corporate Strategy

      Our strategy is to source pharmaceutical and MD&D products into our
company that we can sell, market and commercialize. We do this by entering into
agreements with companies that own the right to the product(s) and require our
expertise in generating product sales. We are compensated either through a fee
for service or by sharing in the product sales we generate.

Contracts

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

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

      The majority of our revenue in the sales and marketing services segment is
generated by contracts for dedicated sales teams. These contracts are generally
for terms of one to three years and may be renewed or extended. The majority of
these contracts, however, are terminable by the client for any reason upon 30 to
90 days' notice. These contracts typically, but not always, provide for
termination payments by the client upon termination without cause. While such
termination may result in the imposition of penalties on the client, these
penalties may not act as an adequate deterrent to the termination of any
contract. In addition, these penalties may not offset the revenue we could have
earned under the contract or the costs we may incur as a result of its
termination. The loss or termination of a large contract or the loss of multiple
contracts could adversely affect our future revenue and profitability. Contracts
may also be terminated for cause if we fail to meet stated performance
benchmarks.

      Our market research and consulting and education and communications
contracts generally are for projects lasting from three to six months. The
contracts are terminable by the client and provide for termination payments in
the event they are terminated without cause. Termination payments include
payment for all work completed to date, plus the cost of any nonrefundable
commitments made on behalf of the client. Due to the typical size of these
contracts, it is unlikely the loss or termination of any individual contract
would materially adversely affect our financial condition or results of
operations.

      The contracts within the pharmaceutical products group are generally
performance based. Certain licensing and acquisition contracts may require
sales, marketing and distribution of product. Typically we provide and finance a
portion, if not all, of the commercial activities in support of a brand in
return for a percentage of product sales. An important performance parameter is
normally the level of sales or prescriptions attained by the product during the
period of our marketing or promotional responsibility, and in some cases, for
periods after our promotional activities have ended.

      In the fourth quarter of 2000, we entered into a performance based
contract with GSK. Our agreement with GSK was in support of Ceftin and was an
exclusive sales, marketing and distribution contract. The agreement had a
five-year term, but was cancelable by either party without cause on 120 days'
notice. The agreement was terminated


                                       7


by mutual consent, effective February 28, 2002, due to the unexpected entry of a
competitive generic product.

      In May 2001, we entered into a copromotion agreement with Novartis where
we secured the U.S. sales, marketing and promotion rights for Lotensin(R)
(benazepril) and Lotensin HCT(R) (collectively Lotensin), that runs through
December 31, 2003. Under this agreement, we provide promotion, sales, marketing
and brand management for Lotensin, an ACE inhibitor. In exchange, we are
entitled to receive a revenue split based on certain total prescription
objectives above specified contractual baselines. Also under this agreement with
Novartis, we promote Lotrel(R), a combination of the ACE inhibitor benazepril
and the calcium channel blocker amlodipine. In May 2002, Diovan(R) (valsartan)
and Diovan HCT (collectively Diovan) were added to the agreement. Diovan, an
angiotensin II receptor blocker (ARB), is one of Novartis' most successful
products. Under the Lotrel and Diovan portion of the agreement, we are
compensated on a fee for service basis with the potential for incentive payments
based upon achieving certain prescription and promotional sales objectives. The
agreement to sell and market Lotensin, and to promote Lotrel and Diovan, runs
through December 31, 2003. Novartis has retained certain regulatory
responsibilities for Lotensin, Lotrel and Diovan as well as ownership of all
intellectual property. Additionally, Novartis will continue to manufacture and
distribute the products, set pricing and provide all managed care and trade
activities. In 2003, the Lotrel and Diovan contract will be classified
differently since the nature of the contract has changed from a pure performance
based contract where we were not assured of recouping our expenses, to a more
traditional fee for service contract where we have greater certainty of
recouping our expenses with the additional potential for incentives at year end
based on achieving certain performance criteria.

      In October 2001, we entered into an agreement with Eli Lilly to copromote
Evista(R) in the U.S. Under this agreement, we were entitled to be compensated
based upon net sales achieved above a predetermined level. In the event these
predetermined net sales levels were not achieved, we would not receive any
revenue to offset expenses incurred. During 2002, it became apparent that the
net sales levels likely to be achieved would not be sufficient to recoup our
expenses. In November 2002, we agreed with Eli Lilly to terminate the Evista
copromotion agreement effective December 31, 2002.

      In October 2002, we entered into an agreement with Xylos for the exclusive
U.S. commercialization rights to the XCell wound care products, by entering into
an agreement pursuant to which we are the exclusive commercialization partner
for the sales, marketing and distribution of the product line in the U.S.

      On December 31, 2002, we entered into an exclusive licensing agreement
with Cellegy Pharmaceuticals, Inc. (Cellegy) for the North American rights to
its testosterone gel product. Cellegy submitted a New Drug Application (NDA) for
the hypogonadism indication in June 2002, based on positive results achieved in
a Phase III clinical trial. The U.S. Food and Drug Administration (FDA) has
accepted the application for review, and FDA approval for the commercialization
of the product is pending. The 10-month Prescription Drug User Fee Act (PDUFA)
date for the product is April 5, 2003, the first potential approval date for the
product, though there is no certainty that it will be approved at that time.
Under the terms of the agreement, which is in effect for the commercial life of
the product, upon execution of the agreement we paid Cellegy a $15.0 million
initial licensing fee. As the nonrefundable payment was made prior to FDA
approval and there is no alternative future use, the $15.0 million was expensed
when incurred. The amount has been recorded in other selling, general, and
administrative expenses in the consolidated statement of operations. We will be
required to pay Cellegy an additional $10.0 million after the product has all
FDA approvals required to promote, sell and distribute the product in the U.S.
This payment will be recorded as an intangible asset and amortized over the
estimated commercial life of the product. Royalty payments to Cellegy over the
term of the commercial life of the product will range from 20% to 30% of net
sales. The agreement is in effect for the commercial life of the product. As
discussed in the Legal Proceedings section of this report, in January 2003, a
lawsuit was filed against us seeking to enjoin our performance under this
agreement.

      Our contracts typically contain cross-indemnification provisions between
our client and ourselves. The client will usually indemnify us against product
liability and related claims arising from the sales of the product and we
indemnify the clients with respect to the errors and omissions of our sales
representatives and marketing personnel. To date, no client or partner has
asserted any claim for indemnification against us under any contract.

Significant Customers

      Our significant customers are discussed in footnote 13 to the consolidated
financial statements included


                                       8


elsewhere in this report.

Marketing

      Our marketing efforts target the biopharmaceutical and MD&D industries.
Companies with large product portfolios have been the most likely customers for
the services and solutions we provide, but we have also partnered with smaller,
emerging companies. Our marketing efforts are designed to reach the senior
sales, marketing and business development personnel within these companies, with
the goal of informing them of our full range of services, and projecting us as
the high quality sales and marketing organization that we are. Our tactical plan
includes advertising in trade publications, direct mail, presence at industry
seminars and a direct selling effort. We have a dedicated team of business
development specialists who work across the organization to identify needs
within the biopharmaceutical and MD&D industries which we can address.

      A multi-disciplinary team of senior managers reviews possible business
opportunities as identified by the business development team and determines
strategies and negotiation positions to contract for the most attractive
business opportunities.

Competition

      There are relatively few barriers to entry into the businesses in which we
operate and, as the industry continues to evolve, new competitors are likely to
emerge. Many of our current and potential competitors are larger than we are and
have greater financial, personnel and other resources than we do. We compete on
the basis of such factors as reputation, service quality, management experience,
performance record, customer satisfaction, ability to respond to specific client
needs, integration skills and price. We believe we compete effectively with
respect to each of these factors. Increased competition may lead to price and
other forms of competition that may have a material adverse effect on our
business and results of operations.

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

      The competition for our PPG and MD&D product offerings is primarily other
pharmaceutical companies and other companies that acquire branded products and
product lines from other pharmaceutical and MD&D companies. Competing to
copromote, license and/or acquire brands brings all the risks generally
associated with identifying, assessing and contracting effectively for products
in addition to the marketing and distribution risks of the products we obtain.

Government and Industry Regulation

      The healthcare sector is heavily regulated by both government and
industry. Various laws, regulations and guidelines established by government,
industry and professional bodies affect, among other matters, the approval, the
provision, licensing, labeling, marketing, promotion, price, sale and
reimbursement of healthcare services and products, including pharmaceutical and
medical diagnostic and device products. The federal government has extensive
enforcement powers over the activities of pharmaceutical manufacturers,
including authority to withdraw product approvals, commence actions to seize and
prohibit the sale of unapproved or non-complying products, to halt manufacturing
operations that are not in compliance with good manufacturing practices, and to
impose or seek injunctions, voluntary recalls, and civil monetary and criminal
penalties. These restrictions or prohibitions on sales or withdrawal of approval
of products marketed by us could materially adversely affect our business,
financial condition and results of operations.

      The Food, Drug and Cosmetic Act, as supplemented by various other
statutes, regulates, among other matters, the approval, labeling, advertising,
promotion, sale and distribution of drugs, including the practice of providing
product samples to physicians. Under this statute, the FDA regulates all
promotional activities involving prescription drugs. The distribution of
pharmaceutical products is also governed by the Prescription Drug Marketing Act
(PDMA), which regulates these activities at both the federal and state level.
The PDMA imposes extensive


                                       9


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
pharmaceuticals is also governed by the Federal Trade Commission Act.

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

      There are also numerous federal and state laws pertaining to healthcare
fraud and abuse. In particular, certain federal and state laws prohibit
manufacturers, suppliers and providers from offering or giving or receiving
kickbacks or other remuneration in connection with ordering or recommending
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 law can result in numerous sanctions, including criminal
fines, imprisonment, and exclusion from participation in the Medicare and
Medicaid programs.

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

      The FDA regulates the drug development process in the U.S. This impacts
products we may develop, license or acquire, including the Cellegy licensed
product. Prior to commencing human clinical trials in the U.S., a company must
file with the FDA an Investigational New Drug (IND) application containing
details for at least one study protocol and outlines of other planned studies.
The company must also provide available manufacturing data, preclinical data,
information about any use of the drug in humans for other purposes, and a
detailed plan for the proposed clinical trials, also referred to as the study
protocols. The protocols must correctly anticipate the nature of the data to be
generated and results that the FDA will require before approving the drug. If
the FDA does not comment within 30 days after an IND filing, human clinical
trials may begin.

      The clinical stage is the most time-consuming and expensive part of the
drug development process. The drug undergoes a series of tests in humans,
including healthy volunteers as well as patients with the targeted disease or
condition. Human trials usually start on a small scale to assess safety and then
expand to larger trials to test efficacy. These trials are usually grouped into
the following three phases, with multiple trials generally conducted within each
phase:

      o     Phase 1 trials involve testing the drug on a limited number of
            healthy individuals to determine the drug's basic safety data,
            including tolerance, absorption, metabolism and excretion.

      o     Phase 2 trials involve testing a small number of volunteer patients,
            who suffer from the targeted disease or condition, to determine the
            drug's effectiveness and how different doses work.


                                       10


      o     Phase 3 trials involve testing large numbers of patients, to verify
            efficacy on a large scale, as well as long-term safety.

      After all three clinical phases have been successfully completed, a
company submits to the FDA an NDA requesting that the drug be approved for
marketing. The NDA is a comprehensive filing that includes, among other things,
the results of all preclinical and clinical studies. The FDA's review can last
from a few months to several years, depending on the drug and the disease state
that is being treated. Drugs that successfully complete this review may be
marketed in the U.S. As a condition to its approval of a drug, the FDA may
require additional clinical trials following receipt of approval, in order to
monitor long-term risks and benefits, to study different dosage levels or to
evaluate different safety and efficacy parameters in target populations.

      We cannot determine what effect changes in regulations or statutes or
legal interpretations, when and if established or enacted, may have on our
business in the future. Changes could require, among other things, changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Further, we may experience delays in the regulatory approval of
products we license or acquire. Such changes, or new legislation, or delays
could have a material adverse effect on our business, financial condition and
results of operations. Our failure, or the failure of our clients to comply
with, or any change in, the applicable regulatory requirements or professional
organization or industry guidelines or regulatory delays could, among other
things, limit or prohibit us or our clients from conducting business activities
as presently conducted or proposed to be conducted, result in adverse publicity,
increase the costs of regulatory compliance or result in monetary fines or other
penalties. Any of these occurrences could have a material adverse affect on us.

                                  RISK FACTORS

      In addition to the other information provided in our reports, you should
carefully consider the following factors in evaluating our business, operations
and financial condition. Additional risks and uncertainties not presently known
to us, that we currently deem immaterial or that are similar to those faced by
other companies in our industry or business in general, such as competitive
conditions, may also impair our business operations. If any of the following
risks occur, our business, financial condition, or results of operations could
be materially adversely affected.

For 2002 we had a net loss of $30.8 million. In addition, year-to-year, our
revenue is down 59.2%.

      For the year ended December 31, 2002, we reported a net loss of
approximately $30.8 million. This is the first time since we became a reporting
company that we had a full year net loss. The two principal contributors were
the $35.1 million operating loss for the Evista contract and the $15.0 million
initial licensing fee associated with the Cellegy agreement. In addition, our
total net revenue for 2002 was $284.0 million compared to $696.6 million in 2001
and $416.9 million in 2000. The decrease in total net revenue is primarily
attributable to the fact that we had virtually no product revenue in 2002 due to
the termination of the Ceftin agreement effective February 28, 2002. There is no
assurance that we will operate profitably in future periods.

We continue to develop the pharmaceutical products group segment of our
business, which includes copromotion, exclusive distribution arrangements, as
well as licensing and brand ownership of products. We cannot assure you that we
can successfully develop this business.

      Notwithstanding the fact that we had virtually no product revenue from the
pharmaceutical products group segment of our business in 2002, we believe that a
key to our future growth is our ability to acquire copromotion and distribution
rights to pharmaceutical products and medical and diagnostic devices as well as
our ability to license or acquire these products. These types of arrangements
can significantly increase our operating expenditures. Typically, these
agreements require significant "upfront" payments, minimum purchase
requirements, minimum royalty payments, payments to third parties for
production, inventory maintenance and control, distribution services and
accounts receivable administration, as well as sales and marketing expenditures.
In addition, particularly where we license or acquire products before they are
approved for commercial use, we may be required to incur significant expense to
gain the required regulatory approvals. As a result, our working capital balance
and cash flow position could be materially and adversely affected until the
products and devices in question become commercially viable.


                                       11


The risks that we face in developing the pharmaceutical product segment of our
business may increase in proportion with:

      o     the number and types of products covered by these types of
            agreements;
      o     the applicable stage of the drug regulatory process of the products
            at the time we enter into these agreements; and
      o     our control over the manufacturing, distribution and marketing
            processes.

      Recently, we acquired from Cellegy the exclusive right to market and sell
a transdermal testosterone gel for the treatment of male hypogonadism in the
U.S., Puerto Rico, Mexico and Canada. While we have entered into copromotion and
exclusive distribution arrangements in the past, the Cellegy agreement is our
first licensing arrangement. We paid $15.0 million (nonrefundable) to acquire
the license and another $10.0 million payment is due after the product has all
FDA approvals required to promote, sell and distribute the product in the U.S.
These two payments represent approximately 25% of our current working capital.
Once the drug is approved, in addition to paying Cellegy a royalty based on net
sales, all of the costs associated with manufacturing the drug, distributing it,
as well as sales and marketing expenditures are our obligation. If additional
testing is required after the drug is approved for sale in the U.S., the costs
associated with those tests are our obligation as well. Furthermore, if we want
to sell the drug in Mexico and Canada, we must fund the regulatory process in
those countries. In light of the significant costs associated with the Cellegy
license, we cannot assure you that we will recoup our investment or that we will
realize a profit from this product.

We rely on third parties to manufacture all of our products and supply raw
materials. Our dependence on these third parties may result in unforeseen delays
or other problems beyond our control, which could adversely affect our financial
condition and our reputation.

      We do not manufacture any products and expect to continue to depend on
third parties to provide us with sufficient quantities of products to meet
demand. As a result, we cannot assure you that we will always have a sufficient
supply of products on hand to satisfy demand or that the products we do have
will meet our specifications. This risk is more acute in those situations where
we have no control over the manufacturers. For example, our agreement with
Cellegy obligates us to purchase all quantities of the product from PanGeo
Pharma Inc. (PanGeo), a third-party manufacturer with which we have no
contractual relationship and to which Cellegy has granted exclusive
manufacturing rights. If there are any problems with this contract manufacturer,
the supply of product could be temporarily halted until either PanGeo is able to
get their facilities back on-line or we are able to source another supplier for
the product. This manufacturing shutdown could have a material impact on the
future demand for the product and thus could have a material adverse effect on
our results of operations. Even if third-party manufacturers comply with the
terms of their supply arrangements, we cannot be certain that supply
interruptions will not occur or that our inventory will always be adequate.
Numerous factors could cause interruptions in the supply of our finished
products, including shortages in raw materials, strikes and transportation
difficulties. Any disruption in the supply of raw materials or an increase in
the cost of raw materials to our supplier could have a significant effect on its
ability to supply us with products.

      In addition, manufacturers of products requiring FDA approval are required
to comply with FDA mandated standards, referred to as good manufacturing
practices, relating not only to the manufacturing process but to record-keeping
and quality control activities as well. Furthermore, they must pass a
pre-approval inspection of manufacturing facilities by the FDA and foreign
authorities before obtaining marketing approval, and are subject to periodic
inspection by the FDA and corresponding foreign regulatory authorities under
reciprocal agreements with the FDA. These inspections may result in compliance
issues that could prevent or delay marketing approval or require significant
expenditures on corrective measures.

      If for any reason we are unable to obtain or retain our relationships with
third-party manufacturers on commercially acceptable terms, or if we encounter
delays or difficulties with contract manufacturers in producing or packaging our
products, the distribution, marketing and subsequent sales of these products
would be adversely affected, and we may have to seek alternative sources of
supply. We cannot assure you that we will be able to maintain our existing
manufacturing relationships or enter into new ones on commercially acceptable
terms, if at all.


                                       12


Our license agreements may require us to make minimum payments to the licensor,
regardless of the revenue derived under the license, which could further strain
our working capital and cash flow position. In addition, these agreements may be
nonexclusive or may condition exclusivity on minimum sales levels.

      Under our license agreement with Cellegy, we are required to make certain
minimum royalty payments to Cellegy once the product is approved. If the Cellegy
product fails to gain market acceptance, we will still be required to make these
minimum royalty payments. This will likely have a negative impact on our
financial condition and results of operations. In addition, the Cellegy license
agreement requires us to satisfy certain minimum net sales requirements. If we
fail to satisfy these minimum net sales requirements, under certain
circumstances Cellegy may, at its option, convert our exclusive license to a
nonexclusive license. This could mean that we would face increased competition
from third parties with respect to the marketing and sale of the product.

The regulatory approval process is expensive, time consuming and uncertain and
may prevent us from obtaining required approvals for the commercialization of
drugs and products that we license or acquire.

      In those situations where we license or acquire ownership of drugs or
other medical or diagnostic equipment, the product in question may not yet be
approved for sale to the public, in which case we may have the obligation to
obtain the required regulatory approvals. The research, testing, manufacturing
and marketing of drugs and other medical and diagnostic devices is heavily
regulated in the U.S. and other countries. The regulatory clearance process
typically takes many years and is extremely expensive. Despite the time and
expense expended, regulatory clearance is never guaranteed. The FDA can delay,
limit or deny approval of a drug for many reasons, including:

      o     safety or efficacy;
      o     inconsistent or inconclusive data or test results;
      o     failure to demonstrate compliance with the FDA's good manufacturing
            practices; or
      o     changes in the approval process or new regulations.

The FDA continues to regulate the sale and marketing of drugs and medical and
diagnostic devices even after they have been approved for sale to the public.
Complying with these regulations may be costly and our failure to comply could
limit our ability to continue marketing and distributing these products.

      Even after drugs have been approved for sale, the FDA continues to
regulate their sale. These post-approval regulatory requirements may require
further testing and/or clinical studies, and may limit our ability to market and
distribute the product or may limit the use of the product. Under our agreement
with Cellegy, we are responsible for all post-approval regulatory compliance. If
we fail to comply with the regulatory requirements of the FDA, we may be subject
to one or more of the following administrative or judicially imposed sanctions:

      o     warning letters;
      o     civil penalties;
      o     criminal penalties;
      o     injunctions;
      o     product seizure or detention;
      o     product recalls;
      o     total or partial suspension of production; and
      o     FDA refusal to approve pending NDAs, or supplements to approved
            NDAs.


                                       13


FDA approval does not guarantee commercial success. If we fail to successfully
commercialize our products, our financial condition and results of operations
could be materially and adversely affected.

      Even if a product is approved for sale to the general public, its
commercial success will depend on our marketing efforts and acceptance by the
general public. The commercial success of any drug or medical or diagnostic
device depends on a number of factors, including:

      o     demonstration of clinical efficacy and safety;
      o     cost;
      o     reimbursement policies of large third-party payors;
      o     competitive products;
      o     convenience and ease of administration;
      o     potential advantages over alternative treatment methods; and
      o     marketing and distribution support.

      We cannot assure you that any of our products will achieve commercial
success, regardless of how effective they may be.

Failure to obtain adequate reimbursement could limit our ability to market
products.

      Our ability to commercialize products, including licensed or acquired
products, will depend in part on the reimbursements, if any, obtained from
third-party payors such as government health administration authorities, private
health insurers, managed care programs and other organizations. Third-party
payors are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for pharmaceutical products. Cost
control initiatives could decrease the price that we would receive for products
and affect our ability to commercialize any product. Third-party payors also
tend to discourage use of branded products when generic substitutes are
available. As a result, reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our
investment in product acquisition and development. If adequate reimbursement
levels for either newly approved or branded products are not provided, our
business, financial condition and results of operations could be materially and
adversely affected.

 We are the defendant in a lawsuit which seeks damages and to enjoin our
performance of the Cellegy license agreement.

      On January 6, 2003, we were named as a defendant in a lawsuit filed by
Auxilium Pharmaceuticals, Inc. (Auxilium), in the Pennsylvania Court of Common
Pleas, Montgomery County. Auxilium is seeking monetary damages and injunctive
relief, including preliminary injunctive relief, based on several claims related
to our alleged breaches of a contract sales force agreement entered into with
Auxilium on November 20, 2002, and claims that we have and currently are
misappropriating trade secrets in connection with our license agreement with
Cellegy. A hearing on Auxilium's preliminary injunction motion was conducted on
February 11th through 13th, 2003, but the court did not reach a decision. Final
arguments in the hearing are scheduled for the week of March 17, 2003. We intend
to continue contesting this case vigorously. An unfavorable ruling in this
proceeding could have a material adverse impact on our business and results of
operations.

We will likely require additional funds in order to implement our evolving
business model.

      We will likely require additional funds in order to:

      o     license or acquire additional pharmaceutical or medical device
            products or technologies;
      o     pursue regulatory approvals;
      o     develop incremental marketing and sales capabilities; and
      o     pursue other business opportunities or meet future operating
            requirements.

      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


                                       14


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

Our contract sales business depends on expenditures by companies in the life
sciences industries.

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

Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.

      Our business and growth depend in large part on demand from the
pharmaceutical and life sciences industries for outsourced marketing and sales
services. The practice of many companies in these industries has been to hire
outside organizations like us to conduct large sales and marketing projects.
This practice had grown substantially until very recently, and we benefited from
this trend. However, companies may elect to perform these services internally
for a variety of reasons, including the rate of new product development and FDA
approval of those products, number of sales representatives employed internally
in relation to demand for or the need to promote new and existing products, and
competition from other suppliers. Recently there has been a reduced level of
outsourcing activity. We believe this reduction is attributable to the factors
discussed above as well as recent consolidation in the pharmaceutical and life
sciences industries. If these industries reduce their tendency to outsource
those projects or these trends continue, our operations, financial condition and
growth rate could be materially adversely affected.

Product liability claims could harm our business.

      We could face substantial product liability claims in the event users of
any of the pharmaceutical and medical device products we market now or in the
future are alleged to cause negative reactions or adverse side effects or in the
event any of these products causes injury, is alleged to be unsuitable for its
intended purpose or is alleged to be otherwise defective. For example, we have
been named in numerous lawsuits as a result of our detailing of Baycol(R) on
behalf of Bayer Pharmaceutical. Product liability claims, regardless of their
merits, could be costly and divert management's attention, or adversely affect
our reputation and the demand for our products. Although we currently have
product liability insurance in the aggregate amount of $10.0 million, we cannot
assure you that our insurance will be sufficient to cover fully all potential
claims. Also, adequate insurance coverage might not be available in the future
at acceptable costs, if at all.

We may be unable to secure or enforce adequate intellectual property rights to
protect the products or technologies we acquire, license or develop.

      Our ability to successfully commercialize new branded products or
technologies depends on our ability to secure and enforce intellectual property
rights, generally patents, and we may be unable to do so. To obtain patent
protection, we must be able to successfully persuade the U.S. Patent and
Trademark Office and its foreign counterparts to issue patents on a timely basis
and possibly in the face of third-party challenges. Even if we are granted a
patent, our rights may later be challenged or circumvented by third parties.
Likewise, a third-party may challenge our trademarks or, alternatively, use a
confusingly similar trademark. The issuance of a patent is not conclusive as to
its validity or enforceability and the patent life is limited. In addition, from
time to time, we might receive notices from third parties regarding patent
claims against us. These type claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, and cause us to incur significant expenses. As a result
of litigation over intellectual property rights, we may be required to stop


                                       15


selling a product, obtain a license from the owner to sell the product in
question or use the relevant intellectual property, which we may not be able to
obtain on favorable terms, if at all, or modify a product to avoid using the
relevant intellectual property. In the event of a successful claim of
infringement against us, our business, financial condition and results of
operations could be materially and adversely affected.

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

      We have recently seen an increase in demand from clients for
incentive-based and revenue sharing arrangements. Under incentive-based
arrangements, we are typically paid a fixed fee and, in addition, have an
opportunity to increase our earnings based on the market performance of the
products being detailed in relation to targeted sales volumes, sales force
performance metrics or a combination thereof. Under revenue sharing
arrangements, our compensation is based on the market performance of the
products being detailed, usually expressed as a percentage of product sales.
These types of arrangements transfer some market risk from our clients to us. In
addition, these arrangements can result in variability in revenue and earnings
due to seasonality of product usage, changes in market share, new product
introductions, overall promotional efforts and other market related factors. As
an example, in October 2001, we entered into an agreement with Eli Lilly to
copromote Evista in the U.S. under which we were to receive payments once
product net sales exceeded a pre-determined baseline. Our net sales of Evista
were insufficient for us to achieve our revenue and profit goals and as a result
we incurred an operating loss for 2002 of $35.1 million on this contract, $28.9
million from operating activities and $6.2 million in unused sales force
capacity. This contract was terminated effective December 31, 2002.

Most of our service revenue is derived from a limited number of clients, the
loss of any one of which could adversely affect our business.

      Our revenue and profitability depend to a great extent on our
relationships with a limited number of large pharmaceutical companies. In 2002,
we had two major clients that accounted for approximately 32.3% and 31.8%,
respectively, or a total of 64.1%, of our service revenue. We are likely to
continue to experience a high degree of client concentration, particularly if
there is further consolidation within the pharmaceutical industry. The loss or a
significant reduction of business from any of our major clients could have a
material adverse effect on our business and results of operations. As an
example, on February 4, 2002, we announced the termination of our fee for
service contract arrangement with Bayer Pharmaceuticals. As a result of this
contract being terminated four and a one-half months early, our 2002 revenues
were reduced by approximately $20.0 million.

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

      Our service contracts are generally for a term of one year and many may be
terminated by the client at any time for any reason. For example, as discussed
above, as a result of the early termination of our fee for service contract
arrangement with Bayer Pharmaceuticals, our 2002 revenues were reduced by
approximately $20.0 million. The termination of a contract by one of our major
clients not only results in lost revenue, but may cause us to incur additional
costs and expenses. All of our sales representatives are employees rather than
independent contractors. Accordingly, when a contract is terminated, unless we
can immediately transfer the related sales force to a new program, we either
must continue to compensate those employees, without realizing any related
revenue, or terminate their employment. If we terminate their employment, we may
incur significant expenses relating to their termination.

We and two of our officers are defendants in a class action shareholder lawsuit
which could divert our time and attention from more productive activities.

      Beginning on January 24, 2002, several purported class action complaints
were filed in the U.S. District Court for the District of New Jersey, against us
and certain of our officers on behalf of persons who purchased our common stock
during the period between May 22, 2001 and August 12, 2002. We believe that
meritorious defenses exist to the allegations asserted in these lawsuits and we
intend to vigorously defend these actions. Although we currently maintain
director and officer liability insurance coverage, there is no assurance that we
will continue to maintain such coverage or that any such coverage will be
adequate to offset potential damages.


                                       16


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

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

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

      Our primary competitors for sales services include in-house sales and
marketing departments of pharmaceutical companies, other CSOs and drug
wholesalers. We also compete for the licensing and acquisition of pharmaceutical
and MD&D products with other larger pharmaceutical and MD&D companies. There are
relatively few barriers to entry in the businesses in which we compete and, as
the industry continues to evolve, new competitors are likely to emerge. Many of
our current and potential competitors are larger than we are and have
substantially greater capital, personnel and other resources than we have.
Increased competition may lead to price and other forms of competition that
could have a material adverse effect on our market share, our ability to source
new business opportunities and our results of operations.

Consolidation of the wholesale distribution network for pharmaceutical products
could adversely impact the terms and conditions of our product sales.

      The distribution network for pharmaceutical products has recently
experienced significant consolidation among wholesalers and chain stores. As a
result, a few large wholesale distributors control a significant share of the
market and we have less ability to negotiate price, return policies and other
terms and related provisions of the sale. As our distribution of products
expands, some of these wholesalers and distributors may account for a
significant portion of our product sales. Our inability to negotiate favorable
terms and conditions for product sales to those wholesalers could have a
material adverse effect on our financial condition and results of operations.

If we are unable to attract key employees and consultants, we may be unable to
develop our emerging business model.

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

Our business will suffer if we fail to attract and retain experienced sales
representatives.

      The success and growth of our business depends on our ability to attract
and retain qualified and experienced pharmaceutical sales representatives. There
is intense competition for experienced pharmaceutical sales representatives from
CSOs and pharmaceutical companies. On occasion our clients have hired the sales
representatives that we trained to detail their products. We cannot be certain
that we can continue to attract and


                                       17


retain qualified personnel. If we cannot attract and retain qualified sales
personnel, we will not be able to expand our business and our ability to perform
under our existing contracts will be impaired.

Our business will suffer if we lose certain key management personnel.

      The success of our business also depends on our ability to attract and
retain qualified senior management, and financial and administrative personnel
who are in high demand and who often have multiple employment options.
Currently, we depend on a number of our senior executives, including Charles T.
Saldarini, our chief executive officer, Steven K. Budd, our president and chief
operating officer, and Bernard C. Boyle, our chief financial officer. The loss
of the services of any one or more of these executives could have a material
adverse effect on our business, financial condition and results of operations.
Except for a $5 million key-man life insurance policy on the life of Mr.
Saldarini and a $3 million policy on the life of Mr. Budd, we do not maintain
and do not contemplate obtaining insurance policies on any of our employees.

Our controlling stockholder continues to have effective control of us, which
could delay or prevent a change in corporate control that may otherwise be
beneficial to our stockholders.

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

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

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

Our quarterly revenues and operating results may vary, which may cause the price
of our common stock to fluctuate.

      Our quarterly operating results may vary as a result of a number of
factors, including:

      o     the commencement, delay, cancellation or completion of programs;
      o     regulatory developments;
      o     uncertainty related to compensation based on achieving performance
            benchmarks;
      o     the mix of services provided;
      o     the mix of programs -- i.e., contract sales, copromotion, exclusive
            marketing, licenses;
      o     the timing and amount of expenses for implementing new programs and
            services and acquiring license rights for products;
      o     the accuracy of estimates of resources required for ongoing
            programs;
      o     the timing and integration of acquisitions;
      o     changes in regulations related to pharmaceutical companies; and
      o     general economic conditions.

      In addition, in the case of revenue related to service contracts, we
recognize revenue as services are performed, while program costs, other than
training costs, are expensed as incurred. As a result, during the first two to
three months of a new contract, we may incur substantial expenses associated
with implementing that new program without recognizing any revenue under that
contract. This could have an 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


                                       18


relied upon as an indication of future performance. Fluctuations in quarterly
results could adversely affect the market price of our common stock in a manner
unrelated to our long-term operating performance.

Our stock price is volatile and could be further affected by events not within
our control. In 2002 our stock traded at a low of $2.85 and a high of $23.44.

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

      o     volatility in the trading markets generally;
      o     significant fluctuations in our quarterly operating results;
      o     announcements regarding our business or the business of our
            competitors;
      o     industry development;
      o     regulatory developments;
      o     changes in product mix;
      o     changes in revenue and revenue growth rates for us and for our
            industry as a whole; and
      o     statements or changes in opinions, ratings or earnings estimates
            made by brokerage firms or industry analysts relating to the markets
            in which we operate or expect to operate.

Employees

      As of December 31, 2002, we had 3,482 employees. Included in that amount
are 301 part-time field representatives employed by InServe, the number of which
vary from time to time based on project demand. We are not party to a collective
bargaining agreement with a labor union and our relations with our employees are
good.

Available Information

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

ITEM 2. PROPERTIES

Facilities

      Our corporate headquarters are located in Upper Saddle River, New Jersey,
in a 48,600 square foot facility. The lease for all but approximately 10,000
square feet of this space expires in the fourth quarter of 2004 with an option
to extend for an additional five years. The lease on the remaining space expires
in the second quarter of 2004.

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

      PPG operates out of a 14,000 square foot facility in Lawrenceville, New
Jersey, under a lease that expires in July 2003.

      InServe operates out of a 9,100 square foot facility in Novato,
California, under a lease which expires in the second quarter of 2005.

      We maintain a call center which supports our sales and marketing services
group in approximately 7,300 square feet of space in Bridgewater, New Jersey,
under a lease that expires in June 2006.


                                       19


      We believe that our current facilities are adequate for our current and
foreseeable operations and that suitable additional space will be available if
needed.

ITEM 3. LEGAL PROCEEDINGS

Securities Litigation

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

      The complaint names us, our chief executive officer, and our chief
financial officer as defendants; purports to state claims against us on behalf
of all persons who purchased our common stock between May 22, 2001 and August
12, 2002; and seeks money damages in unspecified amounts and litigation expenses
including attorneys' and experts' fees. The essence of the allegations in the
Second Consolidated and Amended Complaint is that we intentionally or recklessly
made false or misleading public statements and omissions concerning our
financial condition and prospects with respect to our marketing of Ceftin in
connection with the October 2000 distribution agreement with GlaxoSmithKline,
our marketing of Lotensin in connection with the May 2001 distribution agreement
with Novartis Pharmaceuticals Corp., as well as our marketing of Evista in
connection with the October 2001 distribution agreement with Eli Lilly & Co.

      In February 2003, we filed a motion to dismiss the Second Consolidated and
Amended Complaint under the Private Securities Litigation Reform Act of 1995 and
Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. We believe that
the allegations in this purported securities class action are without merit and
intend to defend the action vigorously.

Bayer-Baycol Litigation

      We have been named as a defendant in numerous lawsuits, including two
class action matters, alleging claims arising from the use of the prescription
compound Baycol that was manufactured by Bayer Pharmaceuticals (Bayer) and
co-marketed by us on Bayer's behalf under a contract sales force agreement. We
may be named in additional similar lawsuits. In August 2001, Bayer announced
that it was voluntarily withdrawing Baycol from the U.S. market. To date, we
have defended these actions vigorously and have asserted a contractual right of
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, subject to certain limited exceptions. Further, Bayer has agreed to
reimburse us for all reasonable costs and expenses incurred to date in defending
these proceedings.

Auxilium Pharmaceuticals Litigation

      On January 6, 2003, we were named as a defendant in a lawsuit filed by
Auxilium Pharmaceuticals, Inc. (Auxilium), in the Pennsylvania Court of Common
Pleas, Montgomery County. Auxilium is seeking monetary damages and injunctive
relief, including preliminary injunctive relief, based on several claims related
to our alleged breaches of a contract sales force agreement entered into by the
parties on November 20, 2002, and claims that we have and currently are
misappropriating its trade secrets in connection with our exclusive license
agreement with Cellegy.

      A hearing on Auxilium's preliminary injunction motion was conducted on
February 11 through 13, 2003, but the court did not reach a decision. Final
arguments in the hearing are scheduled for the week of March 17, 2003. We intend
to continue contesting this case vigorously, and believe the likelihood of any
order enjoining us from


                                       20


marketing and selling under our Cellegy license for any significant time is
unlikely, as is the likelihood of any material damage award.

PDI v. C.E. Unterberg, Towbin Partners

      On February 28, 2003, we commenced an action against C.E. Unterberg,
Towbin ("Unterberg") in the Supreme Court of the State of New York in New York
County. The complaint alleges claims for defamation arising from an analyst
report issued on February 12, 2003. Unterberg has not yet answered the
complaint, or taken any responsive action.

      We are currently a party to other legal proceedings incidental to our
business. While management currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on our consolidated financial statements, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations for the
period in which the ruling occurs.

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

      None.


                                       21


                                     PART II

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

      Our common stock is traded on the Nasdaq National Market under the symbol
"PDII". The following table sets forth, for each of the periods indicated, the
range of high and low closing sales prices for the common stock as reported by
the Nasdaq National Market.

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

      2001
   First quarter..........................................   106.375     50.688
   Second quarter.........................................    96.530     57.500
   Third quarter..........................................    88.050     22.780
   Fourth quarter ........................................    33.330     16.580

      We believe that, as of February 28, 2003, we had approximately 6,800
beneficial stockholders.

Dividend policy

      We have not paid any dividends and do not intend to pay any dividends in
the foreseeable future. Future earnings, if any, will be used to finance the
future growth of our business. Future dividends, if any, will be determined by
our board of directors.

ITEM 6. SELECTED FINANCIAL DATA

      The selected consolidated financial data set forth below as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 are derived from our
audited consolidated financial statements and the accompanying notes. Our
consolidated financial statements for each of the periods prior to 2000
presented reflect our acquisition of TVG in May 1999, which was accounted for as
a pooling of interests, on a pro forma basis as if TVG had been owned by the
Company the entire period. Consolidated balance sheets at December 31, 2002 and
2001 and consolidated statements of operations, stockholders' equity and cash
flows for the three years ended December 31, 2002, 2001 and 2000 and the
accompanying notes are included elsewhere in this Annual Report on Form 10-K and
have been audited by PricewaterhouseCoopers LLP, independent accountants. Our
audited consolidated balance sheet at December 31, 1998 is not included in this
report but has been audited by PricewaterhouseCoopers LLP in reliance on the
audit report issued to TVG by Grant Thornton LLP for 1998. The selected
financial data set forth below should be read together with, and are qualified
by reference to, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our audited Financial Statements and related
notes appearing elsewhere in this report.


                                       22


Statement of operations data:



                                                                                          Years Ended December 31,
                                                                      --------------------------------------------------------------
                                                                         2002          2001         2000         1999         1998
                                                                      ---------      --------     --------     --------     --------
                                                                                    (In thousands, except per share data)
                                                                                                             

Revenue
   Service, net ....................................................  $ 277,575      $281,269     $315,867     $174,902     $119,421
   Product, net ....................................................      6,438       415,314      101,008           --           --
                                                                      ---------      --------     --------     --------     --------
     Total revenue, net ............................................    284,013       696,583      416,875      174,902      119,421
                                                                      ---------      --------     --------     --------     --------

Cost of goods and services
   Program expenses ................................................    254,140       232,171      235,355      130,121       87,840
   Cost of goods sold ..............................................         --       328,629       68,997           --           --
                                                                      ---------      --------     --------     --------     --------
     Total cost of goods and services ..............................    254,140       560,800      304,352      130,121       87,840
                                                                      ---------      --------     --------     --------     --------

Gross profit .......................................................     29,873       135,783      112,523       44,781       31,581

Operating expenses
   Compensation expense ............................................     32,670        39,263       32,820       19,611       15,779
   Other selling, general and administrative expenses ..............     44,163        83,815       38,827        9,448        6,546
   Restructuring and other related expenses ........................      3,215            --           --           --           --
   Acquisition and related expenses ................................         --            --           --        1,246           --
                                                                      ---------      --------     --------     --------     --------
    Total operating expenses .......................................     80,048       123,078       71,647       30,305       22,325
                                                                      ---------      --------     --------     --------     --------
Operating (loss) income ............................................    (50,175)       12,705       40,876       14,476        9,256
Other income, net ..................................................      1,967         2,275        4,864        3,471        2,273
                                                                      ---------      --------     --------     --------     --------
(Loss) income before (benefit) provision for income taxes ..........    (48,208)       14,980       45,740       17,947       11,529
(Benefit) provision for income taxes ...............................    (17,447)        8,626       18,712        7,539        1,691
                                                                      ---------      --------     --------     --------     --------
Net (loss) income ..................................................  $(30,761)      $  6,354     $ 27,028     $ 10,408     $  9,838
                                                                      =========      ========     ========     ========     ========

Basic net (loss) income per share(1) ...............................  $   (2.19)     $   0.46     $   2.00     $   0.87     $   0.92
                                                                      =========      ========     ========     ========     ========
Diluted net (loss) income per share(1) .............................  $   (2.19)     $   0.45     $   1.96     $   0.86     $   0.91
                                                                      =========      ========     ========     ========     ========
Basic weighted average number of shares outstanding(1) .............     14,033        13,886       13,503       11,958       10,684
                                                                      =========      ========     ========     ========     ========
Diluted weighted average number of shares outstanding(1) ...........     14,033        14,113       13,773       12,167       10,814
                                                                      =========      ========     ========     ========     ========


                                                                                                Years Ended December 31,
                                                                              ------------------------------------------------------
                                                                                                                   1999       1998
                                                                                                                 --------   --------
                                                                                         (In thousands, except per share data)
                                                                                                                      
Pro forma data (unaudited)
Income before provision for income taxes ..................................                                      $ 17,947   $ 11,529
Pro forma provision for income taxes (2) ..................................                                         7,677      4,611
                                                                                                                 --------   --------
Pro forma net income (2) ..................................................                                      $ 10,270   $  6,918
                                                                                                                 ========   ========
Pro forma basic net income per share (2) ..................................                                      $   0.86   $   0.65
                                                                                                                 ========   ========
Pro forma diluted net income per share (2) ................................                                      $   0.84   $   0.64
                                                                                                                 ========   ========
Basic weighted average number of shares outstanding (1) ...................                                        11,958     10,684
                                                                                                                 ========   ========
Pro forma diluted weighted average number of shares outstanding (1) .......                                        12,167     10,814
                                                                                                                 ========   ========


Balance sheet data:



                                                                                                As of December 31,
                                                                              ------------------------------------------------------
                                                                                2002         2001       2000       1999       1998
                                                                              ---------    --------   --------   --------   --------
                                                                                                  (in thousands)
                                                                                                             
Cash and cash equivalents .................................................   $  66,827    $160,043   $109,000   $ 57,787   $ 56,989
Working capital ...........................................................      81,854     113,685    120,720     53,144     47,048
Total assets ..............................................................     190,939     302,671    270,225    102,960     77,390
Total long-term debt ......................................................          --          --         --         --         --
Stockholders' equity ......................................................     123,211     150,935    138,110     60,820     50,365


- ----------
(1)   See footnote 10 to our audited consolidated financial statements included
      elsewhere in this report for a description of the computation of basic and
      diluted weighted average number of shares outstanding.

(2)   Prior to our initial public offering (IPO), we were an S corporation and
      had not been subject to Federal or New Jersey corporate income taxes,
      other than a New Jersey state corporate income tax of approximately 2%. In
      addition, TVG, a 1999 acquisition accounted for as a pooling of interest,
      was also taxed as an S corporation from January 1997 to May 1999. Pro
      forma provision for income taxes, pro forma net income and basic and
      diluted net income per share for 1999 and 1998 reflect a provision for
      income taxes as if we and TVG had been taxed at the statutory tax rates in
      effect for C corporations for all periods.


                                       23


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

Cautionary Statement Identifying Important Factors That Could Cause Our Actual
Results to Differ From Those Projected in Forward Looking Statements.

      Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to risks and uncertainties,
which could cause our actual results to differ materially from those indicated
by the forward looking statements. Examples of forward looking statements
include, but are not limited to (i) projections of revenues, income or loss,
earnings per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements regarding our plans and objectives including
product enhancements, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements.

      This report also identifies important factors that could cause our actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the factors discussed under
the heading "Risk Factors" beginning at page 11 of this report.

      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 notes thereto appearing elsewhere in this report.

Overview

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

Description of Reporting Segments and Nature of Contracts

      Our business is organized into three reporting segments:

*     PDI sales and marketing services group (SMSG), comprised of:

      o     dedicated contract sales services (CSO);
      o     shared contract sales services (CSO);
      o     marketing research and consulting services (MR&C); and
      o     medical education and communication services (EdComm).

*     PDI pharmaceutical products group (PPG), comprised of:

      o     copromotion;
      o     licensing; and
      o     acquisitions

*     PDI medical devices and diagnostics group (MD&D), comprised of:

      o     contract sales services (CSO);
      o     InServe;
      o     copromotion;
      o     licensing; and
      o     acquisitions


                                       24


      An analysis of these reporting segments and their results of operations is
contained in Note 24 to the consolidated financial statements found elsewhere in
this report and in the consolidated results of operations discussion below.

PDI Sales and Marketing Services Group

      Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts have
been fee for service, i.e., the client pays a fee for a specified package of
services. These contracts typically include operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by built-in incentives we can earn
based on our performance. In these situations, we have the opportunity to earn
additional fees, as incentives, based on attaining performance benchmarks.

      Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason on 30 to 90 days' notice. These
contracts typically, but not always, provide for termination payments in the
event they are terminated by the client without cause. While the cancellation of
a contract by a client without cause may result in the imposition of penalties
on the client, these penalties may not act as an adequate deterrent to the
termination of any contract. In addition, we cannot assure you that these
penalties will offset the revenue we could have earned under the contract or the
costs we may incur as a result of its termination. The loss or termination of a
large contract or the loss of multiple contracts could adversely affect our
future revenue and profitability. As an example, in February 2002, Bayer
notified us that they were exercising their right to terminate their contract
with us without cause. Contracts may also be terminated for cause if we fail to
meet stated performance benchmarks, though this has never happened.

      Our MR&C and EdComm contracts generally are for projects lasting from
three to six months. The contracts are terminable by the client and provide for
termination payments in the event they are terminated without cause. Termination
payments include payment for all work completed to date, plus the cost of any
nonrefundable commitments made on behalf of the client. Due to the typical size
of the projects, it is unlikely the loss or termination of any individual MR&C
or EdComm contract would have a material adverse impact on our results of
operations, cash flows and liquidity.

PDI Pharmaceutical Products Group

      Our contracts within the PPG segment in general are more heavily
performance based and have a higher risk potential and correspondingly an
opportunity for higher profitability. We use a variety of structures for such
contracts. These contracts typically involve significant startup expenses and a
greater risk of operating losses. These contracts normally require significant
participation from our PPG and MR&C and EdComm professionals whose skills
include marketing, brand management, trade relations and marketing research.

      Beginning in the fourth quarter of 2000, we entered into a number of
significant performance based contracts. Our agreement with GlaxoSmithKline
(GSK), which we entered into in October 2000 regarding Ceftin(R), was a
marketing and distribution contract under which we had the exclusive right to
market and distribute designated Ceftin products in the U.S. The agreement had a
five-year term but was cancelable by either party without cause on 120 days'
notice. The agreement was terminated by mutual consent, effective February 28,
2002. Contracts such as the Ceftin agreement, which require us to purchase and
distribute product, have a greater number of risk factors than a traditional fee
for service contract. Any future agreement that involves in-licensing or product
acquisition would have similar risk factors.

      In May 2001, we entered into a copromotion agreement with Novartis
Pharmaceuticals Corporation (Novartis) for the U.S. sales, marketing and
promotion rights for Lotensin(R) and Lotensin HCT(R), which agreement runs
through December 31, 2003. On May 20, 2002, we expanded this agreement with the
addition of Diovan(R) and Diovan HCT(R). Under this agreement, we provide
promotion, selling, marketing, and brand management for Lotensin. In exchange,
we are entitled to receive a revenue split based on certain total prescription
(TRx) objectives above specified contractual baselines. Also under this
agreement with Novartis, we copromote Lotrel(R) and Diovan in the U.S. for which
we are entitled to be compensated on a fixed fee basis with potential incentive
payments based upon achieving certain TRx objectives. Novartis has retained
regulatory responsibilities for Lotensin, Lotrel and


                                       25


Diovan and ownership of all intellectual property. Additionally, Novartis will
continue to manufacture and distribute the products. In the event our estimates
of the demand for Lotensin are not accurate or more sales and marketing
resources than anticipated are required, the Novartis transaction could have a
material adverse impact on our results of operations, cash flows and liquidity.
Although there is a small operating loss on this contract excluding corporate
expense allocations for the year ending December 31, 2002, our efforts on this
contract did result in operating income for the quarters ended September 30,
2002 and December 31, 2002 because the sales of Lotensin exceeded the specified
baselines and the revenues earned exceeded the operating costs. We currently
estimate that future revenues will continue to exceed costs associated with this
agreement. However, there is no assurance that actual revenues will exceed
costs, in which event the activities covered by this agreement could yield an
operating loss and a contract loss reserve could be required. In 2003, the
Lotrel and Diovan contract within the Novartis agreement will be classified in
the SMSG segment since the nature of the contract has changed from a pure
performance based contract where we were not assured of recouping our expenses,
to a more traditional fee for service contract where we have greater certainty
of recouping our expenses with the additional potential for incentives at year
end based on achieving certain performance criteria.

      In October 2001, we entered into an agreement with Eli Lilly and Company
(Eli Lilly) to copromote Evista(R) in the U.S. Evista is approved in the U.S.
for the prevention and treatment of osteoporosis in postmenopausal women. Under
the terms of the agreement, we provided sales representatives to copromote
Evista to physicians in the U.S. Our sales representatives augmented the Eli
Lilly sales force promoting Evista. Under this agreement, we were entitled to be
compensated based on net factory sales achieved above a predetermined level. The
agreement did not provide for the reimbursement of expenses we incurred.

      The Eli Lilly arrangement was a performance based contract. We were
required to commit a certain level of spending for promotional and selling
activities, including but not limited to sales representatives. The sales force
assigned to Evista was at times used to promote other products in addition to
Evista, including products covered by other PDI copromotion arrangements, which
partially offset the costs of the sales force. Our compensation for Evista was
determined based upon a percentage of net factory sales of Evista above
contractual baselines. To the extent that these baselines were not exceeded, we
received no revenue.

      Based upon management's assessment of the future performance potential of
the Evista brand, on November 11, 2002, we and Eli Lilly mutually agreed to
terminate the contract as of December 31, 2002. We accrued a contract loss of
$7.8 million as of September 30, 2002 representing the anticipated future loss
expected to be incurred by us to fulfill our contractual obligations under the
Evista contract. There was no remaining accrual as of December 31, 2002 as we
had no further obligations due to the termination of the contract. We recorded
$4.1 million in Evista program revenue for 2002 and the Evista program's
operating loss, excluding corporate expense allocations on this contract for the
year ended December 31, 2002, was $35.1 million, comprised of $28.9 million of
direct Evista program operating losses and $6.2 million of unused Evista program
sales force capacity.

      On December 31, 2002, we entered into an exclusive licensing agreement
with Cellegy Pharmaceuticals, Inc. (Cellegy) for the North American rights to
its testosterone gel product. Cellegy submitted a New Drug Application (NDA) for
the hypogonadism indication in June 2002, based on positive results achieved in
a Phase III clinical trial. The U.S. Food and Drug Administration (FDA) has
accepted the application for review, and FDA approval for the commercialization
of the product is pending. The 10-month Prescription Drug User Fee Act (PDUFA)
date for the product is April 5, 2003, the first potential approval date for the
product, though there is no certainty that it will be approved at that time.
Under the terms of the agreement, which is in effect for the commercial life of
the product, upon execution of the agreement we paid Cellegy a $15.0 million
initial licensing fee. As the nonrefundable payment was made prior to FDA
approval and there is no alternative future use, the $15.0 million was expensed
when incurred. The amount has been recorded in other selling, general, and
administrative expenses in the consolidated statement of operations. We will be
required to pay Cellegy an additional $10.0 million after the product has all
FDA approvals required to promote, sell and distribute the product in the U.S.
This payment will be recorded as an intangible asset and amortized over the
estimated commercial life of the product. Royalty payments to Cellegy over the
term of the commercial life of the product will range from 20% to 30% of net
sales. The agreement is in effect for the commercial life of the product. As
discussed in the Legal Proceedings section of this report, in January 2003, a
lawsuit was filed against us seeking to enjoin our performance under this
agreement.


                                       26


PDI Medical Devices and Diagnostics Group

      On September 10, 2001, we acquired InServe Support Solutions (InServe) in
a transaction treated as an asset acquisition for tax purposes. The acquisition
was accounted for as a purchase in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) 141 and SFAS 142. The net assets of
InServe on the date of acquisition were approximately $1.3 million. At closing,
we paid the former shareholders of InServe $8.5 million, net of cash acquired.
Additionally, we deposited $3.0 million in escrow related to additional amounts
payable during 2002 if certain defined benchmarks were achieved. In April 2002,
$1.2 million of the escrow was paid to InServe shareholders (the Seller) and
$265,265 was returned to us due to nonachievement of a performance benchmark. In
September 2002, substantially all of the remaining $1.5 million in escrow was
paid to the Seller. In connection with these transactions, we recorded $7.8
million in goodwill, which is included in other long-term assets, and the
remaining purchase price was allocated to identifiable tangible and intangible
assets and liabilities acquired.

      InServe is a leading nationwide supplier of supplemental field-staffing
programs for the MD&D industry. InServe employs nurses, medical technologists
and other clinicians who visit hospital and non-hospital accounts and provide
hands-on clinical education and after-sales support to maximize product
utilization and customer satisfaction. InServe's clients include many of the
leading MD&D companies, including Becton Dickinson, Boston Scientific and
Johnson & Johnson.

      In addition to helping establish our first presence in the MD&D market,
the InServe acquisition facilitated our entry into, and helped us establish, a
contract sales business within the MD&D market. These service contracts have
similar provisions to our sales and marketing services contracts.

      A major focus of the MD&D group is product licensing and acquisition. We
believe that this segment of the MD&D market is well suited for strategic
alliances and partnerships with companies looking to maximize the commercial
value of their products. This product licensing and acquisition focus led us to
our first commercial partnership in the MD&D market. In October 2002, we entered
into an agreement with Xylos Corporation (Xylos) for the exclusive U.S.
commercialization rights to Xylos' XCell(TM) Cellulose Wound Dressing (XCell)
wound care products, by entering into an agreement whereby we are the exclusive
commercialization partner for the sales, marketing and distribution of the
product line in the U.S. The minimum annual purchase requirement for the
calendar year 2003 is $750,000. The minimum annual purchase requirement for each
subsequent calendar year is based on the aggregate dollar volume of sales of
products during the 12-month period ending with September of the prior year, but
in no case can be less than $750,000.

Critical Accounting Policies

      We prepare our financial statements in accordance with generally accepted
accounting principles (GAAP). The preparation of financial statements in
conformity with GAAP requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, including disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Our
critical accounting policies are those that are most important to our financial
condition and results and that require the most significant judgments on the
part of our management in their application. We believe that the following
represent our critical accounting policies. For a summary of all of our
significant accounting policies, including the critical accounting policies
discussed below, see footnote 1 to the consolidated financial statements. Our
management and our independent accountants have discussed our critical
accounting policies with the audit committee of the board of directors. Because
of the uncertainty of factors surrounding the estimates or judgments in the
preparation of the consolidated financial statements, particularly as it relates
to a number of the judgmental items discussed in this section, actual results
may vary from these estimates.

Revenues and costs of revenue

      The paragraphs that follow describe the guidelines that we adhere to in
accordance with GAAP when recognizing revenue and cost of goods and services in
our financial statements. GAAP requires that service revenue and product revenue
and their respective direct costs be shown separately on the income statement.
However, our


                                       27


reporting segments' revenue and direct costs may consist of both product and
service; the segment financial results are discussed later in the Consolidated
Results of Operations section beginning on page 30 and in Note 24 to the
consolidated financial statements located elsewhere in this report.

      Historically, we have derived a significant portion of our service revenue
from a limited number of clients. Concentration of business in the
pharmaceutical services industry is common and the industry continues to
consolidate. As a result, we are likely to continue to experience significant
client concentration in future periods. Our significant clients, who each
accounted for 10% or more of our service revenue, accounted for approximately
64.1%, 60.0% and 60.2%, of our service revenue for the years ended December 31,
2002, 2001 and 2000, respectively. Our product revenue for the year ended
December 31, 2001, which was comprised entirely of sales of Ceftin, primarily
came from three customers who accounted for approximately 80.2% of total net
product revenue. Of the $6.4 million recorded as product revenue for the year
ended December 31, 2002, approximately $716,000 was from the sale of Ceftin
inventory. The balance of $5.7 million resulted from the net positive
adjustments recorded in sales returns and allowances, discounts and rebates for
2002 that occurred as we continued to satisfy our liabilities relating to the
previous reserves recorded as a result of Ceftin sales in prior periods. Since
those reserves were initially set up as estimates using historical data and
other information, there may be both positive and negative adjustments made as
the liabilities are settled in future periods, and these adjustments will be
reflected in product revenue in accordance with the classification of such
accruals as initially recorded.

      Service revenue and program expenses

      Service revenue is earned primarily by performing product detailing
programs and other marketing and promotional services under contracts. Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured. Revenue is recognized net of any potential penalties
until the performance criteria relating to the penalties have been achieved.
Bonus and other performance incentives, as well as termination payments, are
recognized as revenue in the period earned and when payment of the bonus,
incentive or other payment is assured. Under performance based contracts,
revenue is recognized when the performance based parameters are achieved.

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

      As a result of the revenue recognition and program expense policies
described above, we may incur significant initial direct program costs before
recognizing revenue under a particular product detailing program. We typically
receive an initial contract payment upon commencement of a product detailing
program as compensation for recruiting, hiring and training services associated
with staffing that program. In these cases, the initial payment is recorded as
revenue in the same period in which the costs of the services are incurred. Our
inability to specifically negotiate for payments that are specifically
attributable to recruiting, hiring or training services in our product detailing
contracts could adversely impact our operating results for periods in which the
costs associated with the product detailing services are incurred.


                                       28


      Product revenue and cost of goods sold

      Our only product revenue to date is related to the Ceftin contract which
terminated effective February 28, 2002. Product revenue is recognized when
products are shipped and title to products is transferred to the customer.

      Cost of goods sold includes all expenses for both product distribution
costs and manufacturing costs of product sold. Inventory is valued at the lower
of cost or market value. Cost is determined using the first in, first out
costing method. Inventory to date has consisted of only finished goods. Cost of
goods sold and gross margin on sales under the Ceftin agreement fluctuated based
on our quantity of product purchased, and our contractual unit costs including
applicable discounts, as well as fluctuations in the selling price for products
including applicable discounts.

Estimates for accrued rebates, discounts and sales allowances

      For product sales, provision is made at the time of sale for all discounts
and estimated sales allowances. As is common in our industry, customers who
purchased our Ceftin product are permitted to return unused product, after
approval from us, up to six months before and one year after the expiration date
for the product. The products sold by us prior to the Ceftin agreement
termination date of February 28, 2002, have expiration dates through December
2004. Additionally, certain customers were eligible for price rebates or
discounts, offered as an incentive to increase sales volume and achieve
favorable formulary status, on the basis of volume of purchases or increases in
the product's market share over a specified period, and certain customers are
credited with chargebacks on the basis of their resales to end-use customers,
such as HMO's, which contracted with us for quantity discounts. Furthermore, we
are obligated to issue rebates under the federally administered Medicaid
program. In each instance we have the historical data and access to other
information, including the total demand for the drug we distribute, our market
share, the recent or pending introduction of new drugs or generic competition,
the inventory practices of our customers and the resales by our customers to
end-users having contracts with us, necessary to reasonably estimate the amount
of such returns or allowances, and record reserves for such returns or
allowances at the time of sale as a reduction of revenue. The actual payment of
these rebates varies depending on the program and can take several calendar
quarters before final settlement. As we settle these liabilities in future
periods, we will continue to monitor all appropriate information and determine
if any positive or negative adjustments are required in that period. Any
adjustments will be recorded through revenue in that period.

Contract loss provisions

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

Financial instruments

      Our consolidated balance sheets reflect various financial instruments
including cash and cash equivalents and investments. We do not engage in trading
activities or off-balance sheet financial instruments. As a matter of policy,
excess cash and deposits are held by major banks or in high quality short-term
liquid instruments. We have investments, mainly in equity instruments, that are
carried at fair market value. We do not use derivative instruments such as swaps
or forward contracts. As discussed in footnote 8 to the consolidated financial
statements, we have certain investments accounted for under the cost method. We
review our equity investments for impairment on an ongoing basis based on our
determination of whether the decline in market value of the investment below its
carrying value is other than temporary.

Deferred taxes - valuation allowance

      We evaluate the need for a deferred tax asset valuation allowance by
assessing whether it is more likely than not that it will realize certain of its
deferred tax assets in the future. The assessment of whether or not a valuation
allowance is required often requires significant judgment including the forecast
of future taxable income and the


                                       29


calculation of tax planning initiatives. Adjustments to the deferred tax
allowance are made to earnings in the period when such assessment is made.

Goodwill impairment analysis

      We adopted SFAS 142, "Goodwill and Other Intangible Assets" in fiscal year
2002. The effect of this adoption on us is that goodwill is no longer amortized
but is evaluated for impairment on at least an annual basis. We have established
reporting units for purposes of testing goodwill for impairment. The tests
involve determining the fair market value of each of the reporting units with
which the goodwill was associated and comparing the estimated fair market value
of each of the reporting units with its carrying amount. Goodwill has been
assigned to the reporting units to which the value of the goodwill relates. We
completed the first step of the transitional goodwill impairment test and
determined that no impairment existed at January 1, 2002. We will evaluate
goodwill and other intangible assets at least on an annual basis and whenever
events and changes in circumstances suggest that the carrying amount may not be
recoverable based on the estimated future cash flows. We performed the required
annual impairment tests in the fourth quarter of 2002 and determined that no
impairment existed at December 31, 2002.

Restructuring and other related expenses

      In order to consolidate operations, downsize and improve operating
efficiencies, we have recorded restructuring charges. As a result, we have made
estimates and judgments regarding employee termination benefits and other exit
costs to be incurred when the restructuring actions take place. Actual results
could vary from these estimates which would result in adjustments made in future
periods.

Contingencies

      In the normal course of business, we are subject to contingencies, such as
legal proceedings and tax matters. In accordance with SFAS No. 5, Accounting for
Contingencies, we record accruals for such contingencies when it is probable
that a liability will be incurred and the amount of the loss can be reasonably
estimated. For a discussion of legal contingencies, please refer to footnote 20
to the consolidated financial statements.

Consolidated Results of Operations

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


                                       30




                                                                                        Years Ended December 31,
                                                                 ------------------------------------------------------------------
Operating data                                                    2002           2001            2000           1999           1998
                                                                 -----           -----          -----          -----          -----
                                                                                                               
Revenue                                                           97.7%           40.4%          75.8%         100.0%         100.0%
   Service, net
   Product, net                                                    2.3            59.6           24.2             --             --
                                                                 -----           -----          -----          -----          -----
     Total revenue, net                                          100.0           100.0          100.0          100.0          100.0
                                                                 -----           -----          -----          -----          -----
Cost of goods and services
   Program expenses                                               89.5            33.3           56.5           74.4           73.6
   Cost of goods sold                                               --            47.2           16.5             --             --
                                                                 -----           -----          -----          -----          -----
     Total cost of goods and services                             89.5            80.5           73.0           74.4           73.6
                                                                 -----           -----          -----          -----          -----

Gross profit                                                      10.5            19.5           27.0           25.6           26.4

Operating expenses
   Compensation expense                                           11.5             5.7            7.9           11.2           13.2
   Other selling, general and administrative
    expenses                                                      15.5            12.1            9.3            5.4            5.5
   Restructuring and other related expenses                        1.1              --             --             --             --
   Acquisition and related expenses                                 --              --             --            0.7             --
                                                                 -----           -----          -----          -----          -----
      Total operating expenses                                    28.1            17.8           17.2           17.3           18.7
                                                                 -----           -----          -----          -----          -----
Operating (loss) income                                          (17.6)            1.7            9.8            8.3            7.7
Other income, net                                                  0.7             0.3            1.2            2.0            1.9
                                                                 -----           -----          -----          -----          -----
(Loss) income before (benefit) provision for
income taxes                                                     (16.9)            2.0           11.0           10.3            9.6
(Benefit) provision for income taxes                              (6.1)            1.2            4.5            4.3            1.4
                                                                 -----           -----          -----          -----          -----
Net (loss) income                                                (10.8)%           0.8%           6.5%           6.0%           8.2%
                                                                 =====           =====          =====          =====          =====

Pro forma data (unaudited)
Income (loss) before pro forma provision for
   income taxes                                                                                                 10.3%           9.6%
Pro forma provision for income taxes                                                                             4.4            3.8
                                                                                                               -----          -----
Pro forma net income (loss)                                                                                      5.9%           5.8%
                                                                                                               =====          =====


      Comparison of 2002 and 2001



         Revenue, net
         -------------------------------------------------------------------------------------------------------------------
         (000's)                               Product                                               Service
                          ----------------------------------------------     -----------------------------------------------
                                                   variance         %                                 variance         %
                           2002        2001      fav/(unfav)    variance       2002         2001     fav/(unfav)   variance
                           ----        ----      -----------    --------       ----         ----     -----------   ---------
                                                                                             
         SMSG             $   --     $     --     $      --        0.0%      $179,067     $250,838     $(71,771)     (28.6)%
         PPG               6,438      415,314      (408,876)     (98.4)%       88,538       27,671       60,867      220.0%
         MD&D                 --           --            --        0.0%         9,970        2,760        7,210      261.2%
                          ----------------------------------------------     -----------------------------------------------
          Total           $6,438     $415,314     $(408,876)     (98.4)%     $277,575     $281,269     $ (3,694)      (1.3)%
         -------------------------------------------------------------------------------------------------------------------


      Revenue, net. Net revenue for 2002 was $284.0 million, 59.2% less than net
revenue of $696.6 million for the prior year period. This decrease of $412.6
million was almost entirely due to the mutual termination of the marketing sales
and distribution contract with GSK for Ceftin; this product lost its patent
protection in early 2002 and as a result we recorded only $6.4 million of
product revenue in 2002, of which $5.7 million was attributable to changes in
estimates related to sales returns, discounts and rebates recorded on previous
Ceftin sales. Service revenue was $277.6 million in 2002, a reduction of $3.7
million or 1.3% from the $281.3 million recorded in 2001.


                                       31


There was a $71.8 million revenue reduction for the SMSG segment, primarily
attributable to the loss of several significant dedicated CSO contracts and the
general decrease in demand within our markets for sales and marketing services.
This unfavorable variance was almost totally offset by the revenue increase for
the PPG segment which had revenues of $88.5 million in 2002 compared to $27.7
million in 2001; the major reason for this increase was our Novartis contracts
through which we provided services for Lotensin and Lotrel for all of 2002 and
through which we added the Diovan products to our service base in May 2002. In
2003, the Lotrel and Diovan contract will be classified in the SMSG segment
since the nature of the contract has changed from a pure performance based
contract where we were not assured of recouping our expenses, to a more
traditional fee for service contract where we have greater certainty of
recouping our expenses with the additional potential for incentives at year end
based on achieving certain performance criteria. Revenues for MD&D were $10.0
million for 2002 vs. $2.8 million in 2001 due to the fact we recorded revenue
for InServe for the entire year of 2002 as opposed to only three and one-half
months in 2001, and we earned modest revenue of $1.7 million from the initiation
of our MD&D contract sales unit in 2002.



         Cost of goods and services
         ----------------------------------------------------------------------------------------------------------
         (000's)                        Product                                         Service
                    -------------------------------------------    ------------------------------------------------
                                          variance        %                                 variance        %
                     2002       2001     fav/(unfav)   variance      2002         2001     fav/(unfav)    variance
                     ----       ----     -----------   --------      ----         ----     -----------    --------
                                                                                   
         SMSG       $  --     $     --     $     --       0.0%     $133,113     $187,162     $ 54,049       28.9%
         PPG           --      328,629      328,629     100.0%      113,751       43,205      (70,546)     (163.3)%
         MD&D          --           --           --       0.0%        7,276        1,804       (5,472)     (303.3)%
                    -------------------------------------------    ------------------------------------------------
          Total     $  --     $328,629     $328,629     100.0%     $254,140     $232,171     $(21,969)      (9.5)%
         ----------------------------------------------------------------------------------------------------------


      Costs of goods and services. Cost of goods and services for 2002 was
$254.1 million, which was $306.7 million or 54.7% less than cost of goods and
services of $560.8 million for 2001. The mutual termination of the Ceftin
contract resulted in a $328.6 million reduction in cost of goods and services
for the product category. During 2002 the cost of goods and services for the
service category was $254.1 million, an increase of $21.9 million compared to
2001, and the gross profit for the category was $23.4 million in 2002 versus
$49.1 million in 2001. Despite the 28.6% revenue reduction for the SMSG segment,
the group maintained its gross profit margin, achieving a 25.7% gross profit
margin in 2002 compared to 25.4% in 2001. PPG has suffered a negative gross
profit for both years. During 2001, the negative gross profit for PPG service of
$15.4 million was mostly due to startup expenses and lower than expected product
performance on the Novartis contracts. During 2002 the Novartis contracts
achieved a positive gross profit but the Evista contract resulted in a $34.7
million negative gross profit. Excluding the Evista contract, total PPG would
have earned a positive gross profit of $16.0 million and a 17.6% gross margin,
which is lower than the SMSG margin by 8.1 percentage points. Performance based
contracts can achieve a gross profit percentage above our historical averages
for contract sales programs if the performance of the product(s) meets or
exceeds expectations, but can be below normal gross profit standards if the
performance of the product(s) falls short of baselines. The Evista contract has
been terminated as of December 31 2002 and therefore will not adversely affect
2003. The MD&D segment has earned a modest gross profit in both years.

      Compensation expense. Compensation expense for 2002 was $32.7 million,
16.8% less than $39.3 million for the comparable prior year period. As a
percentage of total net revenue, compensation expense increased to 11.5% for
2002 from 5.7% for 2001. Compensation expense for 2002 attributable to the sales
and marketing services segment was $19.6 million compared to $28.6 million for
2001. As a percentage of net revenue from the sales and marketing services
segment, compensation expense decreased slightly to 11.0% for 2002 from 11.4%
for 2001. Compensation expense for 2002 attributable to the PPG segment was
$10.4 million, or 10.9% of PPG net revenue, compared to $10.1 million, or 2.3%
in the prior year period. Compensation expense for 2002 attributable to the MD&D
segment was $2.7 million, or 26.8% of MD&D net revenue, compared to $0.6 million
for three and one-half months of 2001.

      Other selling, general and administrative expenses. Total other SG&A
expenses were $44.2 million for 2002, 47.3% less than other selling, general and
administrative expenses of $83.8 million (of which $46.9 million was


                                       32


related to Ceftin activities) for 2001. As a percentage of total net revenue,
total other SG&A expenses increased to 15.5% for 2002 from 12.1% for 2001. Other
SG&A expenses attributable to the sales and marketing services segment for 2002
were $15.8 million, $2.8 million less than other SG&A expenses of $18.6 million
attributable to that segment for the comparable prior year period. As a
percentage of net revenue from the sales and marketing services segment, other
SG&A expenses were 8.8% and 7.4% for 2002 and 2001, respectively. Other selling,
general and administrative expenses attributable to the PPG segment for 2002
were $25.7 million, included in this amount is the $15.0 million initial
licensing fee expense associated with the Cellegy agreement. For 2001, other
selling, general and administrative expenses attributable to the PPG segment
were $64.6 million. Excluding $46.9 million in Ceftin field and other
promotional expenses, other selling, general and administrative expenses for
2001 were $17.7 million. Other SG&A expenses attributable to MD&D segment for
2002 were $2.7 million, $2.1 million more than other SG&A expenses of $0.6
million for three and one-half months of 2001. As a percentage of net revenue
from the MD&D segment, other SG&A expenses were 26.7% and 21.7% for 2002 and
2001, respectively.

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

              Operating (loss) income
              ---------------------------------------------------
                                                       variance
              (000's)        2002           2001      fav/(unfav)
                             ----           ----      -----------

              SMSG         $  7,908      $ 16,476      $ (8,568)
              PPG           (55,210)       (3,536)      (51,674)
              MD&D           (2,873)         (235)       (2,638)
                           --------------------------------------
                 Total     $(50,175)     $ 12,705      $(62,880)
              ---------------------------------------------------

      Operating loss. There was an operating loss for 2002 of $50.2 million,
compared to operating income of $12.7 million for 2001. The 2002 period
operating loss was primarily the result of losses generated by the performance
based contracts and from recording $15.0 million in licensing fee expenses
associated with the Cellegy agreement. Operating income for 2002 for the sales
and marketing services segment was $7.9 million, or 52.0% less than the sales
and marketing services operating income for 2001 of $16.5 million. As a
percentage of net revenue from the sales and marketing services segment,
operating income for that segment decreased to 4.4% for 2002, from 6.7% for
2001. There was an operating loss for the PPG segment for 2002 of $55.2 million
almost entirely attributable to the $35.1 million operating loss for the Evista
contract and the $15.0 million initial licensing fee associated with the Cellegy
agreement. There was an operating loss for 2002 for the MD&D segment of $2.9
million compared to an operating loss of $0.2 million in the prior period. The
2002 loss was due primarily to startup costs in preparation for the January 2003
Xylos product launch and the initial efforts of the CSO unit.

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

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


                                       33


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

      Comparison of 2001 and 2000

      The comparisons reflect the segment composition that existed at December
31, 2001, and have not been restated to reflect any changes for 2002.

      Revenue, net. Net revenue for 2001 was $696.6 million, an increase of
67.1% over net revenue of $416.9 million for 2000. Net revenue from the contract
sales and marketing services segment for the year ended December 31, 2001 was
$281.3 million, a decrease of $34.6 million, or 11.0%, compared to net revenue
from that segment of $315.9 million for the prior year. This decrease was
primarily attributable to the loss of one large CSO contract, and the reduction
in size, or non-renewal of several others. These losses were partially offset by
moderate gains in new business, generally reflecting slower demand for
traditional contract sales services. We gained two large performance based
contracts during the year, reflecting increased demand for our LCXT and
copromotion services, although both fell short of our 2001 revenue expectations.
Net product revenue for the year ended December 31, 2001 was $415.3 million, an
increase of $314.3 million, or 311.2%, over net product revenue of $101.0
million for the prior year. All product revenue was attributable to sales of
Ceftin, for which we had distribution rights for the entire 2001 year and only
the fourth quarter of 2000.

      Cost of goods and services. Cost of goods and services for the year ended
December 31, 2001 was $560.8 million, an increase of 84.3% over cost of goods
and services of $304.3 million for the year ended December 31, 2000. As a
percentage of total net revenue, cost of goods and services increased to 80.5%
in 2001 from 73.0% in 2000. This increase as a percentage of revenue was
primarily attributable to the reserve for losses on the Ceftin contract that
were recorded in the third quarter of 2001 due to the U.S. Court of Appeals
decision in August 2001 which allowed for earlier generic competition. This
reserve included certain selling, general and administrative expenses which we
were obligated to incur under the Ceftin contract termination agreement. Program
expenses (i.e., cost of services) for 2001 were $232.2 million, a decrease of
1.4% over program expenses of $235.4 million for 2000. As a percentage of net
service revenue, program expenses for 2001 were 82.5%, an increase of 8.0% over
program expenses as a percentage of net service revenue in 2000 of 74.5%,
primarily because of lower than expected revenues for the performance based
contracts (Novartis and Eli Lilly) that began in the second quarter; excluding
the effect of these contracts, program expenses would have been 67.2% of service
revenue. Performance based contracts can achieve a gross profit percentage above
our historical averages for CSO programs if the performance of the product(s)
meets or exceeds expectations, but can be below normal gross profit standards if
the performance of the product falls short of expectations. Cost of goods sold
was $328.6 million for the year ended December 31, 2001, an increase of $259.6
million, or 376.3% above cost of goods sold of $69.0 million for the prior year.
As a percentage of net product revenue, cost of goods sold for 2001 and 2000 was
79.1% and 68.3%, respectively. The loss on the Ceftin contract includes the
costs we were obligated to incur under the termination agreement with GSK. This
included certain marketing and selling costs previously treated as selling,
general and administrative expenses. Specifically, the associated selling,
general and administrative expenses incurred during the fourth quarter of 2001
of $21.0 million and the $12.3 million of selling, general and administrative
expenses anticipated for the remainder of the contract termination period, which
extended through February 28, 2002, have been classified as cost of goods sold.
Excluding the $21.0 million charge and the remaining reserve of $12.3 million,
cost of goods sold as a percentage of net product revenue would have been 71.1%.
As our previous reports have noted, cost of goods sold and gross margin on sales
could fluctuate based on our quantity of product purchased, and our contractual
unit costs including applicable discounts, as well as fluctuations in the
selling price for our products including applicable discounts. During the fourth
quarter of 2001, we were adversely affected as our selling price reflected
greater discounts than normal and our purchasing discounts were reduced because
of our agreement with GSK to forego such discounts in exchange for a release
from our contractual minimum inventory purchase requirements for the fourth
quarter.

      Compensation expense. Compensation expense for 2001 was $39.3 million
compared to $32.8 million for 2000. As a percentage of total net revenue,
compensation expense decreased to 5.7% for 2001 from 7.9% for 2000. Compensation
expense for the year ended December 31, 2001 attributable to the contract sales
and marketing services segment was $33.2 million compared to $31.8 million for
the year ended December 31, 2000. As a


                                       34


percentage of net revenue from that segment, compensation expense increased to
11.8% in 2001 from 10.1% in 2000. Compensation expense for the year ended
December 31, 2001 attributable to the product segment was $6.1 million compared
to $1.0 million for the prior year. As a percentage of net revenue from the
product segment, compensation expense increased to 1.5% in 2001 from 1.0% in
2000. The low compensation expense for this segment contributed greatly to the
overall reduction in compensation expense as a percentage of total net revenue.

      Other selling, general and administrative expenses. Total other selling,
general and administrative expenses were $83.8 million for the year ended
December 31, 2001, an increase of 115.9% over other selling, general and
administrative expenses of $38.8 million for 2000. As a percentage of total net
revenue, total other selling, general and administrative expenses increased to
12.1% for 2001 from 9.3% for 2000. Other selling, general and administrative
expenses attributable to contract sales and marketing services for the year
ended December 31, 2001 were $22.7 million, an increase of 34.4% over other
selling, general and administrative expenses of $16.9 million attributable to
that segment for 2000. As a percentage of net revenue from contract sales and
marketing services, other selling, general and administrative expenses for 2001
and 2000 were 8.1% and 5.4%, respectively. This increase was primarily due to
facilities expansion resulting in increased rental expense, discretionary
expenditures in information technology resulting in increased depreciation
expense and other expense categories, most notably professional fees; and the
largest increases were marketing expenses related to advertising and promotion
associated with our new service offerings. Other selling, general and
administrative expenses attributable to the product segment for 2001 were $61.1
million, or 14.6% of net product revenue, an increase of $39.2 million, or
178.7%, over other selling, general and administrative expenses of $21.9
million, or 21.7% of net product revenue, for the year ended December 31, 2001.
As discussed previously, approximately $21 million of committed selling expenses
were included in the determination of the loss on the Ceftin contract which was
recorded through cost of goods sold. If this $21.0 million had been included,
total other selling, general and administrative expenses as a percentage of
revenue would have been 19.8%. Other selling, general and administrative
expenses for the product segment consisted primarily of field selling costs,
direct marketing expenses, business insurance and professional fees; all of
these costs were fully implemented in 2001, while during the fourth quarter of
2000 the related capabilities were being developed. The seasonality of Ceftin
sales also caused other selling, general and administrative expenses to vary as
a percentage of revenue.

      Operating income. Operating income for 2001 was $12.7 million, a decrease
of $28.2 million, or 68.9%, compared to operating income of $40.9 million for
2000. There was an operating loss for 2001 for the contract sales and marketing
services segment of $6.8 million, compared to contract sales and marketing
services operating income in 2000 of $31.8 million. The performance based
contracts instituted beginning in May 2001 incurred a negative gross profit and
a significant operating loss in the third and fourth quarters of 2001, thereby
having an adverse effect on the services segment. Operating income for the
product segment for 2001 was $19.5 million, or 4.7% of net product revenue,
compared to $9.1 million, or 9.0% of net product revenue in 2000.

      Other income, net. Other income, net, for 2001 was $2.3 million, compared
to other income, net of $4.9 million for 2000. Interest income of $5.0 million
was the primary component of other income, net in 2001, compared to $7.4 million
in 2000. The $2.4 million decrease in interest income in 2001 compared to 2000
was the result of lower available average cash balances, as well as decreasing
interest rates throughout 2001. The $5.0 million in interest income for 2001 was
partially offset by the $1.9 million loss on investment in In2Focus. In 2000, a
$2.5 million loss was recorded resulting from our investment in iPhysicianNet .

      Provision for income taxes. The income tax provision for the year ended
December 31, 2001 was $8.6 million compared to a $18.7 million tax provision for
the year ended December 31, 2000, which consisted of Federal and state corporate
income taxes. The effective tax rate for the year ended December 31, 2001 was
57.6%, compared to an effective tax rate of 40.9% for the prior year. During
2001, the increase in the effective tax rate was attributable to several
specific transactions or situations that when applied to our lower than normal
pretax earnings created a large deviation from our target effective tax rate of
41% to 42%. During 2001, we wrote off our investment in In2Focus in the amount
of $1.9 million which will likely be treated as a capital loss for tax purposes,
the benefit of which can only be realized via an offset against capital gains.
Since we do not anticipate having offsetting capital gains, a valuation
allowance was recorded. In addition, certain nondeductible expenses which are
routinely incurred had a significantly higher impact on the effective tax rate
in 2001, compared to prior years, due to the lower level of pretax profits.


                                       35


      Net income. Net income for 2001 was $6.4 million, 76.5% lower than net
income of $27.0 million in 2000 due to the factors previously discussed.

Restructuring and Other Related Expenses

      During the third quarter of 2002, we adopted a restructuring plan, the
objectives of which were to consolidate operations in order to enhance operating
efficiencies (the 2002 Restructuring Plan). This plan was primarily in response
to the general decrease in demand within our markets for sales and marketing
services and the recognition that the infrastructure that supported these
business units was larger than required. The majority of the restructuring
activities were completed by December 31, 2002, with full completion expected by
September 30, 2003.

      In connection with this plan, we will record total restructuring expenses
of approximately $5.4 million, other non-recurring expenses of approximately
$0.1 million, and accelerated depreciation of approximately $0.8 million. All
but $0.3 million of these expenses were recognized in 2002.

      The primary items comprising the restructuring are as follows:

            o     $3.7 million in severance expense consisting of cash and
                  non-cash termination payments to employees in connection with
                  their involuntary termination. Out of approximately 175
                  employees affected, 170 have left as of January 15, 2003, and
                  the remaining employees are expected to leave by mid-2003. All
                  of the severance costs were expensed in the fourth quarter of
                  2002. We have recorded the portion of this severance related
                  to the direct sales force of approximately $1.8 million in
                  program expenses in the consolidated statement of operations
                  while the severance costs associated with administrative
                  personnel of approximately $1.9 million have been recorded in
                  the restructuring and other related expenses in the
                  consolidated statement of operations; and

            o     $1.7 million in restructuring costs consisting primarily of
                  $1.3 million for reserves in connection with the closure or
                  exit of leased space located in Mahwah, NJ, Cincinnati, OH
                  (which was closed effective January 15, 2003), Lawrenceville,
                  NJ, Fort Washington, PA and Novato, CA (which will be
                  effective May 2003). These costs are recorded in restructuring
                  and other related expenses line in the consolidated statement
                  of operations. The remaining $0.4 million in restructuring
                  expenses is related to certain other costs associated with the
                  termination of the sales force that was eliminated in the
                  restructuring and similar to the severance, such costs have
                  been classified in program expenses in the consolidated
                  statement of operations. Approximately $0.2 million of these
                  expenses will be recognized in 2003.

      The other related expenses relate to the write off of fixed assets
associated with certain of our facilities being closed or exited as part of the
restructuring plan of approximately $0.2 million. The accelerated depreciation
expenses of $0.8 million relate to the assets to be disposed of but that were
still in service, some through December 31, 2002, and the rest through January
15, 2003. This accelerated depreciation is recorded in selling, general and
administrative expenses in the consolidated statement of operations, consistent
with its historical classification.

      The accrual for restructuring and exit costs, totaled approximately $4.7
million at December 31, 2002, and is recorded in current liabilities on the
accompanying balance sheet.

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



                                          Balance at                         Write offs/       Balance at
                                      December 31, 2001       Accruals        Payments      December 31, 2002
                                                                                      
         Administrative severance            $   --            $ 1,927        $  (257)            $1,670
         Exit costs                              --              1,288             --              1,288
                                             ------            -------        -------             ------
                                             $   --            $ 3,215        $  (257)            $2,958
                                             ------            -------        -------             ------
         Sales force severance                   --              1,741             --              1,741
         Asset write offs                        --                150           (150)                --
                                             ------            -------        -------             ------
            Total                            $   --            $ 5,106        $  (407)            $4,699
                                             ======            =======        =======             ======



                                       36


Liquidity and Capital Resources

      As of December 31, 2002, we had cash and cash equivalents of approximately
$66.8 million and working capital of $81.9 million, compared to cash and cash
equivalents of approximately $160.0 million and working capital of approximately
$113.7 million at December 31, 2001.

      For the year ended December 31, 2002, net cash used in operating
activities was $89.0 million, compared to $80.1 million net cash provided by
operating activities in 2001. The main components of cash used in operating
activities were:

      o     a net loss from operations of $30.8 million; less depreciation and
            amortization of $7.4 million, reducing total cash outflow to
            approximately $23.4 million;
      o     reduction in accrued returns, rebates and sales discounts associated
            with the Ceftin agreement of $51.9 million; the amounts remaining
            are deemed sufficient to pay any future rebates, discounts or
            returns of the product;
      o     elimination of accrual for contract losses of $12.3 million
            associated with the Ceftin agreement as amounts were incurred
            against the accrual, and
      o     cash used from other changes in assets and liabilities of $8.7
            million, almost entirely offset by a reduction in deferred tax
            assets of $8.5 million.

      Inventory increased by $0.2 million in 2002. All inventory as of December
31, 2002 is associated with our XCell wound care product distribution agreement
with Xylos. At December 31, 2001, all inventory consisted of Ceftin product.

      Due to the ability to carry back net operating losses incurred for the
year ended December 31, 2002, we expect to receive a refund of approximately
$20.3 million in 2003.

      When we bill clients for services before they have been completed, billed
amounts are recorded as unearned contract revenue, and are recorded as income
when earned. When services are performed in advance of billing, the value of
such services is recorded as unbilled costs and accrued profits. As of December
31, 2002, we had $9.5 million of unearned contract revenue and $3.4 million of
unbilled costs and accrued profits. Substantially all costs and accrued profits
are earned and billed within 12 months from the end of the respective period.

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

      For the year ended December 31, 2002, net cash used in investing
activities of $6.6 million consisted of $4.0 million in purchases of property
and equipment, $1.0 million invested in the preferred stock of Xylos, $0.4
million invested in iPhysicianNet and $2.7 million related to the acquisition of
InServe, partially offset by the sale of $1.5 million in short-term investments.

      For the year ended December 31, 2002, net cash provided by financing
activities was $2.4 million. This amount is attributable to net proceeds
received from the employee stock purchase plan of $2.3 million and $0.1 million
in proceeds received from the exercise of stock options by employees.

      Capital expenditures during the periods ended December 31, 2002, 2001 and
2000, were $4.0 million, $15.6 million and $7.9 million respectively, and were
funded from available cash. For part of 2000 and all of 2001, capital
expenditures were larger than usual due to our software expenditures and costs
associated with the implementation of PeopleSoft ($7.1 million) and Siebel ($4.1
million).

      Our credit line with PNC Bank, N.A., as administrative and syndication
agent, which was designed to accommodate our needs under the Ceftin agreement,
was terminated effective March 31, 2002. We are currently exploring
opportunities to enter into a credit facility secured by our current assets to
meet our existing needs.


                                       37


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

Contractual Obligations

     As of December 31, 2002, the aggregate minimum future rental payments
required by non-cancelable operating leases with initial or remaining lease
terms exceeding one year are as follows:



         (in thousands)                         2003          2004           2005         2006         2007         Total
                                                ----          ----           ----         ----         ----         -----
                                                                                                  
         Operating leases
          Minimum lease payments              $ 3,525        $ 2,613        $ 1,137        $136       $     3       $ 7,414
          Less minimum sublease rentals          (101)          (135)           (34)         --            --          (270)
                                              -----------------------------------------------------------------------------
           Net minimum lease payments         $ 3,424        $ 2,478        $ 1,103        $136       $     3       $ 7,144
                                              =============================================================================


      Under the terms of the Xylos agreement relating to Xcell, the minimum
annual purchase requirement for the calendar year 2003 is $750,000. The minimum
annual purchase requirement for each subsequent calendar year is based on the
aggregate dollar volume of sales of products during the 12-month period ending
with September of the prior year, but in no case can be less than $750,000.

Quarterly Operating Results

      Our results of operations have varied, and are expected to continue to
vary, from quarter to quarter. These fluctuations result from a number of
factors including, among other things, the timing of commencement, completion or
cancellation of major programs. In the future, our revenue may also fluctuate as
a result of a number of additional factors, including the types of products we
market and sell, delays or costs associated with acquisitions, government
regulatory initiatives and conditions in the healthcare industry generally.
Revenue, generally, is recognized as services are performed and products are
shipped. Program costs, other than training costs, are expensed as incurred. As
a result, we may incur substantial expenses associated with staffing a new
detailing program during the first two to three months of a contract without
recognizing any revenue under that contract. This could have an adverse impact
on our operating results for the quarters in which those expenses are incurred.
Revenue related to performance incentives is recognized in the period when the
performance based parameters are achieved. A significant portion of this revenue
could be recognized in the fourth quarter of a year. Costs of goods sold are
expensed when products are shipped. For milestone payments associated with
licensing agreements, amounts paid before the underlying product has obtained
regulatory approval and which have no alternate use are expensed as incurred,
whereas payments post-approval are capitalized and amortized over the economic
life of the product or agreement. We believe that because of these fluctuations,
quarterly comparisons of our financial results cannot be relied upon as an
indication of future performance.


                                       38


      The following table sets forth quarterly operating results for the eight
quarters ended December 31, 2002:



                                                                               Quarter Ended
                                           -----------------------------------------------------------------------------------------
                                            Mar 31,      Jun 30,     Sep 30,    Dec 31,     Mar 31,    Jun 30,    Sep 30,    Dec 31,
                                              2002         2002        2002       2002        2001       2001       2001       2001
                                              ----         ----        ----       ----        ----       ----       ----       ----
                                                                              (in thousands)
                                                                                                   
Revenue
 Service, net ..........................   $ 68,160    $ 66,033    $ 64,353   $ 79,029    $ 78,087   $ 64,789   $ 71,129   $ 67,264
 Product, net ..........................      5,723         500         215         --      94,978     79,155     44,544    196,637
                                           --------    --------    --------   --------    --------   --------   --------   --------
    Total revenue, net .................     73,883      66,533      64,568     79,029     173,065    143,944    115,673    263,901
                                           --------    --------    --------   --------    --------   --------   --------   --------
Cost of goods and services
 Program expenses ......................     67,277      65,721      67,475     53,667      55,395     53,321     59,529     63,926
 Cost of goods sold ....................         --          --          --         --      64,215     51,523     51,823    161,068
                                           --------    --------    --------   --------    --------   --------   --------   --------
    Total cost of goods and services ...     67,277      65,721      67,475    513,667     119,610    104,844    111,352    224,994
                                           --------    --------    --------   --------    --------   --------   --------   --------

Gross profit (loss) ....................      6,606         812      (2,907)    25,362      53,455     39,100      4,321     38,907

Operating expenses
 Compensation expense ..................      7,759       9,294       9,157      6,459      11,015      9,162      9,282      9,804
 Other selling, general and
   administrative expenses .............      3,325       6,450       9,433     22,956      25,728     23,546     24,560      9,981
 Restructuring and other
   related expenses ....................         --          --         972      4,243          --         --         --         --
                                           --------    --------    --------   --------    --------   --------   --------   --------
    Total operating expenses ...........     11,084      15,744      19,562     33,658      36,743     32,708     33,842     19,785
                                           --------    --------    --------   --------    --------   --------   --------   --------
Operating (loss) income ................     (4,478)    (14,932)    (22,469)    (8,296)     16,712      6,392    (29,521)    19,122
Other income (expense), net ............        889         356         459        263       1,870      1,537        999     (2,132)
                                           --------    --------    --------   --------    --------   --------   --------   --------
(Loss) income before provision for taxes     (3,589)    (14,576)    (22,010)    (8,033)     18,582      7,929    (28,522)    16,990
(Benefit) provision for income taxes ...     (1,322)     (5,385)     (7,696)    (3,044)      7,653      3,527    (11,266)     8,711
                                           --------    --------    --------   --------    --------   --------   --------   --------
Net (loss) income ......................   $ (2,267)   $ (9,191)   $(14,314)  $ (4,989)   $ 10,929   $  4,402   $(17,256)  $  8,279
                                           ========    ========    ========   ========    ========   ========   ========   ========

Basic net (loss) income per share ......   $  (0.16)   $  (0.66)   $  (1.02)  $  (0.35)   $   0.79   $   0.32   $  (1.24)  $   0.59
                                           ========    ========    ========   ========    ========   ========   ========   ========
Diluted net (loss) income per share ....   $  (0.16)   $  (0.66)   $  (1.02)  $  (0.35)   $   0.77   $   0.31   $  (1.24)  $   0.59
                                           ========    ========    ========   ========    ========   ========   ========   ========

Weighted average number of shares:
   Basic ...............................     13,969      14,003      14,063     14,097      13,843     13,856     13,876     13,968
                                           ========    ========    ========   ========    ========   ========   ========   ========
   Diluted .............................     13,969      14,003      14,063     14,097      14,133     14,246     13,876     14,010
                                           ========    ========    ========   ========    ========   ========   ========   ========


Effect of new accounting pronouncements

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
addresses accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
(Issue 94-3) This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured initially at fair value
when the liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. We do not expect the
adoption of this statement to have a material effect on its financial
statements.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure- an amendment of FASB
Statement No. 123." (SFAS No. 148). This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," (SFAS No. 123) to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement requires that companies having a
year-end after December 15, 2002 follow the prescribed format and provide the
additional disclosures in their annual reports. We have provided the disclosures
required by FAS No. 148 in the financial statements. We do not currently intend
to change the method of accounting for stock options and we do not expect the
adoption of this statement to have a material effect on its financial
statements.

      In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company, if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual


                                       39


returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The initial adoption of this accounting
pronouncement will not have a material impact on our consolidated financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

      None.


                                       40


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Directors and executive officers

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



Name                                 Age       Position
- ----                                 ---       --------
                                         
John P. Dugan                         67       Chairman of the board of directors and director of strategic planning
Charles T. Saldarini                  39       Chief executive officer and vice chairman of the board of directors
Steven K. Budd                        46       President and chief operating officer
Bernard C. Boyle                      58       Chief financial officer, executive vice president, secretary and treasurer
Stephen Cotugno                       43       Executive vice president -- corporate development and investor relations
Lloyd X. Fishman                      50       Executive vice president and general manager -- PDI medical devices and diagnostics
Robert R. Higgins                     60       Executive vice president and general manager -- sales and marketing services group
Beth R. Jacobson                      42       Executive vice president  and general counsel
Leonard Mormando                      63       Executive vice president -- corporate operations support
Deborah Schnell                       48       Executive vice president -- business development
Christopher Tama                      44       Executive vice president and general manager -- PDI pharmaceutical products group
Larry Ellberger(1)                    55       Director
John C. Federspiel (1)                49       Director
Gerald J. Mossinghoff                 67       Director
John M. Pietruski (1)(2)              69       Director
Frank J. Ryan(2)                      63       Director
Jan Martens Vecsi (2)                 59       Director


- ----------
(1)   Member of audit committee.
(2)   Member of compensation committee.

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

      Charles T. Saldarini is our vice chairman and chief executive officer.
Joining PDI in 1987, Mr. Saldarini has held positions of increasing
responsibility, becoming president of PDI in January 1995, chief executive
officer in November 1997, and vice chairman in June 2000. In his 16 years at
PDI, his contributions have spanned the full range of our development. He is
responsible for making PDI the largest contract sales organization in the U.S.
Mr. Saldarini is a frequent speaker on industry topics and an author, with
numerous industry publications to his credit. Prior to PDI, Mr. Saldarini worked
at Merrill Dow Pharmaceuticals. He received a B.A. in political science from
Syracuse University in 1985.

      Steven K. Budd has served as our president and chief operating officer
since June 2000. Mr. Budd oversees the management of PDI's operating units and
key internal support functions and contributes to the development of PDI's
strategic plans. Mr. Budd joined us in April 1996 as vice president, account
group sales. He became executive vice president in July 1997, chief operating
officer in January 1998, and our president in June 2000. From January 1994
through April 1995, Mr. Budd was employed by Innovex, Inc., as director of new
business development. From 1989 through December 1993, he was employed by
Professional Detailing Network (now known as Nelson Professional Sales, a
division of Nelson Communications, Inc.), as vice president with responsibility
for building sales teams and developing marketing strategies. Mr. Budd received
a B.A. in history and education from Susquehanna University in 1978.


                                       41


      Bernard C. Boyle has served as our chief financial officer and executive
vice president since March 1997. In 1990, Mr. Boyle founded BCB Awareness, Inc.,
a firm that provided management advisory services, and served as its president
until March 1997. During that period he was also a partner in Boyle & Palazzolo,
Partners, an accounting firm. From 1982 through 1990 he served as controller and
then chief financial officer and treasurer of William Douglas McAdams, Inc., an
advertising agency. From 1966 through 1971, Mr. Boyle was employed by the
national accounting firm then known as Coopers & Lybrand L.L.P. as
supervisor/senior audit staff. Mr. Boyle received a B.B.A. in accounting from
Manhattan College in 1965 and an M.B.A. in corporate finance from New York
University in 1972.

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

      Robert R. Higgins became our executive vice president - sales and
marketing services group in January 2002. Prior to that, Mr. Higgins served as
executive vice president - client programs. He joined us in a field management
capacity in August 1996 and became vice president in 1997. Mr. Higgins has over
30 years experience in the pharmaceutical industry. From 1965 to 1995, Mr.
Higgins was employed by Burroughs Wellcome Co., where he was responsible for
building and managing sales teams and developing and implementing marketing
strategies. Mr. Higgins received a B.S. in biology from Kansas State University
in 1964, and an M.B.A. from North Texas State University in 1971.

      Leonard Mormando became our executive vice president - corporate
operations support in September 2000. Mr. Mormando joined us in 1997 as the
executive director of training and development. In 1998, he was promoted to vice
president - training and development & recruiting and hiring. Prior to joining
PDI, Mr. Mormando spent 32 years at Ciba Geigy Pharmaceuticals, including ten
years as director of U.S. training where he was responsible for training over
5,000 sales representatives. Mr. Mormando has been a member of the National
Society of Professional Sales Trainers since 1982. He received a B.S. in Biology
with a minor in Chemistry from St. Bonaventure University in 1961.

      Christopher Tama joined us as executive vice president and general manager
- - PDI pharmaceutical products in January 2000. Mr. Tama has responsibility for
PDI's at risk programs involving integrated sales and marketing solutions. Prior
to joining us, from 1996 through 2000, he was vice president - marketing for
Novartis. Mr. Tama has over 20 years experience in various pharmaceutical
marketing and sales positions with Novartis, Pharmacia & Upjohn, and Searle. His
marketing and sales experience range many different therapeutic areas, both in
primary care and specialty markets. He received a B.A. in economics from
Villanova University in 1981.

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

      Lloyd X. Fishman joined us as vice president and general manager - PDI
medical devices and diagnostics in January 2001 and was promoted to executive
vice president and general manager - PDI medical devices and diagnostics in
December 2002. From July 1997 through January 2001, he was worldwide director of
marketing for Johnson & Johnson. Mr. Fishman has over 25 years of experience in
the medical devices industry in a variety of sales and marketing positions. In
addition, his background is in several therapeutic areas, including critical
care, anesthesia, cardiology, pulmonary and obstetrics. Mr. Fishman was
instrumental in launching a number of products including anesthesia monitors,
temporary pacing electrodes, hemodynamic monitoring catheters and non-invasive
blood pressure monitors. He received a B.A. from Albany State University in 1973
and graduated from St. John's University with an M.B.A. in 1977.

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


                                       42


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

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

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

      John C. Federspiel became a director in October 2001. Mr. Federspiel is
president of Hudson Valley Hospital Center, a 120-bed, short-term, acute care,
not-for-profit hospital in Westchester County, New York. Prior to joining Hudson
Valley Hospital in 1987, Mr. Federspiel spent an additional 10 years in health
administration, during which he held a variety of executive leadership
positions. Mr. Federspiel is an appointed Member of the State Hospital Review
and Planning Council, and has served as chairman of the Northern Metropolitan
Hospital Association, as well as other affiliations. Mr. Federspiel received a
B.S. degree from Ohio State University in 1975 and a M.B.A. from Temple
University in 1977.

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

      Larry Ellberger became a director in February 2003. Since July 2000, Mr.
Ellberger has been senior vice president, corporate development, at PowderJect,
PLC, a London Stock Exchange listed vaccines company. He has been a member of
PowderJect's board of directors since 1997. From October 1999 through March
2000, Mr. Ellberger was chief executive officer of the Kushner Companies, a
private real estate concern. Previously, from November 1996 through May 1999,
Mr. Ellberger served as chief financial officer of W. R. Grace. Thereafter, from
May 1999 through November 1999, he served as senior vice president - corporate
development of W.R. Grace. In April 2001, 19 months after Mr. Ellberger's
affiliation with W.R. Grace ended, W.R. Grace filed a petition for protection
under the U.S. bankruptcy code. Mr. Ellberger received a B.A. in economics from
Columbia College in 1968 and a B.S. in chemical engineering from Columbia School
of Engineering in 1969.

      Our board of directors is divided into three classes. Each year the
stockholders elect the members of one of the three classes to a three-year term
of office. Messrs. Saldarini, Pietruski and Ryan serve in the class whose term


                                       43


expires in 2003; Messrs. Dugan and Mossinghoff serve in the class whose term
expires in 2004; and Ms. Vecsi and Messrs. Federspiel and Ellberger serve in the
class whose term expires in 2005.

      Our board of directors has an audit committee and a compensation
committee. The audit committee reviews the scope and results of the audit and
other services provided by our independent accountants and our internal
controls. The compensation committee is responsible for the approval of
compensation arrangements for our officers and the review of our compensation
plans and policies.

      Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (SEC). Officers, directors and
greater than ten-percent stockholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on review of
the copies of such forms furnished to us, or written representations that no
Forms 5 were required, we believe that all Section 16(a) filing requirements
applicable to our officers and directors were complied with.

ITEM 11. EXECUTIVE COMPENSATION

      Summary compensation. The following table sets forth certain information
concerning compensation paid for services in all capacities awarded to, earned
by or paid to our chief executive officer and the other four most highly
compensated executive officers during 2002, 2001 and 2000 whose aggregate
compensation exceeded $100,000.



                                            Annual compensation               Long-term compensation
                                  ---------------------------------------   -------------------------
                                                                                            Shares of
                                                                                             common
                                                                             Restricted       stock
                                                             Other annual      stock        underlying         All other
Name and Principal Position       Salary           Bonus     compensation    awards(1)        options        compensation
- ---------------------------       ------           -----     ------------    ---------        -------        ------------
                                                                                              
Charles T. Saldarini
Vice chairman and chief
executive officer
    2002 ................        $350,000        $     --        $3,421        $     --        25,602           $  446
    2001 ................         336,864         179,212         6,264              --        34,066            5,250
    2000 ................         294,594         506,731         8,713              --            --            6,203

Steven K. Budd
President and chief
operating officer
    2002 ................         281,187              --         3,085              --        21,188            2,300
    2001 ................         262,500         103,819         2,537          44,494        23,338            4,200
    2000 ................         225,000         243,003         2,891         104,144            --            4,744

Bernard C. Boyle
Chief financial officer,
executive vice president,
secretary and treasurer
    2002 ................         255,625              --         4,301              --        19,156            5,404
    2001 ................         232,292          93,863         4,455          40,227        19,900            4,646
    2000 ................         187,500         207,211         4,706          88,805            --            4,010

Deborah Schnell
Executive vice president
    2002 ................         214,967          50,000         6,089              --        25,000            4,121
    2001 ................         160,000         124,967            86          31,217         6,196            3,200
    2000 ................         155,769          98,312            --          24,557         3,500               --

Christopher Tama
Executive vice president
    2002 ................         203,500              --         3,568              --        15,421            4,070
    2001 ................         189,583          75,561         2,649          32,383        20,168            2,917
    2000 ................         167,708         210,000         1,828          90,000         5,000               --


- ----------
(1) For the years ended December 31, 2001 and 2000, a portion of the named
executive officers' annual bonus was paid in restricted stock. The number of
shares were calculated by dividing the portion of bonus expense attributable to
restricted stock by a trailing 20-day average stock price on December 31, 2001
and 2000, which was $20.47 and $99.42, respectively. The fair


                                       44


market value of the shares owned by the named executive officers on December 31,
2002, based upon the closing price of our common stock of $10.79 on that date,
was as follows: Mr. Budd -- $34,765 (3,222 shares); Mr. Boyle -- $30,838 (2,858
shares); Mr. Tama -- $26,835 (2,487 shares) and Ms. Schnell -- $19,120 (1,772
shares).

      Option grants. The following table sets forth certain information
regarding options granted by us in 2002 to each of the executives named in the
Summary Compensation Table.



                                                                        Option Grants in Last Fiscal Year
                                         -----------------------------------------------------------------------------------------
                                                             Individual Grants
                                         --------------------------------------------------------         Potential Realizable
                                          Number of      Percent of                                          Value at Assumed
                                           Shares      Total Options                                      Annual Rates of Stock
                                         Underlying       Granted          Exercise                         Price Appreciation
                                           Options      to Employees        Price      Expiration          for Option Term (1)
               Name                        Granted     in Fiscal Year     ($/share)        Date             5%               10%
- ----------------------------------       ----------    --------------     ---------    ----------       --------          --------
                                                                                                        
Charles T. Saldarini .............          25,602            4.6%        $   15.74       3/7/12        $253,429          $642,239
Steven K. Budd ...................          21,188            3.8%            15.74       3/7/12         209,736           531,512
Bernard C. Boyle .................          19,156            3.4%            15.74       3/7/12         189,621           480,538
Deborah Schnell ..................          25,000            4.5%            15.74       3/7/12         247,470           627,138
Christopher Tama .................          15,421            2.8%            15.74       3/7/12         152,649           386,844


- ----------
(1)   Potential realizable values are net of exercise price but before taxes,
      and are based on the assumption that our common stock appreciates at the
      annual rate shown (compounded annually) from the date of grant until the
      expiration date of the options. These numbers are calculated based on
      Securities and Exchange Commission requirements and do not reflect our
      projection or estimate of future stock price growth. Actual gains, if any,
      on stock option exercises are dependent on our future financial
      performance, overall market conditions and the option holder's continued
      employment through the vesting period. This table does not take into
      account any appreciation in the price of the common stock from the date of
      grant to the date of this Form 10-K.

      Option exercises and year-end option values. The following table provides
information with respect to options exercised by the Named Executive Officers
during 2002 and the number and value of unexercised options held by the Named
Executive Officers as of December 31, 2002.

    Aggregated Option Exercise in Last Fiscal Year and Year-End Option Values



                                                                     Number of Shares Underlying       Value of Unexercised In-the-
                                                                    Unexercised Options at Fiscal        Money Options At Fiscal
                                                                               Year-End                         Year-End (2)
                                                                    -----------------------------     -----------------------------
                          Shares Acquired
Name                      on Exercise (#)      Value Realized (1)   Exercisable     Unexercisable     Exercisable     Unexercisable
- ----                      ---------------      ------------------   -----------     -------------     -----------     -------------
                                                                                                          
Charles T. Saldarini             --                     --             11,355           48,313             --               --
Steven K. Budd                   --                     --             32,779           36,747             --               --
Bernard C. Boyle                 --                     --             26,633           32,423             --               --
Deborah Schnell                  --                     --              4,399           30,297             --               --
Christopher Tama                 --                     --             10,056           30,533             --               --


- ----------
(1)   For the purposes of this calculation, value is based upon the difference
      between the exercise price of the options and the stock price at date of
      exercise.

(2)   For the purposes of this calculation, value is based upon the difference
      between the exercise price of the exercisable and unexercisable options
      and the stock price at December 31, 2002 of $10.79 per share.

Employment contracts

      In January 1998, we entered into an agreement with John P. Dugan providing
for his appointment as chairman of the board and director of strategic planning.
The agreement provides for an annual salary of $125,000.

      In November 2001, we entered into an employment agreement with Charles T.
Saldarini providing for his employment as our chief executive officer and vice
chairman of the board for a term expiring on October 31, 2005 subject to
automatic one-year renewals unless either party gives written notice one-year
prior to the end of the then current term of the agreement. The agreement
provides for an annual base salary of $350,000 and for participation in all
executive benefit plans. The agreement also provides that Mr. Saldarini will be
entitled to bonus and incentive compensation awards as determined by the
compensation committee. Further, the agreement provides, among other things,
that, if Mr. Saldarini's employment is terminated without cause (as defined) or
if he terminates his employment for good reason (as defined), we will pay him an
amount equal to three times the sum of his then


                                       45


current base salary plus the average incentive compensation paid to him during
the three years immediately preceding the termination date.

      In May 2001, we entered into an amended and restated employment agreement
with Steven K. Budd providing for his employment as our president and chief
operating officer for a term expiring on April 30, 2005 subject to automatic
one-year renewals unless either party gives written notice one-year prior to the
end of the then current term of the agreement. The agreement provides for an
annual base salary of $275,000 and for participation in all executive benefit
plans. The agreement also provides that Mr. Budd will be entitled to bonus and
incentive compensation awards as determined by the compensation committee.
Further, the agreement provides, among other things, that, if Mr. Budd's
employment is terminated without cause (as defined) or if he terminates his
employment for good reason (as defined), we will pay him an amount equal to
three times the sum of his then current base salary plus the average incentive
compensation paid to him during the three years immediately preceding the
termination date.

      In May 2001, we entered into an amended and restated employment agreement
with Bernard C. Boyle providing for his employment as our executive vice
president and chief financial officer for a term expiring on April 30, 2004
subject to automatic one-year renewals unless either party gives written notice
one-year prior to the end of the then current term of the agreement. The
agreement provides for an annual base salary of $250,000 and for participation
in all executive benefit plans. The agreement also provides that Mr. Boyle will
be entitled to bonus and incentive compensation awards as determined by the
compensation committee. Further, the agreement provides, among other things,
that, if Mr. Boyle's employment is terminated without cause (as defined) or if
he terminates his employment for good reason (as defined), we will pay him an
amount equal to three times the sum of his then current base salary plus the
average incentive compensation paid to him during the three years immediately
preceding the termination date.

      In February 2003, we entered into an employment agreement with Christopher
Tama providing for his employment as our executive vice president for a term
expiring on February 4, 2006, subject to automatic one-year renewals unless
either party gives written notice at least ninety days prior to the end of the
then current term of the agreement. The agreement provides for an annual base
salary of $206,000 and for participation in all executive benefit plans. The
agreement also provides that Mr. Tama will be entitled to bonus and incentive
compensation awards as determined by the compensation committee. Further, the
agreement provides, among other things, that, if Mr. Tama's employment is
terminated without cause (as defined) or if he terminates his employment for
good reason (as defined), we will pay him an amount equal to three times the sum
of his then current base salary plus the average incentive compensation paid to
him during the three years immediately preceding the termination date.

Compensation committee interlocks and insider participation in compensation
decisions

      None of the directors serving on the compensation committee of the board
of directors is employed by us. In addition, none of our directors or executive
officers is a director or executive officer of any other corporation that has a
director or executive officer who is also a member of our board of directors.

Stock compensation plans

      2000 Omnibus Incentive Compensation Plan

      On May 5, 2000 our board of directors approved our 2000 Omnibus Incentive
Compensation Plan. The purpose of the Omnibus Plan is to provide a flexible
framework that will permit the board to develop and implement a variety of
stock-based incentive compensation programs based on our changing needs, our
competitive market and the regulatory climate. The maximum number of shares as
to which awards or options may at any time be granted under the Omnibus Plan is
2.2 million shares of our common stock. The Omnibus Plan is administered by the
compensation committee of the board, which is responsible for developing and
implementing specific stock-based plans that are consistent with the intent and
specific terms of the framework created by the Omnibus Plan. Eligible
participants under the Omnibus Plan include our officers and other employees,
members of our board, and outside consultants. The right to grant awards under
the Omnibus Plan will terminate upon the expiration of 10 years after


                                       46


the date the Omnibus Plan was adopted. No participant may be granted more than
100,000 shares of company stock from all awards under the Omnibus Plan.

      1998 Stock Option Plan

      In order to attract and retain persons necessary for our success, in March
1998, our board of directors adopted our 1998 stock option plan reserving for
issuance up to 750,000 shares. Officers, directors, key employees and
consultants are eligible to receive incentive and/or non-qualified stock options
under this plan. The plan, which has a term of ten years from the date of its
adoption, is administered by the compensation committee. The selection of
participants, allotment of shares, determination of price and other conditions
relating to the purchase of options is determined by the compensation committee
in its sole discretion. Incentive stock options granted under the 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 plan to a stockholder 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.

      At December 31, 2002, options for an aggregate of 1,514,297 shares were
outstanding under our stock option plans, including 59,668 granted to Charles T.
Saldarini, our chief executive officer and vice chairman, 69,526 granted to
Steven K. Budd, our president and chief operating officer, 59,056 granted to
Bernard C. Boyle, our chief financial officer, 40,589 granted to Christopher
Tama, our executive vice president and general manager - PDI pharmaceutical
products, and 26,363 granted to Deborah Schnell, our executive vice president -
business development. The outstanding options also include 33,750 granted to
each of Gerald J. Mossinghoff, John M. Pietruski and Jan Martens Vecsi, 17,500
granted to John C. Federspiel, and 10,000 granted to Frank Ryan, our outside
directors. In addition, as of December 31, 2002, options to purchase an
aggregate of 333,887 shares of common stock had been exercised.

Compensation of directors

      Each non-employee director receives an annual director's fee of $20,000,
payable quarterly in arrears, plus $1,000 for each meeting attended in person
and $500 for each meeting attended telephonically and reimbursement for travel
costs and other out-of-pocket expenses incurred in attending each directors'
meeting. In addition, committee members receive $500 for each committee meeting
attended in person and $200 for each committee meeting attended telephonically.
Under our stock option plans, each non-employee director is granted options to
purchase 10,000 shares upon first being elected to our board of directors. In
addition, each non-employee director will receive options to purchase an
additional 7,500 shares of common stock on the date of our annual stockholders'
meeting. All options have an exercise price equal to the fair market value of
the common stock on the date of grant and vest one-third on the date of grant
and one-third at the end of each subsequent year of service on the board.

401(k) plan

      We maintain two 401(k) retirement plans, one of which is for all PDI
employees except for InServe employees (the "PDI plan") and the other is for
InServe employees exclusively (the "InServe plan"). Both plans are intended to
qualify under sections 401(a) and 401(k) of the Internal Revenue Code and are
defined contribution plans. Under the PDI plan, we committed to make mandatory
cash contributions to the 401(k) plan to match employee contributions up to a
maximum of 2% of each participating employee's annual base wages. In addition we
can make discretionary contributions to this plan. Under the InServe plan, which
was frozen effective January 1, 2003, we matched on the first 25% of pre-tax
contribution, up to 6% of employee compensation. Under the InServe plan, Company
matching contributions are always 100% vested. For either plan, there is no
option for employees to invest any of their 401(k) funds in our common stock.
Our contribution expense related to the 401(k) plans for 2002 was approximately
$1.7 million. On January 1, 2003, the InServe plan was frozen, meaning that all
previous contributions were kept in the plan, but going forward InServe
employees will participate in the PDI plan.


                                       47


Limitation of directors' liability and indemnification

      The Delaware General Corporation Law (DGCL) authorizes corporations to
limit or eliminate the personal liability of directors of corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Our certificate of incorporation limits the liability of our directors to
the fullest extent permitted by Delaware law.

      Our certificate of incorporation provides mandatory indemnification rights
to any officer or director who, by reason of the fact that he or she is an
officer or director, is involved in a legal proceeding of any nature. These
indemnification rights include reimbursement for expenses incurred by an officer
or director in advance of the final disposition of a legal proceeding in
accordance with the applicable provisions of the DGCL. We have been informed
that, in the opinion of the Securities and Exchange Commission, indemnification
for liabilities under the Securities Act is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information regarding the beneficial
ownership of our common stock as of February 28, 2003 by:

      o     each person known to us to be the beneficial owner of more than 5%
            of our outstanding shares;
      o     each of our directors;
      o     each executive officer named in the Summary Compensation Table
            above;
      o     all of our directors and executive officers as a group.

      Except as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all shares of common stock owned by them.
All information with respect to beneficial ownership has been furnished to us by
the respective stockholder. The address for each of Messrs. Dugan and Saldarini
is c/o PDI, Inc., 10 Mountainview Road, Upper Saddle River, New Jersey 07458.



                                                                                  Number of Shares       Percentage of Shares
      Name of Beneficial Owner                                                  Beneficially Owned(1)     Beneficially Owned
      ------------------------                                                  ---------------------     ------------------
                                                                                                             
      Executive officers and directors:
      John P. Dugan ..................................................                4,909,878                    34.6%
      Charles T. Saldarini ...........................................                  831,245(2)                  5.8%
      Steven K. Budd .................................................                   54,910(3)                    *
      Bernard C. Boyle ...............................................                   45,344(4)                    *
      Deborah Schnell ................................................                   18,196(5)                    *
      Christopher Tama ...............................................                   26,072(6)                    *
      John M. Pietruski ..............................................                   28,250(7)                    *
      Jan Martens Vecsi ..............................................                   26,850(7)                    *
      Gerald J. Mossinghoff ..........................................                   26,250(8)                    *
      Frank Ryan .....................................................                    3,333(8)                    *
      Larry Ellberger ................................................                    3,333(8)                    *
      John C. Federspiel .............................................                    9,166(8)                    *
      All executive officers and directors as a group (17 persons) ...                6,066,870(9)                 42.7%

      5% stockholders:
      Brown Capital Management, Inc.(10) .............................                2,128,875                    15.0%
       1201 N. Calvert Street
        Baltimore, MD 21202
      Mellon Financial Corporation(10) ...............................                1,242,176                     8.7%
       One Mellon Center
       Pittsburgh, PA 15258
      Boston Safe Deposit and Trust Company(10) ......................                1,070,575                     7.5%
       One Boston Place, #400
       Boston, MA 02018
      The Boston Company, Asset Management, LLC(10) ..................                  773,600                     5.4%
       One Boston Place, 14th Floor
       Boston, MA 02018



                                       48


- ----------
*     Less than 1%.
(1)   Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission. In computing the number of shares
      beneficially owned by a person and the percentage ownership of that
      person, shares of common stock subject to options and warrants held by
      that person that are currently exercisable or exercisable within 60 days
      of February 28, 2003 are deemed outstanding. Such shares, however, are not
      deemed outstanding for the purpose of computing the percentage ownership
      of any other person.
(2)   Includes 31,245 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(3)   Includes 47,621 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(4)   Includes 39,652 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(5)   Includes 14,797 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(6)   Includes 23,586 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(7)   Includes 26,250 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(8)   Represents shares issuable pursuant to options exercisable within 60 days
      of the date of this report.
(9)   Includes 325,052 shares issuable pursuant to options exercisable within 60
      days of the date of this report.
(10)  This information was derived from the Schedule 13g filed by the reporting
      person.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In connection with our efforts to recruit sales representatives, we place
advertisements in various print publications. These ads are placed on our behalf
through Boomer & Son, Inc., which receives commissions from the publications.
Prior to 1998, B&S was wholly-owned by John P. Dugan, our chairman of the board.
At the end of 1997 Mr. Dugan transferred his interest in B&S to his son, Thomas
Dugan, and daughter-in-law, Kathleen Dugan. John P. Dugan is not actively
involved in B&S; however, his son, Thomas Dugan, is active in B&S. For the year
ended December 31, 2002 we purchased approximately $120,000 of advertising
through B&S and B&S received commissions of approximately $14,400. All ads were
placed at the stated rates set by the publications in which they appeared. In
addition, we believe that the amounts paid to B&S were no less favorable than
would be available in an arms-length negotiated transaction with an unaffiliated
entity.

      Peter Dugan, the son of John P. Dugan, our chairman of the board, is
employed by us as executive director -investor relations. In 2002, compensation
paid or accrued to Peter Dugan was $125,860.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

      Within the past 90 days, our management, including our chief executive
officer and chief financial officer, has conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as amended. Based on that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this annual report has been made
known to them in a timely fashion.

Changes in Internal Controls

      There have been no significant changes in internal controls, or in factors
that could significantly affect internal controls, subsequent to the date our
chief executive officer and chief financial officer completed their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.


                                       49


                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

            The following documents are filed as part of this report:

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

      (a) (2) Financial Statement Schedule

              Schedule II:  Valuation and Qualifying Accounts

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

      (a) (3) Exhibits

    Exhibit
       No.                             Description
       ---                             -----------

      3.1         Certificate of Incorporation of PDI, Inc.(1)

      3.2         By-Laws of PDI, Inc.(1)

      3.3         Certificate of Amendment of Certificate of Incorporation of
                  PDI, Inc.(4)

      4.1         Specimen Certificate Representing the Common Stock(1)

      10.11       Form of 1998 Stock Option Plan(1)

      10.2        Form of 2000 Omnibus Incentive Compensation Plan(2)

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

      10.4        Form of Employment Agreement between the Company and Charles
                  T. Saldarini(4)

      10.5        Agreement between the Company and John P. Dugan(1)

      10.6        Form of Amended and Restated Employment Agreement between the
                  Company and Steven K. Budd(4)

      10.7        Form of Amended and Restated Employment Agreement between the
                  Company and Bernard C. Boyle(4)

      10.8        Form of Employment Agreement between the Company and
                  Christopher Tama*

      10.9        Form of Amended and Restated Employment Agreement between the
                  Company and Stephen Cotugno(4)

      10.10       Form of Employment Agreement between the Company and Lloyd X.
                  Fishman*

      10.11       Form of Employment Agreement between the Company and Beth
                  Jacobson*

      10.12       Form of Loan Agreements between the Company and Steven Budd(3)

      10.13       Exclusive License Agreement between the Company and Cellegy
                  Pharmaceuticals, Inc.*(5)

      21.1        Subsidiaries of the Registrant(4)

      23.1        Consent of PricewaterhouseCoopers LLP*

      99.1        Certification of Chief Executive Officer*

      99.2        Certification of Chief Financial Officer*


                                       50


      ----------
      *     Filed herewith
      (1)   Filed as an exhibit to our Registration Statement on Form S-1 (File
            No 333-46321), and incorporated herein by reference.
      (2)   Filed as an Exhibit to our definitive proxy statement dated May 10
            2000, and incorporated herein by reference.
      (3)   Filed as an exhibit to our Annual Report on Form 10-K for the year
            ended December 31, 1999, and incorporated herein by reference.
      (4)   Filed as an exhibit to our Annual Report on Form 10-K for the year
            ended December 31, 2001, and incorporated herein by reference.
      (5)   An application has been submitted to the Securities and Exchange
            Commission for confidential treatment, pursuant to Rule 24b-2 under
            the Exchange Act, of certain portions of this exhibit. These
            portions of the exhibit have been redacted from the exhibit filed
            with this report.

(b)   Reports on Form 8-K

      During the three months ended December 31, 2002, the Company filed the
following reports on Form 8-K:



                 Date           Item                            Description
                 ----           ----                            -----------
                                     
         November 13, 2002        5        Press Release: PDI Reports 3rd Quarter Financial Results



                                       51


                                   SIGNATURES

      Pursuant to the requirements of the Securities 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 10th day of March, 2003.

                                              PDI, INC.


                                              /s/ Charles T. Saldarini
                                              ------------------------
                                              Charles T. Saldarini,
                                              Chief Executive Officer

      Pursuant to the requirements of the Securities Act of 1934, as amended,
this Form 10-K has been signed by the following persons in the capacities
indicated and on the 10th day of March, 2003.

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

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


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


/s/ Steven K. Budd                     President and Chief Operating Officer
- -----------------------------
   Steven K. Budd


/s/ Bernard C. Boyle                   Chief Financial Officer (principal
- -----------------------------          accounting and financial officer)
   Bernard C. Boyle


/s/ Gerald J. Mossinghoff              Director
- -----------------------------
   Gerald J. Mossinghoff


/s/ John M. Pietruski                  Director
- -----------------------------
   John M. Pietruski


/s/ Jan Martens Vecsi                  Director
- -----------------------------
   Jan Martens Vecsi


/s/ John C. Federspiel                 Director
- -----------------------------
   John C. Federspiel


/s/ Frank Ryan                         Director
- -----------------------------
   Frank Ryan


/s/ Larry Ellberger                    Director
- -----------------------------
   Larry Ellberger


                                       52



                                    PDI, INC.

                     CERTIFICATIONS PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

      CERTIFICATION

      I, Charles T. Saldarini, certify that:

      1. I have reviewed this annual report on Form 10-K of PDI, Inc.;

      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

            (a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

            (b) evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

            (c) presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on our
      evaluation as of the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

            (a) all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's ability to
      record, process, summarize and report financial data and have identified
      for the registrant's auditors any material weaknesses in internal
      controls; and

            (b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      controls; and

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


                                       /s/ Charles T. Saldarini
                                       -----------------------------------------
                                                 Charles T. Saldarini
                                       Vice Chairman and Chief Executive Officer

Date: March 10, 2003




                                    PDI, INC.

                     CERTIFICATIONS PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

      CERTIFICATION

      I, Bernard C. Boyle, certify that:

      1. I have reviewed this annual report on Form 10-K of PDI, Inc.;

      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

            (a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

            (b) evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

            (c) presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on our
      evaluation as of the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

            (a) all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's ability to
      record, process, summarize and report financial data and have identified
      for the registrant's auditors any material weaknesses in internal
      controls; and

            (b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      controls; and

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


                                                    /s/ Bernard C. Boyle
                                                    ----------------------------
                                                        Bernard C. Boyle
                                                     Chief Financial Officer

Date: March 10, 2003





  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                          Page
                                                                          ----
PDI, INC.

     Report of Independent Accountants                                     F-2

     Consolidated Balance Sheets                                           F-3

     Consolidated Statements of Operations                                 F-4

     Consolidated Statements of Cash Flows                                 F-5

     Consolidated Statements of Stockholders' Equity                       F-6

     Notes to Consolidated Financial Statements                            F-7

     Schedule II.  Valuation and Qualifying Accounts                       F-26


                                      F-1


                        Report of Independent Accountants

To the Board of Directors and
Stockholders of PDI, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 15(a)(1), present fairly, in all material respects,
the financial position of PDI, Inc. and its subsidiaries at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2), presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP

February 13, 2003


                                      F-2


                                    PDI, INC.
                           CONSOLIDATED BALANCE SHEETS



                                                                                                           December 31,
                                                                                                    --------------------------
                                                                                                       2002             2001
                                                                                                    ---------        ---------
ASSETS                                                                                                     (in thousands)
                                                                                                               
Current assets:
   Cash and cash equivalents ...........................................................            $  66,827        $ 160,043
   Short-term investments ..............................................................                5,834            7,387
   Inventory, net ......................................................................                  646              442
   Accounts receivable, net of allowance for doubtful accounts of
     $1,063 and $3,692 as of December 31, 2002 and 2001, respectively ..................               40,729           52,640
   Unbilled costs and accrued profits on contracts in progress .........................                3,360            6,898
   Deferred training ...................................................................                1,106            5,569
   Prepaid income tax ..................................................................               18,856               --
   Other current assets ................................................................                4,804            8,101
   Deferred tax asset ..................................................................                7,420           24,041
                                                                                                    ---------        ---------
Total current assets ...................................................................              149,582          265,121
    Net property and equipment .........................................................               18,295           21,044
    Deferred tax asset .................................................................                7,820               --
    Other long-term assets .............................................................               15,242           16,506
                                                                                                    ---------        ---------
Total assets ...........................................................................            $ 190,939        $ 302,671
                                                                                                    =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ....................................................................            $   5,374        $   9,493
   Accrued rebates, sales discounts and returns ........................................               16,500           68,403
   Accrued contract losses .............................................................                   --           12,256
   Accrued incentives ..................................................................               11,758           22,213
   Accrued salaries and wages ..........................................................                6,617            7,167
   Unearned contract revenue ...........................................................                9,473           10,878
   Restructuring accruals ..............................................................                4,699               --
   Other accrued expenses ..............................................................               13,307           21,026
                                                                                                    ---------        ---------
Total current liabilities ..............................................................               67,728          151,436
                                                                                                    ---------        ---------
Long-term liabilities:
   Deferred tax liability ..............................................................                   --              300
                                                                                                    ---------        ---------
Total long-term liabilities ............................................................                   --              300
                                                                                                    ---------        ---------
Total liabilities ......................................................................            $  67,728        $ 151,736
                                                                                                    =========        =========

Stockholders' equity:
   Common stock, $.01 par value; 100,000,000 shares authorized; shares
     issued and outstanding, 2002 - 14,165,880; 2001 - 13,968,097;
     restricted $.01 par value; shares issued and outstanding, 2002,- 44,325;
     2001 - 15,388 .....................................................................            $     142        $     140
   Preferred stock, $.01 par value; 5,000,000 shares authorized, no
     shares issued and outstanding .....................................................                   --               --
Additional paid-in capital (includes restricted of $1,547 and $954
     in 2002 and 2001, respectively) ...................................................              106,673          103,711
Retained earnings ......................................................................               17,247           48,008
Accumulated other comprehensive loss ...................................................                 (100)             (79)
Unamortized compensation costs .........................................................                 (641)            (735)
Treasury stock, at cost: 5,000 shares at 2002 and 2001 .................................                 (110)            (110)
                                                                                                    ---------        ---------
Total stockholders' equity .............................................................            $ 123,211        $ 150,935
                                                                                                    ---------        ---------
Total liabilities & stockholders' equity ...............................................            $ 190,939        $ 302,671
                                                                                                    =========        =========


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


                                      F-3


                                    PDI, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                                         For The Years Ended December 31,
                                                                                    ----------------------------------------
                                                                                       2002            2001           2000
                                                                                    ---------        --------       --------
                                                                                    (in thousands, except for per share data)
                                                                                                           
Revenue
   Service, net .........................................................           $ 277,575        $281,269       $315,867
   Product, net .........................................................               6,438         415,314        101,008
                                                                                    ---------        --------       --------
     Total revenue, net .................................................             284,013         696,583        416,875
                                                                                    ---------        --------       --------
Cost of goods and services
   Program expenses (including related party amounts of
    $120, $1,057 and $3,781 for the periods ended
    December 31, 2002, 2001 and 2000, respectively) .....................             254,140         232,171        235,355
   Cost of goods sold ...................................................                  --         328,629         68,997
                                                                                    ---------        --------       --------
     Total cost of goods and services ...................................             254,140         560,800        304,352
                                                                                    ---------        --------       --------

Gross profit ............................................................              29,873         135,783        112,523

Operating expenses
   Compensation expense .................................................              32,670          39,263         32,820
   Other selling, general and administrative expenses ...................              44,163          83,815         38,827
   Restructuring and other related expenses .............................               3,215              --             --
                                                                                    ---------        --------       --------
     Total operating expenses ...........................................              80,048         123,078         71,647
                                                                                    ---------        --------       --------
Operating (loss) income .................................................             (50,175)         12,705         40,876
Other income, net .......................................................               1,967           2,275          4,864
                                                                                    ---------        --------       --------
(Loss) income before (benefit) provision for taxes ......................             (48,208)         14,980         45,740
(Benefit) provision for income taxes ....................................             (17,447)          8,626         18,712
                                                                                    ---------        --------       --------
Net (loss) income .......................................................           $ (30,761)       $  6,354       $ 27,028
                                                                                    =========        ========       ========

Basic net (loss) income per share .......................................           $   (2.19)       $   0.46       $   2.00
                                                                                    =========        ========       ========
Diluted net (loss) income per share .....................................           $   (2.19)       $   0.45       $   1.96
                                                                                    =========        ========       ========
Basic weighted average number of shares outstanding .....................              14,033          13,886         13,503
                                                                                    =========        ========       ========
Diluted weighted average number of shares outstanding ...................              14,033          14,113         13,773
                                                                                    =========        ========       ========


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


                                      F-4


                                    PDI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                             For The Years Ended December 31,
                                                                                      ---------------------------------------------
                                                                                         2002              2001              2000
                                                                                      ---------         ---------         ---------
                                                                                                      (in thousands)
                                                                                                                 
Cash Flows From Operating Activities
Net (loss) income from operations ............................................        $ (30,761)        $   6,354         $  27,028
     Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization ........................................            7,374             4,676             2,077
        Deferred rent and compensation .......................................               --                --                11
        Loss on disposal of asset ............................................               --               858                --
        Amortized compensation costs .........................................              443               318                --
        Deferred taxes, net ..................................................            8,501           (19,411)           (4,514)
        Reserve for inventory obsolescence and bad debt ......................           (2,080)            2,995               353
        Loss on other investments ............................................              379             1,863             2,500
     Other changes in assets and liabilities, net of acquisitions:
        Decrease (increase) in accounts receivable ...........................           13,991            31,304           (55,838)
        (Increase) decrease in inventory .....................................             (203)           35,066           (36,488)
        Decrease (increase)in unbilled costs .................................            3,538            (3,703)             (695)
        Decrease (increase) in deferred training .............................            4,463              (639)           (3,931)
        (Increase) in other current assets ...................................          (15,559)             (477)           (2,141)
        Decrease (increase) in other long-term assets ........................            4,385            (2,071)           (2,931)
        (Decrease) increase in accounts payable ..............................           (4,119)          (21,969)           25,294
        (Decrease) increase in accrued rebates and sales discounts ...........          (51,903)           44,026            24,368
        (Decrease) increase in accrued contract losses .......................          (12,256)           12,256                --
        (Decrease) increase in accrued liabilities ...........................          (10,398)            6,411            11,567
        (Decrease) increase in unearned contract revenue .....................           (1,404)          (12,939)            6,140
        (Decrease) increase in other current liabilities .....................           (3,371)           (4,623)           26,394
        (Decrease) increase in other deferred compensation ...................               --              (169)              169
        (Decrease) in other long-term liabilities ............................               --                --              (256)
                                                                                      ---------         ---------         ---------
Net cash (used in) provided by operating activities ..........................          (88,980)           80,126            19,107
                                                                                      ---------         ---------         ---------

Cash Flows From Investing Activities
        Sale of short-term investments .......................................            1,532             6,225             1,551
        Purchase of short-term investments ...................................               --            (8,750)           (4,907)
        Investments in Xylos, In2Focus, and iPhysicianNet ....................           (1,379)           (1,103)           (3,260)
        Purchase of property and equipment ...................................           (4,012)          (15,560)           (7,865)
        Cash paid for acquisition, net of cash acquired ......................           (2,735)          (11,902)               --
                                                                                      ---------         ---------         ---------
Net cash used in investing activities ........................................           (6,594)          (31,090)          (14,481)
                                                                                      ---------         ---------         ---------

Cash Flows From Financing Activities

        Net proceeds from employee stock purchase plan
         and the exercise of stock options ...................................            2,358             2,117             3,583
        Purchase of treasury stock ...........................................               --              (110)               --
        Net proceeds from issuance of common stock ...........................               --                --            41,584
        Distributions to S corporation stockholders ..........................               --                --                (8)
        Repayment of loan to stockholder .....................................               --                --             1,428
                                                                                      ---------         ---------         ---------
Net cash provided by financing activities ....................................            2,358             2,007            46,587
                                                                                      ---------         ---------         ---------

Net (decrease) increase in cash and cash equivalents .........................          (93,216)           51,043            51,213
Cash and cash equivalents - beginning ........................................          160,043           109,000            57,787
                                                                                      ---------         ---------         ---------
Cash and cash equivalents - ending ...........................................        $  66,827         $ 160,043         $ 109,000
                                                                                      =========         =========         =========

Cash paid for interest .......................................................        $      33         $      59         $      19
                                                                                      =========         =========         =========
Cash paid for taxes ..........................................................        $   4,827         $  18,023         $  18,552
                                                                                      =========         =========         =========


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


                                      F-5


                                    PDI, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)



                                                                                                                       Accumulated
                                                          Common Stock       Treasury Stock     Additional                 Other
                                                      ------------------    -----------------    Paid in    Retained   Comprehensive
                                                      Shares      Amount    Shares     Amount    Capital    Earnings   Income (Loss)
                                                      ------      ------    ------     ------    -------    --------   -------------
                                                                                                     
Balance - December 31, 1999                          11,975      $  120         --     $  --    $ 47,413     $14,634      $  92

Net income for the year ended December 31, 2000                                                               27,028
Unrealized investment holding losses, net of tax                                                                            (34)
Comprehensive income
Issuance of common stock                              1,609          16                           41,568
Issuance of officers' restricted common stock             8                                          217
Exercise of common stock options                        253           2                            3,581
Tax benefit of  nonqualified option exercise                                                       4,383
Amortization of deferred compensation expense
Stockholders' distribution                                                                                        (8)
Realized gain on sale of investment holdings                                                                                (92)
Deferred compensation costs
Repayment of loan by officer
                                                     ------      ------       ----     -----    --------     -------      -----
Balance - December 31, 2000                          13,845         138         --        --      97,162      41,654        (34)
                                                     ======      ======       ====     =====    ========     =======      =====
Net income for the year ended December 31, 2001                                                                6,354
Unrealized investment holding losses, net of tax                                                                            (56)
Comprehensive income
Issuance of common stock                                 90           1                            1,408
Issuance of officers' restricted common stock             7                                          737
Purchase of treasury stock                                                       5      (110)
Exercise of common stock options                         41           1                              709
Tax benefit of  nonqualified option exercise                                                       3,695
Realized loss on sale of investment holdings                                                                                 11
Amortization of deferred compensation costs
Deferred compensation costs
                                                     ------      ------       ----     -----    --------     -------      -----
Balance - December 31, 2001                          13,983      $  140          5     $(110)   $103,711     $48,008      $ (79)
                                                     ======      ======       ====     =====    ========     =======      =====
Net loss for the year ended December 31, 2002                                                                (30,761)
Unrealized investment holding losses, net of tax                                                                            (21)
Comprehensive income
Issuance of common stock                                190           2                            2,239
Issuance of officers' restricted common stock            29                                          593
Exercise of common stock options                          8                                          130
Amortization of deferred compensation costs
Deferred compensation costs
                                                     ------      ------       ----     -----    --------     -------      -----
Balance - December 31, 2002                          14,210      $  142          5     $(110)   $106,673     $17,247      $(100)
                                                     ======      ======       ====     =====    ========     =======      =====



                                                                        Unamortized
                                                         Deferred         Loan to      Compensation
                                                       Compensation       Officer         Costs            Total
                                                       ------------       -------         -----            -----
                                                                                             
Balance - December 31, 1999                              $    (11)        $(1,428)        $  --          $  60,820

Net income for the year ended December 31, 2000                                                             27,028
Unrealized investment holding losses, net of tax                                                               (34)
                                                                                                         ---------
Comprehensive income                                                                                        26,994
Issuance of common stock                                                                                    41,584
Issuance of officers' restricted common stock                                                                  217
Exercise of common stock options                                                                             3,583
Tax benefit of  nonqualified option exercise                                                                 4,383
Amortization of deferred compensation expense                  11                                               11
Stockholders' distribution                                                                                      (8)
Realized gain on sale of investment holdings                                                                   (92)
Deferred compensation costs                                                                (810)              (810)
Repayment of loan by officer                                                1,428                            1,428
                                                         --------         -------         -----          ---------
Balance - December 31, 2000                                    --              --          (810)           138,110
                                                         ========         =======         =====          =========
Net income for the year ended December 31, 2001                                                              6,354
Unrealized investment holding losses, net of tax                                                               (56)
                                                                                                         ---------
Comprehensive income                                                                                         6,298
Issuance of common stock                                                                                     1,409
Issuance of officers' restricted common stock                                                                  737
Purchase of treasury stock                                                                                    (110)
Exercise of common stock options                                                                               710
Tax benefit of  nonqualified option exercise                                                                 3,695
Realized loss on sale of investment holdings                                                                    11
Amortization of deferred compensation costs                                                 318                318
Deferred compensation costs                                                                (243)              (243)
                                                         --------         -------         -----          ---------
Balance - December 31, 2001                              $     --         $    --         $(735)         $ 150,935
                                                         ========         =======         =====          =========
Net loss for the year ended December 31, 2002                                                              (30,761)
Unrealized investment holding losses, net of tax                                                               (21)
                                                                                                         ---------
Comprehensive income                                                                                       (30,782)
Issuance of common stock                                                                                     2,241
Issuance of officers' restricted common stock                                                                  593
Exercise of common stock options                                                                               130
Amortization of deferred compensation costs                                                 443                443
Deferred compensation costs                                                                (349)              (349)
                                                         --------         -------         -----          ---------
Balance - December 31, 2002                              $     --         $    --         $(641)         $ 123,211
                                                         ========         =======         =====          =========


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


                                      F-6


                                    PDI, Inc.
                 Notes to the Consolidated Financial Statements

1. Nature of Business and Significant Accounting Policies

Nature of Business

      PDI, Inc. ("PDI" and, together with its wholly owned subsidiaries, "the
Company") is a commercial sales and marketing company serving the
biopharmaceutical and medical devices and diagnostics (MD&D) industries. See
note 24 for segment information.

Principles of Consolidation

      The consolidated financial statements include accounts of PDI and its
wholly owned subsidiaries TVG, Inc. (TVG), ProtoCall, Inc. (ProtoCall), InServe
Support Solutions, Inc. (InServe) and PDI Investment Company, Inc. (PDII). All
significant intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates

      The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Significant estimates include
accrued contract losses, accrued incentives payable to employees, valuation
allowances related to deferred taxes, allowances for doubtful accounts and
inventory obsolescence, sales returns and accruals for sales rebates.

Revenue Recognition

      Service Revenue

      Service revenue is earned primarily by performing product detailing
programs and other marketing and promotional services under contracts. Revenue
is recognized as the services are performed and the right to receive payment for
the services is assured. Revenue is recognized net of any potential penalties
until the performance criteria relating to the penalties have been achieved.
Bonus and other performance incentives, as well as termination payments, are
recognized as revenue in the period earned and when payment of the bonus,
incentive or other payment is assured. Under performance based contracts,
revenue is recognized when the performance based parameters are achieved.

      Product Revenue

      The Company recognizes revenue at the time its products are shipped to its
customers as, at that time, the risk of loss or physical damage to the product
passes to the customer, and the obligations of customers to pay for the products
are not dependent on the resale of the product. Provision is made at the time of
sale for all discounts and estimated sales allowances. As is common in the
Company's industry, customers are permitted to return unused product, after
approval from the Company, up to six months before and one year after the
expiration date for the product. The products sold by the Company prior to the
effective date of the Ceftin Agreement termination of February 28, 2002, have
expiration dates through December 2004. Additionally, certain customers are
eligible for price rebates or discounts, offered as an incentive to increase
sales volume and achieve favorable formulary status, on the basis of volume of
purchases or increases in the product's market share over a specified period,
and certain customers are credited with chargebacks on the basis of their
resales to end-use customers, such as HMO's, which have contracted with the
Company for quantity discounts. Furthermore, the Company is also obligated to
issue rebates under the federally administered Medicaid program. In each
instance the Company has the historical data and access to other information,
including the total demand for the drug the Company distributes, the Company's
market share, the recent or pending introduction of new drugs or generic
competition, the inventory practices of the Company's customers and the resales
by its customers to end-users having contracts with the Company, necessary to
reasonably estimate the amount of such returns or allowances, and records
reserves for such returns or allowances at the time of sale as a reduction of
revenue. The actual payment of these rebates varies depending on the program and
can take several calendar quarters before final settlement. As the Company
settles these liabilities in future periods all adjustments, positive or
negative, will be recorded through revenue in that period. The majority of the
product revenue in the consolidated statement of operations in 2002 related to
the settlement of certain of these liabilities.


                                      F-7


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

Fair Value of Financial Instruments

      The book values of cash and cash equivalents, accounts receivable,
accounts payable and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.

Contract Loss Provisions

      Provisions for losses to be incurred on contracts are recognized in full
in the period in which it is determined to be probable that a loss will result
from performance under the contractual arrangement. See Notes 3 and 4.

Unbilled Costs and Accrued Profits and Unearned Contract Revenue

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

Cash and Cash Equivalents

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

Investments

      The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Available-for-sale investments are valued at fair market
value based on quoted market values, with the resulting adjustments, net of
deferred taxes, reported as a separate component of stockholders' equity as
accumulated other comprehensive income (loss). For the purposes of determining
gross realized gains and losses, the cost of securities sold is based upon
specific identification. The Company also has certain other investments which
are accounted for under the cost method, which are included in other long-term
assets. The Company reviews its equity investments for impairment on an ongoing
basis, based on its determination of whether a decline in the fair value of the
investments below the Company's carrying value is other than temporary. The
Company reviews its equity investments for impairment on an ongoing basis based
on its determination of whether a decline in the fair value of the investments
below the Company's carrying value is other than temporary. See Note 8.

Inventory

      Inventory is valued at the lower of cost or market value. Cost is
determined using the first in, first out costing method. Inventory consists
entirely of finished goods and is recorded net of a provision for obsolescence.

Property and Equipment

      Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method, based on estimated
useful lives of five to ten years for furniture and fixtures, two to seven years
for office equipment and computer equipment, and seven years for computer
software. Leasehold improvements are amortized over the shorter of the estimated
service lives or the terms of the related leases. Repairs and maintenance are
charged to expense as incurred. Upon disposition, the asset and related
accumulated depreciation are removed from the related accounts and any gains or
losses are reflected in operations. Purchased computer software is capitalized
and amortized over the software's useful life. Internally-developed software is
also capitalized and amortized over its useful life in accordance with of the
American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."


                                      F-8


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

Realizability of Carrying Value of Long-Lived Assets

      The Company reviews the recoverability of long-lived assets and
finite-lived intangible assets when circumstances indicate that the carrying
amount of assets may not be recoverable. This evaluation is based on various
analyses including cash flow projections. In the event cash flow projections
indicate an impairment, the Company would record an impairment based on the fair
value of the assets at the date of the impairment. Effective January 1, 2002,
the Company accounts for impairments under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Prior to the adoption of this
standard, impairments were accounted for using SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which was superceded by SFAS No. 144. No impairments of long-lived assets were
recorded in 2002, 2001, or 2000.

Goodwill

      The excess of the purchase price of a business acquired over the fair
value of net tangible assets and identifiable intangible assets at the date of
the acquisition has been assigned to goodwill. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill is no longer amortized but is
evaluated for impairment on at least an annual basis.

      The Company will evaluate goodwill and other intangible assets at least on
an annual basis and whenever events and changes in circumstances suggest that
the carrying amount may not be recoverable based on the estimated future cash
flows.

Stock-Based Compensation

      As of December 31, 2002 the Company has two stock-based employee
compensation plans described more fully in Note 21. SFAS No. 123, "Accounting
for Stock-Based Compensation" allows companies a choice of measuring employee
stock-based compensation expense based on either the fair value method of
accounting or the intrinsic value approach under the Accounting Pronouncement
Board (APB) Opinion No. 25. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock option-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Certain employees receive
restricted common stock, the amortization of which is reflected in net income.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.



                                                                                         As of December 31,
                                                                                2002              2001             2000
                                                                            -----------       -----------      -----------
                                                                                  (in thousands, except per share data)
                                                                                                      
         Net (loss) income, as reported                                     $   (30,761)      $     6,354      $    27,028
         Add: Stock-based employee compensation expense included in
         reported net (loss) income, net of related tax effects                     283               134               --
         Deduct: Total stock-based employee compensation expense
         determined under fair value based methods for all awards, net
         of related tax effects                                                  (8,137)           (5,769)          (1,897)
                                                                            -----------       -----------      -----------
         Pro forma net (loss) income                                        $   (38,615)      $       719      $    25,131
                                                                            ===========       ===========      ===========

         (Loss) earnings per share
             Basic--as reported                                             $     (2.19)      $      0.46      $      2.00
                                                                            ===========       ===========      ===========
             Basic--pro forma                                               $     (2.75)      $      0.05      $      1.86
                                                                            ===========       ===========      ===========

             Diluted--as reported                                           $     (2.19)      $      0.45      $      1.96
                                                                            ===========       ===========      ===========
             Diluted--pro forma                                             $     (2.75)      $      0.05      $      1.82
                                                                            ===========       ===========      ===========



                                      F-9


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

      Compensation cost for the determination of Pro forma net (loss) income -
as adjusted and related per share amounts were estimated using the Black Scholes
option pricing model, with the following assumptions: (i) risk free interest
rate of 4.49%, 5.01% and 5.74% at December 31, 2002, 2001 and 2000,
respectively; (ii) expected life of five years for 2002, 2001 and 2000; (iii)
expected dividends - $0 for 2002, 2001 and 2000; and (iv) volatility of 100% for
2002, 90% for 2001 and 80% for 2000. The weighted average fair value of options
granted during 2002, 2001 and 2000 was $14.92, $43.56 and $51.48, respectively.

Advertising

      The Company recognizes advertising costs as incurred. The total amounts
charged to advertising expense were approximately $524,000, $547,000 and
$421,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

Shipping and Handling Costs

      The Company records the costs billed to the customer for shipping and
handling in net revenue, and records the related costs incurred for shipping and
handling in cost of goods sold.

Income Taxes

      The Company applies an asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which the differences are expected to reverse. A
valuation allowance is recorded if the Company determines that it is more likely
than not that a deferred tax asset will not be realized.

License Fees

      Costs related to the acquisition or licensing or products that have not
yet received regulatory approval to be marketed, and that have no alternative
future uses, are expensed as incurred, while costs incurred post-approval are
capitalized and amortized over the economic life of the underlying product. See
Note 4.

Reclassifications

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

New Accounting Pronouncements

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
addresses accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
(Issue 94-3) This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured initially at fair value
when the liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of this statement to have a material effect on its financial
statements.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure- an amendment of FASB
Statement No. 123." (SFAS No. 148). This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," (SFAS No. 123) to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement requires that companies having a
year-end after December 15, 2002 follow the prescribed format and provide the
additional disclosures in their annual reports. The Company has provided the
disclosures required by SFAS No. 148 in the financial statements. The Company
does not currently intend to change its method for accounting for stock options
and does not expect the adoption of this statement to have a material effect on
its financial statements.


                                      F-10


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

      In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company, if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
initial adoption of this accounting pronouncement will not have a material
impact on the Company's consolidated financial statements.

2. Ceftin Contract Termination

      In October 2000, the Company entered into an agreement with
GlaxoSmithKline (GSK) for the exclusive U.S. sales, marketing and distribution
rights for Ceftin(R) Tablets and Ceftin(R) for Oral Suspension, two dosage forms
of a cephalosporin antibiotic, which agreement was terminated as of February 28,
2002 by mutual agreement of the parties. The agreement had a five-year term but
was cancelable by either party without cause on 120 days' notice. From October
2000 through February 2002, the Company marketed and sold Ceftin products,
primarily to wholesale drug distributors, retail chains and managed care
providers.

      On August 21 2001, the U.S. Court of Appeals overturned a preliminary
injunction granted by the New Jersey District Court, which allowed for the entry
of a generic competitor to Ceftin immediately upon approval by the FDA. The
affected Ceftin patent had previously been scheduled to run through July 2003.
As a result of this decision and its impact on future sales, in the third
quarter of 2001, PDI recorded a charge to cost of goods sold and a related
reserve of $24.0 million representing the anticipated future loss to be incurred
by the Company under the Ceftin agreement as of September 30, 2001. The recorded
loss was calculated as the excess of estimated costs that PDI was contractually
obligated to incur to complete its obligations under the arrangement, over the
remaining estimated gross profits to be earned under the contract from selling
the inventory. These costs primarily consisted of amounts paid to GSK to reduce
purchase commitments, estimated committed sales force expenses, selling and
marketing costs through the effective date of the termination, distribution
costs, and fees to terminate existing arrangements. The Ceftin agreement was
terminated by the Company and GSK under a mutual termination agreement entered
into in December 2001. Under the termination agreement, the Company agreed to
perform its marketing and distribution services through February 28, 2002. The
Company also maintained responsibility for sales returns for product sold until
the expiration date of the product sold, estimated to run through December 31,
2004, and certain administrative functions regarding Medicaid rebates.

      As of December 31, 2002, the Company had no remaining Ceftin contract loss
reserve. At December 31, 2001, the reserve had consisted primarily of the
remaining estimated costs required to be incurred to fulfill remaining
obligations under the contract termination. While the Company has certain
responsibilities as discussed above, it had no remaining Ceftin inventory
purchase commitments as of December 31, 2002. The Company also has approximately
$16.5 million in sales rebates and return accruals related to Ceftin at December
31, 2002 for estimated settlement of these obligations which were incurred
through the contract termination date. A significant portion of the accrual
relates to a reserve for returns. As discussed above, certain of the products
sold under the Ceftin agreement have expiration dates up to December 31, 2004.

3. Evista Contract and Termination

      In October 2001, the Company entered into an agreement with Eli Lilly and
Company (Eli Lilly) to copromote Evista(R) in the U.S. Evista is approved in the
U.S. for the prevention and treatment of osteoporosis in postmenopausal women.
Under the terms of the agreement, the Company provided sales representatives to
copromote Evista to physicians in the U.S. The Company's sales representatives
supplemented the Eli Lilly sales force promoting Evista. Under this agreement,
the Company was entitled to be compensated based on net sales achieved by the
product above a predetermined level. The agreement did not provide for the
reimbursement of expenses the Company incurred.

      The Eli Lilly arrangement was a performance based contract. The Company
was required to commit a certain level of spending for promotional and selling
activities, including but not limited to sales representatives. The sales force
assigned to Evista was at times used to promote other products in addition to
Evista, including products covered


                                      F-11


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

by other PDI copromotion arrangements, which partially offset the costs of the
sales force. The Company's compensation for Evista was determined based upon a
percentage of net factory sales of Evista above contractual baselines. To the
extent that such baselines were not exceeded, the Company received no revenue.

      Based upon management's assessment of the future performance potential of
the Evista brand, on November 11, 2002, the Company and Eli Lilly mutually
agreed to terminate the contract as of December 31, 2002. The Company accrued a
contract loss of $7.8 million as of September 30, 2002 representing the
anticipated future loss expected to be incurred by the Company to fulfill our
contractual obligations under the Evista contract. There was no remaining
accrual as of December 31, 2002 as the Company had no further obligations due to
the termination of the contract. The Company recorded $4.1 million in Evista
program revenue for 2002 and the Evista program operating loss, excluding
corporate expense allocations on this contract for the year ended 2002, was
$35.1 million.

4. Other Performance Based Contracts

      In May 2001, the Company entered into a copromotion agreement with
Novartis Pharmaceuticals Corporation (Novartis) for the U.S. sales, marketing
and promotion rights for Lotensin(R) and Lotensin HCT(R), which agreement runs
through December 31, 2003. On May 20, 2002, the Company expanded this agreement
with the addition of Diovan(R) and Diovan HCT(R). Under this agreement, the
Company provides promotion, selling, marketing, and brand management for
Lotensin. In exchange, the Company is entitled to receive a revenue split based
on certain total prescription (TRx) objectives above specified contractual
baselines. Also under this agreement with Novartis, the Company copromotes
Lotrel(R) and Diovan and Diovan HCT in the U.S. for which it is entitled to be
compensated on a fixed fee basis with potential incentive payments based upon
achieving certain total prescription TRx objectives. Novartis has retained
regulatory responsibilities for Lotensin, Lotrel and Diovan and ownership of all
intellectual property. Additionally, Novartis will continue to manufacture and
distribute the products. In the event the Company's estimates of the demand for
Lotensin are not accurate or more sales and marketing resources than anticipated
are required, the Novartis transaction could have a material adverse impact on
the Company's results of operations, cash flows and liquidity. Even though there
is a small operating loss on the contract for Lotensin excluding corporate
expense allocations for the year ending December 31, 2002, the Company's efforts
on this contract did result in operating income for the quarters ended September
30, 2002 and December 31, 2002 because the sales of Lotensin exceeded the
specified baselines and the revenues earned exceeded the operating costs. While
the Company currently estimates that future revenues will continue to exceed
costs associated with this agreement, there is no assurance that actual revenues
will exceed costs; in which event the activities covered by this agreement could
yield an operating loss and a contract loss reserve could be required. In 2003,
the Lotrel and Diovan contracts in the Novartis agreement will be classified
differently since the nature of the contract has changed from a pure performance
based contract where the Company was not assured of recouping its expenses, to a
more traditional fee for service contract where the Company has greater
certainty of recouping its expenses with the additional potential for incentives
at year end based on achieving certain performance criteria.

      In October 2002, the Company entered into an agreement with Xylos
Corporation (Xylos) for the exclusive U.S. commercialization rights to the Xylos
XCell(TM) Cellulose Wound Dressing (XCell) wound care products by entering into
an agreement pursuant to which the Company is the exclusive commercialization
partner for the sales, marketing and distribution of the product line in the
U.S. The minimum annual purchase requirement for the calendar year 2003 is
$750,000. The minimum annual purchase requirement for each subsequent calendar
year is based on the aggregate dollar volume of sales of products during the
12-month period ending with September of the prior year, but in no case can be
less than $750,000.

      On December 31, 2002, the Company entered into an exclusive licensing
agreement with Cellegy Pharmaceuticals, Inc. (Cellegy) for the North American
rights to its testosterone gel product. Cellegy submitted a New Drug Application
(NDA) for the hypogonadism indication in June 2002, based on positive results
achieved in a Phase III clinical trial. The U.S. Food and Drug Administration
(FDA) has accepted the application for review, and FDA approval for the
commercialization of the product is pending. The 10-month Prescription Drug User
Fee Act (PDUFA) date for the product is April 5, 2003, the first potential
approval date for the product, though there is no certainty that it will be
approved at that time. Under the terms of the agreement, which is in effect for
the commercial life of the product, upon execution of the agreement we paid
Cellegy a $15.0 million initial licensing fee. As the nonrefundable payment was
made prior to FDA approval and there is no alternative future use, the $15.0
million was expensed by the Company as incurred. The amount has been recorded in
other selling, general, and administrative expenses in the consolidated
statement of operations. The Company will be required to pay Cellegy an
additional $10.0 million after the product has all FDA approvals required to
promote, sell and distribute the product in the U.S. This payment will be
recorded as an intangible asset and amortized over the estimated commercial life
of the product.


                                      F-12


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

Royalty payments to Cellegy over the term of the commercial life of the product
will range from 20% to 30% of net sales. The agreement is in effect for the
commercial life of the product. As discussed in Note 20, in January 2003, a
lawsuit was filed against the Company seeking to enjoin its performance under
this agreement.

5. Repurchase Program

      On September 21, 2001, the Company announced that its Board of Directors
had unanimously authorized management to repurchase up to $7.5 million of its
Common Stock. Subject to availability, the transactions may be made from time to
time in the open market or directly from stockholders at prevailing market
prices that the Company deems appropriate. The repurchase program was
implemented to ensure stability of the trading in PDI's common shares in light
of the September 11, 2001 terrorist activity. In October 2001, 5,000 shares were
repurchased in an open market transaction for a total of $110,000. No further
purchases have been made through December 31, 2002.

6. Acquisition

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

      The following unaudited pro forma results of operations for the years
ended December 31, 2001 and 2000 assume that the Company and InServe had been
combined as of the beginning of the periods presented. The pro forma results
include estimates and assumptions which management believes are reasonable.
However, pro forma results are not necessarily indicative of the results which
would have occurred if the acquisition had been consummated as of the dates
indicated, nor are they necessarily indicative of future operating results.

                                                  Year ended December 31,
                                             -------------------------------
                                                 2001                2000
                                             -----------         -----------
                                       (in thousands, except for per share data)
                                                      (unaudited)

Net sales - pro forma                        $   702,958         $   425,516
                                             ===========         ===========
Net income - pro forma                       $     6,440         $    27,556
                                             ===========         ===========
Pro forma diluted earnings per share         $      0.46         $      2.00
                                             ===========         ===========

7. Short-Term Investments

      At December 31, 2002, short-term investments were $5.8 million, including
approximately $1.1 million of investments classified as available-for-sale
securities. At December 31, 2001, short-term investments were $7.4 million,
including approximately $928,000 of investments classified as available-for-sale
securities. The unrealized after-tax gain/(loss) on the available-for-sale
securities is included as a separate component of stockholders' equity as
accumulated other comprehensive income (loss). All other short-term investments
are stated at cost, which approximates fair value.

8. Other Investments

      In October 2002, the Company acquired $1.0 million of preferred stock of
Xylos. As discussed in Note 4, the Company is the exclusive distributor of the
Xylos XCell product line. The Company recorded its investment under the cost
method.


                                      F-13


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

      Also during 2002, the Company made additional investments totaling
approximately $379,000 in the preferred stock of iPhysicianNet, Inc
(iPhysicianNet), an equity investment which had previously been written down as
iPhysicianNet incurred losses. Since iPhysicianNet has only incurred operating
losses to date and the Company's cumulative share of losses would exceed its
investment, the Company was required to expense these additional investments as
incurred in the year ended December 31, 2002.

      During 2001 and 2000, the Company made investments totaling $1.9 million
in convertible preferred stock of In2Focus, Inc., (In2Focus) a United Kingdom
contract sales company, giving PDI an ownership percentage in In2Focus of
approximately 14%. The Company recorded its investment under the cost method. In
light of the negative operating cash flows and the uncertainty of achieving
positive future results, the Company concluded as of December 31, 2001 that its
investment related to In2Focus was other than temporarily impaired and it was
written down to zero, the current estimated net realizable value.

9. Inventory

      At December 31, 2002, there was approximately $646,000 in finished goods
inventory, all of which relates to the Xcell wound care product being marketed
and distributed by the Company in accordance with the Xylos agreement discussed
in Note 4. For the year ended December 31, 2001, inventory consisted solely of
Ceftin inventory relating to the distribution agreement with GSK which was
terminated effective February 28, 2002.

10. Historical Basic and Diluted Net Income/(Loss) Per Share

      Historical basic and diluted net income/(loss) per share is calculated
based on the requirements of SFAS No. 128, "Earnings Per Share."

      A reconciliation of the number of shares used in the calculation of basic
and diluted earnings per share for the years ended December 31, 2002, 2001 and
2000 is as follows:



                                                                   Years Ended December 31,
                                                               ------------------------------
                                                                2002        2001        2000
                                                               ------      ------      ------
                                                                      (in thousands)
                                                                              
         Basic weighted average number of common
           shares outstanding ...............................  14,033      13,886      13,503
         Dilutive effect of stock options ...................      --         227         270
                                                               ------      ------      ------

         Diluted weighted average number of common shares
           outstanding ......................................  14,033      14,113      13,773
                                                               ======      ======      ======


      Outstanding options at December 31, 2002 to purchase 1,514,297 shares of
common stock with exercise prices of $5.21 to $98.70 per share were not included
in the 2002 computation of historical and pro forma diluted net income per share
because to do so would have been antidilutive, as a result of the Company's net
loss. Outstanding options at December 31, 2001 to purchase 1,003,162 shares of
common stock with exercise prices of $27.00 to $98.70 were not included in the
2001 computation of historical and pro forma diluted net income per share
because to do so would have been antidilutive. There were no antidilutive
options at December 31, 2000.


                                      F-14


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

11. Property and Equipment

      Property and equipment consisted of the following as of December 31, 2002
and 2001:



                                                                        December 31,
                                                                  ------------------------
                                                                     2002            2001
                                                                  ---------       --------
                                                                        (in thousands)
                                                                            
           Furniture and fixtures.............................    $   3,644       $  3,667
           Office equipment...................................        3,177          3,001
           Computer equipment.................................       11,981         10,273
           Computer software..................................       13,937         12,348
           Leasehold improvements.............................        1,703          1,737
                                                                  ---------       --------
           Total property and equipment.......................       34,442         31,026

             Less accumulated depreciation and amortization...      (16,147)        (9,982)
                                                                  ---------       --------

           Property and equipment, net........................    $  18,295       $ 21,044
                                                                  =========       ========


Depreciation expense was approximately $6.8 million, $4.0 million, and $1.6
million for December 31, 2002, 2001 and 2000, respectively.

12. Operating Leases

      The Company leases facilities, automobiles and certain equipment under
agreements classified as operating leases which expire at various dates through
2007. Lease expense under these agreements for the years ended December 31,
2002, 2001 and 2000 was approximately $26.1 million, $28.4 million and $16.1
million, respectively, of which $21.2 million in 2002, $24.8 million in 2001 and
$14.0 million in 2000 related to automobiles leased for employees for a term of
one-year from the date of delivery.

      As of December 31, 2002, the aggregate minimum future rental payments
required by non-cancelable operating leases with initial or remaining lease
terms exceeding one year are as follows:



          (in thousands)                        2003           2004         2005         2006    2007       Total
                                                ----           ----         ----         ----    ----       -----
                                                                                         
          Operating leases
            Minimum lease payments             $ 3,525       $ 2,613       $ 1,137       $136    $  3      $ 7,414
            Less minimum sublease rentals         (101)         (135)          (34)        --      --         (270)
                                               -------------------------------------------------------------------
              Net minimum lease payments       $ 3,424       $ 2,478       $ 1,103       $136    $  3      $ 7,144
                                               ===================================================================


13. Significant Customers

Service

      During 2002, 2001 and 2000 the Company had several significant customers
for which it provided services under specific contractual arrangements. The
following sets forth the net service revenue generated by customers who
accounted for more than 10% of the Company's net service revenue during each of
the periods presented.

                                                     Years Ended December 31,
                                               ---------------------------------
      Customers                                  2002         2001         2000
                                               -------      -------      -------
                                                        (in thousands)

          A .......................            $89,739      $89,522      $90,976
          B .......................             88,354           --           --
          C .......................                 --       60,120           --
          D .......................                 --           --       67,071
          E .......................                 --           --       37,038


                                      F-15


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

      At December 31, 2002 and 2001, these customers represented 62.0% and
41.3%, respectively, of the aggregate of outstanding service accounts receivable
and unbilled services. The loss of any one of the foregoing customers could have
a material adverse effect on the Company's financial position, results of
operations, and cash flows.

Product

      During 2002, product revenue was $6.4 million, of which approximately
$716,000 was attributable to sales of Ceftin and $5.7 million was attributable
to the changes in estimates related to sales allowances and returns, and
discounts and rebates recorded on previous Ceftin sales. Due to the immaterial
product sales per customer in 2002, those sales will not be shown in the chart
below. During 2001, the Company had several significant customers for which it
provided products related to its distribution arrangement with GSK. The
following sets forth the product revenue generated by customers who accounted
for more than 10% of the Company's product revenue during the years ended
December 31, 2001 and 2000.

                                                       Years Ended December 31,
                                                     ---------------------------
      Customers                                        2001               2000
                                                     --------            -------
                                                             (in thousands)

          A ...................                      $157,541            $30,825
          B ...................                       122,063             31,733
          C ...................                        53,392                 --

      At December 31, 2001 these customers represented 91.1% of aggregated
outstanding net product accounts receivable.

14. Related Party Transactions

      The Company purchases certain print advertising for initial recruitment of
representatives through a company that is wholly-owned by family members of the
Company's largest stockholder. The amounts charged to the Company for these
purchases totaled approximately $120,000, $1.1 million and $3.8 million for the
years ended December 31, 2002, 2001 and 2000.

15. Income Taxes

      The (benefit) provision for income taxes for the years ended December 31,
2002, 2001 and 2000 are summarized as follows:



                                                            2002            2001             2000
                                                         ---------        ---------        ---------
                                                                       (in thousands)
                                                                                  
      Current:
         Federal ..................................      $ (26,972)       $  23,346        $  18,993
         State ....................................          1,024            4,691            4,233
                                                         ---------        ---------        ---------
         Total current ............................        (25,948)          28,037           23,226
      Deferred ....................................          8,501          (19,411)          (4,514)
                                                         ---------        ---------        ---------
      (Benefit) provision for income taxes ........      $ (17,447)       $   8,626        $  18,712
                                                         =========        =========        =========


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



                                                           2002              2001             2000
                                                         ---------        ---------        ---------
                                                                                       
      Federal statutory rate ......................          (35.0)%           35.0%            35.0%
      State income tax rate, net of Federal benefit           (1.1)             9.8              5.3
      Non-deductible acquisition expenses .........             --               --             (0.4)
      Meals and entertainment .....................            0.8              6.7              0.7
      Valuation allowance .........................            0.3              4.8              1.9
      Other .......................................           (1.2)             1.3             (1.6)
                                                             -----             ----             ----

      Effective tax rate ..........................          (36.2)%           57.6%            40.9%
                                                             =====             ====             ====



                                      F-16


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

      The tax effects of significant items comprising the Company's deferred tax
assets and (liabilities) as of December 31, 2002 and 2001 are as follows:



                                                              2002           2001
                                                            --------       --------
                                                                     
      Deferred tax assets (liabilities) -- current
           Allowances and reserves                          $  6,378       $ 23,641
           Inventory                                              --             --
           Compensation                                        1,042            400
           Other                                                  --             --
                                                            --------       --------
                                                            $  7,420       $ 24,041
                                                            --------       --------
      Deferred tax assets (liabilities) -- non current
           Property, plant and equipment                    $ (1,778)      $   (580)
           State net operating loss carryforwards              2,994             --
           State taxes                                         1,178             93
           Intangible assets                                      58            217
           Equity investment                                   1,941          1,808
           Other                                                 548            (30)
           Contract costs                                      5,820             --
           Valuation allowance on deferred tax assets         (2,941)        (1,808)
                                                            --------       --------
                                                            $  7,820       $   (300)
                                                            --------       --------
      Net deferred tax asset                                $ 15,240       $ 23,741
                                                            ========       ========


      At December 31, 2002, the Company had a valuation allowance of $2,941,161
related to certain state net operating loss (NOL) carryforwards. At December 31,
2001, the Company had a valuation allowance of $1,808,046 related to the
Company's equity investments. Each of the valuation allowances was recorded
because management does not consider it more likely than not that such deferred
tax assets will be realized. At December 31, 2002, the Company had approximately
$67.9 million of state net operating loss carryforwards, which will begin to
expire in 2009.

16. Preferred Stock

      The Company's board of directors is authorized to issue, from time to
time, up to 5,000,000 shares of preferred stock in one or more series. The board
is authorized to fix the rights and designation of each series, including
dividend rights and rates, conversion rights, voting rights, redemption terms
and prices, liquidation preferences and the number of shares of each series. As
of December 31, 2002 and 2001, there were no issued and outstanding shares of
preferred stock.

17. Loans to Stockholders/Officers

      In November 1998, the Company agreed to lend $250,000 to an executive
officer of which $100,000 was funded in November 1998, and the remaining
$150,000 was funded in February 1999. This amount was recorded in other
long-term assets. Such loan is payable on December 31, 2008 and bears interest
at a rate of 5.5% per annum, payable quarterly in arrears. In February 2003,
$100,000 of this loan was repaid leaving a balance of $150,000.

18. Retirement Plans

      During 2002 and 2001, the Company provided its employees with two
qualified profit sharing plan with 401(k) features. Under one plan (the "PDI
plan"), the Company expensed contributions of approximately $1.6 million for
each of the years ended December 31, 2002 and 2001. Under this plan, the Company
is required to make mandatory cash contributions each year equal to 100% of the
amount contributed by each employee up to 2% of the employee's wages. Any
additional contribution to this plan is at the discretion of the Company. Under
the other 401(k) plan (the "InServe plan"), which was frozen effective January
1, 2003, the Company expensed contributions of approximately $51,000 and $23,000
for the years ending December 31, 2002 and 2001, respectively. Under the InServe
plan, the Company matched the first 25% of an employee's pretax contribution, up
to 6% of employee compensation. Company matching contributions are always
immediately 100% vested. Participants in this plan will participate in


                                      F-17


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

PDI's plan effective January 1, 2003. For either plan, there is no option for
employees to invest any of their 401(k) funds in the Company's Common Stock.

      During 2000, the Company provided its employees with two qualified profit
sharing plans with 401(k) features. Under one plan (the "PDI plan"), the Company
expensed contributions of approximately $975,000 for the year ended December 31,
2000. Under the other 401(k) plan, which was merged into the PDI plan as amended
effective January 1, 2001, the Company expensed contributions of approximately
$195,000 for the year ended December 31, 2000. Under this plan the Company
matched 100% of the first $1,250 contributed by each employee, 75% of the next
$1,250, 50% of the next $1,250 and 25% of the next $1,250 contributed. The
Company could also make discretionary contributions under the plan.

19. Deferred Compensation Arrangements

      Beginning in 2000, the Company established a deferred compensation
arrangement whereby a portion of certain employees' salaries are withheld and
placed in a Rabbi Trust. The plan permits the employees to diversify these
assets through a variety of investment options. The Company adopted the
provisions of Emerging Issues Task Force (EITF) 97-14 "Accounting for Deferred
Compensation Arrangement Where Amounts are Earned and Held in a Rabbi Trust and
Invested" which requires the Company to consolidate into its financial
statements the net assets of the trust. The deferred compensation obligation has
been classified as a current liability and is adjusted, with the corresponding
charge or credit to compensation expense, to reflect changes in fair value of
the amounts owed to the employee. The assets in the trust are classified as
available for sale. The credit to compensation expense due to a decrease of the
market value of the investments was approximately $95,000, $30,000, and $59,000
during 2002, 2001 and 2000, respectively. The total value of the Rabbi Trust at
December 31, 2002 and 2001 was approximately $1.1 million and $928,000,
respectively.

      In 2000, the Company established a Long-Term Incentive Compensation Plan
whereby certain employees are required to take a portion of their bonus
compensation in the form of restricted Common Stock. The restricted shares vest
on the third anniversary of the grant date and are subject to accelerated
vesting and forfeiture under certain circumstances. The Company recorded
deferred compensation costs of approximately $349,000 and $243,000 during 2002
and 2001, respectively, which is being amortized over the three-year vesting
period. The unamortized compensation costs have been classified as a separate
component of stockholders' equity.

20. Commitments and Contingencies

      Due to the nature of the business that the Company is engaged in, such as
product detailing and distribution of products, those and other activities could
expose the Company to risk. Such activities could expose the Company to risk of
liability for personal injury or death to persons using such products. There can
be no assurance that substantial claims or liabilities will not arise in the
future because of the nature of our business activities. 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 the
indemnification agreements; if the indemnity, although applicable, is not
performed in accordance with its terms; or if the Company's liability exceeds
the amount of applicable insurance or indemnity.

Securities Litigation

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


                                      F-18


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

      The complaint names the Company, its chief executive officer, and its
chief financial officer as defendants; purports to state claims against the
Company on behalf of all persons who purchased the Company's common stock
between May 22, 2001 and August 12, 2002; and seeks money damages in unspecified
amounts and litigation expenses including attorneys' and experts' fees. The
essence of the allegations in the Second Consolidated and Amended Complaint is
that the Company intentionally or recklessly made false or misleading public
statements and omissions concerning its financial condition and prospects with
respect to its marketing of Ceftin in connection with the October 2000
distribution agreement with GSK, its marketing of Lotensin in connection with
the May 2001 distribution agreement with Novartis Pharmaceuticals Corp., as well
as its marketing of Evista in connection with the October 2001 distribution
agreement with Eli Lilly & Co.

      In February 2003, the Company filed a motion to dismiss the Second
Consolidated and Amended Complaint under the Private Securities Litigation
Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil
Procedure. The Company believes that the allegations in this purported
securities class action are without merit and intends to defend the action
vigorously.

Bayer-Baycol Litigation

      The Company has been named as a defendant in numerous lawsuits, including
two class action matters, alleging claims arising from the use of the
prescription compound Baycol that was manufactured by Bayer Pharmaceuticals
(Bayer) and co-marketed by the Company on Bayer's behalf under a contract sales
force agreement. The Company may be named in additional similar lawsuits. In
August 2001, Bayer announced that it was voluntarily withdrawing Baycol from the
U.S. market. To date, the Company has defended these actions vigorously and has
asserted a contractual right of indemnification against Bayer for all costs and
expenses the Company incurs relating to these proceedings. In February 2003, the
Company entered into a joint defense and indemnification agreement with Bayer,
pursuant to which Bayer has agreed to assume substantially all of the Company's
defense costs in pending and prospective proceedings, subject to certain limited
exceptions. Further, Bayer has agreed to reimburse the Company for all
reasonable costs and expenses incurred to date in defending these proceedings.

Auxilium Pharmaceuticals Litigation

      On January 6, 2003, the Company was named as a defendant in a lawsuit
filed by Auxilium Pharmaceuticals, Inc. (Auxilium), in the Pennsylvania Court of
Common Pleas, Montgomery County. Auxilium is seeking monetary damages and
injunctive relief, including preliminary injunctive relief, based on several
claims related to the Company's alleged breach of a contract sales force
agreement entered into by the parties on November 20, 2002, and claims that the
Company has and currently is misappropriating Auxilium's trade secrets in
connection with the Company's exclusive license agreement with Cellegy.

      A hearing on Auxilium's preliminary injunction motion was conducted on
February 11, 2003 through February 13, 2003, but the court did not reach a
decision. Final arguments in the hearing are scheduled for the week of March 17,
2003. The Company intends to continue contesting this case vigorously, and
believes the likelihood of any order enjoining it from marketing and selling
under its Cellegy license for any significant time is unlikely, as is the
likelihood of any material damage award.

      The Company is currently a party to other legal proceedings incidental to
its business. While management currently believes that the ultimate outcome of
these proceedings, individually and in the aggregate, will not have a material
adverse effect on its consolidated financial statements, litigation is subject
to inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations for the
period in which the ruling occurs.

      Other than the foregoing, the Company is not currently a party to any
material pending litigation and it is not aware of any material threatened
litigation.

21. Stock Option Plans

      In May 2000 the Board of Directors (the Board) approved the PDI, Inc. 2000
Omnibus Incentive Compensation Plan (the 2000 Plan). The purpose of the 2000
Plan is to provide a flexible framework that will permit the Board to develop
and implement a variety of stock-based incentive compensation programs based on
the changing needs of the Company, its competitive market, and the regulatory
climate. The maximum number of shares


                                      F-19


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

as to which awards or options may at any time be granted under the 2000 Plan is
2.2 million shares. Eligible participants under the 2000 Plan shall include
officers and other employees of the Company, members of the Board, and outside
consultants, as specified under the 2000 Plan and designated by the Compensation
Committee of the Board. The right to grant Awards under the 2000 Plan will
terminate 10 years after the date the 2000 Plan was adopted. No Participant may
be granted more than 100,000 options of Company Stock from all Awards under the
2000 Plan.

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

      Options granted to members of the Board vest a third upon date of grant
and then ratably over the next two years. All other options granted vest ratably
over a three-year period.

      At December 31, 2002, options for an aggregate of 1,514,297 shares were
outstanding under the Company's stock option plans and options to purchase
333,887 shares of common stock had been exercised since its inception.

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



                                                 2002                         2001                        2000
                                         -----------------------      -----------------------      ---------------------
                                                        Weighted                     Weighted                    Weighted
                                                        Average                      Average                     Average
                                                        Exercise                     Exercise                    Exercise
                                           Shares        Price         Shares         Price         Shares        Price
                                           ------        -----         ------         -----         ------        -----
                                                                                                
Outstanding at beginning of year         1,125,313       $53.60         653,921       $46.60        632,834       $19.15
Granted                                    596,812        14.81         548,848        71.17        301,560        78.57
Exercised                                   (6,520)       16.00         (40,733)       17.41       (252,981)       14.16
Terminated                                (201,308)       63.06         (36,723)       63.06        (27,492)       22.36
                                         -----------------------      -----------------------      ---------------------
Outstanding at end of year               1,514,297       $39.23       1,125,313       $53.60        653,921       $46.60
                                         =======================      =======================      =====================

Options exercisable at end of year         611,871       $46.04         361,584       $37.11        189,394       $20.52
                                         =======================      =======================      =====================


      The following table summarizes information about stock options outstanding
at December 31, 2002:



                                         Options Outstanding                                        Options Exercisable
                ----------------------------------------------------------------------------    ------------------------
                                                                Remaining
                                              Number of          weighted          Weighted       Number of      Weighted
                Exercise price per            options          contractual         exercise       options        exercise
                      share                 outstanding        life (years)         price       exercisable       price
                ----------------------------------------------------------------------------    ------------------------
                                                                                                  
                $ 5.21 - $ 9.15                 53,500              9.8             $  5.98         3,334        $  9.15
                $14.16 - $18.38                596,875              8.6               15.72       112,412          15.88
                $20.59 - $29.88                215,924              7.0               27.09       202,259          27.36
                $38.20 - $59.50                402,905              8.1               59.32       135,636          59.15
                $80.00 - $98.70                245,093              7.9               81.38       158,230          80.89
                                            -----------------------------------------------     ------------------------
                                              1,514,297             8.2             $ 39.23       611,871        $ 46.04
                                            ===============================================     ========================



                                      F-20


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

22. Goodwill and Intangible Assets

      Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized
but is evaluated for impairment on at least an annual basis. This resulted in a
decrease in amortization expense that would have been recorded in the year ended
December 31, 2002 of approximately $1.1 million. The Company has established
reporting units for purposes of testing goodwill for impairment. Goodwill has
been assigned to the reporting units to which the value of the goodwill relates.
The Company completed the first step of the transitional goodwill impairment
test and has determined that no impairment existed at January 1, 2002. The
Company performed the required annual impairment tests in the fourth quarter of
2002 and determined that no impairment existed at December 31, 2002. These tests
involved determining the fair market value of each of the reporting units with
which the goodwill was associated and comparing the estimated fair market value
of each of the reporting units with its carrying amount. The Company's total
goodwill which is not subject to amortization is $11.1 million as of December
31, 2002.

      The statements of operations adjusted to exclude amortization expense for
2001 and 2000 related to goodwill and related taxes are as follows:



                                                                           For the Year
                                                                        Ended December 31,
                                                                  -----------------------------
                                                                      2001              2000
                                                                  ----------         ----------
                                                              (in thousands, except per share data)
                                                                               
            Reported net (loss) income                            $    6,354         $   27,028
            Add goodwill amortization                                    191                171
                                                                  ----------         ----------
            Adjusted net (loss) income                            $    6,545         $   27,199
                                                                  ==========         ==========
            Basic (loss) earnings per share:
            Reported net (loss) income per share                  $     0.46         $     2.00
            Add: Goodwill amortization                                  0.01               0.01
                                                                  ----------         ----------
            Adjusted basic net (loss) income per share            $     0.47         $     2.01
                                                                  ==========         ==========
            Diluted (loss) earnings per share:
            Reported diluted net (loss) income per share          $     0.45         $     1.96
            Add: Goodwill amortization                                  0.01               0.01
                                                                  ----------         ----------
            Adjusted diluted net (loss) income per share          $     0.46         $     1.97
                                                                  ==========         ==========


      Changes in the carrying amount of goodwill for the years ended December
31, 2002 and 2001, by operating segment, were as follows:



                                                    SMSG          PPG          MD&D          Total
                                                                                
            Balance as of January 1, 2001        $ 3,634       $      --      $    --       $  3,634
            Amortization                            (436)             --          (13)          (449)
            Goodwill additions                       146              --        5,080          5,226
                                                 -------       ---------      -------       --------

            Balance as of December 31, 2001      $ 3,344       $      --      $ 5,067       $  8,411
                                                 =======       =========      =======       ========

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

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



                                      F-21


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

      All intangible assets recorded as of December 31, 2002 and 2001 are being
amortized on a straight-line basis over the life of the intangibles which is
primarily 5 years.



                                              As of December 31, 2002              As of December 31, 2001

                                        Carrying    Accumulated               Carrying     Accumulated
                                         Amount     Amortization      Net      Amount      Amortization     Net
                                        ----------------------------------   ------------------------------------
                                                                                         
            Covenant not to compete      $1,686      $    442       $1,244      $1,686        $   105      $1,581
            Customer relationships       $1,208           318       $  890       1,208             76      $1,132
            Corporate tradename          $  172            45       $  127         172             11      $  161
                                         ---------------------------------      ---------------------------------
              Total                      $3,066      $    805       $2,261      $3,066        $   192      $2,874
                                         =================================      =================================


      Amortization expense for the years ended December 31, 2002, 2001 and 2000
was approximately $613,000, $688,000 and $470,000, respectively. Amortization
expense included amounts related to goodwill during 2001 and 2000 of
approximately $450,000 and $419,000, respectively. Estimated amortization
expense for the next five years is as follows:

                  2003   $ 613
                         =====
                  2004     613
                         =====
                  2005     613
                         =====
                  2006     422
                         =====
                  2007      -
                         =====

23. Restructuring and Other Related Expenses

      During the third quarter of 2002, the Company adopted a restructuring
plan, the objectives of which were to consolidate operations in order to enhance
operating efficiencies (the 2002 Restructuring Plan). This plan was primarily in
response to the general decrease in demand within the Company's markets for
sales and marketing services and the recognition that the infrastructure that
supported these business units was larger than required. The majority of the
restructuring activities were completed by December 31, 2002, with full
completion expected by September 30, 2003.

      In connection with this plan, the Company will record total restructuring
expenses of approximately $5.4 million, other non-recurring expenses of
approximately $0.1 million, and accelerated depreciation of approximately $0.8
million. All but $0.3 million of these expenses were recognized in 2002.

      The primary items comprising the restructuring are as follows:

            o     $3.7 million in severance expense consisting of cash and
                  non-cash termination payments to employees in connection with
                  their involuntary termination. Out of approximately 175
                  employees affected, 170 have left the Company's employ as of
                  January 15, 2003, and the remaining employees are expected to
                  leave by mid-2003. All of the severance costs were expensed in
                  the fourth quarter of 2002. The Company has recorded the
                  portion of this severance related to the direct sales force of
                  approximately $1.8 million in program expenses in the
                  consolidated statement of operations while the severance costs
                  associated with administrative personnel of approximately $1.9
                  million have been recorded in the restructuring and other
                  related expenses in the consolidated statement of operations;
                  and

            o     $1.7 million in restructuring costs consisting primarily of
                  $1.3 million for reserves in connection with the closure or
                  exit of leased space located in Mahwah, NJ, Cincinnati, OH
                  (which was closed effective January 15, 2003), Lawrenceville,
                  NJ, Fort Washington, PA and Novato, CA (which will be
                  effective May 2003). These costs are recorded in restructuring
                  and other related expenses line in the consolidated statement
                  of operations. The remaining $0.4 million in restructuring
                  expenses is related to certain other costs associated with the
                  termination of the sales force that was eliminated in the
                  restructuring and


                                      F-22


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

                  similar to the severance, such costs have been classified in
                  program expenses in the consolidated statement of operations.
                  Approximately $0.2 million of these expenses will be
                  recognized in 2003.

      The other related expenses relate to the write off of fixed assets
associated with certain of the Company's facilities being closed or exited as
part of the restructuring plan of approximately $0.2 million. The accelerated
depreciation expenses of $0.8 million relate to the assets to be disposed of but
that were still in service, some through December 31, 2002, and the rest through
January 15, 2003. This accelerated depreciation is recorded in selling, general
and administrative expenses in the consolidated statement of operations,
consistent with its historical classification.

      The accrual for restructuring and exit costs, totaled approximately $4.7
million at December 31, 2002, and is recorded in current liabilities on the
accompanying balance sheet.

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



                                           Balance at                     Write offs/         Balance at
                                       December 31, 2001      Accruals      Payments      December 31, 2002
                                                                                    
         Administrative severance            $   --            $ 1,927      $  (257)            $1,670
         Exit costs                              --              1,288           --              1,288
                                             ------            -------      -------             ------
                                             $   --            $ 3,215      $  (257)            $2,958
                                             ------            -------      -------             ------
         Sales force severance                   --              1,741           --              1,741
         Asset write offs                        --                150         (150)                --
                                             ------            -------      -------             ------
            Total                            $   --            $ 5,106      $  (407)            $4,699
                                             ======            =======      =======             ======


24. Segment Information

      The Company operates under three reporting segments: sales and marketing
services group (SMSG), pharmaceutical products group (PPG) and MD&D, all of
which have changed since the December 31, 2001 financial presentation. This
change reflects that management now views the performance based contracts in the
aggregate and the non performance based contracts in the aggregate. Also, now
that the MD&D segment is growing significantly, those contracts that normally
would fall under the Company's traditional service offerings or performance
based offerings have been carved out and are viewed separately by management as
well. Since the termination of the Ceftin contract and the elimination of
product sales, effective February 28, 2002, the shift in management's focus on
the business has been to view the traditional fee for service type arrangements
within the pharmaceutical industry (offered by the SMSG segment) in the
aggregate and to view the performance based contracts for pharmaceutical
products- those for which the Company is compensated based on the performance of
the products that it is responsible for marketing and/or selling (the PPG
segment) - also in the aggregate. Lastly, the Company also views all contracts
within the MD&D segment for the MD&D industry, whether traditional fee for
service, performance based or other in the aggregate for that segment. The sales
and marketing services segment includes the Company's contract sales (CSO)
business units; and the Company's marketing services business unit, which
includes marketing research and medical education and communication services.
The pharmaceutical products segment includes the Company's licensing,
copromotion and acquisition services, including product sales. The Company's
medical devices and diagnostics business unit includes PDI InServe, contract
sales, and product licensing and acquisition. The segment information from prior
periods has been restated to conform to the current year's presentation.

      The accounting policies of the segments are described in note 1. Segment
data includes a charge allocating all corporate headquarters costs to each of
the operating segments on the basis of total salary costs. Depreciation expense
has been allocated to the appropriate segment, but asset and capital
expenditures have not since it is impracticable to do so.



                                                                                                    For the Year
                                                                                                Ended December 31,
                                                                                    -----------------------------------------
                                                                                       2002            2001            2000
                                                                                    ---------       ---------       ---------
                                                                                                           
      Revenue
         Sales and marketing services group ..................................      $ 179,067       $ 348,860       $ 333,260
         Pharmaceutical products group .......................................         94,976         449,539         102,685
         Medical devices and diagnostics .....................................          9,970           2,760              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $ 284,013       $ 801,159       $ 435,945
                                                                                    =========       =========       =========



                                      F-23


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



                                                                                                   For the Year
                                                                                                Ended December 31,
                                                                                    -----------------------------------------
      (continued)                                                                      2002            2001            2000
                                                                                    ---------       ---------       ---------
                                                                                                           
      Revenue
      Revenue, intercompany
         Sales and marketing services group ..................................      $      --       $  98,022       $  19,070
         Pharmaceutical products group .......................................             --           6,554              --
         Medical devices and diagnostics .....................................             --              --              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $      --       $ 104,576       $  19,070
                                                                                    =========       =========       =========

      Revenue, less intercompany
         Sales and marketing services group ..................................      $ 179,067       $ 250,838       $ 314,190
         Pharmaceutical products group .......................................         94,976         442,985         102,685
         Medical devices and diagnostics .....................................          9,970           2,760              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $ 284,013       $ 696,583       $ 416,875
                                                                                    =========       =========       =========

      (Loss) income from operations
         Sales and marketing services group ..................................      $  17,247       $  32,481       $  50,822
         Pharmaceutical products group .......................................        (48,821)         (2,834)          3,880
         Medical devices and diagnostics .....................................         (2,068)            (39)             --
         Corporate charges ...................................................        (16,533)        (16,903)        (13,826)
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $ (50,175)      $  12,705       $  40,876
                                                                                    =========       =========       =========

      Income from operations, intercompany
         Sales and marketing services group ..................................      $      --       $   4,284       $   4,660
         Pharmaceutical products group .......................................             --          (4,284)         (4,660)
         Medical devices and diagnostics .....................................             --              --              --
         Corporate charges ...................................................             --              --              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $      --       $      --       $      --
                                                                                    =========       =========       =========

      (Loss) income from operations, less intercompany, before corporate
        allocations
         Sales and marketing services group ..................................      $  17,247       $  28,197       $  46,162
         Pharmaceutical products group .......................................        (48,821)          1,450           8,540
         Medical devices and diagnostics .....................................         (2,068)            (39)             --
         Corporate charges ...................................................        (16,533)        (16,903)        (13,826)
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $ (50,175)      $  12,705       $  40,876
                                                                                    =========       =========       =========

      Corporate allocations
         Sales and marketing services group ..................................      $  (9,339)      $ (11,721)      $ (13,131)
         Pharmaceutical products group .......................................         (6,389)         (4,986)           (695)
         Medical devices and diagnostics .....................................           (805)           (196)             --
         Corporate charges ...................................................         16,533          16,903          13,826
                                                                                    ---------       ---------       ---------
           Total .............................................................      $      --       $      --       $      --
                                                                                    =========       =========       =========

      (Loss) income from operations, less corporate allocations
         Sales and marketing services group ..................................      $   7,908       $  16,476       $  33,031
         Pharmaceutical products group .......................................        (55,210)         (3,536)          7,845
         Medical devices and diagnostics .....................................         (2,873)           (235)             --
         Corporate charges ...................................................             --              --              --
                                                                                    ---------       ---------       ---------
           Total .............................................................      $ (50,175)      $  12,705       $  40,876
                                                                                    =========       =========       =========



                                      F-24


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



                                                                                                   For the Year
                                                                                                Ended December 31,
                                                                                    -----------------------------------------
      (continued)                                                                      2002            2001            2000
                                                                                    ---------       ---------       ---------
                                                                                                           
      Reconciliation of (loss) income from operations to
       (loss) income before provision for income taxes
         Total (loss) income from operations
          for operating groups ...............................................      $ (50,175)      $  12,705       $  40,876
         Other income, net ...................................................          1,967           2,275           4,864
                                                                                    ---------       ---------       ---------
           (Loss) income before provision for income taxes ...................      $ (48,208)      $  14,980       $  45,740
                                                                                    =========       =========       =========

      Capital expenditures
         Sales and marketing services group ..................................      $   3,735       $  14,277       $   7,836
         Pharmaceutical products group .......................................            217           1,213              29
         Medical devices and diagnostics .....................................             60              70              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $   4,012       $  15,560       $   7,865
                                                                                    =========       =========       =========

      Total Assets
         Sales and marketing services group ..................................      $ 114,742       $ 116,898       $ 143,970
         Pharmaceutical products group .......................................         60,417         175,933         126,255
         Medical devices and diagnostics .....................................         15,780           9,840              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $ 190,939       $ 302,671       $ 270,225
                                                                                    =========       =========       =========

      Depreciation expense
         Sales and marketing services group ..................................      $   4,318       $   2,760       $   1,548
         Pharmaceutical products group .......................................          2,277           1,199              60
         Medical devices and diagnostics .....................................            165              29              --
                                                                                    ---------       ---------       ---------
             Total ...........................................................      $   6,760       $   3,988       $   1,608
                                                                                    =========       =========       =========



                                      F-25


                                   Schedule II

                                    PDI, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002



                                                             BALANCE AT       ADDITIONS           (1)          BALANCE AT
                                                             BEGINNING       CHARGED TO       DEDUCTIONS           END
DESCRIPTION                                                  OF PERIOD       OPERATIONS          OTHER          OF PERIOD
                                                                                                   
Against trade receivables --
Year ended December 31, 2000
   Allowance for doubtful accounts ...............          $       --       $  250,000      $        --       $  250,000
Year ended December 31, 2001
   Allowance for doubtful accounts ...............             250,000        8,590,676       (5,148,629)       3,692,047
Year ended December 31, 2002
   Allowance for doubtful accounts ...............          $3,692,047       $  366,125      $(2,994,695)      $1,063,477

Against taxes --
Year ended December 31, 2000
   Tax valuation allowance .......................          $       --       $  989,000      $        --       $  989,000
Year ended December 31, 2001
   Tax valuation allowance .......................             989,000          819,046               --        1,808,046
Year ended December 31, 2002
   Tax valuation allowance .......................          $1,808,046       $1,133,115      $        --       $2,941,161


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


                                      F-26

EX-10.8

                                  EXHIBIT 10.8

                              EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 4th day of
February, 2003, by and among PDI, INC., a Delaware corporation (the "Company"),
having its principal place of business at 10 Mountainview Road, Upper Saddle
River, New Jersey 07458, on the one hand, and CHRISTOPHER TAMA, residing at 223
Conshohocken State Road, Gladwyne, Pennsylvania 19035 (the "Executive"), on the
other.

                               W I T N E S S E T H
                               - - - - - - - - - -

      WHEREAS, the Company believes that it would benefit from the application
of the Executive's particular and unique skills, experiences and background in
connection with the management and operation of the Company, and wishes to
employ the Executive as Executive Vice President; and

      WHEREAS, the parties desire by this Agreement to set forth the terms and
conditions of the employment relationship between the Company and the Executive.

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
in this Agreement, the Company and the Executive agree as follows:

      1. Employment and Duties. The Company hereby employs the Executive as
Executive Vice President on the terms and conditions provided in this Agreement
and Executive agrees to accept such employment subject to the terms and
conditions of this Agreement. The Executive shall be responsible for management
of the day-to-day affairs of the Company's PDI's Products Group division, shall
perform the duties and responsibilities as are customary for the officer of a
corporation in such positions, and shall perform such other duties and
responsibilities as are reasonably determined from time to time by the Chief
Executive Officer and the Chief Operating Officer of the Company. The Executive
shall report to and be supervised by the Company's Chief Executive Officer and
the Chief Operating Officer. The Executive shall be based at the Company's
offices in Upper Saddle River, New Jersey, or such other place that shall
constitute the Company's headquarters. The Executive agrees to devote
substantially all his attention and time during normal business hours to the
business and affairs of the Company and to use his reasonable best efforts to
perform faithfully and efficiently the duties and responsibilities of his
positions and to accomplish




the goals and objectives of the Company as may be established from time to time
by the Company's Board of Directors (the "Board"). Notwithstanding the
foregoing, the Executive may engage in the following activities (and shall be
entitled to retain all economic benefits thereof including fees paid in
connection therewith) as long as they do not interfere in any material respect
with the performance of the Executive's duties and responsibilities hereunder
and, with respect to subsections (i) and (ii) below, that such activity is
pre-approved by the Company's Chief Executive Officer or the Chief Operating
Officer: (i) serve on corporate, civic, religious, educational and/or charitable
boards or committees, provided that the Executive shall not serve on any board
or committee of any corporation or other business which competes with the
Business (as defined in Section 10(a) below); (ii) deliver lectures, fulfill
speaking engagements or teach on a part-time basis at educational institutions;
and (iii) make investments in businesses or enterprises and manage his personal
investments; provided that with respect to such activities Executive shall
comply with any business conduct and ethics policy applicable to employees of
the Company.

      2. Term. The term of this Agreement shall commence on February 4, 2003
(the "Commencement Date"), and shall terminate on February 4, 2006, unless
extended or earlier terminated in accordance with the terms of this Agreement
(the "Termination Date"). Such term of employment is herein sometimes referred
to as the "Employment Term". The Employment Term shall be extended for
successive one year periods unless either party notifies the other in writing at
least 90 days before the Termination Date, or any anniversary of the Termination
Date, as the case may be, that she or it chooses not to extend the Employment
Term.

      3. Compensation. As compensation for performing the services required by
this Agreement, and during the term of this Agreement, the Executive shall be
compensated as follows:

            (a) Base Compensation. The Company shall pay to the Executive an
annual salary ("Base Compensation") of $206,000, payable in equal installments
pursuant to the Company's customary payroll procedures in effect for its
executive personnel at the time of payment, but in no event less frequently than
monthly, subject to withholding for applicable federal, state, and local income
and employment related taxes. The Executive may be entitled to such increases in
Base Compensation with respect to each calendar year during the term of this
Agreement, as shall be determined by the Company's Compensation Committee (the
"Committee"), in its sole and absolute discretion, based on an annual review of
the Executive's performance.


                                        2


            (b) Incentive Compensation. In addition to Base Compensation, the
Executive may be entitled to receive additional compensation ("Incentive
Compensation") in the discretion of the Committee. The Incentive Compensation
shall be pursuant to short-term and/or long-term incentive compensation programs
which currently exist or may be established by the Company. For purposes of this
Agreement, the Executive's "Pro Rata Share" of Incentive Compensation for any
calendar of the Company shall be a fraction whose numerator shall be equal to
the number of months (or parts of months) during which the Executive was
actually employed by the Company during any such calendar year and whose
denominator shall be the total number of months in such calendar year.

      4. Employee Benefits. During the Employment Term and subject to the
limitations set forth in this Section 4, the Executive and his eligible
dependents shall have the right to participate in any retirement plans
(qualified and non-qualified), pension, insurance, health, disability or other
benefit plan or program that has been or is hereafter adopted by the Company (or
in which the Company participates), according to the terms of such plan or
program, on terms no less favorable than the most favorable terms granted to
senior executives of the Company.

      5. Vacation and Leaves of Absence. The Executive shall be entitled to the
normal and customary amount of paid vacation provided to senior executive
officers of the Company, but in no event less than 20 days during each 12 month
period, beginning on the Commencement Date of this Agreement. Any vacation days
that are not taken in a given 12 month period shall not accrue or carry-over
from year to year. Upon any termination of this Agreement for any reason
whatsoever, accrued and unused vacation for the year in which this Agreement
terminates will be paid to the Executive within 10 days of such termination
based on his annual rate of Base Compensation in effect on the date of such
termination. In addition, the Executive may be granted leaves of absence with or
without pay for such valid and legitimate reasons as the Company in its sole and
absolute discretion may determine, and the Executive shall be entitled to the
same sick leave and holidays provided to other senior executives of the Company.

      6. Expenses.

            (a) Business Expenses. The Executive shall be promptly reimbursed
against presentation of vouchers or receipts for all reasonable and necessary
expenses incurred by him in connection with the performance of his duties
hereunder.


                                       3


            (b) Automobile Expense. During the Employment Term, in order to
facilitate the performance of the Executive's duties hereunder, and otherwise
for the convenience of the Company, the Company (a) (i) shall reimburse the
Executive for the cost of leasing an automobile consistent with the Executive
Vice President car benefit described in the Company's Car Benefit Program as of
December 2002 or (ii) shall pay the Executive $850 per month and (b) shall pay
or reimburse Executive (upon presentation of vouchers or receipts) for the
reasonable cost of all maintenance, insurance, repairs, and other reasonable
expenses related to such automobile. Employee hereby agrees that a new lease for
an automobile will not be executed until Employee's existing lease term has
expired.

      7. Indemnification.

            (a) General. The Company agrees that if the Executive is made a
party or is threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that she is or was a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including, without limitation, service with respect
to employee benefit plans, whether or not the basis of such Proceeding is
alleged action in an official capacity as a director, officer, member, employee
or agent while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent authorized by applicable law (in accordance with the certificate of
incorporation and/or bylaws of the Company), as the same exists or may hereafter
be amended, against all Expenses (as defined below) incurred or suffered by the
Executive in connection therewith, and such indemnification shall continue as to
the Executive even if the Executive has ceased to be an officer, director or
agent, or is no longer employed by the Company and shall inure to the benefit of
his heirs, executors and administrators.

            (b) Expenses. As used in this Agreement, the term "Expenses" shall
include, without limitation, damages, losses, judgments, liabilities, fines,
penalties, excise taxes, settlements and costs, attorneys' fees, accountants'
fees, and disbursements and costs of attachment or similar bonds,
investigations, and any expenses of establishing a right to indemnification
under this Agreement.


                                       4


            (c) Enforcement. If a claim or request under this Agreement is not
paid by the Company, or on their behalf, within fifteen days after a written
claim or request has been received by the Company, the Executive may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim or request and if successful in whole or in part, the Executive shall be
entitled to be paid also the expenses of prosecuting such suit. The burden of
proving that the Executive is not entitled to indemnification for any reason
shall be upon the Company.

            (d) Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Executive.

            (e) Partial Indemnification. If the Executive is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify the Executive for the portion of such
Expenses to which the Executive is entitled.

            (f) Advances of Expenses. Expenses incurred by the Executive in
connection with any Proceeding shall be paid by the Company in advance upon
request of the Executive that the Company pay such Expenses.

            (g) Notice of Claim. The Executive shall give to the Company notice
of any claim made against him for which indemnity will or could be sought under
this Agreement. In addition, the Executive shall give the Company such
information and cooperation as it may reasonably require and as shall be within
the Executive's power and at such times and places as are convenient for the
Executive.

            (h) Defense of Claim. With respect to any Proceeding as to which the
Executive notifies the Company of the commencement thereof: (i) the Company will
be entitled to participate therein at its own expense; and (ii) except as
otherwise provided below, to the extent that it may wish, the Company jointly
with any other indemnifying party similarly notified will be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the Executive. The
Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which the Executive
shall have reasonably concluded that there may be a conflict of interest between
the Company and the Executive in the conduct of the defense of such action.


                                       5


                  The Company shall not be liable to indemnify the Executive
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action or
claim in any manner which would impose any penalty or limitation on the
Executive without Executive's written consent. Neither the Company nor the
Executive shall unreasonably withhold or delay their consent to any proposed
settlement.

            (i) Non-exclusivity. The right to indemnification and the payment of
expenses incurred in defending a Proceeding in advance of its final disposition
conferred in this Section 7 shall not be exclusive of any other right which the
Executive may have or hereafter may acquire under any statute, provision of the
certificate of incorporation or by-laws of the Company, agreement, vote of
stockholders or disinterested directors or otherwise.

            (j) Directors and Officers Liability Policy. The Company agrees to
use reasonable efforts to maintain directors and officers liability insurance
covering the Executive in a reasonable and adequate amount determined by the
Company.

      8. Termination and Termination Benefits.

            (a) Termination by the Company.

                  (i) For Cause. Notwithstanding any provision contained herein,
the Company may terminate this Agreement at any time during the Employment Term
for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the
continuing failure by the Executive to perform his duties hereunder for any
reason other than total or partial incapacity due to physical or mental illness,
or (2) gross negligence or gross malfeasance on the part of the Executive in the
performance of his duties hereunder that causes material harm to the Company.
Termination pursuant to this subsection 8(a)(i) shall be effective immediately
upon giving the Executive written notice thereof stating the reason or reasons
therefor with respect to clause (2) above, and 15 days after written notice
thereof from the Company to the Executive specifying the acts or omissions
constituting the failure and requesting that they be remedied with respect to
clause (1) above, but only if the Executive has not cured such failure within
such 15 day period. In the event of a termination pursuant to this subsection
8(a)(i), the Executive shall be entitled to payment of his Base Compensation and
the benefits pursuant to Section 4 hereof up to the effective date of such
termination and it is also the intention and agreement of the Company that
Executive shall not be deprived by reason of termination for Cause of any
payments, options or benefits which have been


                                       6


vested or have been earned or to which Executive is entitled as of the effective
date of such termination.

                  (ii) Disability. If due to illness, physical or mental
disability, or other incapacity, the Executive shall fail, for a total of any
six consecutive months ("Disability"), to substantially perform the principal
duties required by this Agreement, the Company may terminate this Agreement upon
30 days' written notice to the Executive. In such event, the Executive shall be
(1) paid his Base Compensation until the Termination Date and his Pro Rata Share
of any Incentive Compensation to which she would have been entitled for the year
in which such termination occurs, and (2) provided with employee benefits
pursuant to Section 4, to the extent available, for the remainder of the
Employment Term; provided, however, that any compensation to be paid to the
Executive pursuant to this subsection 8(a)(ii) shall be offset against any
payments received by the Executive pursuant to any policy of disability
insurance the premiums of which are paid for by the Company.

            (b) Termination Without Cause or Termination For Good Reason. The
Company may terminate the Executive's employment hereunder without Cause and the
Executive may terminate his employment hereunder for "Good Reason" (as defined
below). If the Company terminates the Executive's employment hereunder without
Cause, other than due to death or Disability, or if the Executive terminates his
employment for Good Reason, the Executive shall be paid: (i) his Base
Compensation at the rate in effect at the time of termination through the
Termination Date; (ii) his Pro Rata Share of any Incentive Compensation to which
she would have been entitled for the year in which such termination occurs;
(iii) a lump sum payment equal to the product of thirty-six (36) times the
"Monthly Salary Amount"; (iv) any vested deferred compensation (including,
without limitation, interest or other credits on the deferred amounts) and any
accrued vacation pay; (v) continuation, until the expiration of the Employment
Term and for twelve months thereafter, of the health and welfare benefits of the
Executive and any long-term disability insurance generally provided to senior
executives of the Company (as provided for by Section 4 of this Agreement) (or
the Company shall provide the economic equivalent thereof); provided, however,
if the Executive obtains new employment and such employment makes the Executive
eligible for health and welfare or long-term disability benefits which are equal
to or greater in scope then the benefits then being offered by the Company, then
the Company shall no longer be required to


                                       7


provide such benefits to the Executive; and (vi) any other compensation and
benefits as may be provided in accordance with the terms and provisions of any
applicable plans or programs of the Company.

            As used herein, "Monthly Salary Amount" shall mean an amount equal
to one-twelfth of the sum of (y) the Executive's then current annual Base Salary
plus (z) the average cash incentive compensation paid to the Executive during
the three years immediately preceding the termination date.

            As used herein, "Good Reason" means and shall be deemed to exist if,
without the prior express written consent of the Executive, (a) the Company
breaches this Agreement in any material respect; (b) the Company fails to obtain
the full assumption of this Agreement by a successor; (c) the Company fails to
use its reasonable best efforts to maintain, or cause to be maintained directors
and officers liability insurance coverage for the Executive; (d) the Company
purports to terminate the Executive's employment for Cause and such purported
termination of employment is not effected in accordance with the requirements of
this Agreement, or (e) of within two years following the occurrence of a Change
in Control (i) the Executive suffers an adverse change in his status, title,
position or responsibilities, (ii) the Executive suffers a reduction in his base
salary, (iii) the Executive suffers an adverse change in his working conditions,
or (iv) the Company breaches any material provision of this Agreement; provided,
however, that with respect to items (a) through (d) above, within 30 days of
written notice of termination by the Executive, the Company has not cured, or
commenced to cure, such failure or breach.

            For purposes of this Agreement, a "Change of Control" shall mean (1)
any merger by the Company into another corporation or corporations which results
in the stockholders of the Company immediately prior to such transaction owning
less than 55% of the surviving Corporation; (2) any acquisition (by purchase,
lease or otherwise) of all or substantially all of the assets of the Company by
any person, corporation or other entity or group thereof acting jointly; (3) the
acquisition of beneficial ownership, directly or indirectly, of voting
securities of the Company (defined as Common Stock of the Company or any
securities having voting rights that the Company may issue in the future) and
rights to acquire voting securities of the Company (defined as including,
without limitation, securities that are convertible into voting securities of
the Company (as defined above) and rights, options warrants and other agreements
or arrangements to acquire such voting


                                       8


securities) by any person, corporation or other entity or group thereof acting
jointly, in such amount or amounts as would permit such person, corporation or
other entity or group thereof acting jointly to elect a majority of the members
of the Board of the Company, as then constituted; or (4) the acquisition of
beneficial ownership, directly or indirectly, of voting securities and rights to
acquire voting securities having voting power equal to 25% or more of the
combined voting power of the Company's then outstanding voting securities by any
person, corporation or other entity or group thereof acting jointly unless such
acquisition as is described in this part (4) is expressly approved by resolution
of the Board of the Company passed upon affirmative vote of not less than a
majority of the Board and adopted at a meeting of the Board held not later than
the date of the next regularly scheduled or special meeting held following the
date the Company obtains actual knowledge of such acquisition (which approval
may be limited in purpose and effect solely to affecting the rights of Employee
under this Agreement). Notwithstanding the preceding sentence, (i) any
transaction that involves a mere change in identity form or place of
organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended, or a transaction of similar effect, shall not
constitute a Change in Control.

            (c) Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided or maintained by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise prejudice such rights as the Executive may have under any other
existing or future agreements with the Company. Except as otherwise expressly
provided for in this Agreement, amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plans or programs of the
Company at or subsequent to the date of termination shall be payable in
accordance with such plans or programs.

            (d) Vesting of Stock Grants and Stock Options. In the event of any
termination of this Agreement, Executive's rights with regard to any stock
grants, loan agreements or stock options shall be as set forth in the respective
agreement containing the terms and conditions pertaining thereto.
Notwithstanding the foregoing, in the event that the Executive is terminated for
reasons other than for "Cause" or in the event the Executive terminates this
Agreement for "Good Reason", any stock options then held by the Executive shall
immediately vest in the Executive;


                                       9


provided, however, all stock options then held by the Executive shall expire
and/or terminate 90 days after the date this Agreement is terminated.

            (e) Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event that it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Executive, whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986 or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (an "Excise Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the
Excise Gross-Up Payment, in order to put the Executive in the same net after-tax
position as if the payment were not subject to any Excise Tax. Subject to the
provisions of this Section 8(e), all determinations required to be made
hereunder, including whether an Excise Gross-Up Payment is required and the
amount of such Excise Gross-Up Payment, shall be made by PricewaterhouseCoopers
LLP or such other accounting firm which at the time audits the financial
statements of the Company (the "Accounting Firm") at the sole expense of the
Company, which shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the date of termination of
the Executive's employment under this Agreement, if applicable, or such earlier
time as is requested by the Company.

      If the Accounting Firm determines that no Excise Tax is payable by the
Executive, the Company shall use its reasonable best efforts to cause the
Accounting Firm to furnish the Executive with an opinion that she has
substantial authority not to report any Excise Tax on his federal income tax
return. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which
will not have been made by the Company, should have been made (an
"Underpayment") consistent with the calculations required to be made hereunder.
If the Company exhausts its remedies pursuant hereto and the Executive
thereafter is required to make a payment of


                                       10


any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Company to or for the benefit of the Executive.

      The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Excise Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall: (i) give the Company
any information reasonably requested by the Company relating to such claim; (ii)
take such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including (without limitation)
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company; (iii) cooperate with the Company in good
faith to contest effectively such claim; and (iv) permit the Company to
participate in any proceedings relating to such claim; provided that the Company
shall bear and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any Excise
Tax or income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions hereof the Company shall control
all proceedings taken in connection with such contest and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax claimed and sue for
a refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine, provided that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify


                                       11


and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to
such advance, and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which an Excise Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.

      If, after the receipt by the Executive of an amount advanced by the
Company pursuant hereto, the Executive becomes entitled to receive any refund
with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Excise Gross-Up Payment required to be paid.

            (f) Death Benefit. Notwithstanding any other provision of this
Agreement, this Agreement shall terminate on the date of the Executive's death.
In such event the Company shall pay Executive's Base Compensation to his wife,
if she survives him, or, if she does not survive him, to his estate, through the
termination date. In addition, the Company shall pay to Executive's wife, if she
survives him, or, if she does not survive him, to his estate, the Pro Rata Share
of any Incentive Compensation to which Executive would have been entitled for
the year in which such death occurs.

            (g) Payment. Except as otherwise provided in this Agreement, any
payments to which the Executive shall be entitled under this Section 8,
including, without limitation, any economic equivalent of any benefit, shall be
made as promptly as possible following the date of termination. If the amount of
any payment due to the Executive cannot be finally determined within


                                       12


90 days after the Date of Termination, such amount shall be estimated on a good
faith basis by the Company and the estimated amount shall be paid no later than
90 days after such Date of Termination. As soon as practicable hereafter, the
final determination of the amount due shall be made and any adjustment requiring
a payment to or from the Executive shall be made as promptly as practicable.

            (h) No Mitigation. The Executive shall not be required to mitigate
the amount of any payments provided for by this Agreement by seeking employment
or otherwise, nor shall the amount of any payment or benefit provided in this
Agreement be reduced by any compensation or benefit earned by the Executive
after termination of his employment.

      9. Company Property. All advertising, promotional, sales, suppliers,
manufacturers and other materials or articles or information, including without
limitation data processing reports, customer lists, customer sales analyses,
invoices, product lists, price lists or information, samples, or any other
materials or data of any kind furnished to the Executive by the Company or
developed by the Executive on behalf of the Company or at the Company's
direction or for the Company's use or otherwise in connection with the
Executive's employment hereunder, are and shall remain the sole and confidential
property of the Company; if the Company requests the return of such materials at
any time during or at or after the termination of the Executive's employment,
the Executive shall immediately deliver the same to the Company.

      10. Covenant Not To Compete.

            (a) Covenants Against Competition. The Executive acknowledges that
as of the execution of this Employment Agreement (i) the Company is engaged in
the business of providing sales and marketing and marketing research services to
the pharmaceutical, medical device and diagnostics and biotechnology industries
and in the sale of pharmaceutical, medical device and diagnostics and
biotechnology products (the "Business"); (ii) the Company's Business is
conducted currently throughout the United States and may be expanded to other
locations; (iii) his employment with the Company will have given him access to
confidential information concerning the Company; and (iv) the agreements and
covenants contained in this Agreement are essential to protect the business and
goodwill of the Company. Accordingly, the Executive covenants and agrees as
follows:

                  (i) Non-Compete. Without the prior written consent of the
Board of the Company, the Executive shall not during the Restricted Period (as
defined below) within the


                                       13


Restricted Area (as defined below) (except in the Executive's capacity as an
officer of the Company or any of its affiliates), (a) engage or participate in
the Business; (b) enter the employ of, or render any services (whether or not
for a fee or other compensation) to, any person engaged in the Business; or (c)
acquire an equity interest in any such person; provided, however, that such
restriction shall not apply to any Businesses which do not have products which
compete with the Company's products at the time that such Employee engages,
participates, enters the employ of, or renders service to any person engaged in
the Businesses during the Restricted Period or with products that the Company at
the time of such Termination is in the process of negotiating to market, license
and/or acquire.The foregoing restrictions shall not apply at any time if the
Executive's employment is terminated during the Term by the Executive for Good
Reason (as defined in Section 8(b) below) or by the Company other than for
"Cause"; provided, further, that during the Restricted Period the Executive may
own, directly or indirectly, solely as a passive investment, securities of any
company traded on any national securities exchange or on the National
Association of Securities Dealers Automated Quotation System.

                  As used herein, "Restricted Period" shall mean the period
commencing on the Commencement Date and ending on the second anniversary of the
Executive's termination of employment.

                  "Restricted Area" shall mean any place within the United
States and any other country in which the Company is then actively considering
conducting Business.

            (b) Confidential Information; Personal Relationships. The Executive
acknowledges that the Company has a legitimate and continuing proprietary
interest in the protection of its confidential information and has invested
substantial sums and will continue to invest substantial sums to develop,
maintain and protect confidential information. The Executive agrees that, during
and after the Restricted Period, without the prior written consent of the Board,
the Executive shall keep secret and retain in strictest confidence, and shall
not knowingly use for the benefit of himself or others all confidential matters
relating to the Company's Business including, without limitation, operational
methods, marketing or development plans or strategies, business acquisition
plans, joint venture proposals or plans, and new personnel acquisition plans,
learned by the Executive heretofore or hereafter (such information shall be
referred to herein collectively as "Confidential Information"); provided, that
nothing in this Agreement shall prohibit the Executive


                                       14


from disclosing or using any Confidential Information (A) in the performance of
his duties hereunder, (B) as required by applicable law, (C) in connection with
the enforcement of his rights under this Agreement or any other agreement with
the Company, or (D) in connection with the defense or settlement of any claim,
suit or action brought or threatened against the Executive by or in the right of
the Company. Notwithstanding any provision contained herein to the contrary, the
term Confidential Information shall not be deemed to include any general
knowledge, skills or experience acquired by the Executive or any knowledge or
information known or available to the public in general. Moreover, the Executive
shall be permitted to retain copies of, or have access to, all such Confidential
Information relating to any disagreement, dispute or litigation (pending or
threatened) involving the Executive.

            (c) Employees of the Company and its Affiliates. During the
Restricted Period, without the prior written consent of the Board of the
Company, the Executive shall not, directly or indirectly, hire or solicit, or
cause others to hire or solicit, for employment by any person other than the
Company or any affiliate or successor thereof, any employee of, or person
employed within the two years preceding the Executive's hiring or solicitation
of such person by, the Company and its affiliates or successors or encourage any
such employee to leave his employment. For this purpose, any person whose
employment has been terminated involuntarily by the Company shall be excluded
from those persons protected by this Section for the benefit of the Company.

            (d) Business Relationships. During the Restricted Period, the
Executive shall not, directly or indirectly, request or advise a person that has
a business relationship with the Company to curtail or cancel such person's
business relationship with the Company.

            (e) Rights and Remedies Upon Breach. If the Executive breaches,
threatens to commit a breach of, any of the provisions contained in Section 10
of this Agreement (the "Restrictive Covenants"), the Company shall have the
following rights and remedies, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity.

                  (i) Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any


                                       15


breach or threatened breach of the Restrictive Covenants would cause irreparable
injury to the Company and that money damages would not provide an adequate
remedy to the Company.

                  (ii) Accounting. The right and remedy to require the Executive
to account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by the Executive as
the result of any action constituting a breach of Restrictive Covenants.

            (f) Severability of Covenants. The Executive acknowledges and agrees
that the Restrictive Covenants are reasonable and valid in duration and
geographical scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect without regard to the invalid portions. The
provisions set forth in Section 10 above shall be in addition to any other
provisions of the business conduct and ethics policy applicable to employees of
the Company and its subsidiaries during the term of Executive's employment.

            (g) Saving Clause. If the period of time or the area specified in
subsection (a) above should be adjudged unreasonable in any proceeding, then the
period of time shall be reduced by such number of months or the area shall be
reduced by the elimination of such portion thereof or both so that such
restrictions may be enforced in such area and for such time as is adjudged to be
reasonable. If the Executive violates any of the restrictions contained in the
foregoing subsection (a), the restrictive period shall not run in favor of the
Executive from the time of the commencement of any such violation until such
time as such violation shall be cured by the Executive to the satisfaction of
Company.

      11. Executive's Representation and Warranties. Executive represents and
warrants that she has the full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that she is not subject to any
non-competition agreement other than with the Company, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that she
is not obligated under any contract (including, but not limited to, licenses,
covenants or commitments of any nature) or other agreement or subject to any
judgment, decree or order of any court or administrative agency which would
conflict with his obligation to use his best efforts to perform his duties
hereunder or


                                       16


which would conflict with the Company's business and operations as presently
conducted or proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business as officer and
employee by Executive will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under any contract, covenant
or instrument to which Executive is currently a party.

      12. Miscellaneous.

            (a) Integration; Amendment. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters set forth
herein and supersedes and renders of no force and effect all prior
understandings and agreements between the parties with respect to the matters
set forth herein. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.

            (b) Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable law or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited, or invalid, but the remainder of this Agreement shall not be invalid
and shall be given full force and effect so far as possible.

            (c) Waivers. The failure or delay of any party at any time to
require performance by the other party of any provision of this Agreement, even
if known, shall not affect the right of such party to require performance of
that provision or to exercise any right, power, or remedy hereunder, and any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right, power, or
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to other or further notice or demand in
similar or other circumstances.

            (d) Power and Authority. The Company represents and warrants to the
Executive that it has the requisite corporate power to enter into this Agreement
and perform the terms hereof; that the execution, delivery and performance of
this Agreement by it has been duly authorized by all appropriate corporate
action; and that this Agreement represents the valid and legally binding
obligation of the Company and is enforceable against it in accordance with its
terms.

            (e) Burden and Benefit; Survival. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, personal and legal


                                       17


representatives, successors and assigns. In addition to, and not in limitation
of, anything contained in this Agreement, it is expressly understood and agreed
that the Company's obligation to pay Termination Compensation as set forth
herein shall survive any termination of this Agreement.

            (f) Governing Law; Headings. This Agreement and its construction,
performance, and enforceability shall be governed by, and construed in
accordance with, the laws of the State of New Jersey. Headings and titles herein
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.

            (g) Arbitration; Remedies. Any dispute or controversy arising under
this Agreement or as a result of or in connection with Executive's employment
(other than disputes arising under Section 10) shall be arbitrated and settled
pursuant to the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association which are then in effect in a proceeding held
in Bergen County, New Jersey. This provision shall also apply to any and all
claims that may be brought under any federal or state anti-discrimination or
employment statute, rule or regulation, including, but not limited to, claims
under: the National Labor Relations Act; Title VII of the Civil Rights Act;
Sections 1981 through 1988 of Title 42 of the United States Code; the Employee
Retirement Income Security Act; the Immigration Reform and Control Act; the
Americans With Disabilities Act; the Age Discrimination in Employment Act; the
Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and
Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and
award, if any, is final and binding on the parties and the judgment may be
entered in any court having jurisdiction thereof. The parties will agree upon an
arbitrator from the list of labor arbitrators supplied by the American
Arbitration Association. The parties understand and agree, however, that
disputes arising under Section 10 of this Agreement may be brought in a court of
law or equity without submission to arbitration.

            (h) Jurisdiction. Except as otherwise provided for herein, each of
the parties (a) submits to the exclusive jurisdiction of any state court sitting
in Bergen County, New Jersey or federal court sitting in New Jersey in any
action or proceeding arising out of or relating to this Agreement, (b) agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court, (c) agrees not to bring any action or proceeding
arising out of or relating to this Agreement in any other court and (d) waives
any right such party may have to a trial by jury with respect to any action or
proceeding arising out of or relating to this Agreement. Each of


                                       18


the parties waives any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety or other security
that might be required of any other party with respect thereto. Any party may
make service on another party by sending or delivering a copy of the process to
the party to be served at the address and in the manner provided for giving of
notices in Section 12(i). Nothing in this Section, however, shall affect the
right of any party to serve legal process in any other manner permitted by law.

            (i) Notices. All notices called for under this Agreement shall be in
writing and shall be deemed given upon receipt if delivered personally or by
confirmed facsimile transmission and followed promptly by mail, or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at their respective addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof) as set forth in the preamble to
this Agreement or to any other address or addressee as any party entitled to
receive notice under this Agreement shall designate, from time to time, to
others in the manner provided in this subsection 12(i) for the service of
notices.

            Any notice delivered to the party hereto to whom it is addressed
shall be deemed to have been given and received on the day it was received;
provided, however, that if such day is not a business day then the notice shall
be deemed to have been given and received on the business day next following
such day. Any notice sent by facsimile transmission shall be deemed to have been
given and received on the business day next following the day of transmission.

            (j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.


                                       19


      IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

                                      ------------------------------------
                                      CHRISTOPHER TAMA


                                      PDI, INC.


                                      By:
                                         ------------------------------------
                                         Charles T. Saldarini
                                         Chief Executive Officer


                                       20

EX-10.10

                                  EXHIBIT 10.10

                              EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 4th day of
February, 2003, by and among PDI, INC., a Delaware corporation (the "Company"),
having its principal place of business at 10 Mountainview Road, Upper Saddle
River, New Jersey 07458, on the one hand, and LLOYD FISHMAN, residing at 412
Faletti Circle, River Vale, New Jersey 07675 (the "Executive"), on the other.

                               W I T N E S S E T H
                               - - - - - - - - - -

      WHEREAS, the Company believes that it would benefit from the application
of the Executive's particular and unique skills, experiences and background in
connection with the management and operation of the Company, and wishes to
employ the Executive as Executive Vice President; and

      WHEREAS, the parties desire by this Agreement to set forth the terms and
conditions of the employment relationship between the Company and the Executive.

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
in this Agreement, the Company and the Executive agree as follows:

      1. Employment and Duties. The Company hereby employs the Executive as
Executive Vice President and General Manager on the terms and conditions
provided in this Agreement and Executive agrees to accept such employment
subject to the terms and conditions of this Agreement. The Executive shall be
responsible for management of the day-to-day affairs of the Company's Medical
Devices and Diagnostics Division, shall perform the duties and responsibilities
as are customary for the officer of a corporation in such positions, and shall
perform such other duties and responsibilities as are reasonably determined from
time to time by the Chief Executive Officer and the Chief Operating Officer of
the Company. The Executive shall report to and be supervised by the Company's
Chief Executive Officer and the Chief Operating Officer. The Executive shall be
based at the Company's offices in Upper Saddle River, New Jersey, or such other
place that shall constitute the Company's headquarters. The Executive agrees to
devote substantially all his attention and time during normal business hours to
the business and affairs of the Company and to use his reasonable best efforts
to perform faithfully and efficiently the duties and responsibilities of his
positions and to




accomplish the goals and objectives of the Company as may be established from
time to time by the Company's Board of Directors (the "Board"). Notwithstanding
the foregoing, the Executive may engage in the following activities (and shall
be entitled to retain all economic benefits thereof including fees paid in
connection therewith) as long as they do not interfere in any material respect
with the performance of the Executive's duties and responsibilities hereunder
and, with respect to subsections (i) and (ii) below, that such activity is
pre-approved by the Company's Chief Executive Officer or the Chief Operating
Officer: (i) serve on corporate, civic, religious, educational and/or charitable
boards or committees, provided that the Executive shall not serve on any board
or committee of any corporation or other business which competes with the
Business (as defined in Section 10(a) below); (ii) deliver lectures, fulfill
speaking engagements or teach on a part-time basis at educational institutions;
and (iii) make investments in businesses or enterprises and manage his personal
investments; provided that with respect to such activities Executive shall
comply with any business conduct and ethics policy applicable to employees of
the Company.

      2. Term. The term of this Agreement shall commence on February 4,, 2003
(the "Commencement Date"), and shall terminate on February 4, 2006, unless
extended or earlier terminated in accordance with the terms of this Agreement
(the "Termination Date"). Such term of employment is herein sometimes referred
to as the "Employment Term". The Employment Term shall be extended for
successive one year periods unless either party notifies the other in writing at
least 90 days before the Termination Date, or any anniversary of the Termination
Date, as the case may be, that she or it chooses not to extend the Employment
Term.

      3. Compensation. As compensation for performing the services required by
this Agreement, and during the term of this Agreement, the Executive shall be
compensated as follows:

            (a) Base Compensation. The Company shall pay to the Executive an
annual salary ("Base Compensation") of $180,000, payable in equal installments
pursuant to the Company's customary payroll procedures in effect for its
executive personnel at the time of payment, but in no event less frequently than
monthly, subject to withholding for applicable federal, state, and local income
and employment related taxes. The Executive may be entitled to such increases in
Base Compensation with respect to each calendar year during the term of this
Agreement, as shall be determined by the Company's Compensation Committee (the
"Committee"), in its sole and absolute discretion, based on an annual review of
the Executive's performance.


                                       2


      (b) Incentive Compensation. In addition to Base Compensation, the
Executive may be entitled to receive additional compensation ("Incentive
Compensation") in the discretion of the Committee. The Incentive Compensation
shall be pursuant to short-term and/or long-term incentive compensation programs
which currently exist or may be established by the Company. For purposes of this
Agreement, the Executive's "Pro Rata Share" of Incentive Compensation for any
calendar of the Company shall be a fraction whose numerator shall be equal to
the number of months (or parts of months) during which the Executive was
actually employed by the Company during any such calendar year and whose
denominator shall be the total number of months in such calendar year.

      4. Employee Benefits. During the Employment Term and subject to the
limitations set forth in this Section 4, the Executive and his eligible
dependents shall have the right to participate in any retirement plans
(qualified and non-qualified), pension, insurance, health, disability or other
benefit plan or program that has been or is hereafter adopted by the Company (or
in which the Company participates), according to the terms of such plan or
program, on terms no less favorable than the most favorable terms granted to
senior executives of the Company.

      5. Vacation and Leaves of Absence. The Executive shall be entitled to the
normal and customary amount of paid vacation provided to senior executive
officers of the Company, but in no event less than 20 days during each 12 month
period, beginning on the Commencement Date of this Agreement. Any vacation days
that are not taken in a given 12 month period shall not accrue or carry-over
from year to year. Upon any termination of this Agreement for any reason
whatsoever, accrued and unused vacation for the year in which this Agreement
terminates will be paid to the Executive within 10 days of such termination
based on his annual rate of Base Compensation in effect on the date of such
termination. In addition, the Executive may be granted leaves of absence with or
without pay for such valid and legitimate reasons as the Company in its sole and
absolute discretion may determine, and the Executive shall be entitled to the
same sick leave and holidays provided to other senior executives of the Company.

      6. Expenses.

            (a) Business Expenses. The Executive shall be promptly reimbursed
against presentation of vouchers or receipts for all reasonable and necessary
expenses incurred by him in connection with the performance of his duties
hereunder.


                                       3


            (b) Automobile Expense. During the Employment Term, in order to
facilitate the performance of the Executive's duties hereunder, and otherwise
for the convenience of the Company, the Company (a) (i) shall reimburse the
Executive for the cost of leasing an automobile consistent with the Executive
Vice President car benefit described in the Company's Car Benefit Program as of
December 2002 or (ii) shall pay the Executive $850 per month and (b) shall pay
or reimburse Executive (upon presentation of vouchers or receipts) for the
reasonable cost of all maintenance, insurance, repairs, and other reasonable
expenses related to such automobile. Employee hereby agrees that a new lease for
an automobile will not be executed until Employee's existing lease term has
expired.

      7. Indemnification.

            (a) General. The Company agrees that if the Executive is made a
party or is threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that she is or was a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including, without limitation, service with respect
to employee benefit plans, whether or not the basis of such Proceeding is
alleged action in an official capacity as a director, officer, member, employee
or agent while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent authorized by applicable law (in accordance with the certificate of
incorporation and/or bylaws of the Company), as the same exists or may hereafter
be amended, against all Expenses (as defined below) incurred or suffered by the
Executive in connection therewith, and such indemnification shall continue as to
the Executive even if the Executive has ceased to be an officer, director or
agent, or is no longer employed by the Company and shall inure to the benefit of
his heirs, executors and administrators.

            (b) Expenses. As used in this Agreement, the term "Expenses" shall
include, without limitation, damages, losses, judgments, liabilities, fines,
penalties, excise taxes, settlements and costs, attorneys' fees, accountants'
fees, and disbursements and costs of attachment or similar bonds,
investigations, and any expenses of establishing a right to indemnification
under this Agreement.


                                       4


            (c) Enforcement. If a claim or request under this Agreement is not
paid by the Company, or on their behalf, within fifteen days after a written
claim or request has been received by the Company, the Executive may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim or request and if successful in whole or in part, the Executive shall be
entitled to be paid also the expenses of prosecuting such suit. The burden of
proving that the Executive is not entitled to indemnification for any reason
shall be upon the Company.

            (d) Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Executive.

            (e) Partial Indemnification. If the Executive is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify the Executive for the portion of such
Expenses to which the Executive is entitled.

            (f) Advances of Expenses. Expenses incurred by the Executive in
connection with any Proceeding shall be paid by the Company in advance upon
request of the Executive that the Company pay such Expenses.

            (g) Notice of Claim. The Executive shall give to the Company notice
of any claim made against him for which indemnity will or could be sought under
this Agreement. In addition, the Executive shall give the Company such
information and cooperation as it may reasonably require and as shall be within
the Executive's power and at such times and places as are convenient for the
Executive.

            (h) Defense of Claim. With respect to any Proceeding as to which the
Executive notifies the Company of the commencement thereof: (i) the Company will
be entitled to participate therein at its own expense; and (ii) except as
otherwise provided below, to the extent that it may wish, the Company jointly
with any other indemnifying party similarly notified will be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the Executive. The
Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which the Executive
shall have reasonably concluded that there may be a conflict of interest between
the Company and the Executive in the conduct of the defense of such action.


                                       5


                  The Company shall not be liable to indemnify the Executive
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action or
claim in any manner which would impose any penalty or limitation on the
Executive without Executive's written consent. Neither the Company nor the
Executive shall unreasonably withhold or delay their consent to any proposed
settlement.

            (i) Non-exclusivity. The right to indemnification and the payment of
expenses incurred in defending a Proceeding in advance of its final disposition
conferred in this Section 7 shall not be exclusive of any other right which the
Executive may have or hereafter may acquire under any statute, provision of the
certificate of incorporation or by-laws of the Company, agreement, vote of
stockholders or disinterested directors or otherwise.

            (j) Directors and Officers Liability Policy. The Company agrees to
use reasonable efforts to maintain directors and officers liability insurance
covering the Executive in a reasonable and adequate amount determined by the
Company.

      8. Termination and Termination Benefits.

            (a) Termination by the Company.

                  (i) For Cause. Notwithstanding any provision contained herein,
the Company may terminate this Agreement at any time during the Employment Term
for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the
continuing failure by the Executive to perform his duties hereunder for any
reason other than total or partial incapacity due to physical or mental illness,
or (2) gross negligence or gross malfeasance on the part of the Executive in the
performance of his duties hereunder that causes material harm to the Company.
Termination pursuant to this subsection 8(a)(i) shall be effective immediately
upon giving the Executive written notice thereof stating the reason or reasons
therefor with respect to clause (2) above, and 15 days after written notice
thereof from the Company to the Executive specifying the acts or omissions
constituting the failure and requesting that they be remedied with respect to
clause (1) above, but only if the Executive has not cured such failure within
such 15 day period. In the event of a termination pursuant to this subsection
8(a)(i), the Executive shall be entitled to payment of his Base Compensation and
the benefits pursuant to Section 4 hereof up to the effective date of such
termination and it is also the intention and agreement of the Company that
Executive shall not be deprived by reason of termination for Cause of any
payments, options or benefits which have been


                                       6


vested or have been earned or to which Executive is entitled as of the effective
date of such termination.

                  (ii) Disability. If due to illness, physical or mental
disability, or other incapacity, the Executive shall fail, for a total of any
six consecutive months ("Disability"), to substantially perform the principal
duties required by this Agreement, the Company may terminate this Agreement upon
30 days' written notice to the Executive. In such event, the Executive shall be
(1) paid his Base Compensation until the Termination Date and his Pro Rata Share
of any Incentive Compensation to which she would have been entitled for the year
in which such termination occurs, and (2) provided with employee benefits
pursuant to Section 4, to the extent available, for the remainder of the
Employment Term; provided, however, that any compensation to be paid to the
Executive pursuant to this subsection 8(a)(ii) shall be offset against any
payments received by the Executive pursuant to any policy of disability
insurance the premiums of which are paid for by the Company.

            (b) Termination Without Cause or Termination For Good Reason. The
Company may terminate the Executive's employment hereunder without Cause and the
Executive may terminate his employment hereunder for "Good Reason" (as defined
below). If the Company terminates the Executive's employment hereunder without
Cause, other than due to death or Disability, or if the Executive terminates his
employment for Good Reason, the Executive shall be paid: (i) his Base
Compensation at the rate in effect at the time of termination through the
Termination Date; (ii) his Pro Rata Share of any Incentive Compensation to which
she would have been entitled for the year in which such termination occurs;
(iii) a lump sum payment equal to the product of thirty-six (36) times the
"Monthly Salary Amount"; (iv) any vested deferred compensation (including,
without limitation, interest or other credits on the deferred amounts) and any
accrued vacation pay; (v) continuation, until the expiration of the Employment
Term and for twelve months thereafter, of the health and welfare benefits of the
Executive and any long-term disability insurance generally provided to senior
executives of the Company (as provided for by Section 4 of this Agreement) (or
the Company shall provide the economic equivalent thereof); provided, however,
if the Executive obtains new employment and such employment makes the Executive
eligible for health and welfare or long-term disability benefits which are equal
to or greater in scope then the benefits then being offered by the Company, then
the Company shall no longer be required to


                                       7


provide such benefits to the Executive; and (vi) any other compensation and
benefits as may be provided in accordance with the terms and provisions of any
applicable plans or programs of the Company.

            As used herein, "Monthly Salary Amount" shall mean an amount equal
to one-twelfth of the sum of (y) the Executive's then current annual Base Salary
plus (z) the average cash incentive compensation paid to the Executive during
the three years immediately preceding the termination date.

            As used herein, "Good Reason" means and shall be deemed to exist if,
without the prior express written consent of the Executive, (a) the Company
breaches this Agreement in any material respect; (b) the Company fails to obtain
the full assumption of this Agreement by a successor; (c) the Company fails to
use its reasonable best efforts to maintain, or cause to be maintained directors
and officers liability insurance coverage for the Executive; (d) the Company
purports to terminate the Executive's employment for Cause and such purported
termination of employment is not effected in accordance with the requirements of
this Agreement, or (e) of within two years following the occurrence of a Change
in Control (i) the Executive suffers an adverse change in his status, title,
position or responsibilities, (ii) the Executive suffers a reduction in his base
salary, (iii) the Executive suffers an adverse change in his working conditions,
or (iv) the Company breaches any material provision of this Agreement; provided,
however, that with respect to items (a) through (d) above, within 30 days of
written notice of termination by the Executive, the Company has not cured, or
commenced to cure, such failure or breach.

            For purposes of this Agreement, a "Change of Control" shall mean (1)
any merger by the Company into another corporation or corporations which results
in the stockholders of the Company immediately prior to such transaction owning
less than 55% of the surviving Corporation; (2) any acquisition (by purchase,
lease or otherwise) of all or substantially all of the assets of the Company by
any person, corporation or other entity or group thereof acting jointly; (3) the
acquisition of beneficial ownership, directly or indirectly, of voting
securities of the Company (defined as Common Stock of the Company or any
securities having voting rights that the Company may issue in the future) and
rights to acquire voting securities of the Company (defined as including,
without limitation, securities that are convertible into voting securities of
the Company (as defined above) and rights, options warrants and other agreements
or arrangements to acquire such voting


                                       8


securities) by any person, corporation or other entity or group thereof acting
jointly, in such amount or amounts as would permit such person, corporation or
other entity or group thereof acting jointly to elect a majority of the members
of the Board of the Company, as then constituted; or (4) the acquisition of
beneficial ownership, directly or indirectly, of voting securities and rights to
acquire voting securities having voting power equal to 25% or more of the
combined voting power of the Company's then outstanding voting securities by any
person, corporation or other entity or group thereof acting jointly unless such
acquisition as is described in this part (4) is expressly approved by resolution
of the Board of the Company passed upon affirmative vote of not less than a
majority of the Board and adopted at a meeting of the Board held not later than
the date of the next regularly scheduled or special meeting held following the
date the Company obtains actual knowledge of such acquisition (which approval
may be limited in purpose and effect solely to affecting the rights of Employee
under this Agreement). Notwithstanding the preceding sentence, (i) any
transaction that involves a mere change in identity form or place of
organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended, or a transaction of similar effect, shall not
constitute a Change in Control.

            (c) Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided or maintained by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise prejudice such rights as the Executive may have under any other
existing or future agreements with the Company. Except as otherwise expressly
provided for in this Agreement, amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plans or programs of the
Company at or subsequent to the date of termination shall be payable in
accordance with such plans or programs.

            (d) Vesting of Stock Grants and Stock Options. In the event of any
termination of this Agreement, Executive's rights with regard to any stock
grants, loan agreements or stock options shall be as set forth in the respective
agreement containing the terms and conditions pertaining thereto.
Notwithstanding the foregoing, in the event that the Executive is terminated for
reasons other than for "Cause" or in the event the Executive terminates this
Agreement for "Good Reason", any stock options then held by the Executive shall
immediately vest in the Executive;


                                       9


provided, however, all stock options then held by the Executive shall expire
and/or terminate 90 days after the date this Agreement is terminated.

            (e) Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event that it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Executive, whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986 or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (an "Excise Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the
Excise Gross-Up Payment, in order to put the Executive in the same net after-tax
position as if the payment were not subject to any Excise Tax. Subject to the
provisions of this Section 8(e), all determinations required to be made
hereunder, including whether an Excise Gross-Up Payment is required and the
amount of such Excise Gross-Up Payment, shall be made by PricewaterhouseCoopers
LLP or such other accounting firm which at the time audits the financial
statements of the Company (the "Accounting Firm") at the sole expense of the
Company, which shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the date of termination of
the Executive's employment under this Agreement, if applicable, or such earlier
time as is requested by the Company.

      If the Accounting Firm determines that no Excise Tax is payable by the
Executive, the Company shall use its reasonable best efforts to cause the
Accounting Firm to furnish the Executive with an opinion that she has
substantial authority not to report any Excise Tax on his federal income tax
return. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which
will not have been made by the Company, should have been made (an
"Underpayment") consistent with the calculations required to be made hereunder.
If the Company exhausts its remedies pursuant hereto and the Executive
thereafter is required to make a payment of


                                       10


any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Company to or for the benefit of the Executive.

      The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Excise Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall: (i) give the Company
any information reasonably requested by the Company relating to such claim; (ii)
take such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including (without limitation)
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company; (iii) cooperate with the Company in good
faith to contest effectively such claim; and (iv) permit the Company to
participate in any proceedings relating to such claim; provided that the Company
shall bear and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any Excise
Tax or income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions hereof the Company shall control
all proceedings taken in connection with such contest and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax claimed and sue for
a refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine, provided that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify


                                       11


and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to
such advance, and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which an Excise Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.

      If, after the receipt by the Executive of an amount advanced by the
Company pursuant hereto, the Executive becomes entitled to receive any refund
with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Excise Gross-Up Payment required to be paid.

            (f) Death Benefit. Notwithstanding any other provision of this
Agreement, this Agreement shall terminate on the date of the Executive's death.
In such event the Company shall pay Executive's Base Compensation to his wife,
if she survives him, or, if she does not survive him, to his estate, through the
termination date. In addition, the Company shall pay to Executive's wife, if she
survives him, or, if she does not survive him, to his estate, the Pro Rata Share
of any Incentive Compensation to which Executive would have been entitled for
the year in which such death occurs.

            (g) Payment. Except as otherwise provided in this Agreement, any
payments to which the Executive shall be entitled under this Section 8,
including, without limitation, any economic equivalent of any benefit, shall be
made as promptly as possible following the date of termination. If the amount of
any payment due to the Executive cannot be finally determined within


                                       12


90 days after the Date of Termination, such amount shall be estimated on a good
faith basis by the Company and the estimated amount shall be paid no later than
90 days after such Date of Termination. As soon as practicable hereafter, the
final determination of the amount due shall be made and any adjustment requiring
a payment to or from the Executive shall be made as promptly as practicable.

            (h) No Mitigation. The Executive shall not be required to mitigate
the amount of any payments provided for by this Agreement by seeking employment
or otherwise, nor shall the amount of any payment or benefit provided in this
Agreement be reduced by any compensation or benefit earned by the Executive
after termination of his employment.

      9. Company Property. All advertising, promotional, sales, suppliers,
manufacturers and other materials or articles or information, including without
limitation data processing reports, customer lists, customer sales analyses,
invoices, product lists, price lists or information, samples, or any other
materials or data of any kind furnished to the Executive by the Company or
developed by the Executive on behalf of the Company or at the Company's
direction or for the Company's use or otherwise in connection with the
Executive's employment hereunder, are and shall remain the sole and confidential
property of the Company; if the Company requests the return of such materials at
any time during or at or after the termination of the Executive's employment,
the Executive shall immediately deliver the same to the Company.

      10. Covenant Not To Compete.

            (a) Covenants Against Competition. The Executive acknowledges that
as of the execution of this Employment Agreement (i) the Company is engaged in
the business of providing sales and marketing and marketing research services to
the pharmaceutical, medical device and diagnostics and biotechnology industries
and in the sale of pharmaceutical, medical device and diagnostics and
biotechnology products (the "Business"); (ii) the Company's Business is
conducted currently throughout the United States and may be expanded to other
locations; (iii) his employment with the Company will have given him access to
confidential information concerning the Company; and (iv) the agreements and
covenants contained in this Agreement are essential to protect the business and
goodwill of the Company. Accordingly, the Executive covenants and agrees as
follows:

                  (i) Non-Compete. Without the prior written consent of the
Board of the Company, the Executive shall not during the Restricted Period (as
defined below) within the


                                       13


Restricted Area (as defined below) (except in the Executive's capacity as an
officer of the Company or any of its affiliates), (a) engage or participate in
the Business; (b) enter the employ of, or render any services (whether or not
for a fee or other compensation) to, any person engaged in the Business; or (c)
acquire an equity interest in any such person; provided, that the foregoing
restrictions shall not apply at any time if the Executive's employment is
terminated during the Term by the Executive for Good Reason (as defined in
Section 8(b) below) or by the Company other than for "Cause"; provided, further,
that during the Restricted Period the Executive may own, directly or indirectly,
solely as a passive investment, securities of any company traded on any national
securities exchange or on the National Association of Securities Dealers
Automated Quotation System.

                  As used herein, "Restricted Period" shall mean the period
commencing on the Commencement Date and ending on the second anniversary of the
Executive's termination of employment.

                  "Restricted Area" shall mean any place within the United
States and any other country in which the Company is then actively considering
conducting Business.

            (b) Confidential Information; Personal Relationships. The Executive
acknowledges that the Company has a legitimate and continuing proprietary
interest in the protection of its confidential information and has invested
substantial sums and will continue to invest substantial sums to develop,
maintain and protect confidential information. The Executive agrees that, during
and after the Restricted Period, without the prior written consent of the Board,
the Executive shall keep secret and retain in strictest confidence, and shall
not knowingly use for the benefit of himself or others all confidential matters
relating to the Company's Business including, without limitation, operational
methods, marketing or development plans or strategies, business acquisition
plans, joint venture proposals or plans, and new personnel acquisition plans,
learned by the Executive heretofore or hereafter (such information shall be
referred to herein collectively as "Confidential Information"); provided, that
nothing in this Agreement shall prohibit the Executive from disclosing or using
any Confidential Information (A) in the performance of his duties hereunder, (B)
as required by applicable law, (C) in connection with the enforcement of his
rights under this Agreement or any other agreement with the Company, or (D) in
connection with the defense or settlement of any claim, suit or action brought
or threatened against the Executive by or in the right of the Company.
Notwithstanding any provision contained herein to the contrary, the term


                                       14


Confidential Information shall not be deemed to include any general knowledge,
skills or experience acquired by the Executive or any knowledge or information
known or available to the public in general. Moreover, the Executive shall be
permitted to retain copies of, or have access to, all such Confidential
Information relating to any disagreement, dispute or litigation (pending or
threatened) involving the Executive.

            (c) Employees of the Company and its Affiliates. During the
Restricted Period, without the prior written consent of the Board of the
Company, the Executive shall not, directly or indirectly, hire or solicit, or
cause others to hire or solicit, for employment by any person other than the
Company or any affiliate or successor thereof, any employee of, or person
employed within the two years preceding the Executive's hiring or solicitation
of such person by, the Company and its affiliates or successors or encourage any
such employee to leave his employment. For this purpose, any person whose
employment has been terminated involuntarily by the Company shall be excluded
from those persons protected by this Section for the benefit of the Company.

            (d) Business Relationships. During the Restricted Period, the
Executive shall not, directly or indirectly, request or advise a person that has
a business relationship with the Company to curtail or cancel such person's
business relationship with the Company.

            (e) Rights and Remedies Upon Breach. If the Executive breaches,
threatens to commit a breach of, any of the provisions contained in Section 10
of this Agreement (the "Restrictive Covenants"), the Company shall have the
following rights and remedies, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity.

                  (i) Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company.

                  (ii) Accounting. The right and remedy to require the Executive
to account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by the Executive as
the result of any action constituting a breach of Restrictive Covenants.


                                       15


            (f) Severability of Covenants. The Executive acknowledges and agrees
that the Restrictive Covenants are reasonable and valid in duration and
geographical scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect without regard to the invalid portions. The
provisions set forth in Section 10 above shall be in addition to any other
provisions of the business conduct and ethics policy applicable to employees of
the Company and its subsidiaries during the term of Executive's employment.

            (g) Saving Clause. If the period of time or the area specified in
subsection (a) above should be adjudged unreasonable in any proceeding, then the
period of time shall be reduced by such number of months or the area shall be
reduced by the elimination of such portion thereof or both so that such
restrictions may be enforced in such area and for such time as is adjudged to be
reasonable. If the Executive violates any of the restrictions contained in the
foregoing subsection (a), the restrictive period shall not run in favor of the
Executive from the time of the commencement of any such violation until such
time as such violation shall be cured by the Executive to the satisfaction of
Company.

      11. Executive's Representation and Warranties. Executive represents and
warrants that she has the full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that she is not subject to any
non-competition agreement other than with the Company, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that she
is not obligated under any contract (including, but not limited to, licenses,
covenants or commitments of any nature) or other agreement or subject to any
judgment, decree or order of any court or administrative agency which would
conflict with his obligation to use his best efforts to perform his duties
hereunder or which would conflict with the Company's business and operations as
presently conducted or proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of the Company's business as
officer and employee by Executive will conflict with or result in a breach of
the terms, conditions or provisions of or constitute a default under any
contract, covenant or instrument to which Executive is currently a party.


                                       16


      12. Miscellaneous.

            (a) Integration; Amendment. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters set forth
herein and supersedes and renders of no force and effect all prior
understandings and agreements between the parties with respect to the matters
set forth herein. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.

            (b) Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable law or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited, or invalid, but the remainder of this Agreement shall not be invalid
and shall be given full force and effect so far as possible.

            (c) Waivers. The failure or delay of any party at any time to
require performance by the other party of any provision of this Agreement, even
if known, shall not affect the right of such party to require performance of
that provision or to exercise any right, power, or remedy hereunder, and any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right, power, or
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to other or further notice or demand in
similar or other circumstances.

            (d) Power and Authority. The Company represents and warrants to the
Executive that it has the requisite corporate power to enter into this Agreement
and perform the terms hereof; that the execution, delivery and performance of
this Agreement by it has been duly authorized by all appropriate corporate
action; and that this Agreement represents the valid and legally binding
obligation of the Company and is enforceable against it in accordance with its
terms.

            (e) Burden and Benefit; Survival. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, personal and legal representatives, successors and assigns. In
addition to, and not in limitation of, anything contained in this Agreement, it
is expressly understood and agreed that the Company's obligation to pay
Termination Compensation as set forth herein shall survive any termination of
this Agreement.

            (f) Governing Law; Headings. This Agreement and its construction,
performance, and enforceability shall be governed by, and construed in
accordance with, the laws of


                                       17


the State of New Jersey. Headings and titles herein are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.

            (g) Arbitration; Remedies. Any dispute or controversy arising under
this Agreement or as a result of or in connection with Executive's employment
(other than disputes arising under Section 10) shall be arbitrated and settled
pursuant to the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association which are then in effect in a proceeding held
in Bergen County, New Jersey. This provision shall also apply to any and all
claims that may be brought under any federal or state anti-discrimination or
employment statute, rule or regulation, including, but not limited to, claims
under: the National Labor Relations Act; Title VII of the Civil Rights Act;
Sections 1981 through 1988 of Title 42 of the United States Code; the Employee
Retirement Income Security Act; the Immigration Reform and Control Act; the
Americans With Disabilities Act; the Age Discrimination in Employment Act; the
Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and
Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and
award, if any, is final and binding on the parties and the judgment may be
entered in any court having jurisdiction thereof. The parties will agree upon an
arbitrator from the list of labor arbitrators supplied by the American
Arbitration Association. The parties understand and agree, however, that
disputes arising under Section 10 of this Agreement may be brought in a court of
law or equity without submission to arbitration.

            (h) Jurisdiction. Except as otherwise provided for herein, each of
the parties (a) submits to the exclusive jurisdiction of any state court sitting
in Bergen County, New Jersey or federal court sitting in New Jersey in any
action or proceeding arising out of or relating to this Agreement, (b) agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court, (c) agrees not to bring any action or proceeding
arising out of or relating to this Agreement in any other court and (d) waives
any right such party may have to a trial by jury with respect to any action or
proceeding arising out of or relating to this Agreement. Each of the parties
waives any defense of inconvenient forum to the maintenance of any action or
proceeding so brought and waives any bond, surety or other security that might
be required of any other party with respect thereto. Any party may make service
on another party by sending or delivering a copy of the process to the party to
be served at the address and in the manner provided for giving of notices


                                       18


in Section 12(i). Nothing in this Section, however, shall affect the right of
any party to serve legal process in any other manner permitted by law.

            (i) Notices. All notices called for under this Agreement shall be in
writing and shall be deemed given upon receipt if delivered personally or by
confirmed facsimile transmission and followed promptly by mail, or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at their respective addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof) as set forth in the preamble to
this Agreement or to any other address or addressee as any party entitled to
receive notice under this Agreement shall designate, from time to time, to
others in the manner provided in this subsection 12(i) for the service of
notices.

            Any notice delivered to the party hereto to whom it is addressed
shall be deemed to have been given and received on the day it was received;
provided, however, that if such day is not a business day then the notice shall
be deemed to have been given and received on the business day next following
such day. Any notice sent by facsimile transmission shall be deemed to have been
given and received on the business day next following the day of transmission.

            (j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.

      IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.


                                      ------------------------------------
                                      LLOYD FISHMAN


                                      PDI, INC.


                                      By:
                                      ------------------------------------
                                      Charles T. Saldarini
                                      Chief Executive Officer


                                       19

EX-10.11

                                  EXHIBIT 10.11

                              EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 5th day of
November, 2002, by and among PDI, INC., a Delaware corporation (the "Company"),
having its principal place of business at 10 Mountainview Road, Upper Saddle
River, New Jersey 07458, on the one hand, and BETH JACOBSON, residing at 26
Random Farms Circle, Chappaqua, New York 10514 (the "Executive"), on the other.

                               W I T N E S S E T H
                               - - - - - - - - - -

      WHEREAS, the Company believes that it would benefit from the application
of the Executive's particular and unique skills, experiences and background in
connection with the management and operation of the Company, and wishes to
employ the Executive as Executive Vice President and General Counsel; and

      WHEREAS, the parties desire by this Agreement to set forth the terms and
conditions of the employment relationship between the Company and the Executive.

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
in this Agreement, the Company and the Executive agree as follows:

      1. Employment and Duties. The Company hereby employs the Executive as
Executive Vice President and General Counsel on the terms and conditions
provided in this Agreement and Executive agrees to accept such employment
subject to the terms and conditions of this Agreement. The Executive shall be
responsible for management of the day-to-day legal affairs of the Company, shall
perform the duties and responsibilities as are customary for the officer of a
corporation in such positions, and shall perform such other duties and
responsibilities as are reasonably determined from time to time by the Chief
Executive Officer of the Company. The Executive shall report to and be
supervised by the Company's Chief Executive Officer. The Executive shall be
based at the Company's offices in Upper Saddle River, New Jersey a minimum of
three days per week, or such other place that shall constitute the Company's
headquarters and, except for business travel incident to her employment under
this Agreement, the Company agrees the Executive shall not be required to
relocate. The Executive agrees to devote substantially all her attention and
time during normal business hours to the business and affairs of the Company and
to use her reasonable best efforts to




perform faithfully and efficiently the duties and responsibilities of her
positions and to accomplish the goals and objectives of the Company as may be
established from time to time by the Company's Board of Directors (the "Board").
Notwithstanding the foregoing, the Executive may engage in the following
activities (and shall be entitled to retain all economic benefits thereof
including fees paid in connection therewith) as long as they do not interfere in
any material respect with the performance of the Executive's duties and
responsibilities hereunder and, with respect to subsections (i) and (ii) below,
that such activity is pre-approved by the Company's Chief Executive Officer: (i)
serve on corporate, civic, religious, educational and/or charitable boards or
committees, provided that the Executive shall not serve on any board or
committee of any corporation or other business which competes with the Business
(as defined in Section 10(a) below); (ii) deliver lectures, fulfill speaking
engagements or teach on a part-time basis at educational institutions; and (iii)
make investments in businesses or enterprises and manage her personal
investments; provided that with respect to such activities Executive shall
comply with any business conduct and ethics policy applicable to employees of
the Company.

      2. Term. The term of this Agreement shall commence on November 5, 2002
(the "Commencement Date"), and shall terminate on December 31, 2005, unless
extended or earlier terminated in accordance with the terms of this Agreement
(the "Termination Date"). Such term of employment is herein sometimes referred
to as the "Employment Term". The Employment Term shall be extended for
successive one year periods unless either party notifies the other in writing at
least 90 days before the Termination Date, or any anniversary of the Termination
Date, as the case may be, that she or it chooses not to extend the Employment
Term.

      3. Compensation. As compensation for performing the services required by
this Agreement, and during the term of this Agreement, the Executive shall be
compensated as follows:

            (a) Base Compensation. The Company shall pay to the Executive an
annual salary ("Base Compensation") of $185,000, payable in equal installments
pursuant to the Company's customary payroll procedures in effect for its
executive personnel at the time of payment, but in no event less frequently than
monthly, subject to withholding for applicable federal, state, and local income
and employment related taxes. The Executive may be entitled to such increases in
Base Compensation with respect to each calendar year during the term of this
Agreement, as shall be


                                       2


determined by the Company's Compensation Committee (the "Committee"), in its
sole and absolute discretion, based on an annual review of the Executive's
performance.

            (b) Incentive Compensation. In addition to Base Compensation, the
Executive may be entitled to receive additional compensation ("Incentive
Compensation") in the discretion of the Committee. The Incentive Compensation
shall be pursuant to short-term and/or long-term incentive compensation programs
which currently exist or may be established by the Company. For purposes of this
Agreement, the Executive's "Pro Rata Share" of Incentive Compensation for any
calendar of the Company shall be a fraction whose numerator shall be equal to
the number of months (or parts of months) during which the Executive was
actually employed by the Company during any such calendar year and whose
denominator shall be the total number of months in such calendar year.

            (c) Sign-on Bonus. In addition to Base Compensation, the Company
shall pay to the Executive in the first payroll period following the
Commencement Date the sum of $25,000 subject to withholding for applicable
federal, state and local taxes.

      4. Employee Benefits. During the Employment Term and subject to the
limitations set forth in this Section 4, the Executive and her eligible
dependents shall have the right to participate in any retirement plans
(qualified and non-qualified), pension, insurance, health, disability or other
benefit plan or program that has been or is hereafter adopted by the Company (or
in which the Company participates), according to the terms of such plan or
program, on terms no less favorable than the most favorable terms granted to
senior executives of the Company.

      5. Vacation and Leaves of Absence. The Executive shall be entitled to the
normal and customary amount of paid vacation provided to senior executive
officers of the Company, but in no event less than 20 days during each 12 month
period, beginning on the Commencement Date of this Agreement. Any vacation days
that are not taken in a given 12 month period shall not accrue or carry-over
from year to year. Upon any termination of this Agreement for any reason
whatsoever, accrued and unused vacation for the year in which this Agreement
terminates will be paid to the Executive within 10 days of such termination
based on her annual rate of Base Compensation in effect on the date of such
termination. In addition, the Executive may be granted leaves of absence with or
without pay for such valid and legitimate reasons as the Company in its sole and
absolute discretion may determine, and the Executive shall be entitled to the
same sick leave and holidays provided to other senior executives of the Company.


                                       3


      6. Expenses.

            (a) Business Expenses. The Executive shall be promptly reimbursed
against presentation of vouchers or receipts for all reasonable and necessary
expenses incurred by her in connection with the performance of her duties
hereunder.

            (b) Automobile Expense. During the Employment Term, in order to
facilitate the performance of the Executive's duties hereunder, and otherwise
for the convenience of the Company, the Company shall reimburse the Executive
$500 per month for the cost of an automobile and shall pay or reimburse
Executive (upon presentation of vouchers or receipts) for the reasonable cost of
all maintenance, insurance, repairs, and other reasonable expenses related to
such automobile.

      7. Indemnification.

            (a) General. The Company agrees that if the Executive is made a
party or is threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that she is or was a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including, without limitation, service with respect
to employee benefit plans, whether or not the basis of such Proceeding is
alleged action in an official capacity as a director, officer, member, employee
or agent while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent authorized by applicable law (in accordance with the certificate of
incorporation and/or bylaws of the Company), as the same exists or may hereafter
be amended, against all Expenses (as defined below) incurred or suffered by the
Executive in connection therewith, and such indemnification shall continue as to
the Executive even if the Executive has ceased to be an officer, director or
agent, or is no longer employed by the Company and shall inure to the benefit of
her heirs, executors and administrators.

            (b) Expenses. As used in this Agreement, the term "Expenses" shall
include, without limitation, damages, losses, judgments, liabilities, fines,
penalties, excise taxes, settlements and costs, attorneys' fees, accountants'
fees, and disbursements and costs of attachment or similar bonds,
investigations, and any expenses of establishing a right to indemnification
under this Agreement.


                                       4


            (c) Enforcement. If a claim or request under this Agreement is not
paid by the Company, or on their behalf, within fifteen days after a written
claim or request has been received by the Company, the Executive may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim or request and if successful in whole or in part, the Executive shall be
entitled to be paid also the expenses of prosecuting such suit. The burden of
proving that the Executive is not entitled to indemnification for any reason
shall be upon the Company.

            (d) Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Executive.

            (e) Partial Indemnification. If the Executive is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify the Executive for the portion of such
Expenses to which the Executive is entitled.

            (f) Advances of Expenses. Expenses incurred by the Executive in
connection with any Proceeding shall be paid by the Company in advance upon
request of the Executive that the Company pay such Expenses.

            (g) Notice of Claim. The Executive shall give to the Company notice
of any claim made against her for which indemnity will or could be sought under
this Agreement. In addition, the Executive shall give the Company such
information and cooperation as it may reasonably require and as shall be within
the Executive's power and at such times and places as are convenient for the
Executive.

            (h) Defense of Claim. With respect to any Proceeding as to which the
Executive notifies the Company of the commencement thereof: (i) the Company will
be entitled to participate therein at its own expense; and (ii) except as
otherwise provided below, to the extent that it may wish, the Company jointly
with any other indemnifying party similarly notified will be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the Executive. The
Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which the Executive
shall have reasonably concluded that there may be a conflict of interest between
the Company and the Executive in the conduct of the defense of such action.


                                       5


                  The Company shall not be liable to indemnify the Executive
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action or
claim in any manner which would impose any penalty or limitation on the
Executive without Executive's written consent. Neither the Company nor the
Executive shall unreasonably withhold or delay their consent to any proposed
settlement.

            (i) Non-exclusivity. The right to indemnification and the payment of
expenses incurred in defending a Proceeding in advance of its final disposition
conferred in this Section 7 shall not be exclusive of any other right which the
Executive may have or hereafter may acquire under any statute, provision of the
certificate of incorporation or by-laws of the Company, agreement, vote of
stockholders or disinterested directors or otherwise.

            (j) Directors and Officers Liability Policy. The Company agrees to
use reasonable efforts to maintain directors and officers liability insurance
covering the Executive in a reasonable and adequate amount determined by the
Company.

      8. Termination and Termination Benefits.

            (a) Termination by the Company.

                  (i) For Cause. Notwithstanding any provision contained herein,
the Company may terminate this Agreement at any time during the Employment Term
for "Cause". For purposes of this subsection 8(a)(i), "Cause" shall mean (1) the
continuing willful failure by the Executive to substantially perform her duties
hereunder for any reason other than total or partial incapacity due to physical
or mental illness, or (2) gross negligence or gross malfeasance on the part of
the Executive in the performance of her duties hereunder that causes material
harm to the Company. Termination pursuant to this subsection 8(a)(i) shall be
effective immediately upon giving the Executive written notice thereof stating
the reason or reasons therefor with respect to clause (2) above, and 15 days
after written notice thereof from the Company to the Executive specifying the
acts or omissions constituting the failure and requesting that they be remedied
with respect to clause (1) above, but only if the Executive has not cured such
failure within such 15 day period. In the event of a termination pursuant to
this subsection 8(a)(i), the Executive shall be entitled to payment of her Base
Compensation and the benefits pursuant to Section 4 hereof up to the effective
date of such termination and it is also the intention and agreement of the
Company that Executive shall not be deprived by reason of termination for Cause
of any payments, options or benefits which have been


                                       6


vested or have been earned or to which Executive is entitled as of the effective
date of such termination.

                  (ii) Disability. If due to illness, physical or mental
disability, or other incapacity, the Executive shall fail, for a total of any
six consecutive months ("Disability"), to substantially perform the principal
duties required by this Agreement, the Company may terminate this Agreement upon
30 days' written notice to the Executive. In such event, the Executive shall be
(1) paid her Base Compensation until the Termination Date and her Pro Rata Share
of any Incentive Compensation to which she would have been entitled for the year
in which such termination occurs, and (2) provided with employee benefits
pursuant to Section 4, to the extent available, for the remainder of the
Employment Term; provided, however, that any compensation to be paid to the
Executive pursuant to this subsection 8(a)(ii) shall be offset against any
payments received by the Executive pursuant to any policy of disability
insurance the premiums of which are paid for by the Company.

            (b) Termination Without Cause or Termination For Good Reason. The
Company may terminate the Executive's employment hereunder without Cause and the
Executive may terminate her employment hereunder for "Good Reason" (as defined
below). If the Company terminates the Executive's employment hereunder without
Cause, other than due to death or Disability, or if the Executive terminates her
employment for Good Reason, the Executive shall be paid: (i) her Base
Compensation at the rate in effect at the time of termination through the
Termination Date; (ii) her Pro Rata Share of any Incentive Compensation to which
she would have been entitled for the year in which such termination occurs;
(iii) a lump sum payment equal to the product of thirty-six (36) times the
"Monthly Salary Amount"; (iv) any vested deferred compensation (including,
without limitation, interest or other credits on the deferred amounts) and any
accrued vacation pay; (v) continuation, until the expiration of the Employment
Term and for twelve months thereafter, of the health and welfare benefits of the
Executive and any long-term disability insurance generally provided to senior
executives of the Company (as provided for by Section 4 of this Agreement) (or
the Company shall provide the economic equivalent thereof); provided, however,
if the Executive obtains new employment and such employment makes the Executive
eligible for health and welfare or long-term disability benefits which are equal
to or greater in scope then the benefits then being offered by the Company, then
the Company shall no longer be required to provide such benefits to the
Executive;


                                       7


and (vi) any other compensation and benefits as may be provided in accordance
with the terms and provisions of any applicable plans or programs of the
Company.

      As used herein, "Monthly Salary Amount" shall mean an amount equal to
one-twelfth of the sum of (y) the Executive's then current annual Base Salary
plus (z) the average cash incentive compensation paid to the Executive during
the three years immediately preceding the termination date.

      As used herein, "Good Reason" means and shall be deemed to exist if,
without the prior express written consent of the Executive, (a) the Company
breaches this Agreement in any material respect; (b) the Company fails to obtain
the full assumption of this Agreement by a successor; (c) the Company fails to
use its reasonable best efforts to maintain, or cause to be maintained directors
and officers liability insurance coverage for the Executive; (d) the Company
purports to terminate the Executive's employment for Cause and such purported
termination of employment is not effected in accordance with the requirements of
this Agreement, or (e) of within two years following the occurrence of a Change
in Control (i) the Executive suffers an adverse change in her status, title,
position or responsibilities, (ii) the Executive suffers a reduction in her base
salary, (iii) the Executive suffers an adverse change in her working conditions,
or (iv) the Company breaches any material provision of this Agreement; provided,
however, that with respect to items (a) through (d) above, within 30 days of
written notice of termination by the Executive, the Company has not cured, or
commenced to cure, such failure or breach.

      For purposes of this Agreement, a "Change of Control" shall mean (1) any
merger by the Company into another corporation or corporations which results in
the stockholders of the Company immediately prior to such transaction owning
less than 55% of the surviving Corporation; (2) any acquisition (by purchase,
lease or otherwise) of all or substantially all of the assets of the Company by
any person, corporation or other entity or group thereof acting jointly; (3) the
acquisition of beneficial ownership, directly or indirectly, of voting
securities of the Company (defined as Common Stock of the Company or any
securities having voting rights that the Company may issue in the future) and
rights to acquire voting securities of the Company (defined as including,
without limitation, securities that are convertible into voting securities of
the Company (as defined above) and rights, options warrants and other agreements
or arrangements to acquire such voting securities) by any person, corporation or
other entity or group thereof acting jointly, in such amount


                                       8


or amounts as would permit such person, corporation or other entity or group
thereof acting jointly to elect a majority of the members of the Board of the
Company, as then constituted; or (4) the acquisition of beneficial ownership,
directly or indirectly, of voting securities and rights to acquire voting
securities having voting power equal to 25% or more of the combined voting power
of the Company's then outstanding voting securities by any person, corporation
or other entity or group thereof acting jointly unless such acquisition as is
described in this part (4) is expressly approved by resolution of the Board of
the Company passed upon affirmative vote of not less than a majority of the
Board and adopted at a meeting of the Board held not later than the date of the
next regularly scheduled or special meeting held following the date the Company
obtains actual knowledge of such acquisition (which approval may be limited in
purpose and effect solely to affecting the rights of Employee under this
Agreement). Notwithstanding the preceding sentence, (i) any transaction that
involves a mere change in identity form or place of organization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended, or a transaction of similar effect, shall not constitute a Change in
Control.

            (c) Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided or maintained by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise prejudice such rights as the Executive may have under any other
existing or future agreements with the Company. Except as otherwise expressly
provided for in this Agreement, amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plans or programs of the
Company at or subsequent to the date of termination shall be payable in
accordance with such plans or programs.

            (d) Vesting of Stock Grants and Stock Options. In the event of any
termination of this Agreement, Executive's rights with regard to any stock
grants, loan agreements or stock options shall be as set forth in the respective
agreement containing the terms and conditions pertaining thereto.
Notwithstanding the foregoing, in the event that the Executive is terminated for
reasons other than for "Cause" or in the event the Executive terminates this
Agreement for "Good Reason", any stock options then held by the Executive shall
immediately vest in the Executive; provided, however, all stock options then
held by the Executive shall expire and/or terminate 90 days after the date this
Agreement is terminated.


                                       9


            (e) Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event that it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Executive, whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986 or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (an "Excise Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed upon the Excise Gross-Up Payment and any ordinary income tax on the
Excise Gross-Up Payment, in order to put the Executive in the same net after-tax
position as if the payment were not subject to any Excise Tax. Subject to the
provisions of this Section 8(e), all determinations required to be made
hereunder, including whether an Excise Gross-Up Payment is required and the
amount of such Excise Gross-Up Payment, shall be made by PricewaterhouseCoopers
LLP or such other accounting firm which at the time audits the financial
statements of the Company (the "Accounting Firm") at the sole expense of the
Company, which shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the date of termination of
the Executive's employment under this Agreement, if applicable, or such earlier
time as is requested by the Company.

      If the Accounting Firm determines that no Excise Tax is payable by the
Executive, the Company shall use its reasonable best efforts to cause the
Accounting Firm to furnish the Executive with an opinion that she has
substantial authority not to report any Excise Tax on her federal income tax
return. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which
will not have been made by the Company, should have been made (an
"Underpayment") consistent with the calculations required to be made hereunder.
If the Company exhausts its remedies pursuant hereto and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has


                                       10


occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive.

      The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Excise Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall: (i) give the Company
any information reasonably requested by the Company relating to such claim; (ii)
take such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including (without limitation)
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company; (iii) cooperate with the Company in good
faith to contest effectively such claim; and (iv) permit the Company to
participate in any proceedings relating to such claim; provided that the Company
shall bear and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any Excise
Tax or income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions hereof the Company shall control
all proceedings taken in connection with such contest and, at its sole option,
may pursue or forgo any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax claimed and sue for
a refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine, provided that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including


                                       11


interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance, and further
provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which an Excise Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.

      If, after the receipt by the Executive of an amount advanced by the
Company pursuant hereto, the Executive becomes entitled to receive any refund
with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Excise Gross-Up Payment required to be paid.

            (f) Death Benefit. Notwithstanding any other provision of this
Agreement, this Agreement shall terminate on the date of the Executive's death.
In such event the Company shall pay Executive's Base Compensation to her
husband, if he survives her, or, if he does not survive her, to her estate,
through the termination date. In addition, the Company shall pay to Executive's
husband, if he survives her, or, if he does not survive her, to her estate, the
Pro Rata Share of any Incentive Compensation to which Executive would have been
entitled for the year in which such death occurs.

            (g) Termination Payment. In the event Company does not elect to
extend the Employment Term as provided for in Section 2 hereof, in consideration
for the post-employment covenant against competition set forth in Section 10
hereof, the Executive shall be entitled to a lump-sum payment equal to the
product of twelve times the Monthly Salary Amount.


                                       12


            (h) Payment. Except as otherwise provided in this Agreement, any
payments to which the Executive shall be entitled under this Section 8,
including, without limitation, any economic equivalent of any benefit, shall be
made as promptly as possible following the date of termination. If the amount of
any payment due to the Executive cannot be finally determined within 90 days
after the Date of Termination, such amount shall be estimated on a good faith
basis by the Company and the estimated amount shall be paid no later than 90
days after such Date of Termination. As soon as practicable hereafter, the final
determination of the amount due shall be made and any adjustment requiring a
payment to or from the Executive shall be made as promptly as practicable.

            (i) No Mitigation. The Executive shall not be required to mitigate
the amount of any payments provided for by this Agreement by seeking employment
or otherwise, nor shall the amount of any payment or benefit provided in this
Agreement be reduced by any compensation or benefit earned by the Executive
after termination of her employment.

      9. Company Property. All advertising, promotional, sales, suppliers,
manufacturers and other materials or articles or information, including without
limitation data processing reports, customer lists, customer sales analyses,
invoices, product lists, price lists or information, samples, or any other
materials or data of any kind furnished to the Executive by the Company or
developed by the Executive on behalf of the Company or at the Company's
direction or for the Company's use or otherwise in connection with the
Executive's employment hereunder, are and shall remain the sole and confidential
property of the Company; if the Company requests the return of such materials at
any time during or at or after the termination of the Executive's employment,
the Executive shall immediately deliver the same to the Company.

      10. Covenant Not To Compete.

            (a) Covenants Against Competition. The Executive acknowledges that
as of the execution of this Employment Agreement (i) the Company is engaged in
the business of providing sales and marketing and marketing research services to
the pharmaceutical and biotechnology industries and in the sale of
pharmaceutical and biotechnology products (the "Business"); (ii) the Company's
Business is conducted currently throughout the United States and may be expanded
to other locations; (iii) her employment with the Company will have given her
access to confidential information concerning the Company; and (iv) the
agreements and covenants contained in this


                                       13


Agreement are essential to protect the business and goodwill of the Company.
Accordingly, the Executive covenants and agrees as follows:

                  (i) Non-Compete. Without the prior written consent of the
Board of the Company, the Executive shall not during the Restricted Period (as
defined below) within the Restricted Area (as defined below) (except in the
Executive's capacity as an officer of the Company or any of its affiliates), (a)
engage or participate in the Business; (b) enter the employ of, or render any
services (whether or not for a fee or other compensation) to, any person engaged
in the Business; or (c) acquire an equity interest in any such person; provided,
that the foregoing restrictions shall not apply at any time if the Executive's
employment is terminated during the Term by the Executive for Good Reason (as
defined in Section 8(b) below) or by the Company other than for "Cause";
provided, further, that during the Restricted Period the Executive may own,
directly or indirectly, solely as a passive investment, securities of any
company traded on any national securities exchange or on the National
Association of Securities Dealers Automated Quotation System.

                  As used herein, "Restricted Period" shall mean the period
commencing on the Commencement Date and ending on the second anniversary of the
Executive's termination of employment.

                  "Restricted Area" shall mean any place within the United
States and any other country in which the Company is then actively considering
conducting Business.

            (b) Confidential Information; Personal Relationships. The Executive
acknowledges that the Company has a legitimate and continuing proprietary
interest in the protection of its confidential information and has invested
substantial sums and will continue to invest substantial sums to develop,
maintain and protect confidential information. The Executive agrees that, during
and after the Restricted Period, without the prior written consent of the Board,
the Executive shall keep secret and retain in strictest confidence, and shall
not knowingly use for the benefit of himself or others all confidential matters
relating to the Company's Business including, without limitation, operational
methods, marketing or development plans or strategies, business acquisition
plans, joint venture proposals or plans, and new personnel acquisition plans,
learned by the Executive heretofore or hereafter (such information shall be
referred to herein collectively as "Confidential Information"); provided, that
nothing in this Agreement shall prohibit the Executive from disclosing or using
any Confidential Information (A) in the performance of her duties


                                       14


hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of her rights under this Agreement or any other agreement with the
Company, or (D) in connection with the defense or settlement of any claim, suit
or action brought or threatened against the Executive by or in the right of the
Company. Notwithstanding any provision contained herein to the contrary, the
term Confidential Information shall not be deemed to include any general
knowledge, skills or experience acquired by the Executive or any knowledge or
information known or available to the public in general. Moreover, the Executive
shall be permitted to retain copies of, or have access to, all such Confidential
Information relating to any disagreement, dispute or litigation (pending or
threatened) involving the Executive.

            (c) Employees of the Company and its Affiliates. During the
Restricted Period, without the prior written consent of the Board of the
Company, the Executive shall not, directly or indirectly, hire or solicit, or
cause others to hire or solicit, for employment by any person other than the
Company or any affiliate or successor thereof, any employee of, or person
employed within the two years preceding the Executive's hiring or solicitation
of such person by, the Company and its affiliates or successors or encourage any
such employee to leave her employment. For this purpose, any person whose
employment has been terminated involuntarily by the Company shall be excluded
from those persons protected by this Section for the benefit of the Company.

            (d) Business Relationships. During the Restricted Period, the
Executive shall not, directly or indirectly, request or advise a person that has
a business relationship with the Company to curtail or cancel such person's
business relationship with the Company.

            (e) Rights and Remedies Upon Breach. If the Executive breaches,
threatens to commit a breach of, any of the provisions contained in Section 10
of this Agreement (the "Restrictive Covenants"), the Company shall have the
following rights and remedies, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity.

                  (i) Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company.


                                       15


                  (ii) Accounting. The right and remedy to require the Executive
to account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by the Executive as
the result of any action constituting a breach of Restrictive Covenants.

            (f) Severability of Covenants. The Executive acknowledges and agrees
that the Restrictive Covenants are reasonable and valid in duration and
geographical scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect without regard to the invalid portions. The
provisions set forth in Section 10 above shall be in addition to any other
provisions of the business conduct and ethics policy applicable to employees of
the Company and its subsidiaries during the term of Executive's employment.

            (g) Saving Clause. If the period of time or the area specified in
subsection (a) above should be adjudged unreasonable in any proceeding, then the
period of time shall be reduced by such number of months or the area shall be
reduced by the elimination of such portion thereof or both so that such
restrictions may be enforced in such area and for such time as is adjudged to be
reasonable. If the Executive violates any of the restrictions contained in the
foregoing subsection (a), the restrictive period shall not run in favor of the
Executive from the time of the commencement of any such violation until such
time as such violation shall be cured by the Executive to the satisfaction of
Company.

      11. Executive's Representation and Warranties. Executive represents and
warrants that she has the full right and authority to enter into this Agreement
and fully perform her obligations hereunder, that she is not subject to any
non-competition agreement other than with the Company, and that her past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that she
is not obligated under any contract (including, but not limited to, licenses,
covenants or commitments of any nature) or other agreement or subject to any
judgment, decree or order of any court or administrative agency which would
conflict with her obligation to use her best efforts to perform her duties
hereunder or which would conflict with the Company's business and operations as
presently conducted or proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on


                                       16


of the Company's business as officer and employee by Executive will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument to which
Executive is currently a party.

      12. Miscellaneous.

            (a) Integration; Amendment. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters set forth
herein and supersedes and renders of no force and effect all prior
understandings and agreements between the parties with respect to the matters
set forth herein. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.

            (b) Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable law or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited, or invalid, but the remainder of this Agreement shall not be invalid
and shall be given full force and effect so far as possible.

            (c) Waivers. The failure or delay of any party at any time to
require performance by the other party of any provision of this Agreement, even
if known, shall not affect the right of such party to require performance of
that provision or to exercise any right, power, or remedy hereunder, and any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of the provision itself, or a waiver of any right, power, or
remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to other or further notice or demand in
similar or other circumstances.

            (d) Power and Authority. The Company represents and warrants to the
Executive that it has the requisite corporate power to enter into this Agreement
and perform the terms hereof; that the execution, delivery and performance of
this Agreement by it has been duly authorized by all appropriate corporate
action; and that this Agreement represents the valid and legally binding
obligation of the Company and is enforceable against it in accordance with its
terms.

            (e) Burden and Benefit; Survival. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, personal and legal representatives, successors and assigns. In
addition to, and not in limitation of, anything contained in


                                       17


this Agreement, it is expressly understood and agreed that the Company's
obligation to pay Termination Compensation as set forth herein shall survive any
termination of this Agreement.

            (f) Governing Law; Headings. This Agreement and its construction,
performance, and enforceability shall be governed by, and construed in
accordance with, the laws of the State of New Jersey. Headings and titles herein
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.

            (g) Arbitration; Remedies. Any dispute or controversy arising under
this Agreement or as a result of or in connection with Executive's employment
(other than disputes arising under Section 10) shall be arbitrated and settled
pursuant to the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association which are then in effect in a proceeding held
in Bergen County, New Jersey. This provision shall also apply to any and all
claims that may be brought under any federal or state anti-discrimination or
employment statute, rule or regulation, including, but not limited to, claims
under: the National Labor Relations Act; Title VII of the Civil Rights Act;
Sections 1981 through 1988 of Title 42 of the United States Code; the Employee
Retirement Income Security Act; the Immigration Reform and Control Act; the
Americans With Disabilities Act; the Age Discrimination in Employment Act; the
Fair Labor Standards Act; the Occupational Safety and Health Act; the Family and
Medical Leave Act; and the Equal Pay Act. The decision of the arbitrator and
award, if any, is final and binding on the parties and the judgment may be
entered in any court having jurisdiction thereof. The parties will agree upon an
arbitrator from the list of labor arbitrators supplied by the American
Arbitration Association. The parties understand and agree, however, that
disputes arising under Section 10 of this Agreement may be brought in a court of
law or equity without submission to arbitration.

            (h) Jurisdiction. Except as otherwise provided for herein, each of
the parties (a) submits to the exclusive jurisdiction of any state court sitting
in Bergen County, New Jersey or federal court sitting in New Jersey in any
action or proceeding arising out of or relating to this Agreement, (b) agrees
that all claims in respect of the action or proceeding may be heard and
determined in any such court, (c) agrees not to bring any action or proceeding
arising out of or relating to this Agreement in any other court and (d) waives
any right such party may have to a trial by jury with respect to any action or
proceeding arising out of or relating to this Agreement. Each of the parties
waives any defense of inconvenient forum to the maintenance of any action or
proceeding


                                       18


so brought and waives any bond, surety or other security that might be required
of any other party with respect thereto. Any party may make service on another
party by sending or delivering a copy of the process to the party to be served
at the address and in the manner provided for giving of notices in Section
12(i). Nothing in this Section, however, shall affect the right of any party to
serve legal process in any other manner permitted by law.

            (i) Notices. All notices called for under this Agreement shall be in
writing and shall be deemed given upon receipt if delivered personally or by
confirmed facsimile transmission and followed promptly by mail, or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at their respective addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof) as set forth in the preamble to
this Agreement or to any other address or addressee as any party entitled to
receive notice under this Agreement shall designate, from time to time, to
others in the manner provided in this subsection 12(i) for the service of
notices.

            Any notice delivered to the party hereto to whom it is addressed
shall be deemed to have been given and received on the day it was received;
provided, however, that if such day is not a business day then the notice shall
be deemed to have been given and received on the business day next following
such day. Any notice sent by facsimile transmission shall be deemed to have been
given and received on the business day next following the day of transmission.

            (j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.


                                       19


      IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

                                      ------------------------------------
                                      BETH JACOBSON


                                      PDI, INC.


                                      By:
                                      ------------------------------------
                                         Charles T. Saldarini
                                         Chief Executive Officer


                                       20

EX-10.13

                                                                   EXHIBIT 10.13

================================================================================

                   EXCLUSIVE LICENSE AGREEMENT FOR TOSTREX(TM)

                                     BETWEEN

                                    PDI, INC.

                                       AND

                          CELLEGY PHARMACEUTICALS, INC.

================================================================================

[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.




[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

ARTICLE 1 DEFINITIONS ....................................................     1

         "Affiliates" ....................................................     1
         "Agreement" .....................................................     1
         "Approvals" .....................................................     2
         "Auditor" .......................................................     2
         "Cellegy Information " ..........................................     2
         "Dollars" or "$" ................................................     2
         "Defective Product" .............................................     2
         "Exclusive License" .............................................     2
         "Effective Date" ................................................     2
         "FDA" ...........................................................     2
         "FD&C Act" ......................................................     2
         "Good Manufacturing Practice" ...................................     2
         "Improved Product" ..............................................     2
         "Intellectual Property Rights" ..................................     2
         "Joint Management Committee" ....................................     2
         "Launch Date" ...................................................     3
         "Loss" ..........................................................     3
         "Licensed Product" ..............................................     3
         "KnowHow" .......................................................     3
         "Net Sales" .....................................................     3
         "Patent Rights" .................................................     3
         "Proprietary Rights" ............................................     3
         "Relevant Regulatory Authority" .................................     4
         "Territory" .....................................................     4
         "Third Party" ...................................................     4
         "Trademark" .....................................................     4
         "Sublicensee" ...................................................     4

ARTICLE 2 REPRESENTATIONS AND WARRANTIES .................................     4

    2.1  "Representations and Warranties of Cellegy" .....................     4
    2.2  "Representations and Warranties of Licensee" ....................     6

ARTICLE 3 GRANT OF LICENSE ...............................................     6

    3.1  "Grant" .........................................................     6
    3.2  "Addition to the Territory" .....................................     6
    3.3  "Restrictions on Territory " ....................................     6
    3.4  "Right to sublicense in the Territory" ..........................     6
    3.5  [*] .............................................................     7
    3.6  "Marketing Effort" ..............................................     7
    3.7  "Maintenance of Exclusivity " ...................................     7
    3.8  "Covenant not to Compete" .......................................     8
    3.9  "Notice of Other Testosterone Product Deals" ....................     8


                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

                           Table of Contents (Cont'd)

                                                                            Page
                                                                            ----

ARTICLE 4 LICENSE FEE AND MILESTONE PAYMENTS .............................     8

    4.1  "License Fee" ...................................................     8
    4.2  "Milestone Payments " ...........................................     8
    4.3  "Fee Conditions " ...............................................     8

ARTICLE 5 ROYALTIES AND PAYMENTS FOR ORDERED GOODS .......................     8

    5.1  "Royalties in General" ..........................................     8
    5.2  "Royalty Defined" ...............................................     9
    5.3  "Burdened Costs " ...............................................     9
    5.4  "Minimum Royalty" ...............................................     9

ARTICLE 6 ROYALTY REPORTS AND ACCOUNTING .................................    10

    6.1  "Royalty Reports; Records" ......................................    10
    6.2  "Payment Due Dates" .............................................    10
    6.3  "Right to Audit Licensee" .......................................    11
    6.4  "Right to Audit Cellegy" ........................................    11
    6.5  "Overpayment or Underpayment of Burdened Cost" ..................    11
    6.6  "Disagreement with Auditor Findings" ............................    11

ARTICLE 7 SUPPLY OF LICENSED PRODUCT BY CELLEGY ..........................    12

    7.1  "Purchasing Commitment" .........................................    12
    7.2  "Forecasts and Ordering Procedure" ..............................    12
    7.3  "Orders" ........................................................    13
    7.4  "Production and Supply of Licensed Product " ....................    13
    7.5  "Defective Product" .............................................    13
    7.6  "Product Packaging " ............................................    14
    7.7  "Title and Risk of Loss " .......................................    14
    7.8  "United States Export Controls " ................................    14
    7.9  "Supply Warranty and Disclaimer " ...............................    14
    7.10 "Remedy for Failure to Supply Licensed Product" .................    15

ARTICLE 8 PATENT RIGHTS ..................................................    16

    8.1  "No Ownership by Licensee " .....................................    16
    8.2  "New Cellegy Inventions/Improvements " ..........................    17
    8.3  "Improvements by Licensee " .....................................    17
    8.4  [*] .............................................................    17

ARTICLE 9 INFRINGEMENT AND OTHER CLAIMS ..................................    18

    9.1  "Infringement by Third Person" ..................................    18
    9.2  "Alleged Infringement of Third Party Patents" ...................    18
    9.3  "By Cellegy" ....................................................    19


                                                                   REDACTED COPY



[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

                           Table of Contents (Cont'd)

                                                                            Page
                                                                            ----

    9.4  "By Licensee" ...................................................    19
    9.5  "Conditions to Indemnification" .................................    19
    9.6  "Control of Proceedings" ........................................    20
    9.7  "Indemnification Claim" .........................................    20
    9.8  "Assumption of Defense by Cellegy" ..............................    20

ARTICLE 10 CONFIDENTIALITY ...............................................    20

   10.1  "Treatment of Confidential Information" .........................    20
   10.2  "Right to Disclose" .............................................    20
   10.3  "Release From Restrictions" .....................................    21
   10.4  "Confidentiality of Agreement" ..................................    21
   10.5  "Return of Confidential Information" ............................    21

ARTICLE 11 TRADEMARKS ....................................................    22

   11.1  "Cellegy's Marks" ...............................................    22
   11.2  "Use of Cellegy's Marks by Licensee " ...........................    22
   11.3  "Acknowledgment of Ownership" ...................................    22
   11.4  "Marking " ......................................................    22
   11.5  "Registration " .................................................    22
   11.6  "Infringement Information " .....................................    22
   11.7  "Termination of Use " ...........................................    22
   11.8  "Trademarks" ....................................................    22

ARTICLE 12 TERM; TERMINATION .............................................    23

   12.1  "Term" ..........................................................    23
   12.2  "Bilateral Termination Rights" ..................................    23
   12.3  "Bankruptcy Rights" .............................................    23
   12.4  "Rights Upon Termination or Expiration" .........................    24

ARTICLE 13 REGULATORY MATTERS ............................................    24

   13.1  "Licensee's Obligations " .......................................    24
   13.2  "Cellegy's Obligations " ........................................    25
   13.3  "Adverse Drug Events and Recalls " ..............................    25
   13.4  "Approvals " ....................................................    26
   13.5  "Cellegy Information Warranties " ...............................    26
   13.6  "Insurance " ....................................................    27

ARTICLE 14 REGISTRATION OF LICENSE; LIMITATION OF LIABILITY ..............    27

   14.1  "Registration of License " ......................................    27
   14.2  "Limitation of Liability " ......................................    27

ARTICLE 15 [*] ...........................................................    27


                                                                   REDACTED COPY


                           Table of Contents (Cont'd)

                                                                            Page
                                                                            ----

ARTICLE 16 GENERAL PROVISIONS ............................................    28

   16.1  "Force Majeure" .................................................    28
   16.2  "Further Assurances" ............................................    28
   16.3  "Severability" ..................................................    28
   16.4  "Notices" .......................................................    28
   16.5  "Assignment" ....................................................    29
   16.6  "Amendment" .....................................................    29
   16.7  "Entire Agreement" ..............................................    29
   16.8  "Waiver" ........................................................    29
   16.9  "No Implied Licenses" ...........................................    29
   16.10 "Injunctions" ...................................................    29
   16.11 "Independent Contractors" .......................................    29
   16.12 "No Third Party Beneficiaries" ..................................    30
   16.13 "Governing Law" .................................................    30
   16.14 "Headings" ......................................................    30
   16.15 "Counterparts" ..................................................    30
   16.16 "Publicity" .....................................................    30
   16.17 "Resolution of Disputes" ........................................    30

SIGNATURES

EXHIBIT A  -  REPORTING OF ADVERSE DRUG EVENTS

EXHIBIT B  -  MINIMUM SALES REQUIREMENTS

EXHIBIT C  -  PATENT RIGHTS

EXHIBIT D  -  OTHER TESTOSTERONE PRODUCTS

EXHIBIT E  -  BURDENED COSTS

EXHIBIT F  -  TRADEMARKS


                                                                   REDACTED COPY



                           EXCLUSIVE LICENSE AGREEMENT

      THIS EXCLUSIVE LICENSE AGREEMENT (this "Agreement") is made and entered
into as of December 31st, 2002 (the "Effective Date"), by and between Cellegy
Pharmaceuticals, Inc., a California corporation ("Cellegy"), and PDI, Inc., a
Delaware corporation ("Licensee").

                              W I T N E S S E T H:
                               - - - - - - - - - -

      WHEREAS, Cellegy owns or possesses certain intellectual property rights
current and pending with respect to the Licensed Product (as hereinafter
defined) and certain rights pertaining to the Trademark (as hereinafter
defined);

      WHEREAS, Licensee desires to obtain an exclusive license to certain rights
current and pending to the Licensed Product under such intellectual property
rights, and to the Trademark within the Territory (as hereinafter defined);

      WHEREAS, Cellegy is willing to grant an exclusive license to Licensee
under such current and pending intellectual property rights, and is willing to
grant an exclusive license to the Trademark to Licensee, each within the
Territory, all as more particularly described in, and subject to the terms and
conditions of, this Agreement.

      NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties mutually agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

      As used in this Agreement, the following terms, whether used in the
singular or the plural, shall have the following meanings:

      "Affiliates" shall mean, with respect to any party, any person, which,
directly or indirectly, is controlled by, controls or is under common control
with such party. For purposes of this definition, the term control (including
with correlative meanings, the terms controlled by and under common control
with) means having the power, whether held directly or indirectly and by
whatever means (and whether or not enforceable at law or in equity) to:

            (i) exercise or control the right to vote attached to 50% or more of
the issued shares in the party;

            (ii) dispose of or exercise a right of disposal in respect of 50% or
more of the issued voting shares in the party;

            (iii) appoint one half or more of the number of directors to the
board of the party; or

            (iv) determine substantially the conduct of the party's business
activities.

                                                                             -1-
                                                                   REDACTED COPY



      "Agreement" means this Exclusive License Agreement.

      "Approvals" are registration approvals, registrations or authorizations
provided by the Relevant Regulatory Authority in the Territory for the
manufacturing, importation, storage, promotion, sale or distribution of the
Licensed Product.

      "Auditor" shall mean an independent public accountant and auditor that has
not been employed or had been employed by Licensee, Cellegy or PanGeo and
possesses no beneficial ownership of Cellegy, Licensee or PanGeo.

      "Cellegy Information" means the technical and clinical information
concerning the Licensed Product that is developed by Cellegy or licensed in by
Cellegy (with the right to grant sublicense rights to Licensee), and that is
included in the new drug application filed with the FDA, and Cellegy's European
common technical document format, and which may include, without limitation,
data in support of registered indications, bioequivalency data and information,
clinical data, pharmaco-toxicological data, analytical methods, stability and
pharmaceutical data concerning the Licensed Product, Know How, and any other
related supporting documentation in the possession of Cellegy from time to time
relating to such package.

      "Dollars" or "$" means United States dollars.

      "Defective Product" means any condition that violates the warranty defined
in Section 7.9 or conditions to the Licensed Product in packaging or utility
that prevents it from being sold to a Third Party up to and including any FDA
concerns with compliance to regulatory and manufacturing guidelines.

      "Exclusive License" means a license whereby Licensee's rights in the
Licensed Product in the Territory shall be sole and exclusive and shall operate
to exclude all others, including Cellegy.

      "Effective Date" means the date set forth at the beginning of this
Agreement.

      "FDA" means the United States Food and Drug Administration, or any
successor entity thereto.

      "FD&C Act" means the Federal Food, Drug and Cosmetic Act, as amended.

      "Good Manufacturing Practice" means manufacturing practices in conformity
with the FDA's regulations and regulatory interpretations of such regulations
covering good manufacturing practices set forth in the FD&C Act and any other
applicable law or regulation, as such regulations may be amended and interpreted
by the appropriate government authorities from time to time.

      "Improved Product" means any and all new developments or versions of the
Licensed Product delivered to Licensee under this Agreement.

      "Intellectual Property Rights" means all rights and interests, current and
pending, vested or arising out of any industrial or intellectual property,
whether protected at common law or under statute, which includes (without
limitation) the Proprietary Rights, Patent Rights and Know-How and any rights
and interests in inventions (both patentable and unpatentable), patents,
copyrights, moral rights, designs (whether registered or unregistered), trade
marks (whether registered or unregistered), trade secrets, goodwill, samples,
materials, data, know-how, results and Confidential Information.


                                                                             -2-
                                                                   REDACTED COPY


      "Joint Manufacturing Committee" means a committee consisting of two
designees of each of Cellegy and Licensee; such committee shall work jointly to
manage the process of supplying the Licensed Product to the License, as further
set forth in Section 7.1(a).

      "Launch Date" means the date upon which the first arms length commercial
sale of the Licensed Product in finished product form, packaged and labeled for
sale to a Third Party in the Territory occurs after securing regulatory Approval
required to promote, manufacturer, sell, and distribute the Licensed Product in
the applicable country in the Territory.

      "Loss" means any and all loss, liability, damage, fee, cost, (including
without limitation actual reasonable court costs and reasonable attorneys' fees
regardless of outcome) expense, suit, claim, demand, judgment and prosecution.

      "Licensed Product" means the testosterone based transdermal gel product
for the treatment of male hypogonadism and low levels of testosterone in men
developed by Cellegy and generally referred to as Tostrex(TM) testosterone gel.

      "Know-How" means any technology or information developed by Cellegy or
licensed in by Cellegy (with the right to grant sub-license rights to the
Licensee) used for manufacturing or formulating the Licensed Product or in
exercise of the rights granted to Licensee hereunder, including, but not limited
to: manufacturing data; formulation or production technology; methods of
synthesis, isolation and purification methods and other manufacturing
information and any proprietary reagents and other materials required to
manufacture the Licensed Product; and any data developed by Cellegy related to
pharmacology, toxicology, pathology, clinical data, results of clinical efficacy
studies, clinical effects and indications for use of the Licensed Product.

      "Net Sales" means the gross sales of a Licensed Product that is due, or
otherwise received by, Licensee, or its Affiliates or its Sublicensees from
Third Party customers for such Licensed Product, less:

                  (i) reasonable credited allowances actually granted to such
            Third Party customers for spoiled, damaged, rejected, recalled,
            outdated and returned Licensed Product and for reasonable
            retroactive price reductions,

                  (ii) the amounts of reasonable trade, quantity and cash
            discounts actually allowed, to the extent such trade, quantity and
            cash discounts are specifically allowed on account of the purchase
            of such Licensed Product,

                  (iii) sales taxes, excise taxes, use taxes and import/export
            duties and any other government charges (other than taxes on income)
            actually due or incurred in connection with the manufacture, use or
            sales of the Licensed Product to any Third Party, and

                  (iv) reasonable allowances, adjustments, reimbursements,
            discounts, chargebacks and rebates actually granted to Third
            Parties, including, but not limited to, rebates given to health care
            organizations or other Third Parties, and any bona fide payment made
            in respect of any sales of Licensed Product to any governmental or
            quasi-governmental body or agency, whether during the actual royalty
            period or not.

      "Patent Rights" means: (i) the patents and patent applications listed in
Exhibit C hereto and any patents and patent applications existing as of the
Effective Date but inadvertently omitted from Exhibit C; (ii) any patent or
patent application hereafter which is acquired by Cellegy or under which Cellegy
becomes licensed and with the right to sublicense to Licensee, during the term
of this Agreement, in each


                                                                             -3-
                                                                   REDACTED COPY


case of (i) and (ii) above relating to the Licensed Product, its manufacture,
use or sale, including methods of use and screening or processes that use the
Licensed Product; (iii) any divisions, continuations and continuations-in-part
defined in (i) or (ii); (iv) any extension, renewal or reissue or a patent
identified in (i), (ii) or (iii); and (v) any continuation,
continuation-in-part, or divisional or any patent application and any reissue or
reexamination of any patent or patent application identified in (i) through
(iv), in each case, to the extent that such items relate to the Licensed Product
its manufacture, use or sale including methods of use and screening or processes
that use the Licensed Product. Such items set forth in subitems (i) through (iv)
will be identified and added by the parties to Exhibit C from time to time
during the term of this Agreement.

      "Proprietary Rights" means all of Cellegy's Intellectual Property Rights
and interests in, to, or covering the Licensed Product, or the manufacture, use
or sale, including methods of use and screening, or processes, that use the
Licensed Product, to the extent that such Intellectual Property Rights are of
such legal status and nature as to permit the same to be lawfully licensed and,
without limiting the generality thereof, specifically include unpatented
inventions, ideas, data, Know-How, technology, trade secrets and Confidential
Information; but only to the extent that the foregoing relate to the Licensed
Product within the scope of the License granted under this Agreement.

      "Relevant Regulatory Authority", in relation to a country or region in the
Territory, means the governmental authority, whether Federal, State or
municipal, regulating the use, importation, manufacture, marketing, sale and/or
distribution of therapeutic substances and the grant of Approvals in such
country or region.

      "Territory" means the United States, its territories, Puerto Rico, Mexico
and Canada.

      "Third Party" means any party other than Cellegy or Licensee, or
Licensee's Affiliates or Sublicensees, or Cellegy's Affiliates or sublicensees.

      "Trademark" means Tostrex (R) and any other trademark developed or
acquired by Cellegy for use in connection with the sale of the Licensed Product
in the Territory, as further set forth in Exhibit F.

      "Sublicensee" means any person to whom Licensee sublicenses the rights, or
any portion thereof, granted by Licensee pursuant to Section 3.1 hereof.

                                    ARTICLE 2
                         REPRESENTATIONS AND WARRANTIES

      2.1 Representations and Warranties of Cellegy. cellegy hereby represents
and warrants to Licensee that:

            (a) Cellegy is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of California, with the corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all requisite
corporate action on the part of Cellegy. This Agreement has been duly executed
and delivered by Cellegy and constitutes the valid, binding and enforceable
obligation of Cellegy, subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws affecting creditors' rights generally from
time to time in effect and to general principles of equity.

            (b) Cellegy is not subject to, or bound by, any provision of: (i)
its articles of incorporation or by-laws, (ii) any mortgage, deed of trust,
lease, note, shareholders' agreement, bond,


                                                                             -4-
                                                                   REDACTED COPY


indenture, license, permit, trust, custodianship, or other instrument, agreement
or restriction, or (iii) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator, that would
prevent, or be violated by, or under which there would be a default as a result
of, nor is the consent of any person required for, the execution, delivery and
performance by Cellegy of this Agreement and the obligations contained herein,
including without limitation, the grant to Licensee of the license described in
Article 3.1 hereof.

            (c) Cellegy is the exclusive owner of all right, title and interest
in the Patent Rights that have been granted in the applicable countries in the
Territory, the claims in the patents included in the Patent Rights are valid and
enforceable, and the patent applications included in the Patent Rights have been
duly filed and contain no material errors. Attached hereto as Exhibit C is a
complete and accurate list of all patents and patent applications included in
the Patent Rights as of the Effective Date.

            (d) Cellegy is the exclusive owner of all right, title and interest
in the Trademark in the Territory, and has taken those measures reasonably
necessary to secure its interest in the Trademark. Attached hereto as Exhibit F
is a complete and accurate list of all trademarks and trademark applications
included in the Trademark, and their status, as of the Effective Date.

            (e) Cellegy has taken reasonable measures to protect the
confidentiality of the Know-How. On occasions where Cellegy has granted access
to Third Parties with respect to material elements of either the Know-How or the
confidential information concerning the Licensed Product, to the best of
Cellegy's knowledge, such access has been granted pursuant to an enforceable
confidentiality agreement that has not been materially breached by the
appropriate Third Party.

            (f) To the best of Cellegy's knowledge, as of the Effective Date,
neither the manufacture, use or sale of the Licensed Product or the practice of
any of the inventions included in the Patent Rights nor the use of the Know-How
by Licensee as contemplated by this Agreement infringes upon any Third Party's
know-how, patent or other intellectual property rights in the Territory.

            (g) To the best of Cellegy's knowledge, there is no Third Party
using or infringing any or all of the Patent Rights or the Trademark in
derogation of the rights granted to Licensee in this Agreement.

            (h) Cellegy has obtained the assignment of all interests of all
rights of Cellegy's employees, and to the best of its knowledge, Cellegy has
obtained the assignment of all interests and all rights of any and all other
Third Parties with respect to the Patent Rights and to the Trademark. To the
best of Cellegy's knowledge, Cellegy has obtained all interests and all rights
of any and all Third Parties (including, but not limited to Cellegy's employees)
with respect to confidential or proprietary portions of the Know-How.

            (i) To the best of Cellegy's knowledge, there is no interference or
opposition actions or litigations pending or any communication, which threatens
interference or opposition actions, or other litigation before any patent and
trademark office, court or any other governmental entity in any jurisdiction in
regard to the Patent Rights or the Trademark.

            (j) Cellegy represents and warrants that, to the best of its
knowledge, it has furnished or will furnish (in accordance with the terms of
this Agreement) to Licensee all of the Know-How which Cellegy owns or possesses.

            (k) Nothing has come to the attention of Cellegy which would
indicate the existence of any material side effect, toxicity effect,
carcinogenicity effect, adverse effect or any instances of


                                                                             -5-
                                                                   REDACTED COPY


deleterious physical effects or reactions resulting from, or alleged to result
from, the Licensed Product, which are not identified in the Know-How delivered
to the Licensee under this Agreement, or which has not been otherwise disclosed
to the Licensee by Cellegy.

            (l) Cellegy has or will maintain access to manufacturing facilities
capable of producing a sufficient quantity of the Licensed Product, under Good
Manufacturing Practices, to meet market demand.

            (m) Cellegy, its Affiliates and sublicensees, and their respective
employees, agents and contractors, will manufacture the Licensed Product under
Good Manufacturing practices, in compliance with all applicable laws, statues,
rules and regulations.

            (n) Cellegy, its Affiliates and sublicensees will manufacture,
transport, distribute and dispose, if applicable, of the Licensed Product in
compliance with all applicable laws, statues, rules and regulations.

            (o) Cellegy shall provide Licensee promptly in writing all adverse
events and safety data that Cellegy or its Affiliates or sublicensees obtain
concerning the Licensed Product and Improved Products.

      2.2 Representations and Warranties of Licensee. Licensee hereby represents
and warrants to Cellegy:

            (a) that Licensee is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with the
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action on the part of Licensee. This Agreement has
been duly executed and delivered by Licensee and constitutes the valid, binding
and enforceable obligation of Licensee, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity.

            (b) the compliance of its Affiliates, and Sublicensees with this
Agreement and obligations such Affiliates and Sublicensees may have to Cellegy,
including, but not limited to payment of any fees or royalties.

                                    ARTICLE 3
                                GRANT OF LICENSE

      3.1 Grant. Cellegy hereby grants to Licensee an Exclusive License, with a
right to sublicense as set forth herein, under all of Cellegy's Intellectual
Property Rights to make or have made, manufacture, market, use, offer for sale,
import and export Licensed Product within the Territory, and to use Cellegy's
Intellectual Property Rights in connection with the storage, promotion, sale and
distribution of Licensed Product and obtaining any Approvals under Section 13.
Licensee's rights to the Licensed Product and the Intellectual Property Rights
are limited to those expressly granted, and all others are reserved to Cellegy.

      3.2 Addition to the Territory. The parties may mutually agree to add to
the Territory other countries and their respective territories and
principalities.

      3.3 Restrictions on Territory. Licensee will use its commercially
reasonable efforts not to knowingly directly distribute or otherwise make
available Licensed Product outside the Territory or


                                                                             -6-
                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

knowingly sell, distribute or otherwise make available Licensed Product to
persons for the purpose of resale or distribution outside the Territory,
exclusive of government, or military customers, and (inside the Territory) for
charitable organizations. Without limiting the foregoing, Licensee agrees to use
all reasonable commercial efforts to ensure compliance with the preceding
sentence, including (i) placing appropriate notices on the labels on Licensed
Products, and (ii) enforcing the foregoing restrictions against any Third Party
to which Licensee, or any Affiliate of Licensee, sells Licensed Products that
Licensee learns is violating such restriction and stop selling or distributing
Licensed Products to such Third Party. Cellegy agrees that in any other licenses
to Third Parties to distribute the Licensed Product outside the Territory, and
in any manufacturing and distribution of the Licensed Product on its own
account, Cellegy will institute materially similar restrictions to those set
forth in this Section 3.3.

      3.4 Right to sub-license in the Territory. Subject to Section 3.5 below,
Licensee may sub-license any of its rights or obligations under this Agreement,
directly or indirectly, in whole or in part:

            (a) to third parties, provided the third party agreement does not
impact on Sections 3.3, 3.7, Article 4 and Article 5 hereof, and that Licensee
gives Cellegy reasonable prior notice of such an arrangement, and will consider
Cellegy's advice about such third parties in good faith; and

            (b) to any of its Affiliates that are engaged primarily in the
business of distribution of pharmaceutical products, as Licensee sees fit;
provided that any such Third Party or Affiliate must agree in writing with
Cellegy, in form and substance reasonably satisfactory to Cellegy, to be bound
by the provisions of this Agreement.

      3.5 [*]

      3.6 Marketing Effort. Licensee agrees to exert its best reasonable
efforts, consistent with the profit opportunity relative to other products in
Licensee's pipeline and market conditions in the Territory to introduce and
diligently promote, sell and service the Licensed Product within the Territory,
including, without limitation, the full and complete attainment of the Minimum
Sales Requirements as set forth below in Section 3.7.

      3.7 Maintenance of Exclusivity.

            (a) [*]

            (b) [*]

      3.8 Covenant Not To Compete. Cellegy hereby covenants and agrees that, for
the term of this Agreement, Cellegy shall not, nor shall it permit any of its
affiliates, nor any of their respective officers, employees, agents, or wholly
owned subsidiaries, nor authorize any of its Affiliates, directors, or
Sublicensees to, individually or jointly with other persons, manufacture,
develop, test, sell, market or distribute any product within the Territory which
contains testosterone for the treatment of male hypogonadism.

      3.9 Notice Regarding other Testosterone Product Deals. Cellegy hereby
covenants and agrees to provide Licensee with prompt written notice in the event
that Cellegy executes a license agreement, development agreement or other
collaboration agreement with respect to the development, marketing or
distribution of any testosterone products within the Territory.


                                                                             -7-
                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

                                    ARTICLE 4
                        LICENSE FEE AND RELATED PAYMENTS

      4.1 License Fee. As consideration of the rights granted to Licensee by
Cellegy under Article 3 and Section 8.4 hereof, Licensee shall pay Cellegy
Fifteen Million Dollars ($15,000,000) in cash on the Effective Date Cellegy
hereby agrees to use its commercially reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary to
expeditiously as possible seek all FDA Approvals for the Licensed Product
required to manufacture, label, promote, sell and distribute the Licensed
Product in the United States, and acknowledges that obtaining FDA Approval for
the Licensed Product is a primary corporate priority.

      4.2 Milestone Payment. Licensee shall pay Cellegy a milestone payment of
ten million dollars ($10,000,000) in cash no later than thirty (30) days after
Cellegy certifies in writing to Licensee that the Licensed Product has all FDA
Approvals required to promote, sell and distribute the Licensed Product in the
United States.

      4.3 Fee Conditions. Each and every payment made under this Article 4 shall
be independent, non-refundable and shall not be considered an advance or credit
on any royalties or other obligation received or owed.

                                    ARTICLE 5
                    ROYALTIES AND PAYMENTS FOR ORDERED GOODS

      5.1 Royalties in General. In consideration of the exclusive license
granted to Licensee hereunder, Licensee shall pay or cause to be paid to Cellegy
the Royalty set forth in this Section 5.

      5.2 Royalty Defined. The "Royalty" shall be equal to the following
amounts:

            (a) [*]

            (b) [*]

            (c) [*]

            (d) [*]

      5.3 Burdened Costs. In addition to the Royalty set forth above, for so
long as Licensee purchases Licensed Product from Cellegy, Licensee will pay
Cellegy the Burdened Cost, as set forth pursuant to Exhibit E hereof, which is
subject to adjustment at the end of each calendar year to reflect actual costs
incurred during such year, as reviewed by the Joint Manufacturing Committee.
Such adjustment (if necessary) will be communicated by Cellegy to Licensee
during the first calendar quarter of the subsequent year together with a payment
representing a refund of an overpayment by Licensee, or an invoice for any
shortfall in payments by Licensee. For each order of Licensed Product under
Section 7, Licensee will pay Cellegy the Burdened Costs within thirty (30) days
of the receipt of the invoice for such order.

      5.4 Minimum Royalty.

            (a) [*]

            (b) [*]


                                                                             -8-
                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

            (c) [*]

                                    ARTICLE 6
                         ROYALTY REPORTS AND ACCOUNTING

      6.1 Quarterly Royalty Reports; Records. During the term of this Agreement
after the Launch Date of the Licensed Product, Licensee shall furnish or cause
to be furnished to Cellegy within a thirty (30) day period from the end of a
calendar quarter a written report or reports (the "Royalty Report") covering the
preceding calendar quarter (each such quarter being sometimes referred to herein
as a "royalty period") showing:

            (a) the Net Sales of the Licensed Product in each country of the
Territory during the royalty period;

            (b) the Royalties, payable in Dollars, which shall have accrued
hereunder in respect to such Net Sales; and

            (c) the exchange rate used in determining the amount of Dollars.

With respect to sales of Licensed Product invoiced in Dollars, the Net Sales and
royalty payable shall be expressed in Dollars. With respect to sales of Licensed
Product invoiced in a currency other than Dollars, the Net Sales and royalty
payable shall be expressed in the domestic currency of the country where such
sale was made together with the Dollar equivalent of the royalty payable,
calculated using the exchange rates normally used by Licensee in its management
and financial reporting, provided, however, that the exchange rates used by
Licensee in preparation of the Royalty Report shall not be materially different
from the exchange rates posted in the Wall Street Journal published on the last
day of such royalty period. Royalty Reports shall be due on the thirtieth (30th)
day following the close of each respective royalty period. Licensee, and its
Affiliates and Sublicensees shall keep contemporaneous, legible, verifiable and
accurate records in sufficient detail to enable the royalties payable hereunder
to be determined and substantiated. A final Royalty Report shall be due upon the
expiration or termination of this Agreement. Licensee agrees that it shall pay
all Royalties otherwise owed during a particular royalty period hereunder, which
are allowable by the law, provided that any restrictions that may be imposed by
the government of any applicable country in the Territory regarding the payment
of royalties to companies outside of said countries shall not eliminate
Licensee's overall obligation to pay Royalties owed, either from Licensee's
headquarters or elsewhere.

      6.2 Payment Due Dates. Royalties shown to have accrued by each royalty
report provided for under Article 6 of this Agreement shall be due and payable
on the date such Royalty Report is due. Payment of royalties in whole or in part
may be made in advance of such due date. All royalty and other payments due to
Cellegy hereunder, shall be made in Dollars, delivered to the account(s)
specified by Cellegy from time to time.

      6.3 Right to Audit Licensee.

            (a) Upon the written request of Cellegy, at Cellegy's expense and
not more than twice in each year, Licensee and its Affiliates shall permit an
Auditor selected by Cellegy to have access during normal business hours to those
records of Licensee and its Affiliates as may be reasonably necessary to verify
the accuracy of the Royalty Reports furnished by Licensee hereunder in respect
of any year ending not more than one (1) year following the end of any Licensee
fiscal year, the calculation of royalties payable to respect of such year shall
be binding and conclusive upon Cellegy and Licensee and


                                                                             -9-
                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

its Affiliates shall be released from any liability or accountability with
respect to royalties for such fiscal year. Cellegy's Auditors will provide a
copy of their audit to Licensee at the time it provides it to Cellegy.

            (b) Licensee shall include in each written sublicense granted by it
pursuant to this Agreement a provision requiring the Sublicensee to keep and
maintain records of sales made pursuant to such Sublicense and to grant access
to such records by Cellegy's Auditor subject to the same terms and conditions as
stated in Article 6.3(a) hereof.

            (c) [*]

      6.4 Right to Audit Cellegy. Upon the written request of Licensee, at
Licensee's expense and not more than twice in each year, Cellegy and its
Affiliates shall permit an Auditor selected by Licensee to have access during
normal business hours to those records of Cellegy as may be reasonably necessary
to verify the accuracy of the Burdened Costs furnished by Cellegy hereunder in
respect of any year ending not more than one (1) year following the end of
Cellegy's fiscal year, the calculation of Burdened costs payable to respect of
such year shall be binding and conclusive upon Licensee, its Affiliates and
Cellegy shall be released from any liability or accountability with respect to
royalties for such fiscal year. Licensee's auditors will provide a copy of their
audit to Cellegy at the time it provides it to Licensee.

      6.5 Overpayment or Underpayment of Burdened Costs. [*]

      6.6 Disagreement with Auditor Findings. If either party hereto disagrees
with the determination made above by the Auditor and such disagreement over the
amount in question is in excess of $1,000,000, then the party who disagrees with
such amount shall (i) provide written notice to the other party within thirty
days, (iii) discuss such disagreement with the other party hereto; and (iii)
reserve all rights under Section 16.17 (Dispute Resolution) and Article 12 (Term
and Termination) hereof.

                                    ARTICLE 7
                      SUPPLY OF LICENSED PRODUCT BY CELLEGY

      7.1 Purchasing Commitment. [*]

            (a) CONFIDENTIAL]

            (b) [*]

            (c) [*]

            (d) [*]

      7.2 Forecasts and Ordering Procedure.

            (a) Within sixty (60) days after the Effective Date, Licensee will
provide to Cellegy an initial sales forecast for orders of the Licensed Product
by Licensee for the following year ("Forecast"). Thereafter, commencing on the
first day of the following calendar quarter, and each calendar quarter
thereafter during the term of the Purchase Commitment, Licensee will provide a
rolling three month update to the Forecast. The Forecasts will be deemed
nonbinding estimates.

            (b) Purchases and sales of the Licensed Product between Licensee and
Cellegy under this Agreement shall be made by means of purchase orders (the
"Orders") submitted from time to time by


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[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

Licensee to Cellegy, specifying, among other things, the number of units of each
Licensed Product ordered under each Order, and the desired date and place of
delivery (the "Delivery Date"). The terms and provisions of this Agreement shall
govern and control each Order submitted by Licensee to Cellegy, and any
different terms or provisions contained in any such Order shall have no force
and affect whatsoever.

      7.3 Orders. In order to facilitate manufacturing planning requirements:

            (a) [*]

            (b) [*]

            (c) [*]

      7.4 Production and Supply of Licensed Product. During the term of this
Agreement or thereafter, Cellegy reserves the right after Joint Manufacturing
Committee approval, to manufacture, produce, assemble, warehouse or source the
Licensed Product at any worldwide location, including locations outside of the
United States of America and locations within or outside the Territory. Subject
to the remainder of this Agreement, Cellegy will use reasonable commercial
efforts to provide an adequate supply of raw materials to the manufacturer of
Licensed Product in order to fulfill its obligations under this Agreement and
supply the Licensed Product to Licensee in accordance with the Orders. Cellegy
agrees to solicit and to allow Licensee's input and advice on manufacturing
issues that may arise from time to time in relation to the Licensed Product and
will not take any intentional action with regard to the manufacturing of the
Licensed Product that will materially disadvantage Licensee's ability to use,
promote or sell the Licensed Product.

      7.5 Defective Product

            (a) If Licensee notifies Cellegy within forty-five (45) days of the
receipt of any shipment of the Licensed Product and Licensee believes any of the
Licensed Product does not conform to the warranties for the Licensed Product set
out in Section 7.9 (the "Defective Product") the parties agree to consult with
each other in order to resolve the issue. If a recall is the basis of FDA
directives, Cellegy will cooperate fully and expediently to assist Licensee in
meeting the objections and concerns of the FDA.

            (b) If such consultation does not resolve the discrepancy within a
further forty-five (45) days from receipt of the notice, the parties agree to
nominate promptly an independent analyst, reasonably acceptable to both parties
(the "Independent Analyst"), that will carry out tests on representative samples
taken from such shipment, and the results of such tests will be binding on the
parties.

            (c) If the Independent Analyst determines that the Defective Product
does not conform to the warranties set out in Section 7, Cellegy will, at its
expense, replace any such Defective Product and reimburse Licensee for the costs
of the Independent Analyst.

            (d) If the Independent Analyst determines that the Defective Product
does conform to the warranties set out in Section 7, Licensee will reimburse
Cellegy for the costs of the Independent Analyst.


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            (e) Except with respect to Defective Product arising from gross
negligence or willful misconduct of Cellegy or its suppliers, with respect to
indemnification obligations hereunder, and except with respect to the remedy for
failure to supply the Licensed Product as set forth in Section 7.10 hereof,
replacement of Defective Product shall be Licensee's sole remedy under this
Agreement with respect to Defective Products. For the avoidance of doubt, the
parties acknowledge and agree that Defective Product issues contemplated in this
Section 7.5 could trigger a Stockout period, subject to the terms set forth in
Section 7.10.

      7.6 Product Packaging. Licensee agrees to provide Cellegy with all artwork
desired for packaging and labeling of the Licensed Product, and Cellegy agrees
to pack and label the Licensed Product in a manner approved by Licensee and
pursuant to Licensee's standard export procedure.

      7.7 Title and Risk of Loss. All Licensed Product shall be delivered F.O.B.
Licensee at a location in the Territory set forth in writing by Licensee. Title
to Licensed Products and all risk of loss shall pass from Cellegy to Licensee at
the time and place of such delivery by Cellegy to a location in the Territory
designated by Licensee. Licensee shall be solely responsible for insuring
Licensed Product after such delivery.

      7.8 Export Controls. Cellegy's obligation to sell and deliver Licensed
Product to Licensee shall be subject in all respects to such laws and
regulations of the United States of America and the Territory as shall from time
to time govern, respectively, the sale and delivery of goods abroad by persons
subject to the jurisdiction of the United States of America and the sale and
delivery of goods in the Territory. Subject to the right of the Licensee to
export, re-export or transship any of the Licensed Product to another country
within the Territory, excluding the actions of any government or military
purchaser, Licensee shall not directly or indirectly export, re-export or
transship any of the Licensed Product, except as shall be permitted by the laws
and regulations of the United States of America and the Territory in effect from
time to time. Upon Cellegy's reasonable request, Licensee shall give written
assurances against such export, re-export, or transshipment.

      7.9 Supply Warranty and Disclaimer.

            (a) Cellegy represents and warrants to Licensee that Cellegy will
use its best efforts to ensure that the Product supplied under this Agreement
will upon delivery and for the duration of shelf life: (1) conform in all
respects to the approved product specifications; (2) be manufactured, tested,
and (subject to Licensee's contributions under Section 7.5 above) labeled and
packaged in accordance with the Laws in the Territory relating to the
manufacture, labeling, packaging and testing of the Licensed Product; and (3)
will be manufactured in accordance with the Good Manufacturing Practice.

            (b) Warranty Limitation; Disclaimer. Except as set forth in Section
7.9(a) above, the sole warranty given by Cellegy regarding any Licensed Product
shall be that written limited warranty, if any, which shall accompany such
Product or which shall otherwise be designated in writing by Cellegy as
applicable to such Licensed Product, as the same may be revised by Cellegy from
time to time. After the Launch Date of the Licensed Product, subsequent changes
to the limited warranty must be approved by Licensee, which approval shall not
be unreasonably withheld. Licensee agrees to provide to its customers within the
Territory a written warranty for each Licensed Product on terms which are at
least as favorable to such customers as that provided by the applicable limited
warranty provided by Cellegy, if any, for such Licensed Product. EXCEPT AS
EXPRESSLY SO WARRANTED AND REPRESENTED IN THIS AGREEMENT, CELLEGY HEREBY
DISCLAIMS ALL WARRANTIES, EXPRESS, STATUTORY AND IMPLIED, APPLICABLE TO THE
LICENSED PRODUCT INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY,
DESIGN, AND/OR FITNESS FOR A PARTICULAR PURPOSE AND/OR AGAINST INFRINGEMENT OR
THE


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[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

LIKE. EXCEPT TO THE EXTENT ARISING FROM CELLEGY'S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OR ANY BREACH OF THIS AGREEMENT, AND EXCEPT WITH RESPECT TO
INDEMNIFICATION OBLIGATIONS HEREUNDER, THE WRITTEN LIMITED WARRANTY, IF ANY,
APPLICABLE TO ANY PARTICULAR PRODUCT SHALL STATE THE FULL EXTENT OF CELLEGY'S
LIABILITY, WHETHER DIRECT OR INDIRECT, SPECIAL OR CONSEQUENTIAL, RESULTING FROM
ANY BREACH OF SUCH WARRANTY. EXCEPT AS EXPRESSLY SET FORTH IN ARTICLE 2, CELLEGY
FURTHER DISCLAIMS ALL EXPRESS, STATUTORY AND IMPLIED WARRANTIES APPLICABLE TO
THE LICENSED PRODUCT, WHICH ARE NOT MANUFACTURED BY CELLEGY, OR BY A LICENSEE OR
SUBLICENSEE OF CELLEGY. EXCEPT AS EXPRESSLY SET FORTH IN ARTICLE 2, THE ONLY
WARRANTIES APPLICABLE TO LICENSED PRODUCT NOT MANUFACTURED BY CELLEGY OR BY A
LICENSEE OR SUBLICENSEE THEREOF SHALL BE THE WARRANTIES, IF ANY, OF THE
MANUFACTURERS OF THOSE ITEMS.

            (c) EXCEPT FOR SUCH WARRANTIES SET FORTH IN ARTICLE 2, LICENSEE
HEREBY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES, EXPRESS, STATUTORY AND
IMPLIED, APPLICABLE TO THE LICENSED PRODUCT INCLUDING, BUT NOT LIMITED TO, ANY
WARRANTY OF MERCHANTABILITY, DESIGN, FITNESS FOR A PARTICULAR PURPOSE AND/OR
AGAINST INFRINGEMENT OR THE LIKE. EXCEPT TO THE EXTENT ARISING FROM LICENSEE'S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR ANY BREACH OF THIS AGREEMENT, AND
EXCEPT WITH RESPECT TO INDEMNIFICATION OBLIGATIONS HEREUNDER, THE WRITTEN
LIMITED WARRANTY, IF ANY, APPLICABLE TO ANY PARTICULAR PRODUCT SHALL STATE THE
FULL EXTENT OF LICENSEE'S LIABILITY, WHETHER DIRECT OR INDIRECT, SPECIAL OR
CONSEQUENTIAL, RESULTING FROM ANY BREACH OF SUCH WARRANTY.

      7.10 Remedy for Failure to Supply Licensed Product.

            (a) In the event that Cellegy breaches its obligation to supply the
Licensed Product in accordance with Section 7.1 through Section 7.5, and
[*]

            (b) For the purposes of this Section 7.10, the following definitions
shall apply:

                  (i) [*]

                  (ii) [*]

                  (iii) [*]

                  (iv) [*]

                  (v) [*]

                                    ARTICLE 8
                                  PATENT RIGHTS

      8.1 No Ownership By Licensee. Subject to Section 8.2 below, Licensee shall
not be deemed by anything contained in this Agreement or done pursuant to it to
acquire any right, title or interest in the Patent Rights or any patent owned by
or licensed to Cellegy now or hereafter covering or applicable to any Product,
nor in or to any invention or improvement, owned by Cellegy under Section 8.2,
now or


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[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

hereafter embodied in any Product, whether or not such invention or improvement
is patentable under the laws of any country.

      8.2 New Cellegy Inventions/Improvements. [*]

      8.3 Improvements by Licensee. [*]

      8.4 [*]

                                    ARTICLE 9
                          INFRINGEMENT AND OTHER CLAIMS

      9.1 Infringement by Third Person. In the event Cellegy or Licensee have
reason to believe that a Third Person may be infringing Patent Rights or
Proprietary Rights or misappropriating any of the Licensed Products, or
infringing, misappropriating or diluting any Licensed Trademark, such party
shall promptly notify the other party. Cellegy may, in its discretion, elect to
enforce the Licensed Products, Proprietary Rights or Cellegy Trademarks, through
legal action or otherwise, and Licensee agrees to reasonably cooperate with
Cellegy in such enforcement. At all times in any such enforcement action,
Cellegy shall be entitled to retain recovery which may be obtained in any
lawsuit brought by Cellegy. In the event Cellegy elects not to enforce the
Patent Rights relating to the Licensed Product within one (1) month after notice
of the possible infringement is given between Cellegy and Licensee, and Licensee
can demonstrate that the potential infringement may result in material lost
sales of the Licensed Product within the applicable country, then Licensee may
institute a lawsuit or other such actions at its expense to prevent continuation
of such potential infringement, and then (1) Licensee may discontinue the
payment in such country by 50% during the suit, until such time as the
infringement of the Patent Rights relating to the Licensed Patents ceases, (2)
Licensee will retain all award, damages or compensation obtained by Licensee in
such suit in full, and (3) Cellegy will provide reasonable cooperation with
respect to any lawsuit which Licensee may bring pursuant to this Article.

      9.2 Alleged Infringement of Third Person Patents.

            (a) If a claim or lawsuit is brought against Licensee alleging
infringement of any patent or infringement or dilution of any trademark owned by
a Third Person arising from Licensee's use, sale, offer for sale, or importing
of the Licensed Product or any improved Product or use of Proprietary Rights,
Licensee shall provide to Cellegy all information in Licensee's possession
regarding such claim or lawsuit. Within a reasonable time after receiving notice
of such claim or lawsuit, but in any event within forty five (45) days after
receiving such notice, Cellegy shall advise Licensee of Cellegy's decision as to
what action it plans to take to dispose of such claim or defend such lawsuit.

            (b) Cellegy shall defend, indemnify and hold Licensee harmless
against any judgment, damage, liability, loss, cost or other, expense (including
reasonable legal fees) resulting from any claim or lawsuit which relates to or
arises out of the alleged infringement by Licensee of any patent owned by a
Third Person to the extent that the alleged infringement relates to actions
covered by the Exclusive License granted to Licensee.

            (c) If Cellegy elects not to dispose of such claim or defend such
lawsuit, Licensee may defend the claim or lawsuit. For purposes of Licensee's
conduct of the disposition or defense, Cellegy shall furnish to Licensee such
reasonable assistance as Licensee may need and from time to time reasonable
request. If Licensee takes on the disposition of a claim or defense of a lawsuit
for which Cellegy is obligated to indemnify Licensee pursuant to this Article,
then the payments for such Licensed


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Product in such country, which would otherwise be payable to Cellegy hereunder,
shall be reduced by 50% during the pendency of such lawsuit or any appeal taken
from it, provided that such reduction shall not occur in the event that, in the
opinion of Cellegy's counsel, the defense of such claim is unwarranted. Upon
final resolution of the above-described claim, lawsuit and/or appeal, Licensee
shall resume paying Cellegy any royalties or license payments payable hereunder,
but in no event shall Licensee be liable for back royalties otherwise reduced
hereunder during the suit.

            (d) If Licensee becomes obligated to pay royalties to any Third
Person, in order to make, have made, or sell the Licensed Product in the
Territory, said royalties shall be creditable against royalties otherwise
payable to Cellegy hereunder; provided, that no such credit shall be allowed
with respect to any royalty paid for the use of any technology, method, process,
device, or equipment in connection with manufacturing, packaging or any
container or delivery system, or the use of any trademark, that was developed by
Licensee, any Affiliate of Licensee or any sublicensee, or obtained from a Third
Person.

      9.3 By Cellegy. Cellegy shall defend, indemnify and hold Licensee harmless
against any liability, damage, loss, cost or expense, including reasonable legal
fees ("Liability") arising out of or resulting from any Third Person claims or
lawsuits made or brought against Licensee, any Affiliate of Licensee or
sublicensee, or any of their respective employees, agents, or contractors, to
the extent such Liability arises out off or relates to (i) negligence or willful
misconduct of Cellegy, or any of this employees, agents or contractors, with
regard to clinical trials or testing of the Licensed Product or any Improved
Product, the preparation and filing of FDA Applications, the maintenance of
NDAs, product labeling, reporting required by the FDA, or any other negligent or
wrongful act or omission of Cellegy; (ii) the manufacture, storage, promotion,
sale or distribution or use of the Licensed Product, (iii) any claim that
Licensee's use of the Licensed Product violated the patent rights of a Third
Party in any country of the Territory in which Cellegy has a patent application
filed or granted covering the Licensed Product; (iv) a Product Liability Claim
based on action or inaction of Cellegy, (iv) Cellegy's breach of, or failure to
comply with any representations, warranties, covenants or obligations or this
Agreement and (v) any material failure of Cellegy or any of its employees,
agents or contractors to comply with any applicable law, rule or regulation.

      9.4 By Licensee. Licensee shall defend, indemnify and hold Cellegy
harmless against any liability, damage, loss, cost or expense, including
reasonable legal fees ("Liability"), arising out of or resulting from: (i) any
Third Person claims or lawsuits made or brought against Cellegy, or any of its
employees, agents or contractors, to the extent such Liability arises out of or
relates to negligence or willful misconduct of Licensee, any Affiliate of
Licensee or sublicensee, or any of their respective employees, agents or
contractors, with regard to the promotion, labeling, distribution or sale of,
the Licensed Product, and Improved Product, or the use of the Proprietary
Rights; or (ii)breach of, or failure to perform or comply with, any of its
representations, warranties, covenants and obligations under this Agreement, or
(iii) any material failure of Licensee or any of its employees, agents or
contractors to comply with any applicable law, rule or regulation.

      9.5 Conditions to Indemnification. The indemnified party shall: (i) advise
the indemnifying party of any claim or lawsuit, in writing promptly, after the
indemnified party has received notice of said claim or lawsuit and (ii) assist
the indemnifying party and its representatives in the investigation and defense
of any claim and/or lawsuit for which indemnification is provided. The agreement
of the parties to indemnify each other shall not be valid as to any settlement
of a claim or lawsuit or offer of settlement or compromise without the prior
written approval of the indemnifying party. Failure of the indemnified party to
provide the notice described in (i) shall affect the indemnifying party's
obligation to indemnify the indemnified party only to the extent the
indemnifying party's rights are prejudiced by such failure.


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      9.6 Control of Proceedings. In actions in which one or both of Licensee
and Cellegy is named as a defendant, neither party shall assert a crossclaim or
third-party claim against the other party for either contribution or indemnity
in that action, but each agrees and reserves the right to fully litigate such
claims for indemnity and contribution at a later time. Further, neither party
will pursue a litigation strategy of affirmatively asserting the fault or
liability of the other party as opposed to simply demonstrating the absence of
their own fault. Each party will provide its own defense; provided, however,
that Cellegy has the right, at any time, subject to the rights and obligations
set forth below, to assume the defense of any action against Licensee.

      9.7 Indemnification Claim. If, at the conclusion of an action, either
party believes it is entitled to contribution or indemnification under the
provisions above, such party shall give the other written notice of its claim
for contribution or indemnification (the "Indemnification Claim"). The party who
receives the Indemnification Claim shall have thirty (30) business days in which
to respond. In the event the parties cannot agree on the validity or amount of
the Indemnification Claim, then the parties shall submit their dispute to
confidential mediation, in accordance with Section 16.17. Neither party may
assert the statute of limitations as a defense to the claim for contribution or
indemnification unless the limitations period had already expired and would have
barred the underlying action against that party at the time the underlying
action was filed.

      9.8 Assumption of Defense by Cellegy. In the event Cellegy exercises its
right to assume the defense of an action against Licensee, Cellegy shall have
the exclusive right to control the defense (including all decisions relating to
litigation, defense and appeal) of any Claim related to Licensee as described by
Section 9.6.In such instances the Licensee shall have the right to retain its
own counsel at its sole cost and expense and participate in such defense. With
respect to settlement, Cellegy shall obtain Licensee's consent to any settlement
of a Claim, related to Licensee as described in Section 9.6, prior to settlement
of such claim, which consent shall not be unreasonably withheld. If Cellegy
requests Licensee's cooperation, Licensee shall reasonably cooperate with
Cellegy in its defense of the Claim, related to Licensee as described in Section
9.6 (including, without limitation, making documents and records available for
review and copying and making persons within its control available for
interview, trial preparation assistance and testimony) and Cellegy shall be
responsible for all costs and expenses associated with Licensee's cooperation.

                                   ARTICLE 10
                                 CONFIDENTIALITY

      10.1 Treatment of Confidential Information. Except as otherwise provided
in this Article 10, during the term of this Agreement and for a period of three
(3) years thereafter, Licensee and its Affiliates will retain in confidence and
use only for purposes of this Agreement any information, data, and materials
supplied by Cellegy or on behalf of Cellegy to Licensee and its Affiliates under
this Agreement, and Cellegy will retain in confidence and use only for purposes
of this Agreement any information, data, and materials supplied by Licensee or
on behalf of Licensee to Cellegy under this Agreement. For purposes of this
Agreement, all such information and data which a party is obligated to retain in
confidence shall be called "Confidential Information." For the avoidance of
doubt, Cellegy Information shall constitute Confidential Information of Cellegy.

      10.2 Right to Disclose. To the extent it is reasonably necessary or
appropriate to fulfill its obligations or exercise its rights under this
Agreement or any rights which survive termination or expiration hereof, Licensee
may disclose Confidential Information to its Affiliates, Sublicensees,
consultants, outside contractors, clinical investigators or other Third Parties
on condition that such entities or persons agree in writing (a) to keep the
Confidential Information confidential for the same time periods and to the same
extent as Licensee is required to keep the Confidential Information confidential
and (b) to


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use the Confidential Information only for such purposes as Licensee is entitled
to use the Confidential Information. Each party or its Affiliates or
Sublicensees may disclose such Confidential Information to government or other
regulatory authorities to the extent that such disclosure (i) is reasonably
necessary to obtain Approvals; or (ii) is otherwise legally required.

      10.3 Release From Restrictions. The foregoing obligations in respect of
disclosure and use of Confidential Information shall not apply to any part of
such Confidential Information that the non-disclosing party, or its Affiliates
(all collectively referred to as the "Receiving Party") can demonstrate by
contemporaneously prepared written evidence:

            (a) is or becomes part of the public domain other than by acts of
the Receiving Party in contravention of this Agreement;

            (b) is disclosed to the Receiving Party or its Affiliates or
Sublicensees by a Third Party, provided such Confidential Information was not
obtained by such Third Party directly or indirectly from the other party under
this Agreement;

            (c) prior to disclosure under this Agreement, was already in the
possession of the Receiving Party or its Affiliates or Sublicensees, provided
such Confidential Information was not obtained, directly or indirectly, from the
other party under this Agreement; or

            (d) results from research and development by persons who have not
had access to the disclosures made to Receiving Party under this Agreement,
including any information obtained through the testing, manufacturing regulatory
approval, or distribution of the Licensed Product, or other activities
undertaken in connection with this Agreement by the Receiving Party.

      10.4 Confidentiality of Agreement. Except as otherwise required by law or
the terms of this Agreement or mutually agreed upon by the parties hereto, each
party shall treat as confidential the terms, conditions and existence of this
Agreement, except that Cellegy and Licensee may disclose such terms and
conditions and the existence of this Agreement to its Affiliates and
Sublicensees, and that Cellegy and Licensee may disclose the terms to its
shareholders to the extent required by the federal securities laws, and
provided, that Cellegy shall seek confidential treatment of the key business
terms contained in this Agreement, including but not limited to all payments
owed hereunder. Upon the execution of this Agreement, the parties shall draft a
joint press release, the text of such shall be mutually agreeable to each party,
announcing the execution of the Agreement.

      10.5 Return of Confidential Information. Upon termination of this
Agreement with respect to the entire Territory, the parties hereto shall return
to the respective party all of such parties confidential information in their
respective possession along with a certification that such party no longer
possesses any such Confidential Information of such other party.

                                   ARTICLE 11
                                   TRADEMARKS

      11.1 Cellegy's Marks. Cellegy owns or has the right to use certain
Trademarks, and certain of the Trademarks may be registered in the
jurisdiction(s) which comprise the Territory.

      11.2 Use of Cellegy's Marks by Licensee. Licensee will have the exclusive
right to use the Trademark in the Territory in connection with the promotion,
marketing, sale and distribution of Licensed Product. Licensee shall use The
Trademark only in the form and manner prescribed by Cellegy and shall further
have the right to use a different trademark on the Licensed Product, provided,
that Licensee shall


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not use the Trademark in conjunction with a different trademark in accordance
with Section 11.8 hereof. In no event shall Licensee use any of the Trademark or
any similar mark or term as part of its business name. In the event that
Licensee does not desire to use the Trademark, Licensee will notify Cellegy
within twelve (12) months after the Effective Date, and Cellegy shall have the
right to terminate the license to the Trademark in its entirety. A termination
of the Licensee to the Trademark shall not be deemed to terminate the License to
the Licensed Product granted in Section 3 hereof.

      11.3 Acknowledgment of Ownership. Licensee acknowledges that

            (a) Cellegy owns the Trademark and all goodwill associated with or
symbolized by the Trademark;

            (b) Licensee has no ownership right in or to any of the Trademark;
and

            (c) Licensee shall acquire no ownership interest in or to any of the
Trademark by virtue of this Agreement. Licensee shall do nothing inconsistent
with Cellegy's ownership of the Trademark and related goodwill and agrees that
all use of the Trademark by Licensee shall inure to the benefit of Cellegy.
Nothing in this Agreement shall be deemed to constitute or result in an
assignment of any of the Trademark to Licensee or the creation of any equitable
or other interests therein. Licensee shall not use any of the Trademark in any
manner as a part of its business, corporate or trade name.

      11.4 Marking. Licensee shall mark all advertising, promotional or other
materials created by it and bearing any of the Trademark (the "Licensee
Material") with such notices as Cellegy may require, including, but not limited
to, notices that the Trademark are trademarks of Cellegy and are being used with
the permission of Cellegy.

      11.5 Registration. Cellegy shall have the sole right to take such action
as it deems appropriate to obtain trademark registration in the Territory for
the Trademark. If it shall be necessary for Licensee to be the applicant to
effect any such registrations, Licensee shall cooperate with Cellegy to effect
any such registrations, and hereby does assign all of its right, title and
interest in and to each such application, and any resulting registration, to
Cellegy, and shall execute all papers and documents necessary to effectuate or
confirm any such assignment. Licensee shall perform all reasonable and necessary
acts and execute all necessary documents to affect the registration of the
Trademark as Cellegy may request, all at Cellegy's sole expense. Licensee shall
not obtain or attempt to obtain in the Territory, or elsewhere, any right, title
or interest, registration, or otherwise, in or to the Trademark, or any of them.
In the event that any such right, title or interest should be obtained by
Licensee in contravention hereof, Licensee shall hold the same on behalf of
Cellegy and shall transfer the same to Cellegy upon request and without expense
to Cellegy.

      11.6. Infringement Information. Licensee shall notify Cellegy promptly of
any unauthorized use of the Trademark or of any mark confusingly similar,
thereto which comes to its attention. Cellegy shall have the sole right to
determine whether or not any action shall be taken against any such
infringement, and Licensee shall not institute any suit or take any action on
account of any such infringement or imitation without first obtaining the
written consent of Cellegy to do so.

      11.7 Termination of Use. Upon expiration or earlier termination of this
Agreement, Licensee shall cease using the Trademark in any manner, either
similar or dissimilar to the use enumerated above.

      11.8 Trademarks. Licensee covenants and warrants that Licensee's use of
the Trademark or other trademarks, trade names, logos and designations of
Cellegy on any and all Licensed Product,


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Licensed Product packaging or labels, stationery, invoices, catalogs, brochures,
packages, containers, and advertising or promotional materials which Licensee or
its Agents prepare or use will be in accordance with Cellegy's intellectual
property policies in effect from time to time, including but not limited to
trademark usage and cooperative advertising policies. Cellegy agrees to provide
copies of such policies to Licensee. Licensee agrees not to attach any
additional trademarks, trade names, logos or designations to any Licensed
Product except in compliance with such policies or otherwise with Cellegy's
prior written consent which will not be unreasonably withheld or delayed..
Licensee further agrees not to use any Cellegy trademark, trade name, logo or
designation in connection with any products other than the Licensed Product.
Licensee will include on each Licensed Product that it distributes, and on all
containers and storage media therefor, all trademark, copyright and other
notices of proprietary rights included by Cellegy on such Licensed Product.
Licensee agrees not to alter, erase, deface or overprint any such notice on
anything provided by Cellegy. Licensee also will include the appropriate
trademark notices when referring to any Licensed Product in advertising and
promotional materials. Licensee shall submit to Cellegy for its prior written
approval and before any use is made thereof, representative samples of the
initial Licensed Product, stationery, invoices, catalogs, brochures, packages,
containers, and advertising or promotional materials bearing any of the
Trademark which Licensee or its Sublicensees prepare, but need not seek prior
approval for subsequent uses of such materials that are in compliance with
Cellegy's policies. Licensee shall also submit to Cellegy for its prior written
approval any such materials that may not be consistent with Cellegy's
intellectual property policies in effect from time to time, and Cellegy shall
use all reasonable efforts to respond promptly to give its approval or indicate
the respects in which changes are required in light of Cellegy's policies.

                                   ARTICLE 12
                                TERM; TERMINATION

      12.1 Term. Unless terminated sooner pursuant to Articles 12.2, 12.3 or
12.4 below, this Agreement shall become effective as of the Effective Date and
shall continue in full force and effect in each country until the later of (a)
the date of expiration of the last to expire of the Patent Rights in such
country, on a country-by-country basis, or (b) the end of the commercial life of
the Licensed Product, as determined by Licensee, country by country, with one
(1) year written notice from Licensee to Cellegy for each country. For countries
in which none of the Patent Rights are filed, the date set forth in subitem (a)
above shall be deemed to be the date of the last to expire of the Patent Rights
in the last applicable country. Such termination may be made with respect to one
or more regions of the Territory without effecting the rest of this Agreement or
the Exclusive License granted hereunder in any other region of the Territory.

      12.2 Bilateral Termination Rights. Either party may terminate this
Agreement upon the occurrence of any of the following:

            (a) The other party becomes the subject of a voluntary bankruptcy or
insolvency case;

            (b) The other party becomes the subject of an involuntary bankruptcy
or insolvency case that is not dismissed within 60 days; or

            (c) Upon or after the material breach of any provision of this
Agreement by the other party (other than an actual or claimed breach of 3.7(a)
by Licensee, which shall instead be governed by the provisions of Section 3.7(b)
hereof) if such material breach is not cured within ninety (90) days after
written notice thereof to the party in default.

      12.3 Bankruptcy Rights.


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            (a) If Licensee terminates this Agreement based on Article 12.2(a),
the License rights will remain intact pursuant to Section 365(n) of the US
Bankruptcy Code.

            (b) If Cellegy plans to seek bankruptcy or reorganization relief,
Cellegy will notify Licensee of such intent prior to filing, and Cellegy at its
option may offer to Licensee all rights to the Licensed Product at the fair
market value of the Licensed Product to Cellegy.

            (c) If Licensee plans to seek bankruptcy or reorganization relief,
Licensee will notify Cellegy of such intent prior to filing, and Licensee at its
option may offer to Cellegy those assets and personnel relating to the
performance of this Agreement at the fair market value of such assets to
Licensee.

      12.4 Rights Upon Termination or Expiration. Upon expiration or termination
of this Agreement, the rights and obligations of the parties shall cease,
including without limitation all licenses, except as follows:

            (a) Upon expiration or termination for any reason, the obligations
of confidentiality and use of Confidential Information under Article 10 shall
survive for the period provided therein;

            (b) Upon expiration or termination for any reason, Articles 9 and 12
of this Agreement shall survive for the maximum duration permitted by law;

            (c) Articles 4, 5, 6.1 6.2 and 7.10 shall survive until all
outstanding payment obligations and reporting obligations of Licensee and its
Affiliates and Sublicensees have been fulfilled, and Article 6.3 shall survive
for three years following the year in which such termination or expiration
became effective; and

            (d) Expiration or termination of this Agreement shall not relieve
the parties of any other obligation accruing prior to such termination.

            (e) To the extent that the then-current inventory was purchased by
Licensee from Cellegy under Article 7 hereof, Cellegy shall have the right to
repurchase all then-current inventory of the Licensed Product then in Licensee's
possession, at the Burdened Cost originally paid by Licensee for such inventory.

                                   ARTICLE 13
                               REGULATORY MATTERs

         13.1. Licensee's Obligations. Licensee shall be responsible to, and
shall use all reasonable commercial efforts to do the following:

                  (a) Upon Approval of the Licensed Product, Licensee, at its
own cost, will comply with any and all applicable statutory, administrative or
regulatory requirements of the Territory or any governmental or political
subdivisions thereof (collectively, "Laws") in relation to the importation,
storage, resale, promotion or distribution of the Licensed Product in the
Territory under this Agreement, including, without limitation, Licensed Product
documentation such as Licensed Product tracking, samples, Licensed Product
complaints, adverse event reporting requirements, post-marketing surveillance
activities, and documentation of recalls, which documentation shall be
maintained by the Licensee for the period required by the Relevant Regulatory
Authorities in the Territory notwithstanding termination or


                                                                            -20-
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expiration of this Agreement, any Licensed Product registrations with any
government agency or health authority, or any registration, approvals, or filing
of this Agreement.

            (b) Upon Approval of the Product, Licensee shall inform Cellegy on
at least a semi-annual basis about the progress of such registration work, and
will provide Cellegy with a copy of all presentations and documents submitted by
Licensee to any regulatory authority with respect to the Licensed Product.

            (c) As between the parties, Cellegy shall be responsible for
regulatory costs relating to Approval in the United States, and for those
mutually agreed clinical costs necessary for Approvals in the Territory, and
Licensee will be responsible for regulatory costs relating to Approvals in
Canada and Mexico, and for conducing and bearing the costs of all post-Approval
regulatory monitoring and reporting in the Territory.

      13.2. Cellegy's Obligations. Cellegy shall:

            (a) use its commercially reasonable efforts to expeditiously obtain
FDA Approval necessary for the sale of the Licensed Product within the United
States, including without limitation, any additional clinical trials, studies or
data in addition to the Cellegy Information that may be required in order to
obtain Approvals for Licensed Product in the United States at Cellegy's sole
expense; Cellegy shall provide Licensee with all information regarding the
obtainment of such Approval and shall seek Licensee's input prior to taking any
actions for seeking the Approval with the Relevant Regulatory Authorities;

            (b) provide to Licensee within one (1) month from the date of
execution of this Agreement a then-current and complete copy of the Cellegy
Information;

            (c) not intentionally withhold any information in its possession
regarding the Licensed Product;

            (d) at its cost, promptly provide a sufficient quantity of the
Licensed Product reasonably necessary for Cellegy to prepare and submit the
application, and the grant, maintenance, variation or renewal of Approvals;

            (e) use reasonable commercial endeavors to procure raw materials to
meet the demands of the Relevant Regulatory Authority relating to any
application and any grant, maintenance, variation or renewal of Approvals; and

            (f) at the request of Licensee, at Cellegy's expense supply all
customary documentation (e.g., free sale certification, certification of
analysis, etc.) that is normally necessary to gain an import pharmaceutical
product license in the Territory.

            (g) assist Licensee in the preparation and execution of any
post-Approval trials in the United States that Licensee reasonably deems
appropriate for the Licensed Product. All costs associated with the
post-Approval trials will be borne by Licensee.

      13.3. Adverse Drug Events and Recalls.

            (a) The parties will comply with the adverse drug event reporting
guidelines as set out in Exhibit A or modified from time to time in accordance
with that Exhibit.


                                                                            -21-
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            (b) Subject to Licensee's right to initiate a Licensed Product
recall pursuant to subparagraph (c) below, Licensee will notify Cellegy of any
product recalls on any quantity of Licensed Product at any time, and Licensee
will administer any such recall in the Territory.

            (c) If the Relevant Regulatory Authority requires or otherwise
initiates a recall of the Licensed Product for any reason whatsoever, Licensee
will immediately administer the recall.

            (d) The parties may submit a sample of the Licensed Product to an
Independent Analyst for a report. The cost of the report of the Independent
Analyst will be paid by the party against which the report is unfavorable.

If an Independent Analyst finds that the sole reason for the recall of the
Licensed Product is the action or inaction of Cellegy, then Cellegy will be
liable for the cost of the recall and will reimburse Licensee for all reasonable
costs and expenses of such recall and will provide replacement quantities of
Licensed Product, free of charge. If an Independent Analyst finds that the sole
reason for the recall of the Licensed Product is the action or inaction of
Licensee, then Licensee will be liable for all such costs and expenses and will
reimburse Cellegy for all reasonable costs and expenses (and the cost of any
replacement quantities of Licensed Product) incurred by Cellegy in connection
with such recall. If an Independent Analyst finds that the action or inaction of
both Cellegy and Licensee were reasons for the recall, then Cellegy and Licensee
will each be responsible for one-half of such costs of the recall unless the
report of the Independent Analyst allocates responsibility in a different
proportion.

      13.4 Approvals

            (a) All Approvals by any governmental agency or health authority
which are necessary to sell the Licensed Product within the Territory shall be
issued to, and held in the name of Licensee for the benefit of Cellegy;
provided, however, that all such Approvals shall constitute the sole property of
Cellegy.

            (b) Cellegy shall promptly provide to Licensee, upon Licensee's
request, such evidence that Licensee shall require, confirming that all
Approvals necessary to import and sell the Licensed Product in the Territory
have been obtained. If such evidence is not received by Licensee within thirty
(30) days of the request, Licensee shall be entitled to not take shipment of the
Licensed Product until such evidence is received.

            (c) Cellegy hereby acknowledges that, except as may otherwise be
required by law, Licensee has no obligation to verify the Cellegy Information.

      13.5. Cellegy Information Warranties. Cellegy represents and warrants to
Licensee that:

            (a) to its knowledge, the Cellegy Information supplied to Licensee
under this Agreement in relation to the Licensed Product will be true and that
it will be legally entitled to supply this information to Licensee;

            (b) it will use all reasonable commercial efforts to ensure that
Cellegy will not alter the Cellegy Information supplied to Licensee or the
materials or processes described in that information in relation to the Licensed
Product without the prior written notification to and approval of Licensee; and

            (c) it will use all reasonable commercial efforts to ensure that in
no event will Cellegy implement any alteration to the Cellegy Information or the
materials or processes described in the Cellegy Information in relation to any
of the Licensed Product supplied to Licensee under this


                                                                            -22-
                                                                   REDACTED COPY


[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

Agreement until the Relevant Regulatory Authority in the Territory has approved
all requisite amendments to the applicable Approvals.

      13.6 Insurance. To the extent commercially available, both parties shall
maintain in full force and effect for the term of this Agreement and for five
(5) years thereafter product liability insurance and property damage insurance
on its operations naming the other party as an additional insured, with terms
reasonably satisfactory to the other party, and shall make a copy of such policy
available to the other party upon request. The amount and extent of coverage of
the insurance required hereunder, if any, shall be not less than a single limit
liability of not less than U.S. $5 million in one claim and in the aggregate,
and each party shall furnish to the other party copies of policies of insurance
or certificates evidencing the existence and amounts of such insurance within
thirty (30) days of the other party's request for such copies. Each party shall
provide the other party with written notice of any cancellation of any insurance
hereunder at least thirty (30) days prior to such cancellation.

                                   ARTICLE 14
                REGISTRATION OF LICENSE; LIMITATION OF LIABILITY

      14.1 Licensee may, at its expense, register the exclusive license granted
under this Agreement in any country of the Territory where the government of
such country would require one for use, sale or distribution of the Licensed
Product in such country and Cellegy shall reasonably cooperate in such
registration at Licensee's expense. Upon request by Licensee, Cellegy agrees
promptly to execute any "short form" licenses developed in a form reasonably
acceptable to Cellegy and submitted to it by Licensee from time to time in order
to affect the foregoing registration in such country.

      14.2 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT,
OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, WARRANTY, TORT
(INCLUDING NEGLIGENCE) OR OTHERWISE, AND WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

                                   Article 15
                                       [*]

                                   ARTICLE 16
                               GENERAL PROVISIONS

      16.1 Force Majeure. Neither party shall be held liable or responsible to
the other party nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement,
other than an obligation to make payments hereunder, when such failure or delay
is caused by or results from fire, floods, embargoes, government regulations,
prohibitions or interventions, war, acts of war (whether war be declared or
not), insurrections, riots, terrorism, civil commotions, acts of God or any
other cause beyond the reasonable control of the affected party to anticipate,
prevent, avoid or mitigate (a "Force Majeure Event"); provided, however, that
any failure or delay in fulfilling a term of this Agreement shall not be
considered a result of a Force Majeure Event if it arises from a failure of
Licensee or Cellegy to comply with applicable laws and regulations.

      16.2 Further Assurances. Each party hereto agrees to perform such acts,
execute such further instruments, documents or certificates, and provide such
cooperation in proceedings and actions as may be reasonably requested by the
other party in order to carry out the intent and purpose of this Agreement,
including without limitation the registration or recordation of the rights
granted hereunder.


                                                                            -23-
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      16.3 Severability. Both parties hereby expressly acknowledge and agree
that it is the intention of neither party to violate any public policy,
statutory or common law, rules, regulations, treaty or decision of any
government agency or executive body thereof of any country or community or
association of countries and specifically agree that if any word, sentence,
paragraph, clause or combination thereof in this Agreement is found by a court
or executive body with judicial powers having jurisdiction over this Agreement
or any of the parties hereto in a final unappealed order, to be in violation of
any such provisions in any country or community or association of countries,
then in such event such words, sentences, paragraphs, clauses or combination
shall be inoperative in such country or community or association of countries
and the remainder of this Agreement shall remain binding upon the parties
hereto.

      16.4 Notices. Any notice required or permitted to be given hereunder shall
be in writing and shall be deemed to have been properly given if delivered in
person, or if mailed by registered or certified mail (return receipt requested)
postage prepaid, or by a nationally recognized overnight courier, or by
facsimile (and promptly confirmed by registered, certified mail or overnight
courier), to the addresses given below or such other addresses as may be
designated in writing by the parties from time to time during the term of this
Agreement. Any notice sent by registered, certified mail or overnight courier as
aforesaid shall be deemed to have been given when mailed.

                                           
      In the case of Cellegy:                 With a required copy to:

          Cellegy Pharmaceuticals, Inc.                Fenwick & West LLP
          349 Oyster Point Boulevard                   815 Connecticut Avenue, Suite 200
          San Francisco, California 94080              Washington, DC 20006
          Attention:  John Chandler                    Attention: Kevin Kelso, Esq.
          Telephone No.:     (650) 616-2200            Telephone No.:    (202) 261-0405
          Facsimile No.:     (650) 616-2222            Facsimile No.:    (202) 463-6520

      In the case of Licensee:                With a required copy to:

        PDI, Inc.                                      PDI, Inc.
        10 Mountainview Road, Suite C-200              10 Mountainview Road, Suite C-200
          Upper Saddle River, NJ 07458                 Upper Saddle River, NJ 07458
          Attention:  Charles T. Saldarini             Attention: Beth R. Jacobson
          Telephone No.:     (201) 258-8456            Telephone No.:    (201) 574-8383
          Facsimile No.:     (201) 258-8445            Facsimile No.:      (201) 258-8445



      16.5 Assignment. This Agreement may not be assigned or otherwise
transferred by either party without the written consent of the other party;
provided, however, that either party may, without such consent, assign this
Agreement in connection with the transfer or sale of all or substantially all of
its business related to this Agreement or in the event of the merger or
consolidation of such party with another corporation, or in the case of
Licensee, in the event of a sale by Licensee of all or substantially all of its
business; and further provided that Cellegy may assign, transfer or pledge its
rights to receive any payments due Cellegy hereunder without Licensee's consent;
provided, however, that Licensee's consent shall be required for any payments
due to Cellegy under this Agreement that are to be divided among separate
entities. Any purported assignment in violation of the preceding sentence shall
be void. Any permitted assignee shall assume all obligations of its assignor
under this Agreement.

      16.6 Amendment. The parties hereto may amend, modify or alter any of the
provisions of this Agreement, but only by a written instrument duly executed by
both parties hereto.


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                                                                   REDACTED COPY


      16.7 Entire Agreement. This Agreement contains the entire understanding of
the parties with respect to the subject matter hereof. All express or implied
agreements and understandings, either oral or written, heretofore made are
expressly merged in and made a part of this Agreement.

      16.8 Waiver. The failure of a party to enforce at any time for any period
any of the provisions hereof shall not be construed as a waiver of such
provisions or of the rights of such party thereafter to enforce each such
provisions.

      16.9 No Implied Licenses. Except as expressly and specifically provided
under this Agreement, the parties agree that neither party is granted any
implied rights to or under any of the other party's current or future patents,
trade secrets, copyrights, moral rights, trade or service marks, trade dress, or
any other intellectual property rights.

      16.10 Injunctions. The parties agree that any breach or threatened breach
by one party of the confidentiality provisions contained in this Agreement will
cause substantial harm to the other party that cannot be remedied by monetary
damages, and therefore each party agrees that either party shall be have the
right to obtain equitable remedies, without bond, including injunctions and
repossession of Confidential Information, to abate actual or threatened breaches
of this Agreement.

      16.11 Independent Contractors. The parties agree that the relationship of
Cellegy and Licensee established by this Agreement is that of independent
licensee and licensor. Furthermore, the parties agree that this Agreement does
not, is not intended to, and shall not be construed to, establish a partnership
or joint venture, and nor shall this Agreement create or establish an
employment, agency or any other relationship. Except as may be specifically
provided herein, neither party shall have any right, power or authority, nor
shall they represent themselves as having any authority to assume, create or
incur any expense, liability or obligation, express or implied, on behalf of the
other party, or otherwise act as an agent for the other party for any purpose.

      16.12 No Third Party Beneficiaries. All rights, benefits and remedies
under this Agreement are solely intended for the benefit of Cellegy and
Licensee, and no Third Party shall have any rights whatsoever to (i) enforce any
obligation contained in this Agreement (ii) seek a benefit or remedy for any
breach of this Agreement, or (iii) take any other action relating to this
Agreement under any legal theory, including but not limited to, actions in
contract, tort (including but not limited to negligence, gross negligence and
strict liability), or as a defense, setoff or counterclaim to any action or
claim brought or made by the parties.

      16.13 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, exclusive of its
choice-of-law rules, except that questions affecting the construction and effect
of any patent shall be determined by the laws of the country in which such
patent has been granted.

      16.14 Headings. The Article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

      16.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same document.

      16.16 Publicity. The parties agree that subsequent to the execution of
this Agreement, a press release approved by both parties will be issued. Except
for such press releases and for periodic disclosures required by law or
regulation or in the ordinary course of its SEC filings, neither party shall (i)
originate any publicity, news release or other public announcement, written or
oral, whether to the public


                                                                            -25-
                                                                   REDACTED COPY


press, stockholders or otherwise, relating to this Agreement, any amendment
hereto or performance hereunder, or (ii) use the name of the other in any
publicity, news release or other public announcement, except (a) with the prior
written consent of the other party, or (b) as required by law, in which case the
originating party will give to the other party at least two (2) days prior
notice of such proposed disclosure to complete a review in order to offer
comments and modifications. Consistent with applicable law, the other party will
have the right to request reasonable changes to the disclosure to protect its
interests. In all other cases, the originating party shall give the consenting
party at least two (2) days to complete a review in order to offer comments,
modifications or to give such consent. The party required to give consent shall
respond in less than two (2) days if practicable

      16.17 Dispute Resolution; Venue

            (a) Mediation. If a controversy or claim arising out of or relating
to this Agreement (hereinafter "Controversy") cannot be resolved through
negotiations, Cellegy and Licensee agree to try in good faith to settle the
Controversy through mediation before resorting to litigations.

                  (1) Either Party may invoke mediation at any time during
negotiations by notifying the other party in writing (the "Mediation Notice")
that it wishes to appoint a mediator. If the Parties cannot agree on a mediator
within 30 days of the receipt of the Mediation Notice (or such longer time as
may be mutually agreed), the Parties agree to submit the Controversy to the
American Arbitration Association (hereinafter "AAA") for mediation under its
Commercial Mediation Rules, to the extent that those rules are not inconsistent
with this Section.

                  (2) Mediation shall be conducted within 30 days of the
agreement of the mediator to conduct the mediation, or such longer time as may
be agreed by the parties. It shall be conducted in Chicago, Illinois at such
location as may be mutually agreeable to the Parties and shall continue for no
longer than two consecutive business days, ending by 5 pm of the second day.

                  (3) The parties agree that each will be represented at each
mediation session by a person with full authority to settle the Controversy.

                  (4) All fees and expenses of the mediation shall be borne by
the parties equally. However, each party shall bear the expense of its own
counsel, representatives, preparation and attendance.

                  (5) Neither party may commence litigation until the parties
have conducted and ended mediation. In the event that the provisions of this
subsection (b) would result in an otherwise timely claim being barred by an
applicable statue of limitations, then the parties agree to toll the application
of the statute of limitations for a period equal to the delay caused by the
mediation.

                  (6) In the event that a controversy cannot be resolved through
mediation, each Party shall thereafter have the right to pursue any and all
remedies available at law or in equity.

            (b) Venue. Any court proceeding instituted my one party against the
other with respect to this Agreement may be commenced in the federal courts
residing in the Southern District of New York or in the Northern District of
California.

                  [remainder of page left intentionally blank]


                                                                            -26-
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                 [Signature Page to Exclusive License Agreement]

IN WITNESS HEREOF, the parties have executed this Agreement as of the Effective
Date.

PDI, INC.                                CELLEGY PHARMACEUTICALS, INC.


By:                                      By:
    ----------------------------             -------------------------------



                                    EXHIBIT A
                REPORTING OF ADVERSE DRUG EVENTS FOR THE PRODUCT

1. This Schedule describes the manner in which each of Cellegy and Licensee
   will meet their legal obligations of reporting adverse drug events connected
   with the product to each other.

2. DEFINITIONS

In this document the following terms have the meanings set out below:

"Adverse Drug Event" is any untoward medical occurrence in a patient or clinical
investigation subject administered with a pharmaceutical product. This includes
any unfavorable and unintended sign (including an abnormal laboratory finding),
symptom, or disease temporally associated with the use of a medicinal product,
whether or not considered related to the medicinal product.

"Minimum Criteria" means the minimum criteria for an Adverse Drug Event report
and must include the following:

            (a) name of the drug;

            (b) a description of the adverse drug event;

            (c) patient identifiers (any one or more of name, initials or
clinical investigation number, age, sex or weight); and

            (d) an identifiable source of the report;

"Non-serious Adverse Drug Event" is any Adverse Drug Event other than a Serious
Adverse Drug Event;

"Serious Adverse Drug Event" is any Adverse Drug Event that satisfies one or
more of the following criteria:

            (a) fatal; or

            (b) life-threatening; or

            (c) causing disability or incapacity; or

            (d) causing or prolonging hospitalization; or

            (e) congenital anomaly or cancer; or

            (f) requiring medical intervention to prevent permanent impairment
or damage;

"Spontaneous reports" are reports from any non-clinical trial source, including
regulatory agencies, consumers and literature;

"Unexpected Adverse Drug Event" is any Adverse Drug Event, the nature or
severity of which is not consistent with the applicable product information.

3. COMMENCEMENT OF REPORTING TIME PERIOD

In this Schedule, where a time is specified within which any report is to be
forwarded by either party to the other party, that period of time will commence
when anyone representing the reporting party first learns of enough information
to satisfy the Minimum Criteria.

4. REGULATORY REPORTING

      4.1 Licensee will:




            (a) be responsible for all reporting under this Schedule to the
relevant regulatory authority in the Territory including reporting, where
applicable, of any international case reports forwarded by Cellegy;

            (b) send to Cellegy a copy of all mail exchanges with the relevant
regulatory authority in the Territory; and

            (c) give Cellegy timely notice of any meetings or discussions with
the relevant regulatory authority in the Territory concerning the safety of any
of the Licensed Products.

4.2 Cellegy will:

            (a) be responsible for all reporting to other regulatory authorities
and the other licensees/distributors outside the Territory;

            (b) notify Licensee of any action taken by any regulatory authority
concerning the safety of any of the Licensed Products within one (1) working day
(references in this Schedule to working days refer to U.S. calendar days, other
than a Saturday or Sunday, on which Citibank's San Francisco, California,
offices are open for commercial banking business during normal banking hours) of
that action being taken and will provide Licensee with complete information
concerning that action;

            (c) provide to Licensee an EU PSUR on an annual basis for three
years following all relevant Approvals (four quarterly or two six-monthly
reports are acceptable as an annual report). Thereafter provide to Licensee a
half yearly summary of all spontaneous reports in relation to the Licensed
Products; and

5. SPONTANEOUS SERIOUS or UNEXPECTED ADVERSE DRUG EVENTS

      5.1 Licensee will forward to Cellegy any spontaneous Serious or Unexpected
Adverse Drug Event report within 72 hours of receipt of these by Licensee on A
CIOMS 1 form.

      5.2 All reports from Licensee on Adverse Drug Events shall be addressed to
Cellegy as follows:

            Cellegy Pharmaceuticals, Inc.
            349 Oyster Point Boulevard
            San Francisco, California  94080
            Telephone No.:     (650) 616-2200
            Facsimile No.:(650)616-2222

      5.3 Cellegy will acknowledge receipt of any such report within 5 working
days of that receipt.

6. SPONTANEOUS NON-SERIOUS ADVERSE DRUG EVENT REPORT

      6.1 Licensee will forward to Cellegy any spontaneous Non-serious Adverse
Drug Event reports on a CIOMS 1 form on a monthly basis.

      6.2 All reports from Licensee on Adverse Drug Events shall be addressed to
Cellegy as follows:




            Cellegy Pharmaceuticals, Inc.
            349 Oyster Point Boulevard
            San Francisco, California  94080
            Telephone No.:     (650) 616-2200
            Facsimile No.:      (650) 616-2222

      6.3 Cellegy will acknowledge receipt of any such report within 5 working
days of that receipt.

7. ARCHIVING OF REPORTS

      7.1 Licensee will maintain all reports in accordance with any regulatory
requirements in Territory.

      7.2 Notwithstanding clause 7.1, Licensee will maintain a record of each
report for at least 5 years from Licensee's receipt or creation of each report
and such maintenance will include:

            (a) a copy (hard copy or electronically available copy) of the
report;

            (b) the date of the initial receipt or creation of the report by
Licensee; and

            (c) for Serious or Unexpected Adverse Drug Event reports, the date
the report was forwarded to and received by Cellegy.

8. CLINICAL TRIAL REPORTS

      8.1 Licensee will forward to Cellegy any Serious or Unexpected Adverse
Drug Event report that is considered to be drug related and occurs during
clinical trials within 72 hours of receipt of such report by Licensee.

      8.2 Any Serious Adverse Drug Event report based upon clinical trials
forwarded to Cellegy according to clause 8.1 will:

            (a) be reported on the Serious Adverse Event form from the case
report form;

            (b) include an assessment of causality by the investigator with an
indication on the case report form; and

            (c) if blinded studies are carried out, a disclosure of the
randomization code by a person not directly involved in the study if it is
ongoing, in order to permit entry of that data into a central database.

      8.3 Licensee will forward to Cellegy any Non-serious Adverse Drug Event
report from clinical trials as part of the end of study reports, provided
however, that at least the safety sections of the end of study reports will be
forwarded to Cellegy within 30 days of completion of the end of study reports.

      8.4 All reports from Licensee on Adverse Drug Events from clinical trials
shall be addressed to Cellegy as follows:



            Cellegy Pharmaceuticals, Inc.
            349 Oyster Point Boulevard
            San Francisco, California  94080
            Telephone No.:     (650) 616-2200
            Facsimile No.:      (650) 616-2222

      8.5 Cellegy will acknowledge receipt of any such report within 5 days of
that receipt.

9. VARIATION OF THIS SCHEDULE

      9.1 This Schedule may be amended by mutual consent of the parties as
evidenced in writing and the amended Schedule will then prevail as the Schedule
to the Agreement.




[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

                                    EXHIBIT B
                           MINIMUM SALES REQUIREMENTS
                                       [*]



                                    EXHIBIT C
                       PATENT RIGHTS FOR LICENSED PRODUCT

A.    U.S. Patent Number 6,319,913 B1 entitled "Penetration Enhancing and
      Irritation Reducing Systems" issued November 20, 2001

B.    U.S. Patent Application Number 09/963,287 (U.S. Publication Number US
      2002/0058650 A1), a continuation of US 6,319,913 B1, entitled "Penetration
      Enhancing and Irritation Reducing Systems"

C.    Canadian Patent Application Number 2,309,688 entitled "Penetration
      Enhancing and Irritation Reducing System" (National Phase of PCT
      Application Number PCT/US98/23750, Publication Number WO 99/24041)

D.    Mexican Patent Application Number 4513 (National Phase of PCT Application
      Number PCT/US98/23750, Publication Number WO 99/24041)

E.    U.S. Patent Application (number not yet assigned) entitled "Semisolid
      Topical Hormonal Compositions and Methods for Treatment", filed October 4,
      2002, claiming priority to U.S. Provisional Application Number 60/327,423,
      filed October 4, 2001

F.    PCT Application Number PCT/US02/31997 (not yet published) entitled
      "Semisolid Topical Hormonal Compositions and Methods for Treatment",
      designated states include Canada and Mexico

G.    U.S. Patent Application Number 10/197,627 entitled "Taper Well Meter Dose
      Pump"

H.    PCT Application yet to be filed corresponding to U.S. Application Number
      10/197,627, filing deadline June 4, 2003



                                    EXHIBIT D
                  OTHER TESTOSTERONE PRODUCTS OWNED BY CELLEGY

 Tostrelle(R) testosterone gel



[*] designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the Commission.

                                    EXHIBIT E

                                  BURDENED COST

"Burdened Cost" means [*]

Cellegy's estimated Burdened Cost for 2003 is as follows:  [*]



                                    EXHIBIT F
                                   TRADEMARKS

Tostrex(TM)

A. US: Filed, second request; Application Number 75/866,691, class IN 5

B. Canada: Filed, pending; Application Number 1128610, class IN

C. Mexico: Registered, Registration Number 737847 issued 2/28/02, class IN 5

EX-23.1

                                                                    Exhibit 23.1


                       CONSENT OF INDEPENDENT ACCOUNTANTS

      We hereby consent to the incorporation by reference in the Registration
Statement of PDI, Inc. on Form S-8 (File No. 333-61231) and in the Registration
Statement of PDI, Inc. on Form S-3 (File No. 333-50024) of our report dated
February 13, 2003, on our audits of the financial statements of PDI, Inc. as of
December 31, 2002 and 2001, and for the years ended December 31, 2002, 2001 and
2000, which report is included in this Annual Report on Form 10-K.


PricewaterhouseCoopers LLP


Florham Park, New Jersey
March 10, 2003

EX-99.1

                                                                    Exhibit 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PDI, Inc. (the "Company") on Form 10-K
for the year ending December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Charles T. Saldarini, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

      (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


/s/ Charles T. Saldarini
- ------------------------

Charles T. Saldarini
Chief Executive Officer
March 10, 2003

EX-99.2

                                                                    Exhibit 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PDI, Inc. (the "Company") on Form 10-K
for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bernard C. Boyle,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

      (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


/s/ Bernard C. Boyle
- --------------------

Bernard C. Boyle
Chief Financial Officer
March 10, 2003