**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**Form 10-Q**

 

**Quarterly Report pursuant to Section 13or 15(d) of the SecuritiesExchange Act of 1934**

 

**For thequarterly period ended March 31, 2006**

 

**CommissionFile Number   001-16379**

 

**Dendrite International, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **New  Jersey**                                                  | ** ** | **22-2786386**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1405 U.S.Highway 206**

**Bedminster,NJ  07921**

(Address, including zip code, ofprincipal executive offices)

 

**(908)443-2000**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.ý yes o no

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

| Large  accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|---------------------------------|--------|-------------------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act): oyes ý no

 

As of May 5, 2006, 43,660,285 shares ofDendrite International, Inc. no par value common stock were outstanding.

 

 

----

 

**DENDRITEINTERNATIONAL, INC.**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED MARCH 31, 2006**

 
| PART I.  | FINANCIAL  INFORMATION                                                                              |   |
|---------------|-----------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                |   |
| ITEM  1.      | Financial Statements                                                                                |   |
|          |                                                                                                |   |
|          | Consolidated Statements of  Operations (unaudited)  Three months ended March 31, 2006 and 2005 |   |
|          |                                                                                                |   |
|          | Consolidated Balance Sheets  (unaudited)  March 31, 2006 and December 31, 2005            |   |
|          |                                                                                                |   |
|          | Consolidated Statements of  Cash Flows (unaudited)  Three months ended March 31, 2006 and 2005 |   |
|          |                                                                                                |   |
|          | Notes to  Unaudited Consolidated Financial Statements                                               |   |
|          |                                                                                                |   |
| ITEM 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |   |
|          |                                                                                                |   |
| ITEM 4.       | Controls  and Procedures                                                                            |   |
|          |                                                                                                |   |
| PART II. | OTHER INFORMATION                                                                                   |   |
|          |                                                                                                |   |
| ITEM 1A       | Risk Factors                                                                                        |   |
|          |                                                                                                |   |
| ITEM 6.       | Exhibits                                                                                            |   |
|          |                                                                                                |
| Signatures    |                                                                                                |

 

2

----

 

PART I.    FINANCIALINFORMATION

 

ITEM 1.    Financial Statements

 

**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(INTHOUSANDS, EXCEPT PER SHARE DATA)**

 

**(UNAUDITED)**

 
| ** **                                         | ** ** | **THREEMONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **MARCH 31,**         | ** ** |
| ** **                                         | ** ** | **2006**                   | ** ** | **2005** | ** ** |
| Revenues                                           |       | $                          | 103,129    |   | $ | 99,447 |   |
|                                               |       |                       |       |   |   |
| Operating  Costs & Expenses:              |       |                       |       |   |   |
| Operating  costs                                   |       | 59,751                     |       | 53,651 |   |
| Selling,  general and administrative               |       | 39,796                     |       | 35,788 |   |
| Research and  development                          |       | 1,734                      |       | 1,818 |   |
| Facility and  other charges                        |       | —                     |       | 9,372 |   |
| Amortization  of acquired intangible assets        |       | 1,022                      |       | 1,250 |   |
| Total  operating costs & expenses         |       | 102,303                    |       | 101,879 |   |
|                                               |       |                       |       |   |   |
| Operating  income (loss)                           |       | 826                        |       | (2,432 | ) |
|                                               |       |                       |       |   |   |
| Interest  income, net                              |       | (454                       | )          | (141 | ) |
| Other  income, net                                 |       | (25                        | )          | (23 | ) |
|                                               |       |                       |       |   |   |
| Income  (loss) before income tax expense (benefit) |       | 1,305                      |       | (2,268 | ) |
| Income tax  expense (benefit)                      |       | 596                        |       | (873 | ) |
|                                               |       |                       |       |   |   |
| Net income  (loss)                                 |       | $                          | 709        |   | $ | (1,395 | ) |
|                                               |       |                       |       |   |   |
| Net income  (loss) per share:                      |       |                       |       |   |   |
| Basic                                              |       | $                          | 0.02       |   | $ | (0.03 | ) |
| Diluted                                            |       | $                          | 0.02       |   | $ | (0.03 | ) |

 

The accompanying notes are an integral part ofthese consolidated statements.

 

3

----

 

**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE DATA)**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                          | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                                                |       |               |       |                  |       |
| Current  Assets:                                                                                                                                                                                                    |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                                                          |       | $                  | 77,374     |                  | $          | 66,145 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,000                                                                                                                                              |       | 71,089             |       | 80,167                |       |
| Prepaid  expenses and other current assets                                                                                                                                                                          |       | 8,852              |       | 8,544                 |       |
| Deferred  income taxes                                                                                                                                                                                              |       | 8,848              |       | 8,848                 |       |
| Total  current assets                                                                                                                                                                                               |       | 166,163            |       | 163,704               |       |
|                                                                                                                                                                                                                |       |               |       |                  |       |
| Property and  equipment, net of accumulated depreciation of $64,736 and $61,019,  respectively                                                                                                                      |       | 51,429             |       | 52,592                |       |
| Other assets                                                                                                                                                                                                        |       | 9,499              |       | 8,856                 |       |
| Goodwill                                                                                                                                                                                                            |       | 90,182             |       | 90,440                |       |
| Intangible  assets, net                                                                                                                                                                                             |       | 24,078             |       | 25,083                |       |
| Capitalized  software development costs, net                                                                                                                                                                        |       | 10,270             |       | 10,341                |       |
| Deferred  income taxes                                                                                                                                                                                              |       | 12,114             |       | 11,991                |       |
|                                                                                                                                                                                                                |       | $                  | 363,735    |                  | $          | 363,007 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                                                                                |       |               |       |                  |       |
| Current  Liabilities:                                                                                                                                                                                               |       |               |       |                  |       |
| Accounts  payable                                                                                                                                                                                                   |       | $                  | 7,389      |                  | $          | 7,677 |   |
| Income taxes  payable                                                                                                                                                                                               |       | 9,298              |       | 9,518                 |       |
| Capital  lease obligations                                                                                                                                                                                          |       | 1,373              |       | 1,383                 |       |
| Accrued  compensation and benefits                                                                                                                                                                                  |       | 17,400             |       | 17,950                |       |
| Accrued  professional and consulting fees                                                                                                                                                                           |       | 6,990              |       | 5,690                 |       |
| Accrued  facility and other charges                                                                                                                                                                                 |       | 1,205              |       | 1,490                 |       |
| Other  accrued expenses                                                                                                                                                                                             |       | 16,473             |       | 17,468                |       |
| Purchase  accounting restructuring accrual                                                                                                                                                                          |       | 1,243              |       | 1,601                 |       |
| Deferred  revenues                                                                                                                                                                                                  |       | 17,521             |       | 18,680                |       |
| Total  current liabilities                                                                                                                                                                                          |       | 78,892             |       | 81,457                |       |
|                                                                                                                                                                                                                |       |               |       |                  |       |
| Capital  lease obligations                                                                                                                                                                                          |       | 1,234              |       | 1,648                 |       |
| Purchase  accounting restructuring accrual                                                                                                                                                                          |       | 2,635              |       | 3,009                 |       |
| Accrued  facility and other charges                                                                                                                                                                                 |       | 3,988              |       | 4,143                 |       |
| Deferred  rent                                                                                                                                                                                                      |       | 5,635              |       | 5,740                 |       |
| Other  non-current liabilities                                                                                                                                                                                      |       | 5,697              |       | 5,595                 |       |
|                                                                                                                                                                                                                |       |               |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                                         |       |               |       |                  |       |
| Preferred  stock, no par value, 15,000,000 shares authorized, none issued                                                                                                                                           |       | —             |       | —                |       |
| Common  stock, no par value, 150,000,000 shares authorized, 46,467,805 and 46,353,252  shares issued; 43,606,502 and 43,491,949 shares outstanding at March 31,  2006 and December 31, 2005, respectively |       | 148,699            |       | 149,947               |       |
| Retained  earnings                                                                                                                                                                                                  |       | 149,657            |       | 148,948               |       |
| Deferred  compensation                                                                                                                                                                                              |       | —             |       | (4,419                | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                               |       | (965               | )          | (1,324                | )          |
| Less  treasury stock, at cost                                                                                                                                                                                       |       | (31,737            | )          | (31,737               | )          |
| Total  stockholders’ equity                                                                                                                                                                                    |       | 265,654            |       | 261,415               |       |
|                                                                                                                                                                                                                |       | $                  | 363,735    |                  | $          | 363,007 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

 

4

----

 

**DENDRITEINTERNATIONAL, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

**(UNAUDITED)**

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Operating  activities:                                                                    |       |                                                 |       |   |   |
| Net income  (loss)                                                                        |       | $                                                    | 709        |   | $ | (1,395 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation  and amortization                                                            |       | 5,872                                                |       | 5,402 |   |
| Write-off of  property and equipment                                                      |       | —                                               |       | 1,030 |   |
| Stock-based  compensation                                                                 |       | 1,921                                                |       | 14 |   |
| Deferred  income taxes                                                                    |       | (1                                                   | )          | (3,006 | ) |
| Tax benefits  from stock-based awards                                                     |       | (216                                                 | )          | — |   |
| Changes in  assets and liabilities, net of effects from acquisitions:                     |       |                                                 |       |   |   |
| Decrease in  accounts receivable                                                          |       | 9,471                                                |       | 1,492 |   |
| (Increase)  decrease in prepaid expenses and other current assets                         |       | (282                                                 | )          | 779 |   |
| Increase in  other assets                                                                 |       | (615                                                 | )          | (24 | ) |
| Decrease in  accounts payable and accrued expenses                                        |       | (975                                                 | )          | (1,094 | ) |
| (Decrease)  increase in accrued facility and other charges                                |       | (440                                                 | )          | 8,291 |   |
| Decrease in  purchase accounting restructuring accrual                                    |       | (469                                                 | )          | (1,102 | ) |
| Increase  (decrease) in income taxes payable                                              |       | 5                                                    |       | (1,495 | ) |
| Decrease in  deferred revenue                                                             |       | (1,248                                               | )          | (1,308 | ) |
| Increase  (decrease) in other non-current liabilities                                     |       | 94                                                   |       | (287 | ) |
|                                                                                      |       |                                                 |       |   |   |
| Net cash  provided by operating activities                                                |       | 13,826                                               |       | 7,297 |   |
|                                                                                      |       |                                                 |       |   |   |
| Investing  activities:                                                                    |       |                                                 |       |   |   |
| Acquisitions,  net of cash acquired                                                       |       | —                                               |       | (9,918 | ) |
| Purchases of  property and equipment                                                      |       | (2,353                                               | )          | (7,887 | ) |
| Additions to  capitalized software development costs                                      |       | (1,126                                               | )          | (1,407 | ) |
|                                                                                      |       |                                                 |       |   |   |
| Net cash used  in investing activities                                                    |       | (3,479                                               | )          | (19,212 | ) |
|                                                                                      |       |                                                 |       |   |   |
| Financing  activities:                                                                    |       |                                                 |       |   |   |
| Payments on  capital lease obligations                                                    |       | (424                                                 | )          | (390 | ) |
| Tax benefits  from stock-based awards                                                     |       | 216                                                  |       | — |   |
| Issuance of  common stock                                                                 |       | 1,034                                                |       | 1,493 |   |
|                                                                                      |       |                                                 |       |   |   |
| Net cash  provided by financing activities                                                |       | 826                                                  |       | 1,103 |   |
|                                                                                      |       |                                                 |       |   |   |
| Effect of  foreign exchange rate changes on cash                                          |       | 56                                                   |       | 71 |   |
| Net increase  (decrease) in cash and cash equivalents                                     |       | 11,229                                               |       | (10,741 | ) |
| Cash and  cash equivalents, beginning of year                                             |       | 66,145                                               |       | 64,020 |   |
|                                                                                      |       |                                                 |       |   |   |
| Cash and  cash equivalents, end of period                                                 |       | $                                                    | 77,374     |   | $ | 53,279 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

 

5

----

 

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**1. Basis of Presentation**

 

The consolidated financial statements of DendriteInternational, Inc. and its subsidiaries (“Dendrite” or the “Company”)included in this Form 10-Q are unaudited and reflect all adjustments(consisting of normal recurring adjustments) which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position as of March 31,2006, operating results for the three months ended March 31, 2006 and 2005and cash flows for the three months ended March 31, 2006 and 2005. Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.

 

Our interim operatingresults may not be indicative of operating results for the full year.

***Reclassifications.***Certain prior period balances have been reclassified to conform to the currentperiod presentation related to the classification of purchased capitalizedsoftware, which is now included in intangible assets, net.

 

**2. Recent Accounting Pronouncements**

 

InMay 2005, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changesand Error Corrections—A Replacement of APB Opinion No. 20 and FASBStatement No. 3” (“SFAS 154”). SFAS 154 changes the accounting for andreporting of a change in accounting principle by requiring retrospectiveapplications to prior periods’ financial statements of changes in accountingprinciple unless impracticable. SFAS 154 is effective for accounting changesmade in fiscal years beginning after December 15, 2005. The Company’sadoption of SFAS 154 did not have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

**3. Stock Based Compensation**

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-BasedPayment” (“SFAS 123(R)”) as a replacement to SFAS 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). This statement supersedesAccounting Principles Board (“APB”) 25, “Accounting for Stock Issued toEmployees” (“APB 25”) which allowed companies to use the intrinsic method ofvaluing share-based payment transactions and amends SFAS No. 95, “Statementof Cash Flows.” SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on the fair-value method as defined in SFAS 123.

 

OnJanuary 1, 2006, the Company adopted SFAS 123(R) using the modifiedprospective application method, as permitted under SFAS 123(R), which requiresmeasurement of compensation cost of all stock-based awards at fair value on thedate of grant and recognition of compensation over the service periods forawards expected to vest. Under this method, compensation cost in 2006 includesthe portion vesting in the period for (1) all stock-based awards grantedprior to, but not vested as of, January 1, 2006, based on the grant datefair value estimated in accordance with the original provisions of SFAS No. 123,and (2) all stock-based awards granted subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R). The Company will recognize the cost of all employee stockawards on a straight-line basis over their respective vesting periods, net ofestimated forfeitures. Accordingly, prior periods amounts have not beenrestated. Under this method, the Company is required to record compensationexpense for all awards granted after the date of adoption and for the unvestedportion of previously granted awards that remain outstanding at the date ofadoption.

 

Priorto the adoption of SFAS 123(R), the Company applied ABP 25 to account for itsstock-based awards. Under ABP 25, the Company generally only recordedstock-based compensation expense for restricted stock units, which amounted to$14 ($9 after tax) for the three months ended March 31, 2005. Under theprovisions of APB 25, the Company was not required to recognize compensationexpense for the cost of stock options issued under its equity compensationplans or of shares issued under the its Employee Stock Purchase Plan (“ESPP”). Withthe adoption of SFAS 123(R), the Company recorded stock-based compensationexpense for the cost of stock options, restricted stock units and shares issuedunder the ESPP (collectively, “Employee Stock-Based Awards”). Stock-basedcompensation expense for the three months ended March 31, 2006, was $1,921($1,043 after tax or $.02 per basic and diluted share). The Company hasnot changed its valuation model used for estimating the fair value of optionsgranted after January 1, 2006, from the Black-Scholes option-pricing modelpreviously used for pro forma presentation purposes.

 

6

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

Thefollowing table details the effect on net loss and loss per share had stockbased-compensation expense for the Employee Stock-Based Awards been recordedfor the three months ended March 31, 2005, based on the fair value methodunder SFAS 123:

 
| ** **                                                                                                                               | ** ** | **For the Three** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                               | ** ** | **Months Ended**       | ** ** |
| ** **                                                                                                                               | ** ** | **March 31,**          | ** ** |
| ** **                                                                                                                               | ** ** | **2005**                    | ** ** |
| Net loss as  reported                                                                                                                    |       | $                           | (1,395     | ) |
|                                                                                                                                     |       |                        |       |
| Add: Total  stock-based expense included in reported net loss, net of related tax effects                                                |       | —                      |       |
|                                                                                                                                     |       |                        |       |
| Deduct:  Total stock-based compensation expense determined under the fair value based method  for all awards, net of related tax effects |       | (3,507                      | )          |
|                                                                                                                                     |       |                        |       |
| Pro forma  net loss                                                                                                                      |       | $                           | (4,902     | ) |
|                                                                                                                                     |       |                        |       |
| Basic loss  per share:                                                                                                                   |       |                        |       |
| As reported                                                                                                                              |       | $                           | (0.03      | ) |
| Pro forma                                                                                                                                |       | $                           | (0.12      | ) |
| Diluted loss  per share:                                                                                                                 |       |                        |       |
| As reported                                                                                                                              |       | $                           | (0.03      | ) |
| Pro forma                                                                                                                                |       | $                           | (0.12      | ) |

 

For the three months endedMarch 31, 2006, the adoption of SFAS 123(R) resulted in incrementalstock-based compensation expense causing income before income taxes expense todecrease by $1,427, net income to decrease by $775 and basic and dilutedearnings per share to decrease by $.02 per share. Stock-based compensationexpense of $14 for the cost of restricted stock units would have beenrecognized in 2006 regardless of the adoption of SFAS 123(R). In addition,in connection with the adoption ofSFAS 123(R), net cash provided by operating activities decreased and netcash provided by financing activities increased in the first quarter of 2006 by$216 related to tax benefits from stock-based payments arrangements.

 

The fair value for these options were estimated atthe date of grant for all periods presented using the Black-Scholes optionpricing model with the following assumptions:

 
| ** **                                        | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **March 31,**                                 | ** ** |
| ** **                                        | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Expected  dividend yield                          |       | 0.0                                                | %          | 0.0 | % |
| Weighted-average  expected stock price volatility |       | 50.0                                               | %          | 50.0 | % |
| Weighted-average  risk-free interest rate         |       | 4.6                                                | %          | 3.7 | % |
| Expected  life of the option (years)              |       | 5.25                                               |       | 5.25 |   |

 

The weighted-average expected stock price volatilitywas estimated based on historical volatility for a period equal to the stock option’sexpected life, ending on the day of grant, and calculated on a quarterly basis.The weight-average risk-free interest rate is based on the U. S. Treasury yieldcurve in effect at the time of grant. The expected life (estimated period oftime outstanding) of stock options granted was estimated using the historicalexercise behavior of employees for grants.

 

7

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**EQUITYCOMPENSATION PLANS**

 

TheCompany has various equity compensation plans (the “Plans”) that provide forthe granting of options to purchase the Company’s common stock and otherequity-based awards. Under the Plans, the total number of shares of commonstock that may be granted is 15,750,000.

 

*Options*

* *

Optionsgranted under the Plans generally vest over a four-year period and areexercisable over a period not to exceed ten years as determined by theCompensation Committee of the Board of Directors. During the years ended December 31,2005 and 2004, certain options were granted that vested during the year ofgrant but were subject to a restriction (of up to four years) on the sale ofany shares acquired upon option exercise in the period of restriction. Incentivestock options are granted with exercise prices at fair value of the Company’scommon stock. Nonqualified options are granted at exercise prices determined bythe Compensation Committee of the Board of Directors, but not below fair marketvalue at the date of grant.

 

A summary of award activity under the Plansas of March 31, 2006 and changes during the three month period is asfollows:

 
| ** **                          | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted-Average**      | ** ** | ** **               | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **Contractual Term** | ** ** | **Intrinsic Value** | ** ** |
| Outstanding December 31,  2005 |       | 10,067,978 |       | $                       | 15.04      |                      |       |                     |       |   |
| Granted                             |       | 7,000      |       | 14.56                   |       |                      |       |                     |       |
| Exercised                           |       | (89,141    | )          | 8.44                    |       |                      |       |                     |       |
| Canceled                            |       | (122,295   | )          | 13.52                   |       |                      |       |                     |       |
| Outstanding March 31,  2006    |       | 9,863,542  |       | 15.11                   |       | 6.1                       |       | 12,580                   |       |
| Exercisable March 31,  2006    |       | 8,727,560  |       | 15.64                   |       | 6.1                       |       | 8,355                    |       |
|                                     |            |            |            |                         |            |                           |            |                          |            |  |

 

AtMarch 31, 2006, and December 31, 2005 there were 8,727,560 and8,818,196 options exercisable with a weighted average exercise price of $15.64and $15.63, respectively. As of March 31, 2006 there were 1,187,560 sharesavailable for future grants under the Plans.

 

Theweighted average fair value of options granted, determined using the Black-Scholesoption valuation method, was $7.30 and $8.90 for the three months ended March 31,2006 and 2005, respectively. The total intrinsic value of options exercisedduring the three months ended March 31, 2006 and 2005, was $548 and $1,119,respectively. As of March 31, 2006, there was $3,331 of total unrecognizedcompensation costs related to stock options. These costs are expected to berecognized over a weighted average period of 0.5 years.

 

Theactual tax benefit realized for the tax deduction from option exercise of theshare-based payment arrangement for the three months ended March 31, 2006and 2005, totaled $216 and $329, respectively.

 

8

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

Informationwith respect to the options outstanding under the Plans at March 31, 2006is as follows:

 
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted-Average**      | ** ** | ** **             | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | **Remaining**             | ** ** | ** **             | ** ** |
| **Exercise Price Per** | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** | **Contractual Life** | ** ** | **Number of**     | ** ** |
| **Share**                        | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **(Years)**               | ** ** | **Vested Shares** | ** ** |
|                             |       |       |       |                    |       |                      |       |                   |       |
| $0.00 -  $3.32                   |       | 8,201      |       | $                       | 2.65       |                      | 0.8        |                   | 8,201      |   |
| $3.33 -  $6.64                   |       | 230,142    |       | 6.28                    |       | 1.4                       |       | 229,100                |       |
| $6.65 -  $9.95                   |       | 1,794,743  |       | 8.15                    |       | 5.0                       |       | 1,080,231              |       |
| $9.96 -  $13.27                  |       | 665,559    |       | 12.28                   |       | 5.3                       |       | 632,023                |       |
| $13.28 -  $16.59                 |       | 3,471,346  |       | 14.64                   |       | 7.4                       |       | 3,317,923              |       |
| $16.60 -  $19.91                 |       | 2,827,281  |       | 17.88                   |       | 6.6                       |       | 2,593,812              |       |
| $19.92 -  $23.23                 |       | 295,000    |       | 22.56                   |       | 3.0                       |       | 295,000                |       |
| $23.24 -  $26.55                 |       | 173,570    |       | 23.59                   |       | 4.0                       |       | 173,570                |       |
| $26.56 -  $29.87                 |       | 100,200    |       | 27.42                   |       | 3.9                       |       | 100,200                |       |
| $29.88 -  $33.19                 |       | 297,500    |       | 33.15                   |       | 3.9                       |       | 297,500                |       |
|                             |       | 9,863,542  |       | 15.11                   |       | 6.1                       |       | 8,727,560              |       |
|                                  |            |            |            |                         |            |                           |            |                        |            |  |

 

*Restricted Stock Units*

 

ThePlans also allow for the granting of restricted stock units. Generally theCompany grants restricted stock units that vest in three equal increments oneach of the first three anniversaries of the date of grant. The fair value ofrestricted stock is the most recent closing market price of common stock at thedate of grant.

 

Changesin the Company restricted stock units for the three months ended March 31,2006, were as follows:

 
| ** **                                           | ** ** | ** ** | ** ** | **Weighted-Average**          | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Grant Date Fair** | ** ** |
| ** **                                           | ** ** | **Shares** | ** ** | **Value**                     | ** ** |
| Unvested  restricted stock at December 31, 2005 |       | 280,599    |       | $                             | 17.22      |   |
| Granted                                              |       | 44,000     |       | 14.56                         |       |
| Vested                                               |       | (468       | )          | 14.90                         |       |
| Canceled                                             |       | (620       | )          | 14.90                         |       |
| Unvested  restricted stock at March 31, 2006    |       | 323,511    |       | 16.86                         |       |
|                                                      |            |            |            |                               |            |  |

 

Underthe provisions of SFAS 123(R), the recognition of deferred compensation, acontra-equity account representing the amount of unrecognized restricted stockunit expense that is reduced as expense is recognized at the date restrictedstock unit is granted, is no longer required. Therefore, in the first quarterof 2006, the amount that had been in deferred compensation was reversed to zerothrough common stock in the Company’s consolidated balance sheet.

 

**EMPLOYEESTOCK PURCHASE PLAN**

 

In1997, the Company established an employee stock purchase plan that providesfull-time employees the opportunity to purchase shares, at 85% of the fairvalue on dates determined by the Board of Directors, up to a maximum of 10% oftheir eligible compensation or $21,250, whichever is less. The number ofauthorized shares available for purchase under this plan is 900,000, of whichwas 22,382 and 18,493 shares were purchased in the three months ended March 31,2006 and 2005, respectively. There were 118,227 and 140,609 shares availablefor future issuance under the plan as of March 31, 2006 and December 31,2005, respectively.

 

9

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**4. Net Income (Loss) Per Share**

 

The following table presents the computation ofbasic and diluted net income (loss) per share for the three months ended March 31,2006 and 2005:

 

| ** **                                      | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **March 31,**                                 | ** ** |
| ** **                                      | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Basic net  income (loss) per share computation: |       |                                               |       |   |   |
| Net income  (loss)                              |       | $                                                  | 709        |   | $ | (1,395 | ) |
| Weighted-average  common shares outstanding     |       | 43,548                                             |       | 42,470 |   |
|                                            |       |                                               |       |   |   |
| Basic net  income (loss) per share              |       | $                                                  | 0.02       |   | $ | (0.03 | ) |
|                                            |       |                                               |       |   |   |
| Diluted net  income per share computation:      |       |                                               |       |   |   |
| Net income  (loss)                              |       | $                                                  | 709        |   | $ | (1,395 | ) |
| Diluted  common shares outstanding:             |       |                                               |       |   |   |
| Weighted-average  common shares outstanding     |       | 43,548                                             |       | 42,470 |   |
| Impact of  dilutive stock options               |       | 731                                                |       | — |   |
| Diluted  common shares outstanding              |       | 44,279                                             |       | 42,470 |   |
| Diluted net  income (loss) per share            |       | $                                                  | 0.02       |   | $ | (0.03 | ) |

 

The differencebetween basic and diluted shares is primarily due to the assumed exercise ofstock options included in the diluted earnings per share computation.  For the three months ended March 31, 2005,1,274 stock options that could potentially dilute net income (loss) per sharein the future are not included in the calculation of diluted net (loss) pershare as they would have been antidilutive.

 

**5. Comprehensive Income (Loss)**

 

The components of comprehensive income (loss) forthe three months ended March 31, 2006 and 2005 consisted of the following:

 

| ** **                                | ** ** | **For the Three Months** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **Ended March 31,**           | ** ** |
| ** **                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Net income  (loss)                        |       | $                                       | 709        |   | $ | (1,395 | ) |
| Other  comprehensive income (loss):       |       |                                    |       |   |   |
| Foreign  currency translation adjustments |       | 359                                     |       | (114 | ) |
| Comprehensive  income (loss)              |       | $                                       | 1,068      |   | $ | (1,509 | ) |

 

**6. Purchase Accounting Restructuring Accrual**

 

In connection with the June 2003 acquisition ofSynavant Inc. (“Synavant”), the Company restructured the combined operations byexiting certain former Synavant facilities and eliminating certain formerSynavant positions. The Company anticipates that the accrued restructuringbalance related to the facility exit costs will be paid over the life of thefacility leases, ending in February 2012. The liability accrued forexpenses to be incurred in exiting certain Synavant facilities includesassumptions related to sublease income, which offsets future lease obligations.The underlying subleases are not in place for all facilities and the futureplacement of subleases, including the timing and terms and conditions ofsubleases, could be different than the assumptions utilized.

 

10

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

The activity related to the purchase accountingrestructuring accrual for the three months ended March 31, 2006 issummarized in the table below:

 

| ** **               | ** ** | **Purchase**                    | ** ** | ** **              | ** ** | ** **             | ** ** | **Purchase**                           | ** ** |
|--------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **Accounting**                  | ** ** | ** **              | ** ** | ** **             | ** ** | **Accounting**                         | ** ** |
| ** **               | ** ** | **Restructuring**               | ** ** | **2006**                | ** ** | ** **             | ** ** | **Restructuring**                      | ** ** |
| ** **               | ** ** | **Accrual as of**     | ** ** | **Adjustments to** | ** ** | ** **             | ** ** | **Accrual as of March** | ** ** |
| ** **               | ** ** | **December 31, 2005** | ** ** | **Goodwill**            | ** ** | **2006 Payments** | ** ** | **31, 2006**                      | ** ** |
| Synavant                 |       |                            |       |                    |       |                   |       |                                   |       |
| Facility  exit costs     |       | $                               | 4,289      |                    | $          | —                 |       | $                                      | (411       | ) | $ | 3,878 |   |
|                     |       |                            |       |                    |       |                   |       |                                   |       |
| SAI                      |       |                            |       |                    |       |                   |       |                                   |       |
| Lease  termination costs |       | 321                             |       | (66                     | )          | (255                   | )          | —                                 |       |
| Total                    |       | $                               | 4,610      |                    | $          | (66                    | )          | $                                      | (666       | ) | $ | 3,878 |   |

 

**7. Goodwill and Intangible Assets**

 

The total gross carrying amount and accumulatedamortization for goodwill and intangible assets are as follows:

 
| ** **                                      | ** ** | **As of March 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                   | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**                                    | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible  Assets Subject to Amortization:     |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Purchased  capitalized software                 |       | $                                            | 2,441      |                                            | $          | (2,148 | ) | $ | 293 |   | $ | 2,441 |   | $ | (1,996 | ) | $ | 445 |   |
| Capitalized  software development costs         |       | 32,597                                       |       | (22,327                                         | )          | 10,270 |   | 31,471 |   | (21,130 | ) | 10,341 |   |
| Customer  relationship assets                   |       | 16,399                                       |       | (4,116                                          | )          | 12,283 |   | 16,397 |   | (3,696 | ) | 12,701 |   |
| Backlog                                         |       | 2,500                                        |       | (2,500                                          | )          | — |   | 2,500 |   | (2,491 | ) | 9 |   |
| Non-compete  covenants                          |       | 3,723                                        |       | (3,524                                          | )          | 199 |   | 3,718 |   | (3,464 | ) | 254 |   |
| Purchased  database                             |       | 5,161                                        |       | (2,355                                          | )          | 2,806 |   | 5,151 |   | (2,082 | ) | 3,069 |   |
| Acquired  technology                            |       | 1,390                                        |       | (154                                            | )          | 1,236 |   | 1,390 |   | (84 | ) | 1,306 |   |
| Trademarks                                      |       | 500                                          |       | (105                                            | )          | 395 |   | 500 |   | (82 | ) | 418 |   |
| Other  intangibles                              |       | 474                                          |       | (340                                            | )          | 134 |   | 474 |   | (325 | ) | 149 |   |
| Total                                           |       | 65,185                                       |       | (37,569                                         | )          | 27,616 |   | 64,042 |   | (35,350 | ) | 28,692 |   |
|                                            |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Intangible  Assets Not Subject to Amortization: |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | 90,182                                       |       | —                                          |       | 90,182 |   | 90,440 |   | — |   | 90,440 |   |
| Trademarks                                      |       | 6,732                                        |       | —                                          |       | 6,732 |   | 6,732 |   | — |   | 6,732 |   |
| Total                                           |       | 96,914                                       |       | —                                          |       | 96,914 |   | 97,172 |   | — |   | 97,172 |   |
|                                            |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Total  Goodwill and Intangible Assets           |       | $                                            | 162,099    |                                            | $          | (37,569 | ) | $ | 124,530 |   | $ | 161,214 |   | $ | (35,350 | ) | $ | 125,864 |   |

 

11

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

The changes in the carrying amount of intangibleassets not subject to amortization for the three months ended March 31,2006 is as follows:

 
| ** ** | ** ** | ** **                      | ** ** | **Acquisitions /** | ** ** | ** **      | ** ** | ** **                   | ** ** |
|------------|------------|---------------------------------|------------|-------------------------|------------|-----------------|------------|------------------------------|------------|
| ** ** | ** ** | ** **                      | ** ** | **Purchase**            | ** ** | **Currency**    | ** ** | ** **                   | ** ** |
| ** ** | ** ** | **Balance as of**     | ** ** | **Accounting**          | ** ** | **Translation** | ** ** | **Balance as of**  | ** ** |
| ** ** | ** ** | **December 31, 2005** | ** ** | **Adjustments**         | ** ** | **Adjustments** | ** ** | **March 31, 2006** | ** ** |
| Goodwill   |       | $                               | 90,440     |                    | $          | (263            | )          | $                            | 5          |   | $ | 90,182 |   |
| Trademarks |       | 6,732                           |       | —                  |       | —          |       | 6,732                        |       |
| Total      |       | $                               | 97,172     |                    | $          | (263            | )          | $                            | 5          |   | $ | 96,914 |   |

 

The Company conducts its annual impairment testingof goodwill as of October 1 each year. During the three months ended March 31,2006, there were no changes in events or circumstances that would indicateimpairment.

 

The following table reconciles net intangible assetssubject to amortization for the period from December 31, 2005 to March 31,2006:

 
| ** **                              | ** ** | **Net Intangibles**        | ** ** | **2006 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **as of**                  | ** ** | ** **                               | ** ** | ** **               | ** ** | **Translation** | ** ** | **as of** | ** ** |
| ** **                              | ** ** | **December 31, 2005** | ** ** | **Additions**                            | ** ** | **Amortization**         | ** ** | **and Other** | ** ** | **March 31, 2006** | ** ** |
| Purchased  capitalized software         |       | $                               | 445        |                                     | $          | —                   |       | $ | (152 | ) | $ | — |   | $ | 293 |   |
| Capitalized  software development costs |       | 10,341                          |       | 1,126                                    |       | (1,197                   | )          | — |   | 10,270 |   |
| Customer  relationship assets           |       | 12,701                          |       | —                                   |       | (420                     | )          | 2 |   | 12,283 |   |
| Backlog                                 |       | 9                               |       | —                                   |       | (9                       | )          | — |   | — |   |
| Non-compete  covenants                  |       | 254                             |       | —                                   |       | (60                      | )          | 5 |   | 199 |   |
| Purchased  database                     |       | 3,069                           |       | —                                   |       | (273                     | )          | 10 |   | 2,806 |   |
| Acquired  technology                    |       | 1,306                           |       | —                                   |       | (70                      | )          | — |   | 1,236 |   |
| Trademarks                              |       | 418                             |       | —                                   |       | (23                      | )          | — |   | 395 |   |
| Other  intangibles                      |       | 149                             |       | —                                   |       | (15                      | )          | — |   | 134 |   |
| Total                                   |       | $                               | 28,692     |                                     | $          | 1,126                    |       | $ | (2,219 | ) | $ | 17 |   | $ | 27,616 |   |

 

Amortization expense related to intangible assets,including internally developed capitalized software costs, for the three monthperiods ended March 31, 2006 and 2005 was $2,219 and $2,040, respectively.Aggregate annual amortization expense of intangible assets (exclusive of futureadditions) is estimated to be:

 

| Year Ending December 31,                                            |   |   |   |
|--------------------------------------------------------------------------|--------|--------|--------|
| 2006                                                                     |   | $      | 8,668  |   |
| 2007                                                                     |   | 6,825  |   |
| 2008                                                                     |   | 4,116  |   |
| 2009                                                                     |   | 2,500  |   |
| 2010                                                                     |   | 1,810  |   |
| 2011                                                                     |   | 1,522  |   |
| Thereafter                                                               |   | 4,394  |   |
|                                                                     |   | 29,835 |   |
| Less: Year-to-date  amortization expense                                 |   | (2,219 | )      |
| Net  intangible assets subject to amortization as of March 31, 2006 |   | $      | 27,616 |   |

 

12

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**8. Accrued Facility and Other Charges**

 

During the three month period ended March 31,2005, the Company initiated and completed a plan to exit a facility in NewJersey for which it has an operating lease expiring in September 2011. Theaccrued facility charge relates to vacating a New Jersey facility and foradditional facilities vacated and accrued for in previous periods, for which ithas operating leases expiring through February 2012, due to changes in currentmarket conditions. The Company accrued for the present value of these costs,net of estimated future sublease income. The Company also accrued for severancecharges related to the elimination of certain senior and mid-level managementpositions. These charges are included within accrued facility and other chargeson the consolidated balance sheets as of March 31, 2006 and 2005, and infacility and other charges on the consolidated statement of operations duringthe three months ended March 31, 2005.

 

The activity related to accrued facility and othercharges for the three months ended March 31, 2006 is summarized in thetable below:

 
| ** **           | ** ** | ** **                             | ** ** | **2006**             | ** ** | ** **   | ** ** | ** **      | ** ** | ** **                             | ** ** |
|----------------------|------------|----------------------------------------|------------|----------------------|------------|--------------|------------|-----------------|------------|----------------------------------------|------------|
| ** **           | ** ** | ** **                             | ** ** | **Adjustments**      | ** ** | ** **   | ** ** | ** **      | ** ** | ** **                             | ** ** |
| ** **           | ** ** | **Accrued Facility and**     | ** ** | **to Facility** | ** ** | ** **   | ** ** | **Currency**    | ** ** | **Accrued Facility and**     | ** ** |
| ** **           | ** ** | **Other Charges as of** | ** ** | **and Other**   | ** ** | **2006**     | ** ** | **Translation** | ** ** | **Other Charges as of** | ** ** |
| ** **           | ** ** | **December 31, 2005**        | ** ** | **Charges**          | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **March 31, 2006**           | ** ** |
| Facility  exit costs |       | $                                      | 5,332      |                 | $          | 271          |       | $               | (548       | )                                      | $          | — |   | $ | 5,055 |   |
| Severance            |       | 301                                    |       | —               |       | (165         | )          | 2               |       | 138                                    |       |
|                 |       |                                   |       |                 |       |         |       |            |       |                                   |       |
|                 |       | $                                      | 5,633      |                 | $          | 271          |       | $               | (713       | )                                      | $          | 2 |   | $ | 5,193 |   |

 

In connection with the plan initiated andcompleted during the three months ended March 31, 2005, the Company alsowrote-off $1,030 of leasehold improvements included within facility and othercharges in the consolidated statement of operations for the three months ended March 31,2005.

 

**9. Revolving Credit**

 

The Company has a line-of-credit agreementwith JPMorgan Chase (the “Agreement”) in the amount of $30,000 that expires on June 30,2008. The Agreement is available to finance working capital needs and possiblefuture acquisitions. The Agreement contains customary affirmative and negativecovenants and also contains certain financial covenants, including thoserelated to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) aminimum interest coverage ratio at the end of any fiscal quarter and (c) aminimum fixed charge coverage ratio at the end of any fiscal quarter. TheAgreement also restricts the Company’s ability to create or assume liens, disposeof assets, consolidate or merge, extend credit, incur other indebtedness or paycash dividends. As of March 31, 2006, the Company was in compliance withall covenants and did not have any amounts outstanding under the Agreement.

 

As of March 31, 2006, the Company hadoutstanding letters-of-credit of approximately $5,337.

 

**10. Income Taxes**

 

The Company’s effective income tax expense (benefit)rate increased to 45.7% for the three months ended March 31, 2006, from(38.5)% for the three months ended March 31, 2005. The primary reason forthe increase in the effective tax rate was a less favorable distribution ofprofits between low and high tax rate jurisdictions, the impact of SFAS 123(R),and increased permanent non-deductible items on a lower estimated pre-taxprofit.

 

**11. Enterprise-Wide Data**

 

Information about Major Customers:

 

For the three month periods ended March 31,2006, the Company derived approximately 18% and 11% of its revenues from itstwo largest customers. For the three month periods ended March 31, 2005,the Company derived approximately 25% of its revenues from its largest customer.As of March 31, 2006, approximately 11% of the Company’s accountsreceivable balance was due from its second largest customer. As of December 31,2005, approximately 15% and 10% of the Company’s accounts receivable balancewas due from its two largest customers. Other than what has been presentedabove, no individual customer represented 10% or more of our total consolidatedrevenues or accounts receivable for or as of the periods presented.

 

13

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

Information about Products and Services:

 

Due to the growth in the Company’s strategicproduct and service offerings, the Company has expanded its revenue categoriesinto sales support, marketing support and emerging solutions. These categoriesare reflective of how service offerings are marketed to and viewed bycustomers. They are not reflective of the way the business is currentlymanaged. Company operating costs are not broken out for these categories on aglobal basis, as they are not viewed as necessary to the management of thebusiness globally. Based upon all of these factors, while these categories areuseful in understanding the Company’s operating results, the Company has onlyone reportable segment for disclosure purposes under SFAS 131, “DisclosureAbout Segments of an Enterprise and Related Information.” The following is asummary of our revenue categories:

 

*Sales solutions*revenue includes product and sales support services which are used by, orprovided to, the sales forces of our customers.

 

*Marketing solutions* revenueprimarily includes interactive marketing, data, consulting, and shipping fees. Shippingfees which are pass-through costs that bear little to no margin, are requiredto be included in revenues and costs based upon Emerging Issues Task Force (“EITF”)00-10, “Accounting for Shipping and Handling Fees and Costs.” These billableshipping transactions are primarily related to our interactive marketingactivities.

 

Shippingand handling fees billed to customers are recorded as revenue and shipping andhandling costs paid to vendors are recorded as operating costs. Shipping andhandling fees recorded as revenues and operating costs for the three monthsended March 31, 2006 and 2005 were $5,784 and $4,659, respectively.

 

*Emerging solutions* revenue includes compliance solutions, clinical solutions, andcontract sales force services.

 

The following table presents revenues bycategory for the three month periods ended March 31, 2006 and 2005.

 

| ** **           | ** ** | **For the Three Months Ended** | ** ** |
|----------------------|------------|----------------------------------------------------|------------|
| ** **           | ** ** | **March 31,**                                 | ** ** |
| ** **           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Revenues:            |       |                                               |       |   |   |
| Sales solutions      |       | $                                                  | 66,340     |   | $ | 68,354 |   |
| Marketing  solutions |       | 30,795                                             |       | 24,662 |   |
| Emerging  solutions  |       | 5,994                                              |       | 6,431 |   |
|                 |       | $                                                  | 103,129    |   | $ | 99,447 |   |

 

Information about Geographic Areas:

 

The Company is organized by geographic location andhas one reportable segment. All transfers between geographic areas have beeneliminated from consolidated revenues. The following table presents revenues bygeographic area for the three months ended March 31, 2006 and 2005.

 

| ** **     | ** ** | **For the Three Months Ended** | ** ** |
|----------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **March 31,**                                 | ** ** |
| ** **     | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| United  States |       | $                                                  | 64,289     |   | $ | 58,462 |   |
| Europe         |       | 26,560                                             |       | 28,520 |   |
| All other      |       | 12,280                                             |       | 12,465 |   |
|           |       | $                                                  | 103,129    |   | $ | 99,447 |   |

 

The table above allocates license revenues on alegal basis. On a legal basis, license revenues have been allocated using thegeographic location where the intellectual property is owned.

 

14

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ INTHOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

The following table presents long-livedassets by geographic area:

 

| ** **     | ** ** | ** **                | ** ** | **As of**    | ** ** |
|----------------|------------|---------------------------|------------|-------------------|------------|
| ** **     | ** ** | **As of March** | ** ** | **December**      | ** ** |
| ** **     | ** ** | **31, 2006**         | ** ** | **31, 2005** | ** ** |
| United  States |       | $                         | 166,113    |              | $          | 167,459 |   |
| Europe         |       | 9,118                     |       | 9,267             |       |
| All other      |       | 10,227                    |       | 10,586            |       |
|           |       | $                         | 185,458    |              | $          | 187,312 |   |

 

15

----

 

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

This Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21-E of the Securities Exchange Act of 1934, which areintended to be covered by the safe harbors created by such acts. For thispurpose, any statements that are not statements of historical fact may bedeemed to be forward-looking statements, including the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our strategy, future operations, future expectations and futureestimates, future financial position or results and future plans and objectivesof management. Those statements in this Form 10-Q containing the words “believes,”“anticipates,” “plans,” “expects” and similar expressions constituteforward-looking statements, although not all forward-looking statements containsuch identifying words. These forward-looking statements are based on ourcurrent expectations, assumptions, estimates and projections about our Companyand the pharmaceutical and consumer packaged goods industries. All suchforward-looking statements involve significant risks and uncertainties,including those risks identified in this Form 10-Q under “Factors That May AffectFuture Results,” many of which are beyond our control. Although we believe thatthe assumptions underlying our forward-looking statements are reasonable, anyof the assumptions could be inaccurate. Actual results may differmaterially from those indicated by the forward-looking statements included inthis Form 10-Q, as more fully described under “Factors That May AffectFuture Results.” In light of the significant uncertainties inherent in theforward-looking statements included in this Form 10-Q, you should notconsider the inclusion of such information as a representation by us or anyoneelse that we will achieve such results. Moreover, we assume no obligation toupdate these forward-looking statements to reflect actual results or changes inassumptions, expectations or projections. In addition, our financial andperformance outlook concerning future revenues, margins, earnings, earnings pershare and other operating or performance results does not include the impact ofany future acquisitions, future acquisition-related expenses or accruals, orany future restructuring or other charges that may occur from time-to-timedue to management decisions and changing business circumstances and conditions.

 

**EXECUTIVE OVERVIEW**

 

Weprovide a broad array of solutions worldwide that enable pharmaceutical andother life science companies to strategically optimize their sales andmarketing channels, clinical resources and compliance initiatives. Our plan isto continue to diversify and expand our solutions portfolio, customer base andgeographic reach by leveraging our extensive knowledge of the pharmaceuticaland life sciences industries and capitalizing upon our deep relationships inthese industries. Our strategy continues to rely on both internal growth andacquisitions to meet our growth objectives.

 

Wehave expanded both our portfolio of solutions and customer base and believethat this combination presents significant opportunity for future growth. In January andSeptember 2005, we broadened and enhanced our service portfolio with ouracquisitions of BuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”),respectively. The Buzzeo acquisition expanded our sample and compliancemanagement solution offerings. The Optas acquisition enhanced our portfolio ofmarketing solutions services by expanding our privacy-safe relationshipmarketing solutions for patients and physicians. We believe our acquisitions complementour existing business operations by enhancing our solutions portfolio,increasing our access to new customers and allowing deeper penetration into ourcurrent markets. We have also committed to investing in key initiatives to helpdrive future growth. Our future growth is dependent on our ability to furtherpenetrate the markets in which we operate and increase the adoption rate of ourexpanded portfolio of solutions.

 

Weevaluate our performance based upon a number of operating metrics. Chief among thesemetrics are revenues, operating profit, diluted net income per share, operatingcash flow and days sales outstanding. Our goal is to execute our strategy toyield growth in revenues, operating profit and diluted net income per share. In2005, we grew our revenue approximately 10% but did not grow our operatingprofit and diluted net income per share. As we have experienced strong revenuegrowth in recent years, we believe that we have outgrown our structure and haveseen an increase in organizational costs throughout 2005. Late in 2005 weappointed two new executive officers who are evaluating a business plan to growrevenues and to streamline our cost structure. As part of our effort torealign the Company to drive efficiency and support our growth objectives, wecurrently plan to identify approximately $20 million of annualized cost savingsduring 2006. As a result, we expect to incur severance and other associatedcosts for these actions in 2006. We do not expect to fully realize the savingsfrom these efforts in 2006.

 

Inrecent years we have presented a breakout of our revenues into the threecategories of sales solutions, marketing solutions and shipping. Thesecategories were reflective of how our service offerings were marketed to andviewed by our customers, and we believe they provided useful information tounderstand the changes in our revenues across periods. They are not reflectiveof the way we have managed our business, and therefore associated operatingcosts and assets by revenue category have not been available on a global basis.Based upon this we have been operating under one reportable segment fordisclosure purposes under Statement of Financial Accounting Standards 131, “DisclosureAbout Segments of an Enterprise and Related Information” (“SFAS 131”) through March 31,2006. During 2006, we have initiated a process to reorganize our business andto capture transactional data in a format that will enable the reporting ofvarious financial information broken into three new discreet operating segments.We are able to reclassify our current and historical revenues into these newgroupings, however operating profits and other financial data are not currentlyavailable. We anticipate that this initiative will be completed during thesecond quarter of 2006, and that we will be able to report new

 

16

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

segmentinformation at that time. The three new operating segments are sales solutions,marketing solutions and emerging solutions. Below is a description of theseprospective revenue reporting segments:

 

*Sales solutions* revenueincludes product and sales support services which are used by, or provided to,the sales force of our customers.

 

*Marketing solutions* revenueprimarily includes interactive marketing, data and analytics, campaignmanagement, and shipping fees. Our shipping fees which are pass-through coststhat bear little to no margin, and are required to be included in revenues andcosts based upon Emerging Issues Task Force (“EITF”) 00-10, “Accounting forShipping and Handling Fees and Costs.” These billable shipping transactions areprimarily related to our interactive marketing activities.

 

*Emerging solutions* revenue includes compliance solutions, clinical solutions, andcontract sales force services. While these businesses are not individuallysignificant to our total revenues today, we believe they represent significantgrowth opportunities in the future.

 

**CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

 

There have been no material changes to our criticalaccounting policies, judgments and estimates from the information provided inItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations included in our Annual Report on Form 10-K for the yearended December 31, 2005, except for the Company’s accounting forstock-based compensation in connection with the adoption of SFAS 123 (revised2004) “Share-Based Payment” (“SFAS 123(R)”).

 

In December 2004 the FASB issued SFAS No. 123(R).SFAS 123(R) is a revision of SFAS No. 123, as amended, “Accountingfor Stock-Based Compensation “(“SFAS 123”), and supersedes Accounting PrinciplesBoard Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB25”). SFAS 123(R) eliminates the alternative to use the intrinsic valuemethod of accounting that was provided in SFAS 123, which generallyresulted in no compensation expense recorded in the financial statementsrelated to the issuance of stock options or shares issued under the Company’sEmployee Stock Purchase Plan (“ESPP”). SFAS 123(R) requires that the costresulting from all share-based payment transactions be recognized in thefinancial statements. SFAS 123(R) establishes fair value as themeasurement objective in accounting for share-based payment arrangements andrequires all companies to apply a fair-value-based measurement method inaccounting for generally all share-based payment transactions with employees.

 

We account for stock-based compensation inaccordance with the fair value recognition provisions of SFAS 123(R).Under the fair value recognition provisions of SFAS 123(R), stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense over the appropriate vesting period.Determining the fair value of stock-based awards at the grant date requiresjudgment, including estimating the expected life of stock options, theweighted-average expected stock price volatility and weight-average risk-freeinterest rate. In addition, judgment is required in estimating the amount ofstock-based awards that are expected to be forfeited. If actual results differsignificantly from these estimates or different key assumptions were used, itcould have a material effect on our Consolidated Financial Statements. SeeNote 3 of the Notes to the Unaudited Consolidated Financial Statements foradditional information regarding our adoption of SFAS 123(R).

 

**MERGERS AND ACQUISITIONS**

 

We regularly evaluate opportunities to acquireproducts or businesses that represent strategic enhancements to our operations.Such acquisition opportunities, if they arise, may involve the use of cash,equity or debt instruments.

 

**Optas**

 

OnSeptember 12, 2005, we completed the acquisition of Optas. Based inWoburn, Massachusetts, Optas provided privacy-safe relationship marketingsolutions for patients and physicians. Optas’ results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition. Optas revenues are within our marketing solutions category.

 

Theaggregate purchase price for Optas was approximately $13,188, including $349 oflegal and professional fees. In accordance with the purchase agreement, $1,800of the purchase price was held in escrow as of March 31, 2006. The $1,800held in escrow, less amounts claimed against escrow, if any, is payable asfollows: approximately $600 within five business days after September 12,2006; and approximately $1,200 within five business days after March 12,2007. We are in the process of finalizing the valuation of certain intangibleassets, including the review of a third-party valuation. Therefore, theallocation of the purchase price is preliminary and subject to adjustment. Theassets acquired and liabilities assumed in connection with the Optasacquisition and pro forma results of operations are not deemed material to theconsolidated financial statements.

 

**Buzzeo**

** **

OnJanuary 4, 2005, we completed the strategic acquisition of Buzzeo. Basedin Richmond, Virginia, Buzzeo provided compliance, auditing, consulting andreconciliation outsourcing services to the pharmaceutical and life sciencesindustry. This acquisition further expands our sample and compliance managementsolution offerings. In connection with the acquisition, we

 

17

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

restructuredthe combined operations by eliminating certain former Buzzeo positions. Buzzeo’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition. Buzzeo revenues arecharacterized as compliance solutions within our emerging solutions category.

 

The aggregate purchase price for Buzzeo wasapproximately $10,759, including $33 of legal and professional fees.Approximately $487 of the purchase price was included in other accrued expensesin the consolidated balance sheet as of March 31, 2006. The remainingpurchase price was paid in April 2006. In accordance with the purchaseagreement, the $1,025 was released from escrow in the first quarter of 2006.The valuation of certain intangibles assets was finalized in the fourth quarterof 2005. The assets acquired and liabilities assumed in connection with theBuzzeo acquisition and pro forma results of operations are not deemed materialto the consolidated financial statements.

 

**RESULTS OF OPERATIONS**

 

**THREE MONTHS ENDED MARCH 31, 2006 AND 2005**

 

**REVENUES**

 
| ** **           | ** ** | **THREE MONTHS ENDED** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **           | ** ** | **MARCH 31,**          | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **           | ** ** | **2006**                    | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Revenues:            |       |                        |       |                |       |                  |       |              |       |              |       |   |   |
| Sales  solutions     |       | $                           | 66,340     |                | $          | 68,354                |       | $                 | (2,014     | )                 | -3         | % | 64 | % | 69 | % |
| Marketing  solutions |       | 30,795                      |       | 24,662              |       | 6,133                 |       | 25                | %          | 30                | %          | 25 | % |
| Emerging  solutions  |       | 5,994                       |       | 6,431               |       | (437                  | )          | -7                | %          | 6                 | %          | 6 | % |
|                 |       | $                           | 103,129    |                | $          | 99,447                |       | $                 | 3,682      |              | 4          | % | 100 | % | 100 | % |

 

Total revenues increased by 4% for the three monthsended March 31, 2006 compared with the three months ended March 31,2005. Our international revenues were $38,839, or approximately 38% of totalrevenues in the quarter, and decreased by 5% from 2005, primarily due to aclient delay in decision making in our Asia market, unfavorable foreigncurrency impact and the roll-off of a larger European customer during thesecond quarter of 2005. Total revenues in the United States increased by 10%from the three months ended March 31, 2005, and were $64,290, orapproximately 62% of total revenues. This increase in the United Statesconsisted of considerable growth in interactive marketing, modest growth insales solutions and revenue from the 2005 acquisition of Optas.

 

***Sales Solutions***

 

Sales solutions revenues accounted for approximately64% of total revenues during the three months ended March 31, 2006, anddecreased 3% compared with the three months ended March 31, 2005. Totallicense and implementation fees, which often cause difficulty in comparisonbetween periods, were relatively flat at approximately $11,000 versus March 31,2005. The balance of our sales solutions services decreased by 3% from March 31,2005.

 

Sales solutions revenues in the United Statesincreased by 2%, primarily in the areas of project management, integratedsupport center, and training. These increases were primarily from increasedservices to one of our larger customers offset by a reduction of work ordersand ongoing services with our largest customer resulting from its attention tocost containment initiatives. We expect this trend with our largest customer tocontinue. As a result, we currently expect less revenue from this customer in2006 and beyond. Our current contract with this customer for U.S. salesforceeffectiveness and related services has been renewed through 2006, subject toright of the customer to reduce or modify certain services. The customer isre-evaluating all such U.S. services for 2007 in a request for proposal processin which we are participating. Our international sales solutions decreased by 11%, primarily due toa client delay in decision making in our Asia market, unfavorable foreigncurrency impact and the roll-off of a larger European customer during thesecond quarter of 2005.

 

***Marketing Solutions***

 

Marketing solutions revenues accounted forapproximately 30% of total revenues during the three months ended March 31,2006, and increased by approximately 25% compared with the three months ended March 31,2005. This increase was due to growth in our United States marketing solutionsbusiness, which increased by 80% over the prior year, primarily from 60% growthin our interactive marketing services and revenue from our 2005 acquisition ofOptas. Growth in domestic interactive marketing revenues resulted fromincreased services to one of our larger customers and other new business. Ourinternational marketing solution revenues decreased by approximately 1%compared with the three months ended March 31, 2005, due to decreases ininteractive marketing, and unfavorable foreign currency impact which was offsetby growth in consulting and data.

 

Also included in marketing solutions revenueis low gross margin revenue consisting primarily of shipping fees which

 

18

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

accounted for approximately $6,200 or 6% of total revenues for thethree months ended March 31, 2006, and increased by approximately 22%compared with approximately $5,100 for the three months ended March 31,2005. Shipping revenues contribute little to no margin and result frompass-through shipping costs associated with our global integrated marketingbusiness***.***

 

***Emerging Solutions***

 

Emerging solution revenues accounted forapproximately 6% of total revenues during the three months ended March 31,2006, and decreased 7% compared with the three months ended March 31, 2005.This decrease was due to a reduction of ongoing clinical solution services withour largest customer offset by organic growth in revenues from our compliancesolution services which grew 40% versus March 31, 2005.

 

**OPERATING COSTS &EXPENSES**

 
| ** **                                  | ** ** | **THREE MONTHS ENDED** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **MARCH 31,**          | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **                                  | ** ** | **2006**                    | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Operating  Costs & Expenses:       |       |                        |       |                |       |                  |       |              |       |              |       |   |   |
| Operating  costs (including shipping)       |       | $                           | 59,751     |                | $          | 53,651                |       | $                 | 6,100      |              | 11         | % | 58 | % | 54 | % |
| Selling,  general and administrative        |       | 39,796                      |       | 35,788              |       | 4,008                 |       | 11                | %          | 39                | %          | 36 | % |
| Research and  development                   |       | 1,734                       |       | 1,818               |       | (84                   | )          | -5                | %          | 2                 | %          | 2 | % |
| Facility and  other charges                 |       | —                      |       | 9,372               |       | (9,372                | )          | NM                |       | 0                 | %          | 9 | % |
| Amortization  of acquired intangible assets |       | 1,022                       |       | 1,250               |       | (228                  | )          | -18               | %          | 1                 | %          | 1 | % |
| Total  operating costs & expenses  |       | $                           | 102,303    |                | $          | 101,879               |       | $                 | 424        |              | 0          | % | 99 | % | 102 | % |

 

Aspart of our effort to realign the Company to drive efficiency and supportour growth objectives, we announced plans to identify during 2006 approximately$20 million of annualized cost savings. As a result, we expect to incurseverance and other associated costs for these actions in 2006. We do notexpect to fully realize the savings from these efforts in 2006. Additionallyour future results will include the impact of $3,331 of unrecognizedcompensation costs related to stock options as of March 31, 2006 which areexpected to be recognized over a weighted average period of 0.5 years. Theamount of compensation costs that will impact net income and earnings perdiluted share will depend on, among other factors, the level of future equityawards granted as well as the market price of our common stock at the time ofsuch grants as well as various other assumptions used in valuing such awards.

 

***OPERATING COSTS(including shipping).***Operating costs increased 11% for the three months ended March 31,2006 compared with the three months ended March 31, 2005. As a percentageof revenues, operating costs increased to 58% for the three months ended March 31,2006 versus 54% for the three months ended March 31, 2005. This increasewas due to our 2005 acquisition of Optas, increased marketing and compliancesolutions business which require higher incremental cost to deliver, highercosts related to stock-based compensation, higher employee costs, and increasedpass-through postage costs.

 

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).***SG&A expenses increased 11% for the three months ended March 31,2006 compared with the three month ended March 31, 2005. SG&A costsincreased due to higher costs related stock-based compensation, and strategicconsulting costs related to our effort to realign the Company. As a percentageof revenues, SG&A increased to 39% for the three months ended March 31,2006, up from 36% compared with the three months ended March 31, 2005.

 

***RESEARCH ANDDEVELOPMENT (R&D).***R&D expenses decreased 5% for the three months ended March 31,2006 compared with the three months ended March 31, 2005. As a percentageof revenues, R&D expenses was flat for the three months ended March 31,2006, compared to the three months ended March 31, 2005. R&D expensesplus additions to capitalized software development costs, decreased 11% from$3,225 for the three months ended March 31, 2005, to $2,860 for the threemonths ended March 31, 2006. R&D decreased in 2006 due to thedevelopment of new applications through our capabilities around the world inlower cost areas as compared to our building of the .Net framework andfoundation in 2005.

 

***FACILITY ANDOTHER CHARGES.***Duringthe three months ended March 31, 2005, we recorded $7,649 of facilityrelated charges and a severance charge of $1,723. The facility charges consistof $6,619 related to vacating a New Jersey facility and for additionalfacilities vacated in previous periods due to changes in current marketconditions, as well as $1,030 related to the write-off of leaseholdimprovements associated with the exit of our New Jersey facility. The $1,723severance charge relates to the elimination of certain senior and mid-levelmanagement positions during the three months ended March 31, 2005. No suchcharges were incurred for the three months ended March 31, 2006. We expectto incur restructuring costs during 2006 in connection with our cost savingsinitiative.

 

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.***Amortization ofacquired intangible assets decreased 18% over the comparable three months endedMarch 31, 2005. The decrease primarily reflects certain intangiblesassets related to the Software Associates International (“SAI”) and Synavantacquisitions, which were fully amortized as of June 30, 2005, partiallyoffset by additional amortization of intangibles related to the Schwarzeck,Buzzeo and Optas acquisitions.

 

19

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

***PROVISION FORINCOME TAXES.***Oureffective income tax expense rate increased to 45.7% for the three months endedMarch 31, 2006, from (38.5)% for the three months ended March 31,2005. The increase in our effective tax rate is primarily driven by a lessfavorable distribution of profits between low and high tax rate jurisdictions,the impact of SFAS 123(R), and increased permanent non-deductible items on alower estimated pre-tax profit. In addition, we believe that our effective taxrate could increase as certain cost savings initiatives are executed.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of March 31, 2006, working capital was$87,271 compared to $82,247 as of December 31, 2005. Cash and cashequivalents were $77,374 as of March 31, 2006, compared to $66,145 as of December 31,2005. These increases were primarily attributable to cash generated byoperating activities offset by payments made in connection with purchase ofproperty and equipment.

 

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $13,826and $7,297 for the three month periods ended March 31, 2006 and 2005,respectively. During the three months ended March 31, 2006, we generatedoperating cash from our net income adjusted for changes in assets andliabilities. The increase was primary related to the collections of accountsreceivable. Our accrued facility and other charges resulted in us recording anet loss for the three months ended March 31, 2005, which had a minimaleffect on our operating cash flows. Future payments of these accruals will havea negative impact on future operating cash flows. Impacting our operating cashflow were payments of income taxes, purchase accounting restructuring charges,and accounts payable and accrued expenses. During the three months ended March 31,2006, our accounts receivable days sales outstanding decreased to 62, from 67days for the three months ended December 31, 2005, due to the collectionsof previously deferred revenue in late December 2005 and improvements inour collection process during the three months ended March 31, 2006.

 

Cash used in investing activities was $3,479 for thethree months ended March 31, 2006, and was primarily attributable topurchases of property and equipment as well as additions to capitalized softwaredevelopment costs. Cash used in investing activities was $19,212 for the threemonths ended March 31, 2005, which included payments for the Buzzeo andUto Brain acquisitions as well as additions to capitalized software developmentcosts and purchases of property and equipment. Additions of property andequipment in 2005 primarily related to our new hardware facility in New Jersey,as well as investing in our helpdesk automation process and interactivemarketing machinery.

 

As anticipated, purchases of property and equipmentdecreased for the three months ended March 31, 2006 versus the comparableprior year period. During 2006, we expect capital spending in the range ofapproximately $18,000 to $22,000 primarily to support the Company’sinfrastructure and productivity initiatives. This expected range of capitalspending does not include any capital requirements that could be required insupport of streamlining our cost structure, which could require additionalcapital spending in support of business automation, facility consolidation, orother improvement initiatives. We review our capital expenditure programperiodically and adjust it as required to meet current needs.

 

Cash provided by financing activities was $826 forthe three months ended March 31, 2006, compared to $1,103 for the threemonths ended March 31, 2005. The decrease of $277 was primarily attributedto lower proceeds from the issuance of common stock.

 

We regularly evaluate opportunities to acquireproducts or businesses complementary to our operations. Such acquisitionopportunities, if they arise, may involve the use of cash, equity or debtinstruments. We believe that available funds, anticipated cash flows fromoperations and the availability of our revolving line of credit will satisfyour current projected working capital and capital expenditure requirements,exclusive of cash required for possible future acquisitions of businesses,products and technologies, during the next twelve to eighteen months. There canbe no assurance, however, that our business will continue to generate cash flowat current levels or that anticipated operational improvements will beachieved. Our ability to generate future cash flows depends on our futureperformance and financial results, which, to a certain extent, are subject togeneral conditions in or affecting the pharmaceutical and life sciencesindustry and to general economic, political, financial, competitive andregulatory factors beyond our control.

 

**Contractual Obligations and Commitments**

 

We have a line-of-credit agreement withJPMorgan Chase (the “Agreement”) in the amount of $30,000 that expires on June 30,2008. The Agreement is available to finance working capital needs and possiblefuture acquisitions. The Agreement contains customary affirmative and negativecovenants and also contains certain financial covenants, including thoserelated to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) aminimum interest coverage ratio at the end of any fiscal quarter and (c) aminimum fixed charge coverage ratio at the end of any fiscal quarter. TheAgreement also restricts our ability to create or assume liens, dispose ofassets, consolidate or merge, extend credit, incur other indebtedness or paycash dividends. As of March 31, 2006, we were in compliance with allcovenants and did not have any amounts outstanding under the Agreement.

 

20

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ In Thousands,Except Per Share Data)**

 

Our principal commitments at March 31, 2006consisted primarily of obligations under operating and capital leases as wellas future minimum guarantees to certain vendors. Future minimum payments onthese obligations are as follows:

 
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | ** **                                | ** ** | **April 1, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                                | ** ** | **Through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                                | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
| Capital  leases                  |       | $                                         | 2,726      |   | $ | 1,093 |   | $ | 1,565 |   | $ | 68 |   | $ | — |   | $ | — |   | $ | — |   |
| Corporate  headquarters          |       | 152                                       |       | 152 |   | — |   | — |   | — |   | — |   | — |   |
| Minimum  guarantees              |       | 5,356                                     |       | 1,356 |   | 2,000 |   | 2,000 |   | — |   | — |   | — |   |
| Buzzeo  purchase price           |       | 487                                       |       | 487 |   | — |   | — |   | — |   | — |   | — |   |
| Operating  leases (1)            |       | 92,396                                    |       | 13,603 |   | 16,216 |   | 12,785 |   | 11,703 |   | 10,735 |   | 27,354 |   |
| Total                            |       | $                                         | 101,117    |   | $ | 16,691 |   | $ | 19,781 |   | $ | 14,853 |   | $ | 11,703 |   | $ | 10,735 |   | $ | 27,354 |   |

 

----

(1)                                  Operating lease amounts disclosed aboveinclude $15,920 of future operating lease costs, excluding estimated futuresublease income, accrued for in accrued facility charges and in the purchaseaccounting restructuring accruals related to the Synavant and SAI acquisitions.

 

As of March 31, 2006, letters of credit forapproximately $5,337 were outstanding related to deposits on certainfacilities.

 

We have an agreement with a venture capital fundpromoting technology businesses in New Jersey with a commitment to contribute$1,000 to the fund, callable at the discretion of the general partner in $100increments. As of March 31, 2006, $600 has been paid, with $400 of thecommitment remaining. The agreement has a termination date of December 11,2010, subject to extension with the consent of a majority in interest of thelimited partners. This asset is recorded within other assets in theaccompanying consolidated balance sheet.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

** **

Setforth in this Form 10-Q are certain risks and uncertainties that couldcause our actual results to differ materially from the forward-lookingstatements contained in this Form 10-Q. You are strongly urged tocarefully consider the cautionary language and risks set forth below.

 

**WEDEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES**

** **

Historically,a limited number of our customers have contributed a significant percentage ofour revenues. We anticipate that our operating results in any given period willcontinue to depend significantly upon revenues from a small number ofcustomers. The loss of any of these customers (which could include loss throughmergers and acquisitions) could have a materially adverse effect on ourbusiness, operating results or financial condition. We cannot make anyassurances that we will retain our existing customers or attract new customersthat would replace the revenue that could be lost if one or more of thesecustomers failed to renew its agreement(s) with us.

 

Asignificant agreement with our largest customer covering U.S. salesforceeffectiveness services is scheduled to renew on January 1, 2007, subjectto a right of the customer to terminate at renewal. The customer isre-evaluating all such U.S. services for 2007 in a process in which we areparticipating. We cannot assure you that the contract will renew for 2007, thatit will renew upon substantially similar terms or that it will coversubstantially similar services as those currently provided to this customer.

 

**OURBUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY**

** **

Mostof our solutions are currently used in connection with the marketing and saleof prescription-only drugs. This market is undergoing a number of significantchanges. These changes include:

 

•       thesignificant and continuing consolidation of the pharmaceutical industry which may reducethe number of our existing and potential customers;

•       regulatorychanges that permit the over-the-counter sale of formerly prescription-onlydrugs;

•       U.S. andinternational governmental regulations mandating price controls;

•       increasingFood and Drug Administration activism; and

•       competitivepressure on the pharmaceutical industry resulting from the continuing shift todelivery of healthcare and pharmaceuticals through managed care organizations.

 

21

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

Wecannot assure you that we can respond effectively to any or all of these andother changes in the marketplace. Our failure to do so could have a materialadverse effect on our business, operating results or financial condition, asour business depends, in large part, on the business conditions within thismarketplace.

 

**OURCUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS**

** **

Ourcustomers often implement our products in stages and our products are oftenutilized by a large number of our customers’ personnel. In the event that ourcustomers have difficulties implementing our products and services or are notsatisfied with the implementation or operation of our products and services,our business, operating results and financial condition could be materially andadversely affected.

 

**WEFACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

** **

Aspart of our business strategy, we have acquired, and in the future may acquire,businesses that offer complementary products, services or technologies. Theseacquisitions, including any future acquisitions, are and will be accompanied bysubstantial risks, including:

 

•       unexpectedproblems, liabilities, risks or costs associated with the acquired business;

•       the effectof the acquisitions on our financial and strategic position;

•       ourinability to successfully integrate the acquired business;

•       the failureof an acquired business to further our strategies;

•       ourinability to achieve expected cost and business synergies;

•       the significantstrain on our operating systems;

•       thediversion of our management’s attention from other business concerns;

•       theimpairment or loss of relationships with customers of the acquired business;

•       the negativeimpact of the combination of different corporate cultures;

•       the loss ofkey employees of the acquired company;

•       regulatoryor compliance issues existing in the acquired organization;

•       undetectedproblems within the acquired organization; and

•       theintegration and maintenance of uniform, company-wide standards, procedures andpolicies.

 

Anyof these factors could have a material adverse effect on our revenues andearnings.

 

Weexpect that the consideration paid for future acquisitions, if any, could be inthe form of cash, equity, debt or a combination of these. To the extentthat we issue shares of stock or other rights to purchase stock in connectionwith any future acquisition, existing shareholders will experience dilution andpotentially decreased earnings per share.

 

Whileto date we have had success integrating acquired entities into our operations,we cannot guarantee that we will successfully integrate new businesses into ouroperations or achieve any expected cost synergies.

 

**BUSINESS AND ECONOMICPRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE IN DEMAND FOR OURNEW PRODUCTS AND SERVICES**

** **

Businessand economic pressures on our major customers may result in budgetconstraints that directly impact their ability to purchase our new products andservices offerings. We cannot assure you that any decrease in demand caused bythese pressures will not have a material adverse effect on our business,operating results or financial condition.

 

**THE LENGTHY SALES AND IMPLEMENTATION CYCLES FORSFE SOLUTIONS MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES**

** **

Theselection of a sales force effectiveness (SFE) solution generally entails anextended decision-making process by our customers because of the strategicimplications, substantial costs and significant commitment of resourcesassociated with a customer’s license or implementation of the solution. Giventhe importance of the decision, senior levels of management of our customersare often involved in the process and, in some instances, their board ofdirectors may also be involved. As a result, the decision-making processtypically takes nine to eighteen months, and in certain cases longer. Inaddition, other factors, unrelated to our product and services, such asacquisitions, product delays, or other issues, may also significantlyimpact the timing and amounts of

 

22

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

buyingdecisions. Accordingly, we cannot fully control or predict the timing of ourexecution of contracts with customers. Prior sales and implementation cyclescannot be relied upon as any indication of future cycles.

 

Inaddition, an implementation process of three to six or more months before the softwareis rolled out to a customer’s sales force is customary. However, if a customerwere to delay or extend its implementation process, our quarterly revenues may declinebelow expected levels and could adversely affect our results of operations.

 

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE**

** **

Ourtotal revenue and operating results may vary significantly fromquarter-to-quarter. The main factors that could cause these fluctuations are:

 

•       thediscretionary nature of our customers’ purchase and budget cycles;

•       potentialdelays in recognizing revenue from license and other transactions;

•       seasonalvariations in operating results, including the increased seasonality associatedwith our international growth; and

•       variationsin the fiscal or quarterly cycles of our customers.

 

Inaddition, we establish our expenditure levels for product development, salesand marketing and some of our other operating expenses based in large part onour expected future revenues and anticipated competitive conditions. In particular,we frequently add staff in advance of new business to permit adequate time fortraining. If the new business is subsequently delayed, canceled or not awarded,we will have incurred expenses without the associated revenues. We also may increasesales and marketing expenses if competitive pressures become greater thanoriginally anticipated. Since only a small portion of our expenses variesdirectly with our actual revenues, our operating results and profitability arelikely to be adversely and disproportionately affected if our revenues fallbelow our targeted goals or expectations.

 

Asa result of these and other factors, revenues for any quarter may besubject to fluctuation. You should not rely on our period-to-period comparisonsof our results of operations as indications of future performance. Our futurequarterly results may from time to time not meet the expectations ofmarket analysts or investors, which could have a materially adverse effect onthe price of our common stock.

 

**AN UNFAVORABLE GOVERNMENT REVIEW OF OUR INCOMEAND PAYROLL TAX RETURNS AND CHANGES IN OUR EFFECTIVE TAX RATES COULD ADVERSELYAFFECT OUR OPERATING RESULTS**

** **

Weare subject to income, payroll and indirect taxes in the United States and inmultiple foreign jurisdictions. We exercise judgment in determining ourworldwide provision for these taxes, and in the ordinary course of our businessthere may be transactions and calculations where the ultimate taxdetermination is uncertain.

 

Weare regularly subjected to routine audits by various tax authorities. Any suchaudit may result in a determination that our tax obligations exceed theamounts provided for by us in our financial statements. Such additional taxobligations and any related penalties could adversely impact our business,operating results and financial condition for current, future and priorperiods.

 

Additionally,for a variety of reasons, we may not in the future be able to successfullymaintain our historic effective tax rates.

 

**FUTURERESTRUCTURING MAY ADVERSELY IMPACT OUR OPERATIONS**

** **

Wehave announced plans to identify and reduce costs in our business. As a result,we expect to incur severance and other associated costs for these actions whichmay adversely affect our future operating results.

 

Furthermore,delays or increased costs in implementing any restructuring plans or costsavings initiatives or opportunities could delay or adversely affect theanticipated financial benefits of any such restructuring.

 

Additionally,any restructuring or cost savings initiatives may be disruptive to ouremployees who are transitioning to different roles or responsibilities inrestructured areas of our business. Such disruptions may cumulativelyadversely impact future operating results.

 

Therealso can be no assurance that such savings initiatives or opportunities will beachieved in the time periods or amounts planned.

 

**WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCENEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE**

** **

Themarket for SFE products changes rapidly because of frequent improvements incomputer hardware and software technology. Our future success will depend, inpart, on our ability to:

 

•       useavailable technologies and data sources to develop new products and servicesand to enhance our current products and services;

 

23

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

•       introducenew solutions that keep pace with developments in our target markets; and

•       address thechanging and increasingly sophisticated needs of our customers.

 

Wecannot assure you that we will successfully develop and market new products orproduct enhancements that respond to technological advances in the marketplace,or that we will do so in a timely fashion. We also cannot assure you that ourproducts will adequately and competitively address the needs of the changingmarketplace.

 

Competitionfor software products has been characterized by shortening product cycles. We may bematerially and adversely affected by this trend if the product cycles for ourproducts prove to be shorter than we anticipate. If that happens, our business,operating results or financial condition could be adversely affected.

 

Toremain competitive, we also may have to spend more of our resources onproduct research and development than we have in the past. As a result, ourresults of operations could be materially and adversely affected.

 

**SOFTWAREERRORS OR DEFECTS COULD AFFECT OUR REVENUES**

** **

Oursoftware products are technologically complex and may contain previouslyundetected errors or failures or errors when products are first introduced orwhen updated versions are released. We cannot assure you that, despite ourtesting, our new products will be free from significant errors. Software errorscould cause delays in the commercial release of products until the errors havebeen corrected. Software errors may cause us to be in breach of ouragreements with customers, which could result in termination of the agreementsand monetary damages. Software errors may cause damage to our reputationand cause us to commit significant resources to their correction. Errors thatresult in termination of agreements, monetary damages, losses or delays couldhave a material adverse effect on our business, operating results or financialcondition.

 

**INCREASED COMPETITION MAY RESULT IN PRICEREDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES SOLUTIONS**

** **

Thereare a number of other companies that sell CRM and SFE products and relatedservices that specifically target the pharmaceutical industry, includingcompetitors that are actively selling CRM and SFE software products in morethan one country and competitors that also offer CRM and SFE support services.Some of our competitors and potential competitors are part of largecorporate groups and have significantly greater financial, sales, marketing,technology and other resources than we have.

 

Whilewe believe that the CRM and SFE software products and/or services offered bymost of our competitors do not address the variety of pharmaceutical customerneeds that our solutions address, increased competition may require us toreduce the prices for our products and services. Increased competition may alsoresult in decreased demand for our products and services.

 

Webelieve our ability to compete depends on many factors, some of which arebeyond our control, including:

 

•       the numberand success of new market entrants supplying competing CRM and SFE products orsupport services;

•       alliancesamong existing competitors;

•       technologicalchanges or changes in the our customers’ use of the Internet;

•       expansion ofproduct lines by, or consolidation among, our existing competitors; and

•       developmentand/or operation of in-house CRM or SFE software products or services by ourcustomers and potential customers.

 

Anyone of these factors can lead to price reductions and/or decreased demand andwe cannot assure you that we will be able to continue to compete successfullyor that competition will not have a material adverse effect on our business,operating results or financial condition.

 

**WE MAY NOT BE ABLE TO COMPETE EFFECTIVELYIN THE INTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDEASSURANCES THAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILLINCREASE**

** **

Thesuccess of parts of our business will depend, in part, on our ability tocontinue developing Internet-related products, modifying and improving ourexisting products and responding to technological advances and changingcommercial uses of the Internet. We cannot assure you that our Internet-relatedproducts and services will adequately respond to such technological advancesand changing uses. Nor can we assure you that the demand for our Internet-relatedproducts and services will increase.

 

Commercialuse of the Internet raises potential problems with security, privacy,reliability, accessibility, quality of service and government regulation. Theseissues, if unresolved, may affect the use of our Internet-relatedproducts. If these potential problems arise, our business, financial conditionor results of operations could be materially and adversely affected.

 

24

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

**OURINTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT**

** **

Wehave recently significantly expanded and may in the future further expandour international operations and enter additional international markets. Thisexpansion would require significant management attention and financialresources that could adversely affect operating margins and earnings. We may notbe able to maintain or increase international market demand for our productsand services. If we do not, our international sales will be limited and ourbusiness, financial condition or results of operations could be materially andadversely affected.

 

Thesale of our products and services in foreign countries accounts for, and isexpected in the future to account for, an increasing material part of ourrevenues. These sales are subject to substantial risks inherent ininternational business activities, including:

 

•       adversechanges in the political stability and economic environments in these countriesand regions;

•       adversechanges in tax, tariff and trade and other regulations;

•       the absenceor significant lack of legal protection for intellectual property rights incertain of these countries; and

•       difficultiesin managing an organization spread on a global basis.

 

Eachof the above risks could have a significant impact on our revenues,profitability and our ability to deliver products on a competitive and timelybasis, which could materially and adversely affect our business, financialcondition or operating results.

 

Sincewe have operations in a number of countries and our service agreements in suchcountries are denominated in foreign currencies, we face exposure to adversemovements in foreign currency exchange rates. As currency rates change,translation of the income statements of our international entities from localcurrencies to U.S. dollars affects period-over-period comparability ofoperating results. Historically, we have not hedged these translation risksbecause we generally reinvest our cash flows from international operations.However, we continue to evaluate foreign currency translation risk exposure. Aswe continue to grow our international business, the risks associated withforeign currency translation will also grow.

 

**CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OURINFORMATION TECHNOLOGY INFRASTRUCTURE**

** **

Theefficient operation of our business, and ultimately our operating performance,depends on the uninterrupted use of our critical business and informationtechnology systems. Many of these systems require the use of specializedhardware and other equipment that is not readily available in the marketplace.Although we maintain these systems at more than one location, a naturaldisaster, a fire or other catastrophic event at any of these locations couldresult in the destruction of these systems. In such an event, the replacementof these systems and restoration of archived data and normal operation of ourbusiness could take several days to several weeks, or more. During theintervening period when our critical business and information technologysystems are fully or partially inoperable, our ability to conduct normalbusiness operations could be significantly and adversely impacted and as aresult our business, operating results and financial condition could beadversely affected.

 

**OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIORMANAGEMENT TEAM, ENSURING EFFECTIVE TRANSITION FOR KEY POSITIONS AND ATTRACTINGAND RETAINING QUALIFIED PERSONNEL**

** **

Ourfuture success depends, to a significant extent, upon the contributions of ourexecutive officers and key sales, technical and customer service personnel.While we believe that we have implemented effective succession plans, we can makeno assurance that the loss of key personnel and transitions to new keypersonnel would not adversely impact our business or result in less effectivemanagement or technical teams.

 

Ourfuture success also depends on our continuing ability to attract and retainhighly qualified technical and managerial personnel. Due to competition forsuch personnel, we have at times experienced difficulties in recruiting andretaining qualified personnel and we may experience such difficulties inthe future. Our ability to expand and increase revenue growth in the futurewill depend, in part, on our success in recruiting and training such qualifiedpersonnel. We may not always be able to expand our personnel in theseareas as necessary to support our operations. Any recruiting or retentiondifficulties could adversely affect our business, operating results orfinancial condition.

 

**IF OUR SECURITY MEASURES ARE BREACHED AND ANUNAUTHORIZED PARTY OBTAINS ACCESS TO A CUSTOMER’S DATA, CERTAIN OF OURSOLUTIONS MAY BE PERCEIVED AS BEING INSECURE AND CUSTOMERS MAY CURTAILOR STOP USING OUR SERVICE.**

** **

Certainof our solutions involve the storage and transmission of customers’ proprietaryinformation, and security breaches could expose us to a risk of loss of thisinformation, litigation and potential liability. Because techniques used toobtain unauthorized access or to sabotage systems change frequently andgenerally are not recognized until launched against a target, we may beunable to anticipate these techniques or to implement adequate preventativemeasures. If an actual or perceived breach of our security occurs,

 

25

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

themarket perception of the effectiveness of our security measures could be harmedand we could lose existing customers and our ability to obtain new customers.

 

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THATWE MAY NOT BE ABLE TO PROTECT COMPLETELY**

** **

Werely on a combination of trade secret, copyright and trademark laws,non-disclosure, license and other contractual agreements and technical measuresto protect our proprietary rights. We cannot assure you that the steps we takewill prevent misappropriation of these rights. Further, protective actions wehave taken or will take in the future may not prevent competitors fromdeveloping products with features similar to our products. In addition,effective copyright and trade secret protection may be unavailable orlimited in certain foreign countries. In response to customer requests, we havealso on occasion entered into agreements which require us to place our sourcecode in escrow to secure our service and maintenance obligations.

 

**THIRD PARTIES MAY CLAIM THAT OUR SOLUTIONSINFRINGE ON THEIR PROPRIETARY RIGHTS**

** **

Asa company offering technology solutions, there can be no assurance that thirdparties also offering technology solutions will not assert infringement claimsagainst us in the future. While we believe that our solutions do not infringeupon proprietary rights of other parties, there can be no assurance that theCompany would not be found to infringe on the proprietary rights of others. Anysuch finding could have a material adverse impact on our operating results orfinancial condition.

 

**IF OUR THIRD-PARTY VENDORS ARE UNABLE TOSUCCESSFULLY RESPOND TO TECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OURRELATIONSHIPS WITH THIRD-PARTY VENDORS, INTERRUPTIONS IN THE SUPPLY OF OURPRODUCTS MAY RESULT**

** **

Someof our software is provided by third-party vendors. If our third-party vendorsare unable to successfully respond to technological change or if ourrelationships with certain third-party vendors are terminated, we may experiencedifficulty in replacing the functionality provided by the third-party softwarecurrently offered with our products. Although we believe there are othersources for all of our third-party software, any significant interruption inthe supply of these products could adversely impact our sales unless and untilwe can secure another source. The absence of or any significant delay in thereplacement of functionality provided by third-party software in our productscould materially and adversely affect our sales.

 

**THE RESULTS DERIVED FROM CURRENT AND FUTURESTRATEGIC RELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED**

** **

Weare involved in a number of strategic relationships with third parties and arefrequently pursuing others. Should these relationships, or any of them, proveto be more costly than anticipated or fail to meet revenue expectations orother anticipated synergies, we cannot guarantee that such events will not havea material impact upon our business, operating results or financial condition.

 

**OUR DATA AND ANALYTICS SOLUTIONS ARE DEPENDENTUPON STRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED, COULD UNDERMINE THECONTINUED VIABILITY OF THESE SOLUTIONS**

** **

Ourdata and analytics solutions are sourced, in part, from data provided throughstrategic relationships. Although we believe there are other sources for suchdata, the termination of any of these relationships could diminish the breadthor depth of our data and analytics solutions. This termination or our failureto establish new strategic relationships in the future could negatively impactour business, operating results or financial condition.

 

**FEDERAL AND STATE LAWS AND REGULATIONS COULDDEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS**

** **

Whilewe believe our data and analytics solutions are not in violation of currentfederal or state laws and regulations pertaining to patient privacy or healthinformation, including the Health Insurance Portability and Accountability Actof 1996 (HIPAA), we cannot guarantee that future laws or regulations orinterpretations of existing laws and statutes will not impact negatively uponour ability to market these solutions or cause a decrease in demand for suchsolutions from customers that see an increased risk in any such new laws orregulations.

 

26

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

**GOVERNMENTAL REGULATION MAY MATERIALLY ANDADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THEMAIL**

** **

Throughthe interactive marketing business we acquired in the Synavant acquisition, we may distributecontrolled substances to doctors’ offices through the mail as part ofcertain interactive marketing programs provided on behalf of pharmaceuticalmanufacturers. It is important to the business that this practice ofdistributing prescription-only drugs continues. Future legislation may restrictour ability to provide these types of services. If any such legislation isenacted, it could have a material and adverse effect on our business, operatingresults and financial condition.

 

**DIFFICULTIES IN SUBLEASING OR OTHERWISEDISPOSING OF CERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUREARNINGS**

** **

Weexpect to sublease all or a portion of certain of our facilities. An inabilityto successfully dispose of or sublet, as applicable, any of these facilities orto obtain favorable pricing or sublease terms could negatively impact ourearnings.

 

**UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIESMAY BE REQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTINGORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS**

** **

Inreporting our financial results we rely upon the accounting policies andstandards then in effect at the time of our report. Future regulations,standards or interpretations may require us to adjust or restate financialresults previously reported. A required restatement could have a materialimpact upon past financial results or current comparison to previous results.

 

**WEMAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLDECONOMY**

** **

Worldevents such as terrorist attacks, the current U.S. military action in theMiddle East and elsewhere, and hostilities in the Middle East, Asia and othergeographical areas, have and may in the future weaken the U.S. and worldeconomies. Any resultant weaknesses in these economies may adverselyaffect our business, financial condition or results of operations or thebusinesses of our customers.

 

**WE FACE RISKS IN CONNECTION WITH IMPLEMENTINGTHE REQUIREMENTS OF SECTION 404 OF THE SARBANES OXLEY ACT**

** **

Wecontinue to be involved in the process of evaluating our internal control overfinancial reporting in order to allow management to report on, and ourregistered independent public accounting firm to attest to, our internalcontrols, as required by Section 404 of the Sarbanes-Oxley Act. This is acontinuing process and we cannot be certain as to the timing of completion ofour future reviews, evaluation, testing and remediation actions or the impactof the same on our operations or the results of the required testing andrequired attestation report by us and also by our registered independent publicaccounting firm. If at any time we are unable to implement the requirements of Section 404in a timely manner or with adequate compliance, we may be subject tosanctions or investigation by regulatory authorities, such as the Securitiesand Exchange Commission or NASDAQ. Any such actions could have a materialadverse affect our financial results and the price of our common stock.

 

**PROVISIONS OF OUR CHARTER DOCUMENTS AND NEWJERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE**

** **

Provisionsof our Restated Certificate of Incorporation, as amended, our By-laws, asamended, and New Jersey law may make it more difficult for a third-partyto acquire us. For example, the Board of Directors may, without the consent ofthe stockholders, issue preferred stock with rights senior to those of thecommon stock. In addition, we have a Shareholder Rights Plan which may limitthe ability of a third-party to attempt a hostile acquisition of the Company.

 

27

----

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**($ InThousands, Except Per Share Data)**

 

**OURCOMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS**

** **

Themarket price of our common stock may be significantly affected by thefollowing factors:

 

•       theannouncement or the introduction of new products and services by us or ourcompetitors;

•       quarter-to-quartervariations in our operating results or changes in revenue or earnings estimatesor failure to meet or exceed revenue or earnings estimates;

•       marketconditions in the technology, healthcare and other growth sectors;

•       generalconsolidation in the healthcare information industry which may result inthe market perceiving us or other comparable companies as potential acquisitiontargets;

•       the gain orloss of significant customers, orders or other business with significantcustomers;

•       changes inthe domestic and international economic, political and business conditions; and

•       futureacquisitions.

 

Further, the stock market has experienced onoccasion extreme price and volume fluctuations. The market prices of the equitysecurities of many technology companies have been especially volatile and oftenhave been unrelated to the operating performance of such companies. These broadmarket fluctuations may have a material adverse effect on the market priceof our common stock.

 

28

----

 

**ITEM 4. Controls and Procedures**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer, with the assistance of other members of the Company’smanagement, have evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this Form 10-Q.Based on such evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are effective.

 

The Company’s Chief Executive Officer and ChiefFinancial Officer have also concluded that there have been no changes in theCompany’s internal control over financial reporting during the quarter ended March 31,2006 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

PART II. OTHERINFORMATION

 

**ITEM 1A. Risk Factors**

 

There are nomaterial changes in the risk factors from those included in our 2005 annualreport on Form 10-K.

However, in addition tothe other information set forth in this report, you should carefully considerthe factors discussed in Part I, “*Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations*”under “FACTORS THAT MAY AFFECT FUTURE RESULTS” in this Quarterly Report onForm 10-Q, which could materially affect our business, financial conditionor future results. The risks described in this Quarterly Report on Form 10-Qare not the only risks facing our Company. Additional risks and uncertaintiesnot currently known to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/ or operating results.

 

**ITEM 6.****                                               ****Exhibits**

 
| 10.1   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Joseph Ripp                                                                                                                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Jeffrey Bairstow                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Christine Pellizzari                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Mark H. Cieplik                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Natasha Giordano                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Garry D. Johnson                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Jean-Paul Modde                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Mark Theilken                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.9   |   | New Hire Authorization - Updated Appendix                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.10  |   | Cash Bonus for Mark Theilken (incorporated by reference to the  Company’s Current Report on Form 8-K, Filed with the Commission on February 9,  2006)                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 10.11  |   | Cash Incentive Bonus Arrangements between the Company and Joseph  Ripp, President and Chief Operating Officer and Jeffrey Bairstow, Executive  Vice President and Chief Financial Officer (incorporated be reference to the  Company’s Current Report on Form 8-K, filed with the Commission on March 2,  2006) |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of John E. Bailye, Chairman of the Board and Chief  Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of Jeffrey J. Bairstow, Executive Vice President and Chief  Financial Officer of the Company, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| 32     |   | Certifications of John E. Bailye, Chairman of the Board and Chief  Executive Officer of the Company, and Jeffrey J. Bairstow, Executive Vice President and Chief  Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         |

 

29

----

 

Signatures

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

Date:May 10, 2006

 
|   | By:    | /s/ John E. Bailye                                                                   |
|--------|--------|--------------------------------------------------------------------------------------|
|   |   | John E. Bailye,                                                                      |
|   |   | Chairman of the Board and Chief Executive Officer  (Principal Executive Officer)     |
|   |   |                                                                                 |
|   | By:    | /s/ Jeffrey J. Bairstow                                                              |
|   |   | Jeffrey J. Bairstow,                                                                 |
|   |   | Executive Vice President and Chief  Financial Officer  (Principal Financial Officer) |

 

30

----

 

**EXHIBIT INDEX**

 
| 10.1   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Joseph Ripp*                                                                                                                                                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.2   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Jeffrey Bairstow*                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.3   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Christine Pellizzari*                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.4   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Mark H. Cieplik*                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.5   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Natasha Giordano*                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.6   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Garry D. Johnson*                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.7   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Jean-Paul Modde*                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.8   |   | Amendment to Employment Agreement dated February 13, 2006  between the Company and Mark Theilken *                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.9   |   | New Hire Authorization - Updated Appendix *                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.10  |   | Cash Bonus for Mark Theilken (incorporated by reference to the  Company’s Current Report on Form 8-K, Filed with the Commission on February 9,  2006)*                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.11  |   | Cash Incentive Bonus Arrangements between the Company and Joseph  Ripp, President and Chief Operating Officer and Jeffrey Bairstow, Executive  Vice President and Chief Financial Officer (incorporated be reference to the  Company’s Current Report on Form 8-K, filed with the Commission on March 2,  2006)* |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of John E. Bailye, Chairman of the Board and Chief  Executive Officer of the Company, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Jeffrey J. Bairstow, Executive Vice President and Chief  Financial Officer of the Company, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 32     |   | Certifications of John E. Bailye, Chairman of the Board and Chief  Executive Officer of the Company, and Jeffrey J. Bairstow, Executive Vice President and Chief  Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002          |

 

----

| * |   | Management contract or compensatory plan. |
|---|--------|-------------------------------------------|

 

31

----