**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

**Form 10-Q**

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

**Forthe quarterly period ended September 30, 2006**

**CommissionFile Number 001-16379**

**Dendrite International, Inc.**

(Exact name of registrantas specified in its charter)

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

 

**1405 U.S. Highway 206Bedminster, NJ 07921**

(Address, including zipcode, ofprincipal executive offices)

**(908) 443-2000**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days. x 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” inRule 12b-2 of the Exchange Act.

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

 

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

Asof October 30, 2006, 43,779,092 shares of Dendrite International, Inc. nopar value common stock were outstanding.

 

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**DENDRITE INTERNATIONAL, INC.**

**INDEX TO QUARTERLY REPORT ONFORM 10-Q**

**FOR THE QUARTER ENDED SEPTEMBER 30,2006**

| **PART I.** | ** ** | **FINANCIAL INFORMATION**                                                                                   | ** ** | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **       | ** ** | ** **                                                                                                  | ** ** | ** ** |
| ITEM 1.          |       | Financial Statements                                                                                        |       |       |
|             |       |                                                                                                        |       |       |
|             |       | Consolidated  Statements of Operations (unaudited)  Three and nine months ended September 30, 2006 and 2005 |       |       |
|             |       |                                                                                                        |       |       |
|             |       | Consolidated Balance  Sheets (unaudited)  September 30, 2006 and December 31, 2005                |       |       |
|             |       |                                                                                                        |       |       |
|             |       | Consolidated  Statements of Cash Flows (unaudited)  Three and nine months ended September 30, 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  5.         |       | Other  Information                                                                                          |       |       |
|             |       |                                                                                                        |       |       |
| ITEM  6.         |       | Exhibits                                                                                                    |       |       |
|             |       |                                                                                                        |       |       |
| Signatures       |       |                                                                                                        |       |       |

 

2

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PART I.   FINANCIAL INFORMATION

ITEM 1.    Financial Statements

**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **SEPTEMBER 30,**           | ** ** | **SEPTEMBER 30,**          | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Revenues                                           |       | $                                | 102,973    |                            | $          | 114,360 |   | $ | 312,483 |   | $ | 328,873 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Operating Costs &  Expenses:                   |       |                             |       |                            |       |   |   |   |   |
| Operating costs                                    |       | 56,172                           |       | 61,252                          |       | 175,321 |   | 173,732 |   |
| Selling, general  and administrative               |       | 39,816                           |       | 33,395                          |       | 121,707 |   | 103,258 |   |
| Research and  development                          |       | 1,607                            |       | 1,343                           |       | 4,835 |   | 4,615 |   |
| Restructuring  and other charges                   |       | 12,660                           |       | —                          |       | 15,238 |   | 9,372 |   |
| Amortization of  acquired intangible assets        |       | 1,074                            |       | 960                             |       | 3,131 |   | 3,340 |   |
| Total operating  costs & expenses              |       | 111,329                          |       | 96,950                          |       | 320,232 |   | 294,317 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Operating (loss) income                            |       | (8,356                           | )          | 17,410                          |       | (7,749 | ) | 34,556 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Interest income, net                               |       | (644                             | )          | (150                            | )          | (1,602 | ) | (315 | ) |
| Other expense, net                                 |       | 31                               |       | 35                              |       | 77 |   | 32 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| (Loss) income before  income tax (benefit) expense |       | (7,743                           | )          | 17,525                          |       | (6,224 | ) | 34,839 |   |
| Income tax (benefit)  expense                      |       | (1,698                           | )          | 6,747                           |       | (174 | ) | 13,413 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Net (loss) income                                  |       | $                                | (6,045     | )                               | $          | 10,778 |   | $ | (6,050 | ) | $ | 21,426 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Net (loss) income per  share:                      |       |                             |       |                            |       |   |   |   |   |
| Basic                                              |       | $                                | (0.14      | )                               | $          | 0.25 |   | $ | (0.14 | ) | $ | 0.50 |   |
| Diluted                                            |       | $                                | (0.14      | )                               | $          | 0.24 |   | $ | (0.14 | ) | $ | 0.49 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

3

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT SHARE DATA)**

**(UNAUDITED)**
| ** **                                                                                                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                                                                                                    |       |                   |       |                  |       |
|                                                                                                                                                                                                          |       |                   |       |                  |       |
| Current Assets:                                                                                                                                                                                               |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $                      | 84,147     |                  | $          | 66,145 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,000                                                                                                                                        |       | 67,106                 |       | 80,167                |       |
| Prepaid expenses  and other current assets                                                                                                                                                                    |       | 7,945                  |       | 8,544                 |       |
| Asset held for  sale                                                                                                                                                                                          |       | 8,545                  |       | —                |       |
| Deferred income  taxes                                                                                                                                                                                        |       | 13,035                 |       | 8,848                 |       |
| Total current  assets                                                                                                                                                                                         |       | 180,778                |       | 163,704               |       |
|                                                                                                                                                                                                          |       |                   |       |                  |       |
| Property and equipment,  net of accumulated depreciation of $72,624 and $61,019, respectively                                                                                                                 |       | 38,578                 |       | 52,592                |       |
| Other assets                                                                                                                                                                                                  |       | 9,355                  |       | 8,856                 |       |
| Goodwill                                                                                                                                                                                                      |       | 92,332                 |       | 90,440                |       |
| Intangible assets, net                                                                                                                                                                                        |       | 27,038                 |       | 25,083                |       |
| Capitalized software  development costs, net                                                                                                                                                                  |       | 10,380                 |       | 10,341                |       |
| Deferred income taxes                                                                                                                                                                                         |       | 12,011                 |       | 11,991                |       |
|                                                                                                                                                                                                          |       | $                      | 370,472    |                  | $          | 363,007 |   |
| **Liabilities  and Stockholders' Equity**                                                                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                                                                          |       |                   |       |                  |       |
| Current Liabilities:                                                                                                                                                                                          |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                              |       | $                      | 8,138      |                  | $          | 7,677 |   |
| Income taxes  payable                                                                                                                                                                                         |       | 8,272                  |       | 9,518                 |       |
| Capital lease  obligations                                                                                                                                                                                    |       | 1,408                  |       | 1,383                 |       |
| Accrued  compensation and benefits                                                                                                                                                                            |       | 18,887                 |       | 17,950                |       |
| Accrued  professional and consulting fees                                                                                                                                                                     |       | 6,164                  |       | 5,690                 |       |
| Accrued restructuring  and other charges                                                                                                                                                                      |       | 8,138                  |       | 1,490                 |       |
| Other accrued  expenses                                                                                                                                                                                       |       | 20,376                 |       | 17,468                |       |
| Purchase  accounting restructuring accrual                                                                                                                                                                    |       | 960                    |       | 1,601                 |       |
| Deferred  revenues                                                                                                                                                                                            |       | 15,430                 |       | 18,680                |       |
| Total current  liabilities                                                                                                                                                                                    |       | 87,773                 |       | 81,457                |       |
|                                                                                                                                                                                                          |       |                   |       |                  |       |
| Capital lease obligations                                                                                                                                                                                     |       | 389                    |       | 1,648                 |       |
| Purchase accounting  restructuring accrual                                                                                                                                                                    |       | 2,269                  |       | 3,009                 |       |
| Accrued restructuring  and other charges                                                                                                                                                                      |       | 3,387                  |       | 4,143                 |       |
| Deferred rent                                                                                                                                                                                                 |       | 5,425                  |       | 5,740                 |       |
| Other non-current  liabilities                                                                                                                                                                                |       | 5,617                  |       | 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, 46,583,869 and 46,353,252 shares  issued; 43,722,566 and 43,491,949 shares outstanding at September 30, 2006  and December 31, 2005, respectively |       | 153,728                |       | 149,947               |       |
| Retained earnings                                                                                                                                                                                             |       | 142,899                |       | 148,948               |       |
| Deferred compensation                                                                                                                                                                                         |       | —                 |       | (4,419                | )          |
| Accumulated other  comprehensive income (loss)                                                                                                                                                                |       | 722                    |       | (1,324                | )          |
| Less treasury stock, at  cost                                                                                                                                                                                 |       | (31,737                | )          | (31,737               | )          |
| Total stockholders'  equity                                                                                                                                                                                   |       | 265,612                |       | 261,415               |       |
|                                                                                                                                                                                                          |       | $                      | 370,472    |                  | $          | 363,007 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

4

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

**(UNAUDITED)**
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Operating  activities:                                                                    |       |                                                    |       |   |   |
| Net (loss) income                                                                         |       | $                                                       | (6,050     | ) | $ | 21,426 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                             |       | 19,090                                                  |       | 18,026 |   |
| Asset impairment                                                                          |       | 4,454                                                   |       | 1,030 |   |
| Stock-based compensation                                                                  |       | 5,941                                                   |       | 103 |   |
| Deferred income taxes                                                                     |       | (3,869                                                  | )          | (2,277 | ) |
| Excess tax benefits from stock-based awards                                               |       | (229                                                    | )          | — |   |
| Changes in assets and liabilities, net of effects  from acquisitions:                     |       |                                                    |       |   |   |
| Decrease (increase) in accounts receivable                                                |       | 14,725                                                  |       | (1,825 | ) |
| Decrease in prepaid expenses and other current  assets                                    |       | 860                                                     |       | 56 |   |
| Increase in other assets                                                                  |       | (368                                                    | )          | (1,277 | ) |
| Increase in accounts payable and accrued expenses                                         |       | 567                                                     |       | 1,599 |   |
| Increase in accrued restructuring and other charges                                       |       | 5,829                                                   |       | 6,618 |   |
| Decrease in purchase accounting restructuring  accrual                                    |       | (1,118                                                  | )          | (2,180 | ) |
| Decrease in income taxes payable                                                          |       | (1,004                                                  | )          | (1,621 | ) |
| (Decrease) increase in deferred revenue                                                   |       | (3,579                                                  | )          | 221 |   |
| Decrease in other non-current liabilities                                                 |       | (2                                                      | )          | (70 | ) |
|                                                                                      |       |                                                    |       |   |   |
| Net cash provided by operating activities                                                 |       | 35,247                                                  |       | 39,829 |   |
|                                                                                      |       |                                                    |       |   |   |
| Investing  activities:                                                                    |       |                                                    |       |   |   |
| Acquisitions, net of cash acquired                                                        |       | (5,706                                                  | )          | (21,439 | ) |
| Purchases of property and equipment                                                       |       | (9,863                                                  | )          | (22,633 | ) |
| Additions to capitalized software development costs                                       |       | (3,668                                                  | )          | (3,845 | ) |
|                                                                                      |       |                                                    |       |   |   |
| Net cash used in investing activities                                                     |       | (19,237                                                 | )          | (47,917 | ) |
|                                                                                      |       |                                                    |       |   |   |
| Financing  activities:                                                                    |       |                                                    |       |   |   |
| Payments on capital lease obligations                                                     |       | (1,234                                                  | )          | (1,241 | ) |
| Excess tax benefits from stock-based awards                                               |       | 229                                                     |       | — |   |
| Issuance of common stock                                                                  |       | 2,030                                                   |       | 10,938 |   |
|                                                                                      |       |                                                    |       |   |   |
| Net cash provided by financing activities                                                 |       | 1,025                                                   |       | 9,697 |   |
|                                                                                      |       |                                                    |       |   |   |
| Effect of  foreign exchange rate changes on cash                                          |       | 967                                                     |       | (1,011 | ) |
| Net increase in  cash and cash equivalents                                                |       | 18,002                                                  |       | 598 |   |
| Cash and cash  equivalents, beginning of year                                             |       | 66,145                                                  |       | 64,020 |   |
|                                                                                      |       |                                                    |       |   |   |
| Cash and cash  equivalents, end of period                                                 |       | $                                                       | 84,147     |   | $ | 64,618 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

5

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, 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 ofSeptember 30, 2006, operating results for the three and nine months endedSeptember 30, 2006 and 2005 and cash flows for the nine months ended September30, 2006 and 2005. For further information, refer to the consolidated financialstatements and notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

Our interim operating results may not beindicative of operating results for the full year.

**2.Supplemental Cash Flow Information**

As ofSeptember 30, 2006, the Company acquired approximately $1,027 of propertyand equipment which was not paid and the amount is included in other accruedexpenses on the accompanying consolidated balance sheet as ofSeptember 30, 2006.  Therefore theamount is excluded from the consolidated statement of cash flows for the ninemonths ended September 30, 2006.

**3. Recent Accounting Pronouncements**

In July 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes–an interpretation of FASB Statement No. 109” (“FIN 48”),which prescribes accounting for and disclosure of uncertainty in tax positions.This interpretation defines the criteria that must be met for the benefits of atax position to be recognized in the financial statements as well as themeasurement of tax benefits recognized. The provisions of FIN 48 are effectiveas of the beginning of the Company’s 2007 fiscal year, with the cumulativeeffect of the change in accounting principle recorded as an adjustment to openingretained earnings. The Company is currently evaluating the impact of adoptingFIN 48 on the consolidated financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”), which provides interpretive guidance on howthe effects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. SAB 108 is effective forfiscal years ending after November 15, 2006. The Company does not expect theadoption of SAB 108 to have a material impact on the consolidated financialstatements.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value under U.S. GAAP and expands fair valuemeasurement disclosures.  SFAS No. 157 does not require new fair valuemeasurements and is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears.  The Company is currently evaluating the impact of adopting SFASNo. 157 on the consolidated financial statements.

**4. Stock-Based Compensation**

In December 2004, the FASB issued SFASNo. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as areplacement to SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).This statement supersedes Accounting Principles Board Opinion 25, “Accountingfor Stock Issued to Employees” (“APB 25”) which allowed companies to use theintrinsic method of valuing share-based payment transactions and amends SFASNo. 95, “Statement of Cash Flows.” SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on the fair-value method asdefined in SFAS 123.

On January 1, 2006, the Company adoptedSFAS 123(R) using the modified prospective application method, aspermitted under SFAS 123(R), which requires measurement of compensation cost ofall stock-based awards at fair value on the date of grant and recognition ofcompensation over the respective service periods for awards expected to vest.Under this method, compensation cost in 2006 includes the portion vesting inthe period for (1) all stock-based awards granted prior to, but not vestedas of, January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions

6

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

ofSFAS No. 123, and (2) all stock-based awards granted subsequent toJanuary 1, 2006, based on the grant date fair value estimated inaccordance with the provisions of SFAS 123(R). Accordingly, prior periodsamounts have not been restated. Under this method, the Company is required torecord compensation expense for all awards granted after the date of adoptionand for the unvested portion of previously granted awards that remainoutstanding at the date of adoption. The Company recognizes the cost of allemployee stock awards on a straight-line basis over their respective vestingperiods, net of estimated forfeitures.

Prior to the adoption of SFAS 123(R), the Companyapplied APB 25 to account for its stock-based awards. Under APB 25, the Companygenerally only recorded stock-based compensation expense for restricted stockunits, which amounted to $69 and $103 for the three and nine months endedSeptember 30, 2005. Under the provisions of APB 25, the Company was notrequired to recognize compensation expense for the cost of stock options issuedunder its equity compensation plans or of shares issued under its EmployeeStock Purchase Plan (“ESPP”). With the adoption of SFAS 123(R), theCompany recorded stock-based compensation expense for the cost of stockoptions, restricted stock units and shares issued under the ESPP (collectively,“Employee Stock-Based Awards”). Stock-based compensation expense for the threeand nine months ended September 30, 2006, was $1,927 and $5,994,respectively.  The Company has notchanged 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.

The following table details the pro forma effect onnet income and income per share had stock based-compensation expense for theEmployee Stock-Based Awards been recorded for the three and nine months endedSeptember 30, 2005, based on the fair value method under SFAS 123:

|                                                                                                                                          | ** ** | **For the Three** | ** ** | **For the Nine** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                               | ** ** | **Months Ended**       | ** ** | **Months Ended**      | ** ** |
| ** **                                                                                                                               | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                                                                                               | ** ** | **2005**                    | ** ** | **2005**                   | ** ** |
| Net income as  reported                                                                                                                  |       | $                           | 10,778     |                       | $          | 21,426 |   |
| Add: Total  stock-based expense included in reported net income, net of related tax  effects                                             |       | 42                          |       | 63                         |       |
|                                                                                                                                     |       |                        |       |                       |       |
| Deduct: Total  stock-based compensation expense determined under the fair value based method  for all awards, net of related tax effects |       | (4,165                      | )          | (11,857                    | )          |
| Pro forma net  income                                                                                                                    |       | $                           | 6,655      |                       | $          | 9,632 |   |
|                                                                                                                                     |       |                        |       |                       |       |
| Basic income per  share:                                                                                                                 |       |                        |       |                       |       |
| As reported                                                                                                                              |       | $                           | 0.25       |                       | $          | 0.50 |   |
| Pro forma                                                                                                                                |       | $                           | 0.15       |                       | $          | 0.23 |   |
| Diluted income  per share:                                                                                                               |       |                        |       |                       |       |
| As reported                                                                                                                              |       | $                           | 0.24       |                       | $          | 0.49 |   |
| Pro forma                                                                                                                                |       | $                           | 0.15       |                       | $          | 0.22 |   |

 

For the three and ninemonths ended September 30, 2006, the adoption of SFAS 123(R) resulted inincremental stock-based compensation expense causing the loss before income tax(benefit) expense to increase by $1,022 and $3,750, net loss to increase by$671 and $2,502 and basic and diluted loss per share to increase by $.02 and$.06 per share, respectively. Stock-based compensation expense for the three and nine months endedSeptember 30, 2006, of $905 and $2,244 relating to restricted stock units wouldhave been recognized in 2006 regardless of the adoption of SFAS 123(R). Inaddition, in connection with the adoption of SFAS 123(R), net cashprovided by operating activities decreased and net cash provided by financingactivities increased for the nine months ended September 30, 2006 by $229related to tax benefits from stock-based payments arrangements.

The fair value for theseoptions were estimated at the date of grant for all periods presented using theBlack-Scholes option pricing model with the following assumptions:
| ** **                                       | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                       | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected dividend yield                          |       | 0.0                                                | %          | 0.0                                               | %          | 0.0 | % | 0.0 | % |
| Weighted-average expected stock price volatility |       | 50.0                                               | %          | 50.0                                              | %          | 50.0 | % | 50.0 | % |
| Weighted-average risk-free interest rate         |       | 4.7                                                | %          | 4.1                                               | %          | 4.9 | % | 3.9 | % |
| Expected life of the option (years)              |       | 5.00                                               |       | 5.25                                              |       | 5.00 |   | 5.25 |   |

 

7

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

The weighted-average expected stock price volatilitywas estimated based on historical volatility for a period equal to the stockoption’s expected life, estimated on the date of grant, and calculated on aquarterly basis. The weighted-average risk-free interest rate is based on theU. S. Treasury yield curve in effect at the time of grant. The expected life(estimated period of time outstanding) of stock options granted was estimatedusing the historical exercise behavior of employees.

**EQUITYCOMPENSATION PLANS**

The Company has various equity compensation plans (the“Plans”) that provide for the granting of options to purchase the Company’scommon stock and other equity-based awards. Under the Plans, the total numberof shares of common stock that may be granted is 15,750,000.

*Options*

Options granted under the Plans generally vest over afour-year period and are exercisable over a period not to exceed ten years asdetermined by the Compensation Committee of the Board of Directors. During theyears ended December 31, 2005 and 2004, certain options were granted thatvested during the year of grant but were subject to a restriction (of up tofour years) on the sale of any shares acquired upon option exercise in theperiod of restriction. Incentive stock options are granted with exercise pricesequal to fair value of the Company’s common stock using the closing price fromthe prior trading day. Nonqualified options are granted at exercise pricesdetermined by the Compensation Committee of the Board of Directors, but notbelow fair market value of common stock at the date of grant.

A summary of award activity under the Plans as ofSeptember 30, 2006 and changes during the nine month period is as follows:
| ** **                      | ** ** | ** ** | ** ** | ** **              | ** ** | **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                   |       |
| Granted                         |       | 155,000    |       | 10.04                   |       |                      |       |                     |       |
| Exercised                       |       | (31,012    | )          | 11.48                   |       |                      |       |                     |       |
| Canceled                        |       | (316,075   | )          | 17.66                   |       |                      |       |                     |       |
| Outstanding June  30, 2006      |       | 9,671,455  |       | 14.97                   |       | 6.1                       |       | 2,254                    |       |
| Granted                         |       | 60,000     |       | 9.95                    |       |                      |       |                     |       |
| Canceled                        |       | (127,093   | )          | 12.45                   |       |                      |       |                     |       |
| Outstanding  September 30, 2006 |       | 9,604,362  |       | 14.97                   |       | 5.5                       |       | 3,584                    |       |
| Exercisable September  30, 2006 |       | 8,629,363  |       | 15.59                   |       | 5.4                       |       | 2,390                    |       |
|                                 |            |            |            |                         |            |                           |            |                          |            |  |

 

At September 30, 2006 and December 31, 2005,there were 8,629,363 and 8,818,196 options exercisable with a weighted averageexercise price of $15.59 and $15.63, respectively. As of September 30, 2006,there were 1,415,728 shares available for future grants under the Plans.

The weighted average fair value of options granted,determined using the Black-Scholes option valuation method, was $5.03 and $7.64for the nine months ended September 30, 2006 and 2005, respectively. The totalintrinsic value of options exercised during the nine months ended September 30,2006 and 2005, was $580 and $4,876, respectively. As of September 30, 2006,there was $2,062 of total unrecognized compensation costs related to stockoptions. These costs are expected to be recognized over a weighted averageperiod of 1.2 years.

8

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

The actual tax benefit realized for the tax deductionfrom options exercised of the share-based payment arrangement for the ninemonths ended September 30, 2006 and 2005, totaled $229 and $2,019,respectively.

Information with respectto the options outstanding under the Plans at September 30, 2006 is as follows:
| ** **                                  | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted-Average**      | ** ** | ** **             | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | ** **              | ** ** | **Remaining**             | ** ** | ** **             | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** | **Contractual Life** | ** ** | **Number of**     | ** ** |
| **Exercise Price Per Share** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **(Years)**               | ** ** | **Vested Shares** | ** ** |
|                                        |       |       |       |                    |       |                      |       |                   |       |
| $0.00 - $3.32                               |       | 8,201      |       | $                       | 2.65       |                      | 0.3        |                   | 8,201      |   |
| $3.33 - $6.64                               |       | 230,142    |       | 6.27                    |       | 0.9                       |       | 230,142                |       |
| $6.65 - $9.95                               |       | 1,898,861  |       | 8.30                    |       | 4.8                       |       | 1,114,685              |       |
| $9.96 - $13.27                              |       | 662,082    |       | 12.31                   |       | 4.9                       |       | 618,515                |       |
| $13.28 - $16.59                             |       | 3,308,967  |       | 14.64                   |       | 6.6                       |       | 3,171,711              |       |
| $16.60 - $19.91                             |       | 2,737,839  |       | 17.89                   |       | 6.0                       |       | 2,727,839              |       |
| $19.92 - $23.23                             |       | 190,000    |       | 22.78                   |       | 4.1                       |       | 190,000                |       |
| $23.24 - $26.55                             |       | 173,570    |       | 23.59                   |       | 2.6                       |       | 173,570                |       |
| $26.56 - $29.87                             |       | 97,200     |       | 27.42                   |       | 3.4                       |       | 97,200                 |       |
| $29.88 - $33.19                             |       | 297,500    |       | 33.15                   |       | 3.2                       |       | 297,500                |       |
|                                        |       | 9,604,362  |       | 14.97                   |       | 5.5                       |       | 8,629,363              |       |
|                                             |            |            |            |                         |            |                           |            |                        |            |  |

 

*Restricted Stock Units*

The Plans also allow for the granting of restrictedstock units. Generally, the Company grants restricted stock units that vest inthree equal increments on each of the first three anniversaries of the date ofgrant. The fair value of restricted stock is the most recent closing marketprice of common stock at the date of grant.

Changesin the Company restricted stock units for the nine months ended September 30,2006, were as follows:
| ** **                                       | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **Grant Date**  | ** ** |
| ** **                                       | ** ** | **Shares** | ** ** | **Fair 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                |       |
| Granted                                          |       | 482,500    |       | 12.43                |       |
| Vested                                           |       | (20,802    | )          | 14.22                |       |
| Unvested  restricted stock at June 30, 2006      |       | 785,209    |       | 14.21                |       |
| Vested                                           |       | (3,007     | )          | 14.85                |       |
| Canceled                                         |       | (15,468    | )          | 12.50                |       |
| Unvested restricted  stock at September 30, 2006 |       | 766,734    |       | 14.20                |       |
|                                                  |            |            |            |                      |            |  |

 

Under the provisions of SFAS 123(R), the recognitionof deferred compensation, a contra-equity account representing the amount ofunrecognized restricted stock unit expense that is reduced as expense isrecognized at the date restricted stock unit is granted, is no longer required.Therefore, in the first quarter of 2006, the amount that had been in deferredcompensation was reversed to zero through common stock in the Company’sconsolidated balance sheet.

9

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**EMPLOYEE STOCK PURCHASE PLAN**

In 1997, the Company established an employee stockpurchase plan that provides full-time employees the opportunity to purchaseshares, at 85% of the fair value on dates determined by the Board of Directors,up to a maximum of 10% of their eligible compensation or $21,250, whichever isless. The number of authorized shares available for purchase under this plan is900,000, of which 89,561 and 63,605 shares were purchased in the nine monthsended September 30, 2006 and 2005, respectively. There were 51,048 and 140,609shares available for future issuance under the plan as of September 30, 2006and December 31, 2005, respectively.

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

The following table presents the computation of basicand diluted net (loss) income per share for the three and nine months endedSeptember 30, 2006 and 2005 (share data in thousands):
| ** **                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                        | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic net (loss)  income per share computation:   |       |                                               |       |                                              |       |   |   |   |   |
| Net (loss) income                                 |       | $                                                  | (6,045     | )                                                 | $          | 10,778 |   | $ | (6,050 | ) | $ | 21,426 |   |
| Weighted-average common shares outstanding        |       | 43,713                                             |       | 42,944                                            |       | 43,638 |   | 42,670 |   |
| Basic net (loss)  income per share                |       | $                                                  | (0.14      | )                                                 | $          | 0.25 |   | $ | (0.14 | ) | $ | 0.50 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Diluted net  (loss) income per share computation: |       |                                               |       |                                              |       |   |   |   |   |
| Net (loss) income                                 |       | $                                                  | (6,045     | )                                                 | $          | 10,778 |   | $ | (6,050 | ) | $ | 21,426 |   |
| Diluted common shares outstanding:                |       |                                               |       |                                              |       |   |   |   |   |
| Weighted-average common shares outstanding        |       | 43,713                                             |       | 42,944                                            |       | 43,638 |   | 42,670 |   |
| Impact of dilutive stock options                  |       | —                                             |       | 1,387                                             |       | — |   | 1,233 |   |
| Diluted common shares outstanding                 |       | 43,713                                             |       | 44,331                                            |       | 43,638 |   | 43,903 |   |
| Diluted net (loss)  income per share              |       | $                                                  | (0.14      | )                                                 | $          | 0.24 |   | $ | (0.14 | ) | $ | 0.49 |   |

 

For the three and nine months ended September 30,2006, 136,000 and 381,000 stock options that could potentially dilute net(loss) income per share in the future are not included in the calculation ofdiluted net (loss) income per share as they would have been antidilutive.  The difference between basic and dilutedshares for the three and nine months ended September 30, 2005 is primarily dueto the assumed exercise of stock options included in the diluted earnings pershare computation.

**6. Comprehensive (Loss) Income**

The components of comprehensive (loss) income for thethree and nine months ended September 30, 2006 and 2005 consisted of thefollowing:

|                                           | ** ** | **For the Three Months** | ** ** | **For the Nine Months **  | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,  ** | ** ** |
| ** **                                | ** ** | **2006**                                | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net (loss) income                         |       | $                                       | (6,045     | )                                             | $          | 10,778 |   | $ | (6,050 | ) | $ | 21,426 |   |
| Other comprehensive  income (loss):       |       |                                    |       |                                          |       |   |   |   |   |
| Foreign currency  translation adjustments |       | 306                                     |       | (916                                          | )          | 2,046 |   | (1,878 | ) |
| Comprehensive (loss) income               |       | $                                       | (5,739     | )                                             | $          | 9,862 |   | $ | (4,004 | ) | $ | 19,548 |   |

 

Accumulatedother comprehensive income (loss) as of September 30, 2006 and December 31,2005 is comprised of foreign currency translation adjustments.

10

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

 

**7. Acquisitions**

On September 1, 2006, theCompany completed the acquisition of substantially all the assets of Opus HealthLLC (“Opus”).  Based in Long Island, NewYork, Opus provided direct-to-patient persistence solutions.  Opus’s results of operations have beenincluded in the accompanying financial statements since the date ofacquisition.

The aggregate purchase priceof Opus was $7,353, including $353 of legal and professional fees.  Approximately $250 of the purchase price wasincluded in other accrued expenses in the consolidated balance sheet as ofSeptember 30, 2006, and $2,000 of the purchase price was held in escrow as ofSeptember 30, 2006.  In accordance withthe purchase agreement, the $2,000 held in escrow together with any additionalamounts to be added to escrow, less amounts claimed against escrow, if any, ispayable upon certain milestones relating to the representations, warranties andin connection with a certain patent application acquired as part of theacquisition.  In addition, there is$3,000 contingent consideration based on Opus obtaining certain financialmeasures over the next three years and will be paid if earned.  The $3,000 of contingent consideration willbe accounted for as compensation expense if earned.  There is an additional $1,000 of contingentconsideration based on the successful outcome of a certain patent applicationacquired as part of the acquisition. The $1,000 of additional contingentconsideration would be accounted for as additional purchase price, if earned. Asof September 30, 2006, nothing had been earned or accrued for the contingentconsideration. The Company is in the process of finalizing the valuationof certain intangible assets, including the review of a third-partyvaluation.  Therefore, the allocation of purchase price is preliminary andsubject to adjustment.  The assets and liabilities acquired in connectionwith the Opus acquisition and pro forma results of operations are not deemedmaterial to the consolidated financial statements.

The preliminaryallocation of purchase price, including the net assets acquired ofapproximately $28, to intangible assets and goodwill acquired in connectionwith the Opus acquisition is as follows:

 
| ** **                                       | ** ** | **Weighted-Average**      | ** ** | ** **                   | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                       | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:      |       |                      |       |                         |       |
| Acquired  technology                             |       | 7.5                       |       | $                            | 3,800      |   |
| Customer relationship  asset                     |       | 7.2                       |       | 1,060                        |       |
| Trademarks                                       |       | 10                        |       | 330                          |       |
| Total Intangible  Assets Subject to Amortization |       |                      |       | 5,190                        |       |
|                                             |       |                      |       |                         |       |
| Intangible Asset Not  Subject to Amortization:   |       |                      |       |                         |       |
| Goodwill                                         |       | N/A                       |       | 2,136                        |       |
| Total Intangible Assets                          |       |                      |       | $                            | 7,326      |   |

 

**8. 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.

11

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

The activity related to the purchase accountingrestructuring accrual for the nine months ended September 30, 2006 issummarized in the table below:
| ** **              | ** ** | **Purchase**                    | ** ** | ** **              | ** ** | ** **             | ** ** | **Purchase**                     | ** ** |
|-------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Accounting**                  | ** ** | ** **              | ** ** | ** **             | ** ** | **Accounting**                   | ** ** |
| ** **              | ** ** | **Restructuring**               | ** ** | **2006**                | ** ** | ** **             | ** ** | **Restructuring**                | ** ** |
| ** **              | ** ** | **Accrual as of**     | ** ** | **Adjustments to** | ** ** | ** **             | ** ** | **Accrual as of**      | ** ** |
| ** **              | ** ** | **December 31, 2005** | ** ** | **Goodwill**            | ** ** | **2006 Payments** | ** ** | **September 30, 2006** | ** ** |
| Synavant                |       |                            |       |                    |       |                   |       |                             |       |
| Facility exit costs     |       | $                               | 4,289      |                    | $          | —                 |       | $                                | (1,060     | ) | $ | 3,229 |   |
|                    |       |                            |       |                    |       |                   |       |                             |       |
| SAI                     |       |                            |       |                    |       |                   |       |                             |       |
| Lease termination costs |       | 321                             |       | (66                     | )          | (255                   | )          | —                           |       |
| Total                   |       | $                               | 4,610      |                    | $          | (66                    | )          | $                                | (1,315     | ) | $ | 3,229 |   |

 

**9. Goodwill and Intangible Assets**

The total gross carrying amount and accumulatedamortization for goodwill and intangible assets are as follows:
| ** **                                      | ** ** | **As of September 30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                       | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**                                        | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible  Assets Subject To Amortization:     |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |
| Purchased capitalized software                  |       | $                                                | 2,441      |                                            | $          | (2,441 | ) | $ | — |   | $ | 2,441 |   | $ | (1,996 | ) | $ | 445 |   |
| Capitalized software development costs          |       | 35,139                                           |       | (24,759                                         | )          | 10,380 |   | 31,471 |   | (21,130 | ) | 10,341 |   |
| Customer relationship assets                    |       | 17,469                                           |       | (5,125                                          | )          | 12,344 |   | 16,397 |   | (3,696 | ) | 12,701 |   |
| Backlog                                         |       | 2,500                                            |       | (2,500                                          | )          | — |   | 2,500 |   | (2,491 | ) | 9 |   |
| Non-compete covenants                           |       | 3,732                                            |       | (3,673                                          | )          | 59 |   | 3,718 |   | (3,464 | ) | 254 |   |
| Purchased database                              |       | 5,176                                            |       | (2,908                                          | )          | 2,268 |   | 5,151 |   | (2,082 | ) | 3,069 |   |
| Acquired technology                             |       | 5,190                                            |       | (340                                            | )          | 4,850 |   | 1,390 |   | (84 | ) | 1,306 |   |
| Trademarks                                      |       | 831                                              |       | (152                                            | )          | 679 |   | 500 |   | (82 | ) | 418 |   |
| Other intangibles                               |       | 474                                              |       | (368                                            | )          | 106 |   | 474 |   | (325 | ) | 149 |   |
| Total                                           |       | 72,952                                           |       | (42,266                                         | )          | 30,686 |   | 64,042 |   | (35,350 | ) | 28,692 |   |
|                                            |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |
| Intangible  Assets Not Subject to Amortization: |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | 92,332                                           |       | —                                          |       | 92,332 |   | 90,440 |   | — |   | 90,440 |   |
| Trademarks                                      |       | 6,732                                            |       | —                                          |       | 6,732 |   | 6,732 |   | — |   | 6,732 |   |
| Total                                           |       | 99,064                                           |       | —                                          |       | 99,064 |   | 97,172 |   | — |   | 97,172 |   |
|                                            |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |
| Total Goodwill and  Intangible Assets           |       | $                                                | 172,016    |                                            | $          | (42,266 | ) | $ | 129,750 |   | $ | 161,214 |   | $ | (35,350 | ) | $ | 125,864 |   |

 

The changes in the carrying amount of intangibleassets not subject to amortization for the nine months ended September 30, 2006is as follows:
| ** ** | ** ** | ** **                      | ** ** | **Acquisitions /** | ** ** | ** **      | ** ** | ** **                  | ** ** |
|------------|------------|---------------------------------|------------|-------------------------|------------|-----------------|------------|-----------------------------|------------|
| ** ** | ** ** | ** **                      | ** ** | **Purchase**            | ** ** | **Currency**    | ** ** | **Balance as of** | ** ** |
| ** ** | ** ** | **Balance as of**     | ** ** | **Accounting**          | ** ** | **Translation** | ** ** | **September 30,**      | ** ** |
| ** ** | ** ** | **December 31, 2005** | ** ** | **Adjustments**         | ** ** | **Adjustments** | ** ** | **2006**                    | ** ** |
| Goodwill   |       | $                               | 90,440     |                    | $          | 1,873           |       | $                           | 19         |   | $  | 92,332 |   |
| Trademarks |       | 6,732                           |       | —                  |       | —          |       | 6,732                       |       |
|       |       |                            |       |                    |       |            |       |                        |       |
| Total      |       | $                               | 97,172     |                    | $          | 1,873           |       | $                           | 19         |   | $ | 99,064 |   |

 

TheCompany conducts its annual impairment testing of goodwill as of October 1each year. During the nine months

12

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

ended September30, 2006, there were no changes in events or circumstances that would indicateimpairment.

The following tablereconciles net intangible assets subject to amortization for the period fromDecember 31, 2005 to September 30, 2006:
| ** **                              | ** ** | **Net Intangibles**        | ** ** | **2006 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **as of**                  | ** ** | ** **                               | ** ** | ** **               | ** ** | **Translation** | ** ** | **as of** | ** ** |
| ** **                              | ** ** | **December 31, 2005** | ** ** | **Additions**                            | ** ** | **Amortization**         | ** ** | **and Other** | ** ** | **September 30, 2006** | ** ** |
| Purchased  capitalized software         |       | $                               | 445        |                                     | $          | —                   |       | $ | (445 | ) | $ | — |   | $ | — |   |
| Capitalized  software development costs |       | 10,341                          |       | 3,668                                    |       | (3,629                   | )          | — |   | 10,380 |   |
| Customer  relationship assets           |       | 12,701                          |       | 1,060                                    |       | (1,429                   | )          | 12 |   | 12,344 |   |
| Backlog                                 |       | 9                               |       | —                                   |       | (9                       | )          | — |   | — |   |
| Non-compete  covenants                  |       | 254                             |       | —                                   |       | (209                     | )          | 14 |   | 59 |   |
| Purchased  database                     |       | 3,069                           |       | —                                   |       | (826                     | )          | 25 |   | 2,268 |   |
| Acquired  technology                    |       | 1,306                           |       | 3,800                                    |       | (256                     | )          | — |   | 4,850 |   |
| Trademarks                              |       | 418                             |       | 330                                      |       | (70                      | )          | 1 |   | 679 |   |
| Other  intangibles                      |       | 149                             |       | —                                   |       | (43                      | )          | — |   | 106 |   |
| Total                                   |       | $                               | 28,692     |                                     | $          | 8,858                    |       | $ | (6,916 | ) | $ | 52 |   | $ | 30,686 |   |

 

Amortization expense related to intangible assets,including internally developed capitalized software costs, for the three monthperiods ended September 30, 2006 and 2005 was $1,074 and $1,877, respectively.Amortization expense related to intangible assets, including internallydeveloped capitalized software costs, for the nine month periods ended September30, 2006 and 2005 was $6,916 and $6,022, respectively.  Aggregate annual amortization expense ofintangible assets (exclusive of future additions) is estimated to be:

| Year Ending December 31,                                                |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|
| 2006                                                                    |   | $      | 9,299  |   |
| 2007                                                                    |   | 8,410  |   |
| 2008                                                                    |   | 5,708  |   |
| 2009                                                                    |   | 3,836  |   |
| 2010                                                                    |   | 2,501  |   |
| 2011                                                                    |   | 2,080  |   |
| Thereafter                                                              |   | 5,768  |   |
|                                                                    |   | 37,602 |   |
| Less:  Year-to-date amortization expense                                |   | (6,916 | )      |
| Net intangible assets  subject to amortization as of September 30, 2006 |   | $      | 30,686 |   |

 

**10. Restructuring and Other Charges**

In the first quarter of 2006, the Company announced anOperational Effectiveness (“OE”) program, which is expected to reduce costs andincrease profitability by a minimum of $20,000 on an annual basis. As a result,the Company re-examined its cost structure and has presently identified areasof opportunity in facilities consolidation, optimizing of deliveryorganizations and process automation and improvement.  Specifically, the Company’s plans include thefollowing initiatives:

·                  Consolidationof our United States hardware service operations.  A decision was made to move the NewJersey  portion of our hardwareoperations to a new combined hardware services facility in Georgia.

·                  Consolidationof our United States integrated support center operations.  A decision was made to move the Georgiaportion of our integrated support center operations to our existing facility inVirginia.

·                  Rationalizationof our European operations, including a reduction of our facilities andpersonnel to align our cost structure to our existing revenue base.

In the second quarter of 2006, the Company recordedrestructuring charges of $2,578 associated with the OE

13

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

program.  The restructuring charges includedapproximately $2,042 of severance and $536 of costs related to refocusing ofthe Japanese data business.  

In the third quarter of 2006, the Company recordedrestructuring charges of $12,660 associated with the OE program.  The restructuring charges includedapproximately $8,206 of severance and $4,454 of an asset impairmentcharge.  See Note 11 for furtherdiscussion of the impairment charge.  

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 ithad operating leases expiring through February 2012, due to changes in marketconditions at that time. The Company accrued for the present value of thesecosts, net of estimated future sublease income. The Company also accrued forseverance charges related to the elimination of certain senior and mid-levelmanagement positions. These charges are included within accrued restructuringand other charges on the consolidated balance sheets as of September 30,2006 and December 31, 2005, and in restructuring and other charges on theconsolidated statement of operations during the nine months endedSeptember 30, 2006.

The activity related to accrued restructuring andother charges for the nine months ended September 30, 2006 is summarized in thetable below:
| ** **           | ** ** | **Accrued**                            | ** ** | **2006**           | ** ** | ** **   | ** ** | ** **      | ** ** | **Accrued**                            | ** ** |
|----------------------|------------|----------------------------------------|------------|--------------------|------------|--------------|------------|-----------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **Restructuring and**             | ** ** | **Restructuring**  | ** ** | ** **   | ** ** | **Currency**    | ** ** | **Restructuring and**             | ** ** |
| ** **           | ** ** | **Other Charges as of** | ** ** | **and Other** | ** ** | **2006**     | ** ** | **Translation** | ** ** | **Other Charges as of** | ** ** |
| ** **           | ** ** | **December 31, 2005**        | ** ** | **Charges**        | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **September 30, 2006**       | ** ** |
| Facility exit  costs |       | $                                      | 5,332      |               | $          | —       |       | $               | (698       | )                                      | $          | — |   | $ | 4,634 |   |
| Severance            |       | 301                                    |       | 10,248             |       | (3,665       | )          | 7               |       | 6,891                                  |       |
| Other                |       | —                                 |       | 536                |       | (536         | )          |            |       | —                                 |       |
|                 |       | $                                      | 5,633      |               | $          | 10,784       |       | $               | (4,899     | )                                      | $          | 7 |   | $ | 11,525 |   |

 

In connection with the plan initiated and completedduring the nine months ended September 30, 2005, the Company also wrote-off$1,030 of leasehold improvements included within restructuring and othercharges in the consolidated statement of operations for the nine months ended September30, 2005.

**11. Asset Held for Sale**

In connection with the OEprogram, the Company made the decision to consolidate its hardware supportfunction in Georgia and therefore decided to sell a New Jersey facility.  This facility is classified as asset held forsale in the accompanying consolidated balance sheet and is included within ourCorporate segment.  Accordingly, thecarrying value of the facility held for sale was adjusted to the new fair valueless costs to sell of approximately $8,545 based upon a third partyvaluation.  The resulting $4,454impairment loss is included in the restructuring and other charges within theaccompanying consolidated statement of operations for the three and nine monthsended September 30, 2006.

**12. Revolving Credit**

The Company has a line-of-credit agreement withJPMorgan Chase (the “Agreement”) in the amount of $30,000 that expires onJune 30, 2008. The Agreement is available to finance working capital needsand possible future acquisitions. The Agreement contains customary affirmativeand negative covenants and also contains certain financial covenants, includingthose related to (a) a maximum leverage ratio at the end of any fiscalquarter, (b) a minimum interest coverage ratio at the end of any fiscalquarter and (c) a minimum fixed charge coverage ratio at the end of anyfiscal quarter. The Agreement also restricts the Company’s ability to create orassume liens, dispose of assets, consolidate or merge, extend credit, incurother indebtedness or pay cash dividends. As of September 30, 2006, the Companywas in compliance with all covenants and did not have any amounts outstandingunder the Agreement.

As of September 30, 2006, the Company had outstandingletters-of-credit of approximately $5,337.

14

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

**13.Income Taxes**

The Company’s effective income tax rate decreased to abenefit of 2.8% for the nine months ended September 30, 2006, compared to aprovision of 100.3% for the six months ended June 30, 2006, resulting in abenefit of for the three months ended September 30, 2006 of  21.9%. The decrease in the effective income tax rate is primarily due to thediscrete tax effects of the restructuring charges taken in the three monthsended September 30, 2006, as well as the reversal of certain tax reserves.  The difference from the statutory rateprimarily results from the inability to benefit losses in certain foreignjurisdictions.  

**14. Enterprise-Wide Data**

Informationabout Business Segments:

In the secondquarter of 2006, the Company changed its operating segments to reflect thereorganized business.  The Company hasexpanded its segments into four operating segments: sales solutions, marketingsolutions, emerging solutions and a corporate segment.  The reportable segments presented belowrepresent the Company’s operating segments for which separate financialinformation is available and which is now utilized on a regular basis by itschief operating decision maker to assess performance and to allocateresources.  In identifying its reportablesegments, the Company also considered the nature of services provided by itsoperating segments.

The Companyevaluates the performance of the segments based on operating earnings after thecorporate allocation of certain administrative expenses.  Information about interest income and expenseand income taxes is not provided on a segment level.  In addition, equity-based compensation is notallocated to the segments.  See Note 4above for further discussion of the Company’s equity-based compensation.  The accounting policies of the segments arethe same as the Company’s.  Informationwith respect to the Company’s segments are as follows:

*Sales solutions* includes productsand sales support services which are used by, or provided to, the sales forcesof our customers.

*Marketingsolutions* primarily includes interactive marketing, data& analytics, consulting, and shipping fees. Shipping fees, which arepass-through costs that bear little to no margin, are required to be includedin revenues and costs based upon Emerging Issues Task Force (“EITF”) 00-10,“Accounting for Shipping and Handling Fees and Costs.” These billable shippingtransactions are primarily related to our interactive marketing activities.

Shippingand handling fees billed to customers are recorded as revenue and shipping andhandling costs paid to vendors are recorded as operating costs.  Shipping and handling fees recorded as revenuesand operating costs for the three months ended September 30, 2006 and 2005 were$4,245 and $3,994, respectively. Shipping and handling fees recorded as revenues and operating costs forthe nine months ended September 30, 2006 and 2005 were $15,772 and $13,589,respectively.

*Emerging solutions* includescompliance solutions, clinical solutions, and contract sales force services.

*Corporate* includes costs andassets which are not representative of the results of the Company’s individualoperating segments.  The Companyallocates a significant portion of its gross corporate costs to the respectiveoperating segments, to reflect the approximate value which has been incurredrelating to services provided by the corporate entity.  In addition, certain gross costs areconsidered to be overhead not attributable to any segment and as such, remainunallocated in Corporate.  Included amongthe unallocated overhead remaining within Corporate are costs for equity basedcompensation, audit and tax fees, excess facilities, administrative staff, andother ancillary costs.

Due to the chief operating decision maker’s continuousevaluation of unallocated Corporate costs, the Corporate cost allocations havebeen adjusted for all periods to reflect revisions to the Company’s allocationsincluding the correction of an item previously misclassified in Sales solutionsfor all periods.

The following tables include revenue and operating(loss) income for each reportable segment for the three and nine months ended September30, 2006 and 2005.

15

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**
| ** **           | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Sales solutions      |       | $                                                                      | 66,762     |                                                                  | $          | 82,642 |   | $ | 202,316 |   | $ | 230,641 |   |
| Marketing  solutions |       | 28,835                                                                 |       | 25,310                                                                |       | 90,414 |   | 79,091 |   |
| Emerging  solutions  |       | 7,376                                                                  |       | 6,408                                                                 |       | 19,753 |   | 19,141 |   |
| Total revenue        |       | $                                                                      | 102,973    |                                                                  | $          | 114,360 |   | $ | 312,483 |   | $ | 328,873 |   |

 
| ** **                    | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating (loss)  income:     |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Sales solutions               |       | $                                                                      | 7,570      |                                                                  | $          | 23,019 |   | $ | 33,751 |   | $ | 56,433 |   |
| Marketing  solutions          |       | (2,919                                                                 | )          | (1,440                                                                | )          | (8,253 | ) | (3,566 | ) |
| Emerging solutions            |       | 137                                                                    |       | 69                                                                    |       | (379 | ) | 970 |   |
| Corporate                     |       | (13,144                                                                | )          | (4,238                                                                | )          | (32,868 | ) | (19,281 | ) |
| Total operating (loss) income |       | $                                                                      | (8,356     | )                                                                     | $          | 17,410 |   | $ | (7,749 | ) | $ | 34,556 |   |

 

The following tables include depreciation andamortization expense, capital expenditures and restructuring and other chargesfor each business segment for the three and nine months ended September 30,2006 and 2005.
| ** **                                  | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Depreciation and  amortization expense:     |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Sales solutions                             |       | $                                                                      | 4,072      |                                                                  | $          | 3,272 |   | $ | 12,014 |   | $ | 9,040 |   |
| Marketing  solutions                        |       | 961                                                                    |       | 653                                                                   |       | 2,621 |   | 2,504 |   |
| Emerging  solutions                         |       | 386                                                                    |       | 234                                                                   |       | 978 |   | 787 |   |
| Corporate                                   |       | 1,098                                                                  |       | 1,915                                                                 |       | 3,477 |   | 5,695 |   |
| Total depreciation and amortization expense |       | $                                                                      | 6,517      |                                                                  | $          | 6,074 |   | $ | 19,090 |   | $ | 18,026 |   |

 
| ** **                  | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Capital  expenditures:      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Sales solutions             |       | $                                                                      | 1,820      |                                                                  | $          | 2,828 |   | $ | 5,866 |   | $ | 10,887 |   |
| Marketing solutions         |       | 657                                                                    |       | 516                                                                   |       | 1,343 |   | 1,651 |   |
| Emerging solutions          |       | 30                                                                     |       | 36                                                                    |       | 103 |   | 302 |   |
| Corporate                   |       | 351                                                                    |       | 1,500                                                                 |       | 2,551 |   | 9,793 |   |
| Total capital  expenditures |       | $                                                                      | 2,858      |                                                                  | $          | 4,880 |   | $ | 9,863 |   | $ | 22,633 |   |

 
| ** **                                 | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Restructuring  and other charges:          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Sales solutions                            |       | $                                                                      | 5,758      |                                                                  | $          | — |   | $ | 6,517 |   | $ | — |   |
| Marketing solutions                        |       | 1,930                                                                  |       | —                                                                |       | 2,884 |   | — |   |
| Emerging solutions                         |       | 63                                                                     |       | —                                                                |       | 67 |   | — |   |
| Corporate                                  |       | 4,909                                                                  |       | —                                                                |       | 5,770 |   | 9,372 |   |
| Total restructuring and  other charges (1) |       | $                                                                      | 12,660     |                                                                  | $          | — |   | $ | 15,238 |   | $ | 9,372 |   |

 

16

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

The following table includes total assets at September30, 2006 and December 31, 2005 for each business segment.
| ** **          | ** ** | **As of  September 30,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|---------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| Assets:             |       |                                     |       |                                    |       |
| Sales solutions     |       | $                                        | 122,163    |                                    | $          | 149,920 |   |
| Marketing solutions |       | 85,972                                   |       | 87,642                                  |       |
| Emerging solutions  |       | 19,134                                   |       | 16,515                                  |       |
| Corporate (2)       |       | 143,203                                  |       | 108,930                                 |       |
| Total assets (3)    |       | $                                        | 370,472    |                                    | $          | 363,007 |   |

----

(1)             SeeNote 10 for further discussion of restructuring and other charges.

(2)             Corporateassets consist primarily of cash, property and equipment, prepaid taxes,deferred tax assets and asset held for sale.

(3)             Goodwillwas allocated to the business segments on the basis of relative fair value,determined as of June 30, 2006, using a third party appraisal.

Informationabout Geographic Areas:

Revenue is classified by the major geographic areas inwhich we operate.  All transfers betweengeographic areas have been eliminated from consolidated revenues. The followingtable presents revenues by geographic area:

|               | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $                                                                      | 63,007     |                                                                  | $          | 76,169 |   | $ | 188,999 |   | $ | 209,296 |   |
| Europe        |       | 26,587                                                                 |       | 24,171                                                                |       | 82,495 |   | 79,510 |   |
| All other     |       | 13,379                                                                 |       | 14,020                                                                |       | 40,989 |   | 40,067 |   |
|          |       | $                                                                      | 102,973    |                                                                  | $          | 114,360 |   | $ | 312,483 |   | $ | 328,873 |   |

 

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

The following table presents long-lived assets bygeographic area:

|               | ** ** | **As of  September  30, 2005** | ** ** | **As of  December  31, 2006** | ** ** |
|---------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| United States |       | $                                        | 159,334    |                                    | $          | 167,459 |   |
| Europe        |       | 8,668                                    |       | 9,267                                   |       |
| All other     |       | 9,681                                    |       | 10,586                                  |       |
|          |       | $                                        | 177,683    |                                    | $          | 187,312 |   |

 

Informationabout Major Customers:

For the three month period ended September 30, 2006,the Company derived approximately 17% and 12% of its revenues from its twolargest customers.  For the three monthperiod ended September 30, 2005, the Company derived approximately 27% and 10%of its revenue from its two largest customers. For the nine month period ended September 30, 2006, the Company derivedapproximately 18% and 12% of its revenues from its two largest customers. Forthe nine month periods ended September 30, 2005, the Company derivedapproximately 26% of its revenues from its largest customer. As of 

17

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**DENDRITEINTERNATIONAL, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

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.

**15. Subsequent Event**

On October 9,2006, the Company announced that its largest customer has extended its contractcovering Dendrite’s sales force support services in the United States throughthe end of 2007, at current pricing, but plans an orderly transition of many ofthese support services in-house and to one or more third-party vendors. The customer will continue with support, maintenance and enhancements ofDendrite’s sales force effectiveness products up to 2011.

**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

ThisForm 10-Q contains certain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21-E of theSecurities Exchange Act of 1934, which are intended to be covered by the safeharbors created by such acts. For this purpose, any statements that are notstatements of historical fact may be deemed to be forward-lookingstatements, including the statements under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” regarding ourstrategy, future operations, future expectations and future estimates, futurefinancial position or results and future plans and objectives of 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, life sciences and consumer packaged goods industries.All such forward-looking statements involve significant risks anduncertainties, including those risks identified in this Form 10-Q under“Factors That May Affect Future Results,” many of which are beyond ourcontrol. Although we believe that the assumptions underlying ourforward-looking statements are reasonable, any of the assumptions could beinaccurate. Actual results may differ materially from those indicated bythe forward-looking statements included in this Form 10-Q, as more fullydescribed under “Factors That May Affect Future Results.” In light of thesignificant uncertainties inherent in the forward-looking statements includedin this Form 10-Q, you should not consider the inclusion of suchinformation as a representation by us or anyone else that we will achieve suchresults. Moreover, we do not plan to update these forward-looking statements toreflect actual results or changes in assumptions, expectations or projections.In addition, our financial and performance outlook concerning future revenues,margins, earnings, earnings per share and other operating or performanceresults does not include the impact of any future acquisitions, futureacquisition-related expenses or accruals, or any future restructuring or othercharges that may occur from time-to-time due to management decisions andchanging business circumstances and conditions.

**EXECUTIVE OVERVIEW**

We provide a broadarray of solutions worldwide that enable pharmaceutical and other life sciencecompanies to strategically optimize their sales and marketing channels,clinical resources and compliance initiatives. Our plan is to continue todiversify and expand our solutions portfolio, customer base and geographicreach by leveraging our extensive knowledge of the pharmaceutical and lifesciences industries and capitalizing upon our deep relationships in theseindustries. Our strategy continues to rely on both internal growth andacquisitions to meet our growth objectives.

We have expandedboth our portfolio of solutions and customer base and believe that thiscombination presents significant opportunity for future growth. InJanuary and September 2005, we broadened and enhanced our serviceportfolio with our acquisitions of BuzzeoPDMA, Inc. (“Buzzeo”) andOptas, Inc. (“Optas”), respectively. The Buzzeo acquisition expanded oursample and compliance management solution offerings. The Optas acquisitionenhanced our portfolio of marketing solutions services by expanding ourprivacy-safe relationship marketing solutions for patients and physicians. Webelieve our acquisitions complement our existing business operations byenhancing our solutions portfolio, increasing our access to new customers andallowing deeper penetration into our current markets. We have also committed toinvesting in key initiatives to help drive future growth. Our future growth isdependent on our ability to further penetrate the markets in which we operateand increase the adoption rate of our expanded portfolio of solutions.

Weevaluate our performance based upon a number of operating metrics. Key metricsare revenues, operating income, diluted net income per share, operating cashflow and days sales outstanding. Our goal is to execute our strategy to yieldgrowth in revenues, operating income and diluted net income per share.

In2006, we announced an Operational Effectiveness (“OE”) program to streamlineour cost structure and realign the Company to drive efficiency and support ourgrowth objectives.   The OE programinvolves an extensive review of the entire Company from which we intend toidentify a minimum of $20 million of annualized cost savings.  Our execution of the 

18

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

necessary cost saving actions will result inadditional severance and other associated costs during 2006. As of September30, 2006, we have already identified a significant portion of our cost savingstarget, and certain actions have already been taken, which resulted inrestructuring and other charges of approximately $15.2 million.  We expect to incur approximately $15 to $20 millionof additional charges and expenses related to OE during the fourth quarter of2006 and first quarter of 2007.  We donot expect to fully realize the savings from our OE initiatives in 2006.

In recent years, we have presented a breakout ofour revenues into the three categories of sales solutions, marketing solutionsand shipping. These categories were reflective of how our service offeringswere marketed to and viewed by our customers, and we believe they provideduseful information to understand the changes in our revenues across periods.  They are not reflective of the way we managedour business, and therefore associated operating costs and assets by revenuecategory were  not available on a globalbasis. Based upon these factors, we operated under one reportable segment fordisclosure purposes under Statement of Financial Accounting Standards 131,“Disclosure About Segments of an Enterprise and Related Information” (“SFAS131”) through March 31, 2006. As of June 30, 2006, we completed a processto reorganize our business and to capture transactional data in a format thatwill enable the reporting of various financial information broken into four newdiscrete operating segments.  We have reclassifiedour current and historical revenues, operating income, assets and other selectdata into these new groupings which management is now utilizing to manage thebusiness. Our four operating segments are sales solutions, marketing solutions,emerging solutions as well as a corporate segment. Below is a description ofthese operating segments:

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

*Marketing solutions* businessprimarily includes interactive marketing, data and analytics, campaignmanagement, and shipping fees. Our shipping fees, which are pass-through coststhat bear little to no margin, 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.

*Emergingsolutions* business includes compliance solutions, clinicalsolutions, and contract sales force services. While these businesses are notindividually significant to our total revenues today, we believe they representsignificant growth opportunities in the future.

* Corporate* includes costs andassets which are not representative of the results of the Company’s individualoperating segments.  The Company doesallocate a significant portion of its gross corporate costs to the respectiveoperating segments, to reflect the approximate value which has been incurredrelating to services provided by the corporate entity.  In addition certain gross costs areconsidered to be overhead not attributable to any segment and as such, remainunallocated in Corporate.  Included amongthe unallocated overhead remaining within Corporate are costs for equity basedcompensation, audit and tax fees, excess facilities, administrative staff, andother ancillary costs.

**CUSTOMER UPDATE**

The Company’s largest customer has extended itscontract with Dendrite for sales force effectiveness services inthe United States through 2007, at current pricing, but has advisedthe Company that as part of the previously described RFP process initiated bythe customer, it plans to transition such services, with the exception ofsupport, maintenance and enhancements of Dendrite's sales forceeffectiveness software, in-house and to one or more third-partyvendors.  The customer currently intends to continue withsupport, maintenance and enhancements of Dendrite's sales forceeffectiveness software up to 2011 under a separate contract, which theCompany expects to generate revenue of at least approximately $7 million in2008, plus work orders and special projects.  Contracts withthis customer outside of the United States are not affected.  

Dendrite estimates the value of revenuesassociated with the services that are expected to terminate at the end of 2007to be approximately $41 million, excluding work orders and specialprojects.  Approximately 5% of theserevenues are attributed to the Marketing Solutions segment forreporting purposes.  Although estimating segment operating income isdifficult due to complexities associated with allocations, the segmentoperating income margin associated with these services is estimated to bein the range of 45% to 50%, excluding Corporate segment unallocated expense.

The extension of the contract into 2007 (approximately$48 million in contracted services as compared to $51 million in 2006) plusanticipated one-time revenue from transition services and other work orders areexpected to have a positive impact on 2007 results.  The Company noted that (1) anticipatedadditional cost reductions during the 12-14 month transition period, (2)potential investments in new and complementary business lines and (3) futurenew business are planned to help mitigate the overall impact of the contractloss beyond 2007.  Further, there is noassurance that the current expectation for contract expiration by the end of2007 would not be delayed or otherwise adjusted due to the complex andimportant nature of the services covered by the scope of the contract. 

 

 

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

 

**CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

There have been nomaterial changes to our critical accounting policies, judgments and estimatesfrom the information provided in Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations included in our Annual Reporton Form 10-K for the year ended December 31, 2005, except for theCompany’s accounting for stock-based compensation in connection with theadoption of SFAS 123 (revised 2004) “Share-Based Payment”(“SFAS 123(R)”) and accounting for restructuring activities.

InDecember 2004, the FASB issued SFAS No. 123(R). SFAS 123(R) is arevision of SFAS No. 123, as amended, “Accounting for Stock-BasedCompensation” (“SFAS 123”), and supersedes Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).SFAS 123(R) eliminates the alternative to use the intrinsic value methodof accounting that was provided in SFAS 123, which generally resulted inno compensation expense recorded in the financial statements related to theissuance of stock options or shares issued under the Company’s Employee StockPurchase Plan (“ESPP”). SFAS 123(R) requires that the cost resulting fromall share-based payment transactions be recognized in the financial statements.SFAS 123(R) establishes fair value as the measurement objective inaccounting for share-based payment arrangements and requires all companies toapply a fair-value-based measurement method in accounting for generally allshare-based payment transactions with employees.

We account forstock-based compensation in accordance with the fair value recognitionprovisions of SFAS 123(R). Under the fair value recognition provisions ofSFAS 123(R), stock-based compensation cost is measured at the grant datebased on the fair value of the award and is recognized as expense over theappropriate vesting period. Determining the fair value of stock-based awards atthe grant date requires judgment, including estimating the expected life ofstock options, the weighted-average expected stock price volatility andweight-average risk-free interest rate. In addition, judgment is required inestimating the amount of stock-based awards that are expected to be forfeited.If actual results differ significantly from these estimates or different key assumptionswere used, it could have a material effect on our Consolidated FinancialStatements. See Note 4 of the Notes to the Unaudited ConsolidatedFinancial Statements for additional information regarding our adoption ofSFAS 123(R).

**Accounting for RestructuringActivities**

Upon approval of arestructuring plan by management with the appropriate level of authority, werecord restructuring liabilities in compliance with SFAS 112, “Employers’Accounting for Postemployment Benefits,” and SFAS 146 “Accounting for CostsAssociated with Exit or Disposal Activities,” resulting in the recognition ofemployee severance and related termination benefits for recurring arrangementswhen they become probable and estimable and on the accrual basis for one-timebenefit arrangements.  We record othercosts associated with exit activities as they are incurred.  Employee severance and termination benefitcosts reflect estimates based on agreements with relevant statutoryrequirements or plans adopted by us. These costs are not associated with nor do they benefit continuingactivities.  Changing business conditionsmay affect the assumptions related to the timing and extent of facility closureactivities.  We review the status ofrestructuring activities on a quarterly basis and, if appropriate, recordchanges based on updated estimates.

 

20

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

**MERGERS AND ACQUISITIONS**

Weregularly evaluate opportunities to acquire products or businesses thatrepresent strategic enhancements to our operations. Such acquisitionopportunities, if they arise, may involve the use of cash, equity or debtinstruments.

**Opus**

OnSeptember 1, 2006, we completed the acquisition of substantially all the assetsof Opus Heath LLC (“Opus”).  Based in Long Island, New York, Opus provideddirect-to-patient persistence solutions.  Opus results of operations havebeen included in the accompanying financial statements since the date of acquisition.  Opus revenues are presented within ourmarketing solutions segment.

Theaggregate purchase price of Opus was $7,353, including $353 of legal andprofessional fees.  In accordance withthe purchase agreement $2,000 of the purchase price was held in escrow as ofSeptember 30, 2006.  In accordance withthe purchase agreement, the $2,000 held in escrow together with any additionalamounts to be added to escrow, less amounts claimed against escrow, if any, ispayable upon certain milestones relating to the representations, warranties andin connection with a certain patent application acquired as part of theacquisition.  In addition there is $3,000 contingent consideration based on Opusobtaining certain financial measures over the next three years which will bepaid if earned.  As of September 30,2006, nothing had been earned or accrued for the contingent consideration.  The $3,000 contingent consideration will beaccounted for as compensation expense.  Thereis an additional $1,000 of contingent consideration based on the successfuloutcome of a certain patent application acquired as part of the acquisition.The $1,000 of additional contingent consideration would be accounted for asadditional purchase price, if earned. We are in the process of finalizingthe valuation of certain intangible assets, including the review of athird-party valuation.  Therefore, the allocation of purchase price ispreliminary and subject to adjustment.  The assets and liabilitiesacquired in connection with the Opus acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

**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 presented within our marketing solutionssegment.

Theaggregate purchase price for Optas was approximately $13,188, including $349 oflegal and professional fees.  Inaccordance with the purchase agreement, approximately $1,200 of the purchaseprice was held in escrow as of September 30, 2006. The $1,200 held in escrow,less amounts claimed against escrow, if any, is payable within five businessdays after March 12, 2007. On September 18, 2006, approximately $600 wasreleased from escrow in accordance with the terms of the purchaseagreement.  The valuation of certainintangibles assets was finalized in the second quarter of 2006. The assetsacquired and liabilities assumed in connection with the Optas acquisition andpro forma results of operations are not deemed material to the consolidatedfinancial statements.

**Buzzeo**

OnJanuary 4, 2005, we completed the acquisition of Buzzeo. Based inRichmond, 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.  Buzzeo’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition. Buzzeo revenues are characterized ascompliance solutions within our emerging solutions segment.

Theaggregate purchase price for Buzzeo was approximately $10,759, including $33 oflegal and professional fees. Approximately $487 of the remaining purchase pricewas paid in April 2006. In accordance with the purchase agreement, $1,025was released from escrow in the first quarter of 2006. The valuation of certainintangibles assets was finalized in the fourth quarter of 2005. The assetsacquired and liabilities assumed in connection with the Buzzeo acquisition andpro forma results of operations are not deemed material to the consolidatedfinancial statements.

21

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

**RESULTS OF OPERATIONS**

**THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

**REVENUES**
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** | **2006 %  of Total** | ** ** | **2005 %  of Total** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)**                 | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Revenues:            |       |                                                 |       |                |       |                   |       |                           |       |                           |       |   |   |
| Sales solutions      |       | $                                                    | 66,762     |                | $          | 82,642                 |       | $                              | (15,880    | )                              | (19        | )% | 65 | % | 72 | % |
| Marketing  solutions |       | 28,835                                               |       | 25,310              |       | 3,525                  |       | 14                             | %          | 28                             | %          | 22 | % |
| Emerging  solutions  |       | 7,376                                                |       | 6,408               |       | 968                    |       | 15                             | %          | 7                              | %          | 6 | % |
| Total revenues       |       | $                                                    | 102,973    |                | $          | 114,360                |       | $                              | (11,387    | )                              | (10        | )% | 100 | % | 100 | % |

 

Total revenues decreased by 10% for the three monthsended September  30, 2006 compared withthe three months ended September 30, 2005. Total revenues in the United States decreased by 17% from the threemonths ended September 30, 2005, and were $63,007, or approximately 61% oftotal revenues. This decrease in the United States was primarily due to anon-recurring project for our largest customer for the three months endedSeptember 30, 2005 and reduced spending by our largest customer which waspartially offset by increased revenue from our marketing solution business,including the September 2005 acquisition of Optas for the three months endedSeptember 30, 2006.  Our internationalrevenues were $39,966, or approximately 39% of total revenues in the quarter,which increased by 3% from 2005, which was primarily due our consulting anddata solutions services, partially offset by a reduction in European salessupport services for the three months ended September 30, 2006.

**OPERATING COSTS &EXPENSES**
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** | **2006 %  of Total** | ** ** | **2005 %  of Total** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)**                 | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Operating Costs &  Expenses:            |       |                                                 |       |                |       |                   |       |                           |       |                           |       |   |   |
| Operating costs  (including shipping)       |       | $                                                    | 56,172     |                | $          | 61,252                 |       | $                              | (5,080     | )                              | (8         | )% | 55 | % | 54 | % |
| Selling, general  and administrative        |       | 39,816                                               |       | 33,395              |       | 6,421                  |       | 19                             | %          | 39                             | %          | 29 | % |
| Research and  development                   |       | 1,607                                                |       | 1,343               |       | 264                    |       | 20                             | %          | 2                              | %          | 1 | % |
| Restructuring  and other charges            |       | 12,660                                               |       | —              |       | 12,660                 |       | NM                             |       | 12                             | %          | 0 | % |
| Amortization of  acquired intangible assets |       | 1,074                                                |       | 960                 |       | 114                    |       | 12                             | %          | 1                              | %          | 1 | % |
| Total operating costs  & expenses       |       | $                                                    | 111,329    |                | $          | 96,950                 |       | $                              | 14,379     |                           | 15         | % | 108 | % | 85 | % |

 

As part of our effort to realign the Company inorder to drive efficiency and support our growth objectives, we announced plansto identify initiatives during 2006 that will generate approximately $20million of annualized cost savings. During the three months ended September 30,2006, we identified a significant portion of our cost savings target, andcertain actions have been taken, which resulted in restructuring and impairmentcharges of approximately $12.6 million during the period.  We expect to incur approximately $15 to $20 millionof additional charges related to OE during the fourth quarter of 2006 and firstquarter of 2007.  We do not expect tofully realize the savings from these efforts in 2006.

***OPERATING COSTS(including shipping).***Operating costs decreased 8% for thethree months ended September 30, 2006 compared with the three months endedSeptember 30, 2005. As a percentage of revenues, operating costs increased to55% for the three months ended September 30, 2006 versus 54% for the threemonths ended September 30, 2005. The decrease in operating costs iscommensurate with the decrease in revenues offset by higher temporary labor andother resources relating to large customer projects in 2005. 

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).***SG&A expensesincreased 19% for the three months ended September 30, 2006 compared with thethree months ended September 30, 2005. As a percentage of revenues, SG&Aincreased to 39% for the three months ended September 30, 2006, up from 29%compared with the three months ended September 30, 2005. SG&A costsincreased due to higher costs related to stock based compensation expense of$1,927, strategic consulting costs related to our effort to realign the Companyand increased other compensation expense which included increased salespositions in Europe.

22

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

***RESEARCH ANDDEVELOPMENT (R&D).***R&D expenses increased 20% forthe three months ended September 30, 2006 compared with the three monthsended September 30, 2005. As a percentage of revenues, R&D expensesincreased 1% for the three month period ended September 30, 2006 compared withthe three months ended September 30, 2005. R&D expenses plus additions tocapitalized software development costs, decreased 6% from $2,749 for the threemonths ended September 30, 2005, to $2,586 for the three months ended September30, 2006. This decrease in gross R&D was primarily due to increasedutilization of resources in lower cost jurisdictions.

***RESTRUCTURING ANDOTHER CHARGES.***During the three months ended September30, 2006, we recorded $12,660 of restructuring and other charges. This chargeincluded approximately $8,206 of severance and $4,454 of an asset impairmentrelated to an owned facility, all relating to our 2006 OE initiative. We madethe decision to consolidate our hardware support function in Georgia andtherefore decided to sell a New Jersey facility.  This facility was adjusted to its fair valueless cost to sell based upon a third party valuation. No such charges wereincurred for the three months ended September 30, 2005. We expect to incurapproximately $15 to $20 million of additional charges related to OE during thefourth quarter of 2006 and first quarter of 2007.

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.***Amortization of acquired intangible assetsincreased 12% over the three months ended September 30, 2005. Theincrease primarily relates to additional amortization of intangibles related tothe Optas and Opus acquisitions.

***PROVISION FORINCOME TAXES.***Our effective income tax rate decreased toa benefit of 21.9% for the three months ended September 30, 2006, from anexpense of 38.5% for the three months ended September 30, 2005. The decrease inour effective tax rate is primarily due to the discrete tax effects of therestructuring charges taken in the three months ended September 30, 2006, aswell as the reversal of certain tax reserves. We believe that our full yeareffective tax rate will continue to be volatile as the rate will continue to beimpacted by our cost reduction initiatives.

**NINE MONTHS ENDED SEPTEMBER 30,2006 AND 2005**

**REVENUES**
| ** **          | ** ** | **Nine Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** | **2006 %  of Total** | ** ** | **2005 %  of Total** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease) **           | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Revenues:           |       |                                                |       |                |       |                   |       |                           |       |                           |       |   |   |
| Sales solutions     |       | $                                                   | 202,316    |                | $          | 230,641                |       | $                              | (28,325    | )                              | (12        | )% | 65 | % | 70 | % |
| Marketing solutions |       | 90,414                                              |       | 79,091              |       | 11,323                 |       | 14                             | %          | 29                             | %          | 24 | % |
| Emerging solutions  |       | 19,753                                              |       | 19,141              |       | 612                    |       | 3                              | %          | 6                              | %          | 6 | % |
| Total revenues      |       | $                                                   | 312,483    |                | $          | 328,873                |       | $                              | (16,390    | )                              | (5         | )% | 100 | % | 100 | % |

 

Total revenues decreased by 5% for the nine monthsended September 30, 2006 compared with the nine months ended September 30,2005. Total revenues in the United States decreased by 9% from the nine monthsended September 30, 2005, and were $188,999, or approximately 60%, of totalrevenues. This decrease in the United States was primarily due to reducedspending by our largest customer for the nine months ended September 30, 2006,compounded by the absence of 2005 revenue associated with a non-recurringproject for our two largest customers and a $4,000 one-time contractcancellation settlement from a mid-market pharmaceutical company that exitedthe United States market. These decreases were partially offset by revenue fromthe 2005 acquisition of Optas as well as growth in our marketing solutionsbusiness.  Our international revenueswere $123,484, or approximately 40% of total revenues for the nine months endedSeptember 30, 2006, which increased 1% from 2005 primarily from growth inmarketing solutions.

23

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

**OPERATING COSTS &EXPENSES**
| ** **                                  | ** ** | **Nine Months Ended  September 30,** | ** ** | **$  Increase /** | ** ** | **%  Increase /** | ** ** | **2006 %  of Total** | ** ** | **2005 %  of Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005**               | ** ** | **(Decrease)**         | ** ** | **(Decrease)**                 | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Operating costs  (including shipping)       |       | $                                                   | 175,321    |                   | $          | 173,732                |       | $                              | 1,589      |                           | 1          | % | 56 | % | 53 | % |
| Selling, general  and administrative        |       | 121,707                                             |       | 103,258                |       | 18,449                 |       | 18                             | %          | 39                             | %          | 31 | % |
| Research and  development                   |       | 4,835                                               |       | 4,615                  |       | 220                    |       | 5                              | %          | 2                              | %          | 1 | % |
| Restructuring  and other charges            |       | 15,238                                              |       | 9,372                  |       | 5,866                  |       | 63                             | %          | 5                              | %          | 3 | % |
| Amortization of  acquired intangible assets |       | 3,131                                               |       | 3,340                  |       | (209                   | )          | -6                             | %          | 1                              | %          | 1 | % |
| Total operating  costs & expenses       |       | $                                                   | 320,232    |                   | $          | 294,317                |       | 25,915                         |       | 9                              | %          | 102 | % | 89 | % |
|                                             |            |                                                     |            |                        |            |                        |            |                                |            |                                |            |  |  |  |  |  |

 

***OPERATING COSTS(including shipping).***Operating costs increased 1% for thenine months ended September 30, 2006 compared with the nine months endedSeptember 30, 2005. As a percentage of revenues, operating costs increased to56% for the nine months ended September 30, 2006 versus 53% for the nine monthsended September 30, 2005. This increase was due to our September 2005acquisition of Optas, increased marketing and compliance solutions business,which require higher incremental costs to deliver, and increased pass-throughpostage costs.

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).***SG&A expensesincreased 18% for the nine months ended September 30, 2006 compared with thenine months ended September 30, 2005.  Asa percentage of revenues, SG&A increased to 39% for the nine months endedSeptember 30, 2006, up from 31% compared with the nine months ended September30, 2005.  SG&A cost increased due tohigher costs related to stock based compensation expense of $5,994, andstrategic consulting costs related to our effort to realign the Company andincreased other compensation expense.

***RESEARCH ANDDEVELOPMENT (R&D).***R&D expenses increased 5% forthe nine months ended September 30, 2006 compared with the nine months endedSeptember 30, 2005. As a percentage of revenues, R&D expenses increased 1%for the nine month period ended September 30, 2006 compared with the ninemonths ended September 30, 2005. R&D expenses plus additions to capitalizedsoftware development costs remained flat the nine months ended September 30,2006 and 2005 due to increased utilization of resources in lower costjurisdictions in 2006. 

***RESTRUCTURING ANDOTHER CHARGES.***During the nine months ended September 30,2006, we recorded $15,238 of restructuring and other charges. The chargesinclude approximately $10,248 of severance, $4,454 of an asset impairmentrelated to an owned facility and $536 of costs related to the re-focusing ofour Japanese data business, all relating to our 2006 OE initiative. We made thedecision to consolidate our hardware support function in Georgia and thereforedecided to sell a New Jersey facility. This facility was adjusted to its fair value less cost to sell basedupon a third party valuation.  We expectto incur approximately $15 to $20 million of additional charges related to OEduring the fourth quarter of 2006 and first quarter of 2007.

During the nine months ended September 30, 2005,we recorded $7,649 of facility-related charges and a severance charge of$1,723. The facility charges consist of $6,619 related to vacating a New Jerseyfacility and for additional facilities vacated in previous periods due tochanges in market conditions, as well as $1,030 related to the write-off ofleasehold improvements associated with the exit of our New Jerseyfacility.  The $1,723 severance charge relates to the elimination ofcertain senior and mid-level management positions.  

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.***Amortization of acquired intangible assetsdecreased 6% over the nine months ended September 30, 2005. The decreaseprimarily reflects certain intangibles assets related to the SoftwareAssociates International (“SAI”) and Synavant acquisitions, which were fullyamortized as of June 30, 2005, partially offset by additional amortizationof intangibles related to the Optas and Opus acquisitions.

***PROVISION FORINCOME TAXES.***Our effective income tax rate decreased toa benefit of 2.8% for the nine months ended September 30, 2006, from 38.5% forthe nine months ended September 30, 2005. The decrease in our effective taxrate was primarily due to the discrete tax effects of the restructuring chargestaken in the nine months ended September 30, 2006, as well as the reversal ofcertain tax reserves.  We believe that our full year effective tax ratewill continue to be volatile as the rate will continue to be impacted by ourcost reduction initiatives.

24

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

**SEGMENT REVENUE AND OPERATING INCOME (LOSS)**

**THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

***Sales Solutions***
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                    | 66,762     |                | $          | 82,642                 |       | $ | (15,880 | ) | (19 | )% |
| Restructuring  and other charges |       | $                                                    | 5,758      |                | $          | —                 |       | $ | 5,758 |   | N/A |   |
| Operating income                 |       | $                                                    | 7,570      |                | $          | 23,019                 |       | $ | (15,449 | ) | (67 | )% |

 

Sales solutions revenues accounted for approximately65% of total Company revenues during the three months ended September 30, 2006,which decreased 19% compared with the three months ended September 30, 2005.Revenues in the United States decreased by 24%, due to reduced spending by ourlargest customer during the three months ended September 30, 2006 and anon-recurring project for our largest customer for the three months endedSeptember 30, 2005.  Our internationalsales decreased 5%, which was due to a reduction in European sales support servicesfor the three months ended September 30, 2006.

Operating income decreased by 67% compared with thethree months ended September 30, 2005. This decrease was primarily due to reduced revenues and severance costsrelated to our OE program recorded in the three months ended September 30,2006. 

***Marketing Solutions***
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                    | 28,835     |                | $          | 25,310                 |       | $ | 3,525 |   | 14 | % |
| Restructuring  and other charges |       | $                                                    | 1,930      |                | $          | —                 |       | $ | 1,930 |   | N/A |   |
| Operating loss                   |       | $                                                    | (2,919     | )                   | $          | (1,440                 | )          | $ | (1,479 | ) | 103 | % |

 

Marketing solutions revenues accounted forapproximately 28% of total Company revenues during the three months endedSeptember 30, 2006, which increased by approximately 14% compared with thethree months ended September 30, 2005. This increase was primarily due togrowth in our United States marketing solutions business, excluding low growmargin revenue, increased by 21% over the prior year, primarily from addedrevenue from our 2005 acquisition of Optas. Our international marketingsolution revenues increased by approximately 12% compared with the three monthsended September 30, 2005, due to increases in consulting and data, partiallyoffset by a decrease in interactive marketing revenues.

Marketing solutions revenue includes low gross marginrevenue consisting primarily of shipping fees which accounted for approximately$4,621, or 4% of total revenues for the three months ended September 30, 2006,which remained flat at 4% compared with approximately $4,405 for the threemonths ended September 30, 2005. Shipping revenues contribute little to nomargin and result from pass-through shipping costs associated with our globalinteractive marketing business***.***

Operating loss increased by 103%compared with the three months ended September 30, 2005.  This increase was primarily due to severancecosts related to our OE program recorded and higher incremental costs todeliver various marketing solutions offerings in the three months ended September30, 2006. 

25

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

***Emerging Solutions***
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                    | 7,376      |                | $          | 6,408                  |       | $ | 968 |   | 15 | % |
| Restructuring  and other charges |       | $                                                    | 63         |                | $          | —                 |       | $ | 63 |   | N/A |   |
| Operating income                 |       | $                                                    | 137        |                | $          | 69                     |       | $ | 68 |   | 99 | % |

 

Emerging solutions revenues accounted forapproximately 7% of total Company revenues during the three months endedSeptember 30, 2006, which increased by $968 or 15% compared with the threemonths ended September 30, 2005. This increase was due to growth in ourclinical solution services, which grew by 31% and our European contract salesforce business, which increased by 56% partially offset by decreased revenue inour compliance business due to two large projects that were completed in threemonths ended September 30, 2005.

Operating income increasedby $68 or 99% compared with the three months ended September 30,2005.  This increase was primarily due toincreased revenues from our compliance solutions service and contract salesforce business compared with the three months ended September 30, 2005. 

***Corporate***
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Operating loss                   |       | $                                                    | (13,144    | )                   | $          | (4,238                 | )          | $ | (8,906 | ) | 210 | % |
| Restructuring and other  charges |       | $                                                    | 4,909      |                | $          | —                 |       | $ | 4,909 |   | N/A |   |

 

Operating expenses increasedby 210% compared with the three months ended September 30, 2005.  This increase was primarily due to anasset impairment charge related to an owned facility of $4,454, higher costsrelated to stock based compensation expense, strategic consulting costs relatedto our effort to realign the Company, severancecosts recorded related to our OE program and increased othercompensation expenses for the three months ended September 30, 2006.

**NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

***Sales Solutions***
| ** **                       | ** ** | **Nine Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                   | 202,316    |                | $          | 230,641                |       | $ | (28,325 | ) | (12 | )% |
| Restructuring  and other charges |       | $                                                   | 6,517      |                | $          | —                 |       | $ | 6,517 |   | N/A |   |
| Operating income                 |       | $                                                   | 33,751     |                | $          | 56,433                 |       | $ | (22,682 | ) | (40 | )% |

 

Sales Solutions revenues accounted for approximately65% of total Company revenues during the nine months ended September 30, 2006,which decreased 12% compared with the nine months ended September 30, 2005.Revenues in the United States decreased by 15%, due to reduced spending by ourlargest customer for the nine months ended September 30, 2006 compounded by theabsence of 2005 revenue associated with non-recurring projects for our twolargest customers and a $4,000 one-time contract cancellation settlement from amid-market pharmaceutical company that exited the United States.  International sales decreased byapproximately $4,220 or 7%, primarily due to the roll-off of a larger Europeancustomer during the second quarter of 2005 and reduced European license fees,which was partially offset by growth in license revenues in Asia and increasedongoing service fees resulting from regional deals Latin America.

26

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

Operating income decreased by 40% compared with thenine months ended September 30, 2005. This decrease was primarily due to reduced revenues, severance costsrelated to our OE program recorded in the nine months ended September 30, 2006,and a $4,000 one-time settlement and a large client rollout project whichoccurred during the nine months ended September 30, 2005. 

***Marketing Solutions***
| ** **                       | ** ** | **Nine Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                   | 90,414     |                | $          | 79,091                 |       | $ | 11,323 |   | 14 | % |
| Restructuring  and other charges |       | $                                                   | 2,884      |                | $          | —                 |       | $ | 2,884 |   | N/A |   |
| Operating loss                   |       | $                                                   | (8,253     | )                   | $          | (3,566                 | )          | $ | (4,687 | ) | 131 | % |

 

Marketing solutions revenues accounted forapproximately 29% of total Company revenues during the nine months endedSeptember 30, 2006, which increased by approximately 14% compared with the ninemonths ended September 30, 2005. This increase was primarily due to growth inour United States business, which increased by 39% over the prior year, primarilyfrom growth in our interactive marketing business and added revenue from ourSeptember 2005 acquisition of Optas. Growth in United States interactivemarketing revenues resulted from increased services to one of our largercustomers and other new business. Our international marketing solution revenuesincreased by approximately 2% compared with the nine months ended September 30,2005, due to increases in consulting and data, partially offset by a decreasein interactive marketing revenues.

Marketing solutions includes low gross margin revenueconsisting primarily of shipping fees which accounted for approximately $16,940or 5% of total revenues for the nine months ended September 30, 2006, whichincreased by approximately 11% compared with approximately $15,281 for the ninemonths ended September 30, 2005. Shipping revenues contribute little to nomargin and result from pass-through shipping costs associated with our globalintegrated marketing business***.***

Operatingloss increased from $3,566for the nine months ended September 30, 2005 to $8,253 for the nine monthsended September 30, 2006.  This increasewas primarily due to severance costs related to our OE program recorded in thenine months ended September 30, 2006 and higher incremental costs to delivervarious marketing solutions offerings for the nine months ended September 30,2006 as compared with the nine months ended September 30, 2005. 

***Emerging Solutions***
| ** **                       | ** ** | **Nine Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                                   | 19,753     |                | $          | 19,141                 |       | $ | 612 |   | 3 | % |
| Restructuring  and other charges |       | $                                                   | 67         |                | $          | —                 |       | $ | 67 |   | N/A |   |
| Operating (loss) income          |       | $                                                   | (379       | )                   | $          | 970                    |       | $ | (1,349 | ) | (139 | )% |

 

Emerging solution revenues accounted for approximately6% of total Company revenues during the nine months ended September 30, 2006,which increased by $612 or 3% compared with the nine months ended September 30,2005. This increase was due to growth in revenues from our compliance solutionservices of 18% and our European contract sales force business of 40%,partially offset by decreased revenue in our compliance business due to twolarge projects that were completed the nine months ended September 30, 2005.

Operating (loss) incomedecreased by $1,349 from income of $970 to a loss of $379 for the ninemonths ended September 30, 2006.  Thisdecrease was primarily due to a reduction of ongoing clinical solution serviceswith our largest customer versus the nine months ended September 30, 2005. 

27

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

***Corporate***
| ** **                       | ** ** | **Nine Months Ended  September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase /** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005**            | ** ** | **/ (Decrease)**  | ** ** | **(Decrease)** | ** ** |
| Operating loss                   |       | $                                                   | (32,868    | )                   | $          | (19,281                | )          | $ | (13,587 | ) | 70 | % |
| Restructuring and other  charges |       | $                                                   | 5,770      |                | $          | 9,372                  |       | $ | (3,602 | ) | 38 | % |

 

Operating expenses increasedby $13,587 from $19,281 to $33,868 for the nine months ended September 30,2006.  This increase was primarily due toan asset impairment charge related to an owned facility of $4,454, higher costs related to stock basedcompensation expense, strategic consulting costs related to our effort torealign the Company, increased other compensation expenses and severance costs recorded related to our OEprogram. 

**LIQUIDITY AND CAPITAL RESOURCES**

As of September 30, 2006, working capital was $93,005compared to $82,247 as of December 31, 2005. Cash and cash equivalentswere $84,147 as of September 30, 2006, compared to $66,145 as ofDecember 31, 2005. These increases were primarily attributable to cashgenerated by operating activities offset by payments made in connection withour acquisition of Opus and purchase of property and equipment.

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $35,247and $39,829 for the nine month periods ended September 30, 2006 and 2005,respectively. The decrease was primarily related to the net loss adjusted forchanges in assets and liabilities, net of effects from our current acquisition.During the three months ended September 30, 2006, our accounts receivable dayssales outstanding decreased to 59 from 67 days for the three months endedDecember 31, 2005, due to the 2006 collections of 2005 deferred revenueand improvements in our collection process during the nine months endedSeptember 30, 2006. Our restructuring and other charges resulted in a net lossfor the nine months ended September 30, 2006, however, it had a minimal effecton our operating cash flows. Future payments of these accruals will have anegative impact on future operating cash flows. Our operating cash flows wereaffected by payments of income taxes, purchase accounting restructuringcharges, accounts payable and accrued expenses. We expect to spendapproximately $25,000 to $30,000 in cash relating to our OE initiative,excluding capital investments.

Cash used in investing activities was $19,237 for thenine months ended September 30, 2006, which was primarily attributable topurchases of property and equipment, our acquisition of Opus and additions tocapitalized software development costs. Cash used in investing activities was$47,917 for the nine months ended September 30, 2005, which included paymentsfor the Optas, Buzzeo and Uto Brain acquisitions as well as additions tocapitalized software development costs and purchases of property and equipment.Additions of property and equipment in 2005 primarily related to our facilitiesin New Jersey, as well as investing in our helpdesk automation process andinteractive marketing machinery.

As anticipated, purchases of property and equipmentdecreased for the nine months ended September 30, 2006 versus the comparableprior year period. During 2006, excluding expenditures related to the OE initiativewe expect capital spending in the range of approximately $15,000 to $18,000primarily to support the Company’s infrastructure and productivity initiatives.We expect capital spending related to the OE initiative in the range of $10,000to $12,000 in the fourth quarter of 2006 and first quarter of 2007.  We expect this spending to be offset by thefuture sales of own facilities. We review our capital expenditure programperiodically and adjust it as required to meet current needs.

Cash provided by financing activities was $1,025 forthe nine months ended September 30, 2006, compared to $9,697 for the ninemonths ended September 30, 2005. The decrease of $8,672 was primarilyattributed to 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 and regulatoryfactors beyond our control.

**Contractual Obligations and Commitments**

We have a line-of-credit agreement with 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 possible futureacquisitions. The Agreement contains customary affirmative and negativecovenants and also contains certain financial covenants, including 

28

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

those related to (a) a maximum leverage ratio atthe end of any fiscal quarter, (b) a minimum interest coverage ratio atthe end of any fiscal quarter and (c) a minimum fixed charge coverageratio at the end of any fiscal quarter. The Agreement also restricts ourability to create or assume liens, dispose of assets, consolidate or merge,extend credit, incur other indebtedness or pay cash dividends. As of September30, 2006, we were in compliance with all covenants and did not have any amountsoutstanding under the Agreement.

Our principal commitments at September 30, 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:
| **Contractual Obligations** | ** ** | **Total** | ** ** | **October 1, 2006  Through  December 31,  2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
|----------------------------------|------------|-----------|------------|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Capital leases                   |       | $         | 1,857      |                                                            | $          | 163      |       | $        | 1,622      |     | $          | 72       |       | $              | —     |   | $ | — |   | $ | — |   |
| Minimum  guarantees              |       | 4,469     |       | 469                                                             |       | 2,000    |       | 2,000    |       | —   |       | —   |       | —         |       |
| Operating leases  (1)            |       | 97,410    |       | 7,095                                                           |       | 19,230   |       | 14,877   |       | 12,612   |       | 11,572   |       | 32,024         |       |
| Total                            |       | $         | 103,736    |                                                            | $          | 7,727    |       | $        | 22,852     |     | $          | 16,949   |       | $              | 12,612     |   | $ | 11,572 |   | $ | 32,024 |   |

----

(1)             Operating leaseamounts include $14,520 of future operating lease payments, excluding estimatedfuture sublease income, accrued for in accrued facility charges and in thepurchase accounting restructuring accruals related to the Synavant and SAIacquisitions.

As of September 30, 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 September 30, 2006, $700 has been paid, with $300 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 the accompanyingconsolidated balance sheet.

29

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

**FACTORS THATMAY AFFECT FUTURE RESULTS**

Set forth in this Form 10-Q are certain risks anduncertainties that could cause our actual results to differ materially from theforward-looking statements contained in this Form 10-Q. You are stronglyurged to carefully consider the cautionary language and risks set forth below.

**WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANTPORTION OF OUR REVENUES**

Historically, a limited number of our customers havecontributed a significant percentage of our revenues. We anticipate that ouroperating results in any given period will continue to depend significantlyupon revenues from a small number of customers. The loss of any of thesecustomers (which could include loss through mergers and acquisitions) couldhave a materially adverse effect on our business, operating results orfinancial condition. We cannot make any assurances that we will retain ourexisting customers or attract new customers that would replace the revenue thatcould be lost if one or more of these customers failed to renew itsagreement(s) with us.

**OUR LARGEST CUSTOMER PLANS ATRANSITION OF A SIGNIFICANT PORTION OF THEIR SERVICES**

The Company’s largest customer has extendedits contract with Dendrite for sales force effectivenessservices in the United States through 2007, at current pricing, buthas advised the Company that as part of the previously described RFP processinitiated by the customer, it plans to transition such services, with theexception of support, maintenance and enhancements of Dendrite's sales forceeffectiveness software, in-house and to one or more third-partyvendors.  The customer currently intends to continue withsupport, maintenance and enhancements of Dendrite's sales forceeffectiveness software up to 2011 under a separate contract, which theCompany expects to generate revenue of at least approximately $7 million in2008, plus work orders and special projects.

As discussed above in Management’s Discussion andAnalysis, Dendrite estimates the value of revenues associated with theservices that are expected to terminate at the end of 2007 tobe approximately $41 million, excluding work orders and special projects,and estimates the segment operating income margin associated with theseservices to be in the range of 45% to 50%, excluding Corporate segmentunallocated expense.

While the extension of the contract into 2007 plusanticipated one-time revenue from transition services and other work orders areexpected to have a positive impact on 2007 results, and additional costreductions, potential investments in new and complementary business lines andfuture new business are planned to help mitigate the impact of the contractloss, there can be no assurance that such cost savings will be achieved in theamounts or at the times we are targeting or that we will be able to generatesufficient additional revenues from new and complementary business lines andfuture new business.

Any failure to achieve such additional cost savingsin the amounts and at the times we are targeting and to adequately increaserevenues from investments in new and complementary business lines and futurenew business can be expected to have a material adverse effect on our revenues,profitability and financial condition.

**OUR BUSINESS IS HEAVILYDEPENDENT ON THE PHARMACEUTICAL INDUSTRY**

Most of our solutions are currently used in connectionwith the marketing and sale of prescription-only drugs. This market isundergoing a number of significant changes. These changes include:

•         thesignificant and continuing consolidation of the pharmaceutical industry whichmay reduce the 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.

We cannot assure you that we can respond effectivelyto any or all of these and other changes in the marketplace. Our failure to doso could have a material adverse effect on our business, operating results orfinancial condition, as our business depends, in large part, on the businessconditions within this marketplace.

**OUR CUSTOMERSMAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS**

Our customers often implement our products in stagesand our products are often utilized by a large number of our customers’personnel. In the event that our customers have difficulties implementing ourproducts and services or are not satisfied with the implementation or operationof our products and services, our business, operating results and financialcondition could be materially and adversely affected.

**WE FACE RISKSASSOCIATED WITH OUR ACQUISITIONS**

As part of our business strategy, we haveacquired, and in the future may acquire, businesses that offercomplementary 

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

products, services ortechnologies. These acquisitions, including any future acquisitions, are andwill be accompanied by substantial risks, including:

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

•         theeffect of the acquisitions on our financial and strategic position;

•         ourinability to successfully integrate the acquired business;

•         thefailure of an acquired business to further our strategies;

•         ourinability to achieve expected cost and business synergies;

•         thesignificant strain 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;

•         thenegative impact of the combination of different corporate cultures;

•         theloss of key 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.

Any of these factorscould have a material adverse effect on our revenues and earnings.

We expect that theconsideration paid for future acquisitions, if any, could be in theform of cash, equity, debt or a combination of these. To the extent thatwe issue shares of stock or other rights to purchase stock in connection withany future acquisition, existing shareholders will experience dilution andpotentially decreased earnings per share.

**BUSINESSAND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE INDEMAND FOR OUR NEW PRODUCTS AND SERVICES**

Business and economicpressures on our major customers may result in budget constraints thatdirectly impact their ability to purchase our new products and servicesofferings. We cannot assure you that any decrease in demand caused by thesepressures will not have a material adverse effect on our business, operatingresults or financial condition.

**THELENGTHY SALES AND IMPLEMENTATION CYCLES FOR SFE SOLUTIONS MAKE IT DIFFICULT TOPREDICT OUR QUARTERLY REVENUES**

The selection of a salesforce effectiveness (SFE) solution generally entails an extendeddecision-making process by our customers because of the strategic implications,substantial costs and significant commitment of resources associated with acustomer’s license or implementation of the solution. Given the importance ofthe decision, senior levels of management of our customers are often involvedin the process and, in some instances, their board of directors may alsobe involved. As a result, the decision-making process typically takes nine toeighteen months, and in certain cases longer. In addition, other factors,unrelated to our product and services, such as acquisitions, product delays, orother issues, may also significantly impact the timing and amounts ofbuying decisions. Accordingly, we cannot fully control or predict the timing ofour execution of contracts with customers. Prior sales and implementationcycles cannot be relied upon as any indication of future cycles.

In addition, animplementation process of three to six or more months before the software isrolled out to a customer’s sales force is customary. However, if a customerwere to delay or extend its implementation process, our quarterly revenuesmay decline below expected levels and could adversely affect our resultsof operations.

**OUR QUARTERLYOPERATING RESULTS MAY FLUCTUATE**

Our total revenue andoperating results may vary significantly from quarter-to-quarter. The mainfactors 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.

In addition, we establishour expenditure levels for product development, sales and marketing and some ofour other operating expenses based in large part on our expected futurerevenues and anticipated competitive conditions. In particular, we frequentlyadd staff in advance of new business to permit adequate time for training. Ifthe new business is subsequently

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

delayed, canceled or not awarded, we will haveincurred 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.

As a result of these and other factors, revenues forany quarter may be subject to fluctuation. You should not rely on ourperiod-to-period comparisons of our results of operations as indications offuture performance. Our future quarterly results may from time to time notmeet the expectations of market analysts or investors, which could have amaterially adverse effect on the price of our common stock.

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

We are subject to income, payroll and indirect taxesin the United States and in multiple foreign jurisdictions. We exercisejudgment in determining our worldwide provision for these taxes, and in theordinary course of our business there may be transactions and calculationswhere the ultimate tax determination is uncertain.

We are regularly subjected to routine audits byvarious tax authorities. Any such audit may result in a determination thatour tax obligations exceed the amounts provided for by us in our financialstatements. Such additional tax obligations and any related penalties couldadversely impact our business, operating results and financial condition forcurrent, future and prior periods.

Additionally, for a variety of reasons, wemay not in the future be able to successfully maintain our historiceffective tax rates.

**FUTURE RESTRUCTURING MAY ADVERSELY IMPACT OUROPERATIONS**

We have announced and are executing plans to identifyand reduce costs in our business. As a result, we expect to incur severance andother associated costs for these actions which may adversely affect ourfuture operating results.

Furthermore, delays or increased costs in implementingany restructuring plans or cost savings initiatives or opportunities coulddelay or adversely affect the anticipated financial benefits of any suchrestructuring.

Additionally, any restructuring or cost savingsinitiatives may be disruptive to our employees who are transitioning todifferent roles or responsibilities in restructured areas of our business. Suchdisruptions may cumulatively adversely impact future operating results.

There also can be no assurance that such savingsinitiatives or opportunities will be achieved in the time periods or amountsplanned.

**WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEWPRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE**

The market for SFE products changes rapidly because offrequent improvements in computer hardware and software technology. Our futuresuccess will depend, in part, on our ability to:

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

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

•         address thechanging and increasingly sophisticated needs of our customers.

We cannot assure you that we will successfully developand market new products or product enhancements that respond to technologicaladvances in the marketplace, or that we will do so in a timely fashion. We alsocannot assure you that our products will adequately and competitively addressthe needs of the changing marketplace.

Competition for software products has beencharacterized by shortening product cycles. We may be materially andadversely affected by this trend if the product cycles for our products proveto be shorter than we anticipate. If that happens, our business, operatingresults or financial condition could be adversely affected.

To remain competitive, we also may have to spendmore of our resources on product research and development than we have in thepast. As a result, our results of operations could be materially and adverselyaffected.

**SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES**

Our software products are technologically complex andmay contain previously undetected errors or failures or errors whenproducts are first introduced or when updated versions are released. We cannotassure you that, despite our testing, our new products will be free fromsignificant errors. Software errors could cause delays in the commercialrelease of products

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

until the errors have been corrected. Software errorsmay cause us to be in breach of our agreements with customers, which couldresult in termination of the agreements and monetary damages. Software errorsmay cause damage to our reputation and cause us to commit significantresources to their correction. Errors that result in termination of agreements,monetary damages, losses or delays could have a material adverse effect on ourbusiness, operating results or financial condition.

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

There are a number of other companies that sell CRMand SFE products and related services that specifically target thepharmaceutical industry, including competitors that are actively selling CRMand SFE software products in more than one country and competitors that alsooffer CRM and SFE support services. Some of our competitors and potentialcompetitors are part of large corporate groups and have significantlygreater financial, sales, marketing, technology and other resources than wehave.

While we believe that the CRM and SFE softwareproducts and/or services offered by most of our competitors do not address thevariety of pharmaceutical customer needs that our solutions address, increasedcompetition may require us to reduce the prices for our products andservices. Increased competition may also result in decreased demand forour products and services.

We believe our ability to compete depends on manyfactors, some of which are beyond our control, including:

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

•         alliances among existingcompetitors;                                                                                                                                                

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

•         expansionof product lines by, or consolidation among, our existing competitors; and

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

Any one of these factors can lead to price reductionsand/or decreased demand and we cannot assure you that we will be able tocontinue to compete successfully or that competition will not have a materialadverse effect on our business, operating results or financial condition.

**WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THEINTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCESTHAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE**

The success of parts of our business will depend, inpart, on our ability to continue developing Internet-related products,modifying and improving our existing products and responding to technologicaladvances and changing commercial uses of the Internet. We cannot assure youthat our Internet-related products and services will adequately respond to suchtechnological advances and changing uses. Nor can we assure you that the demandfor our Internet-related products and services will increase.

Commercial use of the Internet raises potentialproblems with security, privacy, reliability, accessibility, quality of serviceand government regulation. These issues, if unresolved, may affect the useof our Internet-related products. If these potential problems arise, ourbusiness, financial condition or results of operations could be materially andadversely affected.

**OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OURDOMESTIC OPERATIONS DO NOT**

We have recently significantly expanded andmay in the future further expand our international operations and enteradditional international markets. This expansion would require significantmanagement attention and financial resources that could adversely affectoperating margins and earnings. We may not be able to maintain or increaseinternational market demand for our products and services. If we do not, ourinternational sales will be limited and our business, financial condition orresults of operations could be materially and adversely affected.

The sale of our products and services in foreigncountries accounts for, and is expected in the future to account for, anincreasing material part of our revenues. These sales are subject tosubstantial risks inherent in international business activities, including:

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

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

33

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

**($ In Thousands, Except Per ShareData)**

•         the absence or significantlack of legal protection for intellectual property rights in certain of thesecountries; and

•         difficultiesin managing an organization spread on a global basis.

Each of the above risks could have a significantimpact on our revenues, profitability and our ability to deliver products on acompetitive and timely basis, which could materially and adversely affect ourbusiness, financial condition or operating results.

Since we have operations in a number of countries andour service agreements in such countries are denominated in foreign currencies,we face exposure to adverse movements in foreign currency exchange rates. Ascurrency rates change, translation of the income statements of our internationalentities from local currencies to U.S. dollars affects period-over-periodcomparability of operating results. Historically, we have not hedged thesetranslation risks because we generally reinvest our cash flows frominternational operations. However, we continue to evaluate foreign currencytranslation risk exposure. As we continue to grow our international business,the risks associated with foreign currency translation will also grow.

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

The efficient operation of our business, andultimately our operating performance, depends on the uninterrupted use of ourcritical business and information technology systems. Many of these systemsrequire the use of specialized hardware and other equipment that is not readilyavailable in the marketplace. Although we maintain these systems at more thanone location, a natural disaster, a fire or other catastrophic event at any ofthese locations could result in the destruction of these systems. In such anevent, the replacement of these systems and restoration of archived data andnormal operation of our business could take several days to several weeks, ormore. During the intervening period when our critical business and informationtechnology systems are fully or partially inoperable, our ability to conductnormal business operations could be significantly and adversely impacted and asa result 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**

Our future success depends, to a significant extent,upon the contributions of our executive officers and key sales, technical andcustomer service personnel. While we believe that we have implemented effectivesuccession plans, we can make no assurance that the loss of key personnel andtransitions to new key personnel would not adversely impact our business orresult in less effective management or technical teams.

Our future success also depends on our continuingability to attract and retain highly qualified technical and managerialpersonnel. Due to competition for such personnel, we have at times experienceddifficulties in recruiting and retaining qualified personnel and wemay experience such difficulties in the future. Our ability to expand andincrease revenue growth in the future will depend, in part, on our success inrecruiting and training such qualified personnel. We may not always beable to expand our personnel in these areas as necessary to support ouroperations. Any recruiting or retention difficulties could adversely affect ourbusiness, operating results or financial 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 CUSTOMERSMAY CURTAIL OR STOP USING OUR SERVICE**

Certain of our solutions involve the storage andtransmission of customers’ proprietary information, and security breaches couldexpose us to a risk of loss of this information, litigation and potentialliability. Because techniques used to obtain unauthorized access or to sabotagesystems change frequently and generally are not recognized until launchedagainst a target, we may be unable to anticipate these techniques or toimplement adequate preventative measures. If an actual or perceived breach ofour security occurs, the market perception of the effectiveness of our securitymeasures could be harmed and we could lose existing customers and our abilityto obtain new customers.

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WEMAY NOT BE ABLE TO PROTECT COMPLETELY**

We rely on a combination of trade secret, copyrightand trademark laws, non-disclosure, license and other contractual agreementsand technical measures to protect our proprietary rights. We cannot assure youthat the steps we take will prevent misappropriation of these rights. Further,protective actions we have taken or will take in the future may notprevent competitors from developing products with features similar to ourproducts. In addition, effective copyright and trade secret protectionmay be unavailable or limited in certain foreign countries. In response tocustomer requests, we have also on occasion entered into agreements whichrequire us to placeour source code in escrow to secure our service and maintenance obligations.

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

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

As a company offering technology solutions, there canbe no assurance that third parties also offering technology solutions will notassert infringement claims against us in the future. While we believe that oursolutions do not infringe upon proprietary rights of other parties, there canbe no assurance that the Company would not be found to infringe on theproprietary rights of others. Any such finding could have a material adverseimpact on our operating results or financial condition.

**IF OUR THIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLYRESPOND TO TECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITHTHIRD-PARTY VENDORS, INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTSMAY RESULT**

Some of our software is provided by third-partyvendors. If our third-party vendors are unable to successfully respond totechnological change or if our relationships with certain third-party vendorsare terminated, we may experience difficulty in replacing thefunctionality provided by the third-party software currently offered with ourproducts. Although we believe there are other sources for all of our third-partysoftware, any significant interruption in the supply of these products couldadversely impact our sales unless and until we can secure another source. Theabsence of or any significant delay in the replacement of functionalityprovided by third-party software in our products could materially and adverselyaffect our sales.

**THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGICRELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED**

We are involved in a number of strategic relationshipswith third parties and are frequently pursuing others. Should theserelationships, or any of them, prove to be more costly than anticipated or failto meet revenue expectations or other anticipated synergies, we cannotguarantee that such events will not have a material impact upon our business,operating results or financial condition.

**OUR DATA AND ANALYTICS SOLUTIONS ARE DEPENDENT UPONSTRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUEDVIABILITY OF THESE SOLUTIONS**

Our data and analytics solutions are sourced, in part,from data provided through strategic relationships. Although we believe thereare other sources for such data, the termination of any of these relationshipscould diminish the breadth or depth of our data and analytics solutions. Thistermination or our failure to establish new strategic relationships in thefuture could negatively impact our business, operating results or financialcondition.

**FEDERAL AND STATE LAWS AND REGULATIONS AND THE LAWS OFVARIOUS FOREIGN JURISDICTIONS COULD DEPRESS THE DEMAND FOR SOME OF OURSOLUTIONS**

While we believe our data and analytics solutions arenot in violation of current federal or state laws and regulations  or the laws of foreign jurisdictionspertaining to patient privacy, health information or personal information,including the Health Insurance Portability and Accountability Act of 1996(HIPAA), we cannot guarantee that future laws or regulations or interpretationsof existing laws and statutes will not impact negatively upon our ability tomarket these solutions or cause a decrease in demand for such solutions fromcustomers that see an increased risk in any such new laws or regulations.

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

Through our interactive marketing business, wemay distribute controlled substances to doctors’ offices through the mailas part of certain interactive marketing programs provided on behalf ofpharmaceutical manufacturers. It is important to the business that thispractice of distributing prescription-only drugs continues. Future legislationmay restrict our ability to provide these types of services. If any suchlegislation is enacted, it could have a material and adverse effect on ourbusiness, operating results and financial condition.

**DIFFICULTIES IN SUBLEASING OR OTHERWISE DISPOSING OFCERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS**

We expect to sublease all or a portion of certain ofour facilities and sell our facility in Piscataway, New Jersey. An inability tosuccessfully dispose of or sublet, as applicable, any of these facilities or toobtain 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**

In reporting our financial results we rely upon theaccounting policies and standards then in effect at the time of our report.Future regulations, standards or interpretations may require us to adjustor restate financial results previously reported. A required restatement couldhave a material impact upon past financial results or current comparison toprevious results.

**WE MAY FACE RISKSASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY**

World events such as terrorist attacks, the currentmilitary action in the Middle East and elsewhere, and hostilities in the MiddleEast, Asia and other geographical areas, have and may in the future weaken the U.S. and worldeconomies. Any

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**ITEM 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

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

resultant weaknesses in these economiesmay adversely affect our business, financial condition or results ofoperations or the businesses of our customers.

**WE FACE RISKS IN CONNECTION WITH IMPLEMENTING THEREQUIREMENTS OF SECTION 404 OF THE SARBANES OXLEY ACT**

We continue to be involved in the process ofevaluating our internal control over financial reporting in order to allowmanagement to report on, and our registered independent public accounting firmto attest to, our internal controls, as required by Section 404 of theSarbanes-Oxley Act. This is a continuing process and we cannot be certain as tothe timing of completion of our future reviews, evaluation, testing andremediation actions or the impact of the same on our operations or the resultsof the required testing and required attestation report by us and also by ourregistered independent public accounting firm. If at any time we are unable toimplement the requirements of Section 404 in a timely manner or withadequate compliance, we may be subject to sanctions or investigation byregulatory authorities, such as the Securities and Exchange Commission orNASDAQ. Any such actions could have a material adverse effect on our financialresults and the price of our common stock.

**PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAWMAY DISCOURAGE AN ACQUISITION OF DENDRITE**

Provisions of our Restated Certificate ofIncorporation, as amended, our By-laws, as amended, and New Jersey lawmay make it more difficult for a third-party to acquire us. For example,the Board of Directors may, without the consent of the stockholders, issuepreferred stock with rights senior to those of the common stock. In addition,we have a Shareholder Rights Plan which may limit the ability of athird-party to attempt a hostile acquisition of the Company.

**OUR COMMON STOCK MAY BESUBJECT TO PRICE FLUCTUATIONS**

The market price of our common stock may besignificantly affected by the following 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 on occasionextreme 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.

**ITEM 4. Controls and Procedures**

Management, with the participation of our ChiefExecutive Officer and Chief Financial Officer have evaluated our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as of the end of the period coveredby this report.  Based on theirevaluation as of September 30, 2006, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective as of September 30, 2006 solely because of the materialweakness in internal control over financial reporting described below.  Management considers internal control overfinancial reporting to be an integral component of disclosure procedures.

As reported in our Annual Report on Form 10-K for theyear ended December 31, 2005, our management conducted an evaluation of theeffectiveness of our system of internal control over financial reporting andconcluded that our system of internal control over financial reporting waseffective as of December 31, 2005. During the second quarter of 2006,management identified a material weakness in internal control at Optas, Inc.,which is part of our Marketing solutions segment.  Specifically, the controls to ensure thatrevenue is recognized in the appropriate accounting period did not operateeffectively at Optas, Inc.  This materialweakness resulted in an overstatement of revenue that was corrected bymanagement in the consolidated financial statements and was not material to theoverall presentation of Dendrite’s consolidated financial statements.  However, due to the potential for additionalmisstatement, management concluded that this deficiency represented a materialweakness. Optas, Inc., which represents approximately 2% of consolidatedrevenues for the nine 

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months ended September 30, 2006, was acquiredduring the third quarter of 2005 and, as permitted by applicable SEC rules, wasexcluded from the scope of our internal control assessment at December 31,2005.  

During the third quarter of 2006, we undertook certainimprovements to remediate the material weakness related to our internalcontrols at Optas, Inc. over revenue recognition in the appropriate accountingperiod.  The remedial actions were asfollows:

1.               TheCompany has appointed new operational and financial management over thebusiness unit.

2.               TheCompany documented formal policies and procedures on revenue recognition forthe Optas, Inc. business.

3.               Managementconducted formal training regarding revenue recognition at the Optas, Inc.business location.

As of the date of this filing, we continue to take thesteps necessary to fully remediate this material weakness in our internalcontrol over financial reporting.  Theseinternal controls will be subject to testing by Dendrite’s internal and externalauditors in connection with management’s annual assessment of the effectivenessof internal control over financial reporting as of December 31, 2006. Webelieve the remedial actions taken to date are reasonably likely to have amaterial affect on our internal control over financial reporting. There were noother changes in our internal control over financial reporting during thequarter ended September 30, 2006 that have materially affected, or arereasonably likely to materially affect our internal control over financialreporting.

PART II. OTHERINFORMATION

**ITEM 1A. Risk Factors**

Other than the risksdescribed under the caption “OUR LARGEST CUSTOMER PLANS A TRANSITION OF A SIGNFICANTPORTION OF THEIR SERVICES” in Part I, Item 2 *.” Management’s Discussion and Analysis of Financial Condition andResults of Operations*”, thereare no material changes in the risk factors from those included in our 2005annual report on Form 10-K.

However,in addition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, Item 2*.” Management’s Discussion and Analysis of Financial Condition andResults of Operations*” under “FACTORS THAT MAY AFFECT FUTURERESULTS” in this Quarterly Report on Form 10-Q, which could materiallyaffect our business, financial condition or future results. The risks describedin this Quarterly Report on Form 10-Q are not the only risks facing ourCompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affectour business, financial condition and/ or operating results.

 

**ITEM 5. Other Information**

 

(a) OnSeptember 30, 2006, the Company committed to a plan to exit the Company’sfacilities in Piscataway, New Jersey, Avalon Ridge, Georgia and the UnitedKingdom.  In connection with the exit ofthese facilities, management determined to terminate the employment of certainemployees at each of these facilities. In addition, the Company committed to a plan of termination with respectto certain European employees related to position eliminations orrestructuring.  The information containedunder the heading “RESTRUCTURING AND OTHER CHARGES” on page 23 isincorporated herein by reference.  Theinformation set forth in Note 10 to the Notes to the unauditedconsolidated financial statements is also incorporated herein by reference.

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**ITEM6.****  Exhibits**
| 10.1   |   | New Hire Authorization – Update Appendix                                                                                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
| 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 |

 

**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: November2, 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) |

 

**EXHIBIT INDEX**
| 10.1   |   | New Hire Authorization – Update Appendix                                                                                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
| 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 |

 

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