**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

**Form 10-Q**

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

**For the quarterly period ended June30, 2006**

**Commission File Number   001-16379**

**Dendrite International, Inc.**

(Exact name of registrant as 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 206**

**Bedminster, NJ  07921**

(Address, including zip code, ofprincipal executive offices)

**(908) 443-2000**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 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 ono

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): oyes x no

As of August 1, 2006, 43,722,566 shares of DendriteInternational, Inc. no par value common stock were outstanding.

 

 

----

**DENDRITE INTERNATIONAL, INC.**

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

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

 

| PART I.  |   | FINANCIAL INFORMATION                                                                                 |   | 3      |
|---------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|
|          |   |                                                                                                  |   |   |
| ITEM 1.       |   | Financial Statements                                                                                  |   | 3      |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated Statements of Operations (unaudited)   Three and six months ended June 30, 2006 and 2005 |   | 3      |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Balance Sheets (unaudited)   June 30, 2006 and December 31, 2005              |   | 4      |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated Statements of Cash Flows (unaudited)   Three and six months ended June 30, 2006 and 2005 |   | 5      |
|          |   |                                                                                                  |   |   |
|          |   | Notes to Unaudited Consolidated Financial Statements                                                  |   | 6      |
|          |   |                                                                                                  |   |   |
| ITEM 2.       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |   | 18     |
|          |   |                                                                                                  |   |   |
| ITEM 4.       |   | Controls and  Procedures                                                                              |   | 35     |
|          |   |                                                                                                  |   |   |
| PART II. |   | OTHER INFORMATION                                                                                     |   | 35     |
|          |   |                                                                                                  |   |   |
| ITEM  1A      |   | Risk  Factors                                                                                         |   | 35     |
|          |   |                                                                                                  |   |   |
| ITEM 4.       |   | Submission of  Matters to a Vote of Security Holders                                                  |   | 36     |
|          |   |                                                                                                  |   |   |
| ITEM  6.      |   | Exhibits                                                                                              |   | 37     |
|          |   |                                                                                                  |   |   |
| Signatures    |   |                                                                                                  |   | 37     |

 

2

----

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 JUNE 30,** | ** ** | **SIX MONTHS ENDED JUNE 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                    |       | $                                                   | 106,381    |                                              | $          | 115,066 |   | $ | 209,510 |   | $ | 214,513 |   |
| Operating Costs &  Expenses:            |       |                                                |       |                                              |       |   |   |   |   |
| Operating costs                             |       | 59,398                                              |       | 58,829                                            |       | 119,149 |   | 112,480 |   |
| Selling, general  and administrative        |       | 42,095                                              |       | 34,075                                            |       | 81,891 |   | 69,863 |   |
| Research and  development                   |       | 1,494                                               |       | 1,454                                             |       | 3,228 |   | 3,272 |   |
| Restructuring  and other charges            |       | 2,578                                               |       | —                                            |       | 2,578 |   | 9,372 |   |
| Amortization of  acquired intangible assets |       | 1,035                                               |       | 1,130                                             |       | 2,057 |   | 2,380 |   |
| Total operating  costs & expenses       |       | 106,600                                             |       | 95,488                                            |       | 208,903 |   | 197,367 |   |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Operating (loss) income                     |       | (219                                                | )          | 19,578                                            |       | 607 |   | 17,146 |   |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Interest income, net                        |       | (504                                                | )          | (24                                               | )          | (958 | ) | (165 | ) |
| Other income, net                           |       | 71                                                  |       | 20                                                |       | 46 |   | (3 | ) |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Income before income  tax expense           |       | 214                                                 |       | 19,582                                            |       | 1,519 |   | 17,314 |   |
| Income tax expense                          |       | 927                                                 |       | 7,539                                             |       | 1,524 |   | 6,666 |   |
| Net (loss)  income                          |       | $                                                   | (713       | )                                                 | $          | 12,043 |   | $ | (5 | ) | $ | 10,648 |   |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) per  share:               |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                       |       | $                                                   | (0.02      | )                                                 | $          | 0.28 |   | $ | — |   | $ | 0.25 |   |
| Diluted                                     |       | $                                                   | (0.02      | )                                                 | $          | 0.28 |   | $ | — |   | $ | 0.24 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

3

----

**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

**(UNAUDITED)**

 

|                                                                                                                                                                                                          | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                                                                                          |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                               |       | $                       | 80,395     |                        | $          | 66,145 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,000                                                                                                                                   |       | 68,744                  |       | 80,167                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                               |       | 10,021                  |       | 8,544                       |       |
| Deferred income  taxes                                                                                                                                                                                   |       | 9,088                   |       | 8,848                       |       |
| Total current  assets                                                                                                                                                                                    |       | 168,248                 |       | 163,704                     |       |
| Property and equipment,  net of accumulated depreciation of $68,707 and $61,019, respectively                                                                                                            |       | 52,825                  |       | 52,592                      |       |
| Other assets                                                                                                                                                                                             |       | 9,378                   |       | 8,856                       |       |
| Goodwill                                                                                                                                                                                                 |       | 90,257                  |       | 90,440                      |       |
| Intangible assets, net                                                                                                                                                                                   |       | 22,942                  |       | 25,083                      |       |
| Capitalized software  development costs, net                                                                                                                                                             |       | 10,591                  |       | 10,341                      |       |
| Deferred income taxes                                                                                                                                                                                    |       | 13,008                  |       | 11,991                      |       |
|                                                                                                                                                                                                     |       | $                       | 367,249    |                        | $          | 363,007 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                           |       |                    |       |                        |       |
| Current Liabilities:                                                                                                                                                                                     |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                         |       | $                       | 8,262      |                        | $          | 7,677 |   |
| Income taxes  payable                                                                                                                                                                                    |       | 10,785                  |       | 9,518                       |       |
| Capital lease obligations                                                                                                                                                                                |       | 1,390                   |       | 1,383                       |       |
| Accrued  compensation and benefits                                                                                                                                                                       |       | 19,219                  |       | 17,950                      |       |
| Accrued  professional and consulting fees                                                                                                                                                                |       | 5,904                   |       | 5,690                       |       |
| Accrued restructuring  and other charges                                                                                                                                                                 |       | 1,436                   |       | 1,490                       |       |
| Other accrued  expenses                                                                                                                                                                                  |       | 15,947                  |       | 17,468                      |       |
| Purchase  accounting restructuring accrual                                                                                                                                                               |       | 1,130                   |       | 1,601                       |       |
| Deferred  revenues                                                                                                                                                                                       |       | 15,855                  |       | 18,680                      |       |
| Total current  liabilities                                                                                                                                                                               |       | 79,928                  |       | 81,457                      |       |
|                                                                                                                                                                                                     |       |                    |       |                        |       |
| Capital lease  obligations                                                                                                                                                                               |       | 816                     |       | 1,648                       |       |
| Purchase accounting  restructuring accrual                                                                                                                                                               |       | 2,428                   |       | 3,009                       |       |
| Accrued restructuring  and other charges                                                                                                                                                                 |       | 3,800                   |       | 4,143                       |       |
| Deferred rent                                                                                                                                                                                            |       | 5,526                   |       | 5,740                       |       |
| Other non-current  liabilities                                                                                                                                                                           |       | 5,590                   |       | 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, 46,528,807 and 46,353,252 shares  issued; 43,667,504 and 43,491,949 shares outstanding at June 30, 2006 and  December 31, 2005, respectively |       | 151,539                 |       | 149,947                     |       |
| Retained earnings                                                                                                                                                                                        |       | 148,943                 |       | 148,948                     |       |
| Deferred compensation                                                                                                                                                                                    |       | —                  |       | (4,419                      | )          |
| Accumulated other  comprehensive income (loss)                                                                                                                                                           |       | 416                     |       | (1,324                      | )          |
| Less treasury stock, at  cost                                                                                                                                                                            |       | (31,737                 | )          | (31,737                     | )          |
| Total  stockholders’ equity                                                                                                                                                                         |       | 269,161                 |       | 261,415                     |       |
|                                                                                                                                                                                                     |       | $                       | 367,249    |                        | $          | 363,007 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

4

----

**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

**(UNAUDITED)**

 

|                                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Operating activities:                                                                     |       |                                              |       |   |   |
| Net (loss)  income                                                                        |       | $                                                 | (5         | ) | $ | 10,648 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                                            |       | 12,573                                            |       | 11,135 |   |
| Write-off of  property and equipment                                                      |       | —                                            |       | 1,030 |   |
| Stock-based  compensation                                                                 |       | 4,059                                             |       | 34 |   |
| Deferred income  taxes                                                                    |       | (931                                              | )          | (2,905 | ) |
| Excess tax  benefits from stock-based awards                                              |       | (348                                              | )          |   |   |
| Changes in  assets and liabilities, net of effects from acquisitions:                     |       |                                              |       |   |   |
| Decrease  (increase) in accounts receivable                                               |       | 12,799                                            |       | (7,247 | ) |
| (Increase)  decrease in prepaid expenses and other current assets                         |       | (1,330                                            | )          | 1,027 |   |
| Increase in  other assets                                                                 |       | (387                                              | )          | (804 | ) |
| Decrease in  accounts payable and accrued expenses                                        |       | (1,575                                            | )          | (212 | ) |
| (Decrease)  increase in accrued restructuring and other charges                           |       | (460                                              | )          | 7,339 |   |
| Decrease in purchase  accounting restructuring accrual                                    |       | (789                                              | )          | (1,630 | ) |
| Increase in  income taxes payable                                                         |       | 1,480                                             |       | 2,045 |   |
| (Decrease)  increase in deferred revenue                                                  |       | (3,154                                            | )          | 716 |   |
| Decrease in  other non-current liabilities                                                |       | (26                                               | )          | (182 | ) |
| Net cash  provided by operating activities                                                |       | 21,906                                            |       | 20,994 |   |
| Investing activities:                                                                     |       |                                              |       |   |   |
| Acquisitions,  net of cash acquired                                                       |       | —                                            |       | (10,172 | ) |
| Purchases of  property and equipment                                                      |       | (7,005                                            | )          | (17,753 | ) |
| Additions to  capitalized software development costs                                      |       | (2,689                                            | )          | (2,439 | ) |
| Net cash used in  investing activities                                                    |       | (9,694                                            | )          | (30,364 | ) |
| Financing activities:                                                                     |       |                                              |       |   |   |
| Payments on  capital lease obligations                                                    |       | (825                                              | )          | (890 | ) |
| Excess tax  benefits from stock-based awards                                              |       | 348                                               |       | — |   |
| Issuance of  common stock                                                                 |       | 1,723                                             |       | 2,527 |   |
| Net cash  provided by financing activities                                                |       | 1,246                                             |       | 1,637 |   |
| Effect of foreign  exchange rate changes on cash                                          |       | 792                                               |       | (149 | ) |
| Net increase (decrease)  in cash and cash equivalents                                     |       | 14,250                                            |       | (7,882 | ) |
| Cash and cash  equivalents, beginning of year                                             |       | 66,145                                            |       | 64,020 |   |
| Cash and cash  equivalents, end of period                                                 |       | $                                                 | 80,395     |   | $ | 56,138 |   |

 

The accompanying notes are an integral part ofthese consolidated statements.

 

5

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE 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 ofJune 30, 2006, operating results for the three and six months ended June 30,2006 and 2005 and cash flows for the six months ended June 30, 2006 and 2005.For further information, refer to the consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005.

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

**2. Recent Accounting Pronouncements**

In June 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 toopening retained earnings. The Company is currently evaluating the impact ofadopting FIN 48 on the consolidated financial statements.

**3. Stock-Based Compensation**

In December 2004,the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”)as a replacement 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.

OnJanuary 1, 2006, the Company adopted SFAS 123(R) using the modifiedprospective application method, as permitted under SFAS 123(R), which requiresmeasurement of compensation cost of all stock-based awards at fair value on thedate of grant and recognition of compensation over the respective serviceperiods for awards expected to vest. Under this method, compensation cost in2006 includes the portion vesting in the period for (1) all stock-basedawards granted prior to, but not vested as of, January 1, 2006, based onthe grant date fair value estimated in accordance with the original provisionsof SFAS 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). The Company will recognize thecost of all employee stock awards on a straight-line basis over theirrespective vesting periods, net of estimated forfeitures. Accordingly, priorperiods amounts have not been restated. Under this method, the Company isrequired to record compensation expense for all awards granted after the dateof adoption and for the unvested portion of previously granted awards thatremain outstanding at the date of adoption.

Priorto the adoption of SFAS 123(R), the Company applied APB 25 to account for itsstock-based awards. Under APB 25, the Company generally only recordedstock-based compensation expense for restricted stock units, which amounted to$20 and $34 for the three and six months ended June 30, 2005. Under theprovisions of APB 25, the Company was not required to recognize compensationexpense for the cost of stock options issued under its equity compensationplans or of shares issued under its Employee Stock Purchase Plan (“ESPP”). Withthe adoption of SFAS 123(R), the Company recorded stock-based compensationexpense for the cost of stock options, restricted stock units and shares issuedunder the ESPP (collectively, “Employee Stock-Based Awards”). Stock-basedcompensation expense for the three and six months ended June 30, 2006, was$2,145 and $4,067, respectively.  TheCompany has not changed its valuation model used for estimating the fair valueof options granted after January 1, 2006, from the Black-Scholesoption-pricing model previously used for pro forma presentation purposes.

6

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

Thefollowing table details the pro forma effect on net income and income per sharehad stock based-compensation expense for the Employee Stock-Based Awards beenrecorded for the three and six months ended June 30, 2005, based on the fairvalue method under SFAS 123:

|                                                                                                                                            | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2005**                                                      | ** ** | **2005**                                                    | ** ** |
| Net income as  reported                                                                                                                    |       | $                                                             | 12,043     |                                                        | $          | 10,648 |   |
|                                                                                                                                       |       |                                                          |       |                                                        |       |
| Add: Total  stock-based expense included in reported  net loss, net of related tax effects                                                 |       | 12                                                            |       | 21                                                          |       |
|                                                                                                                                       |       |                                                          |       |                                                        |       |
| Deduct: Total  stock-based compensation  expense determined under the fair value based   method for all awards, net of related tax effects |       | (4,230                                                        | )          | (7,733                                                      | )          |
| Pro forma net  income                                                                                                                      |       | $                                                             | 7,825      |                                                        | $          | 2,936 |   |
| Basic income per  share:                                                                                                                   |       |                                                          |       |                                                        |       |
| As reported                                                                                                                                |       | $                                                             | 0.28       |                                                        | $          | 0.25 |   |
| Pro forma                                                                                                                                  |       | $                                                             | 0.18       |                                                        | $          | 0.07 |   |
| Diluted income  per share:                                                                                                                 |       |                                                          |       |                                                        |       |
| As reported                                                                                                                                |       | $                                                             | 0.28       |                                                        | $          | 0.24 |   |
| Pro forma                                                                                                                                  |       | $                                                             | 0.18       |                                                        | $          | 0.07 |   |

 

For the three and sixmonths ended June 30, 2006, the adoption of SFAS 123(R) resulted inincremental stock-based compensation expense causing income before income taxexpense to decrease by $1,300 and $2,728, net income to decrease by $870 and$1,831 and basic and diluted earnings per share to decrease by $.02 and $.04per share, respectively.  Stock-basedcompensation expense for the three and six months ended June 30, 2006, of $845and $1,339 relating to restricted stock units would have been recognized in2006 regardless of the adoption of SFAS 123(R). In addition, in connectionwith the adoption of SFAS 123(R), net cash provided by operatingactivities decreased and net cash provided by financing activities increasedfor the six months ended June 30, 2006 by $348 related to tax benefits from stock-basedpayments arrangements.

The fair value for these options were estimated at thedate of grant for all periods presented using the Black-Scholes option pricingmodel with the following assumptions:

|                                                   | ** ** | **For the Three  Months Ended   June 30,** | ** ** | **For the Six  Months Ended  June 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         |       | 5.0                                                                 | %          | 3.9                                                         | %          | 5.0 | % | 3.9 | % |
| Expected life of the  option (years)              |       | 5.00                                                                |       | 5.25                                                        |       | 5.00 |   | 5.25 |   |

 

Theweighted-average expected stock price volatility was estimated based onhistorical volatility for a period equal to the stock option’s expected life, estimatedon the day of grant, and calculated on a quarterly basis. The weighted-averagerisk-free interest rate is based on the U. S. Treasury yield curve in effect atthe time of grant. The expected life (estimated period of time outstanding) ofstock options granted was estimated using the historical exercise behavior ofemployees.

7

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

**EQUITY COMPENSATION PLANS**

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

*Options*

Optionsgranted under the Plans generally vest over a four-year period and areexercisable over a period not to exceed ten years as determined by theCompensation Committee of the Board of Directors. During the years endedDecember 31, 2005 and 2004, certain options were granted that vestedduring the year of grant but were subject to a restriction (of up to fouryears) on the sale of any shares acquired upon option exercise in the period ofrestriction. Incentive stock options are granted with exercise prices equal tofair value of the Company’s common stock using the closing price from the priortrading day. Nonqualified options are granted at exercise prices determined bythe Compensation Committee of the Board of Directors, but not below fair marketvalue at the date of grant.

A summary of award activity under the Plans as of June30, 2006 and changes during the six month period is as follows:

|                                | ** ** | **Shares** | ** ** | **Weighted-Average   Exercise Price** | ** ** | **Weighted-Average  Remaining   Contractual Term** | ** ** | **Aggregate  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                               |       |
| Exercisable June 30,  2006     |       | 8,443,850  |       | 15.55                                           |       | 6.1                                                          |       | 1,815                               |       |
|                                |            |            |            |                                                 |            |                                                              |            |                                     |            |  |

 

At June 30, 2006 and December 31, 2005, therewere 8,443,850 and 8,818,196 options exercisable with a weighted averageexercise price of $15.55 and $15.63, respectively. As of June 30, 2006, therewere 1,348,635 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 $5.08 and $7.35for the six months ended June 30, 2006 and 2005, respectively. The totalintrinsic value of options exercised during the six months ended June 30, 2006and 2005, was $580 and $1,451, respectively. As of June 30, 2006, there was$2,817 of total unrecognized compensation costs related to stock options. Thesecosts are expected to be recognized over a weighted average period of 0.8years.

The actual tax benefit realized for the tax deductionfrom options exercised of the share-based payment arrangement for the sixmonths ended June 30, 2006 and 2005, totaled $348 and $461, respectively.

8

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

Information with respect to the options outstandingunder the Plans at June 30, 2006 is as follows:

| Exercise Price Per  Share | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Life  (Years)** | ** ** | **Number of   Vested Shares** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------|------------|
| $0.00 - $3.32                       |       | 8,201      |       | $                                         | 2.65       |                                                            | 0.6        |                                         | 8,201      |   |
| $3.33 - $6.64                       |       | 230,142    |       | 6.27                                      |       | 1.2                                                             |       | 229,725                                      |       |
| $6.65 - $9.95                       |       | 1,899,935  |       | 8.23                                      |       | 5.1                                                             |       | 1,098,440                                    |       |
| $9.96 - $13.27                      |       | 666,901    |       | 12.31                                     |       | 5.5                                                             |       | 618,870                                      |       |
| $13.28 - $16.59                     |       | 3,335,092  |       | 14.64                                     |       | 7.3                                                             |       | 3,190,899                                    |       |
| $16.60 - $19.91                     |       | 2,769,914  |       | 17.89                                     |       | 6.4                                                             |       | 2,536,445                                    |       |
| $19.92 - $23.23                     |       | 190,000    |       | 22.78                                     |       | 4.3                                                             |       | 190,000                                      |       |
| $23.24 - $26.55                     |       | 173,570    |       | 23.59                                     |       | 3.7                                                             |       | 173,570                                      |       |
| $26.56 - $29.87                     |       | 100,200    |       | 27.42                                     |       | 3.5                                                             |       | 100,200                                      |       |
| $29.88 - $33.19                     |       | 297,500    |       | 33.15                                     |       | 3.6                                                             |       | 297,500                                      |       |
|                                |       | 9,671,455  |       | 14.97                                     |       | 6.1                                                             |       | 8,443,850                                    |       |
|                                     |            |            |            |                                           |            |                                                                 |            |                                              |            |  |

 

*Restricted Stock Units*

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

Changesin the Company restricted stock units for the six months ended June 30, 2006,were as follows:

|                                                 | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date  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                                                  |       |
|                                                 |            |            |            |                                                        |            |  |

 

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

**EMPLOYEE STOCK PURCHASE PLAN**

In1997, the Company established an employee stock purchase plan that providesfull-time employees the opportunity to purchase shares, at 85% of the fairvalue on dates determined by the Board of Directors, up to a maximum of 10% oftheir eligible compensation or $21,250, whichever is less. The number ofauthorized shares available for purchase under this plan is 900,000, of which 50,361and 39,987 shares were purchased in the six months ended June 30, 2006 and2005, respectively. There were 90,248 and 140,609 shares available for futureissuance under the plan as of June 30, 2006 and December 31, 2005,respectively.

9

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

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

The following table presents the computation of basicand diluted net (loss) income per share for the three and six months ended June30, 2006 and 2005 (share data in thousands):

|                                                   | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic net (loss)  income per share computation:   |       |                                                              |       |                                                            |       |   |   |   |   |
| Net (loss) income                                 |       | $                                                                 | (713       | )                                                               | $          | 12,043 |   | $ | (5 | ) | $ | 10,648 |   |
| Weighted-average common shares outstanding        |       | 43,650                                                            |       | 42,592                                                          |       | 43,599 |   | 42,531 |   |
| Basic net (loss)  income per share                |       | $                                                                 | (0.02      | )                                                               | $          | 0.28 |   | $ | (0.00 | ) | $ | 0.25 |   |
| Diluted net  (loss) income per share computation: |       |                                                              |       |                                                            |       |   |   |   |   |
| Net (loss) income                                 |       | $                                                                 | (713       | )                                                               | $          | 12,043 |   | $ | (5 | ) | $ | 10,648 |   |
| Diluted common shares outstanding:                |       |                                                              |       |                                                            |       |   |   |   |   |
| Weighted-average common shares outstanding        |       | 43,650                                                            |       | 42,592                                                          |       | 43,599 |   | 42,531 |   |
| Impact of dilutive stock options                  |       | —                                                            |       | 1,038                                                           |       | — |   | 1,156 |   |
| Diluted common shares outstanding                 |       | 43,650                                                            |       | 43,630                                                          |       | 43,599 |   | 43,687 |   |
| Diluted net (loss)  income per share              |       | $                                                                 | (0.02      | )                                                               | $          | 0.28 |   | $ | (0.00 | ) | $ | 0.24 |   |

 

For the three and six months ended June 30, 2006, 275,000and 503,000 stock options that could potentially dilute net (loss) income pershare in the future are not included in the calculation of diluted net (loss)income per share as they would have been antidilutive.  The difference between basic and dilutedshares for the three and six months ended June 30, 2005 is primarily due to theassumed exercise of stock options included in the diluted earnings per sharecomputation.

**5. Comprehensive Income**

The components of comprehensive income for the threeand six months ended June 30, 2006 and 2005 consisted of the following:

|                                          | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net (loss)  income                       |       | $                                                                 | (713       | )                                                               | $          | 12,043 |   | $ | (5 | ) | $ | 10,648 |   |
| Other  comprehensive income:             |       |                                                              |       |                                                            |       |   |   |   |   |
| Foreign currency translation adjustments |       | 1,381                                                             |       | (848                                                            | )          | 1,740 |   | (962 | ) |
| Comprehensive income                     |       | $                                                                 | 668        |                                                            | $          | 11,195 |   | $ | 1,735 |   | $ | 9,686 |   |

 

**6. Purchase Accounting Restructuring Accrual**

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

10

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

The activity related to the purchase accountingrestructuring accrual for the six months ended June 30, 2006 is summarized inthe table below:

|                         | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2005** | ** ** | **2006  Adjustments to**

**Goodwill** | ** ** | **2006 Payments** | ** ** | **Purchase  Accounting  Restructuring  Accrual as of   June 30, 2006** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| Synavant                |       |                                                                                          |       |                                        |       |                   |       |                                                                                            |       |
| Facility exit costs     |       | $                                                                                             | 4,289      |                                        | $          | —                 |       | $                                                                                               | (731       | ) | $ | 3,558 |   |
| SAI                     |       |                                                                                          |       |                                        |       |                   |       |                                                                                            |       |
| Lease termination costs |       | 321                                                                                           |       | (66                                         | )          | (255                   | )          | —                                                                                          |       |
| Total                   |       | $                                                                                             | 4,610      |                                        | $          | (66                    | )          | $                                                                                               | (986       | ) | $ | 3,558 |   |

 

**7. Goodwill and Intangible Assets**

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

|                                                 | ** ** | **As of June 30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **Gross**                                   | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible Assets  Subject To Amortization:     |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Purchased capitalized software                  |       | $                                           | 2,441      |                                            | $          | (2,301 | ) | $ | 140 |   | $ | 2,441 |   | $ | (1,996 | ) | $ | 445 |   |
| Capitalized software development costs          |       | 34,160                                      |       | (23,569                                         | )          | 10,591 |   | 31,471 |   | (21,130 | ) | 10,341 |   |
| Customer relationship assets                    |       | 16,427                                      |       | (4,698                                          | )          | 11,729 |   | 16,397 |   | (3,696 | ) | 12,701 |   |
| Backlog                                         |       | 2,500                                       |       | (2,500                                          | )          | — |   | 2,500 |   | (2,491 | ) | 9 |   |
| Non-compete covenants                           |       | 3,732                                       |       | (3,600                                          | )          | 132 |   | 3,718 |   | (3,464 | ) | 254 |   |
| Purchased database                              |       | 5,177                                       |       | (2,631                                          | )          | 2,546 |   | 5,151 |   | (2,082 | ) | 3,069 |   |
| Acquired technology                             |       | 1,390                                       |       | (223                                            | )          | 1,167 |   | 1,390 |   | (84 | ) | 1,306 |   |
| Trademarks                                      |       | 503                                         |       | (128                                            | )          | 375 |   | 500 |   | (82 | ) | 418 |   |
| Other intangibles                               |       | 474                                         |       | (353                                            | )          | 121 |   | 474 |   | (325 | ) | 149 |   |
| Total                                           |       | 66,804                                      |       | (40,003                                         | )          | 26,801 |   | 64,042 |   | (35,350 | ) | 28,692 |   |
| Intangible Assets  Not Subject to Amortization: |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | 90,257                                      |       | —                                          |       | 90,257 |   | 90,440 |   | — |   | 90,440 |   |
| Trademarks                                      |       | 6,732                                       |       | —                                          |       | 6,732 |   | 6,732 |   | — |   | 6,732 |   |
| Total                                           |       | 96,989                                      |       | —                                          |       | 96,989 |   | 97,172 |   | — |   | 97,172 |   |
| Total Goodwill and  Intangible Assets           |       | $                                           | 163,793    |                                            | $          | (40,003 | ) | $ | 123,790 |   | $ | 161,214 |   | $ | (35,350 | ) | $ | 125,864 |   |

 

The changes in the carrying amount of intangibleassets not subject to amortization for the six months ended June 30, 2006 is asfollows:

|            | ** ** | **Balance as of  December 31, 2005** | ** ** | **Acquisitions /  Purchase  Accounting  Adjustments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Balance as of  June 30, 2006** | ** ** |
|------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|
| Goodwill   |       | $                                                        | 90,440     |                                                       | $          | (263                                   | )          | $                                                    | 80         |   | $ | 90,257 |   |
| Trademarks |       | 6,732                                                    |       | —                                                     |       | —                                 |       | 6,732                                                |       |
| Total      |       | $                                                        | 97,172     |                                                       | $          | (263                                   | )          | $                                                    | 80         |   | $ | 96,989 |   |

 

The Company conducts its annual impairment testing ofgoodwill as of October 1 each year. During the six months ended June 30,2006, there were no changes in events or circumstances that would indicateimpairment.

11

----

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

The following tablereconciles net intangible assets subject to amortization for the period fromDecember 31, 2005 to June 30, 2006:
| ** **                              | ** ** | **Net Intangibles**                    | ** ** | **2006 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **as of  December 31, 2005** | ** ** | **Additions**                            | ** ** | **Amortization**         | ** ** | **Translation  and Other** | ** ** | **as of  June 30, 2006** | ** ** |
| Purchased  capitalized software         |       | $                                           | 445        |                                     | $          | —                   |       | $ | (305 | ) | $ | — |   | $ | 140 |   |
| Capitalized  software development costs |       | 10,341                                      |       | 2,689                                    |       | (2,439                   | )          | — |   | 10,591 |   |
| Customer  relationship assets           |       | 12,701                                      |       | —                                   |       | (1,002                   | )          | 30 |   | 11,729 |   |
| Backlog                                 |       | 9                                           |       | —                                   |       | (9                       | )          | — |   | — |   |
| Non-compete  covenants                  |       | 254                                         |       | —                                   |       | (136                     | )          | 14 |   | 132 |   |
| Purchased  database                     |       | 3,069                                       |       | —                                   |       | (549                     | )          | 26 |   | 2,546 |   |
| Acquired  technology                    |       | 1,306                                       |       | —                                   |       | (139                     | )          | — |   | 1,167 |   |
| Trademarks                              |       | 418                                         |       | —                                   |       | (46                      | )          | 3 |   | 375 |   |
| Other  intangibles                      |       | 149                                         |       | —                                   |       | (28                      | )          | — |   | 121 |   |
| Total                                   |       | $                                           | 28,692     |                                     | $          | 2,689                    |       | $ | (4,653 | ) | $ | 73 |   | $ | 26,801 |   |

** **

Amortization expense related to intangible assets,including internally developed capitalized software costs, for the three monthperiods ended June 30, 2006 and 2005 was $2,434 and $2,104, respectively.Amortization expense related to intangible assets, including internallydeveloped capitalized software costs, for the six month periods ended June 30,2006 and 2005 was $4,653 and $4,144, respectively.  Aggregate annual amortization expense ofintangible assets (exclusive of future additions) is estimated to be:

| Year Ending December 31,                            | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|
| 2006                                                               |       | $          | 9,049      |   |
| 2007                                                               |       | 7,316      |       |
| 2008                                                               |       | 4,607      |       |
| 2009                                                               |       | 2,753      |       |
| 2010                                                               |       | 1,781      |       |
| 2011                                                               |       | 1,493      |       |
| Thereafter                                                         |       | 4,455      |       |
|                                                               |       | 31,454     |       |
| Less:  Year-to-date amortization expense                           |       | (4,653     | )          |
| Net intangible assets  subject to amortization as of June 30, 2006 |       | $          | 26,801     |   |

 

12

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

**8. 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. As a result, the Company is inthe process of re-examining its cost structure and has presently identifiedareas of opportunity in international operations, facilities consolidation,optimizing of delivery organizations and process automation and improvement.

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

During the three month period ended March 31,2005, the Company intiated 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 currentmarket conditions. The Company accrued for the present valued of these costs,net of estimated future sublease income. The Company also accrued for severancecharges related to the elimination of certain senior and mid-level managementpositions. These charges are included within accrued facility and other chargeson the consolidated balance sheets as of June 30, 2006 andDecember 31, 2005, and in facility and other charges on the consolidatedstatement of operations during the six months ended June 30, 2006.

The activity related to accrued facility and othercharges for the six months ended June 30, 2006 is summarized in the tablebelow:

|                      | ** ** | **Accrued   Restructuring and  Other Charges as of  December 31, 2005** | ** ** | **2006  Restructuring  and Other  Charges** | ** ** | **2006  Payments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Accrued  Restructuring and  Other Charges as of  June 30, 2006** | ** ** |
|----------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| Facility exit  costs |       | $                                                                                                          | 5,332      |                                             | $          | —             |       | $                                      | (478       | )                                                                                                | $          | — |   | $ | 4,854 |   |
| Other                |       | —                                                                                                     |       | 536                                              |       | (536               | )          | —                                 |       | —                                                                                           |       |
| Severance            |       | 301                                                                                                        |       | 2,042                                            |       | (1,968             | )          | 7                                      |       | 382                                                                                              |       |
|                 |       | $                                                                                                          | 5,633      |                                             | $          | 2,578              |       | $                                      | (2,982     | )                                                                                                | $          | 7 |   | $ | 5,236 |   |

 

In connection with the plan initiated and completedduring the six months ended June 30, 2005, the Company also wrote-off $1,030 ofleasehold improvements included within facility and other charges in theconsolidated statement of operations for the six months ended June 30, 2005.

**9. 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 June 30, 2006, the Company wasin compliance with all covenants and did not have any amounts outstanding underthe Agreement.

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

13

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

**10.Income Taxes**

The Company’s effective income tax expense rateincreased to 100.3% for the six months ended June 30, 2006, from 38.5% for thesix months ended June 30, 2005. The Company’s effective income tax expense rateincreased to 433.6% for the three months ended June 30, 2006, from 38.5% forthe three months ended June 30, 2005. The significant increase in our effective tax rate is primarily drivenby the inability to benefit from losses in certain foreign jurisdictions, theimpact of SFAS 123(R), and increased permanent non-deductible items over lowerpre-tax profit.

**11. 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 3above 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 follows:

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

*Marketing solutions* primarilyincludes interactive marketing, data & analytics, consulting, and shippingfees. Shipping fees which are pass-through costs that bear little to no margin,are required to be included in revenues and costs based upon Emerging IssuesTask Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees andCosts.” These billable shipping transactions are primarily related to ourinteractive marketing activities.

Shipping and handling fees billed to customers arerecorded as revenue and shipping and handling costs paid to vendors arerecorded as operating costs.  Shippingand handling fees recorded as revenues and operating costs for the three monthsended June 30, 2006 and 2005 were $5,743 and $4,936, respectively.  Shipping and handling fees recorded asrevenues and operating costs for the six months ended June 30, 2006 and 2005were $11,527 and $9,595, 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.

14

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

The following tablesinclude revenue and operating income (loss) for each reportable segment for thethree and six months ended June 30, 2006 and 2005.

|                      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:             |       |                                                              |       |                                                            |       |   |   |   |   |
| Sales solutions      |       | $                                                                 | 69,214     |                                                            | $          | 80,257 |   | $ | 135,554 |   | $ | 147,999 |   |
| Marketing  solutions |       | 30,784                                                            |       | 28,467                                                          |       | 61,578 |   | 53,781 |   |
| Emerging  solutions  |       | 6,383                                                             |       | 6,342                                                           |       | 12,377 |   | 12,734 |   |
| Total revenue        |       | $                                                                 | 106,381    |                                                            | $          | 115,066 |   | $ | 209,509 |   | $ | 214,514 |   |

 

|                               | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating (loss)  income:     |       |                                                              |       |                                                            |       |   |   |   |   |
| Sales solutions               |       | $                                                                 | 12,133     |                                                            | $          | 21,675 |   | $ | 22,052 |   | $ | 33,346 |   |
| Marketing  solutions          |       | (2,493                                                            | )          | 750                                                             |       | (3,776 | ) | (422 | ) |
| Emerging  solutions           |       | (345                                                              | )          | 770                                                             |       | (552 | ) | 979 |   |
| Corporate                     |       | (9,514                                                            | )          | (3,617                                                          | )          | (17,117 | ) | (16,757 | ) |
| Total operating (loss) income |       | $                                                                 | (219       | )                                                               | $          | 19,578 |   | $ | 607 |   | $ | 17,146 |   |

 

15

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

The following tables include depreciation andamortization expense, capital expenditures and restructuring charges for eachbusiness segment for the three and six months ended June 30, 2006 and2005.

|                                             | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Depreciation and  amortization expense:     |       |                                                              |       |                                                            |       |   |   |   |   |
| Sales solutions                             |       | $                                                                 | 4,170      |                                                            | $          | 3,039 |   | $ | 7,941 |   | $ | 5,700 |   |
| Marketing  solutions                        |       | 875                                                               |       | 868                                                             |       | 1,660 |   | 1,851 |   |
| Emerging  solutions                         |       | 301                                                               |       | 292                                                             |       | 592 |   | 553 |   |
| Corporate                                   |       | 1,355                                                             |       | 1,534                                                           |       | 2,380 |   | 3,031 |   |
| Total depreciation and amortization expense |       | $                                                                 | 6,701      |                                                            | $          | 5,733 |   | $ | 12,573 |   | $ | 11,135 |   |

 

|                            | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months**

**Ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                          | ** ** | **2005**                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Capital expenditures:      |       |                                                              |       |                                                                |       |   |   |   |   |
| Sales solutions            |       | $                                                                 | 2,357      |                                                                | $          | 3,856 |   | $ | 4,046 |   | $ | 8,059 |   |
| Marketing  solutions       |       | 504                                                               |       | 631                                                                 |       | 686 |   | 1,135 |   |
| Emerging  solutions        |       | 73                                                                |       | 4                                                                   |       | 73 |   | 266 |   |
| Corporate                  |       | 1,718                                                             |       | 5,375                                                               |       | 2,200 |   | 8,293 |   |
| Total capital expenditures |       | $                                                                 | 4,652      |                                                                | $          | 9,866 |   | $ | 7,005 |   | $ | 17,753 |   |

 

|                                 | ** ** | **For the Three Months**

**Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                                              | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Restructuring charges:          |       |                                                                  |       |                                                            |       |   |   |   |   |
| Sales solutions                 |       | $                                                                     | 759        |                                                            | $          | — |   | $ | 759 |   | $ | — |   |
| Marketing  solutions            |       | 954                                                                   |       | —                                                          |       | 954 |   | — |   |
| Emerging  solutions             |       | 4                                                                     |       | —                                                          |       | 4 |   | — |   |
| Corporate                       |       | 861                                                                   |       | —                                                          |       | 861 |   | 9,372 |   |
| Total restructuring charges (1) |       | $                                                                     | 2,578      |                                                            | $          | — |   | $ | 2,578 |   | $ | 9,372 |   |

 

The following table includes total assets at June 30,2006 and December 31, 2005 for each business segment.

|                      | ** ** | **As of  June 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|----------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Assets:              |       |                                    |       |                                        |       |
| Sales solutions      |       | $                                       | 137,149    |                                        | $          | 149,920 |   |
| Marketing  solutions |       | 78,352                                  |       | 87,642                                      |       |
| Emerging solutions   |       | 17,390                                  |       | 16,515                                      |       |
| Corporate (2)        |       | 134,358                                 |       | 108,930                                     |       |
| Total assets (3)     |       | $                                       | 367,249    |                                        | $          | 363,007 |   |

 

(1)             SeeNote 8 for further discussion of restructuring charges.

(2)             Corporateassets consist primarily of cash, property and equipment, prepaid taxes anddeferred tax assets.

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

16

----

**DENDRITEINTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)**

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  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $                                                                 | 61,702     |                                                            | $          | 73,680 |   | $ | 125,992 |   | $ | 133,127 |   |
| Europe        |       | 29,348                                                            |       | 27,397                                                          |       | 55,908 |   | 55,339 |   |
| All other     |       | 15,331                                                            |       | 13,989                                                          |       | 27,610 |   | 26,047 |   |
|          |       | $                                                                 | 106,381    |                                                            | $          | 115,066 |   | $ | 209,510 |   | $ | 214,513 |   |

 

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 June  30, 2006** | ** ** | **As of**

**December  31, 2005** | ** ** |
|---------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| United States |       | $                                       | 166,633    |                                        | $          | 167,459 |   |
| Europe        |       | 9,367                                   |       | 9,267                                       |       |
| All other     |       | 9,992                                   |       | 10,586                                      |       |
|          |       | $                                       | 185,992    |                                        | $          | 187,312 |   |

 

Informationabout Major Customers:

For the three month period ended June 30, 2006, theCompany derived approximately 18% and 13% of it revenues from its two largestcustomers.  For the three month periodended June 30, 2005, the Company derived approximately 24% and 11 % of itsrevenue from its two largest customers. For the six month period ended June 30, 2006, the Company derivedapproximately 18% and 12% of its revenues from its two largest customers. Forthe six month periods ended June 30, 2005, the Company derived approximately25% of its revenues from its largest customer. As of June 30, 2006,approximately 11% of the Company’s accounts receivable balance was due from itssecond largest customer. As of December 31, 2005, approximately 15% and10% of the Company’s accounts receivable balance was due from its two largestcustomers. Other than what has been presented above, no individual customerrepresented 10% or more of our total consolidated revenues or accountsreceivable for or as of the periods presented.

17

----

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

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

This Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21-E of the Securities Exchange Act of 1934, which areintended to be covered by the safe harbors created by such acts. For thispurpose, any statements that are not statements of historical fact may bedeemed to be forward-looking statements, including the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our strategy, future operations, future expectations and futureestimates, future financial position or results and future plans and objectivesof management. Those statements in this Form 10-Q containing the words “believes,”“anticipates,” “plans,” “expects” and similar expressions constituteforward-looking statements, although not all forward-looking statements containsuch identifying words. These forward-looking statements are based on ourcurrent expectations, assumptions, estimates and projections about our Companyand the pharmaceutical, 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 “FactorsThat May Affect Future Results,” many of which are beyond our control.Although we believe that the assumptions underlying our forward-lookingstatements are reasonable, any of the assumptions could be inaccurate. Actualresults may differ materially from those indicated by the forward-lookingstatements included in this Form 10-Q, as more fully described under “FactorsThat May Affect Future Results.” In light of the significant uncertaintiesinherent in the forward-looking statements included in this Form 10-Q, youshould not consider the inclusion of such information as a representation by usor anyone else that we will achieve such results. Moreover, we do not plan toupdate these forward-looking statements to reflect actual results or changes inassumptions, expectations or projections. In addition, our financial andperformance outlook concerning future revenues, margins, earnings, earnings pershare and other operating or performance results does not include the impact ofany future acquisitions, future acquisition-related expenses or accruals, orany future restructuring or other charges that may occur from time-to-timedue to management decisions and changing business circumstances and conditions.

**EXECUTIVE OVERVIEW**

We provide a broad array of solutions worldwide thatenable pharmaceutical and other life science companies to strategicallyoptimize their sales and marketing channels, clinical resources and complianceinitiatives. Our plan is to continue to diversify and expand our solutionsportfolio, customer base and geographic reach by leveraging our extensiveknowledge of the pharmaceutical and life sciences industries and capitalizingupon our deep relationships in these industries. Our strategy continues to relyon both internal growth and acquisitions to meet our growth objectives.

We have expanded both our portfolio of solutions andcustomer base and believe that this combination presents significantopportunity for future growth. In January and September 2005, webroadened and enhanced our service portfolio with our acquisitions ofBuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”), respectively.The Buzzeo acquisition expanded our sample and compliance management solutionofferings. The Optas acquisition enhanced our portfolio of marketing solutionsservices by expanding our privacy-safe relationship marketing solutions forpatients and physicians. We believe our acquisitions complement our existingbusiness operations by enhancing our solutions portfolio, increasing our accessto new customers and allowing deeper penetration into our current markets. Wehave also committed to investing in key initiatives to help drive futuregrowth. Our future growth is dependent on our ability to further penetrate themarkets in which we operate and increase the adoption rate of our expandedportfolio of solutions.

We evaluate our performance based upon a number ofoperating metrics. Key metrics are revenues, operating income, diluted netincome per share, operating cash flow and days sales outstanding. Our goal isto execute our strategy to yield growth in revenues, operating income anddiluted net income per share.

In 2006, we have announced an OperationalEffectiveness (“OE”) program to streamline our cost structure and realign theCompany to drive efficiency and support our growth objectives.   The OE program involves an extensive reviewof the entire Company from which we intend to identify a minimum of $20 millionof annualized cost savings during 2006. Our execution of the necessary cost saving actions will result inadditional severance and other associated costs during 2006. During the threemonths ended June 30, 2006, we have already identified a portion of our costsavings target, and certain actions have already been taken, which resulted inrestructuring and other charges of approximately $2.6 million during theperiod.  We expect to incur approximately$25 to $30 million of additional cash and non-cash charges related to OE duringthe third and fourth quarters of 2006. We do not expect to fully realize the savings from our OE initiatives in2006.

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 

18

----

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

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

are not reflective of the way we have managed ourbusiness, and therefore associated operating costs and assets by revenuecategory have not been available on a global basis. Based upon this, weoperated under one reportable segment for disclosure purposes under Statementof Financial Accounting Standards 131, “Disclosure About Segments of anEnterprise and Related Information” (“SFAS 131”) through March 31, 2006.During 2006, we initiated and completed a process to reorganize our businessand to capture transactional data in a format that will enable the reporting ofvarious financial information broken into three new discrete operatingsegments.  We have reclassified ourcurrent and historical revenues operating income, assets and other select datainto 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, and are required to be included in revenues andcosts based upon Emerging Issues Task Force (“EITF”) 00-10, “Accounting forShipping and Handling Fees and Costs.” These billable shipping transactions areprimarily related to our interactive marketing activities.

*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 are consideredto be overhead not attributable to any segment and as such, remain unallocatedin Corporate.  Included among theunallocated overhead remaining within Corporate are costs for equity basedcompensation, audit and tax fees, excess facilities, administrative staff, andother ancillary costs.

**CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

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

In December 2004, the FASB issued SFASNo. 123(R). SFAS 123(R) is a revision of SFAS No. 123, asamended, “Accounting for Stock-Based Compensation” (“SFAS 123”), andsupersedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). SFAS 123(R) eliminates thealternative to use the intrinsic value method of accounting that was providedin SFAS 123, which generally resulted in no compensation expense recordedin the financial statements related to the issuance of stock options or sharesissued under the Company’s Employee Stock Purchase Plan (“ESPP”).SFAS 123(R) requires that the cost resulting from all share-based paymenttransactions be recognized in the financial statements. SFAS 123(R)establishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires all companies to apply afair-value-based measurement method in accounting for generally all share-basedpayment transactions with employees.

We account for stock-based compensation in accordancewith the fair value recognition provisions of SFAS 123(R). Under the fairvalue recognition provisions of SFAS 123(R), stock-based compensation costis measured at the grant date based on the fair value of the award and isrecognized as expense over the appropriate vesting period. Determining the fairvalue of stock-based awards at the grant date requires judgment, includingestimating the expected life of stock options, the weighted-average expectedstock price volatility and weight-average risk-free interest rate. In addition,judgment is required in estimating the amount of stock-based awards that areexpected to be forfeited. If actual results differ significantly from theseestimates or different key assumptions were used, it could have a materialeffect on our Consolidated Financial Statements. See Note 3 of the Notesto the Unaudited Consolidated Financial Statements for additional informationregarding our adoption of SFAS 123(R).

**MERGERS AND ACQUISITIONS**

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

19

----

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

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

**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. In accordance with the purchase agreement, $1,800of the purchase price was held in escrow as of June 30, 2006. The $1,800 heldin escrow, less amounts claimed against escrow, if any, is payable as follows:approximately $600 within five business days after September 12, 2006; andapproximately $1,200 within five business days after March 12, 2007. Thevaluation of certain intangibles assets was finalized in the second quarter of2006. The assets acquired and liabilities assumed in connection with the Optasacquisition and pro forma results of operations are not deemed material to theconsolidated financial statements.

**Buzzeo**

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

The aggregate purchase price for Buzzeo wasapproximately $10,759, including $33 of legal and professional fees.Approximately $487 of the remaining purchase price was paid in April 2006.In accordance with the purchase agreement, $1,025 was released from escrow inthe first quarter of 2006. The valuation of certain intangibles assets wasfinalized in the fourth quarter of 2005. The assets acquired and liabilitiesassumed in connection with the Buzzeo acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

**RESULTS OF OPERATIONS**

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

**REVENUES**

 

|                     | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**        | ** ** | **2005 %**        | ** ** |
|---------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **          | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **          | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Revenues:           |       |                             |       |                |       |                  |       |              |       |              |       |   |   |
| Sales solutions     |       | $                                | 69,214     |                | $          | 80,257                |       | $                 | (11,043    | )                 | (14        | )% | 65 | % | 70 | % |
| Marketing solutions |       | 30,784                           |       | 28,467              |       | 2,317                 |       | 8                 | %          | 29                | %          | 25 | % |
| Emerging solutions  |       | 6,383                            |       | 6,342               |       | 41                    |       | 1                 | %          | 6                 | %          | 5 | % |
| Total revenues      |       | $                                | 106,381    |                | $          | 115,066               |       | $                 | (8,685     | )                 | (8         | )% | 100 | % | 100 | % |

 

Total revenues decreased by 8% for the three monthsended June 30, 2006 compared with the three months ended June 30, 2005. Totalrevenues in the United States decreased by 15% from the three months ended June30, 2005, and were $61,702, or approximately 58% of total revenues. Thisdecrease in the United States was primarily due to reduced spending by ourlargest customer, and a $4,000 one-time contract cancellation settlement from amid-market pharmaceutical company that exited the United States market recordedduring the three months ended June 30, 2005 partially offset by revenue fromthe September 2005 acquisition of Optas and organic growth in our MarketingSolutions business.  Our internationalrevenues were $44,679, or approximately 42% of total revenues in the quarter,which increased by 6% from 2005, which was primarily due to increased licensefee revenues in our Asia market, partially offset by unfavorable foreigncurrency impact in Asia and the roll-off of a larger European customer duringthe second quarter of 2005.

20

----

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

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

**OPERATING COSTS &EXPENSES**

|                                            | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase/**         | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **                                 | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Operating Costs  & Expenses:           |       |                             |       |                |       |                  |       |              |       |              |       |   |   |
| Operating costs (including shipping)       |       | $                                | 59,398     |                | $          | 58,829                |       | $                 | 569        |              | 1          | % | 56 | % | 51 | % |
| Selling, general and administrative        |       | 42,095                           |       | 34,075              |       | 8,020                 |       | 24                | %          | 40                | %          | 30 | % |
| Research and development                   |       | 1,494                            |       | 1,454               |       | 40                    |       | 3                 | %          | 1                 | %          | 1 | % |
| Restructuring and other charges            |       | 2,578                            |       | —              |       | 2,578                 |       | NM                |       | 2                 | %          | 0 | % |
| Amortization of acquired intangible assets |       | 1,035                            |       | 1,130               |       | (95                   | )          | -8                | %          | 1                 | %          | 1 | % |
| Total operating  costs & expenses      |       | $                                | 106,600    |                | $          | 95,488                |       | $                 | 11,112     |              | 12         | % | 100 | % | 83 | % |

 

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 June 30,2006, we have already identified a portion of our cost savings target, andcertain actions have already been taken, which resulted in restructuring andother charges of approximately $2.6 million during the period.  We expect to incur significant additionalcharges related to OE during the third and fourth quarters of 2006.  We do not expect to fully realize the savingsfrom these efforts in 2006.

***OPERATING COSTS(including shipping).***Operating costs increased 1% for thethree months ended June 30, 2006 compared with the three months ended June 30,2005. As a percentage of revenues, operating costs increased to 56% for thethree months ended June 30, 2006 versus 51% for the three months ended June 30,2005. This increase was due to our 2005 acquisition of Optas, increasedmarketing and compliance solutions business, which require higher incrementalcost to deliver, and increased pass-through postage costs.

***SELLING, GENERAL ANDADMINISTRATIVE (SG&A).***SG&A expenses increased24% for the three months ended June 30, 2006 compared with the three monthended June 30, 2005. The SG&A cost increased due to higher costs related tostock based compensation expense of $2,145, strategic consulting costs relatedto our effort to realign the Company and increased other compensation expense.As a percentage of revenues, SG&A increased to 40% for the three monthsended June 30, 2006, up from 30% compared with the three months ended June 30,2005.

***RESEARCH ANDDEVELOPMENT (R&D).***R&D expenses for the threemonths ended June 30, 2006 was flat versus the three months ended June 30,2005. As a percentage of revenues, R&D expenses remained flat at 1% for thethree month periods ended June 30, 2006 and June 30, 2005. R&D expensesplus additions to capitalized software development costs, increased 23% from$2,486 for the three months ended June 30, 2005, to $3,057 for the three monthsended June 30, 2006. This increase in gross R&D was primarily due to thecapitalized development of a new handheld electronic signature captureapplication which involved resources that are normally billable to clients andtherefore not typically included within gross R&D spend.

***RESTRUCTURING ANDOTHER CHARGES.***During the three months ended June 30,2006, we recorded $2,578 of restructuring and other charges. This chargeincluded approximately $2,042 of severance and $536 of costs related to there-focusing of our Japanese data business, all relating to our 2006 OEinitiative. No such charges were incurred for the three months ended June 30,2005. We expect to incur approximately $25 to $30 million of additional chargesrelated to OE during the third and fourth quarters of 2006, and some chargesmay also be incurred during the early part of 2007.

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.***Amortization of acquired intangible assetsdecreased 8% over the three months ended June 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 Schwarzeck, Buzzeo and Optas acquisitions.

***PROVISION FORINCOME TAXES.***Our effective income tax expense rateincreased to 433.6% for the three months ended June 30, 2006, from 38.5% forthe three months ended June 30, 2005. The significant increase in our effectivetax rate is primarily driven by the inability to benefit from losses in certainforeign jurisdictions, the impact of SFAS 123(R), and increased permanentnon-deductible items over lower pre tax book earnings as compared to2005.  We believe that our full year effective tax rate will continue tobe volatile as the rate will continue to be impacted by our cost reductioninitiatives.

21

----

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

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

**SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**REVENUES**

|                     | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|---------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **          | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase/**         | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **          | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Revenues:           |       |                           |       |                |       |                  |       |              |       |              |       |   |   |
| Sales solutions     |       | $                              | 135,554    |                | $          | 147,998               |       | $                 | (12,444    | )                 | (8         | )% | 65 | % | 69 | % |
| Marketing solutions |       | 61,579                         |       | 53,781              |       | 7,798                 |       | 14                | %          | 29                | %          | 25 | % |
| Emerging solutions  |       | 12,377                         |       | 12,734              |       | (357                  | )          | (3                | )%         | 6                 | %          | 6 | % |
| Total revenues      |       | $                              | 209,510    |                | $          | 214,513               |       | $                 | (5,003     | )                 | (2         | )% | 100 | % | 100 | % |

 

Total revenues decreased by 2% for the six monthsended June 30, 2006 compared with the six months ended June 30, 2005. Ourinternational revenues were $83,518, or approximately 40% of total revenues forthe six months ended June 30, 2006, were relatively flat from 2005. Totalrevenues in the United States decreased by 4% from the six months ended June30, 2005, and were $125,992, or approximately 60%, of total revenues. Thisdecrease in the United States was primarily due to reduced spending by ourlargest customer, and a $4,000 one-time contract cancellation settlement from amid-market pharmaceutical company that exited the United States market recordedduring the six months ended June 30, 2005 which was partially offset by revenuefrom the 2005 acquisition of Optas and organic growth in our MarketingSolutions business.

**OPERATING COSTS &EXPENSES**

|                                            | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase/**         | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **                                 | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Operating Costs  & Expenses:           |       |                           |       |                |       |                  |       |              |       |              |       |   |   |
| Operating costs (including shipping)       |       | $                              | 119,149    |                | $          | 112,480               |       | $                 | 6,669      |              | 6          | % | 57 | % | 52 | % |
| Selling, general and administrative        |       | 81,891                         |       | 69,863              |       | 12,028                |       | 17                | %          | 39                | %          | 33 | % |
| Research and development                   |       | 3,228                          |       | 3,272               |       | (44                   | )          | (1                | )%         | 2                 | %          | 2 | % |
| Restructuring and other charges            |       | 2,578                          |       | 9,372               |       | (6,794                | )          | (72               | )%         | 1                 | %          | 4 | % |
| Amortization of acquired intangible assets |       | 2,057                          |       | 2,380               |       | (323                  | )          | (14               | )%         | 1                 | %          | 1 | % |
| Total operating  costs & expenses      |       | $                              | 208,903    |                | $          | 197,367               |       | $                 | 11,536     |              | 6          | % | 100 | % | 92 | % |

 

***OPERATING COSTS(including shipping).***Operating costs increased 6% for thesix months ended June 30, 2006 compared with the six months ended June 30,2005. As a percentage of revenues, operating costs increased to 57% for the sixmonths ended June 30, 2006 versus 52% for the six months ended June 30, 2005.This increase was due to our September 2005 acquisition of Optas, increasedmarketing and compliance solutions business which require higher incrementalcosts to deliver and increased pass-through postage costs.

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).***SG&A expensesincreased 17% for the six months ended June 30, 2006 compared with the sixmonths ended June 30, 2005.  SG&Acost increased due to higher costs related to stock based compensation expenseof $4,067, and strategic consulting costs related to our effort to realign theCompany and increased other compensation expense. As a percentage of revenues,SG&A increased to 39% for the six months ended June 30, 2006, up from 33%compared with the six months ended June 30, 2005.

***RESEARCH ANDDEVELOPMENT (R&D).***R&D expenses for the sixmonths ended June 30, 2006 was relatively flat versus the six months ended June30, 2005. As a percentage of revenues, R&D expenses remained flat at 2% forthe six month period ended June 30, 2006 and June 30, 2005. R&D expensesplus additions to capitalized software development costs, increased 4% from$5,711 for the six months ended June 30, 2005, to $5,917 for the six monthsended June 30, 2006. This increase in gross R&D was primarily due to thecapitalized development of a new handheld electronic signature captureapplication which involved resources that are normally billable to clients andtherefore not typically included within gross R&D spend.

***RESTRUCTURING ANDOTHER CHARGES.***During the six months ended June 30, 2006,we recorded $2,578 of restructuring and other charges. The charges includeapproximately $2,042 of severance and $536 of costs related to the re-focusingof our Japanese data business, all relating to our 2006 OE initiative. Weexpect to incur significant additional restructuring costs during the remainderof 2006 in connection with our cost savings initiative.  During the six months ended June 30,2005, we recorded $7,649 of facility-related charges and a severance charge of$1,723. The facility charges consist 

22

----

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

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

of$6,619 related to vacating a New Jersey facility and for additional facilitiesvacated in previous periods due to changes in current market conditions, aswell as $1,030 related to the write-off of leasehold improvements associatedwith the exit of our New Jersey facility.  The $1,723 severance chargerelates to the elimination of certain senior and mid-level managementpositions.  We expect to incurapproximately $25 to $30 million of additional charges related to OE during thethird and fourth quarters of 2006.

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.***Amortization of acquired intangible assetsdecreased 14% over the six months ended June 30, 2005. The decrease primarilyreflects certain intangibles assets related to the Software AssociatesInternational (“SAI”) and Synavant acquisitions, which were fully amortized asof June 30, 2005, partially offset by additional amortization ofintangibles related to the Schwarzeck, Buzzeo and Optas acquisitions.

***PROVISION FORINCOME TAXES.***Our effective income tax expense rateincreased to 100.3% for the six months ended June 30, 2006, from 38.5% for thesix months ended June 30, 2005. The significant increase in our effective taxrate is primarily driven by the inability to benefit from losses in certainforeign jurisdictions, the impact of SFAS 123(R), and increased permanentnon-deductible items over lower pre tax book earnings as compared to2005.  We believe that our full year effective tax rate will continue tobe volatile as the rate will continue to be impacted by our cost reductioninitiatives.

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

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

***Sales Solutions***

|                                  | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                | 69,214     |                | $          | 80,257                |       | $ | (11,043 | ) | (14 | )% |
| Restructuring  and other charges |       | $                                | 759        |                | $          | —                |       | $ | 759 |   | N/A |   |
| Operating income                 |       | $                                | 12,133     |                | $          | 21,675                |       | $ | (9,542 | ) | (44 | )% |

 

Sales solutions revenues accounted for approximately65% of total Company revenues during the three months ended June 30, 2006,which decreased 14% compared with the three months ended June 30, 2005. Revenuesin the United States decreased by 19%, due to reduced spending by our largestcustomer, a $4,000 one-time contract cancellation settlement from a mid-marketpharmaceutical company that exited the United States market recorded during thethree months ended June 30, 2005 and a large client rollout project which wewere completing during the three months ended June 30, 2005.  We expect the trend of decreased spendingfrom our largest customer to continue. As a result, we currently expect lessrevenue from this customer in 2006 and beyond. Our current contract with thiscustomer for U.S. sales force effectiveness and related services has beenrenewed through 2006, subject to right of the customer to reduce or modifycertain services. The customer is re-evaluating a significant portion of suchU.S. services for 2007 in a request for proposal process in which we areparticipating. Our international sales increased by approximately $1,000 or 4%,primarily due to increased license fee revenues in our Asian market partiallyoffset by an unfavorable foreign currency impact in Asia and the roll-off of alarger European customer during the second quarter of 2005.

Operating income decreased by 44% compared with thethree months ended June 30, 2005.  Thisdecrease was primarily due to reduced spending by our largest customer for thethree months ended June 30, 2006, and a $4,000 one-time settlement recordedduring the three months ended June 30, 2005 and a large client rollout projectwhich we were completing during the three months ended June 30, 2005.

23

----

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

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

***Marketing Solutions***

|                                  | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                | 30,784     |                | $          | 28,467                |       | $ | 2,317 |   | 8 | % |
| Restructuring  and other charges |       | $                                | 954        |                | $          | —                |       | $ | 954 |   | N/A |   |
| Operating income                 |       | $                                | (2,493     | )                   | $          | 750                   |       | $ | (3,243 | ) | (432 | )% |

 

Marketing solutions revenues accounted for approximately29% of total Company revenues during the three months ended June 30, 2006,which increased by approximately 8% compared with the three months ended June30, 2005. This increase was primarily due to growth in our United Statesmarketing solutions business, which increased by 18% over the prior year,primarily from added revenue from our 2005 acquisition of Optas. Ourinternational marketing solution revenues increased by approximately 2%compared with the three months ended June 30, 2005, due to increases inconsulting and data, partially offset by a decrease in interactive marketingrevenues.

Also included in marketing solutions revenue is lowgross margin revenue consisting primarily of shipping fees which accounted forapproximately $6,122 or 6% of total revenues for the three months ended June30, 2006, and increased by approximately 9% compared with approximately $5,592for the three months ended June 30, 2005. Shipping revenues contribute littleto no margin and result from pass-through shipping costs associated with ourglobal integrated marketing business***.***

Operating (loss) incomedecreased by 432% compared with the three months ended June 30,2005.  This decrease was primarily due toseverance costs recorded in the three months ended June 30, 2006 and higherincremental costs to deliver various marketing solutions offerings in the threemonths ended June 30, 2006 as compared with the three months ended June 30,2005.

***Emerging Solutions***

|                                  | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                | 6,383      |                | $          | 6,342                 |       | $ | 41 |   | 1 | % |
| Restructuring  and other charges |       | $                                | 4          |                | $          | —                |       | $ | 4 |   | N/A |   |
| Operating income                 |       | $                                | (345       | )                   | $          | 770                   |       | $ | (1,115 | ) | (145 | )% |

 

Emerging solutions revenues accounted forapproximately 6% of total Company revenues during the three months ended June30, 2006, and increased by $41 or 1% compared with the three months ended June30, 2005. This increase was due to organic growth in revenues from ourcompliance solution services which grew by 38% and our European contract salesforce business which increased by 47% partially offset by a reduction ofongoing clinical solution services with our largest customer versus the threemonths ended June 30, 2005.

Operating (loss) incomedecreased by 145% compared with the three months ended June 30,2005.  This decrease was primarily due toa reduction of ongoing clinical solution services with our largest customerversus the three months ended June 30, 2005.

***Corporate***

|                                  | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Operating  expenses              |       | $                                | (9,514     | )                   | $          | (3,617                | )          | $ | (5,897 | ) | 163 | % |
| Restructuring  and other charges |       | $                                | 861        |                | $          | —                |       | $ | 861 |   | N/A |   |

 

Operating expenses increasedby 163% compared with the three months ended June 30, 2005.  This increase was primarily due to severancecosts recorded, higher costs related to stock based compensation expense,strategic consulting costs related to our effort to realign the Company for thethree months ended June 30, 2006 and increased other compensation expenses.

24

----

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

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

**SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

***Sales Solutions***

|                                  | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                              | 135,554    |                | $          | 147,999               |       | $ | (12,445 | ) | (8 | )% |
| Restructuring  and other charges |       | $                              | 759        |                | $          | —                |       | $ | 759 |   | N/A |   |
| Operating income                 |       | $                              | 22,052     |                | $          | 33,346                |       | $ | (11,294 | ) | (34 | )% |

 

Sales Solutions revenues accounted for approximately65% of total Company revenues during the six months ended June 30, 2006, anddecreased 8% compared with the six months ended June 30, 2005. Revenues in theUnited States decreased by 9%, due to reduced spending by our largest customer,a $4,000 one-time contract cancellation settlement from a mid-marketpharmaceutical company that exited the United States market recorded during thesix months ended June 30, 2005 and a large client rollout project which we werecompleting during the six months ended June 30, 2005.  We expect the trend of decreased spendingfrom our largest customer to continue. As a result, we currently expect lessrevenue from this customer in 2006 and beyond. Our current contract with thiscustomer for U.S. sales force effectiveness and related services has beenrenewed through 2006, subject to right of the customer to reduce or modifycertain services. The customer is re-evaluating a significant portion of suchU.S. services for 2007 in a request for proposal process in which we areparticipating.  International salesdecreased by approximately $1,500 or 3%, primarily due to the roll-off of alarger European customer during the second quarter of 2005 and reduced Europeanlicense fees, which was partially offset by growth in license revenues in Asiaand increased ongoing service fees resulting from regional deals Latin America.

Operating income decreased by 34% compared with thesix months ended June 30, 2005.  Thisdecrease was primarily due to reduced spending by our largest customer for thesix months ended June 30, 2006, and a $4,000 one-time settlement recordedduring the six months ended June 30, 2005 and a large client rollout projectwhich we were completing during the six months ended June 30, 2005.

***Marketing Solutions***

|                                  | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                              | 61,578     |                | $          | 53,781                |       | $ | 7,797 |   | 14 | % |
| Restructuring  and other charges |       | $                              | 954        |                | $          | —                |       | $ | 954 |   | N/A |   |
| Operating loss                   |       | $                              | (3,776     | )                   | $          | (422                  | )          | $ | (3,354 | ) | 795 | % |

 

Marketing solutions revenues accounted forapproximately 29% of total Company revenues during the six months ended June30, 2006, and increased by approximately 14% compared with the six months endedJune 30, 2005. This increase was primarily due to growth in our United Statesbusiness, which increased by 49% over the prior year, primarily from growth inour interactive marketing business and added revenue from our September 2005acquisition of Optas. Growth in interactive marketing revenues resulted fromincreased services to one of our larger customers and other new business. Ourinternational marketing solution revenues increased by approximately 2%compared with the six months ended June 30, 2005, due to increases inconsulting and data, partially offset by a decrease in interactive marketingrevenues.

Also included in marketing solutions revenue is lowgross margin revenue consisting primarily of shipping fees which accounted forapproximately $12,318 or 6% of total revenues for the six months ended June 30,2006, which increased by approximately 13% compared with approximately $10,876for the six months ended June 30, 2005. Shipping revenues contribute little tono margin and result from pass-through shipping costs associated with ourglobal integrated marketing business***.***

Operating loss increased$3,354 from the six months ended June 30, 2005 to $3,776 for the sixmonths ended June 30, 2006.  Thisincrease was primarily due to restructuring costs recorded in the six monthsended June 30, 2006 and higher incremental costs to deliver various marketingsolutions offerings for the six months ended June 30, 2006 as compared with thesix months ended June 30, 2005.

25

----

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

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

***Emerging Solutions***

|                                  | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                              | 12,377     |                | $          | 12,734                |       | $ | (357 | ) | (3 | )% |
| Restructuring  and other charges |       | $                              | 4          |                | $          | —                |       | $ | 4 |   | N/A |   |
| Operating (loss) income          |       | $                              | (552       | )                   | $          | 979                   |       | $ | (1,531 | ) | (156 | )% |

 

Emerging solution revenues accounted for approximately6% of total Company revenues during the six months ended June 30, 2006, whichdecreased by $357 or 3% compared with the six months ended June 30, 2005. Thisdecrease was due to a reduction of ongoing clinical solution services with ourlargest customer, partially offset by organic growth in revenues from ourcompliance solution services, which grew by 39% and our European contract salesforce business, which increased by 40% versus the six months ended June 30,2005.

Operating income decreasedby $1,531 from income to a loss of $552 as compared with the six monthsended June 30, 2005.  This decrease wasprimarily due to a reduction of ongoing clinical solution services with ourlargest customer versus the six months ended June 30, 2005.

***Corporate***

|                                  | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** | **%**                 | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** | **$ Increase** | ** ** | **Increase /**   | ** ** |
| ** **                       | ** ** | **2006**                       | ** ** | **2005**            | ** ** | **/ (Decrease)** | ** ** | **(Decrease)** | ** ** |
| Operating expenses               |       | $                              | (17,117    | )                   | $          | (16,757               | )          | $ | (360 | ) | 2 | % |
| Restructuring and other  charges |       | $                              | 861        |                | $          | 9,372                 |       | $ | (8,511 | ) | (91 | )% |

 

Operating expenses increasedby $360 from $16,757 to $17,117 for the six months ended June 30, 2006.  This increase was primarily due torestructuring costs recorded, higher costs related to stock basedcompensation expense, strategic consulting costs related to our effort torealign the Company and increased other compensation expenses.

**LIQUIDITY AND CAPITAL RESOURCES**

As of June 30, 2006, working capital was $88,231compared to $82,247 as of December 31, 2005. Cash and cash equivalentswere $80,395 as of June 30, 2006, compared to $66,145 as of December 31,2005. These increases were primarily attributable to cash generated byoperating activities offset by payments made in connection with purchase ofproperty and equipment.

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $21,906and $20,994 for the six month periods ended June 30, 2006 and 2005,respectively. The increase was primarily related to the collections of accountsreceivable and depreciation and amortization. During the three months endedJune 30, 2006, our accounts receivable days sales outstanding decreased to 58,from 67 days for the three months ended December 31, 2005, due to thecollections of previously deferred revenue in late December 2005 andimprovements in our collection process during the six months ended June 30,2006. Our accrued facility and other charges resulted in lower net income forthe six months ended June 30, 2005, but had a minimal effect on our operatingcash flows. Future payments of these accruals will have a negative impact onfuture operating cash flows. Impacting our operating cash flow were payments ofincome taxes, purchase accounting restructuring charges, and accounts payableand accrued expenses.

Cash used in investing activities was $9,694 for thesix months ended June 30, 2006, which was primarily attributable to purchasesof property and equipment as well as additions to capitalized softwaredevelopment costs. Cash used in investing activities was $30,364 for the sixmonths ended June 30, 2005, which included payments for the Buzzeo and UtoBrain acquisitions as well as additions to capitalized software developmentcosts and purchases of property and equipment. Additions of property andequipment in 2005 primarily related to our new hardware facility in New Jersey,as well as investing in our helpdesk automation process and interactivemarketing machinery.

As anticipated, purchases of property and equipmentdecreased for the six months ended June 30, 2006 versus the comparable prioryear 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.This expected range of capital spending does not include any capitalrequirements that could be required in support of streamlining our coststructure, which could require 

26

----

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

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

additionalcapital spending in support of business automation, facility consolidation, orother improvement initiatives. We review our capital expenditure programperiodically and adjust it as required to meet current needs.

Cash provided by financing activities was $1,246 forthe six months ended June 30, 2006, compared to $1,637 for the six months endedJune 30, 2005. The decrease of $391 was primarily attributed to lower proceedsfrom the issuance of common stock.

We expect to spend approximately $25,000 to $30,000 incash relating to our OE initiative, excluding capital investments.

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, exclusiveof cash required for possible future acquisitions of businesses, products andtechnologies, during the next twelve to eighteen months. There can be noassurance, however, that our business will continue to generate cash flow atcurrent levels or that anticipated operational improvements will be achieved.Our ability to generate future cash flows depends on our future performance andfinancial results, which, to a certain extent, are subject to generalconditions in or affecting the pharmaceutical and life sciences industry and togeneral economic, political, financial, competitive and regulatory factorsbeyond 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 thoserelated to (a) a maximum leverage ratio at the end of any fiscal quarter,(b) a minimum interest coverage ratio at the end of any fiscal quarter and(c) a minimum fixed charge coverage ratio at the end of any fiscalquarter. The Agreement also restricts our ability to create or assume liens,dispose of assets, consolidate or merge, extend credit, incur otherindebtedness or pay cash dividends. As of June 30, 2006, we were in compliancewith all covenants and did not have any amounts outstanding under theAgreement.

Our principal commitments at June 30, 2006 consistedprimarily of obligations under operating and capital leases as well as futureminimum guarantees to certain vendors. Future minimum payments on theseobligations are as follows:

|                                  | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **July 1, 2006  Through  December 31,**

**2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
| Capital leases                   |       | $                                         | 2,290      |   | $ | 653 |   | $ | 1,565 |   | $ | 72 |   | $ | — |   | $ | — |   | $ | — |   |
| Minimum  guarantees              |       | 4,912                                     |       | 912 |   | 2,000 |   | 2,000 |   | — |   | — |   | — |   |
| Operating leases  (1)            |       | 90,176                                    |       | 10,427 |   | 16,618 |   | 12,969 |   | 11,902 |   | 10,892 |   | 27,368 |   |
| Total                            |       | $                                         | 97,378     |   | $ | 11,992 |   | $ | 20,183 |   | $ | 15,041 |   | $ | 11,902 |   | $ | 10,892 |   | 27,368$ |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)             Operatinglease amounts include $15,205 of future operating lease payments, excludingestimated future sublease income, accrued for in accrued facility charges andin the purchase accounting restructuring accruals related to the Synavant andSAI acquisitions.

As of June 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 June 30, 2006, $600 has been paid, with $400 of thecommitment remaining. The agreement has a termination date of December 11,2010, subject to extension with the consent of a majority in interest of thelimited partners. This asset is recorded within other assets in theaccompanying consolidated balance sheet.

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

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

27

----

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

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

**WE DEPEND ON A FEWMAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES**

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

Asignificant agreement with our largest customer covering U.S. salesforceeffectiveness services is scheduled to renew on January 1, 2007, subjectto a right of the customer to terminate at renewal. The customer isre-evaluating a significant portion of such U.S. services for 2007 in a processin which we are participating. We cannot assure you that the contract willrenew for 2007, that it will renew upon substantially similar terms or that itwill cover substantially similar services as those currently provided to thiscustomer.

**OUR BUSINESS IS HEAVILY DEPENDENT ON THEPHARMACEUTICAL INDUSTRY**

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

•         thesignificant and continuing consolidation of the pharmaceutical industry 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.

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

**OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OURPRODUCTS**

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

**WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

Aspart of our business strategy, we have acquired, and in the futuremay acquire, businesses that offer complementary 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 factors could have a material adverseeffect on our revenues and earnings.

28

----

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

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

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

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

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

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

**THE LENGTHY SALES AND IMPLEMENTATION CYCLES FOR SFESOLUTIONS MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES**

Theselection of a sales force effectiveness (SFE) solution generally entails anextended decision-making process by our customers because of the strategicimplications, substantial costs and significant commitment of resourcesassociated with a customer’s license or implementation of the solution. Giventhe importance of the decision, senior levels of management of our customersare often involved in the process and, in some instances, their board ofdirectors may also be involved. As a result, the decision-making processtypically takes nine to eighteen months, and in certain cases longer. Inaddition, other factors, unrelated to our product and services, such asacquisitions, product delays, or other issues, may also significantly impactthe timing and amounts of buying decisions. Accordingly, we cannot fullycontrol or predict the timing of our execution of contracts with customers.Prior sales and implementation cycles cannot be relied upon as any indicationof future cycles.

Inaddition, an implementation process of three to six or more months before thesoftware is rolled out to a customer’s sales force is customary. However, if acustomer were to delay or extend its implementation process, our quarterlyrevenues may decline below expected levels and could adversely affect ourresults of operations.

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE**

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

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

•         potentialdelays in recognizing revenue from license and other transactions;

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

•         variationsin the fiscal or quarterly cycles of our customers.

Inaddition, we establish our expenditure levels for product development, salesand marketing and some of our other operating expenses based in largepart on our expected future revenues and anticipated competitiveconditions. In particular, we frequently add staff in advance of new businessto permit adequate time for training. If the new business is subsequentlydelayed, canceled or not awarded, we will have incurred expenses without theassociated revenues. We also may increase sales and marketing expenses ifcompetitive pressures become greater than originally anticipated. Since only asmall portion of our expenses varies directly with our actual revenues, ouroperating results and profitability are likely to be adversely anddisproportionately affected if our revenues fall below our targeted goals orexpectations.

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

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

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

29

----

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

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

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

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

**FUTURE RESTRUCTURING MAY ADVERSELY IMPACT OUROPERATIONS**

Wehave announced and are executing plans to identify and reduce costs in ourbusiness. As a result, we expect to incur severance and other associated costsfor these actions which may adversely affect our future operating results.

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

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

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

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

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

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

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

•         address thechanging and increasingly sophisticated needs of our customers.

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

Competitionfor software products has been characterized by shortening product cycles. Wemay be materially and adversely affected by this trend if the productcycles for our products prove to be shorter than we anticipate. If thathappens, our business, operating results or financial condition could beadversely affected.

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

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

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

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

Thereare a number of other companies that sell CRM and SFE products and relatedservices that specifically target the pharmaceutical industry, includingcompetitors that are actively selling CRM and SFE software products in morethan one country and competitors that also offer CRM and SFE support services.Some of our competitors and potential competitors 

30

----

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

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

are part of large corporate groups and havesignificantly greater financial, sales, marketing, technology and otherresources than we have.

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

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

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

•         alliancesamong existing competitors;

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

•         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 ourcustomers and potential customers.

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

31

----

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

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

**WEMAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTSAND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCES THAT THE DEMAND FORINTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE**

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

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

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

Wehave recently significantly expanded and may in the future further expandour international operations and enter additional international markets. Thisexpansion would require significant management attention and financialresources that could adversely affect operating margins and earnings. Wemay not be able to maintain or increase international market demand forour products and services. If we do not, our international sales will belimited and our business, financial condition or results of operations could bematerially and adversely affected.

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

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

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

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

•         difficultiesin managing an organization spread on a global basis.

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

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

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

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

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

Ourfuture success depends, to a significant extent, upon the contributions of ourexecutive officers and key sales, technical and customer service personnel. Whilewe believe that we have implemented effective succession plans, we can make noassurance that the loss of key personnel and transitions to new key personnelwould not adversely impact our 

32

----

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

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

business or result in less effective management ortechnical teams.

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

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

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

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOTBE ABLE TO PROTECT COMPLETELY**

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

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

As acompany offering technology solutions, there can be no assurance that thirdparties also offering technology solutions will not assert infringement claims againstus in the future. While we believe that our solutions do not infringe uponproprietary rights of other parties, there can be no assurance that the Companywould not be found to infringe on the proprietary rights of others. Any suchfinding could have a material adverse impact on our operating results orfinancial 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**

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

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

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

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

Ourdata and analytics solutions are sourced, in part, from data provided throughstrategic relationships. Although we 

33

----

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

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

believe there are other sources for such data, thetermination of any of these relationships could diminish the breadth or depthof our data and analytics solutions. This termination or our failure toestablish new strategic relationships in the future could negatively impact ourbusiness, operating results or financial condition.

**FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESSTHE DEMAND FOR SOME OF OUR SOLUTIONS**

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

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

Throughthe interactive marketing business we acquired in the Synavant acquisition, 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**

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

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

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

**WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICHMAY AFFECT THE WORLD ECONOMY**

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

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

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

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

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

34

----

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

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

**OUR COMMON STOCK MAY BE SUBJECT TO PRICEFLUCTUATIONS**

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

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

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

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

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

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

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

•         futureacquisitions.

Further, the stock market has experienced 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 periodcovered by this report.  Based on theirevaluation as of June 30, 2006, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures were noteffective as of June 30, 2006 solely because of the material weakness ininternal 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., acomponent of our Marketing solutions segment. Specifically, the controls to ensure that revenue is recognized in theappropriate accounting period did not operate effectively at Optas, Inc.  This material weakness resulted in anoverstatement of revenue that was corrected by management in the consolidatedfinancial statements and not material to the overall presentation of Dendrite’sconsolidated financial statements. However due to the potential for additional misstatement this deficiencywas concluded to represent a material weakness. Optas, Inc., which representsapproximately 2% of consolidated revenues for the six months endedJune 30, 2006, was acquired during the third quarter of 2005 and, aspermitted by applicable SEC rules, was excluded from the scope of our internalcontrol assessment at December 31, 2005. 

As of the date of this filing, we are taking the stepsnecessary to fully remediate this material weakness in our internal controlover financial reporting.  These internalcontrols will be subjected 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.  There were no changes in our internalcontrols over financial reporting during the quarter ended June 30, 2006 thathave materially affected, or are reasonably likely to materially affect ourinternal controls over financial reporting. 

PART II. OTHERINFORMATION

**ITEM 1A. Risk Factors**

There are no materialchanges in the risk factors from those included in our 2005 annual report onForm 10-K.

However, in addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “*Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations*”under “FACTORS THAT MAY AFFECT FUTURE RESULTS” in this Quarterly Report onForm 10-Q, which could materially affect our business, financial conditionor future results. The risks described in this Quarterly Report onForm 10-Q are not the only risks facing our Company. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/ or operating results.

35

----

**ITEM4.  Submission of Matters to a Vote of Security Holders.**

The Company’s AnnualMeeting of Shareholders was held on April 19, 2006 (the “Annual Meeting”). Thefollowing proposals were considered and voted upon at the Annual Meeting:

1.  Election of Directors. The following directors were nominated for election tothe Board of Directors until the next Annual Meeting or until their successorsare duly chosen and qualified: John Bailye, John Fazio, Bernard Goldsmith,Edward Kfoury, Peter Ladell, Paul Margolis, John Martinson, Peter Tombros andPatrick Zenner. The votes cast and withheld for such nominees were as follows:

| Name               | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
| John Bailye        |       | 37,128,901 |       | 931,482      |       |
| John Fazio         |       | 37,352,936 |       | 707,447      |       |
| Bernard  Goldsmith |       | 32,559,545 |       | 5,500,838    |       |
| Edward Kfoury      |       | 34,886,715 |       | 3,173,668    |       |
| Peter Ladell       |       | 35,455,252 |       | 2,605,131    |       |
| Paul Margolis      |       | 37,134,101 |       | 926,282      |       |
| John Martinson     |       | 37,122,001 |       | 938,382      |       |
| Peter Tombros      |       | 37,256,836 |       | 803,547      |       |
| Patrick Zenner     |       | 32,367,474 |       | 5,692,909    |       |

 

2.  Ratificationof Independent Registered Public Accounting Firm. The ratification of theappointment of Deloitte & Touche LLP as the Company’s independentregistered public accounting firm for the Company’s 2006 fiscal year wasproposed. There were 38,029,720 votes cast for the proposal, 26,271 votescast against the proposal and 3,692 abstentions.

Based on these votingresults, each of the directors nominated was elected and the proposal wasapproved.

36

----

**ITEM6.****  Exhibits**
| 10.1   |   | Restated Employment Agreement dated May 16, 2006  between the Company and John E. Bailye                                                                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.2   |   | Employment Agreement dated May 26, 2006 between the  Company and Ronald W. Pearce                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.3   |   | Transition Agreement and General Release dated June  6, 2006 between the Company and Mark H. Cieplik                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.4   |   | Employment Agreement dated June 28, 2006  between the Company and Carl L. Cohen                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.5   |   | New Hire Authorization - Updated 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:August 9, 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   |   | Restated Employment Agreement dated May 16, 2006  between the Company and John E. Bailye                                                                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.2   |   | Employment Agreement dated May 26, 2006 between the  Company and Ronald W. Pearce                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.3   |   | Transition Agreement and General Release dated June  6, 2006 between the Company and Mark H. Cieplik                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.4   |   | Employment Agreement dated June 28, 2006  between the Company and Carl L. Cohen                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.5   |   | New Hire Authorization - Updated 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 |

 

37

----