<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    Form 10-K

      [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              Exchange Act of 1934

                       For the fiscal year ended December 31, 1998 
                   [ ] TRANSITION REPORT PURSUANT TO SECTION
                          13 OR 15(d) OF THE SECURITIES
                              Exchange Act of 1934

                         For the transition period from


                         Commission File Number 0-26138

                          Dendrite International, Inc.
             (Exact name of registrant as specified in its Charter)


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

                             1200 Mt. Kemble Avenue
                            Morristown, NJ 07960-6797
                                  973-425-1200

                   (Address, including zip code, and telephone
                  number (including area code) of registrant's
                           principal executive office)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


                                 Title of Class
                           Common Stock, no par value

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter time period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ]

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

The aggregate market value of the shares of the Common Stock held by
nonaffiliates of the registrant was approximately $406,081,037 based upon the
average bid and ask price of the Common Stock, which was $21.41 on March 23,
1999. The number of shares of Common Stock outstanding on that date was
22,956,497.

                       DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT DESCRIPTION                                                 10-K PART

Registrant's Notice of Annual Meeting of Shareholders and
Proxy Statement for the 1999 fiscal year expected to be dated           III
on or about April 15, 1999.
<PAGE>   2
Note:    The reader should be aware that, unless otherwise indicated, for
         purposes of this Form 10-K, all share and per share data have been
         adjusted to reflect a two-for-one stock split of Dendrite's common
         stock, which became effective on August 21, 1998. Dendrite(R),
         ForceAnalyzeRx(TM), ForceCompanion(TM), ForceMultiplieRx(TM),
         ForceOne(R), ForcePharma(TM), J6(TM), J Force(TM), NOMAD'S(TM),
         SalesPlus(TM), Series 4(TM), Series 5(TM) and Series 6(TM) are either
         trademarks or registered trademarks of Dendrite International, Inc. All
         other servicemarks, trademarks and trade names referred to in this
         prospectus are the property of their respective owners.

                                     PART I

ITEM 1.           BUSINESS.

GENERAL

         We succeeded in 1991 to a business co-founded in 1986 by John E.
Bailye, our current President and Chief Executive Officer. This business was
established to provide comprehensive Sales Force Effectiveness or SFE solutions
that would enable companies to manage, coordinate and control the activities of
large sales forces in complex selling environments, primarily in the
prescription-only pharmaceutical industry. Today, Dendrite is a leading
worldwide supplier of a comprehensive range of sales force software products and
support services to the pharmaceutical industry. We also supply our solutions to
manufacturers of consumer packaged goods, which are branded, non-durable goods
used by individual consumers. Our sales force effectiveness solutions are
designed to help our customers increase sales and improve the profitability of
their operations by allowing them to:

         -        improve their use of sales, customer and market information;
                  and

         -        manage, coordinate and control their sales activities more
                  efficiently in complex selling environments.

         Historically, we have focused our solutions on large sales forces
within the prescription-only pharmaceutical industry. We believe that our
extensive knowledge of the complex and unique selling processes in this industry
and our demonstrated ability to meet our customers' business needs have made
Dendrite the world's largest supplier of sales force effectiveness solutions to
the prescription-only pharmaceutical industry, based on the number of licensed
users.

         Our pharmaceutical customers include: Eli Lilly; Johnson & Johnson;
Kissei; Parke-Davis; Pfizer; SmithKline Beecham; and Takeda. Our customers in
the consumer packaged goods market or CPG include: Bacardi-Martini; Gillette; 
and Rayovac.

         Our current offering of sales force software products include:
ForcePharma; SalesPlus; ForceOne; ForceAnalyzerRx; and Force MultiplieRx, each
of which is described below under "Products and Services".

         We also offer a broad range of support services that enable our
customers to maximize the effectiveness of their Dendrite software products.
These services include software implementation, technical and hardware support
and sales force support. We typically provide these services under multi-year
agreements.

PRODUCTS AND SERVICES

         We develop and market a comprehensive range of sales force solutions
consisting of software products and a wide range of support services. These
solutions enable our customers to, among other things, to:

         -        realign sales territories;

         -        reallocate sales personnel on a customer or formulary basis;
                  and

         -        redeploy sales and marketing resources more rapidly and more
                  precisely.

         Our sales force software products integrate and process large volumes
of time-sensitive sales-related data for use in developing sales strategies. Our
current sales force software product offerings allow


                                       -2-
<PAGE>   3
customers to select many different combinations of features for different types
of sales forces. Our current product offerings typically do not require
customization in order to be implemented. In some circumstances, they are
configured to address data, market and other specific customer requirements.

PHARMACEUTICAL SALES FORCE SOFTWARE PRODUCTS

         We currently offer our pharmaceutical customers three primary software
products: ForcePharma; SalesPlus; and J Force. We also offer our pharmaceutical
customers an additional Windows CE(TM)-based software product, known as
ForceCompanion.

         FORCEPHARMA. We recently introduced ForcePharma, our new sales force
software product targeted at large multinational pharmaceutical customers, and,
to date, have entered into licensing agreements with four customers. ForcePharma
can be configured to support sales representatives and managers at all levels
within a sales organization.

         The table below describes the principal functions available for the
ForcePharma product:

                           FORCEPHARMA CLIENT FUNCTIONALITY


CUSTOMER MANAGEMENT        Provides an accurate, up-to-date picture of customer
                           and business opportunities. Allows quick and accurate
                           completion of call reports.

CUSTOMER TARGETING         Allows end user to generate lists using specific
                           database queries easily adapted to the user's needs.
                           Allows sales activity to be concentrated on the most
                           important customers.

PLANNER                    Allows end user to plan and record activity and
                           optimize scheduling and coordination of promotional
                           activities.

SAMPLE MANAGEMENT          Allows end user to track inventory and perform
                           adjustments, including transfers and returns.

MEETINGS                   Allows planning, recording and management of group
                           selling events, such as dinner meetings, speaker
                           programs, symposia, etc.

SYNCHRONIZATION MANAGER    Allows end user to synchronize multiple databases in
                           one communications session.


                           FORCEPHARMA SYSTEM CONFIGURATOR AND BACK OFFICE 
                           ADMINISTRATOR


SYSTEM CONFIGURATOR        Creates interfaces, permits modifications for
                           existing end users and allows the end user to select
                           the language to be used.

BACK OFFICE ADMINISTRATOR  Permits definition of business rules and allows
                           administration of sales force composition and
                           pre-configured drop down boxes.


                                       -3-
<PAGE>   4
         The ForcePharma product can be configured to address a customer's
specific business requirements, including the creation of new data structures.
New functions, which integrate fully with the existing configuration, can be
added over time, therefore allowing the customer to acquire a system that is
capable of evolving as the customer's business requirements change. A typical
major pharmaceutical customer will select a configuration depending on the
structure of the customer's sales force, the geographic region involved and the
type of pharmaceutical sales data available. Each function is offered with
specific continuing support services.

         The ForcePharma software product offers an enhanced user-friendly
graphical interface through a Microsoft(R) Windows environment and uses
object-oriented programming technology to enhance the modular properties of this
product. This product also contains features capable of analyzing both
territory-based and prescriber-level prescription sales data. This data permits
priority targeting of physicians and others who influence the pharmaceutical
prescription process.

         The majority of our installed base consists of Series 6 and, to a
lesser extent, Series 5 and Series 4 software products, the predecessor products
to ForcePharma. ForcePharma offers greater functionality than these predecessor
products. Customers licensed to use Series 6 and Series 5 products accounted for
approximately 92% of the sales representatives licensed to use our
pharmaceutical sales force software products as of December 31, 1997 and 91% as
of December 31, 1998.

         We are presently marketing to all of our customers a migration path
that will enable them to upgrade to the ForcePharma product. There can be no
assurance that any such migration will occur. The primary considerations for
customers determining whether to upgrade include the enhanced ability of
ForcePharma to address their evolving business needs and the significant cost of
making the transition to a competitor's product.

         Our Series 4 product is a DOS-based product. Customers licensed to use
Series 4 accounted for approximately 8% of the sales representatives licensed to
use our pharmaceutical sales force software products as of December 31, 1997 and
6% as of December 31, 1998. We have in the past supported users of our Series 4
products. However, we now consider this product mature and have advised our
customers that we will not support it in the future.

         We price our pharmaceutical sales force software products based on the
geographic area in which a customer uses our software product, the software
configuration and the total number of users. We also charge additional one-time
fees to install the software and annual fees for continuing services.

         SALESPLUS. In July 1998, we acquired Associated Business Computing N.V.
and an affiliated company (collectively, "ABC"). ABC is a Belgian-based
developer and provider of a software product known as SalesPlus, which is
marketed to mid-range European pharmaceutical companies. We are currently
marketing this software product for license under the SalesPlus name to our
pharmaceutical customers in Europe and, through a new strategic business unit,
SalesPlus Americas, in the United States. Dendrite configures SalesPlus prior to
sale, which saves our customers the time and costs associated with
configuration. This product is offered to those prescription-only pharmaceutical
customers whose business needs do not require all of the features of the
ForcePharma product. Like ForcePharma, these products support all levels within
a sales organization.

         J FORCE. We are now also offering for license in Japan a new SFE
product called J Force, which we developed specifically for the Japanese market.
This product contains functionality similar to that of ForcePharma, but has
graphical user interface and local market requirements that reflect the unique
characteristics of the Japanese prescription-only pharmaceutical market.

         FORCECOMPANION. We also offer ForceCompanion, a Windows CE(TM)-based
palmtop solution for remote use by pharmaceutical company sales representatives.
This software product furnishes a sales representative with physician profiles,
an appointment diary and signature capture for pharmaceutical sample management.



                                       -4-
<PAGE>   5
CPG INDUSTRY PRODUCTS

         FORCEONE. In May 1996, we acquired SRCI, S.A. ("SRCI"), France's
largest provider of custom-designed sales force software products for the
consumer packaged goods or CPG market. SRCI's core product, NOMAD'S, was
translated into English and we began to market the product in the United States
and Canadian markets under the name ForceOne in the fourth quarter of 1996.
ForceOne contains most of the same basic features as our ForcePharma product, as
well as features specifically created for the CPG industry. ForceOne can be
configured to support field sales representatives, their managers and key
account managers. The structure of our license, implementation and ongoing
service fees for our CPG customers is generally similar to that of our
pharmaceutical customers.

ANALYTICAL TOOLS

         We currently offer certain analytical software and reporting tools
under the ForceMultiplieRx and ForceAnalyzeRx product names, which may be used
either with our sales force software products or on a stand-alone basis. These
software products allow users to analyze data, such as prescription trends, and
produce reports based on the results of these analyses. These products also
provide customers with timely information that they can use in developing sales
strategies. The custom applications that we design with these products address a
wide variety of client business needs, including sales, market research,
clinical trials, new product launch analyses and sales reporting. 

         The back-end database for ForceMultiplieRx is populated with real time
third party prescription data. This data may be integrated with both internal
and external data sources to provide a customer with timely market information,
including physician prescribing patterns and their responsiveness to customer
sales and marketing efforts.

SERVICES

         Our customers often enter into agreements covering software
implementation, technical and hardware support and sales force support services.
Virtually all customers sign a software maintenance agreement that covers, among
other things, software defect resolution.

         For the year ended December 31, 1998, service revenues represented
approximately 89% of our total revenues. As a result of providing these ongoing
services, we have developed long-term strategic relationships with our
customers. For example, it is generally our experience that once we begin
supplying SFE solutions to our larger customers, we continue to provide support
services to them beyond the expiration of the initial service agreement. In
addition, as these relationships develop, our customers generally increase the
amount of support services they purchase from us. These relationships have
accounted for some of the increase in our service-related revenues.

         The complexity and size of the sales data and market research databases
being integrated and manipulated by our software products require highly
specialized information systems skills, particularly as new sources of data must
be integrated. The creation of a customer's database requires loading third
party data onto a central server or servers and encoding that data with
proprietary Dendrite data links. This encoding process allows the data to be
integrated into a functional sales-related database used by Dendrite's sales
force software products. We initially perform these services during installation
and, if requested, may continue to manage these information systems over time.
Many companies choose not to employ the information systems staff needed to
manage these large, complex databases and consider the outsourcing of these
tasks to us as both economically and operationally advantageous.

         We offer the full range of support services to all of our customers.
However, because customers of our SalesPlus and ForceOne products often require
less functionality, we expect to sell fewer support services to these customers
than to our ForcePharma customers.



                                       -5-
<PAGE>   6
          The following table outlines the principal services we offer:

                           IMPLEMENTATION SERVICES


PROJECT MANAGEMENT         Plan the configuration, if applicable, and
                           implementation of a Dendrite sales force software
                           product.

DATA MODELING              Create the customer's specific version of the
                           Dendrite data model.

CONFIGURATION              Configure software, if applicable, to meet customer
                           requirements for the software components of a
                           Dendrite sales force software product.

DATABASE MODELING          Create the customer's integrated database, including:

                           -        loading and linking third party prescription
                                    sales data, market research and other
                                    materials;

                           -        identifying geographic and/or functional
                                    (e.g., formulary) segments; and

                           -        allocating third party data by territory or
                                    other functional segment.

REMOTE COMPUTER HARDWARE   Load data onto customer's remote computer hardware
PREPARATION                (e.g., laptop and notebook computers) for training,
                           testing and use.

TRAINING                   Instruct on use and capabilities of Dendrite sales
                           force software products.


                           TECHNICAL AND HARDWARE SUPPORT SERVICES


PROJECT MANAGEMENT         Design, structure and manage technical support for
                           Dendrite sales force software products.

SOFTWARE CUSTOMIZATION     Modify source code to meet customer's needs.

DATABASE MAINTENANCE       Continue to support the customer's database,
                           including:

                           -        loading and linking new releases of third
                                    party data purchased by the customer; and

                           -        identifying new functional segments for data
                                    analysis.

SOFTWARE CODE MAINTENANCE  Provide software defect resolution and issue
                           performance updates, feature changes and, in certain
                           circumstances, new versions of products.

SERVER SUPPORT             Operate and maintain server computers.

ASSET MANAGEMENT           Provide asset control and maintain remote computer
                           hardware, including recapture of data on defective
                           equipment and replacement of defective equipment.


                                       -6-
<PAGE>   7
BUSINESS INTERRUPTION SERVICES      Develop business interruption plan for
                                    management of any unforeseen interference
                                    with Dendrite's provision of ongoing support
                                    services, including coordinating the
                                    retention of a disaster recovery provider
                                    for the customer's servers.

YEAR 2000 COMPLIANCE TESTING        Test customer's sales force automation
                                    production environment to determine whether
                                    it is Year 2000 compliant (i.e., accurately
                                    recognizes and processes dates beyond
                                    December 31, 1999). This testing covers not
                                    only the applicable Dendrite product, but
                                    also much of the related hardware, third
                                    party software and associated interfaces.


                                    SALES FORCE SUPPORT SERVICES


PROJECT MANAGEMENT                  Design, organize and manage support for
                                    customer sales forces.

RETRAINING                          Provide ongoing training on use and
                                    capabilities of Dendrite sales force
                                    software products.

TERRITORY REALIGNMENT               Assist the customer in planning and
                                    executing realignments of sales territories
                                    or functional (e.g., formulary-based)
                                    segments to allow more effective resource
                                    allocation.

TELEPHONE SUPPORT SERVICES          Provide direct customer service telephone
                                    support for Dendrite sales force and certain
                                    third party software products, seven days a
                                    week and in many foreign languages.

DATA ANALYSIS                       Provide pro-active prescription data
                                    analysis at a territory and physician level
                                    to a customer's sales representatives to
                                    improve sales and promotional campaigns.

         When a customer licenses a Dendrite sales force software product, we
typically establish an implementation services group for that customer, as well
as a separate support service group composed of both customer support and
technical support personnel who are primarily dedicated to servicing that
customer. However, for customers with smaller sales forces or sales forces with
specialized needs, such as non-home country language capability, the service
group may have responsibility for more than one client. Our service groups are
usually located at our facility in the country where a significant portion of
the customer's sales force is located. This proximity to our customers allows
the service group to provide assistance using a common language.

         Typically, we provide services under a multi-year contract. In North
America, we enter into service agreements directly with our customers. Outside
North America, we enter into service agreements through our local wholly owned
subsidiary or branch. Depending upon the size of the customer and the scope of
services to be performed, a dedicated service group may be comprised of five to
100 persons.

SOFTWARE CONFIGURATION

         Our pharmaceutical sales force software products are configured to
allow information access and communication among geographically dispersed sales
and marketing personnel and regional and home offices. The core of the
configuration is a central database server, which stores the customer
information and integrates and controls all data flow from external points. Most
of the servers used by our customers are manufactured by IBM, Compaq,
Hewlett-Packard or Sun Microsystems and run on UNIX(TM) or Windows NT(R)
operating systems. Servers are purchased or leased


                                       -7-
<PAGE>   8
by Dendrite's customers or leased for them by Dendrite. Some smaller customers
lease space on our servers located in various offices worldwide.

         Remote databases are stored on laptop and palmtop computers used by
sales representatives in the field and updated regularly over telephone lines
via modem. Regional sales managers using personal computers may access the
server via wide area networks. Our customers are responsible for selecting
computer equipment and for deciding when to upgrade or replace it.

         Our pharmaceutical sales force software products permit a sales
representative to send updated information to the central database server.
Similarly, the sales representative can receive information concerning upcoming
calls as well as additional sales efforts planned by other sales representatives
within the same company. This server, in most cases located at one of our
facilities, contains the customer's own database of sales-related information
which is generally maintained and operated for the customer by us.

         Our pharmaceutical sales force software products are designed to
provide information to those involved in sales and sales management and also to
all other levels within each sales organization including its senior management.
For example, information directly related to sales, such as travel and expense
reports, may be provided to the finance and personnel departments. Similarly,
representatives in the field can provide information concerning a physician that
can assist managed care sales personnel. These systems create the linkage which
connects a customer's sales and management functions with other business
departments.

         Our CPG software products are generally configured in a manner similar
to our pharmaceutical software products. However, CPG sales representatives are
more likely to use handheld or palmtop computing devices than laptop and desktop
personal computers.

MARKETING

CUSTOMERS

         Our customers include major multinational pharmaceutical companies,
including: Eli Lilly; Johnson & Johnson; Kissei; Parke-Davis; Pfizer;
Smith-Kline Beecham; and Takeda. In addition, in the CPG market, our customers
include: Bacardi-Martini; Gillette; and Rayovac.

         Revenues from Pfizer and Eli Lilly and Rhone-Poulenc Rorer (considering
all affiliates of each customer as part of that customer) in the aggregate
accounted for 58% of our revenues for the year ended December 31, 1996. Revenues
from Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer in the aggregate
accounted for 59% of our revenues for the year ended December 31, 1997. Revenues
from Pfizer, Johnson & Johnson and Parke-Davis accounted for 56% of our revenues
for the year ended December 31, 1998. The loss of all or a significant part of
the business of any of these customers would have a material adverse affect on
us. See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors that May Affect Future Operating Results --
We depend on a few major customers for a significant portion of our revenues".

SALES AND MARKETING

         We actively market our sales force software products and services to
prescription-only pharmaceutical and CPG companies in the United States, Western
Europe and the Pacific Rim using regional and local sales and marketing
personnel. Sales presentations are typically made to the customer's management
information services department or sales department. The selection of a sales
force software product often entails an extended decision-making process that
typically takes nine to twelve months. This process may involve senior levels of
management and, in some cases, the board of directors. See Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that May Affect Future Operating Results -- Our quarterly
results of operations may fluctuate significantly and may not meet market
expectations -- Our lengthy sales and implementation cycles make it difficult to
predict quarterly revenues".



                                       -8-
<PAGE>   9
         We work with a potential customer to identify its business requirements
in light of its markets, sales organization and operating structure. We draw
upon our broad product functionality and our experience in the applicable
vertical market to provide a comprehensive, yet highly targeted SFE solution.

         The positive response of our customers' sales representatives can
influence the decisions of those customers to license additional functionality
and/or to contract for expanded support services. Accordingly, we try to address
the concerns of sales personnel during the training portion of our
implementation services. We also promptly respond to customer communications and
evaluate them for indications of potential systemic problems or changing market
trends.

         We believe that our relationships with existing customers create
additional sales and marketing opportunities. Further, we believe that our
network of international offices allows us to serve our existing customers in
new locations. Many of our prescription-only pharmaceutical customers also have
over-the-counter operations that provide us with additional sales opportunities.

         Finally, we have occasionally entered into several arrangements with
business partners to market our products and/or services jointly. In addition,
we occasionally resell computer hardware and third-party software.

COMPETITION

         The current market for sales force software products and support
services is highly competitive. Many companies offer sales force automation or
SFA and SFE products and/or services in the prescription-only pharmaceutical and
CPG industries. We believe that there are approximately ten other companies that
sell sales force software products and specifically target the pharmaceutical
industry, including:

         -        four competitors that are actively selling in more than one
                  country; and

         -        three competitors that also offer sales force support
                  services.

We believe that most of our competitors offer sales force software products
and/or services that do not address the variety of customer needs that our
solutions address. However, these competing solutions may cost less than our
solutions.

         SFA software products differ greatly in terms of functionality,
flexibility and the type of hardware platform supported. Vendors of SFA software
products also generally do not provide support services to the same extent as
SFE vendors. We believe that our sales force software products and support
services offer customers a more comprehensive solution than SFA software
products. We believe that potential competitors must incur significant expense
in order to develop an integrated, configurable solution for the problems
presented by complex multinational selling environments. While we believe SFA
software products are less compelling solutions, these software products,
nonetheless, often cost less than SFE solutions. We also face competition from
many vendors that market and sell SFA and sales force software products and
services in the CPG market. In addition, we also compete with many companies
that provide support services similar to our services.

         Our sales force products and services compete with others principally 
on the basis of the following factors:

         -        product flexibility and configuration;

         -        platform configuration;

         -        name recognition;


                                       -9-
<PAGE>   10
         -        global competence;

         -        service standards;

         -        breadth of customer base; and

         -        technical support and service.

         We believe our SFE solutions compete favorably with respect to these
factors, and that we are positioned to maintain our market leadership position
through innovative new product and application developments and continued focus
on support services. Some of our existing competitors, as well as a number of
potential market entrants, have larger technical staffs, larger marketing and
sales organizations and greater financial resources than we do.

         In the prescription-only pharmaceutical vertical market, two of our
competitors, IMS Health Strategic Technologies and TVF (Cegedim), own and
control, either directly or through affiliated entities, proprietary data
collection systems. It may be possible for a competitor to gain a competitive
advantage in the pricing of its sales force software products with respect to
customers who are interested in purchasing the data it or its affiliates
collect. In addition, as new data sources emerge, companies providing such data
may enter the SFE market and provide SFE solutions to our customers directly.

         We believe that competition will increase as new competitors enter the
market to supply sales force software products and/or services and as existing
competitors expand their product lines or consolidate. We also expect that we
may encounter additional competition in the future from firms offering
outsourcing of information technology services and from vendors of software
products providing specialized applications not offered by us, including
enterprise resource planning vendors and data base vendors. We also face
potential competition from our customers and potential customers who may elect
to design and install or to operate their own sales force management systems.
For a discussion of the competitive risks we face in our business, see Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that May Affect Future Operating Results --Increased
competition may result in price reductions and decreased demand for our products
and services".

RESEARCH AND DEVELOPMENT

        We continue to take advantage of new technologies in developing new
products and services. We charged to expense approximately $6.8, $2.7 and $3.7
million of research and development in the years ended December 31, 1996, 1997
and 1998.

         We have capitalized certain costs related to the development of new
software products and the enhancement of existing software products consistent
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
Capitalized software development costs net of accumulated amortization were
$2,408,000 at December 31, 1997 and $3,503,000 at December 31, 1998.

PROPRIETARY RIGHTS

         We rely on a combination of methods to protect our proprietary
intellectual technology. These include:

         -        trade secret, copyright and trademark laws;

         -        license agreements with customers containing confidentiality
                  provisions;

         -        confidentiality agreements with consultants, vendors and
                  suppliers; and


                                      -10-
<PAGE>   11
         -        non-disclosure agreements with each of our executive officers
                  and technical employees.

         Existing United States copyright laws provide only limited protection 
and even less protection may be available under foreign laws. See Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that May Affect Future Operating Results -- Our business
depends on proprietary technology that we may not be able to protect
completely".

EMPLOYEES

         As of December 31, 1998, we employed 771 employees: 507 in the United
States; 210 in Europe; 46 in the Pacific Rim; and 8 in Brazil. 

         We believe that relations with our employees are good. Our employees 
generally are not part of any collective bargaining unit except for our
employees in France who are subject to a national collective bargaining
agreement. We believe that our future growth and success will depend upon our
ability to attract and retain skilled and motivated personnel, which is becoming
progressively more difficult for many technology and services companies in many
countries. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Future Operating
Results -- Our success depends on retaining our key senior management team and
on attracting and retaining qualified personnel."

ADDITIONAL INFORMATION

         For additional information regarding the Company's business, see Item 7
-- "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 2.           PROPERTIES.

        We lease a 101,500 square foot building, which serves as our corporate
headquarters in Morristown, New Jersey; a 26,280 square foot building in Basking
Ridge, New Jersey, which houses customer support personnel; and a 5,000 square
foot warehouse in Somerset, New Jersey. We also lease a total of 47,800 square
feet in twelve locations in Australia, Belgium, Brazil, France, Germany, Italy,
Japan, New Zealand, Spain and the United Kingdom for local management, sales
offices and customer support operations. We believe that our existing U.S.
corporate facilities will become insufficient for our needs in 1999, but that
adequate space will be available as needed.

         Servers located at our facilities are commonly maintained in a secured
area and are often subject to regular audit and inspection by our customers. We
maintain database servers located at our facilities for substantially all of our
U.S. customers and for a substantial majority of our international customers.
For these customers, we offer a business interruption service which is intended
to protect these customers' businesses in the event of any unforeseen
interruption, interference or disruption of the Company's provision of customer
support services. As part of this offering, we will assist a customer in
developing a business interruption plan, which will include the coordination of
the customer's retention of a disaster recovery provider.

ITEM 3.           LEGAL PROCEEDINGS.

         We are occasionally involved in litigation relating to personnel and
other claims arising in the ordinary course of business. We are not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a materially adverse effect on our business.

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

         Not applicable.


                                      -11-
<PAGE>   12
                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS.

         Our common stock, no par value, is quoted on the Nasdaq National
Market under the symbol "DRTE". As of March 23, 1999, there were approximately
95 holders of record of our common stock.

         The following table sets forth for the periods indicated the high and
low sale prices for our common stock as reported by the Nasdaq National Market
System.

<TABLE>
<CAPTION>
     Period                                                                               High          Low
     ------                                                                              -------      -------
<S>                                                                                      <C>          <C>
Quarter Ended March 31, 1997.........................................................    $  5.69      $  3.38
Quarter Ended June 30, 1997..........................................................       8.63         4.06
Quarter Ended September 30, 1997.....................................................      10.75         7.31
Quarter Ended December 31, 1997......................................................      11.00         7.81

Quarter Ended March 31, 1998.........................................................      15.38         9.44
Quarter Ended June 30, 1998..........................................................      19.00        12.78
Quarter Ended September 30, 1998.....................................................      27.88        15.50
Quarter Ended December 31, 1998......................................................      29.50        16.25
</TABLE>


         We have never paid any cash dividends on our capital stock and we do
not intend to pay any cash dividends on our common stock in the foreseeable
future. Our line of credit agreement with The Chase Manhattan Bank, N.A.
requires us to maintain a minimum net worth measured quarterly which is equal to
our net worth as of December 31, 1997 plus 50% of our net income earned after
January 1, 1998 and plus 75% of the net proceeds to us of any stock offerings.
This covenant effectively limits the amount of cash dividends we may pay. As of
December 31, 1998, we had approximately $43,806,000 available for the payment of
dividends under this covenant. See Note 4 of "Notes to Consolidated Financial
Statements" for a discussion of our line of credit agreement.


                                      -12-
<PAGE>   13
ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA.

SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------------
                                                     1994        1995         1996         1997          1998
                                                  ---------   ----------   ----------   ----------      --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>         <C>          <C>          <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
     License fees..............................   $  6,917      $ 6,042      $ 8,774      $ 7,707       $ 12,827
      Services.................................     32,509       48,080       57,472       70,739         99,691
                                                  --------      -------      -------      -------       --------
                                                    39,426       54,122       66,246       78,446        112,518
Costs of revenues:
     Cost of license fees......................      1,450          712          832        1,758          2,314
     Cost of services..........................     15,652       22,714       31,544       36,894         47,558
                                                  --------      -------      -------      -------       --------
                                                    17,102       23,426       32,376       38,652         49,872
                                                  --------      -------      -------      -------       --------
     Gross margin..............................     22,324       30,696       33,870       39,794         62,646

Operating expenses:
     Selling, general and administrative.......     16,392       21,252       26,440       29,905         39,853
     Research and development..................      1,703        2,274        6,834        2,676          3,687
     Write-off of in-process research and
       development.............................       --           --          2,640         --            1,230
                                                  --------      -------      -------      -------       --------
                                                    18,095       23,526       35,914       32,581         44,770
                                                  --------      -------      -------      -------       --------
     Operating income (loss)...................      4,229        7,170       (2,044)       7,213         17,876
Interest income................................         37          544        1,167          529          1,090
Other expense..................................       (361)         (33)        (391)        (201)          (317)
                                                  --------      -------      -------      -------       --------
     Income (loss) before income taxes.........      3,905        7,681       (1,268)       7,541         18,649
Income taxes...................................      1,578        2,987          644        2,931          7,382
                                                  --------      -------      -------      -------       --------
Net income (loss)..............................   $  2,327      $ 4,694      $(1,912)     $ 4,610       $ 11,267
                                                  ========      =======      =======      =======       ========
Net income (loss) per share:
     Basic.....................................   $   0.34      $  0.33      $ (0.09)     $  0.21       $   0.50
                                                  ========      =======      =======      =======       ========
     Diluted...................................   $   0.12      $  0.23      $ (0.09)     $  0.20       $   0.46
                                                  ========      =======      =======      =======       ========
Shares used in computing net income (loss)
  per share:
     Basic.....................................      6,810       14,202       22,112       22,262         22,580
                                                  ========      =======      =======      =======       ========
     Diluted...................................     18,666       20,762       22,112       23,036         24,623
                                                  ========      =======      =======      =======       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                    ----------------------------------------------------------
                                                       1994       1995         1996         1997        1998
                                                    --------    --------     --------     --------    --------
                                                                           (IN THOUSANDS)
<S>                                                 <C>         <C>          <C>          <C>         <C>
BALANCE SHEET DATA:
Working capital...........................          $  5,008    $ 28,655     $ 30,432     $ 33,981    $ 47,963
Total assets..............................            20,480      45,267       49,215       53,019      74,815
Capital lease obligations, less current portion           33          --           --           --         355
Redeemable Series A convertible preferred stock        6,976          --           --           --          --
Stockholders' equity .....................             1,695      32,310       35,176       38,173      56,670
</TABLE>


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

FORWARD-LOOKING STATEMENTS

         In addition to historical information, this Form 10-K contains
forward-looking statements that are subject to risks and uncertainties and that
could cause actual results to differ materially from those reflected in such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed herein. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's


                                      -13-
<PAGE>   14
opinion only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.

OVERVIEW

         We succeeded in 1991 to a business co-founded in 1986 by John E.
Bailye, the Company's current President and Chief Executive Officer. The
business was established to provide SFE solutions that would enable companies to
manage, coordinate and control the activities of large sales forces in complex
selling environments, primarily in the prescription-only pharmaceutical
industry. Today, our solutions combine software products with a wide range of
specialized support services. These services include software implementation,
technical and hardware support and sales force support. We develop, implement
and service sales force software products in the United States, Canada, Western
Europe, Japan, Australia, New Zealand and Brazil through our own sales, support
and technical personnel located in 13 offices worldwide.

         We generate revenues from two sources: fees from support services and
license fees. Service revenues, which account for a substantial majority of our
revenues, consist of fees from a wide variety of contracted services which we
make available to our customers, generally under multi-year contracts. We
generate implementation fees from services provided to configure and implement
the sales force software products for our customers. We receive technical and
hardware support fees for services related to, among other things, the operation
of our customers' server computers, maintenance of our customers' databases,
asset control and maintenance for our customers' remote hardware and ongoing
technical support. Technical and hardware support fees also include fees for
software maintenance services such as software defect resolution, performance
enhancements and, in some cases, product upgrades. We charge fees for these
maintenance services based on a percentage of applicable license fees, plus any
customization fees. We receive sales force support fees for organizing and
managing support of our customers' sales force, including training, telephone
support and data analysis services. Ongoing support fees are generally
negotiated at the commencement of a contract. However, it is our experience that
our larger customers increase the amount of services they purchase from us over
time. Fees for these additional services are typically based on the labor and
materials used to provide the applicable service.

         We charge our customers license fees to use our proprietary computer
software. Customers generally pay one-time perpetual license fees based upon the
number of users, the territory covered and the number of modules, or features,
in the particular software licensed by the customer.

         Historically, we have generally recognized license fees as revenue
using the percentage of completion method over a period of time that begins with
execution of the license agreement and ends with the completion of initial
customization and installation, if any. However, we believe that with some of
our newer sales force software products, such as ForcePharma and SalesPlus, our
customers will not require customization and therefore we may be able to
recognize license fees from these products upon delivery.

         We recognize additional license fees when customers agree to license
additional functions or enhancements, acquire an upgraded version of Dendrite's
software and/or when the maximum permitted number of users or initial geographic
coverage is exceeded. All license fees, domestic and export, are included under
the heading "License Fees -- United States" in Note 10 of "Notes to Consolidated
Financial Statements".

         The United States, the United Kingdom and France are our main markets.
We generated approximately 52% of our total revenues outside the United States
during the year ended December 31, 1996; approximately 42% during the year ended
December 31, 1997; and approximately 27% during the year ended December 31,
1998. This decrease in the percentage of revenues generated outside the United
States during 1998 was principally due to very strong revenue growth in our
pharmaceutical and CPG businesses in the United States.

         We bill services provided by our foreign branches and subsidiaries in
local currency. License fees for our products are generally billed in U.S.
dollars regardless of where they originate. Foreign license fees are shown as
United States


                                      -14-
<PAGE>   15
export revenues in Note 10 of "Notes to Consolidated Financial Statements".
Operating results generated in local currencies are translated into U.S. dollars
at the average exchange rate in effect for the reporting period.

         Our operating profits by geographic segments are shown in Note 10 of
"Notes to Consolidated Financial Statements". Our geographic operating profits
are affected primarily by our use of technical and support personnel to support
service revenues, costs associated with opening new or expanding existing
facilities and our ability to increase service revenues faster than the growth
in selling, general and administrative expenses.

RESULTS OF OPERATIONS

         The following table sets forth our results of operations expressed as a
percentage of total revenues for the periods indicated:


<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                           DECEMBER 31,
                                                     -----------------------
                                                     1996      1997     1998
                                                     ----      ----     ----
<S>                                                  <C>       <C>      <C>
Revenues:
    License fees..................................     13%       10%      11%
    Services......................................     87        90       89
                                                     ----      ----     ----
                                                      100       100      100
Costs of Revenues:
    Cost of license fees..........................      1         2        2
    Cost of services..............................     48        47       42
                                                     ----      ----     ----
                                                       49        49       44
                                                     ----      ----     ----
    Gross Margin..................................     51        51       56

Operating Expenses:
    Selling, general and administrative..........     40        38       36
    Research and development......................     10         4        3
    Write-off in-process research and development..     4        --        1
                                                     ----      ----     ----
                                                       54        42       40
                                                     ----      ----     ----
     Operating income (loss).......................    (3)        9       16
Other income.......................................     1         1        1
                                                     ----      ----     ----
     Income (loss) before income taxes.............    (2)       10       17
Income taxes.......................................     1         4        7
                                                     ----      ----     ----
Net Income (loss)..................................    (3)  %     6%      10%
                                                     ====      ====     ====
</TABLE>

         Certain reclassifications have been made to prior year amounts to
conform with current year presentations. During the second quarter of 1998, we
determined that costs associated with certain activities that were previously
classified as research and development expense should be classified as cost of
services as these expenditures relate to client specific activities. For
consistency of presentation, all prior periods have been reclassified.

YEARS ENDED DECEMBER 31, 1997 AND 1998

         REVENUES. Total revenues increased $34,072,000 or 43% from $78,446,000
in 1997 to $112,518,000 in 1998.

         License fee revenues increased 66% from $7,707,000 in 1997 to
$12,827,000 in 1998. This increase was primarily attributable to the recognition
of revenue related to license fees from several significant contracts in the
pharmaceutical division, sales to new customers in our consumer business
division and increased sales of third party software.


                                      -15-
<PAGE>   16
         Service revenues increased 41% from $70,739,000 in 1997 to $99,691,000
in 1998. This increase was primarily the result of an increase in our installed
base of sales force software products at both new and existing customers, the
commencement of major product rollouts, as well as the provision of additional
services to our existing customers.

         COST OF REVENUES. Cost of revenues increased $11,220,000 or 29% from
38,652,000 in 1997 to $49,872,000 in 1998.

         Cost of license fees increased 32% from $1,758,000 in 1997 to
$2,314,000 in 1998. Cost of license fees for 1998 represents the amortization of
capitalized software development costs of $1,392,000 and third party vendor
license fees of $922,000. Cost of license fees for 1997 represents the
amortization of capitalized software development costs of $1,100,000 and third
party vendor license fees of $658,000. The increase in the amortization of
capitalized software development costs in 1998 was due to the increase in gross
capitalized software development costs in 1998 as compared to 1997. The increase
in third party vendor license fees in 1998 was attributable to the increase in
third party software sales in 1998.

         Cost of services increased 29% from $36,894,000 in 1997 to $47,558,000
in 1998. This increase was primarily due to an increase in staff required to
support greater client activity including the use of higher cost consultants and
contractors. As a percentage of service revenues, however, cost of services
decreased from 52% of service revenues in 1997 to 48% in 1998. This decrease was
primarily the result of increased operational efficiencies in 1998 as well as
unusually high costs in the first quarter of 1997 associated with the carry-over
effect of expenses initially incurred in the fourth quarter of 1996 as discussed
under " -- Years Ended December 31, 1996 and 1997 -- Cost of Revenues".

         SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses
increased 33% from $29,905,000 in 1997 to $39,853,000 in 1998. This increase was
primarily attributable to increased staff required for sales and support
operations. As a percentage of revenue, SG&A expenses decreased from 38% in 1997
to 36% in 1998, due to leveraging the fixed cost elements in general and
administrative expenses over a higher revenue base.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 38% from $2,676,000 in 1997 to $3,687,000 in 1998. As a percentage of
revenues, research and development expenses remained relatively constant. The
increase in research and development expenses during the most recent period was
primarily attributable to increased spending on development of our CPG products,
the continued development of ForceMultiplieRx and the development of our next
generation pharmaceutical sales force software product, ForcePharma. With
respect to future research and development expenses, subject to market
conditions, we currently anticipate that such expenses will be approximately 4%
to 6% of revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Future Operating
Results -- Our quarterly results of operations may fluctuate significantly and
may not meet market expectations" and -- "Factors That May Affect Future
Operating Results --We may be unable to successfully introduce new products or
respond to technological change" in this Item 7.

         WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. We incurred a
one-time charge of $1,230,000 to record the write-off of in-process research and
development costs resulting from the acquisition of ABC. This amount represents
the estimated fair values, based on an independent appraisal, related to
in-process research and development projects which had not yet reached
technological feasibility.

         PROVISION FOR INCOME TAXES. The effective tax rate, excluding the
impact of the write-off of in-process research and development which is not tax
deductible, was reduced to 37% during 1998 as opposed to 39% during 1997. This
decrease was due primarily to the implementation of tax minimization strategies
throughout the world.

         ACQUISITION OF ABC. On July 24, 1998, we acquired 100% of the capital
stock of ABC for a combination of cash and stock equivalent to approximately
$4,013,000 and transaction costs of $150,000. The acquisition has been accounted
for using the purchase method of accounting, whereby the purchase price is
allocated to the assets and liabilities of ABC based on their respective fair
market values at the acquisition date. The excess of the purchase price


                                      -16-
<PAGE>   17
over the fair value of the net assets acquired was assigned to identifiable
intangibles. We assigned $1,230,000 to in-process research and development and
such amount was written off in the accompanying statement of operations. We also
recorded $850,000 as capitalized software and $2,226,000 as goodwill. ABC's
results of operations have been included in our Consolidated Financial
Statements from the date of acquisition.

YEARS ENDED DECEMBER 31, 1996 AND 1997

         REVENUES. Total revenues increased $12,200,000 or 18% from $66,246,000
in 1996 to $78,446,000 in 1997.

         License fee revenues decreased 12% from $8,774,000 in 1996 to
$7,707,000 in 1997. This decrease was primarily attributable to the recognition
of revenue related to license fees for a major European client during 1996,
partially offset by the inclusion of $796,000 in revenue associated with the
resale of third party software during 1997 versus $112,000 in revenue associated
with the resale of third party software during 1996.

         Service revenues increased 23% from $57,472,000 in 1996 to $70,739,000
in 1997. This increase was primarily the result of an increase in our installed
base of sales force software products with new and existing customers and the
provision of additional services to our existing customers, largely in the U.S.,
where the service revenue increase was $11,585,000 or 39%.

         COST OF REVENUES. Cost of revenues increased 19% from $32,376,000 in
1996 to $38,652,000 in 1997.

         Cost of license fees increased 111% from $832,000 in 1996 to $1,758,000
in 1997. In 1997, the cost of license fees represents the amortization of
capitalized costs of $1,100,000 and third party vendor license fees of $658,000.
In 1996, the cost of license fees represents the amortization of capitalized
costs of $739,000 and third party vendor license fees of $93,000.

         Cost of services increased 17% from $31,544,000 in 1996 to $36,894,000
in 1997, primarily due to an increase in the number of service representatives
and technical staff from the prior year. The increase was necessary to support
the increased client activity during the year. As a percentage of service
revenues, cost of services decreased from 55% of service revenues in 1996 to 52%
of service revenues in 1997. This decrease was due to certain events which
occurred in 1996, including:

         -        multiple customer delayed implementations for which we had
                  hired personnel for training, customer service and technical
                  support;

         -        costs associated with retaining a significant number of
                  independent contractors to complete client deliverables;

         -        delayed customer license purchase and upgrade decisions; and

         -        increased research and development spending.

As a result of these factors, we incurred a net loss of $3.3 million in the
fourth quarter of 1996.

         SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses
increased 13% from $26,440,000 in 1996 to $29,905,000 in 1997. As a percentage
of revenue, SG&A expenses decreased from 40% in 1996 to 38% in 1997. This
decrease was attributable to the fixed nature of certain SG&A costs, such as
rent and corporate salaries, as revenues increase.

         RESEARCH AND DEVELOPMENT. Research and development expenses decreased
61% from $6,834,000 in 1996 to $2,676,000 in 1997. As a percentage of revenues,
research and development expenses decreased from 10% for the


                                      -17-
<PAGE>   18
year ended December 31, 1996 to 4% for the year ended December 31, 1997. The
decrease in research and development expenses in 1997 was consistent with our
intentions, as peak development efforts associated with several new software
products decreased as these software products neared completion.

         PROVISION FOR INCOME TAXES. The effective tax rate was reduced to 39%
for the year ended December 31, 1997 as compared to 47% for the year ended
December 31, 1996, excluding the impact of the write-off of in-process research
and development which is not tax deductible. The reduction was due to the higher
base of net income relative to the amount of non-deductible expenses in the year
ended December 31, 1997 as compared to the year ended December 31, 1996.

QUARTERLY RESULTS OF OPERATIONS

         The following table sets forth certain unaudited consolidated statement
of operations data expressed in U.S. dollars for our eight most recently ended
fiscal quarters. This data has been derived from our unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles. Our
results of operations for a particular quarter are not necessarily indicative of
our results of operations for any future period. Our quarterly results have
varied considerably in the past and are likely to vary from quarter to quarter
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors that May Affect Future Operating Results --
Our quarterly results of operations may fluctuate significantly and may not meet
market expectations" in this Item 7.


<TABLE>
<CAPTION>
                                                                 QUARTERS ENDED
                                 ------------------------------------------------------------------------------------
                                 MARCH 31    JUNE 30   SEPT. 30   DEC. 31    MARCH 31    JUNE 30   SEPT. 30   DEC. 31
                                   1997       1997       1997       1997       1998       1998       1998      1998
                                 --------   --------   --------   --------   --------   --------   --------  --------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>        <C>        <C>        <C>        <C>        <C>        <C>       <C>
Statement of Operations Data:
Revenues:
    License fees ..............  $  1,094   $  1,725   $  2,370   $  2,518   $  2,971   $  4,299   $  1,116  $  4,442
    Services ..................    15,548     16,342     17,998     20,851     19,656     24,028     29,352    26,653
                                 --------   --------   --------   --------   --------   --------   --------  --------
                                   16,642     18,067     20,368     23,369     22,627     28,327     30,468    31,095
Costs of Revenues:
    Cost of license fees ......       273        392        729        365        361      1,024        379       550
    Cost of services ..........     9,795      8,333      8,795      9,971      9,894     12,402     13,645    11,616
                                 --------   --------   --------   --------   --------   --------   --------  --------
                                   10,068      8,725      9,524     10,336     10,255     13,426     14,024    12,166
                                 --------   --------   --------   --------   --------   --------   --------  --------
    Gross margin ..............     6,574      9,342     10,844     13,033     12,372     14,901     16,444    18,929

Operating Expenses:
    Selling, general, and
       administrative .........     6,373      7,636      7,678      8,217      8,459      9,962     10,280    11,153
    Research and development ..       683        653        606        734        899        870        847     1,069
    Write-off of in-process
       research and development        --         --         --         --         --         --      1,230        --
                                 --------   --------   --------   --------   --------   --------   --------  --------
                                    7,056      8,289      8,284      8,951      9,358     10,832     12,357    12,222
                                 --------   --------   --------   --------   --------   --------   --------  --------
      Operating income (loss) .      (482)     1,053      2,560      4,082      3,014      4,069      4,087     6,707
Interest income ...............       128        131        100        169        196        214        280       399
Other income (expense) ........       (57)       (95)       (21)       (27)      (321)       (45)       117       (68)
                                 --------   --------   --------   --------   --------   --------   --------  --------
    Income (loss) before
      income taxes (benefit) ..      (411)     1,089      2,639      4,224      2,889      4,238      4,484     7,038
Income taxes (benefit) ........      (145)       442      1,047      1,587      1,127      1,581      2,043     2,631
                                 --------   --------   --------   --------   --------   --------   --------  --------
Net income (loss) .............  $   (266)  $    647   $  1,592   $  2,637   $  1,762   $  2,657   $  2,441  $  4,407
                                 ========   ========   ========   ========   ========   ========   ========  ========
Net income (loss) per share:
    Basic .....................  $  (0.01)  $   0.03   $   0.07   $   0.12   $   0.08   $   0.12   $   0.11  $   0.19
                                 ========   ========   ========   ========   ========   ========   ========  ========
    Diluted ...................  $  (0.01)  $   0.03   $   0.07   $   0.11   $   0.07   $   0.11   $   0.10  $   0.18
                                 ========   ========   ========   ========   ========   ========   ========  ========
Shares used in computing
  net income (loss) per share:
    Basic .....................    22,450     22,142     22,201     22,252     22,324     22,418     22,705    22,883
                                 ========   ========   ========   ========   ========   ========   ========  ========
    Diluted ...................    22,450     22,736     23,226     23,316     23,900     24,302     24,818    25,107
                                 ========   ========   ========   ========   ========   ========   ========  ========
</TABLE>


                                      -18-
<PAGE>   19
LIQUIDITY AND CAPITAL RESOURCES

         We have historically financed our operations primarily through cash
generated by operations. Net cash provided by operating activities was
$24,206,000 for the year ended December 31, 1998, compared to cash provided by
operating activities of $3,318,000 for the year ended December 31, 1997. This
increase was due primarily to higher net income, as well as more efficient
accounts receivable and liability management during the year ended December 31,
1998, compared to the year ended December 31, 1997.

         Cash used in investing activities was $12,565,000 in the year ended
December 31, 1998, compared to cash obtained from investing activities of
$3,301,000 in the year ended December 31, 1997. This increase was due primarily
to the increase in short-term investments as well as the purchase of ABC in the
year ended December 31, 1998.

         On January 16, 1997, Dendrite's Board of Directors (the "Board of
Directors" or the "Board") approved a stock buy-back program initially limited
to $3,000,000, which, subject to further Board review and approval, could be
increased to a maximum of $10,000,000, but not greater than 9% of Dendrite's
outstanding shares of common stock. During the twelve month period ending
December 31, 1997, Dendrite repurchased 401,000 shares of common stock for a
value of $1,927,000. Dendrite did not repurchase any shares of common stock
during the period ending December 31, 1998.

         We obtained $3,610,000 of cash from financing activities in the year
ended December 31, 1998, compared to the use of $1,331,000 in cash from
financing activities in the year ended December 31, 1997. The change in our cash
provided from financing activities was due to an increase in the issuance of
common stock, primarily from the exercise of employee stock options during the
year ended December 31, 1998 and open-market purchases of our common stock
during the year ended December 31, 1997.

         We recently entered into a $15,000,000 revolving line of credit
agreement with The Chase Manhattan Bank, N.A. The agreement is available to
finance working capital needs and possible future acquisitions. The $15,000,000
line of credit agreement requires us to maintain a minimum consolidated net
worth, among other covenants, measured quarterly, which is equal to our net
worth as of December 31, 1997 plus 50% of our net income earned after January 1,
1998 and plus 75% of the net proceeds to us of any stock offering. This covenant
effectively limits the amount of cash dividends we may pay. At December 31,
1998, there were no borrowings outstanding under the agreement.

         Our working capital was approximately $33,981,000 at December 31, 1997
and $47,963,000 at December 31, 1998. We have no significant capital spending or
purchasing commitments other than normal purchase commitments and commitments
under facility and capital leases.

         On January 28, 1999, Dendrite filed a Registration Statement on Form
S-3 (the "Registration Statement") with the Securities and Exchange Commission
to register a proposed offering of 2,750,000 shares of common stock by the
Company and an additional 500,000 shares of common stock by certain selling
stockholders named in the Registration Statement. Dendrite will not receive any
of the proceeds from the sale of the shares of common stock being sold by the
selling stockholders.

         We regularly evaluate opportunities to acquire products or businesses
complementary to our operations. Such acquisition opportunities, if they arise,
and are successfully completed, may involve the use of cash or equity
instruments. We currently have no agreements to make any acquisitions.

YEAR 2000 READINESS DISCLOSURE

         The efficient operation of our business is dependent in part on our
internal computer software and operating systems (collectively, our "Internal
Programs and Systems"). Since 1997, as part of our Year 2000 compliance plan, we
have been evaluating our Internal Programs and Systems to identify potential
Year 2000 compliance problems. We have tested our Internal Programs and Systems
to verify Year 2000 compliance. As a result of the testing, we have determined


                                      -19-
<PAGE>   20
that some of our Internal Programs and Systems are not Year 2000 compliant. We
have begun and will continue to modify or replace some of our Internal Programs
and Systems to make them Year 2000 compliant. We are also communicating with our
suppliers and others to coordinate Year 2000 conversion and are requesting
assurances from all software vendors from which we may purchase or license
software that such software will correctly process all date information at all
times.

          To date, we have spent approximately $178,000 to evaluate, test and
remediate, if necessary, our Internal Programs and Systems for Year 2000
compliance problems and we expect to spend up to an additional $50,000 through
the end of second quarter of 1999. We will fund these costs with cash from our
operations. To date, we have not spent any material amount on evaluating the
Year 2000 compliance status of our software products and software products
licensed to its customers. Although we do not anticipate any future material
expenditures, our customers may require us to incur additional expenses
associated with remediating their software products. We expect that the expenses
and capital expenditures associated with achieving Year 2000 compliance will not
have a material adverse effect on our business, results of operations or
financial condition.

         We believe that we will be able to achieve Year 2000 compliance through
a combination of modification of some existing Internal Programs and Systems and
the replacement of other Internal Programs and Systems with new programs and
systems that are already Year 2000 compliant. We expect to have our Year 2000
compliance program substantially completed by the end of the second quarter of
1999. However, we cannot assure you that these efforts will be successful or
completed in a timely manner.

         We believe most of our sales force software products that we currently
offer to customers are Year 2000 compliant. We define "Year 2000 compliant" to
mean that the applicable Dendrite product is capable of recognizing and
processing date data beyond the Year 2000 as belonging to the correct century,
so long as all products (for example, hardware, firmware, and software including
interfacing programs, operating systems, and database engines) used with the
software are Year 2000 compliant and properly exchange date data with our
products.

         Some of our older products will not, and some may not, accurately
process dates beyond December 31, 1999. To the extent any of these products are
still in use in 1999, we will continue to attempt to migrate our customers to
products which are Year 2000 compliant. We cannot assure you that this will
occur. A failure to migrate any such customer to a product which is Year 2000
compliant could adversely affect our business, operating results or financial
condition. We may also experience increased expenses which we cannot recoup from
current customers in addressing their migration to software that is Year 2000
compliant. We have strongly encouraged each customer to have its product tested
by us for Year 2000 compliance.

         Because of our relatively advanced state of readiness, we have not yet
formulated a reasonably likely worst case scenario. During the second quarter of
1999, as we assess our state of readiness for January 1, 2000, we expect to
formulate this scenario and to prepare a contingency plan, if warranted. For a
discussion of the risks associated with the Year 2000, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors that May Affect Future Operating Results -- We are exposed to risks
associated with the Year 2000 -- Year 2000 Readiness Disclosure" in this Item 7.

                                      -20-

<PAGE>   21
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

        OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY
 
     Most of our sales force software products and services, also referred to as
sales force effectiveness or SFE solutions, are currently used in connection
with the marketing and sale of prescription-only drugs. This market is
undergoing a number of significant changes. These include:
 
- consolidations and mergers which may reduce the number of our existing and
  potential customers;
 
- reclassification of formerly prescription-only drugs to permit their
  over-the-counter sale;
 
- competitive pressures on our pharmaceutical customers resulting from the
  continuing shift to delivery of healthcare through managed care organizations;
  and
 
- changes in law, such as government mandated price reductions for prescription-
  only drugs, that affect the healthcare systems in the countries where our
  customers and potential customers are located.
 
     We cannot assure you that we can respond effectively to any or all of these
and other changes in the marketplace. Our failure to do so could have a material
adverse effect on our business, operating results or financial condition. See
"Business -- Industry Overview" for a discussion of the pharmaceutical industry
sales environment.
 
OUR QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY AND MAY NOT MEET
                              MARKET EXPECTATIONS
 
     Our results of operations may vary from quarter to quarter due to lengthy
sales and implementation cycles for our products, our fixed expenses in relation
to our fluctuating revenues and variations in our customers' budget cycles, each
of which is discussed below. As a result, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. It is possible that in some future period our results of
operations may be below the expectations of the public market analysts and
investors. If this happens, the price of our common stock may decline. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our quarterly operating results.
 
OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OUR
QUARTERLY REVENUES
 
     The selection of a sales force software product often entails an extended
decision-making process because of the strategic implications and substantial
costs associated with a customer's license of the software. Given the importance
of the decision, senior levels of management often are involved and, in some
instances, the board of directors may be involved in this process. As a result,
the decision-making process typically takes nine to twelve months, although in
some cases it may take even longer. Accordingly, we cannot control or predict
the timing of our execution of contracts with customers.
 
     In addition, an implementation process of three to six months is customary
before the software is rolled out to a customer's sales force. However, if a
customer were to delay or extend its implementation process, our quarterly
revenues may decline below expected levels and could adversely affect our
results of operations.
 
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS IF
REVENUES FALL BELOW EXPECTATIONS
 
     We establish our expenditure levels for product development, sales and
marketing and some of our other operating expenses based in large part on our
expected future revenues and anticipated competitive conditions. In particular,
we frequently add staff in advance of new business to permit adequate time for
training. If the new business is subsequently delayed or canceled, we will have
incurred expenses without the associated revenue. In addition,
 
                                      -21-
<PAGE>   22
 
we may increase sales and marketing expenses if competitive pressures become
greater than we currently anticipate. Since only a small portion of our expenses
varies directly with our actual revenues, our operating results and
profitability are likely to be adversely and disproportionately affected if our
revenues fall below expectations.
 
OUR BUSINESS IS AFFECTED BY VARIATIONS IN OUR CUSTOMERS' BUDGET CYCLES
 
     We have historically realized a greater percentage of our license fees and
service revenues in the second half of the year than in the first half because,
among other things, our customers typically spend more of their annual budget
authorization for SFE solutions in the second half of the year. However, the
relationship between the amounts spent in the first and second halves of a year
may vary from year to year and from customer to customer. In addition, changes
in our customers' budget authorizations may reduce the amount of revenues we
receive from the license of additional software or the provision of additional
services. As a result, our operating results could be adversely affected.
 
  WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES
 
     We derive a significant portion of our revenues from a limited number of
customers (considering all affiliates of each customer as part of that
customer). Approximately 56% of our total revenues in 1998 came from Pfizer,
Johnson & Johnson and Parke-Davis. Approximately 59% of our total revenues in
1997 came from Pfizer, Johnson & Johnson and Rhone-Poulenc Rorer. Approximately
58% of our total revenues in 1996 came from Pfizer, Eli Lilly and Rhone-Poulenc
Rorer. We believe that the costs to our customers of switching to a competitor's
software product, or of taking significant system management functions in-house,
are substantial. Nevertheless, some of our customers have switched, and in the
future other customers may switch, to software products and/or services offered
by our competitors. If any of our major customers were to make such a change,
our business, operating results or financial condition would be materially and
adversely affected.
 
     WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO
                              TECHNOLOGICAL CHANGE
 
     The market for sales force software products changes rapidly because of
frequent improvements in computer hardware and software technology. Our future
success will depend, in part, on our ability to:
 
- use available technologies and data sources to develop new products and
  services and to enhance our current products and services;
 
- introduce new solutions that keep pace with developments in our target
  markets; and
 
- address the changing and increasingly sophisticated needs of our customers.
 
     We cannot assure you that we will successfully develop and market new
products or product 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 our products will adequately and competitively address the needs of the
changing marketplace.
 
     Competition for software products has been characterized by shortening
product cycles. We may be materially and adversely affected by this trend if the
product cycles for our products prove to be shorter than we anticipate. If that
happens, our business, operating results or financial condition could be
adversely affected.
 
     To remain competitive, we also may have to spend more of our revenues on
product research and development than we have in the past. As a result, our
results of operations could be materially and adversely affected.
 
     Further, our software products are technologically complex and may contain
previously undetected errors or failures. Such errors have occurred in the past
and we cannot assure you that, despite our testing, our new products will be
free from errors. Errors that result in losses or delays could have a material
adverse effect on our
 
                                      -22-
<PAGE>   23
 
business, operating results or financial condition.
 
  WE ARE EXPOSED TO RISKS ASSOCIATED WITH THE YEAR 2000 -- YEAR 2000 READINESS
                                   DISCLOSURE
 
DEMAND FOR OUR SOFTWARE PRODUCTS AND SERVICES MAY DECLINE BEFORE AND AFTER THE
YEAR 2000
 
     A substantial amount of demand for our software may come from customers in
the process of replacing and upgrading software applications to accommodate the
change in date to the Year 2000. This demand has contributed to our 1998 sales
growth and we expect it to contribute to our 1999 sales growth. Once customers
have completed these activities, we may experience a deceleration in revenue
growth. In addition, the expense and time associated with remediation efforts by
customers to address Year 2000 compliance problems for software products other
than ours may cause our customers to delay the purchase of, or reduce the amount
they spend on, our products and services, both before and after January 1, 2000.
Such reductions could have a material adverse effect on our business, operating
results or financial condition.
 
OUR YEAR 2000 REMEDIATION EFFORTS MAY NOT BE SUCCESSFUL
 
     As part of our Year 2000 compliance plan, we have assessed the readiness of
our internal computer software programs and operating systems. We believe our
programs and systems will be substantially Year 2000 compliant by the end of the
second quarter of 1999. However, if additional defects, including defects in
hardware, are identified or if necessary modifications and conversions are not
made, or are not completed in a timely manner, the Year 2000 problem could have
a material adverse effect on our business, operating results or financial
condition.
 
 
WE MAY INCUR MATERIAL EXPENSES IN CONNECTION WITH ANY CLAIM RELATING TO YEAR
2000 COMPLIANCE OF OUR OWN PRODUCTS OR THE PRODUCTS OF THIRD PARTIES

     We believe most of the sales force software products that we currently
offer to our customers, prior to any customization, are Year 2000 compliant. We
cannot assure you, however, that our current products do not contain undetected
errors or defects associated with Year 2000 date functionality that may result
in material costs to us.
 
     Some of our older products will not, and some may not, accurately process
dates after December 31, 1999. To the extent any of these products are still in
use in 1999, we will continue to attempt to migrate our customers to products
that are Year 2000 compliant. We cannot assure you that this will occur. A
failure to migrate any customer to a product that is Year 2000 compliant could
adversely affect our business, operating results or financial condition. We may
also experience increased expenses which we cannot recoup from current customers
in addressing their migration to software that is Year 2000 compliant. We may
incur additional expenses associated with remediating software products of our
current customers.
 
     In addition, some of our customers may attempt to hold us responsible for
Year 2000 compliance of hardware or software not supplied or created by us, but
used in conjunction with one or more of our products. For example, our
customers' computer hardware and software, with which our software must
interface, may not properly handle date information after the Year 2000 without
error or interruption.
 
     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Readiness Disclosure" for detailed
information on our state of readiness, potential risks and contingency plans
regarding the Year 2000 issue.
 
 INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR
                           OUR PRODUCTS AND SERVICES
 
     We believe there are approximately ten other companies that sell sales
force software products and specifically target the pharmaceutical industry,
including:
 
     - four competitors that are actively selling sales force software products
       in more than one country; and

                                      -23-
<PAGE>   24
 
     - three competitors that also offer sales force support services.
 
     We believe that most of our competitors offer sales force software 
products and/or services that do not address the variety of customer needs that
our solutions address. However, these competing solutions may cost less than our
solutions. We also face competition from many vendors that market and sell sales
force automation and SFE solutions in the consumer packaged goods or CPG market.
In addition, we also compete with various companies that provide support
services similar to our services. We believe our ability to compete depends on
many factors, some of which are beyond our control, including:
 
- the number and success of new market entrants supplying competing sales force
  products or support services;
 
- expansion of product lines by, or consolidation among, our existing
  competitors; and
 
- development and/or operation of in-house sales force software products or
  services by our customers and potential customers.
 
     Some of our competitors and potential competitors are part of large
corporate groups and have longer operating histories and significantly greater
financial, sales, marketing, technology and other resources than we have. We
cannot assure you that we will be able to compete successfully with these
companies or that competition will not have a material adverse effect on our
business, operating results or financial condition. See
"Business -- Competition" for detailed information regarding the competitive
environment in which we operate.
 
         SOME OF OUR CUSTOMERS RELY ON OUR COMPETITORS FOR MARKET DATA
 
     Current market data on the sales of prescription-only pharmaceutical
products is an important element for the operation of our sales force software
products in the prescription-only pharmaceutical industry. Our customers use
this data to guide and organize their sales forces and marketing efforts. Some
of the leading purveyors of this market information compete with us either
directly or through affiliates or may compete with us in the future. If these
purveyors of market information require pharmaceutical companies to use their
sales force products and/or services, our business, operating results and
financial condition may be materially and adversely affected.
 
  OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT
 
     The sale of our products and services in foreign countries accounts for,
and is expected in the future to account for, a material part of our revenues.
These sales are subject to risks inherent in international business activities,
including:
 
- any adverse change in the political or economic environments in these
  countries;
 
- economic instability;
 
- any adverse change in tax, tariff and trade or other regulations;
 
- the absence or significant lack of legal protection for intellectual property
  rights;
 
- exposure to exchange rate risk for service revenues which are denominated in
  currencies other than U.S. dollars; and
 
- difficulties in managing an organization spread over various jurisdictions.
 
     OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON
                  ATTRACTING AND RETAINING QUALIFIED PERSONNEL
 
     Our future success depends, to a significant extent, upon the contributions
of our executive officers and key sales, technical and customer service
personnel. We maintain a $3 million key man insurance policy on John E. Bailye,
our President and Chief Executive Officer, the proceeds of which are payable to
Dendrite. Our future success also depends on our continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense. We have at times experienced difficulties in
recruiting qualified personnel and we may experience such difficulties in the
future. Any such difficulties
 
                                      -24-
<PAGE>   25
 
could adversely affect our business, operating results or financial condition.
See "Management" for detailed information concerning our key personnel.
 
     OUR INABILITY TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
 
     To manage our growth effectively, we must continue to strengthen our
operational, financial and management information systems and expand, train and
manage our work force. However, we may not be able to do so effectively or on a
timely basis. Failure to do so could have a material adverse effect upon our
business, operating results or financial condition.
 
   OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO
                               PROTECT COMPLETELY
 
     We rely on a combination of trade secret, copyright and trademark laws,
non-disclosure and other contractual agreements and technical measures to
protect our proprietary technology. We cannot assure you that the steps we take
will prevent misappropriation of this technology. Further, protective actions we
have taken or will take in the future may not prevent competitors from
developing products with features similar to our products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. We have, on occasion, in response to a request by our
customer, entered into agreements which require us to place our source code in
escrow to secure our service and maintenance obligations.
 
     Further, we believe that our products and trademarks do not infringe upon
the proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future that may result in the imposition
of damages or injunctive relief against us. In addition, any such claims may
require us to enter into royalty arrangements. Any of these results could
materially and adversely affect our business, operating results or financial
condition.
 
 WE HAVE LIMITED EXPERIENCE IN MARKETING TO THE CONSUMER PACKAGED GOODS MARKET
 
     We market and sell SFE solutions to companies in the CPG market. The
selling environment in this market has unique characteristics that differentiate
it from the pharmaceutical market. In addition, we believe that the CPG market
is composed of sub-markets, each of which may have unique characteristics.
Accordingly, we cannot assure you that we will be able to replicate in this
market the success we have achieved in the ethical pharmaceutical market.
 
                    PROVISIONS OF OUR CHARTER DOCUMENTS AND
            NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE
 
     Provisions of our Restated Certificate of Incorporation, our By-laws and
New Jersey law may make it more difficult for a third party to acquire us. For
example, the Board of Directors may, without the consent of the stockholders,
issue preferred stock with rights senior to those of the common stock.
 
             OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS
 
     The market price of our common stock may be significantly affected by the
following factors:
 
- the announcement or the introduction of new products by us or our competitors;
 
- quarter-to-quarter variations in our operating results and changes in earnings
  estimates by analysts;
 
- market conditions in the technology, healthcare and other growth sectors; and
 
- general consolidation in the healthcare information industry which may result
  in the market perceiving us or other comparable companies as potential
  acquisition targets.
 
     Further, the stock market has experienced on occasion extreme price and
volume fluctuations. The market prices of the equity securities of many
technology companies have been especially volatile and often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may have a material adverse effect on the market price of our common stock. See
"Price Range of Common Stock".

 
                                      -25-
<PAGE>   26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

         Because we have operations in a number of countries, we face exposure 
to adverse movements in foreign currency exchange rates. As currency rates 
change, translation of the income statements of our international entities 
from local currencies to U.S. dollars affects year-over-year comparability of 
operating results. We do not hedge translation risks because we generally 
reinvest the cash flows from international operations.

         Management estimates that a 10% change in foreign exchange rates would 
impact reported operating profit by less than $500,000. This sensitivity 
analysis disregards the possibility that rates can move in opposite directions 
and that losses from one area may be offset by gains from another area.

         The introduction of the Euro as a common currency for members of the 
European Monetary Union took place on January 1, 1999. We have not determined 
what impact, if any, the Euro has on our foreign exchange exposure.

INTEREST RATE RISK

         Our exposure to market risk related to changes in interest rates 
primarily to our investment portfolio. We invest in instruments that meet high 
credit quality standards, as specified in our investment policy. The policy 
also limits the amount of credit exposure to any one issue, issuer and type of 
investment.

         As of December 31, 1998, our investments consisted primarily of
commercial paper maturing in the first four months of 1999. Due to the average
maturity and conservative nature of our investment portfolio, a sudden change in
interest rates would not have a material effect on the value of the portfolio.
Management estimates that had the average yield of the Company's investments
decreased by 100 basis points, our interest income for the year ended December
31, 1998 would have decreased by less than $150,000. This estimate assumes that
the decrease occurred on the first day of 1998 and reduced the yield of each
investment instrument by 100 basis points. The impact on our future interest
income, of future changes in investment yields will depend largely on the gross
amount of our investments. See Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources".

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Company's 1998 Financial Statements, together with the report
thereon of Arthur Andersen LLP, are included elsewhere herein. See Item 14 for a
list of Financial Statements and Financial Statement Schedules.

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

         None.

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information regarding directors and executive officers of the Company
will be set forth in the Registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement, expected to be dated on or about April 15, 1999 (the "Proxy
Statement"), which information is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION.

         Information regarding the Company's compensation of its directors and
executive officers will be set forth in the Proxy Statement, which information
is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information regarding security ownership of certain beneficial owners
and management will be set forth in the Proxy Statement, which information is
incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information regarding transactions with the Company's directors and
executive officers will be set forth in the Proxy Statement, which information
is incorporated herein by reference.


                                      -25-
<PAGE>   27
                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      The following documents are filed as part of this report:

         1.       Financial Statements:

                  Report of Independent Public Accountants
                  Consolidated Balance Sheets
                  Consolidated Statements of Operations
                  Consolidated Statements of Stockholders' Equity
                  Consolidated Statements of Cash Flows
                  Notes to Consolidated Financial Statements

         2.       Financial Statement Schedules:

                  None.

         3.       Exhibits:

                  3.1      Restated Certificate of Incorporation of the Company,
                           as amended (incorporated herein by reference to
                           Exhibit 3.1 to the Company's Quarterly Report on Form
                           10-Q, filed with the Securities and Exchange
                           Commission (the "Commission") June 30, 1996)

                  3.2      By-laws of the Company, as amended (incorporated
                           herein by reference to the Exhibit to the Company's
                           Quarterly Report on Form 10-Q for the quarter ended
                           September 30, 1995, filed with the Commission
                           November 13, 1995)

                  4.1      Specimen of Stock Certificate (incorporated herein by
                           reference to Exhibit 4.1 to the Company's
                           Registration Statement on Form S-1, filed with the
                           Commission May 17, 1995)

                  4.2      Registration Rights Agreement dated October 2, 1991
                           between the several purchasers named therein and the
                           Company (incorporated herein by reference to Exhibit
                           4.2 to the Company's Registration Statement on Form
                           S-1, filed with the Commission May 17, 1995)

                  4.3      Amendment to Registration Rights Agreement dated
                           April 23, 1992 between the Company and the parties
                           named therein as shareholders of the Company
                           (incorporated herein by reference to Exhibit 4.3 of
                           Amendment 1 to the Company's Registration Statement
                           on Form S-1, filed with the Commission May 17, 1995)

                  10.1     January 1992 Stock Plan (incorporated herein by
                           reference to Exhibit 10.26 to the Company's
                           Registration Statement on Form S-1, filed with the
                           Commission May 17, 1995)*

                  10.2     October 1992 Stock Option Plan for Senior Management
                           (incorporated herein by reference to Exhibit 10.37 to
                           the Company's Registration Statement on Form S-1,
                           filed with the Commission May 17, 1995)*

                  10.3     1997 Amended and Restated Stock Incentive Plan
                           (incorporated herein by reference to Exhibit 4.2 to
                           the Company's Post-Effective Amendment No. 1 to its
                           Registration Statement on Form S- 8, filed with the
                           Commission November 10, 1997)*

                  10.4     1997 Employee Stock Purchase Plan (incorporated
                           herein by reference to Exhibit 4.2 to the Company's
                           Registration Statement on Form S-8, filed with the
                           Commission April 1, 1997)*

                  10.5     Lease of 1200 Mount Kemble Avenue, Morristown, New
                           Jersey (incorporated herein by reference to Exhibit
                           10.40 to the Company's Registration Statement on Form
                           S-1, filed with the Commission May 17, 1995)

                  10.6     Form of Indemnification Agreement dated as of October
                           28, 1998 (incorporated herein by reference to Exhibit
                           10.1 to the Company's Quarterly Report on Form 10-Q,
                           filed with the Commission November 18, 1998)*

                  10.7     Amended and Restated Credit Agreement, entered into
                           as of November 30, 1998, between the Company and The
                           Chase Manhattan Bank


                                      -26-
<PAGE>   28
                  10.8     Employment Agreement dated March 25, 1997 with John
                           E. Bailye (incorporated herein by reference to
                           Exhibit 10.1 to the Company's Quarterly Report on
                           Form 10-Q/A filed with the Commission May 16, 1997)*

                  10.9     Employment Agreement dated June 2, 1997 with George
                           T. Robson (incorporated herein by reference to
                           Exhibit 10.1 to the Company's Quarterly Report on
                           Form 10-Q, filed with the Commission August 14,
                           1997)*

                  10.10    Employment Agreement dated June 9, 1997 with Mark
                           Cieplik incorporated herein by reference to Exhibit
                           10.2 to the Company's Quarterly Report on Form 10-Q,
                           filed with the Commission August 14, 1997)*

                  10.11    Employment Agreement dated July 24, 1997 with Bruce
                           Savage (incorporated herein by reference to Exhibit
                           10.1 to the Company's Quarterly Report on Form 10-Q,
                           filed with the Commission November 14, 1997)*

                  10.12    Employment Agreement dated October 1, 1991 with
                           Teresa F. Winslow (incorporated herein by reference
                           to Exhibit 10.50 to the Company's Registration
                           Statement on Form S-1, filed with the Commission
                           February 5, 1996)*

                  10.13    Consulting Agreement dated as of January 5, 1998 with
                           Edward Kfoury (incorporated herein by reference to
                           Exhibit 10.1 of the Company's Quarterly Report filed
                           with the Commission May 14, 1998.)

                  10.14    Deferred Compensation Plan dated as of September 1,
                           1998 (incorporated herein by reference to Exhibit
                           10.1 of the Company's Quarterly Report filed with the
                           Commission August 14, 1998.)*

                  10.15    Deferred Compensation Plan Trust Agreement dated as
                           of September 1, 1998 (incorporated herein by
                           reference to Exhibit 10.2 of the Company's Quarterly
                           Report filed with the Commission August 14, 1998.)*

                  21       Subsidiaries of the Registrant

                  23       Consent of Independent Public Accountants

                  27       Financial Data Schedule

                  (b) Reports on Form 8-K.

                  None

--------

*        These contracts are identified pursuant to the requirement in Item 14
         to identify "each management contract or compensatory plan or
         arrangement required to be filed as an exhibit".


                                      -27-
<PAGE>   29
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                          DENDRITE INTERNATIONAL, INC.

Date:  February __, 1999            By:   /s/ John E. Bailye
                                          ------------------
                                          John E. Bailye
                                          Chief Executive Officer and President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
Name                                  Title                                        Date
----                                  -----                                        ----
<S>                                   <C>                                      <C>        
/s/ John E. Bailye                    Chief Executive Officer,                 March 23, 1999
------------------                    President and Director       
John E. Bailye                        (Principal Executive Officer)
                                      

/s/ George T. Robson                  Executive Vice President                 March 23, 1999
--------------------                  and Chief Financial Officer      
George T. Robson                      (Principal Financial Officer     
                                      and Principal Accounting Officer)
                                      

/s/ Bernard M. Goldsmith              Director                                 March 23, 1999
------------------------
Bernard M. Goldsmith

/s/ Edward J. Kfoury                  Director                                 March 23, 1999
--------------------
Edward J. Kfoury

/s/ Paul A. Margolis                  Director                                 March 23, 1999
--------------------
Paul A. Margolis

/s/ John H. Martinson                 Director                                 March 23, 1999
---------------------
John H. Martinson

/s/ Terence H. Osborne                Director                                 March 23, 1999
----------------------
Terence H. Osborne
</TABLE>


                                      -28-
<PAGE>   30
                                  EXHIBIT INDEX


       Exhibit
         No.                           Exhibit

         3.1      Restated Certificate of Incorporation of the Company, as
                  amended (incorporated herein by reference to Exhibit 3.1 to
                  the Company's Quarterly Report on Form 10-Q, filed with the
                  Securities and Exchange Commission (the "Commission") June 30,
                  1996)

         3.2      By-laws of the Company, as amended (incorporated herein by
                  reference to the Exhibit to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended September 30, 1995, filed with
                  the Commission November 13, 1995)

         4.1      Specimen of Stock Certificate (incorporated herein by
                  reference to Exhibit 4.1 to the Company's Registration
                  Statement on Form S-1, filed with the Commission May 17, 1995)

         4.2      Registration Rights Agreement dated October 2, 1991 between
                  the several purchasers named therein and the Company
                  (incorporated herein by reference to Exhibit 4.2 to the
                  Company's Registration Statement on Form S-1, filed with the
                  Commission May 17, 1995)

         4.3      Amendment to Registration Rights Agreement dated April 23,
                  1992 between the Company and the parties named therein as
                  shareholders of the Company (incorporated herein by reference
                  to Exhibit 4.3 of Amendment 1 to the Company's Registration
                  Statement on Form S-1, filed with the Commission May 17, 1995)

         10.1     January 1992 Stock Plan (incorporated herein by reference to
                  Exhibit 10.26 to the Company's Registration Statement on Form
                  S-1, filed with the Commission May 17, 1995)

         10.2     October 1992 Stock Option Plan for Senior Management
                  (incorporated herein by reference to Exhibit 10.37 to the
                  Company's Registration Statement on Form S-1, filed with the
                  Commission May 17, 1995)

         10.3     1997 Amended and Restated Stock Incentive Plan (incorporated
                  herein by reference to Exhibit 4.2 to the Company's
                  Post-Effective Amendment No. 1 to its Registration Statement
                  on Form S-8, filed with the Commission November 10, 1997)

         10.4     1997 Employee Stock Purchase Plan (incorporated herein by
                  reference to Exhibit 4.2 to the Company's Registration
                  Statement on Form S-8, filed with the Commission April 1,
                  1997)

         10.5     Lease of 1200 Mount Kemble Avenue, Morristown, New Jersey
                  (incorporated herein by reference to Exhibit 10.40 to the
                  Company's Registration Statement on Form S-1, filed with the
                  Commission May 17, 1995)

         10.6     Form of Indemnification Agreement dated as of October 28, 1998
                  (incorporated herein by reference to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-Q, filed with the
                  Commission November 18, 1998)

         10.7     Amended and Restated Credit Agreement, entered into as of
                  November 30, 1998, between the Company and The Chase Manhattan
                  Bank

         10.8     Employment Agreement dated March 25, 1997 with John E. Bailye
                  (incorporated herein by reference to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-Q/A filed with the
                  Commission May 16, 1997)

         10.9     Employment Agreement dated June 2, 1997 with George T. Robson
                  (incorporated herein by reference to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-Q, filed with the
                  Commission August 14, 1997)

         10.10    Employment Agreement dated June 9, 1997 with Mark Cieplik
                  incorporated herein by reference to Exhibit 10.2 to the
                  Company's Quarterly Report on Form 10-Q, filed with the
                  Commission August 14, 1997)

         10.11    Employment Agreement dated July 24, 1997 with Bruce Savage
                  (incorporated herein by reference to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-Q, filed with the
                  Commission November 14, 1997)

         10.12    Employment Agreement dated October 1, 1991 with Teresa F.
                  Winslow (incorporated herein by reference to Exhibit 10.50 to
                  the Company's Registration Statement on Form S-1, filed with
                  the Commission February 5, 1996)

         10.13    Consulting Agreement dated as of January 5, 1998 with Edward
                  Kfoury (incorporated herein by reference to exhibit 10.1 of
                  the Company's Quarterly Report filed with the Commission May
                  14, 1998.)
                                             29
<PAGE>   31
         10.14    Deferred Compensation Plan dated as of September 1, 1998
                  (incorporated herein by reference to Exhibit 10.1 of the
                  Company's Quarterly Report filed with the Commission August
                  14, 1998.)

         10.15    Deferred Compensation Plan Trust Agreement dated as of
                  September 1, 1998 (incorporated herein by reference to Exhibit
                  10.2 of the Company's Quarterly Report filed with the
                  Commission August 14, 1998.)

         21       Subsidiaries of the Registrant

         23       Consent of Independent Public Accountants

         27       Financial Data Schedule


                                      -30-
<PAGE>   32
                    Report of Independent Public Accountants

To Dendrite International, Inc.:

         We have audited the accompanying consolidated balance sheets of
Dendrite International, Inc. (a New Jersey corporation) and Subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dendrite
International, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.


                                         ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
  January 27, 1999


                                       F-1
<PAGE>   33
                  DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                             -----------------------------
                                                                                1997               1998
                                                                             ---------           ---------
                                     ASSETS
<S>                                                                          <C>                       <C>
CURRENT ASSETS:                                                                                      
     Cash and cash equivalents...............................................$  15,917           $  31,298
     Short-term investments..................................................    2,955               9,614
     Accounts receivable, net................................................   24,724              17,082
     Prepaid expenses and other..............................................    2,222               3,090
     Prepaid taxes...........................................................       --                 921
     Deferred tax asset......................................................      441                 467
                                                                             ---------           ---------
          Total current assets...............................................   46,259              62,472
PROPERTY AND EQUIPMENT, net..................................................    3,110               5,267
DEFERRED TAXES...............................................................      667               1,077
GOODWILL, net................................................................      575               2,496
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net..................................    2,408               3,503
                                                                             ---------           ---------
                                                                             $  53,019           $  74,815
                                                                             =========           =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable........................................................$   2,211           $   2,002
     Income taxes payable....................................................      867                 122
     Accrued compensation and benefits.......................................    3,439               4,012
     Other accrued expenses..................................................    4,352               6,953
     Deferred revenues.......................................................    1,409               1,420
                                                                             ---------           ---------
          Total current liabilities..........................................   12,278              14,509
                                                                             ---------           ---------
DEFERRED RENT................................................................      598                 392
                                                                             ---------           ---------
CAPITALIZED LEASE OBLIGATIONS................................................       --                 355
DEFERRED TAXES...............................................................    1,970               2,889
                                                                             ---------           ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
     Preferred stock, no par value, 10,000,000 shares authorized, none
        issued...............................................................       --                  --
     Common stock, no par value, 100,000,000 shares authorized,
        22,659,548 and 23,357,497 shares issued and 22,258,548 and
        22,956,497 outstanding...............................................   32,814              40,050
     Retained earnings.......................................................    9,268              20,535
     Deferred compensation...................................................   (1,141)             (1,494)
     Accumulated other comprehensive income..................................     (841)               (494)
     Less treasury stock, at cost............................................   (1,927)             (1,927)
                                                                             ---------           ---------
          Total stockholders' equity.........................................   38,173              56,670
                                                                             ---------           ---------
                                                                             $  53,019           $  74,815
                                                                             =========           =========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       F-2
<PAGE>   34
                  DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                    ---------------------------------------------------
                                                                       1996                 1997                1998
                                                                    ---------            ---------            ---------
<S>                                                                 <C>                  <C>                  <C>      
REVENUES:
     License fees.................................................  $   8,774            $   7,707            $  12,827
     Services.....................................................     57,472               70,739               99,691
                                                                    ---------            ---------            ---------
                                                                       66,246               78,446              112,518
                                                                    ---------            ---------            ---------
COSTS OF REVENUES:
     Cost of license fees.........................................        832                1,758                2,314
     Cost of services.............................................     31,544               36,894               47,558
                                                                    ---------            ---------            ---------
                                                                       32,376               38,652               49,872
                                                                    ---------            ---------            ---------
          Gross margin............................................     33,870               39,794               62,646
                                                                    ---------            ---------            ---------
OPERATING EXPENSES:
     Selling, general and administrative..........................     26,440               29,905               39,853
     Research and development.....................................      6,834                2,676                3,687
     Write-off of in-process research and development.............      2,640                   --                1,230
                                                                    ---------            ---------            ---------
                                                                       35,914               32,581               44,770
                                                                    ---------            ---------            ---------
          Operating income (loss).................................     (2,044)               7,213               17,876
INTEREST INCOME...................................................      1,167                  529                1,090
OTHER EXPENSE.....................................................       (391)                (201)                (317)
                                                                    ---------            ---------            ----------
          Income (loss) before income taxes.......................     (1,268)               7,541               18,649
INCOME TAXES......................................................        644                2,931                7,382
                                                                    ---------            ---------            ---------
NET INCOME (LOSS).................................................  $  (1,912)           $   4,610            $  11,267
                                                                    =========            =========            =========
NET INCOME (LOSS) PER SHARE:
     Basic........................................................  $   (0.09)           $    0.21            $    0.50
                                                                    =========            --=======            =========
     Diluted......................................................  $   (0.09)           $    0.20            $    0.46
                                                                    =========            =========            =========
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
     Basic........................................................     22,112               22,262               22,580
                                                                    =========            =========            =========
     Diluted......................................................     22,112               23,036               24,623
                                                                    =========            =========            =========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       F-3
<PAGE>   35
                  DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                             ACCUMULATED
                                    COMMON STOCK                               OTHER                                       TOTAL
                                                   RETAINED    DEFERRED    COMPREHENSIVE   COMPREHENSIVE     TREASURY  STOCKHOLDERS'
                                  SHARES   AMOUNT  EARNINGS  COMPENSATION     INCOME          INCOME          STOCK       EQUITY
                                  ------  -------  --------   ------------    ------          ------          -----       ------
<S>                               <C>     <C>      <C>       <C>           <C>             <C>            <C>          <C>
BALANCE, DECEMBER 31, 1995........21,352  $26,809   $6,570       $(502)      $(567)                       $     --       $32,310
    Issuance of common stock......   376    1,094       --        (838)         --                              --           256
    Amortization of deferred
      compensation................    --       --       --         113          --                              --           113
    Issuance of common stock
      from consummation
      of  public offering,
      net of offering costs.......   600    4,295       --          --          --                              --         4,295
  Comprehensive income:
    Net loss......................    --       --   (1,912)         --          --         $(1,912)             --        (1,912)
    Other comprehensive
      income:
        Realization of gain on
          short-term investments..    --       --       --          --         (14)            (14)             --           (14)
        Currency translation
          adjustment..............    --       --       --          --         128             128              --           128
        Comprehensive income......                                                         $(1,798)         
                                  ------  -------  -------     -------       -----         -------         -------       -------
                                                                                           -------
BALANCE, DECEMBER 31, 1996........22,328   32,198    4,658      (1,227)       (453)                             --        35,176
    Issuance of common stock......   332      616       --         (20)         --                              --           596
    Amortization of deferred
      compensation................    --       --       --         106          --                              --           106
    Purchase of 401,000 shares
      of treasury stock...........  (401)      --       --          --          --                          (1,927)       (1,927)
  Comprehensive income:
    Net income....................    --       --    4,610          --          --          $4,610              --         4,610
    Other comprehensive
      income:
        Currency translation
          adjustment..............    --       --       --          --        (388)           (388)             --          (388)
        Comprehensive income......                                                          $4,222          
                                  ------  -------  -------     -------       -----         -------         -------       -------
                                                                                           -------
BALANCE, DECEMBER 31, 1997........22,259   32,814    9,268      (1,141)       (841)                         (1,927)       38,173
    Issuance of common stock......   697    5,876       --        (394)                                                    5,482
    Amortization of deferred
      compensation................    --       --       --          41                                          --            41
    Stock option income
      tax benefits................    --    1,360       --          --                                          --         1,360
  Comprehensive income:
    Net income....................    --       --   11,267          --          --         $11,267              --        11,267
    Other comprehensive
        income:
         Currency translation
          adjustment..............    --       --       --          --         347             347              --           347
       Comprehensive income.......                                                         $11,614          
                                  ------  -------  -------     -------       -----         -------         -------       -------
BALANCE, DECEMBER 31,                                                                      -------
 1998.............................22,956  $40,050  $20,535     $(1,494)      $(494)                        $(1,927)      $56,670
                                  ======  =======  =======     =======       =====                         =======       =======
</TABLE>


The accompanying notes are an integral part of these statements.


                                       F-4
<PAGE>   36
                  DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                  ---------------------------------------------
                                                                                       1996              1997              1998
                                                                                  ---------         ---------         ---------
<S>                                                                               <C>               <C>               <C>      
OPERATING ACTIVITIES:
  Net income (loss).............................................................  $  (1,912)        $   4,610         $  11,267
  Adjustments to reconcile net income (loss) to net cash provided by
     (used in) operating activities:
     Depreciation and amortization..............................................      2,037             2,740             3,020
     Deferred income taxes (benefit)............................................       (304)              808               160
     Write-off of in-process research and development...........................      2,640                --             1,230
     Changes in assets and liabilities, net of effect from acquisition:
       (Increase) decrease in accounts receivable...............................     (3,193)           (6,137)            7,114
       Increase in prepaid expenses and other...................................       (253)             (669)             (904)
       (Increase) decrease in prepaid income taxes..............................     (1,397)            1,397                --
       Increase in accounts payable and accrued expenses........................      2,461             1,092             2,886
       Increase (decrease) in deferred rent.....................................        262              (128)             (206)
       Increase (decrease) in income taxes payable..............................     (1,931)              283              (427)
       (Increase) decrease in deferred revenues.................................     (1,174)             (678)               66
                                                                                  ---------         ---------         ---------
          Net cash provided by (used in) operating activities...................     (2,764)            3,318            24,206
                                                                                  ---------         ---------         ---------
INVESTING ACTIVITIES:
  Purchases of short-term investments...........................................     (8,271)           (3,800)          (13,552)
  Sales of short-term investments...............................................     10,805             9,266             6,893
  Purchases of businesses, net of cash acquired.................................     (2,965)               --            (2,295)
  Purchases of property and equipment...........................................       (772)           (1,246)           (1,974)
  Additions to capitalized software development costs...........................     (1,296)             (919)           (1,637)
                                                                                  ---------         ---------         ---------
          Net cash provided by (used in) investing activities...................     (2,499)            3,301           (12,565)
                                                                                  ---------         ---------         ---------
FINANCING ACTIVITIES:
  Payments on capital lease obligations.........................................         --                --               (93)
  Issuance of Common stock from consummation of public offering, net
     of offering costs..........................................................      4,295                --                --
  Purchase of treasury stock....................................................         --            (1,927)               --
  Issuance of common stock......................................................        256               596             3,703
                                                                                  ---------         ---------         ---------
          Net cash provided by (used in) financing activities...................      4,551            (1,331)            3,610
                                                                                  ---------         ---------         ---------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH.................................         94              (283)              130
                                                                                  ---------         ---------         ---------
NET INCREASE (DECREASE) IN CASH.................................................       (618)            5,005            15,381
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................     11,530            10,912            15,917
                                                                                  ---------         ---------         ---------
CASH AND CASH EQUIVALENTS, END OF YEAR..........................................  $  10,912         $  15,917         $  31,298
                                                                                  =========         =========         =========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       F-5
<PAGE>   37
                  DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

         Dendrite International, Inc. and Subsidiaries (the "Company") provides
comprehensive Sales Force Effectiveness solutions used to manage, coordinate and
control the activities of large sales forces in complex selling environments
primarily within the ethical pharmaceutical industry. The Company also markets
its products in the consumer packaged goods market. The Company's solutions
combine proprietary software products with extensive system support services.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The consolidated financial statements include the accounts of Dendrite
International, Inc. and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
substantially all assets and liabilities of the Company's wholly-owned
international subsidiaries are translated at their respective period-end
currency exchange rates and revenues and expenses are translated at average
currency exchange rates for the period. The resulting translation adjustments
are accumulated in a separate component of stockholders' equity. All foreign
currency transaction gains and losses are included in other expense on the
accompanying statements of operations and are immaterial in each year.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition

         The Company generally recognizes license fees as revenue using the
percentage-of-completion method over a period of time that commences with the
execution of the license agreement and ends with the completion of initial
customization and installation, if any. Some of the Company's newer products do
not require initial customization. If the customer does not request such
customization, the Company generally recognizes the license fees from these
products upon delivery, assuming the services to be provided are not essential
to the functionality of the software. The Company's software licensing
agreements provide for a warranty period (typically 180 days from the date of
execution of the agreement). The portion of the license fee associated with the
warranty period is unbundled from the license fee and is recognized ratably over
the warranty period. The Company does not recognize any license fees unless
persuasive evidence of an arrangement exists, the license amount is fixed and
determinable and collectability is probable.

         The Company recognizes license fees from certain third party software
embedded into the product when the related license fees are recognized. The cost
of third party software is included in cost of license fees in the accompanying
statements of operations. For the years ended December 31, 1996, 1997 and 1998,
the Company recorded $112,000, $796,000 and $1,208,000, respectively, of license
fees and $93,000, $658,000 and $922,000, respectively, of cost of license fees
relating to third party software.

         Revenues from services are recognized as the services are performed.
Revenues from customer maintenance, support and data server rental agreements
are recognized ratably over the term of the agreements.

         Services are generally provided under multiyear contracts. The
contracts specify the payment terms, which are generally over the term of the
contract and generally provide for termination in the event of breach, as
defined in the contract.


                                       F-6
<PAGE>   38
Deferred Revenues

         Deferred revenues represent amounts collected from or invoiced to
customers in excess of revenues recognized. Such amounts are recognized as
revenue when the related significant performance obligations have been
satisfied.

Cash and Cash Equivalents

         The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Supplemental Cash Flow Information

         For the years ended December 31, 1996 and 1997, the Company paid no
interest. For the year ended December 31, 1998, the Company paid interest of
$10,000. For the years ended December 31, 1996, 1997 and 1998, the Company paid
income taxes of $4,346,000, $422,000 and $7,528,000, respectively.

         The following table lists noncash assets that were acquired and
liabilities that were assumed as a result of the acquisitions discussed in Note
2:


<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                 ------------------------------------
                                                                        1996                    1998
                                                                 ------------            ------------
<S>                                                              <C>                     <C>         
Noncash assets:                                                                        
  Accounts receivable..........................................  $    823,000            $    301,000
  Prepaid expenses.............................................        31,000                  59,000
  Property and equipment.......................................        91,000                 408,000
  Capitalized software development costs.......................            --                 850,000
  Goodwill.....................................................       860,000               2,226,000
                                                                 ------------            ------------
                                                                    1,805,000               3,844,000
Assumed liabilities:                                                                   
  Accounts payable.............................................      (488,000)               (294,000)
  Income taxes payable.........................................            --                (121,000)
  Accrued compensation and benefits............................      (250,000)                     --
  Other accrued expenses.......................................      (613,000)               (396,000)
  Deferred revenues............................................      (129,000)               (107,000)
  Deferred taxes...............................................            --                (323,000)
                                                                 ------------            ------------
     Net noncash assets acquired...............................       325,000               2,603,000
Write-off of in-process research and development...............     2,640,000               1,230,000
Purchase price paid in stock...................................            --              (1,538,000)
                                                                 ------------            ------------
Cash paid, net of cash acquired................................  $  2,965,000            $  2,295,000
                                                                 ============            ============
</TABLE>

Short-Term Investments

         The Company follows SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company invests
in highly rated corporate bonds and municipal bonds. At December 31, 1997 and
1998, all marketable securities have been classified as available-for-sale.
Available-for-sale securities are carried at fair value, based on quoted market
prices, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses, computed using
specific identification, and declines in value determined to be permanent are
recognized in the statement of operations.

Property and Equipment

         Fixed assets are stated at cost. Depreciation and amortization are
provided generally on the straight-line basis over the estimated useful lives of
the respective assets, which range from 3 to 15 years. Leasehold improvements
are amortized using the straight-line method over the estimated useful lives of
the assets or the lease terms, whichever are shorter. Maintenance, repairs and
minor replacements are charged to expense as incurred.


                                       F-7
<PAGE>   39
Capitalized Software Development Costs

         In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes
certain costs related to the development of new software products or the
enhancement of existing software products for sale or license. These costs are
capitalized from the point in time that technological feasibility has been
established, as evidenced by a working model or a detailed working program
design, to the point in time that the product is available for general release
to customers. Capitalized software development costs are amortized on a product
by product basis over the greater of the ratio of current revenues to total
anticipated revenues or on a straight-line basis over the estimated economic
lives of the products (no longer than four years), beginning with the release to
the customer. Research and development costs incurred prior to establishing
technological feasibility and costs incurred subsequent to general product
release to customers are charged to expense as incurred. The Company continually
evaluates whether events or circumstances have occurred that indicate that the
remaining useful lives of the capitalized software development costs should be
revised or that the remaining balance of such assets may not be recoverable. As
of December 31, 1998, management believes that no revisions to the remaining
useful lives or write-down of capitalized development costs is required.

         Capitalized software development costs are net of accumulated
amortization of $3,041,000 and $4,433,000 at December 31, 1997 and 1998,
respectively. The Company capitalized software development costs of $1,296,000,
$919,000 and $2,487,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Included in the 1998 additions to capitalized software development
costs are $850,000 of costs related to the acquisition of Associated Business
Computing N.V. and an affiliated company (collectively, "ABC"). Amortization of
capitalized software development costs for the years ended December 31, 1996,
1997 and 1998, was $739,000, $1,100,000 and $1,392,000, respectively, and is
included in cost of license fees in the accompanying consolidated statements of
operations.

Intangible Assets

         Goodwill of $3,086,000 is being amortized on a straight-line basis over
five to seven years (see Note 2). Amortization of goodwill for the years ended
December 31, 1996, 1997 and 1998 was $113,000, $172,000 and $305,000,
respectively.

Impairment of Long-Lived Assets

         The Company follows SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
reviews its long-lived assets, including property and equipment, capitalized
software development costs, and goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.

Income Taxes

         The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
that are expected to be in effect when the differences reverse.

         At December 31, 1998, there were approximately $3,581,000 of
accumulated undistributed earnings of subsidiaries outside the United States
that are considered to be reinvested indefinitely. If such earnings were
remitted to the Company, applicable U.S. federal income and foreign withholding
taxes may be partially offset by foreign tax credits.

Major Customers

         In the year ended December 31, 1996, the Company derived approximately
36% and 14% of its revenues from its two largest customers. In the year ended
December 31, 1997, the Company derived approximately 33%, 15% and 11% from its
three largest customers, two of which were the Company's largest customers in
1996. In the year ended December 31, 1998, the Company derived approximately 36%
and 12% of its revenues from its two largest customers, both of which were among
the Company's three largest customers in 1997.


                                       F-8
<PAGE>   40
Concentration of Credit Risk

         Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash balances and trade
receivables. The Company invests its excess cash with large banks. The Company's
customer base principally comprises companies within the ethical pharmaceutical
industry. The Company does not require collateral from its customers.

Net Income (Loss) Per Share

         The Company has presented net income (loss) per share pursuant to
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," and the Securities and Exchange Commission Staff Accounting Bulletin No.
98.

         Basic income (loss) per share (Basic EPS) was computed by dividing the
net income (loss) for each year by the weighted average number of shares of
common stock outstanding for each year. Diluted income (loss) per share (Diluted
EPS) was computed by dividing net income (loss) for each year by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each year.

         The computation of shares used for Basic EPS and Diluted EPS is as
follows:


<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                           ------------------------------------------------------------------------------
                                            1996                                     1997                
                           -------------------------------------    -------------------------------------
                              LOSS         SHARES       PER-SHARE     INCOME        SHARES     PER-SHARE 
                           (NUMERATOR)  (DENOMINATOR)     AMOUNT    (NUMERATOR) (DENOMINATOR)    AMOUNT  
                           -----------  -------------     ------    ----------- -------------    ------  
<S>                        <C>          <C>             <C>         <C>         <C>            <C>
Net income (loss)......... $ (1,912)                                  $ 4,610                            
Basic EPS.................                 22,112        $ (0.09)                  22,262       $   0.21 
Effect of dilutive
  securities
  Stock options...........                     --                                     774                
                                           ------                                  ------                
Diluted EPS...............                 22,112        $ (0.09)                  23,036       $   0.20 
                                           ======        =======                   ======       ======== 
</TABLE>


<TABLE>
<CAPTION>

                                            1998
                           -------------------------------------
                             INCOME        SHARES      PER-SHARE
                           (NUMERATOR)  (DENOMINATOR)   AMOUNT
                           -----------  -------------   ------
<S>                        <C>          <C>             <C>
Net income (loss).........  $ 11,267
Basic EPS.................                  22,580     $   0.50
Effect of dilutive
  securities
  Stock options...........                   2,043     
                                            ------
Diluted EPS...............                  24,623     $   0.46
                                            ======     ========
</TABLE>

Recently Issued Accounting Pronouncements

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Management believes that SFAS 133 will have no impact on the Company's
consolidated financial statements.

Recapitalization

         In August 1998, the Company amended its articles of incorporation to
reflect a 2-for-1 split of its common shares and to change the number of
authorized common shares to 100,000,000. All references in the consolidated
financial statements to the number of shares and to per share amounts have been
retroactively restated to reflect these changes.

Reclassifications

         Certain reclassifications have been made to prior year amounts to
conform with current year presentation.

         During the second quarter of 1998, the Company determined that costs
associated with certain activities that were previously classified as research
and development expense, should be classified as cost of services, as these
expenditures related to client specific activities. For consistency of
presentation, prior periods have been reclassified. The reclassification for the
years ended December 31, 1996 and 1997 was $1,913,000 and $2,540,000,
respectively.


                                       F-9
<PAGE>   41
2.  ACQUISITIONS:

         On May 1, 1996, the Company acquired 100% of the capital stock of SRCI,
S.A. ("SRCI") for approximately $3,198,000 and transaction costs of $302,000.
The purchase was accounted for under the purchase method of accounting, whereby
the purchase price is allocated to the assets acquired and liabilities assumed
of SRCI based on their fair market values at the acquisition date. The excess of
purchase price over the fair value of net assets acquired was assigned to
identifiable intangibles. The Company assigned $2,640,000 to in-process research
and development and such amount was written off in the accompanying consolidated
statements of operations. The Company also recorded $860,000 as goodwill. SRCI's
results of operations have been included in the Company's consolidated financial
statements from the date of acquisition.

         On July 24, 1998, the Company acquired 100% of the capital stock of ABC
for approximately $4,013,000 and transaction costs of $150,000. The purchase was
accounted for under the purchase method of accounting, whereby the purchase
price is allocated to the assets and liabilities assumed of ABC based on their
respective fair market values at the acquisition date. The excess of purchase
price over the fair value of net assets acquired was assigned to identifiable
intangibles. The Company assigned $1,230,000 to in-process research and
development and such amount was written-off in the accompanying consolidated
statements of operations. The Company also recorded $2,226,000 as goodwill.
ABC's results of operations have been included in the Company's consolidated
financial statements from the date of acquisition.

3.  PROPERTY AND EQUIPMENT:


<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                       -----------------------------------
                                                               1997                   1998
                                                       ------------          -------------
<S>                                                    <C>                   <C>          
Computer hardware and other equipment...............   $  4,861,000          $   7,471,000
Furniture and fixtures..............................      1,573,000              1,692,000
Leasehold improvements..............................        870,000              1,557,000
                                                       ------------          -------------
                                                          7,304,000             10,720,000
Less -- Accumulated depreciation and
  amortization......................................     (4,194,000)            (5,453,000)
                                                       ------------          -------------
                                                       $  3,110,000          $   5,267,000
                                                       ============          =============
</TABLE>

4.  REVOLVING LINE OF CREDIT:

         During the year ended December 31, 1998, the Company amended its
revolving line of credit agreement with a bank which provides for borrowings of
up to $15,000,000 and is available to finance working capital needs and possible
future acquisitions. The agreement requires, among other covenants, that the
Company maintain a minimum consolidated net worth, measured quarterly, which is
equal to the Company's net worth as of December 31, 1997 plus 50% of the
Company's net income earned after January 1, 1998, and 75% of the net proceeds
of any stock offerings. This covenant has the effect of limiting the amount of
cash dividends the Company may pay. As of December 31, 1998, approximately
$43,806,000 was available for the payment of dividends under this covenant. The
line of credit expires on November 30, 2001. The Company has never had any
borrowings under this revolving line of credit.

5.  INCOME TAXES:

         The components of income (loss) before income taxes were as follows:


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------------------
                                                                 1996                   1997                   1998
                                                         ------------            -----------            ------------
<S>                                                      <C>                     <C>                    <C>         
 Domestic..........................................      $ (1,211,000)           $ 5,990,000            $ 18,209,000
 Foreign...........................................           (57,000)             1,551,000                 440,000
                                                         ------------            -----------            ------------
                                                         $ (1,268,000)           $ 7,541,000            $ 18,649,000
                                                         ============            ===========            ============
</TABLE>


                                      F-10
<PAGE>   42
The components of income taxes were as follows:


<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                               -------------------------------------------------------------
                                                                      1996                      1997                    1998
                                                               -----------              ------------             -----------
<S>                                                            <C>                      <C>                      <C>        
Current Provision:                                                                                            
  Federal...........................................           $   575,000              $  1,933,000             $ 6,893,000
  State.............................................                    --                        --                      --
  Foreign...........................................               373,000                   190,000                 329,000
                                                               -----------              ------------             -----------
                                                                   948,000                 2,123,000               7,222,000
Deferred Provision (Benefit):
  Federal...........................................              (149,000)                   71,000                (199,000)
  State.............................................               102,000                   389,000                 399,000
  Foreign...........................................              (257,000)                  348,000                 (40,000)
                                                               -----------              ------------             -----------
                                                                  (304,000)                  808,000                 160,000
                                                               -----------              ------------             -----------
                                                               $   644,000              $  2,931,000             $ 7,382,000
                                                               ===========              ============             ===========
</TABLE>

         The reconciliation of the statutory Federal income tax rate to the
Company's effective income tax rate is as follows:


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------
                                                                             1996          1997         1998
                                                                           -------         ------       ------
<S>                                                                        <C>             <C>          <C>  
Federal statutory tax rate................................................ (34.0)%          34.0%        34.0%
Impact of foreign subsidiaries subject to higher tax
  rates...................................................................   0.2             0.1           --
Impact of enacted change in German tax rates on deferred
  tax assets..............................................................   4.6              --           --
State income taxes, net of federal tax benefit............................  (5.0)            4.8          3.4
Nondeductible expenses....................................................   3.8             0.6          0.8
Write-off of in-process research and development..........................  81.1              --          2.5
Tax credits utilized......................................................    --            (0.6)        (1.2)
                                                                            -----           ----         ----
                                                                            50.7%           38.9%        39.5%
                                                                            ======         =====        =====
</TABLE>

         The tax effect of temporary differences as established in accordance
with SFAS No. 109 that give rise to deferred income taxes is as follows:

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                      --------------------------------
                                                                                              1997                1998
                                                                                      ------------        ------------
<S>                                                                                   <C>                 <C>
Gross deferred tax asset:
  Depreciation and amortization..........................................             $    303,000        $    426,000
  Foreign net operating loss.............................................                1,021,000           1,309,000
  Accruals and revenues not currently
     deductible..........................................................                   87,000             234,000
  Other..................................................................                  418,000             334,000
                                                                                      ------------        ------------
                                                                                      $  1,829,000        $  2,303,000
                                                                                      ============        ============
Gross deferred tax liability:
  Capitalized software development costs.................................             $   (598,000)       $ (1,357,000)
  Other..................................................................               (2,093,000)         (2,291,000)
                                                                                      ------------        ------------
                                                                                      $ (2,691,000)       $ (3,648,000)
                                                                                      ============        ============
</TABLE>

         The Company has recorded a deferred tax asset of $1,309,000 reflecting
the benefit of approximately $3,000,000 in foreign loss carryforwards, which
expire in varying amounts commencing in 2000. Realization is dependent on
generating sufficient foreign taxable income prior to the expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.

6.  EQUITY PLANS:

STOCK OPTION PLANS

         The Company has three stock option plans that provide for the granting
of options, the awarding of stock and the purchase of stock. Options granted
under the three stock option plans generally vest over a four-year period and
are exercisable over a period not to exceed ten years both as determined by the
Board of Directors. Incentive stock options are granted at fair value.
Nonqualified options are granted at exercise prices determined by the Board of
Directors.


                                      F-11
<PAGE>   43
         Information with respect to the options under the three stock option
plans is as follows:


<TABLE>
<CAPTION>
                                                                                                 EXERCISE PRICE        AGGREGATE
                                                                                    SHARES         PER SHARE           PROCEEDS
                                                                                    ------         ---------           --------
<S>                                                                               <C>           <C>                 <C>          
Outstanding December 31, 1995...........................................          1,169,500     $0.315 - $ 9.56     $   1,831,337
  Granted...............................................................            448,000     $8.155 - $15.75         5,711,726
  Exercised.............................................................           (368,500)    $0.315 - $ 5.00          (256,138)
  Canceled..............................................................           (117,500)    $1.35  - $15.75        (1,021,855)
                                                                                   --------     ---------------     -------------
Outstanding December 31, 1996...........................................          1,131,500     $0.315 - $15.75         6,265,070
  Granted...............................................................          2,910,000     $3.969 - $10.47        20,745,667
  Exercised.............................................................           (261,750)    $0.315 - $ 5.00          (189,644)
  Canceled..............................................................           (213,000)    $0.315 - $15.75        (1,969,909)
                                                                                   --------     ---------------     -------------
Outstanding December 31, 1997...........................................          3,566,750     $0.315 - $15.75     $  24,851,184
  Grants................................................................          1,114,000     $9.500 - $22.72        18,924,692
  Exercises.............................................................           (557,300)    $0.500 - $15.75        (3,125,920)
  Terminations..........................................................           (336,750)    $3.97  - $15.75        (2,357,250)
                                                                                   --------     ---------------     -------------
Outstanding December 31, 1998...........................................          3,786,700     $0.32  - $22.72        38,292,706
                                                                                  =========     ===============     =============
</TABLE>

         At December 31, 1998, there were 1,026,800 options exercisable at
$1.35-$15.75 per share. The aggregate exercise price of these options was
$7,313,519 as of December 31, 1998.

         The Company adopted the disclosure requirement of SFAS No. 123,
"Accounting for Stock-Based Compensation," effective for the Company's December
31, 1996 financial statements. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, compensation cost has been computed for the stock option plans
based on the intrinsic value of the stock option at the date of grant, which
represents the difference between the exercise price and the fair value of the
Company's stock. As the exercise price of the stock options equaled the fair
value of the Company's stock at the date of option issuance, no compensation
cost has been recorded in the accompanying statements of operations. Had
compensation cost for the three option plans and the employee stock purchase
plan been determined consistent with SFAS No. 123, the Company's net income
(loss) and net income (loss) per share would have been adjusted to the following
pro forma amounts:


<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                   ---------------------------------------------------------------
                                                                           1996                      1997                     1998
                                                                   -------------             ------------            -------------
<S>                                                                <C>                       <C>                     <C>
Net income (loss):
  As reported............................................          $  (1,912,000)            $  4,610,000            $  11,267,000
  Pro forma..............................................          $  (2,404,000)            $  2,335,000            $   5,468,000
Basic income (loss) per share:
  As reported............................................                  $(.09)                    $.21                     $.50
  Pro forma..............................................                  $(.11)                    $.10                     $.24
Diluted income (loss) per share:
  As reported............................................                  $(.09)                    $.20                     $.46
  Pro forma..............................................                  $(.11)                    $.10                     $.23
</TABLE>

         Because the SFAS No. 123 method of accounting is not required to be
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The weighted average fair value of options granted was $8.67, $4.93 and
$10.97 for the years ended December 31, 1996, 1997 and 1998, respectively.

         Information with respect to the options outstanding under the three
stock option plans at December 31, 1998 is as follows:


<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                                 WEIGHTED            AVERAGE
                                                 AVERAGE            REMAINING       NUMBER
     EXERCISE PRICE                              EXERCISE          CONTRACTUAL     OF VESTED
       PER SHARE              SHARES              PRICE               LIFE          SHARES
     --------------           ------              -----               ----         ---------
<S>                        <C>                  <C>                <C>             <C>    
      $1.35-$3.96            531,750            $  3.00               7.57           298,750
      $5.00-$6.37            680,500            $  5.90               8.07           205,500
    $8.00-$11.875          1,605,750            $  9.88               8.68           425,550
    $13.25-$20.94            696,700            $ 15.53               9.19            97,000
    $21.00-$22.72            272,000            $ 22.07               9.73                --
                           ---------            -------               ----         ---------
                           3,786,700            $ 10.11               9.01         1,026,800
                           =========            =======               ====         =========
</TABLE>


                                      F-12
<PAGE>   44
         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1996, 1997 and 1998: risk-free interest rates ranging from 5.4% to
6.9% based on the rate in effect on the date of grant; no expected dividend
yield; expected lives of 6.0 years for the options; and expected volatility of
70%.

EMPLOYEE STOCK PURCHASE PLAN

         In 1997, the Company established an employee stock purchase plan that
provides full-time employees the opportunity to purchase shares at 85% of fair
value on dates determined by the Board of Directors, up to a maximum 10% of
their eligible compensation or $21,250, whichever is less. There were 300,000
shares available for purchase under this plan, of which 42,236 and 55,858 were
purchased in 1997 and 1998, respectively.

ANNIVERSARY STOCK PLAN

         The Company grants 200 shares of the Company's common stock to all
employees who commenced employment prior to December 31, 1998 in July following
their fifth anniversary of employment. The cost of the anniversary stock plan is
accrued over the employment period of the employees.

7.  SAVINGS AND DEFERRED COMPENSATION PLANS:

         The Company maintains Employee Savings Plans (the "Plans") that cover
substantially all of its full-time U.S. and U.K. employees. All eligible
employees may elect to contribute a portion of their wages to the Plans, subject
to certain limitations. In addition, the Company contributes to the Plans at the
rate of 50% of the employee's contributions up to a maximum of 3% of the
employee's salary. The Company's contributions to the Plans were $222,000,
$212,000 and $308,000 in the years ended December 31, 1996, 1997 and 1998,
respectively.

         The Company also maintains a noncontributory pension plan that covers
substantially all of its full-time Japanese employees. All contributions to this
pension plan are made by the Company in accordance with prescribed statutory
requirements. The Company's contributions to the Plan were $56,000, $76,000 and
$74,000 for the years ended December 31, 1996, 1997 and 1998, respectively.

         In 1998, the Company created a deferred compensation plan. Under the
plan, eligible, highly compensated employees, as defined, can elect to defer a
portion of their compensation and determine the nature of the investments which
will be used to calculate earnings on the deferred amounts. The Company will
record the deferrals as a liability and intends to place a corresponding amount
into a trust fund.

8.  COMMITMENTS AND CONTINGENCIES:

         The Company leases office facilities and equipment under various
operating leases with remaining noncancelable lease terms generally in excess of
one year. Rent expense was $3,709,000, $4,867,000 and $5,537,000 for the years
ended December 31, 1996, 1997 and 1998, respectively. Future minimum rental
payments at December 31, 1998, on these leases are as follows:


<TABLE>
<S>                                        <C>                    
1999................................       $  7,088,000
2000................................          4,057,000
2001................................          2,218,000
2002................................          1,650,000
2003.....................................     1,170,000
Thereafter...............................       972,000
                                           ------------
                                           $ 17,155,000
                                           ============
</TABLE>

         From time to time the Company is involved in certain legal actions
arising in the ordinary course of business. In the Company's opinion, the
outcome of such actions will not have a material adverse effect on the Company's
financial position or results of operations.

9. RELATED-PARTY TRANSACTIONS:

         The Company paid approximately $78,000 and $33,000 for the years ended
December 31, 1996 and 1997, respectively, to an entity owned by the President
and Chief Executive Officer of the Company for rental and usage of an aircraft.


                                      F-13
<PAGE>   45
10.  GEOGRAPHIC SEGMENT DATA:

         See Note 1 for a brief description of the Company's business. The
Company is organized by geographic locations and has one reportable segment: the
United States. All license fees are recorded in the United States; service fees
are recorded in the location in which the sale originates and the service is
performed. All transfers between geographic areas have been eliminated from
consolidated net sales. Operating income consists of total net sales recorded in
the location less operating expenses and does not include interest income, other
expense or income taxes. This data is presented in accordance with SFAS No. 131
"Disclosure About Segments of an Enterprise and Related Information".


<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                           ------------------------------------------------
                                               1996               1997              1998
                                           -----------        -----------      ------------
<S>                                        <C>                <C>               <C>        
Revenues:
United States......................        $38,521,000        $49,039,000       $85,650,000
All Other..........................         27,725,000         29,407,000        26,870,000
                                           -----------        -----------      ------------
                                           $66,246,000        $78,446,000      $112,520,000
                                           ===========        ===========      ============
Operating income (loss):
United States......................        $(1,940,000)         5,889,000       $17,757,000
All Other..........................           (104,000)         1,324,000           119,000
                                          -------------       -----------      ------------
                                           $(2,044,000)        $7,213,000       $17,876,000
                                           ============        ==========       ===========
Identifiable assets:
United States......................        $35,911,000        $38,293,000       $58,938,000
All Other..........................         13,304,000         14,726,000        14,620,000
                                           -----------        -----------      ------------
                                           $49,215,000        $53,019,000       $73,558,000
                                           ===========        ===========       ===========
</TABLE>


                                      F-14