**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2005**

**Commissionfile number 001-16379**

**Dendrite International, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

| **New Jersey**                                             |   | **22-2786386**       |
|------------------------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of                           |   | (I.R.S. Employer     |
| Incorporation or  Organization)                            |   | Identification  No.) |
| **1405/1425 Route 206 South**                              |
| **Bedminster,  NJ 07921**                                  |
| (Address of  Principal Executive Offices)                  |
| **(908) 443-2000**                                    |
| (Registrant’s  telephone number, including area code) |

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**CommonStock, no par value**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

The aggregate market valueof shares of common stock held by non-affiliates of the registrant as of June 30,2005 was $548,709,000 based upon the June 30, 2005, closing price of$13.80 per share.

The number of shares ofcommon stock outstanding as of March 6, 2006 was 43,552,894.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholdersare incorporated by reference into Part III.

 

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**TABLE OF CONTENTS**

| **PART I**   |
|-------------------|
| ITEM 1.           |   | BUSINESS |   | 3 |   |
| ITEM 1A.          |   | RISK FACTORS |   | 13 |   |
| ITEM 1B.          |   | UNRESOLVED STAFF  COMMENTS |   | 13 |   |
| ITEM 2.           |   | PROPERTIES |   | 13 |   |
| ITEM 3.           |   | LEGAL PROCEEDINGS |   | 13 |   |
| ITEM 4.           |   | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS |   | 14 |   |
| **PART II**  |
| ITEM 5.           |   | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |   | 14 |   |
| ITEM 6.           |   | SELECTED FINANCIAL  DATA |   | 15 |   |
| ITEM 7.           |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   | 16 |   |
| ITEM 7A.          |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK |   | 43 |   |
| ITEM 8.           |   | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |   | 43 |   |
| ITEM 9.           |   | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |   | 43 |   |
| ITEM 9A.          |   | CONTROLS AND  PROCEDURES |   | 44 |   |
| ITEM 9B.          |   | OTHER INFORMATION |   | 48 |   |
| **PART III** |
| ITEM 10.          |   | DIRECTORS AND  EXECUTIVE OFFICERS OF THE REGISTRANT |   | 48 |   |
| ITEM 11.          |   | EXECUTIVE  COMPENSATION |   | 48 |   |
| ITEM 12.          |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS |   | 48 |   |
| ITEM 13.          |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |   | 50 |   |
| ITEM 14.          |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES |   | 50 |   |
| **PART IV**  |
| ITEM 15.          |   | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES |   | 50 |   |

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Note:                 Dendrite, MobileIntelligence and the other Dendrite product and service names mentioned hereinare trademarks or registered trademarks of Dendrite in the United States and inseveral other countries world-wide. All other product and service namesreferred to in this document are or may be the trademarks of their respectiveowners.

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**PART I**

**ITEM 1. Business**

**General**

Dendrite International, Inc. (collectively, withits subsidiaries, the “Company,” “Dendrite,” “we,” and “our”) was incorporatedin 1987 with a mission to improve sales and marketing productivity forpharmaceutical and other life sciences companies. Dendrite pioneered andquickly became the standard for pharmaceutical sales force automation, enablingtransparency between the home office and its sales force—a relationship thatwas formerly detached and paper-based.

Dendrite leverages its extensive knowledge of thepharmaceutical industry’s complex and unique selling process to deliver leadingand adaptive solutions. Our solutions are deployed in each of the world’s top20 pharmaceutical companies, in hundreds of large, mid-tier, and emergingmanufacturers, and in 59 countries around the globe. Every year hundreds ofmillions of interactions are made using Dendrite’s sales, marketing, clinicaland compliance solutions that are closely aligned with the growing needs of thepharmaceutical industry

In the mid 1990s, with the advent of prescriber volumedata, the pharmaceutical industry underwent a significant shift in the way itwent to market, aligning its efforts toward scaling sales forces to maximizethe number of contacts made with the highest volume prescribers. Dendrite ledthe way with innovative functionality to support more complex salesorganization structures and integrated field support solutions to improveproductivity among the growing sales force

Over the past few years, anew evolutionary shift has taken shape as only a handful of pharmaceuticalcompanies have the sales force sizes to saturate the doctor’s office, andprescribers have become overwhelmed by sales visits. This trend, coupled withthe decreasing pipeline of new blockbuster drugs to carry growth, has led thepharmaceutical industry to seek innovative solutions to drive market share. Theindustry is moving away from a mono-focal dependence on sales representativestoward a more integrated sales and marketing approach that allows it to reachthe right prescribers at the right time with the right message through theright channel. As the complexity of selling, marketing, complying withregulations and supporting clinical trials continues to increase, Dendrite hascontinued to evolve and expand itself to cater to the industry’s emergingneeds.

**Dendrite Solutions**

Dendrite helpspharmaceutical companies communicate effectively and efficiently withprescribers to provide the information and knowledge that will help doctorsselect the best available medication to improve their patients’ health. Oursolutions are grouped into four categories: Sales Solutions, MarketingSolutions, Compliance Solutions, and Clinical Solutions.

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**I. Sales Solutions**

In anenvironment where time with the prescriber is decreasing and competition isincreasing, field sales representatives need state-of-the-art tools andinformation that allow them to achieve their ultimate objective of deliveringtimely and pertinent information to their customers—the prescriber. Our suiteof Sales Solutions includes a comprehensive field and home based software suitedesigned to enable pharmaceutical and life sciences companies to manage salesforce activities. The full suite of software and services in this categoryincludes:

**i. SalesForce Effectiveness (SFE) Software**

A comprehensive,field-based product suite that helps pharmaceutical companies manage salesforce activities and includes both software licensing and maintenance.

·       **Mobile Intelligence****Ô**.(Version 4.0). This is the next generation successor to WebForceÔ,Dendrite’s flagship Sales Force Effectiveness (SFE) solution used to providevisibility and direction between the pharmaceutical home office and the fieldsales representative. As sales force automation solutions became more complexover the years, there grew a need for a solution that not only provided betterfunctionality, but also allowed for better use by the sales representative.Mobile Intelligence was developed using human centered design principles toimprove product usability via a more intuitive user interface that mapsdirectly to the daily workflow of sales representatives. The solution improvesfield sales productivity as it promotes more efficient and effective detailinginteractions with customers and is available as an enterprise or On-Demand,hosted version. Mobile Intelligence is built on a Microsoft .NET framework thatincludes TIBCO Enterprise Application Integration (EAI) technologies. Theplatform enables an open, extensible and configurable solution that is easilyintegrated into a sales and marketing system environment.

·        **WebForceMedSurg****Ô****.**An SFE tool used to manage the specialized needs ofmedical device and surgical sales forces.

·        **WebForceCG****Ô****.**An SFE tool used to manage the specialized needs ofconsumer goods sales forces globally.

·        **j-force****Ô****.**A suite ofSFE tools specifically developed for the Asian hospital-drivenpharmaceutical market.

·        **J-centreSYNERGY****Ô****.**A solution that enables information exchange betweenpharmaceutical companies and wholesalers.

·        **VisiForce****Ô****.**An SFE tool specifically for life science andpharmaceutical companies in emerging international markets where organizing,targeting, and evaluating potential prescribers is essential for the commercialsuccess of sales forces.

·       **Application Integration Server (AIS).**The AIS is theintegration hub for Dendrite’s entire technology solution suite. It is acost-effective, flexible, and practical architecture that provides pre-builtintegration between Dendrite products and allows Dendrite customers tointegrate Dendrite solutions within their own environment. AIS enablescustomers to make better and more informed decisions in an environment wheredata and activity must be shared and accessed at an individual prescriber level.The AIS uses universal integration technologies (XML, Web Services), whichpromotes the reuse of existing sales and marketing infrastructure investmentsand standards.

·       **Analyzer****Ô****.**A flexible, easy-to-use data analysis tool thatstandardizes the decision support and reporting processes for all levels of apharmaceutical sales organization. Analyzer is available as a .NET based aswell as a non-.NET based solution.

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·       **Organization Manager®.**Acomprehensive sales force resource management solution that was developed tominimize interruption to the sales process, as pharmaceutical companies rapidlyredeploy and reorganize their sales force. The solution manages complex fieldsales alignments linking sales representatives and managers to customers, geographies,products, territories, and teams in order to promote an efficient andproductive sales environment.

·       **ForcePharma Geo****Ô**.A geographical-based business intelligence tool used to share objectives orsales results between the home office and the sales force. It provides thesales force with an easy and intuitive way to analyze performance indicatorsagainst the strategy set by the home office.

**ii. Customer Analytics**

·       **360****° Insights****Ô.**As the pharmaceutical industry continues to experience pricing, regulatory andpipeline pressures, sales and marketing integration has become paramount toimproving bottom line results. Dendrite’s 360° Insights enables sales andmarketing integration by providing transparency into brand, market, and salesperformance in one software application. This transparency enables integrationand collaboration between the sales and marketing organizations to gaincomprehensive, accurate, and actionable insights about their customers andtheir brands that will support and grow their business by making adaptations tosales and marketing tactical plans based on measured market responses.

**·****      Nucleus Pharma®.** Nucleus Pharma is an end-to-endcustomer information management solution that enables users to capture,centralize and manage customer-related information across the enterprise and use this information to makecritical business decisions. Creating this “single view of the customer” enables the pharmaceutical company toleverage up-to-date information for improved relationship marketing andachieve more efficient selling.

**iii. Support Services**

Pharmaceuticalcompanies are being challenged to increase their productivity through improvedbusiness process support, a robust technical infrastructure and seamlesssystems integration. Dendrite’s unique depth of pharmaceutical industryknowledge gained over nearly two decades of unrelenting support has yielded asuite of effective and proven business process alignment solutions that enableclients’ to meet these goals.

·       **Integrated Support Center.**Support services that enhance theproductivity and success of mobile field sales professionals and home officepersonnel, including support for Dendrite business applications, third-partysoftware, custom applications, and communications. Unlike a traditional helpdesk, Dendrite’s Integrated Support Center is pharma-focused for greater depthof knowledge and uses multiple, integrated channels to create a complete viewof support issues and allow for efficient resolution. It is a single sitesolution center for sales representatives that have problems executing theirjob.

·       **Hardware & Asset Management Services.**This servicefocuses on minimizing pharmaceutical sales representative downtime byexpediently repairing and/or replacing non-functioning field-based hardware,such as laptop computers, tablets, slates, desktops, or handheld devices. Inaddition, this service also focuses on tracking client assets and performinginventory management functions.

·       **Implementation Services.**Nearly two decades of deliveringcustomer relationship management (CRM) and SFE solutions back this service,which provides pharmaceutical and life sciences companies with unique industryinsight, expertise and technical capabilities for implementing today’s businessapplication software solutions that best reflect the customer’s current ordesired future practices.

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·       **Training Services.**Training solutions tailored to apharmaceutical and life science company’s specific needs.

·       **Production Services.**Technical operations services tomaintain customer applications/systems readiness.

·       **Managed Hosting Services.**Provides a total outsourcingalternative for customer system, software, and business application components,including servers, databases, communication networks, and data processes, whichare housed within Dendrite’s state-of-the art Data Center facilities, or withMobile Intelligence technology, available for on site support.

**Note:**In2005, the Company’s Sales and Sales Support Solutions were marketed under theFirst Source Sales Applications and First Source Sales Support Solutions brandcategories.

**II. Marketing Solutions**

With increased industrypressure for brand performance as a result of fewer blockbuster drugs andshorter patent expiries, the pharmaceutical industry has sought more efficientways to reach its prospects versus traditional mass-marketing techniques. Increasingly,the pharmaceutical marketer is striving to reach prescribers based onindividualized adoption and prescribing behavior. Dendrite’s MarketingSolutions include powerful targeting tools, unique execution channels and theability to measure campaign effectiveness to enable more precision to reachprescribers at the right time, through the right channel with the rightmessage.

**i. Targeting Solutions**

·       **ScripMax****Ô.**United Statesbusiness intelligence solutions that access anonymous longitudinal patient data(LPD) to identify individual doctor prescribing changes. ScripMax was developedfor use in marketing campaigns to provide more precise targeting versustraditional volume-based solutions. It enables the brand to more quicklyidentify prescriber brand switching behavior and behavioral tendencies whichcan be used to craft highly targeted, personalized proactive messages.

·       **Physician Connect****SM.**Dendrite’s Physician Connect solution enables brand teams to identifyprescribers that influence peer script writing behavior. Unlike traditional keyopinion leader solutions, Physician Connect identifies local and regionalinfluencers within social or professional networks of trust. By targeting theseinfluencers with specific marketing and sales messaging, the rapid adoption ofa new product by these leaders catalyzes its adoption in localized markets.

·       **Practitioner Validation and Cleansing Services.**Thissolution reconciles physician data through standardizing, matching and mergingout duplicate information. Clean, up to date files that uniquely affect eachindividual prescriber are the prerequisite for integrated marketing and salesactivity.

·       **Optas****TM Database.**The Optas Database, usedprimarily for targeted patient compliance and relationship marketing programs,captures and centralizes patient records acquired through various customeropt-in programs that comply with HIPAA (Health Insurance Portability andAccountability Act) regulations to ensure privacy at all times.

·       **Pharbase****TM.**A prescriber database service that provides a source of intelligence topharmaceutical companies. Powerful marketing programs can be developed withprecise targeting characteristics based on elements such as doctor profiledata, response to previous promotional approaches, specialty, interests, areasof influence and socio-demographic data contained in Pharbase.

·       **Docscan®.**AEuropean, regional and country based physician profiling service that enablespharmaceutical customers to analyze physician behavior, market trends, anddemographics. 

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Docscan providescustomers with business intelligence for a broad range of strategic sales andmarketing actions, including projecting prescriber product acceptance,predicting consumer utilization and preparing subsequent promotionalinitiatives.

**ii. Execution Solutions**

·       **Medical Dialogue****SM.**A fully refined, pharmaceutical industry-specific service that providestelephone-based, interactive discussions between Dendrite’s own healthcare professionals and physicians targeted for specific promotion by ourcustomers. The service builds product awareness using a disease managementapproach.

·       **Loyalty Programs.**Comprehensive programs that help foster asense of patient brand loyalty for specific pharmaceutical products. LoyaltyPrograms help maximize the effectiveness of direct-to-patient marketing througha one-on-one channel; reinforcing doctor prescribing intention. These programsuse various mechanisms such as loyalty cards, debit cards, vouchers, rebates,email and other channels.

·       **Optas****TM E-mail.**Optas E-mail is a privacy-safesoftware solution designed specifically for pharmaceutical companies to createand deploy high volume and personalized e-mail campaigns to a target audience.

·       **Single Source Sampling**®**.**Acooperative, cost-effective mail and fulfillment program to target non-calledor infrequently called upon physicians used primarily to market mature products

·       **Direct Mail.**Dendrite’sdirect mail services range from personalized mail creation and distribution tocustom mail merge and dimensional mail projects.

·       **STAT/GRAM**®**.**A brandedcommunication service that is favored by many pharmaceutical companies todistribute important medical news such as product launches, labeling changesand product safety recalls.

·       **Telecommunications/Call Center.**A service that enablesinteractive communication with health care professionals via leading-edge callservices, broadcasting, and Web-based technologies. Dendrite customizesprograms and offers live operator or interactive voice response systems.

·       **CME Marketing.**A service that allows a continuing medicaleducation provider’s message to reach its key target audience throughproprietary lists.

·       **PublicationCirculation Management.**Expert services to support paid, controlled,and single-sponsored publications. Dendrite’s extensive databaseresources make it possible to customize the profiling and targeting ofhealthcare professionals to meet a customer’s targeting objectives.

**iii. Measurement Solutions**

·       **Optas****Ô****Campaign Management Solution.**A platform for designing,executing and managing pharmaceutical marketing campaigns. The campaignmanagement suite incorporates several components of the marketing processincluding segmentation, message management, timed communications, responsemanagement, program registration and privacy protection. The suite is deliveredin a hosted, online format and consists of campaign planning tools, an onlinesurvey tool, an email deployment tool and a reporting tool for tracking andmeasuring the progress and return of a campaign.

**Note:**In2005, the Company’s Marketing Solutions were marketed under the First SourceIntegrated Marketing and First Source Customer Insight brand categories.

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**III. Compliance Solutions**

A solution suite poweredby Dendrite’s BuzzeoPDMA division. These solutions unite market-leadingsoftware tools with consulting,  andprofessional services to help pharmaceutical and other life sciences companiesmeet federal and state regulatory compliance requirements. This comprehensivesolutions suite supports the pharmaceutical product lifecycle through thefollowing components:

**i. Sampling Solutions**

·       **Sample Guardian****Ô****.**A complete sample management tool used to track, analyze andstore all drug sample activity. Sample Guardian helps enable pharmaceuticalcompanies to comply with government regulations, specifically in the UnitedStates, but with growing applicability in other countries.

·       **FDA/PDMA Consulting.**Aconsulting service that addresses the needs of pharmaceutical and life sciencescompanies in the design or redesign of their sample accountability andcompliance programs.

·       **Intelligent Allocations.**A comprehensive solution, combininghigh value services with Web-based ordering technology that enablespharmaceutical personnel to manage and optimize the allotment of productsamples.

·       **Distribution and Fulfillment.**Services for distribution andfulfillment of pharmaceutical drug samples through Dendrite’s distributionfacilities. These distribution centers include operations such as receiving,inventory management, fulfillment, shipping, returns and document retention.

·       **Reconciliation Services.**Services designed to enableinternal reconciliation of prescription drug samples along with the evaluationof potential significant loss of field sales representatives’ drug sampleinventories. These services are guided by client-specific procedures and byregulatory requirements, such as the Prescription Drug Marketing Act (PDMA) inthe US.

·       **Auditing andInventory Services.**Comprehensive services that include annualinventories, random audits, and for-cause audits of field salesrepresentatives. Additionally, these services include practitioner officevisits, signature verification programs and sales representative’s samplecloseouts.

**ii. Federaland State Regulatory Compliance Solutions**

·       **Regulatory Consulting Services.**Services in this suiteinclude compliance auditing and gap analysis, mock inspections, standardoperating procedure development, program design and implementation, ongoingsupport and guidance, staff augmentation, and liaising with federal and stateagencies. Consultation is provided to pharmaceutical and other life sciencecustomers in the regulated areas of controlled substances, prescription drugs,list I chemicals, and medical devices.

·       **Regulatory and Compliance Training Services.**Completeregulation and compliance-specific training and collaborative educationalsolutions delivered through traditional, web-based or blended training methods.Dendrite develops and delivers training-program content, tailored tospecific requirements.

·       **State Services.**Dendrite provides guidance to companies toassist them with understanding state regulatory requirements and registrationprocesses related to research, manufacturing, and the distribution ofpharmaceutical products, controlled substances, over-the-counter products, andmedical devices. Services are designed to provide assistance in licensing,corporate changes, surveys, state license monitoring, state legislation andregulation monitoring, Medicaid program, and Puerto Rico regulations.

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·       **Document Scanning and Data Capture.**An optical scanning,imaging, character-recognition, and retrieval system designed forefficient, economical sample accountability to assist our customers with theirregulatory compliance requirements.

·       **Computer Systems Auditing, Validation Services and InformationTechnology Security.**Services focused on ensuring that our clients’software applications and systems meet business and regulatory requirements.

**Note:**In2005, the Company’s Compliance Solutions were marketed under the First SourceSample and First Source Compliance Solutions brand categories.

**IV. Clinical Solutions**

Dendrite offers aset of solutions designed to benefit the clinical trial process by assisting ineffectively initiating studies, identifying potential investigators andpatients, providing ongoing support and training to investigators, conductingpre- and post-marketing risk assessments, facilitating safety reporting, andproviding data analysis of trial and competitive drugs. Services include:

·       **Clinical Trial Accelerator Services****SM.**Allowpharmaceutical and other life sciences companies to expedite the initiation ofclinical trials, including protocol feasibility testing, eligible patientpopulation profiling, and investigator identification/qualification.

·       **Clinical Trial Effectiveness Solutions****Ô.**Designed to ensure two critical success factors for trials utilizingclinical trial technologies:  1) trialsite productive up-time, and 2) trial site satisfaction. These success factorsare achieved through Dendrite’s site assessment services, provisioningservices, connectivity services, application and data hosting services, sitetraining and site support.

**Proactive Risk Management****SM****.****  **An intelligence-based service aimedat delivering actual drug usage data and analysis through observational studiesand safety tracking tools that can be used to identify and analyze risksituations before they adversely affect the product life cycle.

**Customers**

Our solutions are deployed in each of the world’s top20 pharmaceutical companies, in hundreds of large, mid-tier, and emergingmanufacturers, and in 59 countries around the globe.

Approximately 24% and 10%of our total revenues in 2005 came from our two largest customers, Pfizer andSanofi-Aventis, respectively. Approximately 28% and 36% of our total revenuesin 2004 and 2003, respectively, came from our largest client, Pfizer.

**Competition**

Our solutions compete with others principally on thebasis of industry applicability and product flexibility. They also compete onthe basis of name recognition, global competence, service standards, cost,breadth of customer base and technical support and service. We believe that oursolutions compete favorably with respect to these factors and that we arepositioned to maintain strong market leadership through innovative new productand application developments and continued focus on support services.

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While we face a number ofsignificant competitors in each of our specific market areas, we believe thatthere is no single competitor that currently offers our breadth of solutions inthe pharmaceutical and life sciences industries on a worldwide basis. We expectcompetition to increase as new competitors enter our markets and as existingcompetitors expand their product lines, consolidate or offer more compellingsolutions. We believe that we have distinguished ourselves and are wellpositioned in the pharmaceutical market due to our combination of deeppharmaceutical business knowledge, recognized technical support, depth ofpersonnel experienced in the pharmaceutical industry and the quality of ourproprietary products and product architecture which is uniquely suited to thepharmaceutical industry. In addition, we face competition from currentcustomers and potential customers who may elect to design and install oroperate their own systems.

**Research and Development**

We continue to take advantage of new technologies indeveloping new products and services. We work closely with our customers todevelop new products designed directly for their business needs. We recordedapproximately $6,094,000, $9,316,000, and $11,633,000 of research anddevelopment expense for the years ended December 31, 2005, 2004 and 2003,respectively. Our research and development expense plus additions tocapitalized software development costs, was approximately $10,958,000,$15,202,000 and $14,815,000 for the years ended December 31, 2005, 2004and 2003, respectively. We capitalized less costs in the year ended December 31,2005 than in 2004 due to the development for the release of our next generationSFE solution, released in 2005.

Dendrite has capitalizedcertain costs related to the development of new software products and theenhancement of existing software products consistent with Statement ofFinancial Accounting Standards No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased or Otherwise Marketed.” Capitalizedsoftware development costs net of accumulated amortization were $10,341,000 and$9,170,000 at December 31, 2005 and 2004, respectively.

**Seasonality**

Historically, we haveexperienced lower spending from our customers in the first and third quartersas compared to other quarters. Due to the recent growth of our internationaloperations, we have been further impacted by lower third quarter spending byour customers outside the United States.

**Proprietary Rights**

Dendrite relies ona combination of methods to protect our proprietary rights, including:

·       tradesecret, copyright and trademark laws;

·       non-disclosureand other restrictive covenants with our customers, vendors and strategicpartners; and

·       non-disclosureand other restrictive covenants with our executive officers and other key andtechnical employees and consultants.

Existing U.S. trade secretand copyright and trademark laws provide only limited protection for ourproprietary rights, and even less protection may be available under foreignlaws.

**Employees**

As of December 31,2005, the Company employed 2,793 employees: 1,456 in the U.S. and Canada; 858in Europe; 279 in the Pacific Rim; and 200 in Latin America.

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**Geographical Areas**

See Note 13 of theNotes to Consolidated Financial Statements concerning information relating tothe Company’s geographic areas.

**Executive Officers**

Thefollowing table identifies the current executive officers of the Company:

| **Name**                | ** ** | ** ** | ** ** | **Age**                                               | ** ** | ** ** | **Capacities in Which They Serve** | ** ** |
|-------------------------|------------|------------|------------|-------------------------------------------------------|------------|------------|------------------------------------|------------|
| John E. Bailye          |       | 52         |       | Chairman of the Board  and Chief Executive Officer    |
| Joseph Ripp             |       | 53         |       | President and Chief  Operating Officer                |
| Jeffrey J. Bairstow     |       | 47         |       | Executive Vice President  and Chief Financial Officer |
| Christine A. Pellizzari |       | 38         |       | Senior Vice President,  General Counsel and Secretary |
| Mark H. Cieplik         |       | 51         |       | Senior Vice President                                 |
| Natasha Giordano        |       | 45         |       | Senior Vice President                                 |
| Garry D. Johnson        |       | 54         |       | Senior Vice President  and Chief Technology Officer   |
| Jean-Paul Modde         |       | 41         |       | Senior Vice President                                 |
| Mark Theilken           |       | 55         |       | Senior Vice President                                 |

 

Each executive officer serves at the discretion of theBoard of Directors.

**JohnE. Bailye**   has served as Chief Executive Officerand Director since the Company’s founding in 1987 and since 1991 in theadditional position of Chairman of the Board. Prior to 1987, Mr. Bailye servedas Managing Director of Foresearch Pty., Limited (“Foresearch”), a consultingcompany to the pharmaceutical industry in Australia. Mr. Bailye served inthat capacity from the time he acquired Foresearch in 1976 until he sold thecompany in 1986. Mr. Bailye served as a market researcher for Foresearchprior to 1976. Mr. Bailye holds a Bachelors of Commerce in Finance,Marketing and Business from the University of New South Wales.

**JosephRipp**   has servedas President and Chief Operating Officer since November 2005. Priorto joining the Company, Mr. Ripp held several senior positions within TimeWarner, Inc., most recently serving as Senior Vice President of the Media &Communications Group. Prior to that position, Mr. Ripp served asVice Chairman of America Online, Inc. from 2002 to 2004. Mr. Rippalso served as Chief Financial Officer of America Online, Inc.; ExecutiveVice President and Chief Financial Officer of Time Warner, Inc.; andExecutive Vice President, Chief Financial Officer of Time, Inc. Mr. Rippis on the Board of Directors of Greenfield Online, Inc. He is on the Boardof Trustees at Manhattan College, the Board of Directors of the AdvertisingEducational Foundation and the Finance Committee of A Better Chance. He alsoserves on the Board of Directors and Executive Committee of the Ad Council andis Chairman of its Finance Committee. Mr. Ripp holds a Bachelor of Artsdegree from Manhattan College and Master of Business Administration from theBernard M. Baruch College of the City University of New York.

**JeffreyJ. Bairstow**   has servedas Executive Vice President and Chief Financial Officer since December 2005. Priorto joining Dendrite, Mr. Bairstow served as Chief Operating Officerof RelayHealth Corporation from 2004 to 2005 and Senior Vice President andChief Financial Officer of Vitria Technology, Inc. from 2003 to 2004. From1997 to 2002, Mr. Bairstow held senior management positions within HealthNet, Inc. including Executive Vice President and Chief Financial Officerof Health Net-California and President of Health Net’s Government and SpecialtyServices Division. Mr. Bairstow has also previously served as ChiefOperating Officer of America Service Group; President of Managed HealthNetwork, a subsidiary of Health Net, Inc.; Chief Financial Officerand then President of Vendell Healthcare; and Vice President of Finance andCorporate Controller and then Chief Operating Officer of 

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Park Healthcare Company.Mr. Bairstow holds a Bachelor of Arts degree from VanderbiltUniversity and Master of Business Administration from Vanderbilt’sOwen School of Business.

**ChristineA. Pellizzari**   has served as Senior VicePresident, General Counsel and Secretary since 2000. Ms. Pellizzari servedas Associate Counsel from 1998 to 2000. Prior to joining the Company, Ms. Pellizzariwas an Associate at Wilentz, Goldman & Spitzer, P.A. from 1995 to 1998and law clerk to the Honorable Reginald Stanton, Superior Court of New Jersey,from 1994 to 1995. Ms. Pellizzari holds a Bachelors of Arts in LegalStudies from the University of Massachusetts at Amherst and a Juris Doctoratefrom the University of Colorado School of Law.

**MarkH. Cieplik**   has served as Senior Vice Presidentresponsible for the Company’s operations and sales efforts for a major customersince 2002 and, additionally, for clinical services since 2003. Mr. Cieplikhas been with Dendrite since 1997, previously serving in key senior positionsincluding Senior Vice President, Worldwide Sales. Prior to joining the Company,Mr. Cieplik served as Vice President of Americas of Interleaf, Inc.from 1995 to 1997 and Director of North America Major Accounts for SystemSoftware Associates from 1991 to 1995. Mr. Cieplik also served in variouscapacities with IBM from 1976 until 1991. Mr. Cieplik holds a Bachelors ofScience in Marketing from Millikin University.

**NatashaGiordano**   has served as Senior Vice Presidentresponsible for global pharmaceutical company sales and Latin American salessince January 2005. Ms. Giordano has been with Dendrite since 2001and has previously served as Group President, Global Business Unit for majorcustomers, and Vice President, Global Accounts. Prior to joining Dendrite, Ms. Giordanospent 10 years at Parke-Davis/Warner Lambert in various sales andsales leadership positions, most recently managing Strategic Alliances. Ms. Giordanoholds a Bachelors of Science degree from Wagner College in New York.

**GarryD. Johnson**   has served as Senior Vice Presidentand Chief Technology Officer since 2003. Mr. Johnson has been withDendrite since 2000 and has served as Vice President of North AmericanTechnical Operations. Prior to joining the Company, Mr. Johnson served asVice President of Information Technology at Boron Lepore and, prior to that, asDirector, IT Strategy & Quality, at Allied Signal. Mr. Johnsonholds a Bachelors of Arts in Management from Fairfield University.

**Jean-PaulModde**   has served as Senior Vice President responsiblefor European and Asia/Pacific sales and marketing and operations since 2003. Mr. Moddehas been with Dendrite since 1988, previously serving in other key managementpositions including: Senior Vice President, Asia/Pacific and Latin Americanregion; Regional Director, Latin America; and Sales Director, Europe. Mr. Moddeholds a Bachelors of Science in Computer Science from Macquarie University,Australia.

**Mark Theilken**   hasserved as Senior Vice President responsible for North American sales, marketingservices, and BuzzeoPDMA sales and operations since January 2005. Mr. Theilkenhas been with Dendrite since April 2004 and has previously served asSenior Vice President responsible for integrated marketing, data management andDendrite’s CRM Effectiveness unit. Prior to joining Dendrite, Mr. Theilkenserved as President and Chief Executive Officer of Fuego, Inc. from March 2000to January 2004. Prior to Fuego Mr. Theilken spent 5 years atAcxiom Corporation serving as Group Leader, InfoBase Products, and Senior VicePresident, marketing information services. Prior to Acxiom, Mr. Theilkenspent 22 years at IBM Corporation. Mr. Theilken holds a Bachelors ofScience in Mathematics from the University of Illinois.

**Additional Information**

For additional informationregarding the Company’s business, see Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

12

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**Available Information**

We make available free of charge through our website, *www.dendrite.com*, all materials that wefile electronically with the SEC, including our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports, filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as soon as reasonablypracticable after electronically filing such materials with, or furnishing themto, the SEC.

You may also read and copyany materials filed by the Company with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549, and you may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains an Internet website, *www.sec.gov*, that contains reports, proxy and informationstatements and other information which the Company files electronically withthe SEC.

**ITEM 1A. Risk Factors**

Incorporated by referenceto “FACTORS THAT MAY AFFECT FUTURE RESULTS” included in “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”included in Item 7 below.

**ITEM 1B. Unresolved Staff Comments**

Not applicable.

**ITEM 2. Properties**

We lease the following facilities in the U.S.: a233,000 square foot facility in Bedminster, New Jersey, which serves as ourcorporate headquarters; a 137,000 square foot facility in Totowa, New Jersey,which serves as a distribution center, warehouse and call center for ourintegrated marketing business; a 100,000 square foot facility in Chesapeake,Virginia, which houses a data and call center; a 57,000 square foot facility inNorcross, Georgia, which serves as a data and call center and hardware repairand maintenance facility; a 6,700 square foot office in Durham, North Carolina,which houses certain employees and operations in our data and analyticsbusiness; a 14,000 square foot facility in Woburn Massachusetts which housesemployees and operations for our Optas Division; and a 4,200 square foot officein Fort Mitchell, Kentucky, a 2,100 square foot office in Mount Laurel, NewJersey, and a 300 square foot office in San Juan, Puerto Rico each of whichhouse employees and operations for our BuzzeoPDMA Division. The Bedminsterfacility is subleased from Pharmacia & Upjohn Company, a subsidiary ofPfizer, Inc.

We also lease, or have leased on our behalf, a totalof approximately 378,000 square feet for local management, sales offices andoperations in the following countries: Australia, Austria, Belgium, Brazil,Canada, China, Colombia, France, Germany, Greece, Hungary, India, Italy, Japan,Mexico, New Zealand, Poland, Portugal, Russia, South Korea, Spain, TheNetherlands, and the United Kingdom.

The Company also owns a145,000 square foot facility in Piscataway, New Jersey, which serves as ahardware repair and maintenance facility; and a 2,500 square foot facility inLeicestershire, United Kingdom, which is utilized for administrative officesand integrated marketing operations.

**ITEM 3. Legal Proceedings**

Dendrite is from time-to-timeinvolved in litigation relating to personnel and other claims arising in theordinary course of business. The Company is not currently engaged in any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our business.

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**ITEM 4. Submission of Matters to a Vote of SecurityHolders**

None.

**PART II**

**ITEM 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**

*Market Information*

The Company’s common stock, no par value, is quoted onthe NASDAQ Stock Market under the symbol “DRTE.”

The following table setsforth for the periods indicated the high and low sale prices for our commonstock as reported by the NASDAQ Stock Market.

| **Period**                             | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| Quarter Ended December 31,  2005       |       | $          | 19.96      |     | $          | 13.60   |       |
| Quarter Ended  September 30, 2005 |       | $          | 20.05      |     | $          | 13.88   |       |
| Quarter Ended June 30,  2005           |       | $          | 16.21      |     | $          | 13.75   |       |
| Quarter Ended March 31,  2005          |       | $          | 18.64      |     | $          | 13.79   |       |
| Quarter Ended  December 31, 2004  |       | $          | 19.73      |     | $          | 14.16   |       |
| Quarter Ended September 30,  2004 |       | $          | 18.59      |     | $          | 12.26   |       |
| Quarter Ended June 30,  2004           |       | $          | 19.77      |     | $          | 15.47   |       |
| Quarter Ended March 31, 2004           |       | $          | 17.48      |     | $          | 13.91   |       |

 

*Approximate Numberof Equity Security Holders*

As of March 6, 2006, there were approximately 310holders of record of our common stock.

*Dividends*

The Company has never paid cash dividends on itscommon stock and does not intend to pay cash dividends on common stock in theforeseeable future. If the Company were to consider paying cash dividends,certain of the covenants of the Company’s line of credit may limit the amountof any such dividends we may pay. See Note 7 of the Notes to ConsolidatedFinancial Statements and “Liquidity and Capital Resources” in Item 7 for adiscussion of our credit agreement.

*Issuer Purchases*

| **Period**             | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar Value)  of Shares that May  Yet be Purchased under  the Plans or Programs** | ** ** |
|------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| August 17, 2005   |       |       | 223,469    | (1)                                                  |       |                                             | $          | 18.00                                                                                                                            |       |                                                                                                                                                                                  |       | None |   |   |   | None |   |   |   |
| December 19, 2005 |       |       | 96,379     | (1)                                                  |       |                                             | $          | 14.63                                                                                                                            |       |                                                                                                                                                                                  |       | None |   |   |   | None |   |   |   |
| December 19, 2005 |       |       | 2,707      | (2)                                                  |       |                                             | $          | 14.63                                                                                                                            |       |                                                                                                                                                                                  |       | None |   |   |   | None |   |   |   |

 

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(1)           Represents shares tendered under the Company’sreplacement option program under which a designated executive may tender sharesof the Company’s common stock owned by the executive in order to pay theexercise price of vested options and applicable withholdings. The designatedexecutive receives replacement options in an amount equal to the number ofshares tendered. Each replacement option expires on the expiration date of theoriginal exercised option to which it relates and the exercised options must beheld for a period of at least one year or the replacement options areforfeited.

(2)           Represents shares tendered by an executiveto pay the exercise price of vested options and applicable withholdings in atransaction under the Company’s 2005 Stock Ownership Incentive Plan.

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**ITEM6. Selected Financial Data**

| ** **                                            | ** ** | **Year Ended December 31 ,**                   | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003(a)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                                                  | 437,240    |   | $ | 399,197 |   | $ | 321,107 |   | $ | 225,756 |   | $ | 227,362 |   |
| Operating costs & expenses:                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating costs                                       |       | 236,230                                                            |       | 205,896 |   | 162,481 |   | 111,381 |   | 120,679 |   |
| Selling, general and  administrative                  |       | 144,931                                                            |       | 132,016 |   | 107,862 |   | 77,132 |   | 93,276 |   |
| Research and development                              |       | 6,094                                                              |       | 9,316 |   | 11,633 |   | 10,396 |   | 11,104 |   |
| Facility and other charges(b)                         |       | 9,372                                                              |       | — |   | — |   | — |   | — |   |
| Amortization of acquired  intangible assets           |       | 4,431                                                              |       | 4,851 |   | 4,308 |   | 335 |   | 2,832 |   |
| Purchased software  impairment                        |       | —                                                             |       | — |   | — |   | — |   | 2,614 |   |
| Restructuring (benefit)  expense(c)                   |       | —                                                             |       | — |   | — |   | (47 | ) | 6,110 |   |
| Asset impairment(d)(e)                                |       | —                                                             |       | — |   | — |   | 1,832 |   | 11,723 |   |
| Other operating  (income)(f)                          |       | —                                                             |       | (707 | ) | — |   | — |   | — |   |
| Total operating costs &  expenses                 |       | 401,058                                                            |       | 351,372 |   | 286,284 |   | 201,029 |   | 248,338 |   |
| Operating income (loss)                               |       | 36,182                                                             |       | 47,825 |   | 34,823 |   | 24,727 |   | (20,976 | ) |
| Interest (income)                                     |       | (625                                                               | )          | (64 | ) | (731 | ) | (1,085 | ) | (2,439 | ) |
| Other expense (income)                                |       | 20                                                                 |       | 277 |   | (560 | ) | 149 |   | (3 | ) |
| Income (loss) before  income tax expense (benefit)    |       | 36,787                                                             |       | 47,612 |   | 36,114 |   | 25,663 |   | (18,534 | ) |
| Income tax expense (benefit)                          |       | 15,340                                                             |       | 18,047 |   | 15,054 |   | 10,265 |   | (6,063 | ) |
| Net income (loss)                                     |       | $                                                                  | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   | $ | 15,398 |   | $ | (12,471 | ) |
| Net income (loss) per share:                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | $                                                                  | 0.50       |   | $ | 0.71 |   | $ | 0.52 |   | $ | 0.39 |   | $ | (0.31 | ) |
| Diluted                                               |       | $                                                                  | 0.48       |   | $ | 0.69 |   | $ | 0.51  |   | $ | 0.38 |   | $ | (0.31 | ) |
| Shares used in computing net income (loss) per share: |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | 42,861                                                             |       | 41,503 |   | 40,340 |   | 39,872 |   | 39,681 |   |
| Diluted                                               |       | 44,223                                                             |       | 43,075 |   | 41,415 |   | 40,127 |   | 39,681 |   |

 

| ** **                                      | ** ** | **As of December 31 ,** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003(a)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                      | ** ** | **(in thousands)**      | ** ** |
| **Balance Sheet Data:**                         |       |                    |       |   |   |   |   |   |   |   |   |
| Working capital                                 |       | $                       | 82,247     |   | $ | 68,058 |   | $ | 47,176 |   | $ | 86,037 |   | $ | 93,721 |   |
| Total assets                                    |       | 363,007                 |       | 322,569 |   | 262,457 |   | 188,476 |   | 166,483 |   |
| Capital lease  obligation, less current portion |       | 1,648                   |       | 3,036 |   | 187 |   | 275 |   | — |   |
| Stockholders’ equity                       |       | 261,415                 |       | 227,589 |   | 176,135 |   | 146,759 |   | 128,847 |   |
|                                                 |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Includes the operatingresults of Synavant Inc. for the period from June 16, 2003 through December 31,2003.

(b)          2005 facility and othercharge relates to $7,649 of facility related charges and $1,723 of severance.

(c)           2001 restructuringexpense relates to the elimination of certain positions and closing of ourStroudsburg facility, including the related exit costs.

(d)          2002 asset impairmentrelates to write-down of a facility then held for sale.

(e)           2001 asset impairmentsrelated to a $6,173 goodwill impairment charge, $3,450 write-off of equityinvestments and $2,100 impairment of a facility held for sale.

(f)             Insurance proceedsrelated to the recovery of costs of certain losses.

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**ITEM 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**($ in thousands)**

**Forward-Looking Statements**

This Form 10-Kmay contain certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21-E of the SecuritiesExchange Act of 1934, which are intended to be covered by the safe harborscreated by such acts. For this purpose, any statements that are not statementsof historical fact may be deemed to be forward-looking statements,including the statements under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” regarding our strategy, futureoperations, future expectations or future estimates, future financial positionor results and future plans and objectives of management. Those statements inthis Form 10-K containing the words “believes,” “anticipates,” “plans,”“expects” and similar expressions constitute forward-looking statements,although not all forward-looking statements contain such identifyingwords. These forward-looking statements are based on our currentexpectations, assumptions, estimates and projections about our Company and thepharmaceutical and consumer packaged goods industries. All such forward-lookingstatements involve significant risks and uncertainties, including those risksidentified in this Form 10-K under “Factors That May AffectFuture Results,” many of which are beyond our control. Although we believe thatthe assumptions underlying our forward-looking statements are reasonable,any of the assumptions could be inaccurate and actual results may differmaterially from those indicated by the forward-looking statementsincluded in this Form 10-K, as more fully described under “FactorsThat May Affect Future Results.” In light of the significant uncertaintiesinherent in the forward-looking statements included in this Form 10-K,you should not consider the inclusion of such information as a representationby us or anyone else that we will achieve such results. Moreover, we assume noobligation to update these forward-looking statements to reflect actualresults or changes in assumptions, expectations or projections. In addition,our financial and performance outlook concerning future revenues, margins,earnings, earnings per share and other operating or performance results doesnot include the impact of any future acquisitions, future acquisition-relatedexpenses or any future restructuring or other charges that may occur fromtime-to-time due to management decisions and changing business circumstancesand conditions.

**EXECUTIVE OVERVIEW**

We provide a broad array of solutions worldwide thatenable pharmaceutical and other life science companies to strategicallyoptimize their sales and marketing channels and clinical resources. Our plan isto continue to diversify and expand our solutions portfolio, customer base andgeographic reach by leveraging our extensive knowledge of the pharmaceuticaland life sciences industries and capitalizing upon our deep relationships in theseindustries. Our strategy continues to rely on both internal growth andacquisitions to meet to our growth objectives.

We have expanded both our portfolio of solutions andcustomer base and believe that this combination presents significantopportunity for future growth. In January and September 2005, webroadened and enhanced our service portfolio with our acquisitions ofBuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”), respectively.The Buzzeo acquisition expands our sample and compliance management solutionofferings. The Optas acquisition enhances our portfolio of marketing solutionsservices by expanding our privacy-safe relationship marketing solutions forpatients and physicians. We believe our recent acquisitions complement ourexisting business operations by enhancing our solutions portfolio, increasingour access to new customers and allowing deeper penetration into our currentmarkets. We have also committed to investing in key initiatives to help drivefuture growth. Our future growth is dependent on our ability to furtherpenetrate the markets in which we operate and increase the adoption rate of ourexpanded portfolio of solutions.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations(Continued)**

We evaluate our performance based upon a number ofoperating metrics. Chief among these metrics are revenues, operating profit,diluted net income per share, operating cash flow and days sales outstanding. Ourgoal is to execute our strategy to yield growth in revenues, operating profitand diluted net income per share. In 2005, we grew our revenue approximately10% but did not grow our operating profit and diluted net income per share. As wehave experienced strong revenue growth in recent years, we believe that we haveoutgrown our structure and have seen an increase in organizational coststhroughout 2005. Late in 2005 we appointed two new executive officers who areevaluating a business plan to grow revenues and to streamline our coststructure. As part of our effort to realign the Company to drive efficiency andsupport our growth objectives, we currently plan to identify approximately $20million of annualized cost savings during 2006. As a result, we expect to incurseverance and other associated costs for these actions in 2006. We do notexpect to fully realize the savings from these efforts in 2006.

In 2004, we expanded our revenue categories into salessolutions, marketing solutions and shipping. These categories reflect how ourservice offerings have been marketed to and viewed by our customers. They arenot reflective of the way we manage our business. Our operating costs are notbroken out for these categories on a global basis, as they are not viewed asnecessary in the management of our global business. Based upon all of thesefactors, while these categories are useful in understanding our operatingresults, we have one reporting segment for disclosure purposes under Statementof Financial Accounting Standards (“SFAS”) 131, “Disclosure About Segments ofan Enterprise and Related Information.” The following is a summary of ourrevenue categories:

*Sales Solutions* revenueincludes products and services of the traditional Dendrite business. All ofthese solutions and services are used by or provided to the sales force of ourcustomers and sales management.

*Marketing Solutions*revenueincludes our product and service offerings that are not geared toward theclient sales force and primarily consists of offerings acquired in our businesscombinations over the past few years. The primary components of marketingrevenue include integrated marketing, data, consulting and clinical services.

*Shipping* revenues aredisclosed separately as they are pass-through costs that bear little to nomargin, and are required to be included in revenues and costs based uponEmerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping andHandling Fees and Costs.” These billable shipping transactions are primarilyrelated to our integrated marketing activities.

Management’s Discussion and Analysis (“MD&A”) isintended to help the reader understand the results of our operations andfinancial condition. MD&A is provided as a supplement to, and should beread in conjunction with our financial statements and the accompanying notes toconsolidated financial statements. Enterprise-wide disclosure informationappearing in Note 13 of the Notes to Consolidated Financial Statements arepresented in accordance with SFAS 131, “Disclosures about Segments of anEnterprise and Related Information.”

**CRITICALACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

Acritical accounting policy is one that is both very important to the portrayalof a company’s financial position and results of operations and requiresmanagement’s most difficult, subjective or complex judgments. We believe thatour critical accounting policies are revenue recognition, acquisitions andrelated accruals, impairments, income taxes and capitalized software.

**Revenue Recognition**

The area of revenue recognition requires management’sto make significant judgments and estimates. AICPA Statement of Position (“SOP”)97-2, “Software Revenue Recognition,” governs revenue recognition forarrangements that include software which is more than incidental to thearrangement. Under SOP 97-2, if a sale of software includes services thatare essential to the functionality of the

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

software, then the software and essential services areto be accounted for using contract accounting as described in AccountingResearch Bulletin 45, “Long-Term Construction-Type Contracts,” and SOP 81-1,“Accounting for Performance of Construction-Type and Certain Production-TypeContracts.” The determination of whether or not services are essential to thefunctionality of the software can differ from arrangement-to-arrangementand requires the use of significant judgment by management. Factors used indetermining whether or not services are essential to the functionality mayinclude: whether or not physical changes are being made to the software’sunderlying source code; the complexity of software configuration services; thelevel of effort required to build interfaces; the overall relationship of theservice fees to the license fees; the length of time expected to complete theservices; and whether or not the services can be obtained by a customer fromtheir internal resources or another third-party vendor. If services arenot considered to be essential to the functionality of the software, SOP 97-2generally allows companies to recognize revenue for software licenses upondelivery of the licenses, prior to configuration or implementation services,provided that the other requirements of the SOP are met. In management’sjudgment, our configuration and implementation services generally are essentialto the functionality of our software. Therefore, we typically recognize revenueusing the percentage-of-completion method as detailed in SOP 81-1.

The percentage-of-completion method of revenuerecognition requires us to use significant estimates in measuring theprogress-to-completion for each project. For our license fee and implementationservice projects, we use the input measure of labor incurred as compared withtotal expected labor for the entire project. The determination of total projectlabor requires the use of significant judgment and estimates. We review theseestimates on a monthly basis. Actual results could differ from these estimates,which would impact the amount of revenue previously recognized, had betterestimates been available at the time.

Many of our arrangements include multipledeliverables. In the absence of higher-level specific authoritativeguidance, we determine the units of accounting for multiple elementarrangements in accordance with Emerging Issues Task Force Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”).Specifically, we will consider a delivered item as a separate unit ofaccounting if it has value to the customer on a stand-alone basis, ifthere is objective and reliable evidence of the fair value of the undeliveredelements, and if the arrangement includes a general right of return relative tothe delivered element, delivery or performance of the undelivered element isconsidered probable and is substantially within our control. The determinationof whether or not arrangements meet these criteria requires significantjudgment on the part of the management. If our arrangements did not meet theseparation criteria of EITF 00-21, the timing of revenue recognitioncould be delayed.

**Accounting for Acquisitions**

Theaccounting related to business combinations requires us to estimate the fairvalue and useful life of the assets acquired and the fair value of theliabilities assumed in the combinations. These estimates of fair value arebased on our business plan for the entities acquired including planned redundancies,restructuring, use of assets acquired and assumptions as to the ultimateresolution of obligations assumed for which no future benefit will be received.We typically analyze a number of factors such as valuation or appraisal reportswhen determining the estimates of fair value. Should actual use of assets orresolution of obligations differ from our estimates, revisions to the estimatedfair values, useful lives, or both, would be required.

**Accounting for Impairments**

We review long-lived assets for impairment on anannual basis or whenever events or changes in circumstances indicate that thecarrying amount of an asset might not be recoverable. Other than goodwill 

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

and indefinite-lived intangibles, if indicatorsof impairment are present, we evaluate the recoverability of the long-livedassets by estimating future undiscounted cash flows that are directlyassociated with and expected to arise as a direct result of the use andeventual disposition of the long-lived asset. If this estimate of futureundiscounted cash flows demonstrates that recoverability is not probable, animpairment loss would be calculated and recognized based on the excess carryingvalue of the long-lived asset over the long-lived asset’s fair value. Theestimate of the fair value and the future undiscounted cash flows of theunderlying long-lived assets are based on significant judgments andassumptions.

We review capitalized software development costs andpurchased capitalized software development costs for impairment at each balancesheet date to determine if the unamortized capitalized costs of a computersoftware product is greater than the net realizable value of that product. Ininstances where the unamortized capitalized costs are greater than the netrealizable value, we would record an impairment loss.

We assess goodwilland indefinite-lived intangibles for the possibility of impairment on anannual basis (as of October 1 of each year), and whenever events orchanges in circumstances indicate that the carrying values may not berecoverable. Some factors we consider important which could trigger animpairment review include the following:

·       Significantunderperformance relative to historical or projected future operating results;

·       Significantchanges in our use of acquired assets or the strategy for our overall business;and

·       Significantnegative industry or economic trends.

On an annual basis, or when we determine that thecarrying value of goodwill may not be recoverable based upon the existence ofone or more of the above indicators of impairment, we calculate and compare thefair value of our reporting unit to its carrying value. We currently have onlyone reporting unit. If the carrying value exceeds the fair value, we calculatethe implied fair value of the goodwill for our reporting unit and compare it tothe carrying value of the goodwill. If the implied fair value of the goodwillwas less than the carrying value of the goodwill, we would recognize animpairment loss, (not to exceed the carrying value) in our consolidatedstatement of operations.

On an annual basis, orwhen we determine that the carrying value of an indefinite-livedintangible asset may not be recoverable based upon the existence of one or moreof the above indicators of impairment, we calculate and compare the fair valueof the indefinite-lived intangible asset to its carrying value. If thecarrying value exceeds the fair value, an impairment loss would be recognized.If we deem the useful life to be no longer indefinite, after testing forimpairment in accordance with the applicable rules stated above, weamortize the intangible asset over its remaining estimated useful life,following the pattern in which the expected benefits will be consumed orotherwise used up and we would continue to review for impairment in the futureon an annual basis.

**Accounting for Income Taxes**

Deferred tax assets andliabilities represent the differences between the financial reporting and taxbasis of assets and liabilities and are measured using the enacted tax ratesthat are expected to be in effect when the differences reverse. We regularlyreview our deferred tax assets for recoverability and establish a valuationallowance based on historical taxable income, projected future taxable incomeand the expected timing of the reversals of existing temporary differences, allof which require significant judgment. We must believe it is more likely thannot that the recorded net deferred tax asset will be realized. Realization isdependent on generating sufficient taxable income of a specific nature prior tothe expiration of the loss 

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

carryforwards, capital loss and foreign tax creditcarryforwards. The asset may be reduced if estimates of future taxable incomeduring the carryforward period are reduced. In addition, we maintain reservesfor certain tax items, which are included in income taxes payable on theconsolidated balance sheet. We periodically review these reserves to determineif adjustments to these balances are necessary.

**Accountingfor Capitalized Software**

We account for researchand development costs in accordance with applicable accounting pronouncements,including SFAS 2, “Accounting for Research and Development Costs,” and SFAS 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed” (“SFAS 86”). SFAS 86 specifies that costs incurred internally inresearching and developing a computer software product to be sold should becharged to expense until technological feasibility has been established for theproduct. Once technological feasibility is established, all software costs,which includes directs costs of developing the product, should be capitalizeduntil the product is available for general release to customers. Technologicalfeasibility is considered to be reached when a product and program design hasbeen completed or a working model of the software product has been completed.Our application engineering group reviews each project to determine whentechnological feasibility of a product is established.

**MERGERS AND ACQUISITIONS**

We regularly evaluateopportunities to acquire products or businesses that represent strategicenhancements to our operations. Such acquisition opportunities, if they arise,may involve the use of cash, equity and/or debt instruments. We have made thefollowing acquisitions over the last three years:

**Optas**

On September 12, 2005, we completed theacquisition of Optas. Based in Woburn, Massachusetts, Optas providedprivacy-safe relationship marketing solutions for patients and physicians. Optas’results of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition.

The aggregate purchaseprice for Optas was approximately $13,188, including $349 of legal andprofessional fees. In accordance with the purchase agreement, $1,800 of thepurchase price was held in escrow as of December 31, 2005. The $1,800 heldin escrow, less amounts claimed against escrow, if any, is payable as follows:approximately $600 within five business days after September 12, 2006; andapproximately $1,200 within five business days after March 12, 2007. Weare in the process of finalizing the valuation of certain intangible assets,including the review of a third-party valuation. Therefore, the allocation ofthe purchase price is preliminary and subject to adjustment. The assetsacquired and liabilities assumed in connection with the Optas acquisition andpro forma results of operations are not deemed material to the consolidated financialstatements.

**Buzzeo**

On January 4, 2005, we completed the strategicacquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provided compliance,auditing, consulting and reconciliation outsourcing services to thepharmaceutical and life sciences industry. This acquisition further expands oursample and compliance management solution offerings. In connection with theacquisition, we restructured the combined operations by eliminating certainformer Buzzeo positions. Buzzeo’s results of operations have been included inthe accompanying consolidated financial statements since the date ofacquisition.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

The aggregate purchaseprice for Buzzeo was approximately $10,759, including $33 of legal andprofessional fees. Approximately $590 of the purchase price was included inother accrued expenses in the consolidated balance sheet as of December 31,2005 and $1,025 of the purchase price was held in escrow as of December 31,2005. In accordance with the purchase agreement, the $1,025 was released fromescrow in the first quarter of 2006. The valuation of certain intangiblesassets was finalized in the fourth quarter of 2005. The assets acquired andliabilities assumed in connection with the Buzzeo acquisition and pro formaresults of operations are not deemed material to the consolidated financialstatements.

**Schwarzeck**

On July 20, 2004, wecompleted the strategic acquisition of the capital stock of Schwarzeck-VerlagGmbH (“Schwarzeck”). Schwarzeck was a provider of physician databases, directmarketing services and sample fulfillment services to pharmaceutical companiesin Germany. This acquisition accelerated our expansion in Europe and increasesour integrated marketing solutions and services to the German pharmaceuticalindustry. In connection with the acquisition, we restructured the combinedoperations by eliminating certain former Schwarzeck positions. Schwarzeck’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition. We have allocated theentire purchase price of approximately $800 to purchased database. Thevaluation of certain intangibles assets was finalized in the second quarter of2005. The assets acquired and liabilities assumed in connection with theSchwarzeck acquisition, the aggregate purchase price and pro forma results ofoperations are not deemed material to the consolidated financial statements.

**MDM**

On April 6, 2004, we completed the strategicacquisition of the capital stock of the Medical Data Management group ofcompanies (“MDM”). Primarily based in Warsaw, Poland, MDM was a provider ofphysician databases, market research and sales force support services topharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition.

The aggregate purchaseprice for MDM was approximately $9,290 and consisted of approximately $5,700 incash payments, approximately $3,320 in restricted stock and approximately $270of legal and professional fees. The valuation of certain intangible assets wasfinalized in the fourth quarter of 2004. The assets acquired and liabilitiesassumed in connection with the MDM acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

**Uto Brain**

On January 5, 2004, we completed the strategicacquisition of the capital stock of Uto Brain Co., Ltd. (“Uto Brain”).Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceuticalcompanies with data, analytics, publishing and advisory services. The combiningof resources of Uto Brain with our existing resources creates comprehensiveinformation, software and services company dedicated to the Japanesepharmaceutical industry and further enhances our ability to provide solutionsto enhance sales, marketing and clinical functions of pharmaceutical companiesin the Japanese market. Uto Brain’s results of operations have been included inthe accompanying consolidated financial statements since the date ofacquisition.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

The aggregate purchaseprice for Uto Brain was approximately $4,900 (498,270 Yen), includingapproximately $100 of legal and professional fees. We paid approximately $1,400and $3,400 of the purchase price during the years ended December 31, 2005and 2004, respectively. In addition, we assumed approximately $3,800 in bankdebt and an acquired loan, all of which was repaid during the year ended December 31,2004. The valuation of certain intangible assets was finalized in the fourthquarter of 2004. The assets acquired and liabilities assumed in connection withthe Uto Brain acquisition and pro forma results of operations are not deemedmaterial to the consolidated financial statements.

**Synavant**

On June 16, 2003, we completed our acquisition ofSynavant Inc. (“Synavant”). Synavant provided a broad range of knowledge-basedservices to pharmaceutical and other life science companies around the world.Its global solutions included pharmaceutical CRM applications, integratedmarketing, server and database management, dedicated local help-line support,training, telemarketing, sample management and product recall services.Synavant was headquartered in Atlanta, Georgia, and had offices in 21countries. We believe that combining Synavant’s resources with Dendrite’sresources created a more comprehensive information, software and servicescompany dedicated to the global life sciences industry, and further enhancesour ability to provide market leading solutions to the sales, marketing andclinical functions of pharmaceutical and other life science companies. Synavant’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition.

The aggregate purchase price for Synavant wasapproximately $55,130, including consideration paid for the common stock ($3.22per share) and approximately $3,445 of legal and professional fees incurred inconnection with the transaction. We have finalized the valuation of certainintangibles and our restructuring plan to eliminate certain former Synavantpositions and exit certain former Synavant facilities due to redundancies andgained efficiencies.

We accrued approximately $22,102 at June 16,2003, for liabilities associated with the cost of completing the restructuringplan. The components of this accrued liability were approximately $13,042 ofseverance costs for former Synavant positions being eliminated andapproximately $9,060 of costs to exit former Synavant facilities. During thefourth quarter of 2003, we reduced the liabilities related to the restructuringplan by approximately $2,442 based on our revised estimate of the total cost.The components of the reduction to the accrued liability were approximately$2,272 for lower expected severance costs for former Synavant positions beingeliminated and approximately $170 for lower costs to exit certain formerSynavant facilities. This reduction was recorded by an adjustment withingoodwill. During finalization of the purchase price allocation, we increasedour restructuring accrual estimate by approximately $1,800 due to an adjustmentof the total costs to exit certain former Synavant facilities and recorded thecorresponding adjustment to goodwill in the accompanying consolidated balancesheet.

The liability accrued forexpenses incurred in exiting certain Synavant facilities includes, assumptionsrelated to sublease income which offsets future lease obligations. Theunderlying subleases are not in place for all facilities and the futureplacement of subleases, including the timing and terms and conditions ofsubleases, could be different than the assumptions and impact future results ofoperations.

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**ITEM 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations (Continued)**

**RESULTS OFOPERATIONS**

Thefollowing table sets forth our results of operations expressed as a percentageof total revenues for the periods indicated:

| ** **                                 | ** ** | **Year Ended December 31 ,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                   |       |                                             | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
| Operating Costs &  Expenses:           |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs                            |       |                                             | 54         |   |   |   | 52 |   |   |   | 51 |   |   |
| Selling, general and administrative        |       |                                             | 33         |   |   |   | 33 |   |   |   | 33 |   |   |
| Research and development                   |       |                                             | 1          |   |   |   | 2 |   |   |   | 4 |   |   |
| Facility and other charges                 |       |                                             | 2          |   |   |   | — |   |   |   | — |   |   |
| Amortization of acquired intangible assets |       |                                             | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Total operating costs & expenses  |       |                                             | 91         |   |   |   | 88 |   |   |   | 89 |   |   |
| Operating income                           |       |                                             | 9          |   |   |   | 12 |   |   |   | 11 |   |   |
| Interest and other (income), net           |       |                                             | —     |   |   |   | — |   |   |   | (1 | ) |   |
| Income before income tax expense           |       |                                             | 9          |   |   |   | 12 |   |   |   | 12 |   |   |
| Income tax expense                         |       |                                             | 4          |   |   |   | 5 |   |   |   | 5 |   |   |
| Net income                                 |       |                                             | 5          | % |   |   | 7 | % |   |   | 7 | % |   |

 

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**ITEM7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations ($ in thousands) (Continued)**

**YEARSENDED DECEMBER 31, 2005 AND 2004**

***REVENUES***

| ** **                 | ** ** | **Year Ended December 31,** | ** ** | **$**    | ** ** | **%**        | ** ** | **2005 %  of Total** | ** ** | **2004 %  of Total** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|----------|------------|--------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **Increase** | ** ** | **Increase**                   | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Services & Technology: |       |                                       |       |     |       |         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Sales solutions            |       | $                                          | 311,157    |     | $          | 286,544      |       | $                              | 24,613     |                           |       | 9 | % |   |   | 71 | % |   |   | 72 | % |   |
| Marketing solutions        |       | 107,120                                    |       | 95,292   |       | 11,828       |       |                           | 12         | %                              |       |   | 25 | % |   |   | 24 | % |   |
| Shipping                   |       | 18,963                                     |       | 17,361   |       | 1,602        |       |                           | 9          | %                              |       |   | 4 | % |   |   | 4 | % |   |
| Total revenues             |       | $                                          | 437,240    |     | $          | 399,197      |       | $                              | 38,043     |                           |       | 10 | % |   |   | 100 | % |   |   | 100 | % |   |

 

Total revenues for the year ended December 31,2005 increased 10% compared with the year ended December 31, 2004. Ourinternational revenues were $164,010, or approximately 38% of total revenues,and increased by 4% over 2004, due to our recent acquisitions and organicgrowth which was offset by a reduction in ongoing services and licenses fees inAsia. Total revenues in the United States were $273,230, or approximately 62%of total revenues, and increased by 13% from the year ended December 31,2004. The increase in revenues is primarily due to our current yearacquisitions, a non-recurring project at our largest customer, and increasedservices at our second largest customer which was partially offset by areduction of work orders and ongoing services with our largest customerresulting from its cost containment initiatives. We expect this trend with ourlargest customer to continue in the future as this customer continues toevaluate its spending on salesforce effectiveness and related services. As aresult, we currently expect less revenue from this customer in 2006 and beyond.Our current contract with this customer for U.S. salesforce effectiveness andrelated services has been renewed through 2006, subject to a right of thecustomer to reduce or modify certain services. The customer is re-evaluatingall such U.S. services for 2007 in a process in which we expect to participate.

*Sales Solutions*

Sales solutions revenues accounted for approximately71% of total revenues during the year ended December 31, 2005, andincreased 9% compared with the year ended December 31, 2004. Salessolutions services in the United States increased by 14%, which included $4,000associated with the early termination of a contract with Odyssey, as well as anincrease in integrated support center, asset management, and implementationservices which were primarily driven by non-recurring projects, and theaddition of sales support services from our Buzzeo acquisition. Our internationalsales solutions decreased by 4%, with sales solutions decreasing by 1% andlicense fees decreasing by 28% versus the year ended December 31, 2004. Internationalsales solutions decreased due to the loss of a European customer in 2005 andlicense fees decreased due to a sale of third-party licenses to aninternational customer in 2004, which did not occur in 2005.

*Marketing Solutions*

Marketing solutions revenues accounted forapproximately 25% of total revenues during the year ended December 31, 2005, andincreased by approximately 12% compared with the year ended December 31, 2004.The increase was mostly due to growth in our international marketing solutionsbusiness, which increased by 18% over the prior year, including 22% growth inour integrated marketing services.  Thegrowth in international integrated marketing included the additional revenuesfrom our 2004 acquisitions as well as organic growth.  In the United States, marketing solutionsincreased by approximately 6% compared with the year ended December 31, 2004,due to increases in integrated marketing revenues and the inclusion ofmarketing services from our 2005 acquisitions, which was partially offset by adecrease in our domestic clinical, data and consulting revenues.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

*Shipping*

Shipping fees accountedfor approximately 4% of total revenues during the year ended December 31, 2005,and increased by approximately 9% compared with the year ended December 31,2004. Shipping revenues contribute little to no margin and result frompass-through shipping costs associated with our global integrated marketingbusiness. 

**OPERATING COSTS& EXPENSES**

| ** **                                  | ** ** | **Year Ended December 31,** | ** ** | **$  Increase / ** | ** ** | **%  Increase / ** | ** ** | **2005 %  of Total** | ** ** | **2004 %  of Total** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **(Decrease)**               | ** ** | **(Decrease)**                 | ** ** | **Revenues**                   | ** ** | **Revenues** | ** ** |
| Operating costs  (including shipping)       |       | $                                          | 236,230    |                         | $          | 205,896                      |       |                           | $          | 30,334                         |       |   |   | 15 | % |   |   | 54 | % |   |   | 52 | % |   |
| Selling, general  and administrative        |       | 144,931                                    |       | 132,016                      |       |                         | 12,915     |                           |       |                           | 10         | % |   |   | 33 | % |   |   | 33 | % |   |
| Research and  development                   |       | 6,094                                      |       | 9,316                        |       |                         | (3,222     | )                              |       |                           | (35        | )% |   |   | 1 | % |   |   | 2 | % |   |
| Facility and  other charges                 |       | 9,372                                      |       | —                       |       |                         | 9,372      |                           |       |                           | N/A        |   |   |   | 2 | % |   |   | 0 | % |   |
| Amortization of  acquired intangible assets |       | 4,431                                      |       | 4,851                        |       |                         | (420       | )                              |       |                           | (9         | )% |   |   | 1 | % |   |   | 1 | % |   |
| Other operating  (income)                   |       | —                                     |       | (707                         | )          |                         | 707        |                           |       |                           | (100       | )% |   |   | — |   |   |   | — |   |   |
| Total operating  costs & expenses       |       | $                                          | 401,058    |                         | $          | 351,372                      |       |                           | $          | 49,686                         |       |   |   | 14 | % |   |   | 92 | % |   |   | 88 | % |   |

 

Aspart of our effort to realign the Company to drive efficiency and support ourgrowth objectives, we announced plans to identify approximately $20 million ofannualized cost savings during 2006.  Asa result, we expect to incur severance and other associated costs for theseactions in 2006.  We do not expect tofully realize the savings from these efforts in 2006.

***OPERATINGCOSTS (including shipping).***   Operating costsincreased 15% for the year ended December 31, 2005, compared with the yearended December 31, 2004. This increase was due to additional costs from our2005 acquisitions and a full year of costs related to our 2004 acquisitions,higher pass-through postage costs and our overall increase in revenues.  These increases were partially offset bysavings related to our offshore initiatives. As a percentage of revenues, operating costs increased to 54% for theyear ended December 31, 2005 versus 52% for the year ended December 31, 2004due to our revenue growth in lower margin solutions.  

***SELLING,GENERAL AND ADMINISTRATIVE (SG&A).***   SG&Aexpenses increased 10% for the year ended December 31, 2005, compared with theyear ended December 31, 2004. SG&A costs increased due to additional costsfrom our 2005 acquisitions and a full year of costs related to our 2004acquisitions, severance, as well as increased expenses as a result of ourefforts to recruit and hire executive officers. As a percentage of revenues, SG&A remained flat at 33% for the yearsended December 31, 2005 and 2004.  Wehave and expect to continue to invest in sales and marketing initiatives inorder to drive our top-line growth while continuing to focus on costcontainment measures in other elements of SG&A.

***RESEARCHAND DEVELOPMENT (R&D).***   R&D expensesdecreased 35% for the year ended December 31, 2005, compared with the yearended December 31, 2004. As a percentage of revenues, R&D expensesdecreased to 1% for the year ended December 31, 2005, from 2% for the yearended December 31, 2004. This decrease was due to decreased R&D spendingand a higher capitalization rate during the year ended December 31, 2005.  We capitalized more costs in the year endedDecember 31, 2004 than in 2005 due to the development for the release of ournext generation SFE solution. Gross R&D spending (R&D expenses plusadditions to capitalized software development costs) decreased 28% from $15,202for the year ended December 31, 2004, to $10,958 for the year ended December31, 2005.  Gross 

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

R&Ddecreased due to the deployment of resources to revenue-generating projects andthe savings related to our offshore initiative.

***FACILITYAND OTHER CHARGES.***   During the year endedDecember 31, 2005, we recorded $7,649 of facility-related charges and aseverance charge of $1,723. The facility charges consist of $6,619 related tovacating a New Jersey facility and for additional facilities vacated inprevious periods due to changes in current market conditions, as well as $1,030related to the write-off of leasehold improvements associated with the exit ofour New Jersey facility.  The $1,723severance charge relates to the elimination of certain senior and mid-levelmanagement positions.  No such chargeswere incurred in 2004.

***AMORTIZATIONOF ACQUIRED INTANGIBLE ASSETS.***   Amortizationof acquired intangible assets decreased 9% compared with the year endedDecember 31, 2004. The decrease primarily reflects certain intangibles assetsrelated to the Software Associates International (“SAI”) and Synavantacquisitions, which were fully amortized as of June 30, 2005, partially offsetby additional amortization of intangibles related to the Schwarzeck, Buzzeo andOptas acquisitions.

***OTHEROPERATING (INCOME).***   We received insuranceproceeds in the year ended December 31, 2004 related to the recovery of costsof certain losses.

**NON-OPERATING(INCOME) EXPENSE, NET**

| ** **              | ** ** | **Year Ended  December 31,** | ** ** | **$  Increase /** | ** ** | **%  Increase /** | ** ** |
|-------------------------|------------|----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **              | ** ** | **2005**                               | ** ** | **2004**               | ** ** | **Decrease**           | ** ** | **Decrease** | ** ** |
| Interest  (income), net |       | (625                                   | )          |                   | (64        | )                      |       |   | $ | 561 |   |   |   | 877 | % |   |
| Other expense, net      |       | 20                                     |       |                   | 277        |                   |       |   | (257 | ) |   |   | (93 | )% |   |

 

***INTEREST(INCOME), NET.***   Interest income increased877% for the year ended December 31, 2005 due to higher average cash balances,higher interest rates in 2005 and investing surplus cash offset by interestexpense related to capital leases.

***OTHER EXPENSE,NET.***   Other expense decreased 93% for theyear ended December 31, 2005 due to decreased foreign exchange losses onintercompany loans.  

***PROVISION FORINCOME TAXES.***   Our estimated effective incometax rate increased to 41.7% for the year ended December 31, 2005 compared to37.9% in prior year. The increase in our effective tax rate is primarilyattributable to international subsidiaries generating taxable losses for whichwe were unable to take a benefit, the distribution of profits among countries withhigher tax rates, and a reduction in the utilization of federal and statecredits for which we had previously generated. These increases were partiallyoffset as we determined it was more likely than not that some of our state andforeign deferred tax assets, which had previously been reserved for, would beutilized prior to expiration and accordingly, we released a valuation allowancereserve associated with these deferred tax assets.

At December 31, 2005 and2004, there were approximately $21,383 and $25,211, respectively, ofundistributed earnings of non-U.S. subsidiaries that are considered to bereinvested indefinitely. If such earnings were remitted to us, the applicableUnited States federal income and foreign withholding taxes may be wholly orpartially offset by foreign tax credits. As a result, the determination ofpotential U.S. income taxes on these undistributed earnings is not practicableat December 31, 2005 or 2004.

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**ITEM 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations ($ in thousands) (Continued)**

**YEARS ENDEDDECEMBER 31, 2004 AND 2003**

***REVENUES***

| ** **                  | ** ** | **Year Ended December 31,** | ** ** | **$**    | ** ** | **%**        | ** ** | **2004 % of  Total** | ** ** | **2003 % of  Total** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|----------|------------|--------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **Increase** | ** ** | **Increase**                   | ** ** | **Revenue**                    | ** ** | **Revenue** | ** ** |
| Services &  Technology: |       |                                       |       |     |       |         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Sales solutions             |       | $                                          | 286,544    |     | $          | 262,737      |       | $                              | 23,807     |                           |       | 9 | % |   |   | 72 | % |   |   | 82 | % |   |
| Marketing solutions         |       | 95,292                                     |       | 51,009   |       | 44,283       |       |                           | 87         | %                              |       |   | 24 | % |   |   | 16 | % |   |
| Shipping                    |       | 17,361                                     |       | 7,361    |       | 10,000       |       |                           | 136        | %                              |       |   | 4 | % |   |   | 2 | % |   |
| Total revenues              |       | $                                          | 399,197    |     | $          | 321,107      |       | $                              | 78,090     |                           |       | 24 | % |   |   | 100 | % |   |   | 100 | % |   |

 

Total revenues for theyear ended December 31, 2004 increased 24% compared with the year endedDecember 31, 2003. Our international revenues, for which license revenues havebeen allocated to the geographic location of the customer, were $157,375, orapproximately 39% of total revenues, for the year ended December 31, 2004,versus $87,922, or 27% of total revenue for the year ended December 31, 2003,an increase of 79%. Total revenues in the United States were $241,822, orapproximately 61% of total revenues, and increased by 4% from the year endedDecember 31, 2003. The increase in revenues is primarily due to a full twelve monthperiod of revenues in 2004 from the June 2003 acquisition of Synavant as wellas revenues resulting from the 2004 acquisitions of Uto Brain, MDM andSchwarzeck and a favorable impact from foreign currency rates.

*Sales Solutions*

Sales solutions revenues accounted for approximately72% of total revenues during the year ended December 31, 2004, and increased 9%compared with the year ended December 31, 2003. License fee revenue, whichaccount for approximately 5% of 2004 sales solution revenues, increased 25%over the prior year, largely due to multi county roll-outs of our softwareproducts by large global pharmaceutical customers. In 2004, we saw a trend ofclients negotiating larger regional or multi country deals. Sales solutionsservices in the United States declined by approximately 4%, but included anincrease in our ongoing solutions services which were more than offset bylarger decreases in one-time services related to client software rollouts in2003. International sales solutions service fees increased 48% versus the yearended December 31, 2003, primarily due to our recent acquisitions as well asservices relating to multi country rollouts initiated by several large globalpharmaceutical customers.

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**ITEM7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations ($ in thousands)  (Continued)**

*Marketing Solutions*

Marketing solutionsrevenues accounted for approximately 24% of total revenues during the yearended December 31, 2004, and increased by approximately 87% compared withthe year ended December 31, 2003. Our international marketing solutionsbusiness increased by 165% over the prior year, including 200% growth in ourinternational integrated marketing services, 133% growth in our internationalconsulting services, 105% growth in international data fees and the addition ofcontract sales services from our recent acquisition of MDM. In the UnitedStates, marketing solutions fees increased by 36% compared with the year ended December 31,2003. This increase in the United States was comprised of 76% growth in ourIntegrated Marketing services, 3% growth in our clinical services, 30% growthin our consulting services and 20% growth in domestic data fees. The growth inour worldwide marketing solutions revenues was primarily driven by our 2003 and2004 acquisitions.

*Shipping*

Shipping fees accountedfor approximately 4% of total revenues during the year ended December 31,2004, and increased by approximately 136% compared with the year ended December 31,2003. Shipping revenues contribute little to no margin and result frompass-through shipping costs associated with our global integrated marketingbusiness. The integrated marketing business was originated through our acquisitionof Synavant in June 2003, and has been further expanded through our 2004acquisitions.

***OPERATING COSTS &EXPENSES***

| ** **                                  | ** ** | **Year Ended  December 31,** | ** ** | **$  Increase /** | ** ** | **%  Increase /** | ** ** | **2004 % of  Total** | ** ** | **2003 % of  Total** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2004**                               | ** ** | **2003**               | ** ** | **(Decrease)**         | ** ** | **(Decrease)**                 | ** ** | **Revenue**                    | ** ** | **Revenue** | ** ** |
| Operating costs  (including shipping)       |       | $                                      | 205,896    |                   | $          | 162,481                |       |                           | $          | 43,415                         |       |   |   | 27 | % |   |   | 52 | % |   |   | 51 | % |   |
| Selling, general  and administrative        |       | 132,016                                |       | 107,862                |       |                   | 24,154     |                           |       |                           | 22         | % |   |   | 33 | % |   |   | 33 | % |   |
| Research and  development                   |       | 9,316                                  |       | 11,633                 |       |                   | (2,317     | )                              |       |                           | (20        | )% |   |   | 2 | % |   |   | 4 | % |   |
| Amortization of  acquired intangible assets |       | 4,851                                  |       | 4,308                  |       |                   | 543        |                           |       |                           | 13         | % |   |   | 1 | % |   |   | 1 | % |   |
| Other operating  (income)                   |       | (707                                   | )          | —                 |       |                   | (707       | )                              |       |                           | —     |   |   |   | — |   |   |   | — |   |   |
| Total operating  costs & expenses  |       | $                                      | 351,372    |                   | $          | 286,284                |       |                           | $          | 65,088                         |       |   |   | 23 | % |   |   | 88 | % |   |   | 89 | % |   |

*** ***

***OPERATING COSTS(including shipping).******  ***Operating costs increased 27% forthe year ended December 31, 2004, compared with the year ended December 31,2003. The primary driver of the increase was a full year of costs in 2004 fromour acquisition of Synavant in June 2003. In addition, we had costsassociated with the revenues from our 2004 acquisitions of Uto Brain, MDM andSchwarzeck, the ongoing implementation costs of our offshore initiative andincreased pass-through postage costs for the year ended December 31, 2004.

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).******  ***SG&Aexpenses increased 22% for the year ended December 31, 2004, compared withthe year ended December 31, 2003. This increase reflects the additionalcosts related to our recent acquisitions, primarily a full year of Synavantcosts in 2004, partially offset by a decrease in management incentives.SG&A in 2004 also included increased expenses as a result of our efforts tocomply with Sarbanes-Oxley section 404 review, testing andattestation requirements. We invested in sales and marketing initiatives in 2004while continuing to focus on cost containment measures. As a percentage ofrevenues, SG&A remained flat at 33% for the years ended December 31,2004 and 2003.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands)  (Continued)**

***RESEARCH ANDDEVELOPMENT (R&D).******  ***R&Dexpenses decreased 20% for the year ended December 31, 2004, compared withthe year ended December 31, 2003. As a percentage of revenues, R&Dexpenses decreased to 2% for the year ended December 31, 2004, from 4% forthe year ended December 31, 2003. This decrease was due to the expansionof revenue in marketing solutions areas which is not dependent on R&Dspending as well as a higher software capitalization rate. We capitalized morecosts in the year ended December 31, 2004 than in 2003 due to thedevelopment for the release of our next generation CRM solution, expected to bereleased in 2005. R&D expenses plus additions to capitalized softwaredevelopment costs, remained relatively flat at approximately $15,202 for theyear ending December 31, 2004, compared to $14,815 for the year ended December 31,2003.

***AMORTIZATION OFACQUIRED INTANGIBLE ASSETS.******  ***Amortizationof acquired intangible assets increased 13% compared with the year ended December 31,2003. The increase reflects the current year’s amortization of intangibleassets acquired in connection with our 2004 acquisitions of Uto Brain, MDM andSchwarzeck.

***OTHER OPERATING (INCOME).******  ***We receivedinsurance proceeds in the year ended December 31, 2004 related to therecovery of costs of certain losses.

***NON-OPERATING(INCOME) EXPENSE, NET***

| ** **                   | ** ** | **Year Ended  December 31,** | ** ** | **$**    | ** ** | **%  Increase /** | ** ** |
|------------------------------|------------|----------------------------------------|------------|----------|------------|------------------------|------------|
| ** **                   | ** ** | **2004**                               | ** ** | **2003** | ** ** | **(Decrease)**         | ** ** | **(Decrease)** | ** ** |
| Interest  (income), net      |       | $                                      | (64        | )        | $          | (731                   | )          |   | $ | (667 | ) |   |   | (91 | )% |   |
| Other expense (income),  net |       | 277                                    |       | (560     | )          |                   | (837       | ) |   |   | (149 | )% |   |
|                              |            |                                        |            |          |            |                        |            |  |  |  |  |  |  |  |  |  |

*** ***

***INTEREST (INCOME),NET.******  ***Interest income decreased 91% for theyear ended December 31, 2004 due to lower average cash balances in 2004,increases in interest expense related to new capital leases and interestexpense on acquired debt.

***OTHER EXPENSE(INCOME), NET.******  ***Other expense increased 149% for theyear ended December 31, 2004 due to foreign exchange losses onintercompany loans in 2004 while other income in 2003 related to the favorablesettlement of certain litigation.

***PROVISION FORINCOME TAXES.******  ***Our estimated effective income taxrate decreased to 37.9% for the year ended December 31, 2004 compared to41.7% in prior year. The reduction in our effective tax rate resulted primarilyfrom the decrease in the number of international subsidiaries generatingtaxable losses for which previously we could not take a benefit as well as themore favorable distribution of profits among countries with lower tax rates. Inaddition, during 2003 we recognized a full valuation allowance on a netoperating loss carryforward at one of our international subsidiaries in theamount of $608 that increased the effective tax rate by approximately 2%.

At December 31, 2004 and 2003, there wereapproximately $25,211 and $13,708, respectively, of undistributed earnings ofnon-U.S. subsidiaries that are considered to be reinvested indefinitely. Ifsuch earnings were remitted to us, the applicable United States federal incomeand foreign withholding taxes may be wholly or partially offset by foreign taxcredits. As a result, the determination of potential U.S. income taxes on theseundistributed earnings is not practicable at December 31, 2004 or 2003.

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**ITEM7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations ($ in thousands) (Continued)**

**QUARTERLY RESULTSOF OPERATIONS**

Thefollowing table sets forth certain unaudited quarterly consolidated statementof operations data for 2005 and 2004. Our quarterly results have variedconsiderably in the past and are likely to vary from quarter-to-quarter in thefuture.

| ** **                                     | ** ** | **Dec. 31,**                                                  | ** ** | **Sept. 30,** | ** ** | **June 30,** | ** ** | **Mar. 31,** | ** ** | **Dec. 31,** | ** ** | **Sept. 30,** | ** ** | **June 30,** | ** ** | **Mar. 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2005**                                                           | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2005**          | ** ** | **2004**          | ** ** | **2004**           | ** ** | **2004**          | ** ** | **2004**          | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** | ** **         | ** ** |
| Revenues:                                      |       | $                                                                  | 108,367    |               | $          | 114,360           |       | $                 | 115,066    |              | $          | 99,447             |       | $                 | 104,798    |              |       | $ | 99,428 |   |   |   | $ | 99,907 |   |   |   | $ | 95,064 |   |   |
| Operating costs & expenses:           |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |   |   |   |   |   |   |
| Operating costs                                |       | 62,498                                                             |       | 61,252             |       | 58,829            |       | 53,651            |       | 54,089            |       |               | 51,578     |              |       |              | 50,422     |   |   |   | 49,807 |   |   |
| Selling, general  and administrative           |       | 41,673                                                             |       | 33,395             |       | 34,075            |       | 35,788            |       | 33,093            |       |               | 32,832     |              |       |              | 33,934     |   |   |   | 32,157 |   |   |
| Research and  development                      |       | 1,479                                                              |       | 1,343              |       | 1,454             |       | 1,818             |       | 1,899             |       |               | 1,673      |              |       |              | 2,722      |   |   |   | 3,022 |   |   |
| Facility and other  charges                    |       | —                                                             |       | —             |       | —            |       | 9,372             |       | —            |       |               | —     |              |       |              | —     |   |   |   | — |   |   |
| Amortization of  acquired intangible assets    |       | 1,091                                                              |       | 960                |       | 1,130             |       | 1,250             |       | 1,384             |       |               | 1,214      |              |       |              | 1,226      |   |   |   | 1,027 |   |   |
| Other operating  income                        |       | —                                                             |       | —             |       | —            |       | —            |       | —            |       |               | (368       | )                 |       |              | —     |   |   |   | (339 | ) |   |
| Total operating  costs & expenses     |       | 106,741                                                            |       | 96,950             |       | 95,488            |       | 101,879           |       | 90,465            |       |               | 86,929     |              |       |              | 88,304     |   |   |   | 85,674 |   |   |
| Operating income:                              |       | 1,626                                                              |       | 17,410             |       | 19,578            |       | (2,432            | )          | 14,333            |       |               | 12,499     |              |       |              | 11,603     |   |   |   | 9,390 |   |   |
| Interest (income)  expense, net                |       | (310                                                               | )          | (150               | )          | (24               | )          | (141              | )          | (75               | )          |               | 14         |              |       |              | 4          |   |   |   | (7 | ) |   |
| Other expense  (income), net                   |       | (12                                                                | )          | 35                 |       | 20                |       | (23               | )          | 528               |       |               | (190       | )                 |       |              | (18        | ) |   |   | (43 | ) |   |
| Income before  income tax expense              |       | 1,948                                                              |       | 17,525             |       | 19,582            |       | (2,268            | )          | 13,880            |       |               | 12,675     |              |       |              | 11,617     |   |   |   | 9,440 |   |   |
| Income tax expense                             |       | 1,927                                                              |       | 6,747              |       | 7,539             |       | (873              | )          | 5,060             |       |               | 4,880      |              |       |              | 4,331      |   |   |   | 3,776 |   |   |
| Net income                                     |       | $                                                                  | 21         |               | $          | 10,778            |       | $                 | 12,043     |              | $          | (1,395             | )          | $                 | 8,820      |              |       | $ | 7,795 |   |   |   | $ | 7,286 |   |   |   | $ | 5,664 |   |   |
| Net income per share:                          |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |   |   |   |   |   |   |
| Basic                                          |       | $                                                                  | —     |               | $          | 0.25              |       | $                 | 0.28       |              | $          | (0.03              | )          | $                 | 0.21       |              |       | $ | 0.19 |   |   |   | $ | 0.18 |   |   |   | $ | 0.14 |   |   |
| Diluted                                        |       | $                                                                  | —     |               | $          | 0.24              |       | $                 | 0.28       |              | $          | (0.03              | )          | $                 | 0.20       |              |       | $ | 0.18 |   |   |   | $ | 0.17 |   |   |   | $ | 0.13 |   |   |
| Shares used in computing net income per share: |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |   |   |   |   |   |   |
| Basic                                          |       | 43,427                                                             |       | 42,944             |       | 42,592            |       | 42,470            |       | 42,001            |       |               | 41,620     |              |       |              | 41,464     |   |   |   | 40,919 |   |   |
| Diluted                                        |       | 45,175                                                             |       | 44,331             |       | 43,630            |       | 42,470            |       | 43,469            |       |               | 42,939     |              |       |              | 43,342     |   |   |   | 42,515 |   |   |

 

**Liquidity and Capital Resources**

At December 31, 2005, working capital was $82,247compared to $68,058 as of December 31, 2004. Cash and cash equivalentswere $66,145 as of December 31, 2005, compared to $64,020 as of December 31,2004. These increases were primarily attributable to the cash generated byoperating activities offset by payments made in connection with our 2005 and2004 acquisitions as well as higher capital expenditures related to variousfacility moves and consolidations throughout the world.

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $44,126and $55,692 for the years ended December 31, 2005 and 2004, respectively.During the year ended December 31, 2005, we generated operating cash fromour net income adjusted for changes in assets and liabilities, net of effectsfrom acquisitions. Our accrued facility and other charges resulted in lower netincome for the year ended December 31, 2005, however, these charges hadapproximate $2,650 negative impact on our operating cash flows for the yearended December 31, 2005. Future payments of these accruals will continueto have a negative impact on future operating cash flows. In addition, ouroperating cash flows were impacted by payments for income taxes and purchaseaccounting restructuring charges. During the three months ended December 31,2005, our accounts receivable days sales outstanding increased to 67, from 62days for the three months ended December 31, 2004, due to advancebillings to customers in late December 2005 and delays in collections atyear end.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

Cash used in investing activities was $51,196 for theyear ended December 31, 2005, and includes payments for the Optas, Buzzeoand, Uto Brain acquisitions as well as additions to capitalized softwaredevelopment costs and purchases of property and equipment. Cash used ininvesting activities was $32,080 for the year ended December’ 31, 2004 and wasprimarily attributable to purchase payments made related to the MDM, Uto Brainand Schwarzeck acquisitions as well as increased purchases of property andequipment related to various facility moves.

As anticipated, purchases of property and equipmentincreased for the year ended December 31, 2005 versus the comparable prioryear period. The increase is primarily due to equipment related to our newhardware facility in New Jersey, new corporate headquarters in New Jersey andinternational facilities, as well as investing in our integrated support centerautomation process, integrated marketing machinery, and the higher overall capitalspending associated with our larger combined company. During 2006, we expectcapital spending in the range of approximately $18,000 to $22,000 primarily tosupport the Company’s infrastructure and productivity initiatives. We reviewour capital expenditure program periodically and adjust it as required to meetcurrent needs.

Cash provided by financing activities was $10,062 forthe year ended December 31, 2005, and includes proceeds from the issuanceof common stock partially offset by payments related to capital leaseobligations. Cash provided by financing activities was $8,248 for the yearended December 31, 2004, and was primarily attributable to proceeds fromthe issuance of common stock partially offset by the repayments of long-termdebt and loans acquired in connection with the Uto Brain acquisition.

We regularly evaluateopportunities to acquire products or businesses complementary to ouroperations. Such acquisition opportunities, if they arise, may involve the useof cash, equity and/or debt instruments. We believe that available funds,anticipated cash flows from operations and the availability of our revolvingline of credit will satisfy our current projected working capital and capitalexpenditure requirements, exclusive of cash required for possible futureacquisitions of businesses, products and technologies, during the next twelveto eighteen months. There can be no assurance, however, that our business willcontinue to generate cash flow at current levels or that anticipatedoperational improvements will be achieved. Our ability to generate future cashflows depends on our future performance and financial results, which, to acertain extent, are subject to general conditions in or affecting thepharmaceutical and life sciences industry and to general economic, political,financial, competitive and regulatory factors beyond our control.

**ContractualObligations and Commitments**

The June 16, 2003 line-of-credit agreement withJPMorgan Chase, amended September 24, 2004, expired on July 1, 2005. OnJuly 25, 2005, we entered into a replacement line-of-credit agreement (the“Agreement”), in the amount of $30,000 with JPMorgan Chase Bank that expires onJune 30, 2008. The Agreement is available to finance working capital needsand possible future acquisitions. The Agreement contains customary affirmativeand negative covenants and also contains certain financial covenants, includingthose related to (a) a maximum leverage ratio at the end of any fiscalquarter, (b) a minimum interest coverage ratio at the end of any fiscalquarter and (c) a minimum fixed charge coverage ratio at the end of anyfiscal quarter. The Agreement also restricts our ability to create or assumeliens, dispose of assets, consolidate or merge, extend credit, incur otherindebtedness or pay cash dividends. As of December 31, 2005, we were incompliance with all covenants and did not have any amounts outstanding underthe Agreement.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

Our principal commitments at December 31, 2005consisted primarily of obligations under operating and capital leases as wellas future minimum guarantees to certain vendors. Future minimum payments onthese obligations are as follows:

| ** **                       | ** ** | **Payments Due by Period** | ** ** |     |
|----------------------------------|------------|-------------------------------------------|------------|----------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
| Capital leases                   |       | $                                         | 3,187      |     | $ | 1,548 |   | $ | 1,571 |   | $ | 68 |   | $ | — |   | $ | — |   |   | $ | — |   |   |   |
| Corporate headquarters           |       | 154                                       |       | 154      |   | — |   | — |   | — |   | — |   |   | — |   |   |   |
| Minimum guarantees               |       | 6,271                                     |       | 2,271    |   | 2,000 |   | 2,000 |   | — |   |   |   |   | — |   |   |   |
| Buzzeo purchase price            |       | 590                                       |       | 590      |   | — |   | — |   | — |   | — |   |   | — |   |   |   |
| Operating leases(1)              |       | 96,031                                    |       | 18,121   |   | 15,665 |   | 12,544 |   | 11,616 |   | 10,731 |   |   | 27,354 |   |   |   |
| Total                            |       | $                                         | 106,233    |     | $ | 22,684 |   | $ | 19,236 |   | $ | 14,612 |   | $ | 11,616 |   | $ | 10,731 |   |   | $ | 27,354 |   |   |   |

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(1)          Operating lease amountsdisclosed above include $16,635 of future operating lease costs, excludingestimated future sublease income, accrued for in the purchase accountingrestructuring accruals related to the Synavant and SAI acquisitions and in thefacility and other charges accrual related to the Bridgewater facility.

As of December 31, 2005, letters of credit forapproximately $5,337 were outstanding related to deposits on certainfacilities.

We have an agreement witha venture capital fund with a commitment to contribute $1,000 to the fund,callable at the discretion of the general partner in $100 increments. As of December 31,2005, $600 has been paid and is included other assets in the accompanyingconsolidated balance sheet, with $400 of the commitment remaining. Theagreement has a termination date of December 11, 2010, subject toextension with the consent of a majority in interest of the limited partners.

**Recent Accounting Pronouncements**

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,“Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the accountingfor and reporting of a change in accounting principle by requiringretrospective applications to prior periods’ financial statements of changes inaccounting principle unless impracticable. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. We do notexpect SFAS 154 to have a material impact on our financial position, results ofoperations or cash flows.

In March 2005, the FASB issued FIN No. 47, “Accountingfor Conditional Asset Retirement Obligations” an interpretation of SFAS 143(the “Interpretation”). The Interpretation clarifies the manner in whichuncertainties concerning the timing and the method of settlement of an assetretirement obligation should be accounted for. In addition, the Interpretationclarifies the circumstances under which fair value of an asset retirementobligation is considered subject to reasonable estimation. The Company adoptedthe Interpretation for the fiscal year ended December 31, 2005 and theadoption did not have a material impact on our financial position, results ofoperations or cash flows.

In December 2004, the FASB issued SFAS No. 123(revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as areplacement to SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS123”). This statement supersedes Accounting Principles Board (“APB”) 25, “Accountingfor Stock Issued to Employees” which allowed companies to use the intrinsicmethod of valuing share-based payment transactions and amends SFAS No. 95,“Statement of Cash Flows.” SFAS 123(R) requires all share-based

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on the fair-value method as defined in SFAS 123. SFAS 123(R) providestwo alternatives for adoption: (1) a “modified prospective” method inwhich compensation cost is recognized for all awards granted subsequent to theeffective date of this statement as well as for the unvested portion of awardsoutstanding as of the effective date; or (2) a “modified retrospective”method which follows the approach in the “modified prospective” method, butalso permits entities to restate prior periods to record compensation costcalculated under SFAS No. 123 for the pro forma disclosure. In addition,SFAS 123(R) also requires that tax benefits received in excess ofcompensation cost be reclassified from operating cash flows to financing cashflows in the consolidated statement of cash flows. The Company has adoptedSFAS 123(R) under the modified prospective method effective January 1,2006. The effect of adoption of SFAS 123(R) is currently estimated to beapproximately $3.2 million to $4.3 million after tax for 2006. However, ouractual equity-based compensation expense in 2006 will depend on a number offactors, including the amount of awards granted and the fair value of thoseawards at the time of grant.

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

Set forth in this Form 10-Kare certain risks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in this Form 10-K.You are strongly urged to carefully consider the cautionary language and risksset forth below.

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

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

A significant agreement with our largest customercovering U.S. salesforce effectiveness services is scheduled to renew on January 1,2007, subject to a right of the customer to terminate at renewal. The customeris re-evaluating all such U.S. services for 2007 in a process in which weexpect to participate. We cannot assure you that the contract will renew for2007, that it will renew upon substantially similar terms or that it will coversubstantially similar services as those currently provided to this customer.

**OUR BUSINESS ISHEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY**

Most of oursolutions are currently used in connection with the marketing and sale ofprescription-only drugs. This market is undergoing a number of significantchanges. These changes include:

·       thesignificant and continuing consolidation of the pharmaceutical industry whichmay reduce the number of our existing and potential customers;

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

·       U.S.and international governmental regulations mandating price controls;

·       increasingFood and Drug Administration activism; and

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

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

We cannot assure you thatwe can respond effectively to any or all of these and other changes in themarketplace. Our failure to do so could have a material adverse effect on ourbusiness, operating results or financial condition, as our business depends, inlarge part, on the business conditions within this marketplace.

**OUR CUSTOMERS MAY NOTSUCCESSFULLY IMPLEMENT OUR PRODUCTS**

Our customers oftenimplement our products in stages and our products are often utilized by a largenumber of our customers’ personnel. In the event that our customers havedifficulties implementing our products and services or are not satisfied withthe implementation or operation our products and services, our business,operating results and financial condition could be materially and adverselyaffected.

**WE FACE RISKSASSOCIATED WITH OUR ACQUISITIONS**

As part of ourbusiness strategy, we have acquired, and in the future may acquire, businessesthat offer complementary products, services or technologies. Theseacquisitions, including any future acquisitions, are and will be accompanied bysubstantial risks, including:

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

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

·       ourinability to successfully integrate the acquired business;

·       thefailure of an acquired business to further our strategies;

·       ourinability to achieve expected cost and business synergies;

·       thesignificant strain on our operating systems;

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

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

·       thenegative impact of the combination of different corporate cultures;

·       theloss of key employees of the acquired company;

·       regulatoryor compliance issues existing in the acquired organization;

·       undetectedproblems within the acquired organization; and

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

Any of these factors could have a material adverseeffect on our revenues and earnings.

We expect that the consideration paid for futureacquisitions, if any, could be in the form of cash, equity, debt or acombination of these. To the extent that we issue shares of stock or otherrights to purchase stock in connection with any future acquisition, existingshareholders will experience dilution and potentially decreased earnings pershare.

While to date we have had success integrating acquiredentities into our operations, we cannot guarantee that we will successfullyintegrate new businesses into our operations or achieve any expected costsynergies.

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

**BUSINESS ANDECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAY CAUSE A DECREASE IN DEMANDFOR OUR NEW PRODUCTS AND SERVICES**

Business and economicpressures on our major customers may result in budget constraints that directlyimpact their ability to purchase our new products and services offerings. Wecannot assure you that any decrease in demand caused by these pressures willnot have a material adverse effect on our business, operating results orfinancial condition.

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

The selection of a sales force Effectiveness (SFE)solution generally entails an extended decision-making process by our customersbecause of the strategic implications, substantial costs and significantcommitment of resources associated with a customer’s license or implementationof the solution. Given the importance of the decision, senior levels ofmanagement of our customers are often involved in the process and, in someinstances, their board of directors may also be involved. As a result, thedecision-making process typically takes nine to eighteen months, and in certaincases longer. In addition, other factors, unrelated to our product andservices, such as acquisitions, product delays, or other issues, may alsosignificantly impact the timing and amounts of buying decisions. Accordingly,we cannot fully control or predict the timing of our execution of contractswith customers. Prior sales and implementation cycles cannot be relied upon asany indication of future cycles.

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

**OUR QUARTERLYOPERATING RESULTS MAY FLUCTUATE**

Our total revenue andoperating results may vary significantly from quarter-to-quarter. The mainfactors that could cause these fluctuations are:

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

·       potentialdelays in recognizing revenue from license and other transactions;

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

·       variationsin the fiscal or quarterly cycles of our customers.

In addition, we establish our expenditure levels forproduct development, sales and marketing and some of our other operatingexpenses based in large part on our expected future revenues and anticipatedcompetitive conditions. In particular, we frequently add staff in advance ofnew business to permit adequate time for training. If the new business issubsequently delayed, canceled or not awarded, we will have incurred expenseswithout the associated revenues. We also may increase sales and marketingexpenses if competitive pressures become greater than originally anticipated.Since only a small portion of our expenses varies directly with our actualrevenues, our operating results and profitability are likely to be adverselyand disproportionately affected if our revenues fall below our targeted goalsor expectations.

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

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**ITEM 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations ($ in thousands) (Continued)**

**AN UNFAVORABLEGOVERNMENT REVIEW OF OUR INCOME AND PAYROLL TAX RETURNS AND CHANGES IN OUREFFECTIVE TAX RATES COULD ADVERSELY AFFECT OUR OPERATING RESULTS**

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

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

Additionally, for a variety of reasons, we may not inthe future be able to successfully maintain our historic effective tax rates.

**FUTURERESTRUCTURING MAY ADVERSELY IMPACT OUR OPERATIONS**

We have announced plans to identify and reduce costsin our business. As a result, we expect to incur severance and other associatedcosts for these actions which may adversely affect our future operatingresults.

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

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

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

**WE MAY BEUNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICALCHANGE**

The market for SFEproducts changes rapidly because of frequent improvements in computer hardwareand software technology. Our future success will depend, in part, on ourability to:

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

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

·       addressthe changing and increasingly sophisticated needs of our customers.

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

Competition for software products has beencharacterized by shortening product cycles. We may be materially and adverselyaffected by this trend if the product cycles for our products prove to be shorterthan we anticipate. If that happens, our business, operating results orfinancial condition could be adversely affected.

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**ITEM 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations ($ in thousands) (Continued)**

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

**SOFTWARE ERRORS ORDEFECTS COULD AFFECT OUR REVENUES**

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

**INCREASEDCOMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OURPRODUCTS AND SERVICES SOLUTIONS**

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

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

We believe our ability tocompete depends on many factors, some of which are beyond our control,including:

·       thenumber and success of new market entrants supplying competing CRM and SFEproducts or support services;

·       alliancesamong existing competitors;

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

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

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

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

**WE MAY NOT BEABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTS AND SERVICES MARKETNOR CAN WE PROVIDE ASSURANCES THAT THE DEMAND FOR INTERNET-RELATED PRODUCTS ANDSERVICES WILL INCREASE**

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

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Commercial use of theInternet raises potential problems with security, privacy, reliability,accessibility, quality of service and government regulation. These issues, ifunresolved, may affect the use of our Internet-related products. If thesepotential problems arise, our business, financial condition or results ofoperations could be materially and adversely affected.

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

We have recently significantly expanded and may in thefuture further expand our international operations and enter additionalinternational markets. This expansion would require significant managementattention and financial resources that could adversely affect operating marginsand earnings. We may not be able to maintain or increase international marketdemand for our products and services. If we do not, our international saleswill be limited and our business, financial condition or results of operationscould be materially and adversely affected.

The sale of ourproducts and services in foreign countries accounts for, and is expected in thefuture to account for, an increasing material part of our revenues. These salesare subject to substantial risks inherent in international business activities,including:

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

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

·       theabsence or significant lack of legal protection for intellectual propertyrights in certain of these countries; and

·       difficultiesin managing an organization spread on a global basis.

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

Since we have operationsin a number of countries and our service agreements in such countries aredenominated in foreign currencies, we face exposure to adverse movements inforeign currency exchange rates. As currency rates change, translation of theincome statements of our international entities from local currencies to U.S.dollars affects period-over-period comparability of operating results. Historically,we have not hedged these translation risks because we generally reinvest ourcash flows from international operations. However, we continue to evaluateforeign currency translation risk exposure. As we continue to grow ourinternational business, the risks associated with foreign currency translationwill also grow.

**CATASTROPHIC EVENTSCOULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE**

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

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**OUR SUCCESS DEPENDSON RETAINING OUR KEY SENIOR MANAGEMENT TEAM, ENSURING EFFECTIVE TRANSITION FORKEY POSITIONS AND ATTRACTING AND RETAINING QUALIFIED PERSONNEL**

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

Our future success also depends on our continuingability to attract and retain highly qualified technical and managerialpersonnel. Due to competition for such personnel, we have at times experienceddifficulties in recruiting and retaining qualified personnel and we mayexperience such difficulties in the future. Our ability to expand and increaserevenue growth in the future will depend, in part, on our success in recruitingand training such qualified personnel. We may not always be able to expand ourpersonnel in these areas as necessary to support our operations. Any recruitingor retention difficulties could adversely affect our business, operatingresults or financial condition.

**IF OUR SECURITYMEASURES ARE BREACHED AND AN UNAUTHORIZED PARTY OBTAINS ACCESS TO A CUSTOMER’SDATA, CERTAIN OF OUR SOLUTIONS MAY BE PERCEIVED AS BEING INSECURE ANDCUSTOMERS MAY CURTAIL OR STOP USING OUR SERVICE.**

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

**OUR BUSINESSDEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECTCOMPLETELY**

We rely on a combination of trade secret, copyrightand trademark laws, non-disclosure, license and other contractual agreementsand technical measures to protect our proprietary rights. We cannot assure youthat the steps we take will prevent misappropriation of these rights. Further,protective actions we have taken or will take in the future may not preventcompetitors from developing products with features similar to our products. Inaddition, effective copyright and trade secret protection may be unavailable orlimited in certain foreign countries. In response to customer requests, we havealso on occasion entered into agreements which require us to place our sourcecode in escrow to secure our service and maintenance obligations.

Further, while we believethat our products and trademarks do not infringe upon the proprietary rights ofany third parties, third parties may assert infringement claims against us inthe future that may result in costly litigation, diversion of management’sattention, the imposition of monetary 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.

**THIRD PARTIESMAY CLAIM THAT OUR SOLUTIONS INFRINGE ON THEIR PROPRIETARY RIGHTS**

As a company offering technology solutions, there canbe no assurance that third parties also offering technology solutions will notassert infringement claims against us in the future. While we believe that our 

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solutions do not infringeupon proprietary rights of other parties, there can be no assurance that theCompany would not be found to infringe on the proprietary rights of others. Anysuch finding could have a material adverse impact on our operating results orfinancial condition.

**IF OUR THIRD-PARTYVENDORS ARE UNABLE TO SUCCESSFULLY RESPOND TO TECHNOLOGICAL CHANGE OR IF WE DO NOTMAINTAIN OUR RELATIONSHIPS WITH THIRD-PARTY VENDORS, INTERRUPTIONS IN THESUPPLY OF OUR PRODUCTS MAY RESULT**

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

**THE RESULTS DERIVEDFROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BE LESSFAVORABLE THAN ANTICIPATED**

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

**OUR DATA ANDANALYTICS SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IF NOTMAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS**

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

**FEDERAL AND STATELAWS AND REGULATIONS COULD DEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS**

While we believe our data and analytics solutions arenot in violation of current federal or state laws and regulations pertaining topatient privacy or health information, including the Health InsurancePortability and Accountability Act of 1996 (HIPAA), we cannot guarantee thatfuture laws or regulations or interpretations of existing laws and statuteswill not impact negatively upon our ability to market these solutions or causea decrease in demand for such solutions from customers that see an increasedrisk in any such new laws or regulations.

**GOVERNMENTALREGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTECONTROLLED SUBSTANCES THROUGH THE MAIL**

Through the interactive marketing business we acquiredin the Synavant acquisition, we may distribute controlled substances to doctors’offices through the mail as part of certain interactive marketing programsprovided on behalf of pharmaceutical manufacturers. It is important to thebusiness that this practice of distributing prescription-only drugs continues.Future legislation may restrict our ability to provide these types of services.If any such legislation is enacted, it could have a material and adverse effecton our business, operating results and financial condition.

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**DIFFICULTIES INSUBLEASING OR OTHERWISE DISPOSING OF CERTAIN OF OUR FACILITIES MAY NEGATIVELYIMPACT UPON OUR EARNINGS**

We expect to sublease all or a portion of certainfacilities, including facilities acquired as part of the Synavant acquisition. Aninability to successfully dispose of or sublet, as applicable, any of thesefacilities or to obtain favorable pricing or sublease terms could negativelyimpact our earnings.

**UNANTICIPATEDCHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BYACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ONOUR FINANCIAL STATEMENTS**

In reporting our financialresults we rely upon the accounting policies and standards then in effect atthe time of our report. Future regulations, standards or interpretations mayrequire us to adjust or restate financial results previously reported. Arequired restatement could have a material impact upon past financial resultsor current comparison to previous results.

**WE MAY FACERISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY**

World events such as terrorist attacks, the currentU.S. military action in the Middle East and elsewhere, and hostilities in theMiddle East, Asia and other geographical areas, have and may in the futureweaken the U.S. and world economies. Any resultant weaknesses in theseeconomies may adversely affect our business, financial condition or results ofoperations or the businesses of our customers.

**WE FACE RISKS INCONNECTION WITH IMPLEMENTING THE REQUIREMENTS OF SECTION 404 OF THESARBANES OXLEY ACT**

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

**PROVISIONS OF OURCHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OFDENDRITE**

Provisions of our RestatedCertificate of Incorporation, as amended, our By-laws, as amended, and NewJersey law may make it more difficult for a third-party to acquire us. Forexample, the Board of Directors may, without the consent of the stockholders,issue preferred stock with rights senior to those of the common stock. Inaddition, we have a Shareholder Rights Plan which may limit the ability of athird-party to attempt a hostile acquisition of the Company.

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

The market price ofour common stock may be significantly affected by the following factors:

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

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

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

·       generalconsolidation in the healthcare information industry which may result in themarket perceiving us or other comparable companies as potential acquisitiontargets;

·       thegain or loss of significant customers, orders or other business withsignificant customers;

·       changesin the domestic and international economic, political and business conditions;and

·       futureacquisitions.

Further, the stock markethas experienced on occasion extreme price and volume fluctuations. The marketprices of the equity securities of many technology companies have beenespecially volatile and often have been unrelated to the operating performanceof such companies. These broad market fluctuations may have a material adverseeffect on the market price of our common stock.

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**ITEM7A. Quantitative and Qualitative Disclosures About Market Risk**

**Foreign Currency Risk**

Because we have operations in a number of countriesand our service agreements in such countries are denominated in a foreigncurrency, we face exposure to adverse movements in foreign currency exchangerates. As currency rates change, translation of the income statements of ourinternational entities from local currencies to U.S. dollars affectsperiod-over-period comparability of operating results. Historically, we havenot hedged translation risks because we generally reinvest our cash flows frominternational operations. However, we continue to evaluate foreign currencytranslation risk exposure.

Management estimates thata 10% change in foreign exchange rates would have impacted 2005 reportedoperating profit by approximately $887. This sensitivity analysis disregardsthe possibility that rates can move in opposite directions and that losses fromone area may be offset by gains from another area. As we continue to grow ourinternational businesses, the risks associated with foreign currencytranslation will also grow.

**Interest Rate Risk**

We earn interest income from our balances of cash andshort-term investments. This interest income is subject to market risk relatedto changes in interest rates, which primarily affects our investment portfolio.We invest in instruments that meet high credit quality standards, as specifiedin our investment policy. The policy also limits the amount of credit exposureto any one issue, issuer and type of investment.

Due to the averagematurity and conservative nature of our investment portfolio, a sudden changein interest rates would not have a material effect on the value of theportfolio. Management estimates that if the average yield of the Company’sinvestments decreased by 100 basis points, our interest income for the yearended December 31, 2005 would have decreased approximately $548. Thisestimate assumes that the decrease occurred on the first day of 2005 andreduced the yield of each investment instrument by 100 basis points. The impacton our future interest income will depend largely on the gross amount of ourinvestments and future changes in investment yields.

**ITEM 8. Financial Statements and Supplementary Data**

The Company’s 2005Consolidated Financial Statements, together with the report thereon of Deloitte &Touche LLP, are included in Item 15. The supplementary financial informationrequired by this Item 8 is included in the “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations” in Item 7.

**ITEM 9. Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

On May 11, 2004 Ernst & Young LLP (“E&Y”)resigned as the independent auditor for the Company.

E&Y was initially engaged by the Company as itsindependent auditor effective April 4, 2002. The reports of E&Y on theCompany’s financial statements for the years ended December 31, 2003 and2002 do not contain an adverse opinion or a disclaimer of opinion and are notqualified or modified as to uncertainty, audit scope or accounting principles.

During the years ended December 31, 2003 and 2002and through May 11, 2004, there were no reportable events as defined inItem 304(a)(1)(v) of Regulation S-K. The Company believes that,during the years ended December 31, 2003 and 2002 and through May 11,2004, there were no disagreements, as defined in Item 304(a)(1)(iv) ofRegulation S-K, with E&Y on any matter of accounting principles orpractices, financial statement disclosure or auditing scope or procedure which,if not resolved to the 

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satisfaction of E&Y,would have caused E&Y to make reference to such disagreement in itsreports. The quarterly written reports of E&Y to the Audit Committee underSAS 61 and AU Section 722 prior to E&Y’s resignation areconsistent with this conclusion.

In connection with its review of the Company’s draftQuarterly Report on Form 10-Q for the quarter ended September 30,2003, E&Y identified a material transaction for which during the quarterthe Company had included revenue on the transfer and sale of certainirrevocable licenses in an initial stocking order to a Japanese distributor.Based on its review and analysis, E&Y determined that the revenue relatedto this particular transaction should be accounted for utilizing the “sell-through”method of accounting, provided the other criteria for revenue recognition underapplicable accounting standards were met. After discussion and further review,the Company agreed with this position and did not include this revenue in thequarterly report or its quarterly results. This matter was reviewed with boththe Company’s Audit Committee and with the Company’s Board of Directors inmeetings on October 21, 2003 by E&Y. In connection with the Company’spreparation of a Current Report on Form 8-K in connection withE&Y’s resignation, E&Y informed the Company that, upon further reviewand analysis of all discussions and information through the date of itsresignation, E&Y concluded that in its view in fact there had been adisagreement in connection with the matters described above. The Company hasnot changed its conclusion that no disagreement occurred.

The Audit Committee authorized E&Y to respondfully to any and all inquiries of the successor auditor concerning any mattersthat occurred during E&Y’s tenure as the Company’s auditor, including anyof the matters referred to above.

E&Y furnished a letteraddressed to the Securities and Exchange Commission stating that it agreed withthe above statements.

**ITEM 9A. Controls and Procedures**

The Company’s Chief Executive Officer and ChiefFinancial Officer, with the assistance of other members of the Company’smanagement, have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”) as of the end of theperiod covered by this Form 10-K. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as of December 31,2005, our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed in our ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified by the Securities and Exchange Commission and that materialinformation relating to the Company and its consolidated subsidiaries is madeknown to management, including the Chief Executive Officer and Chief FinancialOfficer, during the period when our periodic reports are being prepared.

The Company’s ChiefExecutive Officer and Chief Financial Officer have also concluded that therehave not been any changes in the Company’s internal control over financialreporting during the fiscal quarter ended December 31, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

**Management’sReport on Internal Control Over Financial Reporting**

Management of the Company is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.

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Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005.Management based this assessment on criteria for effective internal controlover financial reporting described in “Internal Control-Integrated Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission.Management’s assessment included an evaluation of the design of the Company’sinternal control over financial reporting and testing of the operationaleffectiveness of its internal control over financial reporting. Managementreviewed the results of its assessment with the Audit Committee.

Based on this assessment, management determined that,as of December 31, 2005, the Company’s internal control over financialreporting was effective to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America.

During the year ended December 31, 2005, weacquired BuzzeoPDMA, Inc. and Optas, Inc. Management has excludedthese acquisitions from our assessment of the effectiveness of our internalcontrol over financial reporting. For such fiscal year, these acquisitionscontributed approximately 8% and 3% to total assets and revenues, respectively.

Deloitte & Touche LLP, our independentregistered public accounting firm, who audited and reported on the consolidatedfinancial statements of the Company included in this report, has issued anattestation report on management’s assessment of internal control overfinancial reporting.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofDendrite International, Inc.Bedminster, New Jersey

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control Over FinancialReporting”, included in Item 9A, that Dendrite International, Inc. andsubsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).As described in “Management’s Report on Internal Control Over FinancialReporting”, management excluded from their assessment the internal control overfinancial reporting at BuzzeoPDMA, Inc. and Optas, Inc., which wereacquired in January 2005 and September 2005, respectively, and whosefinancial statements reflect total assets and revenues constituting 8 and 3percent, respectively, of the related consolidated financial statement amountsas of and for the year ended December 31, 2005. Accordingly, our audit didnot include the internal control over financial reporting at BuzzeoPDMA, Inc.and Optas, Inc. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the 

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criteria established in *Internal Control—Integrated Framework* issued by the COSO. Alsoin our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, basedon the criteria established in *Internal Control—IntegratedFramework* issued by the COSO.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets as of December 31, 2005and 2004 and the related consolidated statements of operations, stockholders’equity and cash flows for the years ended December 31, 2005 and 2004 andfinancial statement schedule as of and for the year ended December 31,2005 of the Company and our report dated March 16, 2006 expressed anunqualified opinion on those financial statements and financial statementschedule.

*/s/ DELOITTE & TOUCHE LLP*

Parsippany, New JerseyMarch 16, 2006

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**ITEM 9B. Other Information**

None.

**PART III**

**ITEM 10. Directors and Executive Officers of theRegistrant**

Information concerning the Company’s directors underthe caption “Election of Directors” in the Company’s Proxy Statement for the2006 Annual Meeting of Shareholders, the information concerning the Company’sexecutive officers set forth in Part I, Item 1 above under the caption “ExecutiveOfficers,” and the information under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in the Company’s Proxy Statement for the Company’s2006 Annual Meeting of Shareholders, are incorporated herein by reference.

The information regarding the Company’s AuditCommittee and its designated audit committee financial expert is set forthunder the caption “Board and Committee Meetings” in the Company’s ProxyStatement for the Company’s 2006 Annual Meeting of Shareholders and suchinformation is incorporated by reference herein.

We have adopted a Code of Ethics and Standards ofBusiness Conduct (“Code of Ethics”) within the meaning of Item 406(b) ofSEC Regulation S-K that applies to our principal executive officer,principal financial officer and principal accounting officer, as well as to allother officers, employees and directors of the Company. Our Code of Ethics ispublicly available on our website at *www.dendrite.com*.If we make substantive amendments to our Code of Ethics or grant any waiver infavor of a director or executive officer, we will publicly disclose the natureof such amendment or waiver on our website and to the extent required by NASDAQand SEC rules in a current report on Form 8-K.

**ITEM 11. Executive Compensation**

The information set forthunder the caption “Executive Compensation and Related Information” and theinformation concerning director compensation under the caption “DirectorCompensation” in the Company’s Proxy Statement for the Company’s 2006 AnnualMeeting of Shareholders, are incorporated herein by reference. The informationincluded under “Report of the Compensation Committee,” “Report of the AuditCommittee” and “Performance Graph” is not incorporated in this Item 11.

**ITEM 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

The information set forth under the caption “BeneficialOwnership of Common Stock” in the Company’s Proxy Statement for the Company’s2006 Annual Meeting of Shareholders is incorporated herein by reference.

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The following tableprovides equity compensation plan information as of the end of our 2005 fiscalyear with respect to compensation plans under which the Company’s equitysecurities are authorized for issuance:

**EquityCompensation Plan Information**

| **Plan category**                                         | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)(1)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders(2)     |       |       | 8,273,286  | (3)                                                                                                                                                   |       |                                                                                                                | $          | 14.97                                                                                                                                                                                                                 |       |   |   | 511,090 | (4) |   |
| Equity compensation  plans not approved by security holders(5) |       |       | 2,074,671  | (6)                                                                                                                                                   |       |                                                                                                                | $          | 15.36                                                                                                                                                                                                                 |       |   |   | 701,784 |   |   |
| Total                                                          |       |       | 10,347,957 |                                                                                                                                                  |       |                                                                                                                | $          | 15.04                                                                                                                                                                                                                 |       |   |   | 1,212,874 |   |   |

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(1)          Excludes restrictedstock units.

(2)          Represents the Company’s1992 Stock Plan, 1997 Employee Stock Purchase Plan and 1997 Stock IncentivePlan.

(3)          Represents 8,214,606shares subject to outstanding options and 29,979 shares subject to restrictedstock units under the 1997 Stock Incentive Plan and 28,701 shares subject tooutstanding options under the 1992 Stock Plan.

(4)          Includes 140,609 sharesavailable for purchase under the 1997 Employee Stock Purchase Program. Noshares are available for issuance under the 1992 Stock Plan.

(5)          Represents the New HireAuthorization (“New Hire Plan”).

(6)          Represents 1,824,671shares subject to outstanding options and 250,000 shares subject to restrictedstock units under the New Hire Plan.

Transactions under the NewHire Plan were registered with the Securities and Exchange Commission on Form S-8.In accordance with the requirements of NASDAQ Rule 4350(i), new hires maybe granted non-qualified stock options under the new hire authorization. Theexercise price for options is the fair market value of the Company’s CommonStock on the date of the grant. Vesting of options under the New Hire Plan isdetermined by the Compensation Committee. All options granted prior to 2004,and certain grants in 2004, vest twenty-five percent (25%) on the firstanniversary of date of grant and the remaining seventy-five percent (75%)become exercisable pro rata over the following three year period, on a monthlybasis, commencing on the first anniversary of the date of grant and ending onthe fourth anniversary of the date of grant. All other option grants during2004 vested 100% on December 31, 2004, with the right to sell theunderlying shares accruing in either three, or four, equal installments on eachof the first three, or four, anniversaries of the date of grant. Option grantsduring 2005 vested on June 30, 2005 for grants made prior to April 1,2005 and December 31, 2005 for grants made after April 1, 2005, withthe right to sell the underlying shares accruing in either three, or four,equal installments on each of the first three, or four, anniversaries of thedate of grant. The other terms and conditions of such new hire options aregenerally the same as for non-qualified stock options granted under the 1997Stock Incentive Plan. Such grants are not subject to the Employee RetirementIncome Security Act of 1974, as amended.

49

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**ITEM 13. Certain Relationships and RelatedTransactions**

The information set forthunder the caption “Certain Transactions with Related Parties” in the Company’sProxy Statement for the Company’s 2006 Annual Meeting of Shareholders isincorporated herein by reference.

**ITEM 14. Principal Accountant Fees and Services**

The information regardingprincipal accounting fees and services and the Company’s pre-approval policiesand procedures for audit and non-audit services provided by the Company’sindependent registered public accounting firms are set forth under the caption “PrincipalAccountant Fees and Services” in the Company’s Proxy Statement for the Company’s2006 Annual Meeting of Shareholders and such information is incorporated hereinby reference.

**PART IV**

**ITEM 15. Exhibits and Financial Statement Schedules**

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

1.                FinancialStatements

Reports of Independent Registered Public AccountingFirms

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2.                FinancialStatement Schedules:

i. Schedule II—Valuation and Qualifying Accounts

3.                Exhibits. Theexhibits in the accompanying “Exhibit Index” are incorporated herein byreference.

50

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                           | DENDRITE INTERNATIONAL, INC. |
|---------------------------|------------------------------|
|                      |                         |   |
|                      | By:                          | JOHN  E. BAILYE |
| Date: March 16, 2006 | * *                     | John E. Bailye*Chairman of the Board and Chief Executive Officer* |

 

PURSUANTTO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HASBEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND INTHE CAPACITIES AND ON THE DATES INDICATED.

|                           | **Name** | ** **                                         | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|----------|----------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
|                      |     |                                               |       |                 |
| JOHN E. BAILYE            |     | Chairman of the Board and  Chief Executive Officer |       | March 16,  2006 |
| John  E. Bailye           |     | (Principal Executive  Officer)                     |       |                 |
| JEFFREY J. BAIRSTOW  |     | Executive Vice President and Chief Financial       |       | March 16,  2006 |
| Jeffery  J. Bairstow      |     | Officer (Principal  Financial Officer)             |       |                 |
| BRENT J. COSGROVE         |     | Vice President and  Corporate Controller           |       | March 16,  2006 |
| Brent  J. Cosgrove        |     | (Principal  Accounting  Officer)                   |       |                 |
| JOHN A. FAZIO             |     | Director                                           |       | March 16,  2006 |
| John  A. Fazio            |     |                                               |       |                 |
| BERNARD M. GOLDSMITH      |     | Director                                           |       | March 16,  2006 |
| Bernard  M. Goldsmith     |     |                                               |       |                 |
| EDWARD J. KFOURY          |     | Director                                           |       | March 16,  2006 |
| Edward  J. Kfoury         |     |                                               |       |                 |
| PETER W. LADELL           |     | Director                                           |       | March 16,  2006 |
| Peter  W. Ladell          |     |                                               |       |                 |
| PAUL A. MARGOLIS          |     | Director                                           |       | March 16,  2006 |
| Paul  A. Margolis         |     |                                               |       |                 |
| JOHN H. MARTINSON         |     | Director                                           |       | March 16,  2006 |
| John  H. Martinson        |     |                                               |       |                 |
| PETER G. TOMBROS          |     | Director                                           |       | March 16,  2006 |
| Peter  G. Tombros         |     |                                               |       |                 |
| PATRICK J. ZENNER         |     | Director                                           |       | March 16,  2006 |
| Patrick J. Zenner         |     |                                               |       |                 |

 

51

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofDendrite International, Inc.**Bedminster, New Jersey

We have audited the accompanying consolidated balancesheets of Dendrite International, Inc.and subsidiaries (the “Company”) as of December 31, 2005 and 2004,and the related statements of income, stockholders’ equity, and cash flows forthe years then ended. Our audits also included the financial statement schedulelisted in the Index at Item 15 for the years ended December 31, 2005 and2004. These financial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such 2005 and 2004 consolidatedfinancial statements present fairly, in all material respects, the financialposition of Dendrite International, Inc. and subsidiaries as of December 31,2005 and 2004, and the results of operations and their cash flows for the yearsthen ended in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, such financial statementschedule for the years ended December 31, 2005 and 2004, when consideredin relation to the basic financial statements taken as a whole, presents fairlyin all material respects the information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”), and our report dated March 16, 2006expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

*/s/ DELOITTE & TOUCHE LLP*

Parsippany, New JerseyMarch 16, 2006

52

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and StockholdersDendrite International, Inc.

We have audited the accompanying consolidatedstatements of income, stockholders’ equity and cash flows of DendriteInternational, Inc. and subsidiaries for the year ended December 31,2003. Our audit also included the financial statement schedule listed in theIndex at Item 15(a)2 for the year ended December 31, 2003. These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated results of operations and cash flows ofDendrite International, Inc. and subsidiaries for the year ended December 31,2003, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule for the year ended December 31,2003, when considered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information set forththerein.

|  | * * | */s/ ERNST & YOUNG LLP* |
|--|----------|----------------------------------|

 

MetroPark, New JerseyJanuary 29, 2004

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**DENDRITEINTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, Except Share Data)**

| ** **                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Assets**                                                                                      |       |
| Current Assets:                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                       |       | $                     | 66,145     |   | $ | 64,020 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $1,000 and $2,034, respectively |       | 80,167                |       | 71,653 |   |
| Prepaid expenses and  other current assets                                                      |       | 8,544                 |       | 7,145 |   |
| Deferred income taxes                                                                           |       | 8,848                 |       | 5,029 |   |
| Total current assets                                                                            |       | 163,704               |       | 147,847 |   |
| Property and equipment,  net of accumulated depreciation of $61,019 and $56,499, respectively   |       | 52,592                |       | 45,283 |   |
| Other assets                                                                                    |       | 8,856                 |       | 7,922 |   |
| Goodwill                                                                                        |       | 90,440                |       | 80,963 |   |
| Intangible assets, net                                                                          |       | 24,638                |       | 19,876 |   |
| Purchased capitalized  software, net                                                            |       | 445                   |       | 1,056 |   |
| Capitalized software  development costs, net                                                    |       | 10,341                |       | 9,170 |   |
| Deferred income taxes                                                                           |       | 11,991                |       | 10,452 |   |
|                                                                                            |       | $                     | 363,007    |   | $ | 322,569 |   |
| **Liabilities  and Stock holders‘ Equity**                                                 | ** ** |
| Current Liabilities:                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                |       | $                     | 7,677      |   | $ | 8,171 |   |
| Income taxes payable                                                                            |       | 9,518                 |       | 12,223 |   |
| Capital lease obligations                                                                       |       | 1,383                 |       | 1,689 |   |
| Accrued compensation and  benefits                                                              |       | 17,950                |       | 14,662 |   |
| Accrued professional and  consulting fees                                                       |       | 5,690                 |       | 7,413 |   |
| Accrued facility and  other charges                                                             |       | 1,490                 |       | — |   |
| Other accrued expenses                                                                          |       | 17,468                |       | 19,284 |   |
| Purchase accounting  restructuring accrual                                                      |       | 1,601                 |       | 3,000 |   |
| Deferred revenues                                                                               |       | 18,680                |       | 13,347 |   |
| Total current liabilities                                                                       |       | 81,457                |       | 79,789 |   |
| Capital lease obligations                                                                       |       | 1,648                 |       | 3,036 |   |
| Purchase accounting  restructuring accrual                                                      |       | 3,009                 |       | 4,143 |   |
| Accrued facility and  other charges                                                             |       | 4,143                 |       | — |   |
| Deferred rent                                                                                   |       | 5,740                 |       | 2,070 |   |
| Other non-current  liabilities                                                                  |       | 5,595                 |       | 5,942 |   |
| Stockholders’ Equity:                                                                      |       |                  |       |   |   |
| Preferred stock, no par value, 15,000,000 shares                                                |       |                  |       |   |   |
| authorized, none issued                                                                         |       | —                |       | — |   |
| Common stock, no par value, 150,000,000 shares authorized,                                      |       |                  |       |   |   |
| 46,353,252 and 44,913,584 shares issued; 43,491,949  and 42,374,836                             |       |                  |       |   |   |
| shares outstanding at  December 31, 2005 and December 31, 2004, respectively          |       | 149,947               |       | 125,237 |   |
| Retained earnings                                                                               |       | 148,948               |       | 127,501 |   |
| Deferred compensation                                                                           |       | (4,419                | )          | (123 | ) |
| Accumulated other  comprehensive (loss) income                                                  |       | (1,324                | )          | 1,239 |   |
| Less treasury stock, at  cost                                                                   |       | (31,737               | )          | (26,265 | ) |
| Total stockholders’  equity                                                                |       | 261,415               |       | 227,589 |   |
|                                                                                            |       | $                     | 363,007    |   | $ | 322,569 |   |

 

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

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**DENDRITEINTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, Except Per Share Data)**

| ** **                                 | ** ** | **Year Ended December 3 1 ,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                   |       | $                                                      | 437,240    |   | $ | 399,197 |   | $ | 321,107 |   |
| Operating  Costs & Expenses:      |       |                                                   |       |   |   |   |   |
| Operating costs                            |       | 236,230                                                |       | 205,896 |   | 162,481 |   |
| Selling, general and administrative        |       | 144,931                                                |       | 132,016 |   | 107,862 |   |
| Research and development                   |       | 6,094                                                  |       | 9,316 |   | 11,633 |   |
| Facility and other charges                 |       | 9,372                                                  |       | — |   | — |   |
| Amortization of acquired intangible assets |       | 4,431                                                  |       | 4,851 |   | 4,308 |   |
| Other operating (income)                   |       | —                                                 |       | (707 | ) | — |   |
| Total operating costs & expenses  |       | 401,058                                                |       | 351,372 |   | 286,284 |   |
| Operating income                           |       | 36,182                                                 |       | 47,825 |   | 34,823 |   |
| Interest (income), net                     |       | (625                                                   | )          | (64 | ) | (731 | ) |
| Other expense (income), net                |       | 20                                                     |       | 277 |   | (560 | ) |
| Income before income tax expense           |       | 36,787                                                 |       | 47,612 |   | 36,114 |   |
| Income tax expense                         |       | 15,340                                                 |       | 18,047 |   | 15,054 |   |
| Net income                                 |       | $                                                      | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   |
| Net income per  share:                     |       |                                                   |       |   |   |   |   |
| Basic                                      |       | $                                                      | 0.50       |   | $ | 0.71 |   | $ | 0.52 |   |
| Diluted                                    |       | $                                                      | 0.48       |   | $ | 0.69 |   | $ | 0.51 |   |

 

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

55

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**DENDRITEINTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands)**

| ** **                                            | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|------------|------------|
| ** **                                            | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Other**         | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | **Comprehensive** | ** ** | **Comrehensive** | ** ** | ** **        | ** ** | **Total**  | ** ** |
| ** **                                            | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Deferred** | ** ** | **Income**       | ** ** | **Income**        | ** ** | **Treasury**     | ** ** | **Stockholders'** | ** ** |
| ** **                                            | ** ** | **Shares**            | ** ** | **Dollars**  | ** ** | **Earnings** | ** ** | **Compensation** | ** ** | **(Loss)**        | ** ** | **(Loss)**       | ** ** | **Stock**         | ** ** | **Equity** | ** ** |
| BALANCE,  JANUARY 1, 2003                             |       |                  | 39,934     |         |       | $            | 93,037     |             |       | $                 | 76,876     |             |       |              | $          | (76        | )          |   |   | $ | (2,202 | ) |   |   |   |   |   |   | $ | (20,876 | ) |   |   | $ | 146,759 |   |   |
| Issuance of common  stock                        |       |                  | 857        |         |       | 6,235        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   |   |   |   |   | 6,235 |   |   |
| Changes in  deferred compensation                     |       |                  | —     |         |       | —       |       |             | —     |              |       |             | 20         |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 20 |   |   |
| Stock option tax  benefits                            |       |                  | —     |         |       | 1,176        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 1,176 |   |   |
| Comprehensive income:                                 |       |                  |       |         |       |         |       |             |       |              |       |             |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |         |       | —       |       |             | 21,060     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 21,060 |   |   |   | — |   |   |   | 21,060 |   |   |
| Currency  translation adjustment                      |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | 885        |   |   |   | 885 |   |   |   | — |   |   |   | 885 |   |   |
| Comprehensive income                             |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 21,945 |   |   |   | — |   |   |   | — |   |   |
| BALANCE,  DECEMBER 31, 2003                      |       |                  | 40,791     |         |       | 100,448      |       |             | 97,936     |              |       |             | (56        | )                 |       |       | (1,317     | ) |   |   |   |   |   |   | (20,876 | ) |   |   | 176,135 |   |   |
| Common stock  issued under replacement option program |       |                  | 71         |         |       | 4,696        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | (5,389 | ) |   |   | (693 | ) |   |
| Issuance of common  stock                        |       |                  | 1,305      |         |       | 13,363       |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 13,363 |   |   |
| Changes in deferred  compensation                     |       |                  | 14         |         |       | 335          |       |             | —     |              |       |             | (67        | )                 |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 268 |   |   |
| Stock option tax  benefits                            |       |                  | —     |         |       | 3,078        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 3,078 |   |   |
| Shares issued in  connection with acquisition         |       |                  | 194        |         |       | 3,317        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 3,317 |   |   |
| Comprehensive income:                                 |       |                  |       |         |       |         |       |             |       |              |       |             |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |         |       | —       |       |             | 29,565     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 29,565 |   |   |   | — |   |   |   | 29,565 |   |   |
| Currency  translation adjustment                      |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | 2,556      |   |   |   | 2,556 |   |   |   | — |   |   |   | 2,556 |   |   |
| Comprehensive income                             |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 32,121 |   |   |   | — |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2004                  |       |                  | 42,375     |         |       | 125,237      |       |             | 127,501    |              |       |             | (123       | )                 |       |       | 1,239      |   |   |   |   |   |   |   | (26,265 | ) |   |   | 227,589 |   |   |
| Common stock  issued under replacement option program |       |                  | 28         |         |       | 4,798        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | (5,472 | ) |   |   | (674 | ) |   |
| Issuance of common  stock                        |       |                  | 1,086      |         |       | 12,480       |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 12,480 |   |   |
| Changes in  deferred compensation                     |       |                  | 3          |         |       | 4,736        |       |             | —     |              |       |             | (4,296     | )                 |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 440 |   |   |
| Stock option tax  benefits                            |       |                  | —     |         |       | 2,696        |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   |   |   |   |   | — |   |   |   | 2,696 |   |   |
| Comprehensive income:                                 |       |                  | —     |         |       |         |       |             |       |              |       |             |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |         |       | —       |       |             | 21,447     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 21,447 |   |   |   | — |   |   |   | 21,447 |   |   |
| Currency  translation adjustment                      |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | (2,563     | ) |   |   | (2,563 | ) |   |   | — |   |   |   | (2,563 | ) |   |
| Comprehensive income                             |       |                  | —     |         |       | —       |       |             | —     |              |       |             | —     |              |       |       | —     |   |   |   | $ | 18,884 |   |   |   | — |   |   |   | — |   |   |
| BALANCE,   DECEMBER 31, 2005                     |       |                  | 43,492     |         |       | $            | 149,947    |             |       | $                 | 148,948    |             |       |              | $          | (4,419     | )          |   |   | $ | (1,324 | ) |   |   |   |   |   |   | $ | (31,737 | ) |   |   | $ | 261,415 |   |   |

 

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

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**DENDRITEINTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating activities:                                                 |       |                                       |       |   |   |   |   |
| Net income                                                            |       | $                                          | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   |
| Adjustments to  reconcile net income to net cash                      |       |                                       |       |   |   |   |   |
| provided by  operating activities:                                    |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                         |       | 24,161                                     |       | 21,589 |   | 21,717 |   |
| Write-off of property and equipment                                   |       | 1,030                                      |       | — |   | — |   |
| Amortization of deferred compensation, net of  forfeitures            |       | 440                                        |       | 268 |   | (30 | ) |
| Deferred income taxes                                                 |       | (5,260                                     | )          | 2,699 |   | 3,530 |   |
| Changes in assets  and liabilities, net of effects from acquisitions: |       |                                       |       |   |   |   |   |
| (Increase) decrease in accounts receivable                            |       | (6,785                                     | )          | 7,472 |   | 6,105 |   |
| (Increase) decrease in prepaid expenses and other  current assets     |       | (1,321                                     | )          | 585 |   | (1,090 | ) |
| (Decrease) increase in other assets                                   |       | (1,239                                     | )          | 622 |   | 32 |   |
| Increase (decrease) in accounts payable and accrued  expenses         |       | 3,467                                      |       | (6,389 | ) | (20,775 | ) |
| Increase in accrued facility and other charges                        |       | 5,641                                      |       | — |   | — |   |
| Decrease in purchase accounting restructuring  accrual                |       | (2,523                                     | )          | (6,612 | ) | (10,883 | ) |
| Increase in income taxes payable                                      |       | 131                                        |       | 8,518 |   | 398 |   |
| Decrease in accrued restructuring charge                              |       | —                                     |       | — |   | (260 | ) |
| Increase (decrease) in deferred revenue                               |       | 5,272                                      |       | (4,076 | ) | (2,161 | ) |
| (Decrease) increase in other non-current liabilities                  |       | (335                                       | )          | 1,451 |   | (279 | ) |
| Net cash provided by operating activities                             |       | 44,126                                     |       | 55,692 |   | 17,364 |   |
| Investing activities:                                                 |       |                                       |       |   |   |   |   |
| Sales of short-term investments                                       |       | —                                     |       | — |   | 1,294 |   |
| Proceeds from sale-leaseback of furniture and  equipment              |       | —                                     |       | 2,162 |   | — |   |
| Acquisitions, net of cash acquired                                    |       | (21,813                                    | )          | (8,375 | ) | (53,458 | ) |
| Purchases of property and equipment                                   |       | (24,519                                    | )          | (19,881 | ) | (6,350 | ) |
| Additions to capitalized software development costs                   |       | (4,864                                     | )          | (5,886 | ) | (3,182 | ) |
| Other, net                                                            |       | —                                     |       | (100 | ) | 400 |   |
| Net cash used in investing activities                                 |       | (51,196                                    | )          | (32,080 | ) | (61,296 | ) |
| Financing activities:                                                 |       |                                       |       |   |   |   |   |
| Repayments of long-term debt                                          |       | —                                     |       | (3,344 | ) | — |   |
| Repayments of acquired loan                                           |       | —                                     |       | (624 | ) | — |   |
| Payments on capital lease obligations                                 |       | (1,744                                     | )          | (1,147 | ) | (999 | ) |
| Issuance of common stock                                              |       | 11,806                                     |       | 13,363 |   | 6,235 |   |
| Net cash provided by financing activities                             |       | 10,062                                     |       | 8,248 |   | 5,236 |   |
| Effect of foreign  exchange rate changes on cash                      |       | (867                                       | )          | 1,755 |   | 793 |   |
| Net increase in  cash and cash equivalents                            |       | 2,125                                      |       | 33,615 |   | (37,903 | ) |
| Cash and cash  equivalents, beginning of year                         |       | 64,020                                     |       | 30,405 |   | 68,308 |   |
| Cash and cash  equivalents, end of period                             |       | $                                          | 66,145     |   | $ | 64,020 |   | $ | 30,405 |   |

 

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

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, Except Share and Per Share Data)**

**1. THECOMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**THE COMPANY**

Dendrite International, Inc.and its subsidiaries (the “Company”) provide a broad array of solutionsworldwide focused primarily on improving the sales and marketing productivityof the pharmaceutical and other life sciences industries. The Company’ssolutions span the pharmaceutical commercialization process including clinicaldevelopment, brand marketing, customer management, sales effectiveness andcompliance management**.**

**SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Principles of Consolidation**

The consolidated financialstatements include the accounts of Dendrite International, Inc. and itswholly-owned subsidiaries. All intercompany balances and transactionshave been eliminated in consolidation.

**Foreign Currency**

The functional currenciesof the Company’s foreign operations have been deemed to be the local country’scurrency. As a result, the assets and liabilities of the Company’s wholly-ownedinternational subsidiaries are translated at their respective year-end exchangerates and revenues and expenses are translated at average currency exchangerates for the period. The resulting balance sheet translation adjustments areincluded in “Accumulated other comprehensive (loss) income” and are reflectedas a separate component of stockholders’ equity. Foreign currency transactiongains and losses are immaterial in each year. To date, the Company has notengaged in any foreign currency hedging activities.

**Use of Estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan on-going basis, the Company evaluates its estimates which are based onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results could differ from thoseestimates. The Company believes its critical accounting policies to be revenuerecognition, acquisitions and related accruals, impairments, income taxes andcapitalized software.

**Revenue Recognition**

The Company provides a comprehensive range of SalesForce Effectiveness (“SFE”) software products, technology support services andvarious distribution and marketing services to the pharmaceutical industry. Newcustomers that purchase software products from the Company generally enter intoa license contract and a services contract with the Company. The Company’ssoftware licenses typically provide for a perpetual right to use the Company’ssoftware and are contracted for within a license agreement that provides forlicense fees billable upon contract execution. When purchasing new software,customers often also purchase implementation services, which are essential tothe functionality of 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

the Company’s software.These services are contracted for in a services contract, which generallyprovides for payment terms over the course of the implementation project. Thiscontract also covers the specific ongoing support services that may have beenpurchased by the customer, which typically begin after the completion of thesoftware implementation. Certain customers who have not purchased software fromthe Company will also enter into services contracts, and the Company willprovide services that may include technology solutions services and/ordistribution and marketing services.

Many of the Company’s arrangements include multipledeliverables. In the absence of higher-level specific authoritativeguidance, the Company determines the units of accounting for multiple elementarrangements in accordance with Emerging Issues Task Force Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”).Specifically, the Company will consider a delivered item as a separate unit ofaccounting if it has value to the customer on a standalone basis, if there isobjective and reliable evidence of the fair value of the undelivered elements,and, if the arrangement includes a general right of return relative to thedelivered element, delivery or performance of the undelivered element isconsidered probable and is substantially within the Company’s control.

Revenues for the Company’s software licenses andrelated implementation fees are considered one accounting unit, and arerecognized using the percentage-of-completion method as prescribed by AICPAStatement of Position 81-1, “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts,” (“SOP 81-1”)and pursuant to paragraph 7 of AICPA Statement of Position 97-2 (“SOP 97-2”).The Company has not historically deferred performance costs related to itssoftware and implementation arrangements, as revenues are generally recognizedas the associated costs are incurred. The Company uses the input measure oflabor incurred to monitor progress-to-completion on its software andimplementation projects. Under the terms of its contracts with customers, theCompany does not have the right to invoice for claims relating to overruns inits fixed fee implementation projects. To the extent that a customer submits aproperly authorized change of scope document, the Company will add the budgetedrevenues and costs to its existing percentage-of-completion model, as a changein estimate, for that particular project. The expected gross margin for changesof scope generally approximates that for the overall project, and thereforeproject revenue recognition has not historically been impacted significantly bythe addition of change of scope work orders. The Company evaluates its contractaccounting projects for expected losses. If it becomes evident that a projectwill result in a loss, the Company will provide for this loss in the periodthat such loss becomes evident. Contract profitability is measured at the grossmargin level, with no allocation of overhead or other inclusion of indirectcosts.

The remaining service elements within the Company’sarrangements, which are not related to software implementation, are evaluatedusing the separation criteria of EITF 00-21. This typically results inseparate accounting units for initial training and hardware services that oftenoccur during the roll out of the configured software to end users. Revenues forthese services are recognized as delivered, provided all other criteria forrevenue recognition have been met. In addition to the initial training andhardware services, the Company also performs various ongoing services such asintegrated support center, data center, asset management, production servicesand operations management. These ongoing services are selected and negotiatedindividually by customers based upon their business needs and are generallyrecognized as delivered over the respective contractual term. Revenues relatedto the Company’s distribution and marketing services are generally recognizedas items are shipped or service obligations have been fulfilled. The Companyhas offered limited price protection under services agreements. Any 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

right to a future refundfrom such price protection is entirely within the Company’s control. It isestimated that the likelihood of a future payout due to price protection isremote.

From time-to-time, the Company’s customers will expandtheir field sales force, and consequently, purchase additional user licensesfrom the Company. The customer generally has the ability to create its owncopies of the software for the new users, and therefore, there is no need forthe Company to deliver anything further. Based upon this, the related revenueis recognized at the time of the customer order, in accordance with SOP 97-2.The Company utilizes distributors to resell certain of its software productsinternationally, on a limited basis. Revenues related to sales to distributorsare recognized as the licenses are sold through to end-users.

The Company utilizes vendor specific objectiveevidence of fair value (“VSOE”) to allocate the portion of the arrangement feethat relates to post-contract customer support (“PCS”). The PCS-relatedservices offered consist only of software maintenance and warranty services.The Company’s maintenance services consist primarily of the correction oferrors in the software and the delivery of unspecified upgrades andenhancements, on a when-and-if available basis, over the maintenance term. TheCompany establishes VSOE of fair value for PCS using the maintenance renewalrate that is present in each of its services contracts. The Company’smaintenance is offered at a fee that is based upon a percentage of licensefees. The PCS element of the Company’s arrangements is accounted for under SOP97-2.

The Company will sometimes provide for a warrantyperiod within its arrangements. The services provided during the warrantyperiod are the same as those provided under software maintenance. Theseactivities include correcting errors or bugs in the software, ensuring that thesoftware complies with defined specifications and providing unspecifiedupgrades or enhancements on a when-and-if-available basis, during the term ofthe warranty period. The warranties included in the Company’s arrangementsgenerally coincide with the length of the projected software implementationperiod, typically 180 days from the execution of the license contract andalways end on a specific date. The Company allocates a portion of the relatedlicense fee revenues to the value of services during the warranty period andrecognizes such amounts ratably over the warranty period. VSOE for the Company’swarranty services is established using the maintenance renewal rate that ispresent in each of the Company’s services contracts.

In connection with theacquisition of Synavant Inc. (“Synavant”) (Note 2), the Companyassumed an existing agreement between Synavant and IMS Health, Synavant’sformer parent company, for subscription access to certain information databasesbetween the two companies. The databases, namely Xponent (owned by IMS Health)and Pharbase (owned by the Company), contain information related toprescription drug trends and physicians, respectively. The companies sellinformation from these databases to their customers. The fees charged betweenIMS Health and the Company are fixed and the annual fee amounts, under thecurrent agreement, offset one another. During the year ended December 31,2003, the Company recorded $750 of revenues and $750 of costs related to thisarrangement.

**Shipping and Handling Fees**

Shipping and handling feesbilled to customers are recorded as revenue and shipping and handling costspaid to vendors are recorded as operating costs. Shipping and handling feesrecorded as revenues and operating costs for the year ended December 31,2005, 2004 and 2003 were $18,963, $17,361 and $7,361, respectively.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**Stock Based Compensation**

TheCompany has adopted the disclosure requirements of Statement of FinancialAccounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,”(SFAS 123)as amended by SFAS 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure.” The Company applies Accounting Principles Board 25, “Accountingfor Stock Issued to Employees”(“APB 25”) and related interpretations in accountingfor stock options granted under the Company’s stock option plans (the “Plans”).Accordingly, compensation cost has been computed for the Plans based on theintrinsic value of the stock options at the date of grant, which represents thedifference between the exercise price and the fair value of the Company’sstock. The exercise price of all stock options granted equaled the fair valueof the Company’s stock at the date of option grant and accordingly, nocompensation cost related to stock options has been recorded in theaccompanying consolidated statements of operations. Had compensation cost forthe Plans and the employee stock purchase plan been determined consistent withSFAS 123, the Company’s net income and net income per share would havebeen adjusted to the following pro forma amounts:

| ** **                                                                                                                                        | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as  reported                                                                                                                           |       | $                                                            | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   |
| Add/(Deduct):  Deferred compensation amortization, net of forfeitures recognized in  accordance with APB 25, net of related tax effects           |       | 257                                                          |       | 26 |   | (18 | ) |
| Deduct: Total stock-based employee compensation  expense determined under the fair value based method for all awards, net of  related tax effects |       | (21,805                                                      | )          | (21,967 | ) | (10,693 | ) |
| Pro forma net  (loss) income                                                                                                                      |       | $                                                            | (101       | ) | $ | 7,624 |   | $ | 10,349 |   |
| Basic (loss) income per share:                                                                                                                    |       |                                                         |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                                                            | 0.50       |   | $ | 0.71 |   | $ | 0.52 |   |
| Pro forma                                                                                                                                         |       | $                                                            | 0.00       |   | $ | 0.18 |   | $ | 0.26 |   |
| Diluted (loss)  income per share:                                                                                                                 |       |                                                         |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                                                            | 0.48       |   | $ | 0.69 |   | $ | 0.51 |   |
| Pro forma                                                                                                                                         |       | $                                                            | 0.00       |   | $ | 0.18 |   | $ | 0.25 |   |

 

The fair values for these options were estimated atthe date of grant using a Black-Scholes option pricing model with thefollowing assumptions:

| ** **                                        | ** ** | **For the Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected dividend  yield                          |       | 0.0                                                      | %          | 0.0 | % | 0.0 | % |
| Weighted-average  expected stock price volatility |       | 50.0                                                     | %          | 67.4 | % | 70.0 | % |
| Weighted-average  risk-free interest rate         |       | 4.1                                                      | %          | 3.2 | % | 3.2 | % |
| Expected life of the  option (years)              |       | 5.25                                                     |       | 5.25 |   | 5.25 |   |

 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

The stock-basedemployee compensation expense determined under the fair value based methods forall awards, net of related tax effects, disclosed above is determined basedupon the number and fair value of options granted and an estimate offorfeitures. The expense is recognized over the vesting period of the optionson a straight line basis. Under SFAS 123, compensation expense is notrecognized for options that are forfeited due to the employee’s failure tofulfill service requirements. Therefore, while the fair value per option is notrecalculated, the number of options vesting would change, thus requiringrecalculation of the aggregate compensation expense. The Company accounts forforfeitures by estimating the total number of awards that will vest andadjusting that estimate if evidence becomes available that a different numberof awards are expected to vest.

**Deferred Revenues**

Deferred revenuesrepresent amounts collected from, or invoiced to, customers in excess ofrevenues recognized. This predominantly occurs in two situations:a) annual billings of software maintenance fees; and b) upfrontbillings of fees that are recognized over time.

**Cash and Cash Equivalents**

The Company considers allhighly liquid investments purchased with a maturity of three months or less tobe cash equivalents.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**Supplemental Cash Flow Information**

For the years ended December 31, 2005, 2004 and2003, the Company paid interest of approximately $462, $420 and $80,respectively. For the years ended December 31, 2005, 2004 and 2003, theCompany paid income taxes of approximately $13,331, $8,864, and $11,811,respectively.

Pursuant to the terms of its replacement optionprogram, the Company accepted 319,848 shares of its common stock from anexecutive, in lieu of cash for the exercise of approximately 347,957 stockoptions. The shares delivered were valued at approximately $5,432 on the datesof exercise, which value was equal to the number of options exercisedmultiplied by the exercise price.

The Company accepted 2,707 shares of its common stockfrom an executive, in lieu of cash for the exercise of approximately 3,000stock options. The shares delivered were valued at approximately $40 on thedates of exercise, which value was equal to the exercise price of the optionsexercised and applicable tax withholdings.

In 2004, the Company also entererd into new capitallease arrangements for computer hardware and other equipment of approximately$4,200 expiring through November 2007.

Thefollowing table lists assets (other than cash) that were acquired andliabilities that were assumed in connection with the acquisitions in 2005, 2004and 2003 as discussed in Note 2:

| ** **                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| *Assets Acquired*                                                                         |       |     |       |     |       |     |       |
| Accounts receivable                                                                       |       | $        | 4,351      |     | $          | 2,867    |       | $ | 30,156 |   |
| Other current assets                                                                      |       | 378      |       | 1,901    |       | 9,156    |       |
| Property and equipment                                                                    |       | 451      |       | 736      |       | 9,158    |       |
| Other assets                                                                              |       | 1,287    |       | 458      |       | 8,797    |       |
| Intangibles                                                                               |       | 8,900    |       | 5,444    |       | 18,900   |       |
| Goodwill                                                                                  |       | 11,164   |       | 10,112   |       | 58,273   |       |
| Total assets acquired                                                                     |       | 26,531   |       | 21,518   |       | 134,440  |       |
| *Liabilities Assumed*                                                                     |       |     |       |     |       |     |       |
| Restructuring reserve—current                                                        |       | —   |       | (322     | )          | (11,535  | )          |
| Deferred revenue                                                                          |       | (618     | )          | (709     | )          | (10,320  | )          |
| Other current liabilities                                                                 |       | (2,102   | )          | (7,833   | )          | (48,144  | )          |
| Restructuring reserve—long-term                                                      |       | —   |       | —   |       | (9,709   | )          |
| Other liabilities                                                                         |       | (1,998   | )          | —   |       | (644     | )          |
| Total liabilities  assumed                                                                |       | (4,718   | )          | (8,864   | )          | (80,352  | )          |
| Net assets acquired, net  of cash                                                         |       | 21,813   |       | 12,654   |       | 54,088   |       |
| Unpaid purchase price  and professional fees incurred in connection with the acquisitions |       | —   |       | (962     | )          | (630     | )          |
| Value of stock options  issued                                                            |       | —   |       | (3,317   | )          | —   |       |
| Cash paid, net of cash acquired                                                           |       | $        | 21,813     |     | $          | 8,375    |       | $ | 53,458 |   |

 

**Receivablesand Allowance for Doubtful Accounts**

Receivables consist of amounts billed and currentlydue to the Company from normal business activities and unbilled costs primarilyrelated to revenues on long-term contracts that have been recognized foraccounting purposes, but not yet billed to customers. The Company maintains anallowance for estimated losses resulting from the inability of its customers tomake required payments. The Company 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

estimates uncollectibleamounts based upon historical bad debts, current customer receivable balances,age of customer receivable balances, the customer’s financial condition andcurrent economic trends.

**Impairment of Long-Lived Assets**

The Company reviews its long-lived assets, includingproperty and equipment and intangible assets subject to amortization forimpairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be fully recoverable. To determine therecoverability of its long-lived assets, the Company evaluates the estimatedfuture undiscounted cash flows that are directly associated with and that areexpected to arise as a direct result of the use and eventual disposition of thelong-lived asset. If the estimated future undiscounted cash flows demonstratethat recoverability is not probable, an impairment loss would be recognized. Animpairment loss would be calculated based on the excess carrying amount of thelong-lived asset over the long-lived asset’s fair value. As of December 31,2005 and 2004 there was no evidence of impairment.

**Property and Equipment**

Property and equipment, including software developedfor internal use, are stated at cost less accumulated depreciation andamortization. Depreciation and amortization are calculated on a straight-linebasis. Maintenance, repairs and minor replacements that do not extend the lifeor functionality of the related assets are charged to expense as incurred;renewals and betterments are capitalized.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**CapitalizedSoftware Development Costs**

In accordance with SFAS86, “Accounting for the Costs of Computer Software to be Sold, Leased orOtherwise Marketed,” the Company capitalizes certain costs related to thedevelopment of new software products or the enhancement of existing softwareproducts for sale or license. These costs are capitalized from the point intime that technological feasibility has been established, as evidenced by aworking model or a detailed working program design, to the point in time thatthe product is available for general release to customers. Capitalized softwarecosts are amortized on a product-by-product basis. Capitalized softwareamortization is the greater of the ratio of current revenues for a product tothe total of current and anticipated future gross revenues for that product oron a straight-line basis over the remaining estimated economic life of theproduct, including the current reporting period (not to exceed four years).Amortization of capitalized software begins with the general release of aproduct to customers. Research and development costs incurred prior to establishingtechnological feasibility and costs incurred subsequent to general productrelease to customers are charged to expense as incurred. The Companyperiodically evaluates whether events or circumstances have occurred thatindicate that the remaining useful lives of the capitalized softwaredevelopment costs should be revised or that the remaining balance of suchassets may not be recoverable. As of December 31, 2005, managementbelieves that no revisions to the remaining useful lives or write-down of capitalizeddevelopment costs are required. The amount of capitalized software developmentrelated to the development of new software products or the enhancement ofexisting software products from sale of licenses as of December 31, 2005and 2004 was as follows:

| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Capitalized software  development costs     |       | $                | 31,471     |   | $ | 26,607 |   |
| Less: Accumulated  amortization             |       | (21,130          | )          | (17,437 | ) |
| Capitalized software development costs, net |       | $                | 10,341     |   | $ | 9,170 |   |

 

Amortizationof capitalized software development costs for the years ended December 31,2005, 2004 and 2003 was $3,693, $2,842 and $2,654, respectively, and isincluded in operating costs in the accompanying consolidated statements ofoperations.

In connection with certainbusiness acquisitions, the Company purchased software that was determined tohave reached technological feasibility. The amount of purchased capitalizedsoftware remaining as of December 31, 2005 and 2004 was as follows:

| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Capitalized software development  costs     |       | $                | 2,441      |   | $ | 2,441 |   |
| Less: Accumulated  amortization             |       | (1,996           | )          | (1,385 | ) |
| Capitalized software development costs, net |       | $                | 445        |   | $ | 1,056 |   |

 

Amortization expense ofpurchased capitalized software for the years ended December 31, 2005, 2004and 2003 was $611, $610 and $609, respectively, and is included in amortizationof acquired intangible assets in the accompanying consolidated statements ofoperations.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**Goodwill and Intangible Assets**

In July 2001, the FASB issued SFAS 142, “Goodwilland Other Intangible Assets”(“SFAS 142”). SFAS 142 requires goodwillto be tested for impairment on an annual basis and between annual tests incertain circumstances, and written down when impaired, rather than beingamortized as previous accounting standards required. On an annual basis, orwhen management determines that the carrying value of an indefinite-livedintangible asset may not be recoverable based upon the existence of certainindicators of impairment, the Company calculates and compares the fair value ofthe indefinite-lived intangible asset to its carrying value. If thecarrying value exceeds the fair value, an impairment loss will be recognized inan amount equal to the difference. If the Company deems the useful life to beno longer indefinite, after testing for impairment in accordance with theapplicable rules stated above, the Company amortizes the intangible assetover its remaining estimated useful life, following the pattern in which theexpected benefits will be consumed or otherwise used up and the Company wouldcontinue to review for impairment in the future on an annual basis. The Companyconducts its annual impairment testing of goodwill as of October 1 eachyear. Based on the impairment tests performed, there was no impairment ofgoodwill in 2005, 2004 or 2003; however, there can be no assurance that futuregoodwill impairment tests will not result in a charge to earnings.

Purchased intangible assets are carried at cost lessaccumulated amortization. Amortization is computed over the estimated usefullives of the respective assets, generally two to thirteen years.

**Guarantees**

TheCompany provides certain indemnification provisions within its softwarelicensing agreements, to protect its customers from any liabilities or damagesresulting from a claim of misappropriation or infringement by third partiesrelating to its software. These provisions continue in perpetuity, along withthe Company’s software licensing agreements. The Company has never incurred aliability relating to one of these indemnification provisions in the past andmanagement believes that the likelihood of any future payout relating to theseprovisions is remote. Therefore, the Company has not recorded a liabilityduring any period for these indemnification provisions.

**Deferred Rent**

The Company has leases for its facilities, whichinclude escalation clauses and concessions as well as tenant improvementallowances. In accordance with accounting principles generally accepted in theUnited States of America, the Company recognizes rental expense, includingtenant improvement allowances, on a straight-line basis over the life of theleases, irrespective of the timing of payments to or from the lessor.

**Asset Retirement Obligations**

The Company accrues for asset retirement obligationsover the period in which the obligations are incurred. These costs consistprimarily of retro-fit costs related to leasehold improvements required atlease termination and are accrued at the estimated fair value. When the relatedliability is initially recorded, the Company capitalizes the cost by increasingthe carrying amount of the related long-lived asset. Over time, the liabilityis accreted to its settlement value and the capitalized cost is depreciatedover the useful life of the related asset. Upon settlement of the liability,the Company recognizes a gain or loss for any difference between the settlementamount and the liability recorded. As of December 31, 2005 and 2004, theCompany has approximately $514 and $465 accrued for asset retirement obligations,respectively.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**Income Taxes**

TheCompany accounts for income taxes in accordance with SFAS 109, “Accountingfor Income Taxes.” (“SFAS 109”) Under SFAS 109, deferred tax assetsand liabilities reflect the differences between the financial reporting and taxbasis of assets and liabilities and are measured using the enacted tax ratesthat are expected to be in effect when the differences reverse. In addition, inaccordance with SFAS 109, a valuation allowance is required to berecognized if it is not believed to be “more likely than not” that a deferredtax asset will be realized.

At December 31, 2005 and 2004, there wereapproximately $21,383 and $25,211, respectively, of undistributed earnings ofnon-U.S. subsidiaries that are considered to be reinvested indefinitely. Ifsuch earnings were remitted to the Company, the applicable United Statesfederal income and foreign withholding taxes may be wholly or partially offsetby foreign tax credits. As a result, the determination of potential U.S. incometaxes on these undistributed earnings is not practicable at December 31,2005 or 2004.

**Concentration of Credit Risk**

Financial instruments that potentially subject theCompany to concentration of credit risk consist principally of cash and tradeaccounts receivable. The Company invests its excess cash with large banks whichmay at times exceed the Federal Deposit Insurance Corporation of $100. TheCompany has not experienced any losses to date on the invested cash. TheCompany’s customer base principally comprises companies within thepharmaceutical industry. As a result, the Company derives its revenues from alimited number of large pharmaceutical companies. As of December 31, 2005,approximately 15% and 10% of our receivables balance was due from our twolargest customers, respectively. As of December 31, 2004, approximately19% of our receivables balance was due from our largest customer. The Companymonitors its customers’ financial condition and does not require collateralfrom its customers.

**Advertising Costs**

Advertising costs are expensed as incurred.Advertising expense was $2,643, $2,547 and $2,137 for the years ended December 31,2005, 2004 and 2003, respectively.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

**Net Income Per Share**

TheCompany calculates net income per share pursuant to SFAS 128, “EarningsPer Share.” The following table presents the computation of basic and dilutednet income per share for the years ended:

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic net income per  share computation:   |       |                  |       |   |   |   |   |
| Net income                                 |       | $                     | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   |
| Weighted-average common shares outstanding |       | 42,861                |       | 41,503 |   | 40,340 |   |
| Basic net income  per share                |       | $                     | 0.50       |   | $ | 0.71 |   | $ | 0.52 |   |
| Diluted net income per  share computation: |       |                  |       |   |   |   |   |
| Net income                                 |       | $                     | 21,447     |   | $ | 29,565 |   | $ | 21,060 |   |
| Diluted common  shares outstanding:        |       |                  |       |   |   |   |   |
| Weighted-average common shares outstanding |       | 42,861                |       | 41,503 |   | 40,340 |   |
| Impact of dilutive stock options           |       | 1,362                 |       | 1,572 |   | 1,075 |   |
| Diluted common shares outstanding          |       | 44,223                |       | 43,075 |   | 41,415 |   |
| Diluted net income per  share              |       | $                     | 0.48       |   | $ | 0.69 |   | $ | 0.51 |   |

 

**Reclassificationsand Other Adjustments**

Certain prior periodbalances have been reclassified to conform to current year presentation. TheCompany has made immaterial adjustments to prior year classifications ofcurrent and non-current purchase accounting restructuring accruals and fromaccrued compensation and benefits to other non-current liabilities. Inaddition, the Company made immaterial adjustments to prior year classificationsof income taxes payable to prepaid expenses and other current assets and from non-currentdeferred income taxes to other non-current liabilities due to the netting ofdeferred tax assets and liabilities across various tax jurisdictions.

**Recent Accounting Pronouncements**

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,“Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20and FASB Statement No. 3,” (“SFAS 154”). SFAS 154 changes the accountingfor and reporting of a change in accounting principle by requiringretrospective applications to prior periods’ financial statements of changes inaccounting principle unless impracticable. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. TheCompany does not expect SFAS 154 to have a material impact on our financialposition, results of operations or cash flows.

In March 2005, the FASB issued FIN No. 47, “Accountingfor Conditional Asset Retirement Obligations” an interpretation of SFAS 143(the “Interpretation”). The Interpretation clarifies the manner in whichuncertainties concerning the timing and the method of settlement of an assetretirement obligation should be accounted for. In addition, the Interpretationclarifies the circumstances under which fair value of an asset retirementobligation is considered subject to reasonable estimation. The Company adoptedthe Interpretation for the fiscal year ended December 31, 2005 and theadoption did not have a material impact on the financial position, results ofoperations or cash flows.

In December 2004, the FASB issued SFAS No. 123(revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as areplacement to SFAS 123, “Accounting for Stock-Based Compensation” 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

(“SFAS 123”). Thisstatement supersedes Accounting Principles Board (“APB”) 25, “Accounting forStock Issued to Employees” which allowed companies to use the intrinsic methodof valuing share-based payment transactions and amends SFAS No. 95, “Statementof Cash Flows.” SFAS 123(R) requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on the fair-value method as defined in SFAS 123.SFAS 123(R) provides two alternatives for adoption: (1) a “modifiedprospective” method in which compensation cost is recognized for all awardsgranted subsequent to the effective date of this statement as well as for theunvested portion of awards outstanding as of the effective date; or (2) a “modifiedretrospective” method which follows the approach in the “modified prospective”method, but also permits entities to restate prior periods to recordcompensation cost calculated under SFAS No. 123. In addition,SFAS 123(R) also requires that tax benefits received in excess ofcompensation cost be reclassified from operating cash flows to financing cashflows in the consolidated statement of cash flows. The Company has adoptedSFAS 123(R) under the modified prospective method effective January 1,2006. The effect of adoption of SFAS 123(R) is currently estimated to beapproximately $3.2 million to $4.3 million after tax for 2006. However, theCompany’s actual equity-based compensation expense in 2006 will depend on anumber of factors, including the amount of awards granted and the fair value ofthose awards at the time of grant.

**2.      ACQUISITIONS**

***Optas***

**On September 12,2005, the Company completed the acquisition of Optas, Inc. (“Optas”). Basedin Woburn, Massachusetts, Optas provided privacy-safe relationship marketingsolutions for patients and physicians. Optas’ results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.**

The aggregate purchase price for Optas wasapproximately $13,188, including $349 of legal and professional fees. Inaccordance with the purchase agreement, $1,800 of the purchase price was heldin escrow as of December 31, 2005. The $1,800 held in escrow, less amountsclaimed against escrow, if any, is payable as follows: approximately $600within five business days after September 12, 2006; and approximately$1,200 within five business days after March 12, 2007. The Company is inthe process of finalizing the valuation of certain intangible assets, includingthe review of a third-party valuation. Therefore, the allocation of thepurchase price is preliminary and subject to adjustment. The assets acquiredand liabilities assumed in connection with the Optas acquisition and pro formaresults of operations are not deemed material to the consolidated financialstatements.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

Thepreliminary allocation of purchase price, including the net assets acquired ofapproximately $422, to intangible assets and goodwill acquired in connectionwith the Optas acquisition is as follows:

| ** **                                      | ** ** | **Weighted-Average**      | ** ** | ** **                   | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                      | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:     |       |                      |       |                         |       |   |   |   |   |
| Customer relationship asset                     |       |                      | 10         |                         |       |   | $ | 2,590 |   |   |
| Acquired technology                             |       |                      | 5          |                         |       |   | 1,390 |   |   |
| Backlog                                         |       |                      | 0.33       |                         |       |   | 100 |   |   |
| Trademarks                                      |       |                      | 2          |                         |       |   | 70 |   |   |
| Total Intangible Assets Subject to Amortization |       |                      |       |                         |       |   | 4,150 |   |   |
| Intangible Asset  Not Subject to Amortization:  |       |                      |       |                         |       |   |   |   |   |
| Goodwill                                        |       |                      | N/A        |                         |       |   | 8,616 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 12,766 |   |   |

 

The goodwill andintangible assets recorded for financial statement purposes are not deductiblefor tax purposes.

***Buzzeo***

On January 4, 2005, the Company completed thestrategic acquisition of BuzzeoPDMA, Inc. (“Buzzeo”). Based in Richmond,Virginia, Buzzeo provided compliance, auditing, consulting and reconciliationoutsourcing services to the pharmaceutical and life sciences industry. Thisacquisition further expands the Company’s sample and compliance managementsolution offerings. In connection with the acquisition, the Companyrestructured the combined operations by eliminating certain former Buzzeopositions. Buzzeo’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Buzzeo wasapproximately $10,759, including $33 of legal and professional fees.Approximately $590 of the purchase price was included in other accrued expensesin the consolidated balance sheet as of December 31, 2005 and $1,025 ofthe purchase price was held in escrow as of December 31, 2005. Inaccordance with the purchase agreement, the $1,025 was released from escrow inthe first quarter of 2006. The valuation of certain intangibles assets wasfinalized in the fourth quarter of 2005. The assets acquired and liabilitiesassumed in connection with the Buzzeo acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

Theallocation of purchase price, including the net assets acquired ofapproximately $3,461, to intangible assets and goodwill acquired in connectionwith the Buzzeo acquisition is as follows:

| ** **                                      | ** ** | **Weighted-Average**      | ** ** | ** **                   | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                      | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:     |       |                      |       |                         |       |   |   |   |   |
| Customer relationship asset                     |       |                      | 10         |                         |       |   | $ | 4,390 |   |   |
| Trademark                                       |       |                      | 7          |                         |       |   | 290 |   |   |
| Other                                           |       |                      | 0.25       |                         |       |   | 70 |   |   |
| Total Intangible Assets Subject to Amortization |       |                      |       |                         |       |   | 4,750 |   |   |
| Intangible Asset  Not Subject to Amortization:  |       |                      |       |                         |       |   |   |   |   |
| Goodwill                                        |       |                      | N/A        |                         |       |   | 2,548 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 7,298 |   |   |

 

Thegoodwill and intangible assets recorded for financial statement purposes aredeductible for tax purposes.

***Schwarzeck***

On July 20, 2004, theCompany completed the strategic acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”).Schwarzeck was a provider of physician databases, direct marketing services andsample fulfillment services to pharmaceutical companies in Germany. Thisacquisition accelerated the Company’s expansion in Europe and increases itsintegrated marketing solutions and services to the German pharmaceuticalindustry. In connection with the acquisition, the Company restructured thecombined operations by eliminating certain former Schwarzeck positions.Schwarzeck’s results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition. The Companyhas allocated the entire purchase price of approximately $800 to purchaseddatabase. The purchased database asset recorded for financial statementpurposes is not deductible for tax purposes. The valuation of certainintangibles assets was finalized in the second quarter of 2005. The assetsacquired and liabilities assumed in connection with the Schwarzeck acquisition,the aggregate purchase price and pro forma results of operations are notdeemed material to the consolidated financial statements.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

***MDM***

On April 6, 2004, the Company completed theacquisition of the capital stock of the Medical Data Management group ofcompanies (“MDM”). Primarily based in Warsaw, Poland, MDM was a leadingprovider of physician databases, market research and sales force supportservices to pharmaceutical companies in Poland, Hungary, Russia and theUkraine. MDM’s results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition.

The aggregate purchase price for MDM was approximately$9,290 and consisted of approximately $5,700 in cash payments, approximately$3,320 in restricted stock and approximately $270 of legal and professionalfees. The valuation of certain intangible assets was finalized in the fourth quarterof 2004. The assets acquired and liabilities assumed in connection with the MDMacquisition and pro forma results of operations are not deemed material to theconsolidated financial statements.

The allocation of purchase price, including the netassets acquired of approximately $370, to intangible assets acquired inconnection with the MDM acquisition is as follows:

|  

** **                              | ** ** | **Weighted-Average  Estimated Useful**

**Life (Years)** | ** ** | **Acquired Intangible**

**Asset Value** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------|------------|
| Intangible Assets  Subject to Amortization:     |       |                                                          |       |                                               |       |   |   |   |   |
| Purchased database                              |       |                                                          | 3          |                                               |       |   | $ | 1,700 |   |   |
| Customer relationship assets                    |       |                                                          | 7          |                                               |       |   | 690 |   |   |
| Other                                           |       |                                                          | 4          |                                               |       |   | 240 |   |   |
| Total Intangible Assets Subject to Amortization |       |                                                          |       |                                               |       |   | 2,630 |   |   |
| Intangible Asset Not Subject  to Amortization:  |       |                                                          |       |                                               |       |   |   |   |   |
| Goodwill                                        |       |                                                          | N/A        |                                               |       |   | 6,283 |   |   |
| Total Intangible  Assets                        |       |                                                          |       |                                               |       |   | $ | 8,913 |   |   |

 

The goodwill andintangible assets recorded for financial statement purposes are not deductiblefor tax purposes.

***Uto Brain***

On January 5, 2004, the Company completed itsacquisition of the capital stock of Uto Brain Co., Ltd. (“Uto Brain”).Based in Osaka, Japan, Uto Brain provided more than thirty pharmaceuticalcompanies with data, analytics, publishing and advisory services. The combiningof resources of Uto Brain with the existing resources of Dendrite creates a comprehensiveinformation, software and services company dedicated to the Japanesepharmaceutical industry and further enhances Dendrite’s ability to providesolutions to enhance sales, marketing and clinical functions of pharmaceuticalcompanies in the Japanese market. Uto Brain’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

The aggregate purchase price for Uto Brain wasapproximately $4,900 (498,270 Yen), including approximately $100 of legal andprofessional fees. The Company paid approximately $1,400 and $3,400 of thepurchase price during the years ended December 31, 2005 and 2004,respectively. In addition, the Company assumed approximately $3,800 in bankdebt and an acquired loan, all of which were repaid 

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

during the year ended December 31,2004. The valuation of certain intangible assets was finalized in the fourthquarter of 2004. The assets acquired and liabilities assumed in connection withthe Uto Brain acquisition and pro forma results of operations are not deemedmaterial to the consolidated financial statements.

Theallocation of purchase price, including net liabilities acquired ofapproximately $1,100, to intangible assets acquired in connection with the UtoBrain acquisition is as follows:

| ** **                                       | ** ** | **Weighted Average** | ** ** | ** **                   | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                       | ** ** | **Life (Years)**          | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:      |       |                      |       |                         |       |   |   |   |   |
| Customer  relationship assets                    |       |                      | 10         |                         |       |   | $ | 1,870 |   |   |
| Trademarks                                       |       |                      | 10         |                         |       |   | 150 |   |   |
| Total Intangible  Assets Subject to Amortization |       |                      |       |                         |       |   | 2,020 |   |   |
| Intangible  Asset Not Subject to Amortization:   |       |                      |       |                         |       |   |   |   |   |
| Goodwill                                         |       |                      | N/A        |                         |       |   | 3,912 |   |   |
| Total Intangible  Assets                         |       |                      |       |                         |       |   | $ | 5,932 |   |   |

 

The goodwill andintangible assets recorded for financial statement purposes are not deductiblefor tax purposes.

***Synavant***

On June 16, 2003, the Company completed itsacquisition of Synavant Inc. (“Synavant”). Synavant provided a broad rangeof knowledge-based services to pharmaceutical and other life sciencescompanies around the world. Its comprehensive global solutions includedpharmaceutical SFE applications, integrated marketing, server and databasemanagement, dedicated local help-line support, training, telemarketing, samplemanagement and product recall services. Synavant was headquartered in Atlanta,Georgia, and had offices in 21 countries. The combining of resources ofSynavant with the existing resources of Dendrite created comprehensiveinformation, software and services company dedicated to the global lifesciences industry, and further enhanced Dendrite’s ability to provide marketleading solutions to the sales, marketing and clinical functions ofpharmaceutical and other life science companies. Synavant’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of acquisition.

The Synavant acquisition was completed pursuant to anAgreement and Plan of Merger, dated as of May 9, 2003 and amended as of May 16,2003 (as amended, the “Merger Agreement”) by and among Dendrite, Synavant andAmgis Acquisition Co. (“Amgis”), a wholly-owned subsidiary of Dendrite.Amgis and Dendrite conducted an all cash tender offer to acquire theoutstanding shares of Synavant common stock at $3.22 per share. Theconsideration paid in the acquisition was a result of a bidding process andarms-length negotiations between the executive officers and boards of directorsof Synavant and Dendrite.

The aggregate purchase price was approximately$55,130, including consideration paid for the common stock, and approximately$3,445 of legal and professional fees incurred in connection with thetransaction. The valuation of certain intangible assets was finalized in thefourth quarter of 2003.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

Inconnection with the Synavant acquisition, the Company recorded the allocationof purchase price to intangible assets as follows:

| ** **                                      | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:     |       |                      |       |                         |       |   |   |   |   |
| Backlog(1)                                      |       |                      | 3          |                         |       |   | $2,400 |   |   |
| Customer relationship assets                    |       |                      | 13         |                         |       |   | 5,800 |   |   |
| Non-compete covenants                           |       |                      | 2          |                         |       |   | 2,100 |   |   |
| Purchased database                              |       |                      | 10         |                         |       |   | 2,600 |   |   |
| Total Intangible Assets Subject to Amortization |       |                      |       |                         |       |   | 12,900 |   |   |
| Intangible Assets  Not Subject to Amortization: |       |                      |       |                         |       |   |   |   |   |
| Goodwill                                        |       |                      | N/A        |                         |       |   | 58,273 |   |   |
| Trademarks                                      |       |                      | N/A        |                         |       |   | 6,000 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 77,173 |   |   |
|                                                 |            |                           |            |                              |            |  |  |  |  |  |

----

(1)          Backlog is beingamortized over a projected revenue curve of 3 years.

The goodwill andintangible assets recorded for financial statement purposes are not deductiblefor tax purposes.

**3.**   PURCHASEACCOUNTING RESTRUCTURING ACCRUAL

In connection with the June 2003 acquisition ofSynavant, the Company restructured the combined operations by exiting certainformer Synavant facilities and eliminating certain former Synavant positions.The Company anticipates that the remaining accrued restructuring balancerelated to the facility exit costs will be paid over the life of the facilityleases, ending in February 2012. The liability accrued for expenses to beincurred in exiting certain Synavant facilities includes assumptions related tosublease income, which offsets future lease obligations. The underlyingsubleases are not in place for all facilities and the future placement ofsubleases, including the timing and terms and conditions of subleases, could bedifferent than the assumptions utilized.

In connection with the September 2002 acquisitionof Software Associates International (“SAI”), the Company developed an exitplan to close the facility in Mt. Arlington, New Jersey, and relocated the operationsto the Company’s other facilities in New Jersey. The Company accrued, as partof the acquisition costs, the costs to terminate certain leases amounting to$3,252. The Company closed the facility during the first quarter of 2003.

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, Except Share and Per Share Data)**

Theactivity related to purchase accounting restructuring accruals for the yearsended December 31, 2005 and 2004 is summarized in the tables below:

| ** **                        | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2004** | ** ** | **2005  Adjustments to  Goodwill** | ** ** | **2005  Payments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Synavant                          |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Termination payments to employees |       |                                                                                          | $          | 23                                      |       |               |       | $                                      | —     |                                                                                          |       |   | $ | (23 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Facility exit costs               |       |                                                                                          | 5,926      |                                    |       |               | —     |                                   |       |                                                                                          | (1,637     | ) |   |   | — |   |   |   | 4,289 |   |   |
| Total Synavant                    |       |                                                                                          | 5,949      |                                    |       |               | —     |                                   |       |                                                                                          | (1,660     | ) |   |   | — |   |   |   | 4,289 |   |   |
| SAI                               |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Lease termination costs           |       |                                                                                          | 947        |                                    |       |               | —     |                                   |       |                                                                                          | (626       | ) |   |   | — |   |   |   | 321 |   |   |
| Schwarzeck                        |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Termination payments to employees |       |                                                                                          | 247        |                                    |       |               | —     |                                   |       |                                                                                          | (233       | ) |   |   | (14 | ) |   |   | — |   |   |
| Buzzeo                            |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Termination payments to employees |       |                                                                                          | —     |                                    |       |               | 4          |                                   |       |                                                                                          | (4         | ) |   |   | — |   |   |   | — |   |   |
| Total                             |       |                                                                                          | $          | 7,143                                   |       |               |       | $                                      | 4          |                                                                                          |       |   | $ | (2,523 | ) |   |   | $ | (14 | ) |   |   | $ | 4,610 |   |   |

 

| ** **                        | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2003** | ** ** | **2004  Adjustments to  Goodwill** | ** ** | **2004  Payments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2004** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Synavant                          |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Termination payments to employees |       |                                                                                          | $          | 2,378                                   |       |               |       | $                                      | (207       | )                                                                                             |       |   | $ | (2,148 | ) |   |   | $ | — |   |   |   | $ | 23 |   |   |
| Facility exit costs               |       |                                                                                          | 7,187      |                                    |       |               | 1,791      |                                   |       |                                                                                          | (3,052     | ) |   |   | — |   |   |   | 5,926 |   |   |
| Total Synavant                    |       |                                                                                          | 9,565      |                                    |       |               | 1,584      |                                   |       |                                                                                          | (5,200     | ) |   |   | — |   |   |   | 5,949 |   |   |
| SAI                               |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Lease termination costs           |       |                                                                                          | 2,265      |                                    |       |               | —     |                                   |       |                                                                                          | (1,318     | ) |   |   | — |   |   |   | 947 |   |   |
| Schwarzeck                        |       |                                                                                          |       |                                    |       |               |       |                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Termination payments to employees |       |                                                                                          | —     |                                    |       |               | 322        |                                   |       |                                                                                          | (95        | ) |   |   | 20 |   |   |   | 247 |   |   |
| Total                             |       |                                                                                          | $          | 11,830                                  |       |               |       | $                                      | 1,906      |                                                                                          |       |   | $ | (6,613 | ) |   |   | $ | 20 |   |   |   | $ | 7,143 |   |   |

 

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**4. PROPERTY AND EQUIPMENT**

Propertyand equipment is as follows:

| ** **                                       | ** ** | **Estimated Useful Life** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **(Years)**                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land                                             |       | n/a                                 |       | $                     | 2,338      |   | $ | 2,352 |   |
| Building and  building improvements              |       | 40                                  |       | 11,813                |       | 5,525 |   |
| Computer  hardware, software and other equipment |       | 2 -  10                             |       | 59,589                |       | 57,116 |   |
| Furniture and  fixtures                          |       | 3 -  5                              |       | 8,584                 |       | 7,815 |   |
| Leasehold  improvements                          |       | Shorter  of estimated               |       |                  |       |   |   |
|                                             |       | useful  life or lease term          |       | 26,111                |       | 23,549 |   |
| Capital lease  furniture and equipment           |       | 2 -  10                             |       | 5,176                 |       | 5,425 |   |
|                                             |       |                                |       | 113,611               |       | 101,782 |   |
| Less: Accumulated  depreciation and amortization |       |                                |       | (61,019               | )          | (56,499 | ) |
|                                             |       |                                |       | $                     | 52,592     |   | $ | 45,283 |   |

 

Depreciation expense, including amortization expenseof capital leases, for the years ended December 31, 2005, 2004 and 2003was $16,037, $13,791 and $14,719, respectively

**5.**                 GOODWILLAND INTANGIBLE ASSETS

Thetotal gross carrying amount and accumulated amortization for goodwill andintangible assets are as follows:

| ** **                                     | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Gross**                                       | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible Assets Subject To Amortization:     |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchased capitalized  software                |       | $                                               | 2,441      |                                            |       | $ | (1,996 | ) |   | $ | 445 |   | $ | 2,441 |   |   | $ | (1,385 | ) |   | $ | 1,056 |   |
| Capitalized software  development costs        |       | 31,471                                          |       |                                            | (21,130    | ) |   | 10,341 |   | 26,607 |   |   | (17,437 | ) |   | 9,170 |   |
| Customer relationship  assets                  |       | 16,397                                          |       |                                            | (3,696     | ) |   | 12,701 |   | 9,595 |   |   | (2,222 | ) |   | 7,373 |   |
| Backlog                                        |       | 2,500                                           |       |                                            | (2,491     | ) |   | 9 |   | 2,400 |   |   | (2,313 | ) |   | 87 |   |
| Non-compete covenants                          |       | 3,718                                           |       |                                            | (3,464     | ) |   | 254 |   | 3,768 |   |   | (2,678 | ) |   | 1,090 |   |
| Purchased database                             |       | 5,151                                           |       |                                            | (2,082     | ) |   | 3,069 |   | 5,221 |   |   | (979 | ) |   | 4,242 |   |
| Acquired technology                            |       | 1,390                                           |       |                                            | (84        | ) |   | 1,306 |   | — |   |   | — |   |   | — |   |
| Trademarks                                     |       | 500                                             |       |                                            | (82        | ) |   | 418 |   | 151 |   |   | (15 | ) |   | 136 |   |
| Other intangibles                              |       | 474                                             |       |                                            | (325       | ) |   | 149 |   | 413 |   |   | (197 | ) |   | 216 |   |
| Total                                          |       | 64,042                                          |       |                                            | (35,350    | ) |   | 28,692 |   | 50,596 |   |   | (27,226 | ) |   | 23,370 |   |
| Intangible Assets Not Subject to Amortization: |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                       |       | 90,440                                          |       |                                            | —     |   |   | 90,440 |   | 80,963 |   |   | — |   |   | 80,963 |   |
| Trademarks                                     |       | 6,732                                           |       |                                            | —     |   |   | 6,732 |   | 6,732 |   |   | — |   |   | 6,732 |   |
| Total                                          |       | 97,172                                          |       |                                            | —     |   |   | 97,172 |   | 87,695 |   |   | — |   |   | 87,695 |   |
| Total Goodwill and Intangible Assets           |       | $                                               | 161,214    |                                            |       | $ | (35,350 | ) |   | $ | 125,864 |   | $ | 138,291 |   |   | $ | (27,226 | ) |   | $ | 111,065 |   |

 

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The changes in thecarrying amount of intangible assets not subject to amortization for the yearsended December 31, 2005 and 2004 are as follows:

| ** ** | ** ** | **Balance as of  December 31, 2004** | ** ** | **Acquisitions / Purchase  Accounting Adjustments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Balance as of  December 31, 2005** | ** ** |
|------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------|------------|
| Goodwill   |       |                                                     | $          | 80,963                                                             |       |                                   |       | $                                                        | 9,919      |   |   |   | $ | (442 | ) |   |   | $ | 90,440 |   |   |
| Trademarks |       |                                                     | 6,732      |                                                               |       |                                   | —     |                                                     |       |   | — |   |   |   | 6,732 |   |   |
| Total      |       |                                                     | $          | 87,695                                                             |       |                                   |       | $                                                        | 9,919      |   |   |   | $ | (442 | ) |   |   | $ | 97,172 |   |   |

 

| ** ** | ** ** | **Balance as of  December 31, 2003** | ** ** | **Acquisitions / Purchase  Accounting Adjustments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Balance as of  December 31, 2004** | ** ** |
|------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------|------------|
| Goodwill   |       |                                                     | $          | 70,403                                                             |       |                                   |       | $                                                        | 10,468     |   |   |   | $ | 92 |   |   |   | $ | 80,963 |   |   |
| Trademarks |       |                                                     | 6,732      |                                                               |       |                                   | —     |                                                     |       |   | — |   |   |   | 6,732 |   |   |
| Total      |       |                                                     | $          | 77,135                                                             |       |                                   |       | $                                                        | 10,468     |   |   |   | $ | 92 |   |   |   | $ | 87,695 |   |   |

 

Includedin the “Acquisitions/Purchase Accounting Adjustments” of $10,468 disclosedabove is approximately $300 of net adjustments related to the Synavantacquisition arising from the finalization of the purchase price allocationduring 2004. These adjustments primarily include an increase to the purchaseaccounting restructuring accrual of approximately $1,800 related facility exitcosts disclosed in Note 3, an increase to other current liabilities ofapproximately $1,000 related to a pre-acquisition contingency and increases tocurrent deferred tax assets and current deferred tax liabilities ofapproximately $6,200 and $3,900, respectively, related to the revision of prioryear estimates made to related accruals, reserves and net operating losses.

Thefollowing table reconciles net intangible assets subject to amortization forthe period from December 31, 2004 to December 31, 2005:

| ** **                              | ** ** | **Net Intangibles**        | ** ** | **2005 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **as of**                  | ** ** | ** **                               | ** ** | **Translation**          | ** ** | **as of** | ** ** |
| ** **                              | ** ** | **December 31, 2004** | ** ** | **Additions**                            | ** ** | **Amortization**         | ** ** | **and Other** | ** ** | **December 31, 2005** | ** ** |
| Purchased  capitalized software         |       |                            | $          | 1,056                                    |       |                     |       | $ | — |   |   |   | $ | (611 | ) |   |   | $ | — |   |   |   | $ | 445 |   |   |
| Capitalized  software development costs |       |                            | 9,170      |                                     |       |                     | 4,864      |   |   |   | (3,693 | ) |   |   | — |   |   |   | 10,341 |   |   |
| Customer  relationship assets           |       |                            | 7,373      |                                     |       |                     | 6,980      |   |   |   | (1,474 | ) |   |   | (178 | ) |   |   | 12,701 |   |   |
| Backlog                                 |       |                            | 87         |                                     |       |                     | 100        |   |   |   | (178 | ) |   |   | — |   |   |   | 9 |   |   |
| Non-compete  covenants                  |       |                            | 1,090      |                                     |       |                     | —     |   |   |   | (786 | ) |   |   | (50 | ) |   |   | 254 |   |   |
| Purchased  database                     |       |                            | 4,242      |                                     |       |                     | —     |   |   |   | (1,103 | ) |   |   | (70 | ) |   |   | 3,069 |   |   |
| Acquired  technology                    |       |                            | —     |                                     |       |                     | 1,390      |   |   |   | (84 | ) |   |   | — |   |   |   | 1,306 |   |   |
| Trademarks                              |       |                            | 136        |                                     |       |                     | 360        |   |   |   | (67 | ) |   |   | (11 | ) |   |   | 418 |   |   |
| Other intangibles                       |       |                            | 216        |                                     |       |                     | 70         |   |   |   | (128 | ) |   |   | (9 | ) |   |   | 149 |   |   |
| Total                                   |       |                            | $          | 23,370                                   |       |                     |       | $ | 13,764 |   |   |   | $ | (8,124 | ) |   |   | $ | (318 | ) |   |   | $ | 28,692 |   |   |

 

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Amortizationexpense related to intangible assets, including internally developedcapitalized software costs, for the years ended December 31, 2005, 2004and 2003 was $8,124, $7,798 and $6,998, respectively. Aggregate future annualamortization expense of intangible assets is estimated to be:

| Year Ending December 31, |   |   |   |
|--------------------------|--------|--------|--------|
| 2006                     |   | $      | 8,559  |   |
| 2007                     |   | 6,429  |   |
| 2008                     |   | 3,788  |   |
| 2009                     |   | 2,197  |   |
| 2010                     |   | 1,810  |   |
| Thereafter               |   | 5,909  |   |
|                     |   | $      | 28,692 |   |

 

**6.      ACCRUEDFACILITY AND OTHER CHARGES**

During the period ended March 31, 2005, theCompany initiated and completed a plan to exit a facility in New Jersey forwhich it has an operating lease expiring in September 2011. The accruedfacility charge relates to vacating this New Jersey facility and for additionalfacilities vacated and accrued for in previous periods, for which the Companyhas operating leases expiring through February 2012, due to changes incurrent market conditions. The Company accrued for the present value of thesecosts, net of estimated future sublease income. The Company also accrued forseverance charges related to the elimination of certain senior and mid-levelmanagement positions. These charges are included within accrued facility andother charges on the consolidated balance sheet as of December 31, 2005,and within facility and other charges on the consolidated statement of operationsfor the year ended December 31, 2005.

Theactivity related to Accrued facility and other charges for the year ended December 31,2005 is summarized in the table below:

| ** **          | ** ** | **Accrued Facility and  Other Charges as of  December 31, 2004** | ** ** | **2005 Facility  and Other Charges** | ** ** | **2005 Payments** | ** ** | **Currency  Translation  Adjustments** | ** ** | **Accrued Facility and  Other Charges as of  December 31, 2005** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Facility exit costs |       |                                                                                                | $          | —                                              |       |                   |       | $                                      | 6,619      |                                                                                                |       |   | $ | (1,287 | ) |   |   | $ | — |   |   |   | $ | 5,332 |   |   |
| Severance           |       |                                                                                                | —     |                                                |       |                   | 1,723      |                                   |       |                                                                                                | (1,363     | ) |   |   | (59 | ) |   |   | 301 |   |   |
|                |       |                                                                                                | $          | —                                              |       |                   |       | $                                      | 8,342      |                                                                                                |       |   | $ | (2,650 | ) |   |   | $ | (59 | ) |   |   | $ | 5,633 |   |   |

 

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In connection with theplan initiated and completed during the three months ended March 31, 2005,the Company also wrote-off $1,030 of leasehold improvements included withinfacility and other charges in the consolidated statement of operations for theyear ended December 31, 2005.

**7.      REVOLVING CREDIT**

The June 16, 2003 line-of-credit agreement withJPMorgan Chase, amended September 24, 2004, expired on July 1, 2005. OnJuly 25, 2005, the Company entered into a replacement line-of-creditagreement (the “Agreement”), in the amount of $30,000 with JPMorgan Chase Bankthat expires on June 30, 2008. The Agreement is available to financeworking capital needs and possible future acquisitions. The Agreement containscustomary affirmative and negative covenants and also contains certainfinancial covenants, including those related to (a) a maximum leverageratio at the end of any fiscal quarter, (b) a minimum interest coverageratio at the end of any fiscal quarter and (c) a minimum fixed chargecoverage ratio at the end of any fiscal quarter. The Agreement also restrictsthe Company’s ability to create or assume liens, dispose of assets, consolidateor merge, extend credit, incur other indebtedness or pay cash dividends. As of December 31,2005, the Company was in compliance with all covenants and did not have anyamounts outstanding under the Agreement.

As of December 31,2005 and 2004, the Company had outstanding letters-of-credit of approximately$5,337 and $5,721, respectively.

**8.      INCOME TAXES**

Thecomponents of income before income tax expense were as follows:

| ** **                        | ** ** | **December 31 ,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic                          |       | $                           | 32,336     |   | $ | 29,982 |   | $ | 29,306 |   |
| Foreign                           |       | 4,451                       |       | 17,630 |   | 6,808 |   |
| Income before  income tax expense |       | $                           | 36,787     |   | $ | 47,612 |   | $  | 36,114 |   |

 

Thecomponents of income tax expense were as follows:

| ** **                     | ** ** | **December 31 ,** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current Provision:             |       |                        |       |   |   |   |   |
| Federal                        |       | $                           | 14,032     |   | $  | 8,035  |   | $ | 8,049 |   |
| State                          |       | 1,576                       |       | 1,071 |   | 876 |   |
| Foreign                        |       | 4,578                       |       | 6,242 |   | 2,599 |   |
|                           |       | 20,186                      |       | 15,348 |   | 11,524 |   |
| Deferred Provision  (Benefit): |       |                        |       |   |   |   |   |
| Federal                        |       | (811                        | )          | 1,861 |   | 1,123 |   |
| State                          |       | (1,239                      | )          | (2,194 | ) | 15 |   |
| Foreign                        |       | (2,796                      | )          | 3,032 |   | 2,392 |   |
|                           |       | (4,846                      | )          | 2,699 |   | 3,530 |   |
| Total income tax  expense      |       | $                           | 15,340     |   | $ | 18,047 |   | $ | 15,054 |   |

 

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Thereconciliation of the Federal statutory income tax rate to the Company’seffective income tax rate is as follows:

| ** **                                      | ** ** | **December 31 ,** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory  income tax rate              |       | 35.0                        | %          | 35.0 | % | 35.0 | % |
| Difference  between U.S. and non-U.S. rates     |       | 2.5                         |       | 2.6 |   | 4.5 |   |
| State income  taxes, net of federal tax benefit |       | 2.8                         |       | 1.7 |   | 1.4 |   |
| Nondeductible  expenses                         |       | 0.4                         |       | 0.4 |   | 0.4 |   |
| Tax credits  utilized                           |       | 0.0                         |       | (0.6 | ) | (1.9 | ) |
| Other                                           |       | 1.0                         |       | (1.2 | ) | 2.3 |   |
|                                            |       | 41.7                        | %          | 37.9 | % | 41.7 | % |

 

Thetax effect of temporary differences that give rise to deferred income taxassets and liabilities is as follows:

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Gross Deferred Tax  Asset:                     |       |                  |       |   |   |
| Federal net operating losses                   |       | $                     | 5,418      |   | $ | 6,223 |   |
| Foreign net operating losses                   |       | 9,822                 |       | 12,438 |   |
| State credits and net operating losses         |       | 3,919                 |       | 4,218 |   |
| Federal captial loss carryover                 |       | 1,994                 |       | 1,527 |   |
| Accruals and reserves not currently deductible |       | 11,681                |       | 9,487 |   |
| Depreciation and amortization                  |       | 1,376                 |       | — |   |
| Other                                          |       | 2,832                 |       | 1,599 |   |
|                                           |       | 37,042                |       | 35,492 |   |
| Less valuation  allowance:                     |       | (10,827               | )          | (15,987 | ) |
|                                           |       | $                     | 26,215     |   | $ | 19,505 |   |
| Gross Deferred Tax  Liability:                 |       |                  |       |   |   |
| Depreciation and amortization                  |       | $                     | —     |   | $ | (3,304 | ) |
| Capitalized software development costs         |       | (5,649                | )          | (1,299 | ) |
|                                           |       | $                     | (5,649     | ) | $ | (4,603 | ) |

 

As of December 31, 2005 and 2004, the Company hasrecorded a valuation allowance against its net deferred tax assets ofapproximately $10,827 and $15,987, respectively. The change in the valuationallowance relates primarily to the realizability of state and foreign netoperating losses.

If the Company is able to recognize tax benefitsrelated to deferred tax assets, for which valuation allowances have beenprovided as of December 31, 2005, the benefit would be allocated asfollows:

| Income tax  benefit |   | $  | 4,285  |   |
|---------------------|--------|---------|--------|--------|
| Goodwill            |   | 6,542   |   |
|                |   | $  | 10,827 |   |

 

As of December 31,2005, the Company has available federal net operating loss carryforwards ofapproximately $15,481 resulting from its acquisition of Synavant. These lossesbegin to expire in varying amounts from 2019 through 2023. Utilization of theselosses are subject to annual limitations under section 382 of the InternalRevenue Code. Realization of these loss carryforwards, either through thereduction of valuation allowance or deferred tax assets, will not affect theCompany’s future provision for income taxes due to the effects of purchaseaccounting. Additionally, the Company has state net operating 

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losscarryforwards of approximately $47,160 and foreign net operating losscarryforwards of approximately $28,923 that expire in varying amounts from 2006through 2024.

**9.      STOCKHOLDERS’EQUITY**

**EQUITY COMPENSATION PLANS**

The Company has various equitycompensation plans (the “Plans”) that provide for the granting of options topurchase the Company’s common stock and other equity-based awards. Under thePlans, the total number of shares of common stock that may be granted is15,750,000. 

*Options*

Options granted under the Plans generally vest over afour-year period and are exercisable over a period not to exceed ten years asdetermined by the Compensation Committee of the Board of Directors. During theyears ended December 31, 2005 and 2004, certain options were granted thatvested during the year of grant but were subject to a three or four year salesrestrictions. Incentive stock options are granted with exercise prices at fairvalue of the Company’s common stock. Nonqualified options are granted atexercise prices determined by the Compensation Committee of the Board ofDirectors, but not below fair market value at the date of grant.

Informationwith respect to the options under the Plans is as follows:

| ** **                          | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding  December 31, 2002 |       | 7,848,895  |       |                    | $          | 14.68 |   |   |
| Granted                             |       | 2,479,250  |       |                    | 8.50       |   |   |
| Exercised                           |       | (716,084   | )          |                    | 7.33       |   |   |
| Canceled                            |       | (979,673   | )          |                    | 16.19      |   |   |
| Outstanding  December 31, 2003 |       | 8,632,388  |       |                    | 13.35      |   |   |
| Granted                             |       | 2,661,925  |       |                    | 15.84      |   |   |
| Exercised                           |       | (1,615,713 | )          |                    | 10.53      |   |   |
| Canceled                            |       | (711,726   | )          |                    | 16.30      |   |   |
| Outstanding  December 31, 2004 |       | 8,966,874  |       |                    | 14.38      |   |   |
| Granted                             |       | 3,374,252  |       |                    | 15.93      |   |   |
| Exercised                           |       | (1,344,421 | )          |                    | 12.05      |   |   |
| Canceled                            |       | (928,727   | )          |                    | 16.17      |   |   |
| Outstanding  December 31, 2005 |       | 10,067,978 |       |                    | 15.04      |   |   |

 

At December 31, 2005, 2004 and 2003 there were8,818,196, 6,347,979 and 4,907,857 options exercisable with a weighted averageexercise price of $15.63, $15.98 and $15.79, respectively. As of December 31,2005 there were 1,072,265 shares available for future grants under the Plans.

The weighted average fair value of options granted,determined using the Black-Scholes option valuation method, was $7.87,$9.32 and $5.25 for the years ended December 31, 2005, 2004 and 2003,respectively.

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Informationwith respect to the options outstanding under the Plans at December 31,2005 is as follows:

| **Exercise Price Per** | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Number of**     | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|--------------------------------------------------------|------------|------------------------|------------|
| **Share**                        | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **(Years)**                                            | ** ** | **Vested Shares** | ** ** |
| $0.00 - $3.32                    |       | 8,201      |       |                    | $          | 2.65                                                   |       |                   |       | 1.0 |   |   |   | 8,201 |   |   |
| $3.33 - $6.64                    |       | 235,768    |       |                    | 6.28       |                                                   |       |                   | 1.8        |   |   |   | 230,976 |   |   |
| $6.65 - $9.95                    |       | 1,903,689  |       |                    | 8.12       |                                                   |       |                   | 5.0        |   |   |   | 1,116,796 |   |   |
| $9.96 - $13.27                   |       | 706,034    |       |                    | 12.24      |                                                   |       |                   | 5.5        |   |   |   | 637,079 |   |   |
| $13.28 - $16.59                  |       | 3,467,546  |       |                    | 14.64      |                                                   |       |                   | 7.7        |   |   |   | 3,311,873 |   |   |
| $16.60 - $19.91                  |       | 2,867,470  |       |                    | 17.88      |                                                   |       |                   | 6.9        |   |   |   | 2,634,001 |   |   |
| $19.92 - $23.23                  |       | 295,000    |       |                    | 22.56      |                                                   |       |                   | 3.2        |   |   |   | 295,000 |   |   |
| $23.24 - $26.55                  |       | 176,570    |       |                    | 23.59      |                                                   |       |                   | 4.1        |   |   |   | 176,570 |   |   |
| $26.56 - $29.87                  |       | 100,200    |       |                    | 27.42      |                                                   |       |                   | 4.1        |   |   |   | 100,200 |   |   |
| $29.88 - $33.19                  |       | 307,500    |       |                    | 33.14      |                                                   |       |                   | 4.1        |   |   |   | 307,500 |   |   |
|                             |       | 10,067,978 |       |                    | 15.04      |                                                   |       |                   | 6.3        |   |   |   | 8,818,196 |   |   |

 

*Restricted StockUnits*

The Plans also allow for the granting of restrictedstock units.  In 2005, 2004 and 2003, theCompany granted 269,000, 7,619 and 3,810 units representing shares of theCompany’s common stock, respectively, under the Plans.  For 2005, 2004 and 2003, the total value atthe date of grant of such units was $4,736, $115 and $50, respectively.  On the date of grant, this value is recordedto Common Stock and Deferred Compensation within Stockholders’ Equity on theConsolidated Balance Sheet.

The units grantedgenerally vest in three equal increments on each of the first threeanniversaries of the date of grant. Certain units granted in July 2005 vest on June 30, 2006.  The Company amortizes deferred compensationto expense for these grants over the respective vesting periods.  For 2005, 2004 and 2003, the Company recordedtotal expenses of $440, $46 and $0, respectively. 

**EMPLOYEE STOCK PURCHASE PLAN**

In 1997, the Companyestablished an employee stock purchase plan that provides full-time employeesthe opportunity to purchase shares, at 85% of the fair value on datesdetermined by the Board of Directors, up to a maximum of 10% of their eligiblecompensation or $21,250, whichever is less. During 2002, the Company obtainedshareholder approval to increase the number of authorized shares available forpurchase under this plan from 450,000 to 900,000, of which 86,960, 79,367 and112,575 were purchased in 2005, 2004 and 2003, respectively. There were 140,609and 227,569 available for future issuance under the plan as of December 31,2005 and 2004, respectively.

**REPLACEMENT OPTION PROGRAM**

In December 1999, theCompany’s Board of Directors approved a replacement option program under whicha designated executive may tender shares of the Company’s common stock owned bythe executive in order to pay the exercise price of vested options andapplicable withholdings. The designated executive receives replacement optionsin an amount equal to the number of shares tendered. Each replacement optionexpires on the expiration date of the original exercised option to which itrelates and the exercised options must be held for a period of a least one yearor the replacement options will be forfeited.

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**SHAREHOLDER RIGHTS PLAN**

On February 16, 2001, the Company’s Board ofDirectors adopted a shareholder rights plan (the “Rights Plan”). The RightsPlan is designed to deter coercive or unfair takeover tactics and to prevent aperson or group from acquiring control of the Company without offering a fairprice to all shareholders. The adoption of the Rights Plan was not in responseto any known effort to acquire control of the Company.

Under the Rights Plan, each shareholder of record on March 5,2001 received a distribution of one right for each share of common stock of theCompany (“Rights”). At present, the Rights are represented by the Company’scommon stock certificates, are not traded separately from the common stock andare not exercisable. The Rights will become exercisable only if a personacquires, or announces a tender offer that would result in ownership of 15% ormore of the Company’s common stock, at which time each Right would enable theholder to buy one one-hundredth of a share of the Company’s Series Apreferred stock at an exercise price of $120, subject to adjustment. Followingthe acquisition of 15% or more of the Company’s common stock, the holders ofRights (other than the acquiring person or group) will be entitled to purchaseshares of the Company’s common stock at one-half of the market price, and inthe event of a subsequent merger or other acquisition of the Company, to buyshares of common stock of the acquiring entity at one-half of the market priceof those shares.

The Company may redeem theRights for $0.01 each, subject to adjustment, at any time before theacquisition by a person or group of 15% or more of the Company’s common shares.The Rights will expire on February 20, 2011.

**10.**          SAVINGSAND DEFERRED COMPENSATION PLANS

The Company maintains Employee Savings Plans (the “SavingsPlans”) that cover substantially all of its full-time U.S., U.K., Italy, Japan,Korea and Netherlands employees. All eligible employees may elect to contributea portion of their wages to the Savings Plans, subject to certain limitations.The Company contributes to the Savings Plans at a certain rate of theparticipant’s contribution based on their location. The Company’s contributionto the Savings Plans ranges from approximately 1% of a participant’s annualsalary to 10% of the participant’s annual salary. The Company’s contributionsto the Plans were $3,042, $3,049 and $2,341 in the years ended December 31,2005, 2004 and 2003, respectively.

The Company also maintains a noncontributory definedcontribution retirement plan that covers substantially all of its full-timeemployees in Japan and Australia. All contributions to these pension plans aremade by the Company in accordance with prescribed statutory requirements. TheCompany’s contributions to the plan were $757, $657 and $301 for the yearsended December 31, 2005, 2004 and 2003, respectively.

The Company hassupplemental deferred compensation arrangements for the benefit of certainofficers, directors and certain key executives. In connection with these plansthe Company maintains life insurance contracts, which have been purchased bythe Company. The arrangements permit the participants to diversify theirinvestments, which are funded, unsecured general obligations of the Company.The value of the assets held, managed and invested, pursuant to the agreementswas approximately $4,000 and $3,400 as of December 31, 2005 and 2004,respectively, and is included in Other assets in the accompanying consolidatedbalance sheets. The corresponding deferred compensation liability ofapproximately $3,900 and $3,800 as of December 31, 2005 and 2004,respectively, is recorded at the fair market value of the assets held in arabbi trust and adjusted to reflect the fair value of the amount owed tocertain officers, directors and certain key executives and is included in othernon-current liabilities in the accompanying consolidated balance sheets.

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**11.**          COMMITMENTSAND CONTINGENCIES

TheCompany leases office facilities and equipment under various capital andoperating leases with remaining lease terms generally in excess of one year.Rent expense was $23,767, $16,035 and $13,528 for the years ended December 31,2005, 2004 and 2003, respectively. Future minimum rental payments on theseleases, including leases accrued for in purchase accounting restructuringaccruals and excluding estimated future sublease income, are as follows:

| ** **                                            | ** ** | **Capital Lease** | ** ** | **Operating Lease** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|
| 2006                                                  |       |                   | $          | 1,548                    |       |   |   | $ | 18,121 |   |   |
| 2007                                                  |       |                   | 1,571      |                     |       |   | 15,665 |   |   |
| 2008                                                  |       |                   | 68         |                     |       |   | 12,544 |   |   |
| 2009                                                  |       |                   | —     |                     |       |   | 11,616 |   |   |
| 2010                                                  |       |                   | —     |                     |       |   | 10,731 |   |   |
| Thereafter                                            |       |                   | —     |                     |       |   | 27,354 |   |   |
| Total                                                 |       |                   | 3,187      |                     |       |   | $ | 96,031 |   |   |
| Less: Amount  representing interest                   |       |                   | 156        |                     |       |   |   |   |   |
| Present value of  net minimum lease payments          |       |                   | 3,031      |                     |       |   |   |   |   |
| Less: Current  portion of capital lease obligations   |       |                   | 1,383      |                     |       |   |   |   |   |
| Capital lease  obligations, excluding current portion |       |                   | $          | 1,648                    |       |   |   |   |   |   |

 

In connection with certain leasing arrangements, theCompany entered into a sale-leaseback of furniture and equipment ofapproximately $2,200 expiring in November 2007. In addition, the Companyalso entered into new capital lease arrangements for computer hardware andother equipment of approximately $2,400 expiring through January 2008.

In addition to the capital and operating leasesdisclosed above, the Company also has certain purchase commitments ofapproximately $2,271 for 2006, $2,000 for 2007 and $2,000 for 2008.

From time-to-time, the Company is involved in certainlegal actions arising in the ordinary course of business. In the Company’sopinion, the outcome of such actions will not have a material adverse effect onthe Company’s consolidated financial position, results of operations, liquidityor cash flows.

The Company has employment agreements with certainofficers that provide for, among other things, salary, bonus, severance andchange in control provisions.

The Company has anagreement with a venture capital fund with a commitment to contribute $1,000 tothe fund, callable in $100 increments. As of December 31, 2005, $600 hasbeen paid with $400 of commitment remaining. The agreement has a terminationdate of December 11, 2010, subject to extension by the limited partners.

**12.**          RELATED-PARTYTRANSACTIONS

For the years ended December 31, 2005, 2004 and2003, the Company incurred approximately $158, $289 and $524, respectively, ofcosts for rental and use of aircraft for Company business payable to certainthird-party charter companies. While none of these third-partycharter companies are affiliated with the Company or any of its officers ordirectors, in some instances, the aircraft provided by these third-partycompanies was leased from an entity whose owners are the Company’s Chairman andChief Executive Officer and his spouse. As of December 31, 2005 and 2004,there were no rental charges included in other accrued expenses.

For the years ended December 31,2005, 2004 and 2003, the Company also incurred approximately $0, $1 and $0,respectively, of costs for air travel for Company business payable to theentity owned by the 

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Chairmanand Chief Executive Officer and his spouse. As of December 31, 2005 and2004, there was no air travel costs included in other accrued expenses.

**13.**          ENTERPRISE-WIDEDATA

*Information aboutMajor Customers:*

For the year ended December 31,2005, the Company derived approximately 24% and 10% of its total revenues fromits two largest customers. For the years ended December 31, 2004, and 2003the Company derived approximately 28% and 36% of total revenues from itslargest client, respectively.

*Information aboutProducts and Services:*

Due to the growth in the Company’s strategic productand service offerings, largely built through recent acquisitions, the Companyhas expanded its revenue categories into sales support, marketing support andshipping. These categories are reflective of how service offerings are marketedto and viewed by customers. They are not reflective of the way the business ismanaged. Company operating costs are not broken out for these categories on aglobal basis, as they are not viewed as necessary to the management of thebusiness globally. Based upon all of these factors, while these categories areuseful in understanding the Company’s operating results, the Company has onlyone reportable segment for disclosure purposes under SFAS 131, “DisclosureAbout Segments of an Enterprise and Related Information.” The following is asummary of our revenue categories:

*Salessolutions* revenue includes product and sales supportservices of the traditional Dendrite business. All of these products andservices are used by, or provided to, the sales force of our customers.

*Marketingsolutions* revenue includes our product and serviceofferings that are not geared toward the client sales force and primarilyconsists of offerings acquired in our business combinations over the past fewyears. The primary components of marketing solutions revenue include integratedmarketing, data, consulting and clinical.

*Shipping*revenues are disclosed separately as they are pass-through costs that bearlittle to no margin, and are required to be included in revenues and costsbased upon Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shippingand Handling Fees and Costs.” These billable shipping transactions areprimarily related to our integrated marketing activities.

Thefollowing table presents revenues by category for the years ended:

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Services &  Technology: |       |                  |       |   |   |   |   |
| Sales solutions                  |       | $                     | 311,157    |   | $ | 286,544 |   | $ | 262,737 |   |
| Marketing solutions              |       | 107,120               |       | 95,292 |   | 51,009 |   |
| Shipping                         |       | 18,963                |       | 17,361 |   | 7,361 |   |
|                             |       | $437,240              |       | $ | 399,197 |   | $ | 321,107 |   |
|                                  |            |                       |            |  |  |  |  |  |  |  |

 

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*Information aboutGeographic Areas:*

TheCompany is organized by geographic location and has one reportable segment. Alltransfers between geographic areas have been eliminated from consolidatedrevenues. The following table presents revenues by geographic area for theyears ended:

| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States |       | $                     | 276,282    |   | $ | 247,437 |   | $ | 237,654 |   |
| Europe        |       | 107,307               |       | 98,368 |   | 52,494 |   |
| All other     |       | 53,651                |       | 53,392 |   | 30,959 |   |
|          |       | $                     | 437,240    |   | $ | 399,197 |   | $ | 321,107 |   |

 

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

Thefollowing table presents long-lived assets by geographic area:

| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| United States |       | $                     | 167,459    |   | $ | 144,233 |   |
| Europe        |       | 9,267                 |       | 9,614 |   |
| All other     |       | 10,586                |       | 10,423 |   |
|          |       | $                     | 187,312    |   | $ | 164,270 |   |

 

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**DENDRITEINTERNATIONAL, INC.**

**SCHEDULEII—VALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

| ** **                         | ** ** | **Balance at  the  Beginning  of the Year** | ** ** | **Additions  charged to  expense or  other accounts** | ** ** | **Acquisition  related  additions** | ** ** | **Deductions  from  reserves** | ** ** | **Acquisition  related  deductions  from reserves** | ** ** | **Balance at  the End of  year** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| Year Ended  December 31, 2005 |       |                                                       |       |                                                                 |       |                                |       |                           |       |                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts    |       |                                                       | $          | 2,034                                                                |       |                                |       | $                              | 76         |                                                     |       |                                            | $          | 50 |   |   |   | $ | (1,127 | ) |   |   | $ | (33 | ) |   |   | $ | 1,000 |   |   |
| Deferred tax valuation allowance   |       |                                                       | $          | 15,987                                                               |       |                                |       | $                              | 520        |                                                     |       |                                            | $          | 903 |   |   |   | $ | (2,553 | ) |   |   | $ | (4,030 | ) |   |   | $ | 10,827 |   |   |
| Year Ended  December 31, 2004 |       |                                                       |       |                                                                 |       |                                |       |                           |       |                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts    |       |                                                       | $          | 1,595                                                                |       |                                |       | $                              | 1,088      |                                                     |       |                                            | $          | 13 |   |   |   | $ | (662 | ) |   |   | $ | — |   |   |   | $ | 2,034 |   |   |
| Deferred tax valuation allowance   |       |                                                       | $          | 15,215                                                               |       |                                |       | $                              | 2,200      |                                                     |       |                                            | $          | 1,355 |   |   |   | $ | (2,162 | ) |   |   | $ | (621 | ) |   |   | $ | 15,987 |   |   |
| Year Ended December 31,  2003      |       |                                                       |       |                                                                 |       |                                |       |                           |       |                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts    |       |                                                       | $          | 926                                                                  |       |                                |       | $                              | 890        |                                                     |       |                                            | $          | 966 |   |   |   | $ | (791 | ) |   |   | $ | (396 | ) |   |   | $ | 1,595 |   |   |
| Deferred tax  valuation allowance  |       |                                                       | $          | 4,482                                                                |       |                                |       | $                              | 1,842      |                                                     |       |                                            | $          | 8,891 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 15,215 |   |   |

 

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**EXHIBIT INDEX**
|                                         |   | Plan of Acquisition,  Reorganization, Arrangement, Liquidation or Succession:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                                     |   | Agreement and Plan of  Merger, dated as of May 9, 2003, among the Company, Amgis Acquisition  Co., and Synavant Inc. (incorporated by reference to Exhibit 99.1 to the  Company’s Current Report on Form 8-K, filed with the Securities  and Exchange Commission (the “Commission”) on May 12, 2003)                                                                                                                                                                                                                                                                                                        |
| 2.2                                     |   | Amendment No. 1 to  the Agreement and Plan of Merger, dated as of May 16, 2003, by and among  the Company, Amgis Acquisition Co., and Synavant Inc. (incorporated by  reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K,  filed with the Commission on May 20, 2003)                                                                                                                                                                                                                                                                                                                         |
| Articles  of Incorporation and By-Laws: |
| 3.1                                     |   | Restated Certificate of  Incorporation of Dendrite International, Inc. (incorporated by reference  to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q,  filed with the Commission on August 14, 1996)                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1(a)                                  |   | Certificate of Amendment  to the Restated Certificate of Incorporation of Dendrite  International, Inc. (incorporated by reference to  Exhibit 3.1(a) to the Company’s Current Report on Form 8-K,  filed with the Commission on March 30, 2001)                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1(b)                                  |   | Certificate of Amendment  to the Restated Certificate of Incorporation of Dendrite  International, Inc. (incorporated by reference to  Exhibit 3.1(b) to the Company’s Current Report on Form 8-K,  filed with the Commission on March 30, 2001)                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1(c)                                  |   | Certificate of Amendment  of the Restated Certificate of Incorporation of Dendrite  International, Inc. Setting Forth the Terms of Series A Junior  Participating Preferred Stock (incorporated by reference to  Exhibit 3.1(c) to the Company’s Current Report on Form 8-K,  filed with the Commission on March 30, 2001)                                                                                                                                                                                                                                                                                  |
| 3.2                                     |   | Amended and Restated  By-laws of the Company (incorporated by reference to Exhibit 3.2 to the  Company’s Current Report on Form 8-K, filed with the Commission on  October 21, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                    |   | Instruments  Defining Rights of Security Holders, including Indentures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                                     |   | Specimen of Stock  Certificate (incorporated by reference to Exhibit 4.1 to the Company’s  Registration Statement on Form S-1, filed with the Commission on  May 17, 1995)                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2                                     |   | Registration Rights  Agreement dated October 2, 1991 between the several purchasers named  therein and the Company (incorporated by reference to Exhibit 4.2 to the  Company’s Registration Statement on Form S-1, filed with the  Commission on 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 by  reference to Exhibit 4.3 of Amendment 1 to the Company’s Registration  Statement on Form S-1, filed with the Commission on May 17,  1995)                                                                                                                                                                                                                                                                                                        |
| 4.4                                     |   | Rights Agreement dated  as of February 20, 2001 between the Company and Registrar and Transfer  Company, as Rights Agent, which includes, as Exhibit A the Form of  Certificate of Amendment of the Restated Certificate of Incorporation of the  Company Setting Forth the Terms of Series A Junior Participating  Preferred Stock, as Exhibit B the Form of Rights Certificate and as  Exhibit C Summary of Rights to Purchase Preferred Stock (incorporated by  reference to Exhibit 4 to the Company’s Current Report on Form 8-K,  filed with the Commission on February 21, 2001) |

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| Material Contracts and Compensatory Plans and  Arrangements: |
|--------------------------------------------------------------|
| 10.1                                                         |   | 1992 Stock Plan, as  amended (incorporated by reference to Exhibit 10.1 to the Company’s  Annual Report on Form 10-K, filed with the Commission on  March 30, 2000)* |
| 10.2                                                         |   | 1997 Stock Incentive  Plan, as amended (incorporated by reference to Appendix A to the Company’s  Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders, filed  with the Commission on April 26, 2005)* |
| 10.3                                                         |   | 1997 Employee Stock  Purchase Plan (incorporated by reference to Appendix A to the Company’s  Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders, filed  with the Commission on April 19, 2002)* |
| 10.4                                                         |   | Employment Agreement  dated as of March 25, 1997, between the Company and John E. Bailye  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q/A, filed with the Commission on May 16,  1997)* |
| 10.5                                                         |   | Dendrite  International, Inc. Deferred Compensation Plan effective as of  September 1, 1998 (incorporated by reference to Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on August 14, 1998)* |
| 10.6                                                         |   | Deferred Compensation  Plan Trust Agreement effective as of September 1, 1998 (incorporated by  reference to Exhibit 10.2 to the Company’s Quarterly Report on  Form 10-Q, filed with the Commission on August 14, 1998)* |
| 10.7                                                         |   | Employment Agreement  dated September 8, 1998, between the Company and Christine Pellizzari  (incorporated by reference to Exhibit 10.18 to the Company’s Current  Report on Form 8-K, filed with the Commission on March 30,  2001) * |
| 10.8                                                         |   | Amendment to Employment  Agreement dated August 1, 2000, between the Company and Christine  Pellizzari (incorporated by reference to Exhibit 10.24 to the Company’s  Current Report on Form 8-K, filed with the Commission on  March 30, 2001)* |
| 10.9                                                         |   | Separation Agreement of  Marc Kustoff dated February 16, 2005 (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the Commission on February 23, 2005)*(2) |
| 10.10                                                        |   | Agreement of Purchase  and Sale between the Company and Townsend Property Trust Limited Partnership  dated January 5, 2001 (incorporated by reference to Exhibit 10.26  to the Company’s Current Report on Form 8-K, filed with the  Commission on March 30, 2001) |
| 10.11                                                        |   | Employment Agreement  (including Amendment), dated May 16, 2001, between the Company and Paul  Zaffaroni (incorporated by reference to Exhibit 10.29 to the Company’s  Current Report on Form 8-K, filed with the Commission on  March 19, 2002)*(3) |
| 10.12                                                        |   | Retirement Agreement and  General Release of Paul L. Zaffaroni dated November 4, 2005  (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly  Report on Form 10-Q, filed with the Commission on November 7,  2005)*(3) |
| 10.13                                                        |   | Dendrite  International, Inc. New Hire Authorization, as amended (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the Commission on September 21, 2005)* |
| 10.14                                                        |   | New Hire  Authorization-Updated Appendix* |
| 10.15                                                        |   | Credit Agreement, dated  as of July 25, 2005, among the Company, the Lenders party thereto, and  JPMorgan Chase Bank (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed with the Commission on  July 29, 2005) |

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| 10.16 |   | Sublease dated as of September 17, 2003 between  Pharmacia & Upjohn Company and the Company (incorporated by  reference to Exhibit 10.44 to the Company’s Quarterly Report on  Form 10-Q, filed with the Commission on November 14, 2003)                                                                                       |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17 |   | New Hire Authorization—Form of  Notice of Stock Option Award and Nonqualified Stock Option Agreement  (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed with the Commission on  September 21, 2005)*                                                                                   |
| 10.18 |   | New Hire  Authorization—Form of Notice of Restricted Stock [Units] Agreement  (incorporated by reference to Exhibit 10.3 to the Company’s Current  Report on Form 8-K, filed with the Commission on  September 21, 2005)*                                                                                                           |
| 10.19 |   | Employment Agreement as  amended on May 26, 1999, between the Company and Mark H. Cieplik  (incorporated by reference to Exhibit 10.32 to the Company’s Annual  Report on Form 10-K, filed with the Commission on March 15,  2004)*                                                                                                      |
| 10.20 |   | Employment Agreement  dated as of June 9, 1988, between the Company and Jean-Paul Modde (incorporated  by reference to Exhibit 10.33 to the Company’s Annual Report on  Form 10-K, filed with the Commission on March 15, 2004) *                                                                                                        |
| 10.21 |   | Employment Agreement  dated as of November 10, 2000, between the Company and Garry D.  Johnson (incorporated by reference to Exhibit 10.34 to the Company’s  Annual Report on Form 10-K, filed with the Commission on  March 15, 2004)*                                                                                             |
| 10.22 |   | Form of  Indemnification Agreement between the Company and its directors and executive  officers (incorporated by reference to Exhibit 10.41 to the Company’s  Quarterly Report on Form 10-Q, filed with the Commission on  November 8, 2004)*                                                                                           |
| 10.23 |   | Master Lease Agreement  and Master Lease Agreement Addendum each dated as of September 20, 2004,  as executed on September 29, 2004, between the Company and BNY Leasing  Edge Corporation (incorporated by reference to Exhibit 10.39 to the  Company’s Current Report on Form 8-K, filed with the Commission on  October 5, 2004) |
| 10.24 |   | Form of Dendrite  International, Inc. 1997 Stock Incentive Plan Restricted Stock Units  Agreement (incorporated by reference to Exhibit 10.40 to the Company’s  Current Report on Form 8-K, filed with the Commission on  October 7, 2004)*                                                                                         |
| 10.25 |   | Dendrite International, Inc. 1997 Stock  Incentive Plan—Form of Notice of Stock Option Award and Stock Option  Agreement (incorporated by reference to Exhibit 10.42 to the Company’s  Current Report on Form 8-K, filed with the Commission on  November 29, 2004)*                                                           |
| 10.26 |   | Performance criteria for the Company’s executive  bonus plan for 2005 (incorporated by reference to the Company’s Current  Report on Form 8-K, filed with the Commission on February 2,  2005)*                                                                                                                                               |
| 10.27 |   | Performance criteria for the Company’s executive  bonus plan for 2006 (incorporated by reference to the Company’s Current  Report on Form 8-K, filed with the Commission on March 9,  2006)*                                                                                                                                                  |
| 10.28 |   | Employment Agreement dated September 26, 2000,  between the Company and Natasha Giordano (incorporated by reference to  Exhibit 10.33 of the Company’s Annual Report on Form 10-K filed with the  Commission on March 16, 2005)*                                                                                                              |
| 10.29 |   | Change in Control agreement dated February 25,  2005, between the Company and Natasha Giordano (incorporated by reference to  the Company’s Current Report on Form 8-K, filed with the  Commission on March 3, 2005)*                                                                                                                         |
| 10.30 |   | Employment Agreement of George T. Robson dated  June 6, 2005 (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed with the Commission on  June 10, 2005)*(4)                                                                                                                                   |

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| 10.31                                                        |   | Letter Amendment to  Employment Agreement of George T. Robson dated September 27, 2005  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the Commission on October 3,  2005)*(4)                                                                   |
|--------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32                                                        |   | Employment Agreement of  Joseph A. Ripp dated October 5, 2005 (incorporated by reference to  Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q,  filed with the Commission on November 7, 2005)*                                                                                            |
| 10.33                                                        |   | Employment Agreement of  Jeffrey J. Bairstow dated November 28, 2005 (incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the Commission on December 8, 2005)*                                                                                        |
| 10.34                                                        |   | Dendrite International  Director Compensation Program (incorporated by reference to the Company’s  Current Report on Form 8-K, filed with the Commission on  October 21, 2005)*                                                                                                                                 |
| 10.35                                                        |   | Employment Agreement of  Mark Theilken dated April 2, 2004*                                                                                                                                                                                                                                                               |
| 10.36                                                        |   | Cash Bonus for Mark  Theilken (incorporated by reference to the Company’s Current Report on  Form 8-K, filed with the Commission on February 9, 2006)*                                                                                                                                                          |
| 10.37                                                        |   | Cash Incentive Bonus  Arrangement between the Company and Joseph Ripp, President and Chief  Operating Officer and Jeffrey Bairstow, Executive Vice President and Chief  Financial Officer (incorporated by reference to the Company’s Current Report  on Form 8-K, filed with the Commission on March 2, 2006)* |
| Subsidiaries:                                                |
| 21.                                                          |   | Subsidiaries of the  Company                                                                                                                                                                                                                                                                                                   |
| Consents  of Independent Registered Public Accounting Firms: |
| 23.1                                                         |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                                                                     |
| 23.2                                                         |   | Consent of  Ernst & Young LLP                                                                                                                                                                                                                                                                                         |
| Certifications:                                              |
| 31.1                                                         |   | Certification of  John E. Bailye, Chairman of the Board and Chief Executive Officer of the  Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                       |
| 31.2                                                         |   | Certification of Jeffrey  J. Bairstow, Executive Vice President and Chief Financial Officer of the  Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                    |
| 32                                                           |   | Certification of  John E. Bailye, Chairman of the Board and Chief Executive Officer of the  Company and Jeffrey J. Bairstow, Executive Vice President and Chief Financial  Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |

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*                    Managementcontract or compensatory plan.

(1)          Ceased as executiveofficer effective June 7, 2005

(2)          Ceased employment withthe Company effective February 25, 2005

(3)          Ceased employment withthe Company effective November 1, 2005

(4)          Ceased employment withthe Company effective November 11, 2005

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