**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2006**

**Commissionfile number 001-16379**

**Dendrite International, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

| **New Jersey**                  |   | **22-2786386**      |
|---------------------------------|--------|---------------------|
| (State or Other Jurisdiction of |   | (I.R.S. Employer    |
| Incorporation or Organization)  |   | Identification No.) |

 

**1405/1425 Route 206 SouthBedminster, NJ 07921**(Address ofPrincipal Executive Offices)**(908) 443-2000**(Registrant’s telephone number, including area code)

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

| **Title of Each Class**     |   | **Name of Exchange on Which Listed** |
|-----------------------------|--------|--------------------------------------|
| Common Stock, no  par value |   | The NASDAQ Stock  Market LLC         |

 

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

**None**

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 30,2006 was $326,241,000 based upon the June 30, 2006 closing price of $9.22per share.

The number of shares ofcommon stock outstanding as of March 22, 2007 was 44,559,874.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certain informationrequired by Part III is omitted for this Report. This Registrant will filean amendment to this Report on Form 10-K/A containing suchinformation not later than 120 days after the end of the fiscal year covered bythe Report in accordance with General Instruction G(3) of Form 10-K.

 

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**TABLEOF CONTENTS**

| **PART I**   |   |
|-------------------|--------|
| ITEM 1.           |   | BUSINESS |   | 3 |   |
| ITEM  1A.         |   | RISK  FACTORS |   | 18 |   |
| ITEM 1B.          |   | UNRESOLVED STAFF COMMENTS |   | 18 |   |
| ITEM 2.           |   | PROPERTIES |   | 18 |   |
| ITEM  3.          |   | LEGAL  PROCEEDINGS |   | 19 |   |
| ITEM 4.           |   | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |   | 19 |   |
| **PART II**  |   |
| ITEM 5.           |   | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |   | 20 |   |
| ITEM  6.          |   | SELECTED  FINANCIAL DATA |   | 21 |   |
| ITEM 7.           |   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS |   | 22 |   |
| ITEM 7A.          |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK       |   | 53 |   |
| ITEM 8.           |   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |   | 53 |   |
| ITEM 9.           |   | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE |   | 53 |   |
| ITEM 9A.          |   | CONTROLS AND PROCEDURES |   | 54 |   |
| ITEM  9B.         |   | OTHER  INFORMATION |   | 58 |   |
| **PART III** |   |
| ITEM 10.          |   | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |   | 58 |   |
| ITEM 11.          |   | EXECUTIVE COMPENSATION |   | 58 |   |
| ITEM 12.          |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS |   | 58 |   |
| ITEM 13.          |   | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND  DIRECTOR INDEPENDENCE |   | 58 |   |
| ITEM 14.          |   | PRINCIPAL ACCOUNTING FEES AND SERVICES |   | 58 |   |
| **PART IV**  |   |
| ITEM 15.          |   | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |   | 59 |   |

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Note:                 Dendrite,Mobile Intelligence and the other Dendrite product and service names mentionedherein are trademarks or registered trademarks of Dendrite in the United States(“U.S.”) and in several other countries world-wide. All other product andservice names referred to in this document are or may be the trademarks oftheir respective owners.

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**PART I**

**ITEM 1. Business**

**Potential Sale ofthe Company**

On March 1, 2007, Dendrite International, Inc.(collectively, with its subsidiaries, the “Company,” “Dendrite,” “we,” and “our”)entered into an Agreement and Plan of Merger (the “Merger Agreement”) withCegedim SA and Dogwood Enterprises, Inc., an indirect subsidiary ofCegedim (“MergerCo”). Pursuant to the Merger Agreement, MergerCo will be mergedwith and into Dendrite (the “Merger”), with Dendrite continuing as thesurviving corporation. Under the Merger Agreement, at the effective time of theMerger (i) each outstanding share of common stock of Dendrite will beconverted into the right to receive $16.00 per share in cash; (ii) eachvested and unvested option to purchase Dendrite common stock that is outstandingand unexercised shall become fully vested and exercisable and, if not exercisedprior to the effective time of the merger, shall be cancelled in exchange forthe right to receive a cash payment per option equal to the excess of (a) $16.00over (b) the exercise price of such option, less any applicable andrequired withholding taxes; and (iii) all unvested restricted stock unitawards will be cancelled and the holder will be entitled to receive a cashpayment equal to $16.00 in cash, without interest and less any applicablewithholding taxes, for each share of common stock underlying the restrictedstock unit award. Each of Dendrite and Cegedim has made customaryrepresentations, warranties and covenants in the Merger Agreement. Thecompletion of the Merger is subject to various closing conditions, includingobtaining the approval of Dendrite’s shareholders, antitrust approvals andother customary closing conditions. The Merger Agreement contains certaintermination rights for both Dendrite and Cegedim. If the Merger Agreement isterminated under certain circumstances specified in the Merger Agreement,Dendrite will be required to pay to Cegedim a termination fee of $22.2 million.The Merger Agreement also requires Dendrite to reimburse up to $5 million ofCegedim’s reasonable expenses if the Merger Agreement is terminated undercertain specified circumstances.

In connection with theMerger Agreement, on March 1, 2007, Dendrite and Registrar and TransferCompany, as Rights Agent, entered into Amendment No. 1 (the “RightsAmendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “RightsAgreement”). The effect of the Rights Amendment is to permit the execution ofthe Merger Agreement and the performance and consummation of the transactionscontemplated by the Merger Agreement, including the Merger, without triggeringthe separation or exercise of the Rights (as defined in the Rights Agreement)or any adverse event under the Rights Agreement.

**General**

Dendrite was incorporated in 1987 with a mission toimprove sales and marketing productivity for pharmaceutical and other lifesciences companies. Dendrite pioneered and quickly became the standard forpharmaceutical sales force automation, enabling transparency between the homeoffice and its sales force—a relationship that was formerly detached andpaper-based.

Although considered a pioneer in sales forceautomation for the pharmaceutical industry, we also provide products andservices at nearly every stage of the drug lifecycle, including, productmarketing, regulatory compliance, and clinical trials. Our products andservices are deployed in each of the world’s top 20 pharmaceutical companies;in hundreds of large, mid-tier, and emerging life sciences companies; and inmore than 50 countries. Every year, millions of interactions are made using ourproducts and services, which are closely aligned with the growing needs of thepharmaceutical industry.

At a company’s home office, for instance, we offerapplications to manage sales territories and drug sample allocation. We offermore precise prescriber targeting methodologies that use longitudinal patientdata to measure new brand starts and prescriber behavior, rather than justtotal prescriptions. To 

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supplement the activity ofsales representatives, we offer various direct-to-prescriber marketingproducts, such as direct mail, sample fulfillment, and peer-to-peer outreach.We solve patient persistence issues through integrated marketing programs thatprospectively and retrospectively remind patients to fill their prescriptions. Inthe compliance area, we help clients adhere to state and federal regulations,validate computer systems, and audit sample inventories.

In 2006, weintroduced several noteworthy products and services:

·       Inthe U.S. market, we launched Dendrite MICROÔ,which is the industry’s first smartphone-based, cost-effective Sales ForceEffectiveness (“SFE”) application. Primarily for emerging pharmaceuticalcompanies with smaller sales forces, Dendrite MICRO is our first smartphone-basedpharmaceutical industry solution.

·       Inthe Asian pharmaceutical market, we launched j-forceWirelessÔ,a mobile phone-based SFE solution.

·       Earlyin the year, we delivered a complete solution to help U.S. pharmaceuticalcompanies comply with increased reporting and disclosure requirements at thestate level.

·       Dendriteacquired certain assets of Opus Health LLC to bolster its Marketing Solutionsbusiness, specifically to provide patient discount card adjudication for use inDendrite’s persistence programs.

Global product teams werecreated in 2006 to better coordinate R&D efforts. We also embarked on aseries of Customer Advisory Board meetings to partner with customers, seekingtheir input on current and future products.

**Dendrite’s Productsand Services**

We deliver leading andadaptive products and services that help our customers become more efficient inspending their sales and marketing dollars in an increasingly competitivebusiness environment. Our products and services are grouped into three operatingsegments: Sales Solutions; Marketing Solutions; and Emerging Solutions, whichinclude compliance and clinical solutions.

**I. Sales Solutions**

With more than 100,000 sales representatives anddistrict managers using our SFE solutions throughout the world, we have becomea global leader in providing sales solutions to the life sciences industry. Ourflagship product, Mobile Intelligence, enables sales representatives to beproductive and efficient. We also provide organization alignment tools, samplemanagement tools, geographic targeting tools for the European Union, and fullyintegrated support services.

The full suite of softwareand services in this category are grouped into three areas:

**A. Sales ForceManagement**

A broad field andhome-office product suite that helps pharmaceutical companies manage salesforce activities and includes both software licensing and maintenance. Productsand services include sales force effectiveness, territory alignment and samplemanagement**.**

**Field**

1.                 **Mobile Intelligence****Ô****(Version 4.2)**—This succeeded WebForceÔas our flagship SFE solution, and it enables sales representatives in the lifesciences industry to deliver timely and pertinent information to theircustomers—the prescribers—and provide visibility between 

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the pharmaceutical homeoffice and the field. Mobile Intelligence is the first-ever sales forcemanagement product designed to mirror the way that pharmaceutical salesrepresentatives think and act in the field. Built on the Microsoft® .NETframework, the platform is open, extensible and configurable and can easily beintegrated into a sales and marketing system environment.

2.                 **J-force****Ô**—Asuite of SFE tools specifically developed for the Asian pharmaceutical market.In Japan, approximately 25,000 life sciences sales representatives use thej-force suite of products.

a.                  **J-forceNET****Ô**—Aweb-based product that integrates all major sales and support functions withina single SFE system. Designed specifically for the Japanese market, it enablespharmaceutical companies to manage all aspects of their customer relationships;view sales data; enter call information; update client profiles; accesscorporate resources; and effectively communicate with the home office.

b.                 **J-forceWIRELESS****Ô**—Anew mobile-phone solution fully integrated with j-forceNET to further increasesales representatives mobility. This is especially useful in emerging markets,where up-front equipment costs must be kept low. Because sales representativesalready own mobile phones, they simply download our proprietary software, visitprescribers, and enter information directly with the phone, which istransmitted to the home office.

3.                 **J-centreSYNERGY****Ô**—A solution that enables informationexchange between pharmaceutical manufacturers and drug wholesalers.

4.                 **VisiForce****Ô**—An SFE toolspecifically for life science and pharmaceutical companies in emerginginternational markets where organizing, targeting, and evaluating potentialprescribers is essential for the commercial success of sales forces.

5.                 **Dendrite MICRO****Ô**—Ourlatest SFE solution using smartphones, designed for emerging life sciencecompanies with growing sales forces. Dendrite MICRO is preconfiguredspecifically for the needs of this market and is available on a monthlysubscription basis to mitigate upfront investment costs for training andimplementation. This solution boasts smartphone specific features such as “NearMe” which enables the sales representative to seek the closest prescriber tohis or her exact location.

6.                 **ForceMobile****Ô**—APDA based solution that is highly configurable, highly functional, andeasy-to-use, ForceMobile is designed specifically for organizations requiringportability and instant data access.

**Home-OfficeSuite**

7.                 **Application Integration Server (“AIS”)**—The AIS is theintegration hub for our entire technology solution suite. It is acost-effective, flexible, and practical architecture that provides pre-builtintegration between our products and allows our customers to integrate oursolutions within their own environment. The AIS uses universal integrationtechnologies (XML, Web Services), which promotes the integration of existingsales and marketing infrastructure investments and standards.

8.                 **Analyzer****Ô**—Aflexible, easy-to-use data analysis tool that standardizes the decision supportand reporting processes for all levels of a pharmaceutical sales organization.Analyzer is available integrated with our .NET framework through MobileIntelligence or as a standalone solution.

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9.                 **IntelliGEO****Ô**—IntelliGEO,available in the European region, allows sales management to determinegeographical penetration in specific sales regions, known as bricks, with aninteractive visual interface.

10.          **OrganizationManager®**—A sales force resource management solution to eliminateinterruption to the sales process as pharmaceutical companies redeploy andreorganize their sales force. The solution manages complex field salesalignments, linking sales representatives and managers to customers,geographies, products, territories, and teams to promote an efficient and productivesales environment.

11.          **Sample Guardian****Ô**—A drug samplemanagement tool used to track, analyze and store all drug sample relatedactivity. Sample Guardian enables pharmaceutical companies to comply withgovernment regulations, specifically in the United States, but with potentialapplicability in other countries.

**B. Sales SupportServices**

Pharmaceuticalcompanies are challenged to increase their productivity through improvedbusiness process support, a robust technical infrastructure, and systemsintegration. We offer a suite of solutions that enable clients to meet thesegoals.

1.                 **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 when they encounter challenges.

2.                 **Hardware & Asset Management Services**—This servicefocuses on minimizing pharmaceutical sales representative downtime by quicklyrepairing and/or replacing non-functioning field-based hardware, such as laptopcomputers, tablets, slates, desktops, or handheld devices. In addition, thisservice focuses on tracking client assets and performing inventory managementfunctions.

3.                 **Implementation Services**—With two decades of deliveringcustomer relationship management (“CRM”) and SFE solutions, Dendrite providespharmaceutical and life sciences companies with unique industry insight,expertise and technical capabilities for implementing today’s businessapplication software solutions that best reflect the customer’s current ordesired future practices.

4.                 **Learning Solutions**—Customized training programs that aredesigned to fully integrate into a company’s business needs. Our LearningSolutions may act as the total outsource provider or collaborate with a company’sexisting training organization to deliver programs across a wide range ofsubject areas, including product education, compliance issues, corporate policyeducation, and soft skills.

5.                 **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.

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**C. Customer DataManagement**

Our Customer DataManagement solutions are aimed at providing an accurate view of customers byenabling precision-based sales and marketing efforts that open up newopportunities for more efficient and effective selling.

1.                 **Nucleus Pharma®**—An end-to-end customer informationmanagement solution that enables users to capture, centralize and managecustomer-related information from multiple data sources across the enterpriseand use this focused customer view to make critical business decisions.Creating this “single view of the customer” enables the pharmaceuticalcompanies to leverage up-to-date information for improved sales rep targetingand to achieve more efficient selling.

2.                 **Business Intelligence DataMart**—A comprehensive solution thatenables the integration of sales and marketing data into a centralizedrepository to provide the ability to drive focused sales and marketing businessdecisions based on a 360-degree view of customers, brands, campaigns,programs, and events.

3.                 **Validator**—A tool that takes a company’s existing customerdata, and returns it cleaned and verified against the industry’s most accuratereference database to ensure accuracy for sampling compliance.

**II. MarketingSolutions**

With increasing industry pressure for brandperformance, the pharmaceutical industry has sought more efficient ways toreach its prescribers and patients versus traditional mass marketingtechniques.

Our objective is to drive brand growth throughout itslifecycle. Through Dendrite’s unique methodology for driving behavioral change,we can help increase dialogue about the brand and connect their primarycustomers—the sales rep, the prescriber, the patient and ultimately thepharmacy where they fill prescriptions. Our unique methodology starts with moreprecise targeting based not only on prescriber volume but also on behavior andspheres of influence; execution through a series of behavioral changingoutreach tools to professionals and patients; and measurement of results usingrobust Return-on-Investment (“ROI”) data analysis. This complete process ismanaged by Dendrite’s proprietary campaign management tools acquired throughthe Optas, Inc. (“Optas”) acquisition in 2005.

Our products are groupedin four areas: Targeting, Driving Behavior, Measurement and CampaignManagement.

**A. Targeting**

1.                 **Data & Analytics**—LongitudinalPrescription Data (“LPD”) uses prescription data to track physicians’ prescribing patterns and theirpatients’ adherence. By partnering with Verispan LLC, which supplies the rawdata, Dendrite has access to the most comprehensive pharmacy-linkedprescription dataset. Dendrite has a team of industry specialists and analyststhat are pioneers in the area of pharmaceutical data analysis andinterpretation.

a.                  LPD helps toprovide a thorough understanding of a client’s goals and barriers, performsextensive study of current and ongoing market positioning, and provides clientswith insightful observations and points of interest.

i.                   With LPD, wecan identify true new brand starts because they are not masked by refill data.By tracking a patient’s prescription history over time, we can distinguishbetween a true new prescription in a brand versus traditional sales data thatcannot distinguish between a prescription being renewed or truly written forthe first time.

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ii.               Using LPD, we canidentify patients’ persistence and link those to their prescribers by lookingat the prescribing and adherence behavior of each over time. We can identifycompetitive switching behavior by showing a prescriber’s tendency to beinfluenced by early adopters, or slow adopters, to specific program messagingand tactics.

b.                 Dendrite providestargeting and segmentation at the start of any promotional program, withtracking and ROI reporting during and after a program’s execution. Reportingincludes transactional and behavioral, observations; recommendations for goingforward with any given program; and suggestions for future programs that mayincrease product awareness and market share.

2.                 **Physician Connect****SM**—Atool that offers the pharmaceutical industry an advanced solution foridentifying prescribers who influence peers’ script writing behavior. Unliketraditional key opinion leader solutions, Physician Connect identifies localand regional influencers within the social or professional networks of trust.By targeting these influencers with specific marketing and sales messaging, therapid adoption of a new or mature product by these leaders can catalyze itsadoption in localized markets.

3.                 **Validator****Ô**—Thissolution reconciles physician data by standardizing, matching, and purging outduplicate information. Dendrite clients build a solid foundation of reliable,practitioner-specific data, which is the prerequisite for targeted integratedmarketing and sales activity. For Marketing Solutions validation is done as anintegrated part of direct-to-prescriber marketing programs.

4.                 **Pharbase****Ô**—Aprescriber database service in the European region that provides a source ofintelligence to pharmaceutical companies. Powerful marketing programs can bedeveloped with precise targeting characteristics based on various elements,such as doctor profile data, response to previous promotional approaches,specialty, interests, areas of influence, and socio-demographic datacontained in Pharbase.

5.                 **Docscan®**—A European, regional and country based physicianprofiling service that enables pharmaceutical customers to analyze physicianbehavior, market trends, and demographics. Docscan provides customers withbusiness intelligence for a broad range of strategic sales and marketingactions, including projecting prescriber product acceptance, predictingconsumer utilization and preparing subsequent promotional initiatives.

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

7.                 **Publication Circulation Management**—Expert services tosupport paid, controlled, and single-sponsored publications. Dendrite’sextensive database resources make it possible to customize the profiling andtargeting of prescribers and healthcare professionals to meet a customer’sbrand objectives.

**B . DrivingBehavior**

1.                 **Dendrite Sampling and Fulfillment**—Dendrite’s fulfillmentsolution provides ordering, distribution, tracking, compliance and reporting.Clients can ship directly to individual prescribers, to patients, or to salesrepresentatives in bulk.****The serviceincludes prescription drugs, controlled drugs, over-the-counter (“OTC”)medications, premium materials and literature. We have a 137,000 square-foot,climate-controlled facility, which is fully licensed to distribute prescriptionand controlled (Schedule II-V) drugs, medical devices, and OTC 

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products to physicians,patients, and pharmaceutical representatives throughout the U.S. We ship about1.4 million drug samples per year.

2.                 **Medical Dialogue****SM**—Apharmaceutical industry-specific peer-to-peer outreach that provides targetedtelephone-based, interactive discussions between our on-staff physicians andtargeted prescribing decision-makers for specific promotions by our customers.This service help builds product awareness and credibility.

3.                 **Patient Persistence Cards**—These cards can be redeemed bypatients of participating brands at pharmacies to receive discounts onmedication to encourage first fill and subsequent refills (using prospectiveand retrospective communication). Together, using our Campaign Managementplatform, prescriber data analysis and our fulfillment and telecommunicationservices, our Patient Persistence programs are now deployed for over 40 brandswith over 25 million cards in circulation.

4.                 **Dendrite E-Marketing**

a.                  **Dendrite E-Mail**—The only privacy-safe software solutiondesigned specifically for pharmaceutical companies to create and deploypersonalized high volume customized messaging e-mail campaigns to a targetedaudience.

b.                 **E-Detailing (Provided by Lathium)**—Targeted programs thatcreate an interaction between the pharmaceutical company and physician. Forinstance, using the Internet to create a relationship with each physician,generating an educated dialogue about a pharmaceutical product and then capturingthe user’s insights and opinions helps marketers refine product sellingstrategies.

c.                  **E-Sampling (Provided by Medmanage)**—Samples empowerphysicians to prescribe a certain brand. E-Sampling allows a physician torequest a shipment of samples directly from the manufacturers through theirfulfillment vendor without the need for a representative’s visit. Dendriteprovides this capability to physicians via a simple, convenient, anduser-friendly web-based process.

5.                 **Direct Mail**—Dendrite’s direct mail services range frompersonalized Direct-to-Physicians and Direct-to-Patients mail creation anddistribution. This is widely used in our European business.

6.                 **STAT/GRAM®**—An effective branded communication service thatis both well recognized by physicians, secondary prescribers, pharmacists, andother health care professionals. Pharmaceutical companies use this service todistribute important medical news, such as product launches, labeling changesand product safety recalls.

7.                 **Telecommunications/Call Center**—A rapidly deployed servicethat enables interactive communications in reaching targeted prescribers andhealth care professionals via leading-edge call services that deliver themarketers’ product messages. Dendrite customizes programs and offers liveoperator or interactive voice response (“IVR”) systems.

C.              **Measurement**—Wemeasure campaign performance through operational reports for products. Ourprograms can be reported via an online dashboard, and our programs includereturn on investment measurement to track performance and to inform futurecampaign waves.

D.**             DendriteCampaign Management Solution (Optas****TM)**—Aplatform built for the pharmaceutical industry for designing, executing andmanaging pharmaceutical marketing campaigns. The campaign management suite incorporatesseveral components of the marketing process, including segmentation, messagemanagement, timed communications, response management, 

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and programregistration and privacy protection as per the Health Insurance Portability andAccountability Act (“HIPAA”). The suite is delivered in a hosted, online formatand consists of campaign planning tools, an online survey tool, an emaildeployment tool and a reporting tool for tracking and measuring the progressand return of a campaign.

**III. Emerging Solutions**

Dendrite’sEmerging Solutions business includes compliance solutions and clinicalsolutions. While these businesses are smaller relative to the Company’s totalrevenues today, they service additional functional areas within our customerorganizations, where Dendrite’s core competencies provide opportunities forfuture growth.

**A.**               **Regulatory Compliance Solutions**

Dendrite’sRegulatory Compliance Solutions provide the resources and specialized guidanceneeded to cost-effectively comply with the policies and regulatory requirementsof the Food and Drug Administration (“FDA”), the Drug EnforcementAdministration (“DEA”), and state agencies (including registration processes).These solutions unite market-leading software tools with consulting andprofessional services and support the pharmaceutical product lifecycle throughthe following components:

1.                 **Regulatory Consulting**—Services to help pharmaceuticalcompanies overcome challenges and meet the provisions of the DEA, FDA,Prescription Drug Marketing Act (“PDMA”) and the Controlled Substances Act (“CSA”).These services are designed to help pharmaceutical companies streamlinecompliance activities and reduce costs.

a.                  **Off-Label Promotion Auditing**—A documentation program thatenables pharmaceutical companies to show how all promotional messaging fallswithin the guidelines of FDA-approved use.

b.                 **DEA Solutions**—These encompass the regulatory requirements ofthe CSA and the DEA policies pertaining to controlled substances and List Ichemicals. These reviews provide an in-depth insight into a pharmaceuticalcompany’s level of compliance with DEA regulations and in assessing the wellbeing of its overall compliance program.

c.                  **FDA Solutions**—These include Standard Operating Procedures (“SOPs”),inventory and reconciliation process, and drug sample labeling to helppharmaceutical companies comply with FDA regulations.

2.                 **Sample Management**—Dendrite provides a single source for allof a pharmaceutical company’s sample management needs—either as a completeoutsourcing solution or components to address specific needs, including programdesign, management, automation, and logistics.

a.                  **Sample Guardian****Ô**—A managementtool used to track, analyze and store all drug sample activity. Sample Guardianhelps enable pharmaceutical companies to comply with government regulations,specifically in the United States, but with growing applicability in othercountries.

b.                 **Sample Reconciliation Services**—Services designed to providereconciliation of prescription drug samples along with the evaluation ofpotential significant loss of field sales representatives’ drug sampleinventories. These services are guided by client-specific procedures and byregulatory requirements, such as PDMA in the U.S.

c.                  **Sales Rep Close Outs**—A service that is guided byclient-specific procedures and by the regulatory requirements of the PDMA. Wework with pharmaceutical companies to gather corporate equipment (phones, car,laptop, etc.) from field sales representatives 

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whose jobs areeliminated or are leaving the company. This service is available in all 50states.

d.                 **PDMA Training**—Designed to address the needs ofpharmaceutical and life sciences companies in the design or redesign of theirsample, regulatory and compliance programs to provide solutions such as businessrules definition, SOP generation, drug sample program design, and processflows to ensure compliance with PDMA regulations.

3.                 **Auditing and Inventory Services**—A full set of services tohelp pharmaceutical companies identify potential issues and track progresstoward resolving them. Using experienced and professional field inventoryspecialists and auditors, Dendrite conducts annual inventories, random audits,and For-Cause audits of field sales representatives. Additional Auditing andInventory Services include practitioner office visits, Signature Verificationprograms, and sales representative close outs.

a.                  **Signature Verification**—A service that enables pharmaceuticalcompanies to maintain accurate PDMA records. Dendrite’s professional fieldinventory specialists and auditors are responsible for the SignatureVerification programs, helping clients detect potential PDMA recordfalsification. Dendrite designs programs for specific needs, including aSignature Verification Letter component and/or a formalized program forperforming practitioner office visits.

b.                 **For-Cause Audits**—A service involving independent personneloutside of field sales to conduct a thorough and timely For-Cause Audit thatcan be completed within the required reporting window when it comes toreporting issues, such as significant loss, theft, and falsification of recordsto the FDA. Dendrite’s team of former state and federal investigators isstrategically located throughout the United States. This allows them tooquickly and cost effectively audit for drug accountability, perform documentreviews, and conduct interviews with a pharmaceutical company’s salesrepresentatives, practitioners and/or pharmacists. At the conclusion of everyassignment, Dendrite provides a detailed audit report that helps facilitatedevelopment of a FDA-required written report.

c.                  **Validator**—Designed to take a company’s existing customerdata, and return it cleaned and verified, using the industry’s most accuratereference database to ensure validation for sampling.

4.                 **State Services**—From Vermont to California, inconsistenciesin state regulations are contributing to a confusing regulatory landscape andmaking in-house compliance efforts increasingly expensive and impractical tooversee. Dendrite’s suite of State Services enable pharmaceutical companies toimprove their understanding of regulatory trends.

a.                  **State Monitor****Ô**—Tokeep compliance costs manageable while staying ahead of current and pendingstate regulations, Dendrite provides a monitoring service that improves apharmaceutical company’s understanding of the state regulatory requirements andregistration processes related to the research, manufacturing and distributionof pharmaceutical products, controlled substances, over-the counter products,and medical devices.

b.                 **Custom State Research**—For those regulatory challenges thatrequire in-depth information and analysis to adequately frame and address aspecific compliance issue, Dendrite offers experts who are continuouslymonitoring the regulatory compliance situation as it develops.

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c.                  **State Guardian****Ô**—Dendrite’sState GuardianÔprovides a safe and efficient way to ensure uniform compliance with the statelaws and regulations that govern marketing and advertising expenses, as well assales promotion and expenses. This comprehensive data management and reportingservice collects all the necessary compliance data, rationalizes that data forone view of the customer and then generates reports for state compliancerequirements. State GuardianÔintegrates with a wide range of enterprise applications and scales to grow withchanging needs.

d.                 **State Licensing**—Dendrite provides the knowledge andresources required for the in-state and out-of-state licensing and renewalsprocess as it pertains to pharmaceutical research, distribution, manufacturing,and corporate locations, with the guidance that enables pharmaceuticalcompanies to understanding the state regulatory requirements and registrationprocesses. This includes the research, manufacturing and distribution ofpharmaceutical products, controlled substances, OTC products, and medicaldevices.

e.                  **VAWD Consulting and Auditing**—Through its Verified-AccreditedWholesale DistributionTM (“VAWDÔ”)Consulting and Auditing program, Dendrite helps pharmaceutical companies take aproactive approach to addressing the current drug counterfeiting issue.Dendrite enables companies to pass the accreditation process and thereby remaincompliant with this FDA supported voluntary program.

5.                 **Computer Systems Validation Services**—Services to validateclients’ systems to ensure compliance with FDA / PDMA regulations and clientbusiness process by utilizing a formalized, risk-based methodology. This doesnot apply to sampling solutions alone, but also to solutions to supportmarketing, clinical, and sales.

a.                  **Training**—Complete regulation and compliance-specifictraining and collaborative educational solutions delivered through traditional,web-based or blended training methods. Dendrite develops and delivers trainingprogram content, tailored to specific requirements.

b.                 **Revalidation**—When a client’s regulated systems undergochanges, it’s not always easy to determine the extent to which re-validationmeasures are required. Our risk-based revalidation methodology helps ensure theclient’s continued regulatory compliance, while remaining focused on anefficient revalidation execution that avoids over-testing.

c.                  **Documentation**—An optical scanning, imaging, character-recognition,and retrieval system designed for efficient, economical sample accountabilityand management of samples distributed utilizing paper (versus electronicsignature capture).

d.                 **Validation Gap Analysis**—The Dendrite computer systemsvalidation service enables pharmaceutical clients to quickly remediate anyvalidation shortcomings, starting with a thorough evaluation of current systemvalidation suitability and ending with reporting on the existing gaps andactionable recommendations for alleviating them.

e.                  **Validation Staffing**—For life science companies performingComputer System Validations, those skills are highly specialized and in shortsupply. Dendrite provides experienced staff with deep knowledge and practicalexperience to help fill those capability gaps, as needed or on a scheduledrecurring basis.

f.                    **21 CFR Part 11**—A service provided by****Dendrite’s seasoned team of compliance professionalsconsisting of onsite assessment audits and reviews to identify any gaps orpotential issues that affect a client’s existing Part 11 compliance statusalong with recommended action plans.

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**B.  Clinical Solutions**

Dendrite offers aset of cost-effective solutions designed to benefit the clinical trial processby assisting in effectively initiating studies, identifying potentialinvestigators and patients, providing ongoing support and training toinvestigators, conducting pre- and post-marketing risk assessments,facilitating safety reporting, and providing data analysis of trial andcompetitive drugs. Dendrite helps pharmaceutical companies find high-valueinvestigators and keep them satisfied, by providing the comprehensiveInvestigator Relationship Management (“IRM”) capabilities necessary. Thisincludes the tools to bring communications, collaboration, metrics andbenchmarks to customer studies, the data management services to keeppractitioner data clean, up-to-date and verified, and the trial supportservices to ensure that processes are running smoothly.

1.                 **Clinical Data**—Old data and unmanageable lists can make thesearch for new investigators difficult. As a one-stop shop for trial-relateddata services, Dendrite enables pharmaceutical companies to optimize theinvestigator search process.

a.                  **Clinical Validator**—A customer information management serviceto the pharmaceutical industry. Clinical Validator processes ensurepractitioner data is clean, up-to-date, and verified, allowing everypractitioner to be standardized, augmented, and verified against the UniversalMaster Prescriber database (“UMP”). This service supports both one-time datascrubbing needs and ongoing periodic data validation programs, such as those requiredby PDMA legislation. Clinical Validator helps pharmaceutical companies build asolid information foundation on which to base strategic business decisions andsupport critical business processes.

b.                 **Protocol/Investigator Identification Feasibility**—Dendriteprovides clients with clinical trial services utilizing a global, strategicapproach that multiplies pool size at the onset and then, through a series ofclient-defined filters, produces a verified and ranked listing ofinvestigators.

c.                  **Patient Recruitment**—A service designed to help clientsalleviate a key operational burden of the trial process—patient recruiting.Dendrite enables clients to create a strong foundation for their patientrecruitment through a relationship marketing program that delivers educationalmessaging to keep patients invested in the study and thereby reduce turnover.

2.                 **Applications Technology**—Dendrite’s Applications Technologyprovides the tools to help Investigators collaborate more effectively on aclinical study. Dendrite also helps improve the performance of site monitorsthrough access to the Monitor Contact Management System fully configured to theneeds of the user.

3.                 **Support Services**—Dendrite’s clinical trial support services,include technical help desk, site assessments, hardware provisioning, andconnectivity facilitation. Dendrite’s experience with clinical trials and theirinfrastructure provides access to full-service support for even large globalstudies.

Services include:

·       Technicalhelp desk

·       Siteassessments

·       Hardwareprovisioning

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·       Connectivity facilitation

a.                 **Investigator Meeting/Training**—We help clients efficientlytrain investigators and site study staff and can also develop custome-learning/training courses to match client needs.

b.                **Help Desk and Hardware**—We provide a single-vendor servicethat helps uninterrupted site productivity for a client’s clinical trials. Aspart of this service, we provide technical help desk, site assessments, hardwareprovisioning, and connectivity facilitation.

c.                 **Managed Hosting**—We provide pharmaceutical and life scienceclients with a secure disaster recovery or backup site for mission criticalapplications and databases to their primary data center along with a full rangeof customized services, featuring the latest in technology innovation.

**Customers**

Our solutions are deployed in each of the world’s top20 pharmaceutical companies, in hundreds of large, mid-tier, and emergingmanufacturers, and in more than 50 countries around the globe.

Approximately 18% and 12% of our total revenues in2006 and approximately 24% and 10% of our total revenues in 2005 came from ourtwo largest customers, Pfizer and Sanofi-Aventis, respectively. Approximately28% of our total revenues in 2004 came from our largest client, Pfizer.

The Company’s largestcustomer plans to transition U.S. sales effectiveness services from Dendrite toone or more third-party vendors. See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” for moreinformation on this transition and its expected impact on the Company.

**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.

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 andDevelopment**

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 $7,580,000, $6,094,000, and $9,316,000 of research anddevelopment expense for 

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the years endedDecember 31, 2006, 2005 and 2004, respectively. Our research anddevelopment expense plus additions to capitalized software development costs,was approximately $12,159,000, $10,958,000 and $15,202,000 for the years endedDecember 31, 2006, 2005 and 2004, respectively. We capitalized less costsin the year ended December 31, 2006 than in 2005 due to development of ournext generation SFE 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 $9,952,000and $10,341,000 at December 31, 2006 and 2005, respectively.

**Seasonality**

Historically, we haveexperienced lower spending from our customers in the first and third quartersas compared to other quarters. Due to our international operations, we havebeen impacted by lower third quarter spending by our customers outside theUnited 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 31,2006, the Company employed 2,534 employees: 1,292 in the U.S. and Canada; 729in Europe; 301 in the Pacific Rim; and 212 in Latin America.

**Operating Segments**

In the second quarter of 2006, the Company changed itsoperating segments to reflect its reorganized business. The Company hasexpanded its segments into three operating segments: Sales solutions, Marketingsolutions, Emerging solutions as well as a corporate segment. For moreinformation with respect to the financial results and conditions of ouroperating segments, see Note 14 to our consolidated financial statements.

In 2004, the Company didnot have the necessary systems in place to track global information needed toconsolidate revenue, operating (loss) profit, depreciation and amortizationexpense and capital expenditures between the new operating segments. As such,the 2004 amounts have not been presented, as to do so would be impracticable. Our2005 segment results have been restated to conform to the current yearpresentation.

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**Geographical Areas**

See Note 14 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          |       | 53         |       | Chairman of the Board  and Chief Executive Officer      |
| Joseph A. Ripp          |       | 54         |       | President and Chief  Operating Officer                  |
| Jeffrey J. Bairstow     |       | 48         |       | Executive Vice President  and Chief Financial Officer   |
| Christine A. Pellizzari |       | 39         |       | Senior Vice President,  General Counsel and Secretary   |
| Carl L. Cohen           |       | 47         |       | President, Marketing  Solutions                         |
| Natasha Giordano        |       | 46         |       | President, Global  Business Unit                        |
| Garry D. Johnson        |       | 55         |       | Senior Vice President  and Chief Technology Officer     |
| Mario Mauri             |       | 41         |       | President, Europe                                       |
| Jean-Paul Modde         |       | 42         |       | President, Asia-Pacific                                 |
| Mark Theilken           |       | 56         |       | President, Sales  Solutions                             |
| James Young             |       | 48         |       | Senior Vice President and Chief Human Resource  Officer |

 

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

**JohnE. Bailye**hasserved as Chief Executive Officer and Director since the Company’s founding in1987 and since 1991 in the additional position of Chairman of the Board. Priorto 1987, Mr. Bailye served as Managing Director of Foresearch Pty.,Limited (“Foresearch”), a consulting company to the pharmaceutical industry inAustralia. Mr. Bailye served in that capacity from the time he acquiredForesearch in 1976 until he sold the company in 1986. Mr. Bailye served asa market researcher for Foresearch prior to 1976. Mr. Bailye holds aBachelor of Commerce degree in Finance, Marketing and Business from theUniversity of New South Wales.

**Joseph A. Ripp**has served as President and ChiefOperating Officer since he joined Dendrite in November 2005. Prior to joiningthe Company, Mr. Ripp held several senior positions within Time Warner, Inc.,most recently serving as Senior Vice President of the Media &Communications Group. Prior to that position, Mr. Ripp served as ViceChairman of America Online, Inc. from 2002 to 2004. Mr. Ripp alsoserved as Chief Financial Officer of America Online, Inc.; Executive VicePresident and Chief Financial Officer of Time Warner, Inc.; and ExecutiveVice President, Chief Financial Officer of Time, Inc. Mr. Ripp is onthe Board of Directors of Greenfield Online, Inc. He is on the Board ofTrustees at Manhattan College and the Board of Directors of the AdvertisingEducational Foundation. He also serves on the Board of Directors and ExecutiveCommittee of the Ad Council and is Chairman of its Finance Committee. Mr. Rippholds a Bachelor of Arts degree from Manhattan College and Master of BusinessAdministration from the Bernard M. Baruch College of the City University of NewYork.

**Jeffrey J. Bairstow**has served as Executive VicePresident and Chief Financial Officer since he joined Dendrite in December 2005. Priorto joining Dendrite, Mr. Bairstow served as Chief Operating Officer ofRelayHealth Corporation from 2004 to 2005 and Senior Vice President and ChiefFinancial Officer of Vitria Technology, Inc. from 2003 to 2004. From 1997to 2002, Mr. Bairstow held senior management positions within Health Net, Inc.including Executive Vice President and Chief Financial Officer of HealthNet-California and President of Health Net’s Government and Specialty ServicesDivision. Mr. Bairstow has also previously served as Chief OperatingOfficer of America Service Group; President of Managed Health Network, asubsidiary of Health Net, Inc.; Chief Financial Officer and then Presidentof Vendell Healthcare; and Vice President of Finance and Corporate Controllerand then Chief Operating Officer of 

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Park Healthcare Company. Mr. Bairstow holds a Bachelorof Arts degree from Vanderbilt University and Master of BusinessAdministration from Vanderbilt’s Owen School of Business.

**Christine A. 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 Bachelor of Arts in LegalStudies from the University of Massachusetts at Amherst and a Juris Doctoratefrom the University of Colorado School of Law.

**Carl L. Cohen******has served as President, MarketingSolutions since joining Dendrite in June 2006. Prior to joining Dendrite, hespent more than six years with Starwood Hotels and Resorts Worldwide where heheld senior executive positions, he most recently serving as Senior VicePresident, Marketing and Customer Technology. Prior to Starwood, Mr. Cohenserved in other senior executive roles including Chief Marketing Officer forWrenchhead.com and Executive Vice President of Marketing for Indy LeagueRacing. Mr. Cohen has also held senior marketing and brand managementleadership positions at Philip Morris, Colgate Palmolive and Reckitt &Coleman. Mr. Cohen holds a Bachelor of Science degree in Accounting fromthe University of Albany, State University of New York, and Master of BusinessAdministration from the Wharton School of the University of Pennsylvania.

**Natasha Giordano******has served as President, GlobalBusiness Unit responsible for global pharmaceutical company business andCanadian and Latin American sales and operations since January 2005. Ms. Giordanohas additionally been responsible for company-wide sales strategy and NorthAmerican Integrated Services since March 2006. Ms. Giordano has beenwith Dendrite since 2000 and has previously served as Group President, GlobalBusiness Unit for major customers, and Vice President, Global Accounts. Priorto joining Dendrite, Ms. Giordano spent 10 years at Parke-Davis/WarnerLambert in various sales and sales leadership positions, most recently managingStrategic Alliances. Ms. Giordano holds a Bachelor of Science degree fromWagner College in New York.

**Garry D. Johnson******has served as Senior Vice Presidentand Chief Technology Officer since 2003. Mr. Johnson has been withDendrite since 2000 and has previously served as Vice President of NorthAmerican Technical Operations. Prior to joining the Company, Mr. Johnsonserved as Vice President of Information Technology at Boron Lepore and, priorto that, as Director, IT Strategy & Quality, at Allied Signal. Mr. Johnsonholds a Bachelor of Arts degree in Management from Fairfield University.

**Mario Mauri******has served as President, Europeresponsible for European sales, marketing and operations since March 2006and has previously served as Vice President, Europe; Vice President, SouthernEurope; and Vice President, European Operations. Mr. Mauri joined Dendritein 2003 when Dendrite acquired SYNAVANT, Inc. Mr. Mauri worked atSYNAVANT and its predecessor companies, WALSH International and IMS HealthStrategic Technologies, for eleven years and held several key senior sales andmarketing positions, including General Manager, Italy, Greece and Turkey andSales Solutions Director, Europe. Mr. Mauri holds a University MasterDegree in Computer Science from the University of Milan, Italy.

**Jean-Paul Modde******has served as President,Asia-Pacific responsible for Asia-Pacific sales, marketing and operations sinceMarch 2006. Mr. Modde has been with Dendrite since 1988 and haspreviously served in other key senior executive positions including: SeniorVice President, International; Vice President, Asia/Pacific and Latin America;Regional Director, Latin America; and Sales Director, Europe. Mr. Moddeholds a Bachelor of Science degree in Computer Science from MacquarieUniversity, Australia.

**Mark S. Theilken******has served as President, SalesSolutions since March 2006 and is responsible for the U.S. sales solutionsbusiness and North American Implementation Services. Mr. Theilken has beenwith 

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Dendrite since 2004 and has previously served as Senior VicePresident responsible for North American sales, marketing services, andBuzzeoPDMA sales and operations, and Senior Vice President responsible forintegrated marketing, data management and Dendrite’s CRM Effectiveness unit.Prior to joining Dendrite, Mr. Theilken served as President and ChiefExecutive Officer of Fuego, Inc. from March 2000 to January 2004.Prior to Fuego Mr. Theilken spent 5 years at Acxiom Corporationserving as Group Leader, InfoBase Products, and Senior Vice President,marketing information services. Prior to Acxiom, Mr. Theilken spent22 years at IBM Corporation. Mr. Theilken holds a Bachelor of Sciencedegree in Mathematics from the University of Illinois.

**James E. Young******has served asSenior Vice President and Chief Human Resources Officer since September 2006.Prior to joining Dendrite, Mr. Young served as Senior Vice President,Human Resources at WebMD Corporation from 2001 to 2005. Mr. Young alsoserved for five years as Senior Vice President, Human Resources, at Simon &Schuster; the publishing division of Viacom Inc. Before Simon &Shuster, Mr. Young held several key senior human resources and businessleadership positions at General Electric’s NBC division where he worked foreleven years. Mr. Young holds Bachelor of Arts degrees in Philosophy &Political Science from Fairleigh Dickinson University.

**AdditionalInformation**

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

**AvailableInformation**

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)or 15(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 Roomat 100 F Street, NE, Washington, DC 20549, and you may obtain information onthe operation 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. RiskFactors**

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. UnresolvedStaff Comments**

Not applicable.

**ITEM 2. Properties**

We lease the following facilities in the UnitedStates: a 233,000 square foot facility in Bedminster, New Jersey, which servesas our corporate headquarters; a 137,000 square foot facility in Totowa, NewJersey, which houses a distribution center, warehouse, call center andadministrative offices for our integrated marketing business; a 100,000 squarefoot facility in Chesapeake, Virginia, which houses our data and integratedsupport centers; a 86,000 square foot facility in Duluth, Georgia, which housesour 

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hardware repair,maintenance and asset management center; a 6,700 square foot office in Durham,North Carolina, which houses 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; a 2,500 square foot facilityin Hauppuage, New York which houses employees and operations for our OPUSHealth division; and a 4,400 square foot office in Fort Mitchell, Kentucky, a2,100 square foot office in Mount Laurel, New Jersey and 11,000 square footfacility in Richmond, Virginia which house employees and operations for ourBuzzeoPDMA division. The Bedminster facility is subleased from Pharmacia &Upjohn Company, a subsidiary of Pfizer, Inc.

We also lease a total of approximately 353,000 squarefeet for local management, sales offices and operations in the followingcountries: Australia, Belgium, Brazil, Canada, China, Colombia, France,Germany, Greece, India, Italy, Japan, Mexico, New Zealand, Poland, Portugal,Russia, Singapore (Asia-Pacific regional headquarters), South Korea, Spain andThe Netherlands. We also own a 10,000 square foot facility in Leicestershire,United Kingdom, which is utilized for local management, sales offices andoperations.

The Company also owns a145,000 square foot facility in Piscataway, New Jersey which does not currentlyhouse any operations and is being held for sale.

**ITEM 3. LegalProceedings**

Dendrite is from time to time involved in litigationrelating to personnel and other claims arising in the ordinary course ofbusiness. On or about March 13, 2007, plaintiff Albert Oldham commenced apurported class action against Dendrite, its directors and Cegedim alleging thatCegedim’s pending acquisition of Dendrite is unfair to Dendrite’s shareholders,and purporting to assert claims for breach of fiduciary duty and aiding andabetting breach of fiduciary duty. In the lawsuit, captioned Albert Oldham v.Dendrite International, Inc., et al., plaintiff asks the court to (i) declarethat the action is properly maintainable as a class action, and certify thenamed plaintiff as class representative and its counsel as class counsel; (ii) declareand decree that the merger agreement between Dendrite and entities affiliatedwith Cegedim was entered into in breach of the fiduciary duties of the membersof the Board and is therefore unlawful and unenforceable; (iv) rescind andinvalidate the merger agreement; (v) enjoin Dendrite and the Board fromconsummating the merger unless and until procedures are implemented to obtainthe highest possible price for the shareholders; (vi) direct the Board toexercise its fiduciary duties to obtain a transaction which is in the bestinterests of the shareholders and in which the highest possible price isobtained; (viii) impose a constructive trust on any benefits improperlyreceived by the Board as a result of wrongful conduct; and (viii) awardplaintiff the costs and disbursements of this action, including reasonableattorneys’ and experts’ fees. Based on the facts known to date, Dendritebelieves that the claims asserted by the plaintiff are without merit andintends to defend itself vigorously.

The Company is notcurrently engaged in any other legal proceedings that are expected,individually or in the aggregate, to have a material adverse effect on ourbusiness.

**ITEM 4. Submissionof Matters to a Vote of Security Holders**

None.

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**PART II**

**ITEM 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

*Market Information*

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

Thefollowing table sets forth for the periods indicated the high and low saleprices for our common stock as reported by the NASDAQ Global Select Market.

| **Period**                             | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| Quarter Ended  December 31, 2006  |       | $          | 11.99      |     | $          | 9.34    |       |
| Quarter Ended  September 30, 2006 |       | $          | 10.50      |     | $          | 8.48    |       |
| Quarter Ended  June 30, 2006      |       | $          | 13.57      |     | $          | 9.14    |       |
| Quarter Ended  March 31, 2006     |       | $          | 14.92      |     | $          | 12.28   |       |
| 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   |       |

 

*Approximate Numberof Equity Security Holders*

As of March 22, 2007,there were approximately 289 holders 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 and its mergeragreement with Cegedim, SA and Dogwood Enterprise, Inc. may limit theamount or restrict the payment of any such dividends we may pay. SeeNote 8 of the Notes to Consolidated Financial Statements and “Liquidityand Capital Resources” in Item 7 for a discussion of our credit agreement.

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**ITEM6. Selected Financial Data**

| ** **                                             | ** ** | **Year Ended December 31,**                         | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(a)** | ** ** | **2002** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                  | 423,958    |   | $ | 437,240 |   | $ | 399,197 |   | $ | 321,107 |   | $ | 225,756 |   |
| Operating costs &  expenses:                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating costs                                        |       | 236,046                                                            |       | 236,230 |   | 205,896 |   | 162,481 |   | 111,381 |   |
| Selling, general and administrative                    |       | 166,857                                                            |       | 144,931 |   | 132,016 |   | 107,862 |   | 77,132 |   |
| Research and development                               |       | 7,580                                                              |       | 6,094 |   | 9,316 |   | 11,633 |   | 10,396 |   |
| Restructuring and other charges(b)(c)(d)               |       | 29,744                                                             |       | 9,372 |   | — |   | — |   | 1,785 |   |
| Amortization of acquired intangible assets             |       | 4,140                                                              |       | 4,431 |   | 4,851 |   | 4,308 |   | 335 |   |
| Other operating (income)(f)                            |       | —                                                             |       | — |   | (707 | ) | — |   | — |   |
| Total operating costs & expenses(e)                |       | 444,367                                                            |       | 401,058 |   | 351,372 |   | 286,284 |   | 201,029 |   |
| Operating (loss)  income                               |       | (20,409                                                            | )          | 36,182 |   | 47,825 |   | 34,823 |   | 24,727 |   |
| Interest (income), net                                 |       | (2,310                                                             | )          | (625 | ) | (64 | ) | (731 | ) | (1,085 | ) |
| Other expense (income), net                            |       | 315                                                                |       | 20 |   | 277 |   | (560 | ) | 149 |   |
| (Loss) income  before income tax expense               |       | (18,414                                                            | )          | 36,787 |   | 47,612 |   | 36,114 |   | 25,663 |   |
| Income tax expense                                     |       | 8,331                                                              |       | 15,340 |   | 18,047 |   | 15,054 |   | 10,265 |   |
| Net (loss) income                                      |       | $                                                                  | (26,745    | ) | $ | 21,447 |   | $ | 29,565 |   | $ | 21,060 |   | $ | 15,398 |   |
| Net (loss) income per  share:                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | $                                                                  | (0.61      | ) | $ | 0.50 |   | $ | 0.71 |   | $ | 0.52 |   | $ | 0.39 |   |
| Diluted                                                |       | $                                                                  | (0.61      | ) | $ | 0.48 |   | $ | 0.69 |   | $ | 0.51 |   | $ | 0.38 |   |
| Shares used in computing  net (loss) income per share: |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | 43,692                                                             |       | 42,861 |   | 41,503 |   | 40,340 |   | 39,872 |   |
| Diluted                                                |       | 43,692                                                             |       | 44,223 |   | 43,075 |   | 41,415 |   | 40,127 |   |

 

| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(a)** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **(in thousands)**     | ** ** |
| **Balance Sheet Data:**                         |       |                   |       |   |   |   |   |   |   |   |   |
| Working capital                                 |       | $                      | 68,951     |   | $ | 82,247 |   | $ | 68,058 |   | $ | 47,176 |   | $ | 86,037 |   |
| Total assets                                    |       | 374,671                |       | 363,007 |   | 322,569 |   | 262,457 |   | 188,476 |   |
| Capital lease  obligation, less current portion |       | 71                     |       | 1,648 |   | 3,036 |   | 187 |   | 275 |   |
| Stockholders’  equity                      |       | 248,060                |       | 261,415 |   | 227,589 |   | 176,135 |   | 146,759 |   |
|                                                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

(b)          2006 restructuring andother charges relates to $21,312 of severance expense, $4,454 of an assetimpairment charge and $3,978 of facility and other charges.

(c)           2005 restructuring andother charges relates to $7,649 of facility related charges and $1,723 ofseverance

(d)          2002 restructuring andother charges relates to write-down of a facility then held for sale.

(e)           2006 includes $4,367 oftotal stock-based compensation expense from the adoption of SFAS 123 (R).

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

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

**Forward-LookingStatements**

This Form 10-K may contain certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21-E of the Securities Exchange Act of 1934, which areintended to be covered by the safe harbors created by such acts. For thispurpose, any statements that are not statements of historical fact may bedeemed to be forward-looking statements, including the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our strategy, future operations, future expectations or futureestimates, future financial position or results and future plans and objectivesof management. Those statements in this Form 10-K containing thewords “believes,” “anticipates,” “plans,” “expects” and similar expressionsconstitute forward-looking statements, although not all forward-lookingstatements contain such identifying words. These forward-lookingstatements are based on our current expectations, assumptions, estimates andprojections about our Company and the pharmaceutical and consumer packagedgoods industries. All such forward-looking statements involve significantrisks and uncertainties, including those risks identified in this Form 10-Kunder “Factors That May Affect Future Results,” many of which are beyondour control. Although we believe that the assumptions underlying our forward-lookingstatements are reasonable, any of the assumptions could be inaccurate andactual results may differ materially from those indicated by the forward-lookingstatements included in this Form 10-K, as more fully described under“Factors That May Affect Future Results.” In light of the significantuncertainties inherent in the forward-looking statements included in thisForm 10-K, you should not consider the inclusion of such informationas a representation by us or anyone else that we will achieve such results.Moreover, we assume no obligation to update these forward-lookingstatements to reflect actual results or changes in assumptions, expectations orprojections.

Management’s Discussionand Analysis (“MD&A”) is intended to help the reader understand the resultsof our operations and financial condition. MD&A is provided as a supplementto and should be read in conjunction with our financial statements and theaccompanying notes to consolidated financial statements. Enterprise-widedisclosure information appearing in Note 14 of the Notes to ConsolidatedFinancial Statements are presented in accordance with SFAS 131, “Disclosuresabout Segments of an Enterprise and Related Information.”

**Potential Sale ofthe Company**

On March 2, 2007, Dendrite entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Cegedim S.A. (“Cegedim”)and Dogwood Enterprises, Inc., a wholly-owned subsidiary of Cegedim (“MergerSub”). Pursuant to the Merger Agreement, Cegedim will acquire Dendrite in ataxable all-cash transaction whereby Merger Sub will merge with and intoDendrite (the “Merger”). Dendrite will continue as the corporation survivingthe Merger and will become a wholly-owned subsidiary of Cegedim. The MergerAgreement provides, upon consummation of the Merger, for Dendrite’sstockholders to receive $16.00 in cash, without interest, for each share ofcommon stock of Dendrite. The Merger Agreement is subject to adoption byDendrite’s stockholders, as well as the satisfaction or waiver of otherconditions, including, among others, the expiration or termination ofapplicable waiting periods under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976, as amended. The Merger Agreement contains certain terminationrights and provides that, upon the termination of the Merger Agreement underspecified circumstances, Dendrite will be required to pay Cegedim a terminationfee of $22,200 and reimburse Cegedim up to $5,000 of Cegedim’s reasonableexpenses.

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

In connection with theMerger Agreement, on March 1, 2007, Dendrite and Registrar and TransferCompany, as Rights Agent, entered into Amendment No. 1 (the “RightsAmendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “RightsAgreement”). The effect of the Rights Amendment is to permit the execution ofthe Merger Agreement and the performance and consummation of the transactionscontemplated by the Merger Agreement, including the Merger, without triggeringthe separation or exercise of the Rights (as defined in the Rights Agreement)or any adverse event under the Rights Agreement.

**EXECUTIVE OVERVIEW**

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

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

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

In 2006, we announced an Operational Effectiveness (“OE”)program to streamline our cost structure and realign the Company to driveefficiency and support our growth objectives.  The OE program involved an extensive review ofthe entire Company from which we identified $20 million of annualized costsavings over our 2005 cost base. Our execution of the necessary cost savingactions resulted in additional severance and other associated costs during2006. As of December 31, 2006, we have identified all significant costsavings, and significant actions have been taken, which resulted inrestructuring and other charges of approximately $29.7 million. We expect toincur approximately $1 to $2 million of additional restructuring and othercharges during first quarter of 2007.

In previous years, we presented a breakout of ourrevenues into the three categories of sales solutions, marketing solutions andshipping. These categories were reflective of how our service offerings weremarketed to and viewed by our customers, and we believe they provided usefulinformation to understand the changes in our revenues across periods. They werenot reflective of the way we managed our business, and therefore associatedoperating costs and assets by revenue category were not available on a globalbasis. Based upon these factors, we operated under one reportable segment fordisclosure purposes under Statement of Financial Accounting Standards 131, “DisclosureAbout Segments of an Enterprise and 

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

Related Information” (“SFAS131”) through March 31, 2006. As of June 30, 2006, we completed aprocess to reorganize our business and to capture transactional data in aformat that will enable the reporting of various financial information brokeninto three new discrete operating segments as well as a corporate segment. Wehave reclassified our 2006 and 2005 historical revenues, operating income,assets and other select data into these new groupings which management is nowutilizing to manage the business. Our three operating segments are salessolutions, marketing solutions, emerging solutions as well as a corporate segment.Below is a description of these operating segments:

*Sales solutions*business includesproducts and sales support services which are used by, or provided to, thesales force of our customers.

*Marketingsolutions*business primarilyincludes interactive marketing, data and analytics, campaign management, andshipping fees. Our shipping fees, which are pass-through costs that bear littleto no margin, 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 interactive marketing activities.

*Emergingsolutions* business includes compliance solutions,clinical solutions, and contract sales force services. While these businessesare not individually significant to our total revenues today, we believe theyrepresent significant growth opportunities in the future.

*Corporate*includes costs and assets which are not representative of the results of the Company’sindividual operating segments. The Company does allocate a significant portionof its gross corporate costs to the respective operating segments, to reflectthe approximate value which has been incurred relating to services provided bythe corporate entity. In addition, certain gross costs are considered to beoverhead not attributable to any segment and as such, remain unallocated inCorporate. Included among the unallocated overhead remaining within Corporateare costs for equity based compensation, audit and tax fees, excess facilities,certain administrative staff, and other ancillary costs.

In 2004, the Company didnot have the necessary systems in place to track global information needed toconsolidate revenue, operating (loss) profit, depreciation and amortizationexpense and capital expenditures between the new operating segments. As such,the 2004 amounts have not been presented, as to do so would be impracticable.

**CUSTOMER UPDATE**

In the fourth quarter 2006, the Company’s largestcustomer extended its contract with Dendrite for salesforce effectiveness services in the United States through 2007,at current pricing, but advised the Company that as part of the previouslydescribed RFP process initiated by the customer, it plans to transition suchservices, with the exception of support, maintenance and enhancements ofDendrite’s sales force effectiveness software, in-house and to one ormore third-party vendors. The customer currently intendsto continue with support, maintenance and enhancements of Dendrite’ssales force effectiveness software up to 2011 under a separate contract,which the Company expects to generate revenue of at least approximately $7million in 2008, plus work orders and special projects. Contracts withthis customer outside of the United States are not affected.

Dendrite estimates the value of revenuesassociated with the services that are expected to terminate at the end of 2007to be approximately $41 million, excluding work orders and specialprojects. Approximately 5% of these revenues are attributed tothe Marketing Solutions segment for reporting purposes. Althoughestimating segment operating income is difficult due to complexities associatedwith 

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

allocations, the segmentoperating income margin associated with these services is estimated to bein the range of 45% to 50%, excluding Corporate segment unallocated expense.

The extension of the contractinto 2007 (approximately $48 million in contracted services as compared to $51million in 2006) plus anticipated one-time revenue from transition services andother work orders are expected to have a positive impact on 2007 results. TheCompany noted that (1) anticipated additional cost reductions during the 12-14month transition period, (2) potential investments in new andcomplementary business lines and (3) future new business are planned tohelp mitigate the overall impact of the contract loss beyond 2007. Further,there is no assurance that the current expectation for contract expiration bythe end of 2007 would not be delayed or otherwise adjusted due to the complexand important nature of the services covered by the scope of the contract.

**CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

A critical accountingpolicy is one that is both very important to the portrayal of a company’sfinancial position and results of operations and requires management’s mostdifficult, subjective or complex judgments. We believe that our criticalaccounting policies are revenue recognition, acquisitions and related accruals,impairments, income taxes and capitalized software.

**Revenue Recognition**

The area of revenuerecognition requires management’s to make significant judgments and estimates.AICPA Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” “SOP97-2”, governs revenue recognition for arrangements that include softwarewhich is more than incidental to the arrangement. Under SOP 97-2, if a saleof software includes services that are essential to the functionality of thesoftware, then the software and essential services are to be accounted forusing contract accounting as described in Accounting Research Bulletin 45, “Long-TermConstruction-Type Contracts,” and SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” “SOP 81-1.”The determination of whether or not services are essential to the functionalityof the software can differ from arrangement-to-arrangement andrequires 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.

Thepercentage-of-completion method of revenue recognition requires us to usesignificant estimates in measuring the progress-to-completion for each project.For our license fee and implementation service projects, we use the inputmeasure of labor incurred as compared with total expected labor for the entireproject. The determination of total project labor requires the use of significantjudgment and estimates. We review these estimates on a monthly basis. Actualresults could differ from these estimates, which would impact the amount ofrevenue previously recognized, had better estimates been available at the time.

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**ITEM 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations($ in thousands) (Continued)**

Many of our arrangementsinclude multiple deliverables. In the absence of higher-level specificauthoritative guidance, we determine the units of accounting for multipleelement arrangements 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**

The accounting related tobusiness combinations requires us to estimate the fair value and useful life ofthe assets acquired and the fair value of the liabilities assumed in thecombinations. These estimates of fair value are based on our business plan forthe entities acquired including planned redundancies, restructuring, use ofassets acquired and assumptions as to the ultimate resolution of obligationsassumed for which no future benefit will be received. We typically analyze anumber of factors such as valuation or appraisal reports when determining theestimates of fair value. Should actual use of assets or resolution of obligationsdiffer from our estimates, revisions to the estimated fair values, usefullives, or both, would be required.

**Accounting for Restructuring Activities**

Upon approval of arestructuring plan by management with the appropriate level of authority, werecord restructuring liabilities in compliance with Statement of FinancialAccounting Standards (“SFAS”) No. 112, “Employers’ Accounting forPostemployment Benefits,” and SFAS No. 146 “Accounting for CostsAssociated with Exit or Disposal Activities,” resulting in the recognition ofemployee severance and related termination benefits for recurring arrangementswhen they become probable and estimable and on the accrual basis for one-timebenefit arrangements. We record other costs associated with exit activities asthey are incurred. Employee severance and termination benefit costs reflectestimates based on agreements with relevant statutory requirements or plansadopted by us. These costs are not associated with nor do they benefitcontinuing activities. Changing business conditions may affect the assumptionsrelated to the timing and extent of facility closure activities. We review thestatus of restructuring activities on a quarterly basis and, if appropriate,record changes based on updated estimates.

**Accounting for Impairments**

We review long-livedassets for impairment on an annual basis or whenever events or changes incircumstances indicate that the carrying amount of an asset might not berecoverable. Other than goodwill 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 

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

unamortizedcapitalized costs are greater than the net realizable value, we would record animpairment loss.

Weassess goodwill and indefinite-lived intangibles for the possibility ofimpairment on an annual basis (as of October 1 of each year), and wheneverevents or changes 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, orwhen we determine that the carrying value of goodwill may not be recoverablebased upon the existence of one or more of the above indicators of impairment,we calculate and compare the fair value of our reporting unit to its carryingvalue. We currently have three reporting units as well as a corporate unit. Ifthe carrying value exceeds the fair value, we calculate the implied fair valueof the goodwill for the reporting unit and compare it to the carrying value ofthe goodwill for the reporting unit. 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 of the reporting unit) inour consolidated statement 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 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 maintainreserves for uncertain income tax positions, which are included in income taxespayable on the consolidated balance sheet. As a result of its multinationaloperations, we are subject to examination by various federal, state, and localtax authorities throughout the world. We establish liabilities for actual andprobable assessments by tax authorities resulting from known tax exposures.Such liabilities represent an estimate for taxes ultimately expected to bepaid, and may need to be adjusted over time as more information becomes known.

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

**Accounting for 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.

**Accounting for Stock Based Compensation**

In December 2004, theFASB issued SFAS No. 123(R), “Shared Based Payment” (“SFAS 123(R)”).SFAS 123(R) is a revision of SFAS No. 123, as amended, “Accountingfor Stock-Based Compensation” (“SFAS 123”), and supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). SFAS 123(R) eliminates the alternative to use theintrinsic value method of accounting that was provided in SFAS 123, whichgenerally resulted in no compensation expense recorded in the financialstatements related to the issuance of stock options or shares issued under theCompany’s Employee Stock Purchase Plan (“ESPP”). SFAS 123(R) requiresthat the cost resulting from all share-based payment transactions be recognizedin the financial statements. SFAS 123(R) establishes fair value asthe measurement objective in accounting for share-based payment arrangementsand requires all companies to apply a fair-value-based measurement method inaccounting for generally all share-based payment transactions with employees.

We account for stock-basedcompensation in accordance with the fair value recognition provisions ofSFAS 123(R). Under the fair value recognition provisions ofSFAS 123(R), stock-based compensation cost is measured at the grant datebased on the fair value of the award and is recognized as expense over theappropriate vesting period. Determining the fair value of stock-based awards atthe grant date requires judgment, including estimating the expected life ofstock options, the weighted-average expected stock price volatility andweight-average risk-free interest rate. In addition, judgment is required inestimating the amount of stock-based awards that are expected to be forfeited.If actual results differ significantly from these estimates or different keyassumptions were used, it could have a material effect on our ConsolidatedFinancial Statements. See Notes 1 and 10 of the Notes to the consolidatedfinancial statements for additional information regarding our adoption ofSFAS 123(R).

In addition, existingvaluation models, including Black-Scholes, may not provide reliable measures ofthe fair value of our share-based compensation. Consequently, there is asignificant risk that our estimates of the fair values of share-basecompensation awards on the grant dates may not reflect the actual valuesrealized upon the vesting, exercise, expiration, early termination orforfeiture of those share-based payments in the future. There currently is nomarket-based mechanism or other practical application to verify the reliabilityand accuracy of the estimates stemming from these valuation models. Further,the future impact of the cost of share-based compensation on our results ofoperations, including net income and earnings per diluted share, will dependon, among other factors, the level of our equity awards as well as the marketprice of our shares at the time of award as well as various other assumptionsused in valuing such awards.

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

**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:

**Opus**

On September 1, 2006,we completed the acquisition of substantially all the assets of Opus Heath LLC(“Opus”). Based in Long Island, New York, Opus provided direct-to-patientpersistence solutions. Opus’ results of operations have been included in theaccompanying financial statements since the date of acquisition. Opus revenuesare presented within our marketing solutions segment.

The aggregate purchaseprice of Opus was $7,378, including $379 of legal and professional fees. Inaccordance with the purchase agreement $2,000 of the purchase price was held inescrow as of December 31, 2006. The $2,000 held in escrow together withany additional amounts to be added to escrow, less amounts claimed againstescrow, if any, is payable upon certain milestones relating to therepresentations, warranties and in connection with a certain patent applicationacquired as part of the acquisition. Inaddition, there is $3,000 contingent consideration based on Opus obtainingcertain financial measures over the next three years, which will be paid ifearned. As of December 31, 2006, nothing had been earned or accrued forthe contingent consideration. The $3,000 contingent consideration, if earned,will be accounted for as compensation expense. There is an additional $1,000 ofcontingent consideration based on the successful outcome of a certain patentapplication acquired as part of the acquisition. The $1,000 of additionalcontingent consideration would be accounted for as additional purchase price,if earned. The valuation of certain intangible assets was finalized inthe fourth quarter of 2006. The assets and liabilities acquired in connectionwith the Opus acquisition and pro forma results of operations are not deemedmaterial to the consolidated financial statements.

**Optas**

On September 12,2005, we completed the acquisition of Optas. Based in Woburn, Massachusetts,Optas provided privacy-safe relationship marketing solutions for patients andphysicians. Optas’ results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition. Optas revenuesare presented within our marketing solutions segment.

Theaggregate purchase price for Optas was approximately $13,188, including $349 oflegal and professional fees. In accordance with the purchase agreement,approximately $1,200 of the purchase price was held in escrow as of December 31,2006. Approximately $1,200, representing the balance of escrow, less amountsclaimed against escrow, is scheduled to be released from escrow in accordancewith the purchase agreement in April 2007. The valuation of certain intangiblesassets was finalized in the second quarter of 2006. The assets acquired andliabilities assumed in connection with the Optas acquisition and pro formaresults of operations are not deemed material to the consolidated financialstatements.

**Buzzeo**

On January 4, 2005,we completed the acquisition of Buzzeo. Based in Richmond, Virginia, Buzzeoprovided compliance, auditing, consulting and reconciliation outsourcingservices to the pharmaceutical and life sciences industry. This acquisitionfurther expands our sample and compliance management solution offerings. Buzzeo’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition. Buzzeo revenues arecharacterized as compliance solutions within our emerging solutions segment.

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

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

**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 ($ in thousands) (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 endedDecember 31, 2004. The valuation of certain intangible assets wasfinalized in the fourth quarter of 2004. The assets acquired and liabilitiesassumed in connection with the Uto Brain acquisition and pro forma results ofoperations are not deemed material to the consolidated financial statements.

**RESULTS OFOPERATIONS**

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

| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                    |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
| Operating  Costs & Expenses:       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs                             |       |                                       | 56         |   |   |   | 54 |   |   |   | 52 |   |   |
| Selling, general and  administrative        |       |                                       | 39         |   |   |   | 33 |   |   |   | 33 |   |   |
| Research and development                    |       |                                       | 2          |   |   |   | 1 |   |   |   | 2 |   |   |
| Restructuring and other  charges            |       |                                       | 7          |   |   |   | 2 |   |   |   | — |   |   |
| Amortization of acquired  intangible assets |       |                                       | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Total operating  costs & expenses  |       |                                       | 105        |   |   |   | 91 |   |   |   | 88 |   |   |
| Operating (loss) income                     |       |                                       | (5)        |   |   |   | 9 |   |   |   | 12 |   |   |
| Interest and other  (income), net           |       |                                       | —     |   |   |   | — |   |   |   | — |   |   |
| (Loss) income before income  tax expense    |       |                                       | (5)        |   |   |   | 9 |   |   |   | 12 |   |   |
| Income tax expense                          |       |                                       | 2          |   |   |   | 4 |   |   |   | 5 |   |   |
| Net (loss) income                           |       |                                       | (7         | )% |   |   | 5 | % |   |   | 7 | % |   |

 

**YEARS ENDEDDECEMBER 31, 2006 AND 2005**

***REVENUES***

| ** **          | ** ** | ** **                                 | ** ** | ** **          | ** ** | **$**               | ** ** | **%**             | ** ** | **2006 %**   | ** ** | **2005 %** | ** ** |
|---------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|-----------------|------------|
| ** **          | ** ** | **Year Ended December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **          | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues**    | ** ** |
| Revenues:           |       |                                       |       |                |       |                |       |              |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Sales solutions     |       | $                                          | 274,257    |                | $          | 300,624             |       |              | $          | (26,367           | )          |            |       | (9 | )% |   |   | 65 | % |   |   | 69 | % |   |
| Marketing solutions |       | 123,034                                    |       | 112,049             |       |                | 10,985     |              |       |              | 10         | %               |       |   | 29 | % |   |   | 26 | % |   |
| Emerging solutions  |       | 26,667                                     |       | 24,567              |       |                | 2,100      |              |       |              | 9          | %               |       |   | 6 | % |   |   | 5 | % |   |
| Total revenues      |       | $                                          | 423,958    |                | $          | 437,240             |       |              | $          | (13,282           | )          |            |       | (3 | )% |   |   | 100 | % |   |   | 100 | % |   |

 

Total revenues decreasedby 3% for the year ended December 31, 2006, compared with the year ended December 31,2005. Total revenues in the United States decreased by 7% from the year ended December 31,2005, and were $255,417, or approximately 60%, of total revenues. This decreasein the United States was primarily due to reduced spending by our largestcustomer for the year ended 

31

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

December 31,2006, compounded by the absence of 2005 revenue associated with a non-recurringproject for our two largest customers and a $4,000 one-time contractcancellation settlement from a mid-market pharmaceutical company that exitedthe United States market. These decreases were partially offset by revenue fromthe 2005 acquisition of Optas, a $3,000 one-time contract cancellation settlementfrom a mid-market pharmaceutical company that exited the United States market,as well as growth in our marketing solutions business. Our internationalrevenues were $168,541, or approximately 40% of total revenues for the yearended December 31, 2006, which increased 3% from 2005 primarily fromgrowth in marketing solutions.

**OPERATING COSTS & EXPENSES**

| ** **                                  | ** ** | ** **                                 | ** ** | **$**               | ** ** | **%**               | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)**    | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Operating costs  (including shipping)       |       | $                                          | 236,046    |                | $          | 236,230             |       |              | $          | (184              | )          |   |   | 0 | % |   |   | 56 | % |   |   | 54 | % |   |
| Selling, general  and administrative        |       | 166,857                                    |       | 144,931             |       |                | 21,926     |              |       |              | 15         | % |   |   | 39 | % |   |   | 33 | % |   |
| Research and  development                   |       | 7,580                                      |       | 6,094               |       |                | 1,486      |              |       |              | 24         | % |   |   | 2 | % |   |   | 1 | % |   |
| Restructuring and  other charges            |       | 29,744                                     |       | 9,372               |       |                | 20,372     |              |       |              | 217        | % |   |   | 7 | % |   |   | 2 | % |   |
| Amortization of  acquired intangible assets |       | 4,140                                      |       | 4,431               |       |                | (291       | )                 |       |              | (7         | )% |   |   | 1 | % |   |   | 1 | % |   |
| Total operating  costs & expenses  |       | $                                          | 444,367    |                | $          | 401,058             |       |              | 43,309     |              |       |   | 11 | % |   |   | 105 | % |   |   | 92 | % |   |

 

***OPERATING COSTS(including shipping).******  ***Operating costs remained flat forthe year ended December 31, 2006 compared with the year ended December 31,2005. As a percentage of revenues, operating costs increased to 56% for theyear ended December 31, 2006 versus 54% for the year ended December 31,2005. This increase was due to a full year costs from our September 2005acquisition of Optas versus approximately four months in 2005, increasedmarketing and compliance solutions business, which require higher incrementalcosts to deliver, and $2,820 of costs related to implementing our OE program.

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).******  ***SG&Aexpenses increased 15% for the year ended December 31, 2006 compared withthe year ended December 31, 2005. As a percentage of revenues, SG&Aincreased to 39% for the year ended December 31, 2006, up from 33%compared with the year ended December 31, 2005. SG&A cost increaseddue to strategic consulting costs related to our effort to realign the Companyof approximately $9,600, stock based compensation expense of $7,499 and $984 ofcosts related to implementing our OE program and increased other compensationexpense.

***RESEARCH ANDDEVELOPMENT (R&D).******  ***R&Dexpenses increased 24% for the year ended December 31, 2006 compared withthe year ended December 31, 2005. As a percentage of revenues, R&Dexpenses increased 1% for the year ended December 31, 2006 compared withthe year ended December 31, 2005. R&D expenses plus additions tocapitalized software development costs, increased 11% from $10,958 for the yearended December 31, 2005, to $12,159 for the year ended December 31,2006. This increase in gross R&D was primarily due to development of ournew clinical products.

***RESTRUCTURING ANDOTHER CHARGES.******  ***For the year ended December 31,2006, we recorded $29,744 of restructuring and other charges. The chargesinclude approximately $21,313 of severance, $4,454 of an asset impairmentrelated to an owned facility and $3,977 of facility and other charges. We madethe decision to consolidate our hardware support function in Georgia andtherefore decided to sell a 

32

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

New Jersey facility. This facilitywas adjusted to its fair value less cost to sell. The facility and othercharges primarily relate to a lump sum early termination payment charge of$1,539 for a leased facility in New Jersey, additional facility charges of$1,456 in New Jersey and the United Kingdom, $536 of costs related tore-focusing of our Japanese data business, and $447 of other charges.

For the year ended December 31, 2005, we recorded$7,649 of facility-related charges and a severance charge of $1,723. Thefacility charges consisted of $6,619 related to vacating a New Jersey facilityand for additional facilities vacated in previous periods due to changes inmarket conditions, as well as $1,030 related to the write-off of leaseholdimprovements associated with the exit of our New Jersey facility. The $1,723severance charge related to the elimination of certain senior and mid-levelmanagement positions.

***AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS.******  ***Amortization ofacquired intangible assets decreased 7% over the year ended December 31, 2005. Thedecrease primarily reflects certain intangibles assets acquired as part of theSoftware Associates International (“SAI”) and Synavant acquisitions, which werefully amortized as of June 30, 2005, partially offset by additionalamortization of intangibles acquired as part of the Optas and Opusacquisitions.

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

| ** **              | ** ** | **Year Ended**   | ** ** | **$**               | ** ** | **%**               | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|-------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|
| ** **              | ** ** | **December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **              | ** ** | **2006**              | ** ** | **2005**            | ** ** | **Decrease**        | ** ** | **Decrease**      | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| Interest  (income), net |       | (2,310                | )          | (625                | )          |                | $          | 1,685             |       |              |       | 270 | % |   |   | (1 | )% |   |   | 0 | % |   |
| Other expense, net      |       | 315                   |       | 20                  |       |                | 295        |              |       |              | 1475       | % |   |   | 0 | % |   |   | 0 | % |   |

 

***INTEREST (INCOME),NET.***   Interestincome increased $1,685 from $625 to $2,310 for the year ended December 31,2006 due to higher average cash balances, higher interest rates and investingof surplus cash in 2006 offset by interest expense related to capital leases.

***OTHER EXPENSE, NET.***   Other expenseincreased by $295 from $20 to $315 for the year ended December 31, 2006 primarilydue to a $171 impairment charge related to our investment in a venture capitalfund.

**INCOME TAX EXPENSE**

| ** **                               | ** ** | **Year Ended**   | ** ** | **$**               | ** ** | **%**               | ** ** | **2006 %**   | ** ** | **2005 %**   | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|
| ** **                               | ** ** | **December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** | **of Total** | ** ** | **of Total** | ** ** |
| ** **                               | ** ** | **2006**              | ** ** | **2005**            | ** ** | **Decrease**        | ** ** | **Decrease**      | ** ** | **Revenues**      | ** ** | **Revenues** | ** ** |
| (Loss) income  before income tax expense |       | (18,414               | )          | 36,787              |       |                | $          | 55,201            |       |              |       | (150 | )% |   |   | (4 | )% |   |   | 8 | % |   |
| Income tax expense                       |       | 8,331                 |       | 15,340              |       |                | (7,009     | )                 |       |              | (46        | )% |   |   | 2 | % |   |   | 4 | % |   |

 

***PROVISION FORINCOME TAXES.***   Our estimated effective incometax rate was (45.2%) for the year ended December 31, 2006 compared to41.7% in the prior year.

We conduct business in various countries throughoutthe world and are subject to tax in numerous jurisdictions. As a result of our multinationaloperations, we are subject to examination by various federal, state, and localtax authorities throughout the world. We establish liabilities for actual andprobable assessments by tax authorities resulting from known tax exposures.Such liabilities represents an estimate for taxes ultimately expected to bepaid, and may need to be adjusted over time as more information becomes known.

33

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

The 2006 effective tax rate was unfavorably affectedprimarily by valuation allowances and tax reserves attributable to ourinternational subsidiaries. Valuation allowances recorded in 2006 of approximately$5,800 are attributable to international subsidiaries generating taxable lossesfor which we were unable to take a benefit. We recorded income tax reservesrelated to tax exposures identified at some of our international subsidiariesof approximately $4,800, of which $600 related to prior periods. In addition,the rate was also adversely affected by certain non-deductible expenses andforeign earnings taxed at different tax rates.

During 2006, we completed arestructuring of our Asia Pacific operations whereby a regional headquarteroffice was established in Singapore. As a result of committing to certainspending and employment levels, income from operations in Singapore will besubject to a reduced tax rate of 10%. We expect to benefit from this reducedtax rate for 7 years effective January 1, 2007. In connection with thisrestructuring, we transferred certain intangible assets from existingoperations in the Asia Pacific region and the United States to Singapore. Werecorded a current year tax expense of approximately $2,700 associated withthis restructuring.

At December 31, 2006and 2005, there were approximately $17,410 and $21,383, 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, 2006 or 2005.

**SEGMENT REVENUE ANDOPERATING INCOME (LOSS)**

**YEARS ENDEDDECEMBER 31, 2006 AND 2005**

***Sales Solutions***

| ** **                       | ** ** | ** **                                 | ** ** | ** **          | ** ** | **$**               | ** ** | **%**          | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **Year Ended December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** |
| ** **                       | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                          | 274,257    |                | $          | 300,624             |       |           | $          | (26,367 | ) |   |   | (9 | )% |   |
| Restructuring and  other charges |       | $                                          | 13,712     |                | $          | —              |       |           | $          | 13,712 |   |   |   | N/A |   |   |
| Operating income                 |       | $                                          | 40,521     |                | $          | 65,578              |       |           | $          | (25,057 | ) |   |   | (38 | )% |   |

 

Sales Solutions revenues accounted for approximately65% of total Company revenues for the year ended December 31, 2006, whichdecreased by approximately 9% or $26,367 compared with the year ended December 31,2005. Revenues in the United States decreased by 11% or $22,236, due to reducedspending by our largest customer for the year ended December 31, 2006compounded by the absence of 2005 revenue associated with non-recurringprojects for our two largest customers and a $4,000 one-time contract cancellationsettlement from a mid-market pharmaceutical company that exited the UnitedStates. These decreases were partially offset by revenue of $3,000 associatedwith one-time contract cancellation settlement from a mid-market pharmaceuticalcompany that exited the United States in 2006. International sales decreased byapproximately $2,998 or 1%, primarily due to the roll-off of a larger Europeancustomer during the second quarter of 2005 and reduced European license fees,which was partially offset by growth in license revenues in Asia and increasedongoing service fees resulting from regional deals in Latin America.

Operating income decreasedby 38% compared with the year ended December 31, 2005. This decrease wasprimarily due to reduced revenues, severance costs related to our OE program,$2,757 of 

34

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

othernon-restructuring costs related to implementing our OE program for the year endedDecember 31, 2006 and the absence of a large client rollout project whichoccurred during the year ended December 31, 2005.

***Marketing Solutions***

| ** **                       | ** ** | ** **                                 | ** ** | ** **          | ** ** | **$**               | ** ** | **%**          | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **Year Ended December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** |
| ** **                       | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                                          | 123,034    |                | $          | 112,049             |       |           | $          | 10,985 |   |   |   | 10 | % |   |
| Restructuring and  other charges |       | $                                          | 6,221      |                | $          | —              |       |           | $          | 6,221 |   |   |   | N/A |   |   |
| Operating loss                   |       | $                                          | (13,162    | )                   | $          | (2,484              | )          |           | $          | (10,678 | ) |   |   | 430 | % |   |

 

Marketing solutions revenues accounted forapproximately 29% of total Company revenues for the year ended December 31,2006, which increased by approximately 10% or $10,985 compared with the yearended December 31, 2005. This increase was primarily due to growth in ourUnited States business, which increased by approximately 27% or $9,218 over theprior year, primarily from growth in our interactive marketing business andadded revenue from our September 2005 acquisition of Optas. Growth inUnited States interactive marketing revenues resulted from increased servicesto one of our larger customers and other new business. Our internationalmarketing solution revenues increased by approximately 2% or $1,358 compared tothe year ended December 31, 2005, due to increases in consulting and data,partially offset by a decrease in transactional interactive marketing revenues.

Marketing solutions includes low gross margin revenueconsisting primarily of shipping fees which accounted for approximately $21,517or 5% of total revenues for the year ended December 31, 2006, whichincreased by approximately 2% compared with approximately $21,109 for the yearended December 31, 2005. Shipping revenues contribute little to no marginand result from pass-through shipping costs associated with our globalintegrated marketing business***.***

Operatingloss increased from $2,484for the year ended December 31, 2005 to $13,162 for the year ended December 31,2006. This increase was primarily due to severance costs, approximately $1,300of strategic consulting costs and $522 of other costs related to implementingour OE program recorded for the year ended December 31, 2006 and higherincremental costs to deliver various marketing solutions offerings for the yearended December 31, 2006 as compared with the year ended December 31,2005.

***Emerging Solutions***

| ** **                       | ** ** | **Year Ended**   | ** ** | **$**               | ** ** | **%**               | ** ** |
|----------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                       | ** ** | **December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** |
| ** **                       | ** ** | **2006**              | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Revenue                          |       | $                     | 26,667     |                | $          | 24,567              |       |   | $ | 2,100 |   |   |   | 9 | % |   |
| Restructuring and  other charges |       | $                     | 113        |                | $          | —              |       |   | $ | 113 |   |   |   | N/A |   |   |
| Operating (loss) income          |       | $                     | (1,070     | )                   | $          | 522                 |       |   | $ | (1,592 | ) |   |   | (305 | )% |   |

 

Emerging solution revenues accounted for approximately6% of total Company revenues for the year ended December 31, 2006, whichincreased by $2,100 or 9% compared with the year ended December 31, 2005.This increase was due to growth in revenues from our compliance solutionservices of approximately 16% or $2,024 and our European contract sales forcebusiness of 68%, partially offset by decreased revenue in our clinical businessdue to two large projects that were completed for the during the year ended December 31,2005.

35

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

Operatingloss increased by $1,592 from income of $522 to a loss of $1,070 for theyear ended December 31, 2006. This operating loss increase was primarilydue to the loss of ongoing clinical solution services with our largestcustomer.

***Corporate***

| ** **                       | ** ** | ** **                                 | ** ** | ** **          | ** ** | **$**               | ** ** | **%**          | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **Year Ended December 31,** | ** ** | **Increase /** | ** ** | **Increase /** | ** ** |
| ** **                       | ** ** | **2006**                                   | ** ** | **2005**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| Restructuring and  other charges |       | $                                          | 9,698      |                | $          | 9,372               |       |           | $          | 326 |   |   |   | 3 | % |   |
| Operating loss                   |       | $                                          | (46,698    | )                   | $          | (27,434             | )          |           | $          | (19,264 | ) |   |   | 70 | % |   |

 

Operatingexpenses increased by $19,264 from $27,434 to $46,698 for the year endedDecember 31, 2006. This increasewas primarily due to higher costs related to stock based compensationexpense of $7,499, approximately $7,500 of strategic consulting costs relatedto our effort to realign the Company, increased other compensation expenses, anasset impairment charge related to an owned facility of $4,454 and severance costs recorded related to our OEprogram.

**YEARS ENDEDDECEMBER 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 theyear ended December 31, 2005 increased 10% compared with the year ended December 31,2004. Our international revenues were $164,010, or approximately 38% of totalrevenues, and increased by 4% over 2004, due to our recent acquisitions andorganic growth which was offset by a reduction in ongoing services and licensefees in Asia. Total revenues in the United States were $273,230, orapproximately 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.

*Sales Solutions*

Sales solutions revenuesaccounted for approximately 71% of total revenues during the year ended December 31,2005, and increased 9% compared with the year ended December 31, 2004.Sales solutions services in the United States increased by 14%, which included$4,000 associated with the early termination of a contract with Odyssey, aswell as an increase in integrated support center, asset management, andimplementation services which were primarily driven by non-recurring projects,and the addition of sales support services from our Buzzeo acquisition. Ourinternational sales solutions decreased by 4%, with sales solutions decreasingby 1% and license fees decreasing by 28% versus the year ended 

36

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

December 31, 2004. International sales solutionsdecreased due to the loss of a European customer in 2005 and license feesdecreased due to a sale of third-party licenses to an international customer in2004, which did not occur in 2005.

*Marketing Solutions*

Marketing solutionsrevenues accounted for approximately 25% of total revenues during the yearended December 31, 2005, and increased by approximately 12% compared withthe year ended December 31, 2004. The increase was mostly due to growth inour international marketing solutions business, which increased by 18% over theprior year, including 22% growth in our 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 solutions increased 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.

*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 | % |   |
| Restructuring 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 | % |   |

 

***OPERATING COSTS(including shipping).***   Operating costs increased 15% for the yearended December 31, 2005, compared with the year ended December 31,2004. This increase was due to additional costs from our 2005 acquisitions anda full year of costs related to our 2004 acquisitions, higher pass-throughpostage costs and our overall increase in revenues. These increases werepartially offset by savings related to our offshore initiatives. As apercentage of revenues, operating costs increased to 54% for the year ended December 31,2005 versus 52% for the year ended December 31, 2004 due to our revenuegrowth in lower margin solutions.

***SELLING, GENERALAND ADMINISTRATIVE (SG&A).***   SG&Aexpenses increased 10% for the year ended December 31, 2005, compared withthe year ended December 31, 2004. SG&A costs increased due toadditional costs from our 2005 acquisitions and a full year of costs related toour 2004 acquisitions, severance, as well as increased expenses as a result ofour efforts to recruit and hire executive officers. As a percentage ofrevenues, SG&A remained flat at 33% for the years ended December 31,2005 and 2004. We have and expect to continue to invest in sales and marketinginitiatives in order to drive our top-line growth while continuing to focus oncost containment measures in other elements of SG&A.

37

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

***RESEARCH AND DEVELOPMENT (R&D).***   R&Dexpenses decreased 35% for the year ended December 31, 2005, compared withthe year ended December 31, 2004. As a percentage of revenues, R&Dexpenses decreased to 1% for the year ended December 31, 2005, from 2% forthe year ended December 31, 2004. This decrease was due to decreasedR&D spending and a higher capitalization rate during the year ended December 31,2005. We capitalized more costs in the year ended December 31, 2004 thanin 2005 due to the development for the release of our next generation SFEsolution. Gross R&D spending (R&D expenses plus additions tocapitalized software development costs) decreased 28% from $15,202 for the yearended December 31, 2004, to $10,958 for the year ended December 31,2005. Gross R&D decreased due to the deployment of resources torevenue-generating projects and the savings related to our offshore initiative.

***RESTRUCTURING AND OTHER CHARGES.***   During theyear ended December 31, 2005, we recorded $7,649 of facility-relatedcharges and a severance charge of $1,723. The facility charges consist of$6,619 related to vacating a New Jersey facility and for additional facilitiesvacated in previous periods due to changes in current market conditions, aswell as $1,030 related to the write-off of leasehold improvements associatedwith the exit of our New Jersey facility. The $1,723 severance charge relatesto the elimination of certain senior and mid-level management positions. Nosuch charges were incurred in 2004.

***AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS.***   Amortizationof acquired intangible assets decreased 9% compared with the year ended December 31,2004. The decrease primarily reflects certain intangibles assets acquired inthe Software Associates International (“SAI”) and Synavant acquisitions, whichwere fully amortized as of June 30, 2005, partially offset by additionalamortization of intangibles related to the Schwarzeck, Buzzeo and Optasacquisitions.

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

 

***INTEREST (INCOME), NET.***   Interestincome increased 877% for the year ended December 31, 2005 due to higheraverage cash balances, higher interest rates and investing of surplus cash in2005 offset by interest expense related to capital leases.

***OTHER EXPENSE, NET.***   Other expensedecreased 93% for the year ended December 31, 2005 due to decreasedforeign exchange losses on intercompany loans.

***PROVISION FOR INCOME TAXES.***   Our estimatedeffective income tax rate increased to 41.7% for the year ended December 31,2005 compared to 37.9% in prior year. The increase in our effective tax rate isprimarily attributable to international subsidiaries generating taxable lossesfor which we were unable to take a benefit, the distribution of profits amongcountries with higher tax rates, and a reduction in the utilization of federaland state credits for which we had previously generated. These increases werepartially offset as we determined it was more likely than not that some of ourstate and foreign deferred tax assets, which had previously been reserved for,would be utilized prior to expiration and accordingly, we released a valuationallowance reserve associated with these deferred tax assets.

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

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 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, 2005 or 2004.

**QUARTERLY RESULTS OF OPERATIONS**

Thefollowing table sets forth certain unaudited quarterly consolidated statementof operations data for 2006 and 2005. 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,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2006**                                                           | ** ** | **2006**           | ** ** | **2006**          | ** ** | **2006**          | ** ** | **2005**          | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2005**          | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                             | ** ** | **(unaudited)**                                                    | ** ** |
| Revenues:                                              |       | $                                                                  | 111,474    |               | $          | 102,973           |       | $                 | 106,381    |              | $          | 103,129            |       | $                 | 108,367    |              | $          | 114,360 |   | $ | 115,066 |   | $ | 99,447 |   |
| Operating  costs & expenses:                  |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |
| Operating costs                                        |       | 60,725                                                             |       | 56,172             |       | 59,398            |       | 59,751            |       | 62,498            |       | 61,252             |       | 58,829            |       | 53,651            |       |
| Selling, general and administrative                    |       | 45,150                                                             |       | 39,816             |       | 42,095            |       | 39,796            |       | 41,673            |       | 33,395             |       | 34,075            |       | 35,788            |       |
| Research and development                               |       | 2,745                                                              |       | 1,607              |       | 1,494             |       | 1,734             |       | 1,479             |       | 1,343              |       | 1,454             |       | 1,818             |       |
| Restructuring and other charges                        |       | 14,506                                                             |       | 12,660             |       | 2,578             |       | —            |       | —            |       | —             |       | —            |       | 9,372             |       |
| Amortization of acquired intangible assets             |       | 1,010                                                              |       | 1,074              |       | 1,035             |       | 1,022             |       | 1,091             |       | 960                |       | 1,130             |       | 1,250             |       |
| Total operating costs & expenses              |       | 124,136                                                            |       | 111,329            |       | 106,600           |       | 102,303           |       | 106,741           |       | 96,950             |       | 95,488            |       | 101,879           |       |
| Operating (loss) income:                               |       | (12,662                                                            | )          | (8,356             | )          | (219              | )          | 826               |       | 1,626             |       | 17,410             |       | 19,578            |       | (2,432            | )          |
| Interest (income) expense, net                         |       | (708                                                               | )          | (644               | )          | (504              | )          | (454              | )          | (310              | )          | (150               | )          | (24               | )          | (141              | )          |
| Other expense (income), net                            |       | 237                                                                |       | 31                 |       | 71                |       | (25               | )          | (12               | )          | 35                 |       | 20                |       | (23               | )          |
| (Loss) income before income tax expense (benefit)      |       | (12,191                                                            | )          | (7,743             | )          | 214               |       | 1,305             |       | 1,948             |       | 17,525             |       | 19,582            |       | (2,268            | )          |
| Income tax expense (benefit)                           |       | 8,505                                                              |       | (1,698             | )          | 927               |       | 596               |       | 1,927             |       | 6,747              |       | 7,539             |       | (873              | )          |
| Net (loss) income                                      |       | $                                                                  | (20,696    | )                  | $          | (6,045            | )          | $                 | (713       | )                 | $          | 709                |       | $                 | 21         |              | $          | 10,778 |   | $ | 12,043 |   | $ | (1,395 | ) |
| Net (loss) income per  share:                          |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |
| Basic                                                  |       | $                                                                  | (0.47      | )                  | $          | (0.14             | )          | $                 | (0.02      | )                 | $          | 0.02               |       | $                 | —     |              | $          | 0.25 |   | $ | 0.28 |   | $ | (0.03 | ) |
| Diluted                                                |       | $                                                                  | (0.47      | )                  | $          | (0.14             | )          | $                 | (0.02      | )                 | $          | 0.02               |       | $                 | —     |              | $          | 0.24 |   | $ | 0.28 |   | $ | (0.03 | ) |
| Shares used in computing  net (loss) income per share: |       |                                                               |       |               |       |              |       |              |       |              |       |               |       |              |       |              |       |
| Basic                                                  |       | 43,852                                                             |       | 43,713             |       | 43,650            |       | 43,548            |       | 43,427            |       | 42,944             |       | 42,592            |       | 42,470            |       |
| Diluted                                                |       | 43,852                                                             |       | 43,713             |       | 43,650            |       | 44,279            |       | 45,175            |       | 44,331             |       | 43,630            |       | 42,470            |       |

 

**Liquidity andCapital Resources**

At December 31, 2006, working capital was $69,153compared to $82,247 as of December 31, 2005. Cash and cash equivalentswere $78,355 as of December 31, 2006, compared to $66,145 as of December 31,2005. This increase in cash and cash equivalents was primarily attributable tocash generated by operating activities offset by payments made in connectionwith our acquisition of Opus, purchases of property and equipment, severancepayments and other OE related payments.

We finance our business primarily through cashgenerated by operations. Net cash provided by operating activities was $36,528and $44,126 for the years ended December 31, 2006 and 2005, respectively. Thedecrease was primarily related to the net loss adjusted for changes in assetsand liabilities, net of effects from our 2006 acquisition of Opus. During thethree months ended December 31, 2006, our accounts receivable days salesoutstanding decreased to 58, from 67 days for the three months ended December 31,2005, due to the 2006 collections of 2005 advanced billings and improvements in

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

our collection processduring the year ended December 31, 2006. Our restructuring and other chargesresulted in a net loss for the year ended December 31, 2006, however, ithad a minimal effect on our operating cash flows. Future payments of theseaccruals will have a negative impact on future operating cash flows. Ouroperating cash flows were affected by payments of income taxes, purchaseaccounting restructuring charges, accounts payable and accrued expenses.

Cash used in investing activities was $27,652 for theyear ended December 31, 2006, which was primarily attributable topurchases of property and equipment, our acquisition of Opus and additions tocapitalized software development costs. Cash used in investing activities was$51,196 for the year ended December 31, 2005, which included payments forthe Optas, Buzzeo and Uto Brain acquisitions as well as additions tocapitalized software development costs and purchases of property and equipment.Additions of property and equipment in 2005 primarily related to our facilitiesin New Jersey, as well as investing in our help desk automation process.

As anticipated, purchases of property and equipmentdecreased for the year ended December 31, 2006, versus the comparableprior year period. During 2007, excluding expenditures related to the OEinitiative, we expect capital spending in the range of approximately $17,000 to$20,000 primarily to support the Company’s infrastructure and productivityinitiatives. We expect capital spending related to the OE initiative in therange of $4,000 to $7,000 in 2007. We expect this spending to be offset by thefuture sales of owned facilities. We review our capital expenditure programperiodically and adjust it as required to meet current needs.

Cash provided by financing activities was $2,305 forthe year ended December 31, 2006, compared to $10,062 for the year ended December 31,2005. The decrease of $7,757 was primarily attributed to lower proceeds fromthe issuance of common stock.

We believe that availablefunds, anticipated cash flows from operations and the availability of ourrevolving line of credit will satisfy our currently projected working capitaland currently expected capital expenditure requirements, exclusive of cashrequired for possible future acquisitions of businesses, products andtechnologies, during the next twelve to eighteen months. There can be noassurance, however, that our business will continue to generate cash flow atcurrent levels or that anticipated operational improvements will be achieved.Our ability to generate future cash flows depends on our future performance andfinancial results, which, to a certain extent, are subject to generalconditions in or affecting the pharmaceutical and life sciences industry and togeneral economic, political, financial, competitive and regulatory factorsbeyond our control.

**ContractualObligations and Commitments**

On December 14, 2006, we amended ourline-of-credit agreement with JPMorgan Chase, dated as of July 25, 2005,(the “Agreement”) in the amount of $30,000, redefining the maturity date from June 30,2008 to June 30, 2007 and redefining earnings before interest and taxesfor purposes of the Agreement. The Agreement is available to finance workingcapital 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 restrictsour ability to create or assume liens, dispose of assets, consolidate or merge,extend credit, incur other indebtedness or pay cash dividends. As of December 31,2006, we were in compliance with all covenants and did not have any amountsoutstanding under the Agreement.

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

Our principal commitmentsat December 31, 2006 consisted primarily of obligations under operatingand capital leases as well as future minimum guarantees to certain vendors.Future minimum payments on these obligations are as follows:

| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Capital leases                   |       | $                                         | 1,424      |   | $ | 1,352 |   | $ | 72 |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Minimum  guarantees              |       | 4,000                                     |       | 2,000 |   | 2,000 |   | — |   | — |   | — |   |   | — |   |   |
| Operating  leases(1)             |       | 82,194                                    |       | 17,128 |   | 13,229 |   | 11,514 |   | 10,018 |   | 7,417 |   |   | 22,888 |   |   |
| Total                            |       | $                                         | 87,618     |   | $ | 20,480 |   | $ | 15,301 |   | $ | 11,514 |   | $ | 10,018 |   | $ | 7,417 |   |   | $ | 22,888 |   |   |

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(1)          Operating lease amountsdisclosed above include $7,677 of future operating lease costs, excludingestimated future sublease income, accrued for in the purchase accountingrestructuring and accrued restructuring and other charges accruals.

As of December 31, 2006, 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 31,2006, $700 has been paid, with $300 of the commitment remaining. The agreementhas a termination date of December 11, 2010, subject to extension with theconsent of a majority in interest of the limited partners. During the fourthquarter of 2006, we determined that our investment in the venture capital fundwas impaired, therefore we recorded an impairment charge of $171 to write theventure capital fund down to its fair market value of $529, which is included inother assets in the accompanying consolidated balance sheet.

**Recent AccountingPronouncements**

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value andamends SFAS 115 to, among other things, require certain disclosures for amountsfor which the fair value option is applied. Additionally, this Statementprovides that an entity may reclassify held-to-maturity and available-for-salesecurities to the trading account when the fair value option is elected forsuch securities, without calling into question the intent to hold othersecurities to maturity in the future. This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects toapply the provisions of SFAS 157. We have not completed our assessment of SFAS159 and the impact, if any, on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value under U.S. GAAP and expands fair valuemeasurement disclosures. SFAS 157 does not require new fair value measurementsand is effective for financial statements issued for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. Weare currently evaluating the impact of adopting SFAS 157 on our consolidatedfinancial statements.

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

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements When Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”), which provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. SAB 108 is effectivefor fiscal years ending after November 15, 2006. The adoption of SAB 108did not have a material effect on our consolidated financial statements.

In June 2006, theFASB issued  Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”(“FIN 48). This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The Interpretation is effective for fiscal years beginning after December 15,2006. Our analysis of the impact of this Interpretation is not yet complete.

**FACTORS THAT MAY AFFECTFUTURE RESULTS**

Set forth in this Form 10-Kare certain risks and uncertainties that could cause our actual results todiffer materially 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.

**POTENTIAL SALE OFTHE COMPANY**

*For additional information with respect to thepotential Merger with Cegedim, see “Item 1. Business.”*

***A significant delayin consummating or a failure to consummate the proposed Merger with Cegedimcould have a material adverse effect on our stock price and operating results.***

If the proposed Mergerwith Cegedim is materially delayed or not completed, it could have a materialadverse effect on our stock price. In addition, any significant delay inconsummating the Merger could have a material adverse effect on our operatingresults, adversely affect our vendor and customer relationships and wouldlikely lead to significant diversion of management and employee attention andpotential employee attrition.

***Expenses related tothe proposed Merger with Cegedim are significant and will adversely affect ouroperating results in 2007.***

We have incurred andexpect to incur significant expenses in connection with the proposed Mergerwith Cegedim, including legal and investment banker fees. We expect these coststo have an adverse effect on our operating results in 2007.

***Restrictions on theconduct of our business prior to the completion of the proposed Merger withCegedim may have a negative impact on our operating results.***

We have agreed to certainrestrictions on the conduct of our business in connection with the proposedMerger with Cegedim, that require us to conduct our business only in theordinary course, subject to specific limitations. These restrictions may delayor prevent us from undertaking business opportunities that may arise pendingcompletion of the transaction.

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

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

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

**OUR LARGEST CUSTOMER PLANS A TRANSITION OF ASIGNIFICANT PORTION OF THEIR SERVICES**

The Company’s largest customer has extended itscontract with Dendrite for sales force effectiveness services inthe United States through 2007, at current pricing, but has advisedthe Company that as part of the previously described RFP process initiated bythe customer, it plans to transition such services, with the exception ofsupport, maintenance and enhancements of Dendrite’s sales forceeffectiveness software, in-house and to one or more third-partyvendors. The customer currently intends to continue withsupport, maintenance and enhancements of Dendrite’s sales forceeffectiveness software up to 2011 under a separate contract, which theCompany expects to generate revenue of at least approximately $7 million in2008, plus work orders and special projects.

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

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

Any failure to achievesuch additional cost savings in the amounts and at the times we are targetingand to adequately increase revenues from investments in new and complementarybusiness lines and future new business can be expected to have a materialadverse effect on our revenues, profitability and financial condition.

**OUR BUSINESS IS HEAVILY DEPENDENT ON THEPHARMACEUTICAL 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:

·  the significant and continuingconsolidation of the pharmaceutical industry which may reduce the numberof our existing and potential customers;

·  regulatory changes that permitthe over-the-counter sale of formerly prescription-only drugs;

·  U.S. and internationalgovernmental regulations mandating price controls;

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

·  increasing Food and DrugAdministration activism; and

·  competitive pressure on thepharmaceutical industry resulting from the continuing shift to delivery ofhealthcare and pharmaceuticals through managed care organizations.

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 NOT SUCCESSFULLY IMPLEMENT OURPRODUCTS**

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 of our products and services, our business,operating results and financial condition could be materially and adverselyaffected.

**WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

As part of ourbusiness strategy, we have acquired, and in the future may acquire,businesses that offer complementary products, services or technologies. Theseacquisitions are accompanied by substantial risks, including:

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

·  the effect of the acquisitionson our financial and strategic position;

·  our inability to successfullyintegrate the acquired business;

·  the failure of an acquiredbusiness to further our strategies;

·  our inability to achieveexpected cost and business synergies;

·  the significant strain on ouroperating systems;

·  the diversion of our management’sattention from other business concerns;

·  the impairment or loss ofrelationships with customers of the acquired business;

·  the negative impact of thecombination of different corporate cultures;

·  the loss of key employees of theacquired company;

·  regulatory or compliance issuesexisting in the acquired organization;

·  undetected problems within theacquired organization; and

·  the integration and maintenanceof uniform, company-wide standards, procedures and policies.

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.

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

**BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERSMAY CAUSE A DECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES**

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

**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 and services,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 revenuesmay decline below expected levels and could adversely affect our resultsof operations.

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE**

Our total revenueand operating results may vary significantly from quarter-to-quarter. Themain factors that could cause these fluctuations are:

·  the discretionary nature of ourcustomers’ purchase and budget cycles;

·  potential delays in recognizingrevenue from license and other transactions;

·  seasonal variations in operatingresults, including the increased seasonality associated with our internationalgrowth; and

·  variations in the fiscal orquarterly 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 andanticipated competitive conditions. In particular, we frequently add staff inadvance of new business to permit adequate time for training. If the newbusiness is subsequently delayed, canceled or not awarded, we will haveincurred expenses without the associated revenues. We also may increasesales and marketing expenses if competitive pressures become greater thanoriginally anticipated. Since only a small portion of our expenses variesdirectly with our actual revenues, our operating results and profitability arelikely to be adversely and disproportionately affected if our revenues fallbelow our targeted goals or expectations.

As a result of these andother factors, revenues for any quarter may be subject to fluctuation. Youshould not rely on our period-to-period comparisons of our results ofoperations as indications of future 

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

performance.Our future quarterly results may from time to time not meet theexpectations of market analysts or investors, which could have a materiallyadverse effect on the price of our common stock.

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

We are subject to income,payroll and indirect taxes in the United States and in multiple foreignjurisdictions. We exercise judgment in determining our worldwide provision forthese taxes, and in the ordinary course of our business there may betransactions and calculations where the ultimate tax determination isuncertain.

We are regularly subjectedto routine audits by various tax authorities. Any such audit may result ina determination that our tax obligations exceed the amounts provided for by usin our financial statements. Such additional tax obligations and any relatedpenalties could adversely impact our business, operating results and financialcondition for current, future and prior periods.

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

**FUTURERESTRUCTURING MAY ADVERSELY IMPACT OUR OPERATIONS**

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

Furthermore, delays orincreased costs in implementing any restructuring plans or cost savingsinitiatives or opportunities could delay or adversely affect the anticipatedfinancial benefits of any such restructuring.

Additionally, any restructuringor cost savings initiatives may be disruptive to our employees who aretransitioning to different roles or responsibilities in restructured areas ofour business. Such disruptions may cumulatively adversely impact futureoperating results.

There also can be noassurance that such savings initiatives or opportunities will be achieved inthe time periods or amounts planned.

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

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

·  use available technologies anddata sources to develop new products and services and to enhance our currentproducts and services;

·  introduce new solutions thatkeep pace with developments in our target markets; and

·  address the changing andincreasingly sophisticated needs of our customers.

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

We cannot assure you that we will successfully developand market new products or product enhancements that respond to technological advancesin the marketplace, or that we will do so in a timely fashion. We also cannotassure you that our products will adequately and competitively address theneeds of the changing marketplace.

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

To remain competitive, wealso may have to spend more of our resources on product research anddevelopment than we have in the past. As a result, our results of operationscould be materially and adversely affected.

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

Our software products aretechnologically complex and may contain previously undetected errors orfailures or errors when products are first introduced or when updated versionsare released. We cannot assure you that, despite our testing, our new productswill be free from significant errors. Software errors could cause delays in thecommercial release of products until the errors have been corrected. Softwareerrors may cause us to be in breach of our agreements with customers,which could result in termination of the agreements and monetary damages.Software errors may cause damage to our reputation and cause us to commitsignificant resources to their correction. Errors that result in termination ofagreements, monetary damages, losses or delays could have a material adverseeffect on our business, operating results or financial condition.

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

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

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

We believe ourability to compete depends on many factors, some of which are beyond ourcontrol, 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

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

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

Any one of these factorscan lead to price reductions and/or decreased demand and we cannot assure youthat we will be able to continue to compete successfully or that competitionwill not have a material adverse effect on our business, operating results orfinancial condition.

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

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

Commercial use of 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 of operationscould be materially and adversely affected.

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

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

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

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

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

·       the absence or significant lack oflegal protection for intellectual property rights in certain of thesecountries; and

·       difficultiesin managing an organization spread on a global basis.

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

Since we have 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, 

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

we havenot hedged these translation risks because we generally reinvest our cash flowsfrom international operations. However, we continue to evaluate foreigncurrency translation risk exposure. As we continue to grow our internationalbusiness, the risks associated with foreign currency translation will alsogrow.

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

The efficient operation ofour business, and ultimately our operating performance, depends on theuninterrupted use of our critical business and information technology systems.Many of these systems require the use of specialized hardware and otherequipment that is not readily available in the marketplace. Although wemaintain these systems at more than one location, a natural disaster, a fire orother catastrophic event at any of these locations could result in thedestruction of these systems. In such an event, the replacement of thesesystems and restoration of archived data and normal operation of our businesscould take several days to several weeks, or more. During the interveningperiod when our critical business and information technology systems are fullyor partially inoperable, our ability to conduct normal business operationscould be significantly and adversely impacted and as a result our business,operating results and financial condition could be adversely affected.

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

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

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

In addition, during theperiod prior to shareholder consideration of our proposed merger with CegedimS.A. we may be at increased risk for the loss of key executives due to theuncertainty associated with such proposed transaction.

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

Certain of our solutionsinvolve the storage and transmission of customers’ proprietary information, andsecurity breaches could expose us to a risk of loss of this information,litigation and potential liability. Because techniques used to obtainunauthorized access or to sabotage systems change frequently and generally arenot recognized until launched against a target, we may be unable to anticipatethese techniques or to implement adequate preventative measures. If an actualor perceived breach of our 

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

securityoccurs, the market perception of the effectiveness of our security measurescould be harmed and we could lose existing customers and our ability to obtainnew customers.

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

We rely on a combinationof trade secret, copyright and trademark laws, non-disclosure, license andother contractual agreements and technical measures to protect our proprietaryrights. We cannot assure you that the steps we take will preventmisappropriation of these rights. Further, protective actions we have taken orwill take in the future may not prevent competitors from developingproducts with features similar to our products. In addition, effectivecopyright and trade secret protection may be unavailable or limited incertain foreign countries. In response to customer requests, we have also onoccasion entered into agreements which require us to place our source code in escrow to secure ourservice and maintenance obligations.

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

As a company offeringtechnology solutions, there can be no assurance that third parties alsooffering technology solutions will not assert infringement claims against us inthe future. While we believe that our solutions do not infringe uponproprietary rights of other parties, there can be no assurance that the Companywould not be found to infringe on the proprietary rights of others. Any suchfinding could have a material adverse impact on our operating results orfinancial condition.

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

Someof our software is provided by third-party vendors. If our third-party vendorsare unable to successfully respond to technological change or if ourrelationships with certain third-party vendors are terminated, wemay experience difficulty in replacing the functionality provided by thethird-party software currently offered with our products. Although we believethere are other sources for all of our third-party software, any significantinterruption in the supply of these products could adversely impact our sales unlessand until we can secure another source. The absence of or any significant delayin the replacement of functionality provided by third-party software in ourproducts could materially and adversely affect our sales.

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

We are involved in anumber of strategic relationships with third parties and are frequentlypursuing others. Should these relationships, or any of them, prove to be morecostly than anticipated or fail to meet revenue expectations or otheranticipated synergies, we cannot guarantee that such events will not have amaterial impact upon our business, operating results or financial condition.

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

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

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

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

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

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

Through our interactivemarketing business, 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 ofservices. If any such legislation is enacted, it could have a material and adverseeffect on our business, operating results and financial condition.

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

We expect tosublease all or a portion of certain of our facilities and sell our facility inPiscataway, New Jersey. An inability to successfully dispose of or sublet, asapplicable, any of these facilities or to obtain favorable pricing or subleaseterms could negatively impact our earnings.

**UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BEREQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS ANDCOULD HAVE A MATERIAL IMPACT ON OUR 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 interpretationsmay require us to adjust or restate financial results previously reported.A required restatement could have a material impact upon past financial resultsor current comparison to previous results.

**WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECTTHE WORLD ECONOMY**

World events such asterrorist attacks, the current military action in the Middle East andelsewhere, and hostilities in the Middle East, Asia and other geographicalareas, have andmay in the future weaken 

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

the U.S. and world economies. Any resultantweaknesses in these economies may adversely affect our business,financial condition or results of operations or the businesses of ourcustomers.

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

We continue to be involvedin the process of evaluating our internal control over financial reporting inorder to allow management to report on, and our registered independent publicaccounting firm to attest to, our internal controls, as required by Section 404of the Sarbanes-Oxley Act. This is a continuing process and we cannot becertain as to the timing of completion of our future reviews, evaluation,testing and remediation actions or the impact of the same on our operations orthe results of the required testing and required attestation report by us andalso by our registered independent public accounting firm. If at any time weare unable to implement the requirements of Section 404 in a timely manneror with adequate compliance, we may be subject to sanctions orinvestigation by regulatory authorities, such as the Securities and ExchangeCommission or NASDAQ. Any such actions could have a material adverse effect onour financial results and the price of our common stock.

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

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

In connection with theMerger Agreement, on March 1, 2007, Dendrite and Registrar and TransferCompany, as Rights Agent, entered into Amendment No. 1 (the “RightsAmendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “RightsAgreement”). The effect of the Rights Amendment is to permit the execution ofthe Merger Agreement and the performance and consummation of the transactionscontemplated by the Merger Agreement, including specifically the mergertransaction with Cegedim, without triggering the separation or exercise of theRights (as defined in the Rights Agreement) or any adverse event under theRights Agreement.

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

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;

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

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

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

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

·       futureacquisitions.

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

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

**ITEM 7A. Quantitative andQualitative Disclosures About Market Risk**

**Foreign CurrencyRisk**

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 2006 reportedoperating profit by approximately $895. 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 tothe average maturity and conservative nature of our investment portfolio, asudden change in interest rates would not have a material effect on the valueof the portfolio. Management estimates that if the average yield of the Company’sinvestments decreased by 100 basis points, our interest income for the yearended December 31, 2006 would have decreased approximately $773. Thisestimate assumes that the decrease occurred on the first day of 2006 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. FinancialStatements and Supplementary Data**

The Company’s 2006Consolidated Financial Statements, together with the report thereon of Deloitte &Touche LLP the Company’s Independent Registered Public Accounting Firm, areincluded in Item 15. The supplementary financial information required by thisItem 8 is included in the “Management’s Discussion and Analysis of FinancialConditions and Results of Operations” in Item 7.

**ITEM 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

None.

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**ITEM 9A. Controls andProcedures**

The Company’s Chief Executive Officer and ChiefFinancial Officer, with the assistance of other members of the Company’smanagement, have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as 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 31,2006, 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. Disclosurescontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports we file under the Exchange Act is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding disclosures.

During the thirdquarter of 2006, we undertook certain improvements to remediate a materialweakness related to our internal controls at Optas, Inc. which wasidentified in the second quarter of 2006 over revenue recognition in theappropriate accounting period. The remedial actions were as follows:

1.      TheCompany appointed new operational and financial management over the businessunit.

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

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

During the fourth quarterof 2006, we took the actions necessary to fully remediate this materialweakness in our internal control over financial reporting. There were no otherchanges in our internal control over financial reporting during the quarterended December 31, 2006 that have materially affected the Company’sinternal control over financial reporting.

**Management’s Reporton Internal Control Over Financial Reporting**

Management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, have evaluated our disclosurecontrols and procedures (as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934) as of the period covered by this report. Basedon their evaluation as of December 31, 2006, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosures controls andprocedures were not effective as of December 31, 2006 because of amaterial weakness in internal control over financial reporting related to our accountingfor tax contingencies and reserves.

Subsequent to the filing of the Form 10-Qfor the quarterly period ended September 30, 2006, management identified amaterial weakness in the design and operating effectiveness of the Company’sinternal control over financial reporting related to its tax contingencies andreserves. The material weakness related to the lack of effective controls totimely identify and properly account for tax items at certain non U.Ssubsidiaries. The material weakness resulted in immaterial misstatements toprior period financial statements and created a more than remote likelihoodthat a material misstatement of the annual or interim financial statementswould not be prevented or detected on a timely basis.

Based on the material weakness discussed above,management has determined that the Company did not maintain effective internalcontrol over financial reporting as of December 31, 2006, based oncriteria for effective internal control over financial reporting described in “InternalControl-Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission.

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**ITEM 9A.Controls and Procedures (Continued)**

During the year ended December 31, 2006, weacquired substantially all the assets of Opus Heath LLC. Management hasexcluded this acquisition from our assessment of the effectiveness of ourinternal control over financial reporting. As of and for the year ended December 31,2006, this acquisition contributed approximately 2% to total assets and lessthan 1% of 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 OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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”) did not maintain effective internal control overfinancial reporting as of December 31, 2006, because of the effect of thematerial weakness identified in management’s assessment based on criteriaestablished in *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 Opus Health LLC., which was acquired in September 2006,and whose financial statements reflect total assets and revenues constituting 2and less than 1 percent, respectively, of the related consolidated financialstatement amounts as of and for the year ended December 31, 2006.Accordingly, our audit did not include the internal control over financialreporting at Opus Health LLC. The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility 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).Those standards 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 similar functions,and effected by the company’s board of directors, management, and otherpersonnel 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.

A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financial 

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statements will not beprevented or detected. The following material weakness has been identified andincluded in management’s assessment: management identified a material weaknessin the design and operating effectiveness of its internal controls over thefinancial reporting related to the lack of effective controls to timelyidentify and properly account for tax contingencies and reserves. This materialweakness was considered in determining the nature, timing, and extent of audittests applied in our audit of the accompanying consolidated balance sheets of the Company as of December 31,2006 and 2005, the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2006, and the financial statement schedule listed in the Index at Item 15 foreach of the three years in the period ended December 31, 2006 and thisreport does not affect our report on such financial statements and financialstatement schedule.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 31, 2006, is fairly stated, in all material respects, based onthe criteria established in *Internal Control—IntegratedFramework* issued by the COSO. Also in our opinion, because of theeffect of the material weakness described above on the achievement of theobjectives of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of December 31, 2006, 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 financial statements and financial statementschedule as of and for the year ended December 31, 2006 of the Company andour report dated March 30, 2007 expressed an unqualified opinion andincluded an explanatory paragraph regarding the Company’s adoption of Statementof Financial Accounting Standards No. 123 (revised 2004) *Share Based Payment*.

*/s/ DELOITTE & TOUCHE LLP*

Parsippany, New JerseyMarch 30, 2007

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**ITEM 9B. OtherInformation**

None.

**PART III**

***Certain information required by PART IIIis omitted from this Report. The Company plans to file an amendment to thisReport on a Form 10-K/A (the “Form 10-K/A”) containing such informationnot later than 120 days after the end of the fiscal year covered by thisReport in accordance with General Instruction G(3) of Form 10-K.***

**ITEM 10. Directors,Executive Officers and Corporate Governance**

The information required by this Item will be setforth in Item 10 of the Form 10-K/A which will be filed withthe Securities and Exchange Commission.

We have adopted a Code ofEthics and Standards of Business Conduct (“Code of Ethics”) within the meaningof Item 406(b) of SEC Regulation S-K that applies to our principalexecutive officer, principal financial officer and principal accountingofficer, as well as to all other officers, employees and directors of theCompany. Our Code of Ethics is publicly available on our website atwww.dendrite.com. If we make substantive amendments to our Code of Ethics orgrant any waiver in favor of a director or executive officer, we will publiclydisclose the nature of such amendment or waiver on our website and to theextent required by NASDAQ and SEC rules in a current report on Form 8-K.

**ITEM 11. ExecutiveCompensation**

The information requiredby this Item will be set forth in Item 11 of the Form 10-K/Awhich will be filed with the Securities and Exchange Commission.

**ITEM 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

The information requiredby this Item will be set forth in Item 12 of the Form 10-K/Awhich will be filed with the Securities and Exchange Commission.

**ITEM 13. CertainRelationships and Related Transactions**

The information requiredby this Item will be set forth in Item 13 of the Form 10-K/Awhich will be filed with the Securities and Exchange Commission.

**ITEM 14. PrincipalAccountant Fees and Services**

The information requiredby this Item will be set forth in Item 14 of the Form 10-K/Awhich will be filed with the Securities and Exchange Commission.

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**PART IV**

**ITEM 15. Exhibits,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—Valuationand Qualifying Accounts

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

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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 30, 2007 |   | * *                     |   | 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 30,  2007 |
| John  E. Bailye       |     | (Principal  Executive Officer)                    |       |                 |
| JEFFREY J. BAIRSTOW   |     | Executive Vice President and Chief Financial      |       | March 30,  2007 |
| Jeffrey  J. Bairstow  |     | Officer  (Principal Financial Officer)       |       |                 |
| RONALD W. PEARCE      |     | Vice President and Corporate Controller           |       | March 30,  2007 |
| Ronald  W. Pearce     |     | (Principal  Accounting Officer)                   |       |                 |
| JOHN A. FAZIO         |     | Director                                          |       | March 30,  2007 |
| John  A. Fazio        |     |                                              |       |                 |
| BERNARD M. GOLDSMITH  |     | Director                                          |       | March 30,  2007 |
| Bernard  M. Goldsmith |     |                                              |       |                 |
| EDWARD J. KFOURY      |     | Director                                          |       | March 30,  2007 |
| Edward  J. Kfoury     |     |                                              |       |                 |
| PETER W. LADELL       |     | Director                                          |       | March 30,  2007 |
| Peter  W. Ladell      |     |                                              |       |                 |
| CLAY LIFFLANDER       |     | Director                                          |       | March 30,  2007 |
| Clay  Lifflander      |     |                                              |       |                 |
| PAUL A. MARGOLIS      |     | Director                                          |       | March 30,  2007 |
| Paul  A. Margolis     |     |                                              |       |                 |
| JOHN H. MARTINSON     |     | Director                                          |       | March 30,  2007 |
| John H. Martinson     |     |                                              |       |                 |
| PETER G. TOMBROS      |     | Director                                          |       | March 30, 2007  |
| Peter G. Tombros      |     |                                              |       |                 |
| PATRICK J. ZENNER     |     | Director                                          |       | March 30, 2007  |
| Patrick J. Zenner     |     |                                              |       |                 |

 

60

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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, 2006 and 2005,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2006. Our audits also included the financial statement schedule listed in theIndex at Item 15. These financial statements and the financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards 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 consolidated financial statementspresent fairly, in all material respects, the financial position of DendriteInternational, Inc. and subsidiaries as of December 31, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2006 in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

As discussed in Note 1 to the consolidated financialstatements, the Company changed its method of accounting for stock-basedcompensation to conform to Statement of Financial Accounting Standards No. 123(revised 2004) *Share Based Payment*.

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, 2006, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”), and our report dated March 30, 2007expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting because of a material weakness.

*/s/ DELOITTE & TOUCHE LLP*

Parsippany, New JerseyMarch 30, 2007

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

| ** **                                                                                                                                                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                                                                                                   |       |
| Current Assets:                                                                                                                                                                                              |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                    |       |                  | $          | 78,355                |       |   |   | $ | 66,145 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,744 and $1,000, respectively                                                                                                              |       |                  | 71,154     |                  |       |   | 80,167 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                                    |       |                  | 10,733     |                  |       |   | 8,544 |   |   |
| Asset held for sale                                                                                                                                                                                          |       |                  | 8,545      |                  |       |   | — |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                  | 7,860      |                  |       |   | 8,848 |   |   |
| Total current assets                                                                                                                                                                                         |       |                  | 176,647    |                  |       |   | 163,704 |   |   |
| Property and equipment, net of accumulated  depreciation of $75,287 and $61,019, respectively                                                                                                                |       |                  | 43,483     |                  |       |   | 52,592 |   |   |
| Other assets                                                                                                                                                                                                 |       |                  | 9,476      |                  |       |   | 8,856 |   |   |
| Goodwill                                                                                                                                                                                                     |       |                  | 95,624     |                  |       |   | 90,440 |   |   |
| Intangible assets, net                                                                                                                                                                                       |       |                  | 24,154     |                  |       |   | 25,083 |   |   |
| Capitalized software development costs, net                                                                                                                                                                  |       |                  | 9,952      |                  |       |   | 10,341 |   |   |
| Deferred income taxes                                                                                                                                                                                        |       |                  | 15,335     |                  |       |   | 11,991 |   |   |
|                                                                                                                                                                                                         |       |                  | $          | 374,671               |       |   |   | $ | 363,007 |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                |       |
| Current Liabilities:                                                                                                                                                                                         |       |                  |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                             |       |                  | $          | 9,442                 |       |   |   | $ | 7,677 |   |   |
| Income taxes payable                                                                                                                                                                                         |       |                  | 16,363     |                  |       |   | 9,518 |   |   |
| Capital lease obligations                                                                                                                                                                                    |       |                  | 1,318      |                  |       |   | 1,383 |   |   |
| Accrued compensation and benefits                                                                                                                                                                            |       |                  | 19,052     |                  |       |   | 17,950 |   |   |
| Accrued professional and consulting fees                                                                                                                                                                     |       |                  | 8,260      |                  |       |   | 5,690 |   |   |
| Accrued restructuring and other charges                                                                                                                                                                      |       |                  | 11,853     |                  |       |   | 1,490 |   |   |
| Other accrued expenses                                                                                                                                                                                       |       |                  | 24,025     |                  |       |   | 17,468 |   |   |
| Purchase accounting restructuring accrual                                                                                                                                                                    |       |                  | 351        |                  |       |   | 1,601 |   |   |
| Deferred revenues                                                                                                                                                                                            |       |                  | 17,032     |                  |       |   | 18,680 |   |   |
| Total current liabilities                                                                                                                                                                                    |       |                  | 107,696    |                  |       |   | 81,457 |   |   |
| Capital lease obligations                                                                                                                                                                                    |       |                  | 71         |                  |       |   | 1,648 |   |   |
| Purchase accounting restructuring accrual                                                                                                                                                                    |       |                  | —     |                  |       |   | 3,009 |   |   |
| Accrued restructuring and other charges                                                                                                                                                                      |       |                  | 5,690      |                  |       |   | 4,143 |   |   |
| Deferred rent                                                                                                                                                                                                |       |                  | 7,306      |                  |       |   | 5,740 |   |   |
| Other non-current liabilities                                                                                                                                                                                |       |                  | 5,848      |                  |       |   | 5,595 |   |   |
| Stockholders’ Equity:                                                                                                                                                                                   |       |                  |       |                  |       |   |   |   |   |
| Preferred stock, no par value, 15,000,000 shares  authorized, none issued                                                                                                                                    |       |                  | —     |                  |       |   | — |   |   |
| Common stock, no par value, 150,000,000 shares  authorized, 46,832,347 and 46,353,252 shares issued; 43,971,044 and  43,491,949 shares outstanding at December 31, 2006 and December 31, 2005,  respectively |       |                  | 156,611    |                  |       |   | 149,947 |   |   |
| Retained earnings                                                                                                                                                                                            |       |                  | 122,203    |                  |       |   | 148,948 |   |   |
| Deferred compensation                                                                                                                                                                                        |       |                  | —     |                  |       |   | (4,419 | ) |   |
| Accumulated other comprehensive income (loss)                                                                                                                                                                |       |                  | 983        |                  |       |   | (1,324 | ) |   |
| Less treasury stock, at cost                                                                                                                                                                                 |       |                  | (31,737    | )                     |       |   | (31,737 | ) |   |
| Total stockholders’ equity                                                                                                                                                                              |       |                  | 248,060    |                  |       |   | 261,415 |   |   |
|                                                                                                                                                                                                         |       |                  | $          | 374,671               |       |   |   | $ | 363,007 |   |   |

 

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 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                   |       | $                                          | 423,958    |   | $ | 437,240 |   | $ | 399,197 |   |
| Operating Costs  & Expenses:           |       |                                       |       |   |   |   |   |
| Operating costs                            |       | 236,046                                    |       | 236,230 |   | 205,896 |   |
| Selling, general and administrative        |       | 166,857                                    |       | 144,931 |   | 132,016 |   |
| Research and development                   |       | 7,580                                      |       | 6,094 |   | 9,316 |   |
| Restructuring and other charges            |       | 29,744                                     |       | 9,372 |   | — |   |
| Amortization of acquired intangible assets |       | 4,140                                      |       | 4,431 |   | 4,851 |   |
| Other operating (income)                   |       | —                                     |       | — |   | (707 | ) |
| Total operating costs & expenses       |       | 444,367                                    |       | 401,058 |   | 351,372 |   |
| Operating (loss) income                    |       | (20,409                                    | )          | 36,182 |   | 47,825 |   |
| Interest income, net                       |       | (2,310                                     | )          | (625 | ) | (64 | ) |
| Other expense, net                         |       | 315                                        |       | 20 |   | 277 |   |
| (Loss) income before income tax expense    |       | (18,414                                    | )          | 36,787 |   | 47,612 |   |
| Income tax expense                         |       | 8,331                                      |       | 15,340 |   | 18,047 |   |
| Net (loss) income                          |       | $                                          | (26,745    | ) | $ | 21,447 |   | $ | 29,565 |   |
| Net (loss) income  per share:              |       |                                       |       |   |   |   |   |
| Basic                                      |       | $                                          | (0.61      | ) | $ | 0.50 |   | $ | 0.71 |   |
| Diluted                                    |       | $                                          | (0.61      | ) | $ | 0.48 |   | $ | 0.69 |   |

 

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

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

| ** **                                                 | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Comprehensive  Income** | ** ** | **Treasur** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|-----------------------------------------------|------------|---------------------------|------------|-------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **Shares**            | ** ** | **Dollars**  | ** ** | **Earnings** | ** ** | **Compensation**                              | ** ** | **(Loss)**                | ** ** | **(Loss)**  | ** ** | **Stock**                     | ** ** | **Equity** | ** ** |
| BALANCE,  JANUARY 1, 2004                             |       |                  | 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 |   |   |
| Issuance of common  stock                                  |       |                  | 479        |         |       | 3,169        |       | —                                        |       |                      | —     |        |       |                          | —     |   |   |   |   |   |   | — |   |   | 3,169 |   |   |
| Changes in  deferred compensation                          |       |                  | —     |         |       | (4,419       | )          | —                                        |       |                      | 4,419      |        |       |                          | —     |   |   |   |   |   |   | — |   |   | — |   |   |
| Stock-based  compensation expense                          |       |                  | —     |         |       | 7,499        |       | —                                        |       |                      | —     |        |       |                          | —     |   |   |   |   |   |   | — |   |   | 7,499 |   |   |
| Stock option tax  benefits                                 |       |                  | —     |         |       | 415          |       | —                                        |       |                      | —     |        |       |                          | —     |   |   |   |   |   |   | — |   |   | 415 |   |   |
| Comprehensive income:                                      |       |                  |       |         |       |         |       |                                          |       |                      |       |        |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                   |       |                  | —     |         |       | —       |       | (26,745                                       | )          |                      | —     |        |       |                          | —     |   |   |   | $ | (26,745 | ) |   | — |   |   | (26,745 | ) |   |
| Currency  translation adjustment                           |       |                  | —     |         |       | —       |       | —                                        |       |                      | —     |        |       |                          | 2,307      |   |   |   | 2,307 |   |   | — |   |   | 2,307 |   |   |
| Comprehensive  income                                      |       |                  | —     |         |       | —       |       | —                                        |       |                      | —     |        |       |                          | —     |   |   |   | $ | (24,438 | ) |   | — |   |   | — |   |   |
| BALANCE,  DECEMBER 31, 2006                           |       |                  | 43,971     |         |       | $            | 156,611    |                                          | $          | 122,203                   |       |        | $          | —                        |       |   |   | $ | 983 |   |   |   |   |   |   | $ | (31,737 | ) |   | $ | 248,060 |   |   |

 

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

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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)**

| ** **                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                     |       |     |       |     |       |     |       |
| Net (loss) income                                                                         |       | $   | (26,745)   |     | $     | 21,447   |       | $  | 29,565 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                             |       | 26,305   |       | 24,161   |       | 21,589   |       |
| Asset impairment                                                                          |       | 4,454    |       | 1,030    |       | —   |       |
| Stock-based compensation                                                                  |       | 7,499    |       | 440      |       | 268      |       |
| Deferred income taxes                                                                     |       | (1,917   | )          | (5,260   | )          | 2,699    |       |
| Excess tax benefits from stock-based awards                                               |       | (444     | )          | —   |       | —   |       |
| Changes in assets  and liabilities, net of effects from acquisitions:                     |       |     |       |     |       |     |       |
| Decrease (increase) in accounts receivable                                                |       | 11,483   |       | (6,785   | )          | 7,472    |       |
| (Increase) decrease in prepaid expenses and other  current assets                         |       | (1,783   | )          | (1,321   | )          | 585      |       |
| (Increase) decrease in other assets                                                       |       | (465     | )          | (1,239   | )          | 622      |       |
| Increase (decrease) in accounts payable and accrued  expenses                             |       | 5,507    |       | 3,467    |       | (6,389   | )          |
| Increase in accrued restructuring and other charges                                       |       | 11,848   |       | 5,641    |       | —   |       |
| Decrease in purchase accounting restructuring  accrual                                    |       | (3,996   | )          | (2,523   | )          | (6,612   | )          |
| (Decrease) increase in income taxes payable                                               |       | 6,627    |       | 131      |       | 8,518    |       |
| (Decrease) increase in deferred revenue                                                   |       | (2,062   | )          | 5,272    |       | (4,076   | )          |
| Increase (decrease) in other non-current liabilities                                      |       | 217      |       | (335     | )          | 1,451    |       |
| Net cash provided by operating activities                                                 |       | 36,528   |       | 44,126   |       | 55,692   |       |
| Investing activities:                                                                     |       |     |       |     |       |     |       |
| Proceeds from sale-leaseback of furniture and  equipment                                  |       | —   |       | —   |       | 2,162    |       |
| Acquisitions, net of cash acquired                                                        |       | (5,731   | )          | (21,813  | )          | (8,375   | )          |
| Purchases of property and equipment                                                       |       | (17,342  | )          | (24,519  | )          | (19,881  | )          |
| Additions to capitalized software development costs                                       |       | (4,579   | )          | (4,864   | )          | (5,886   | )          |
| Other, net                                                                                |       | —   |       | —   |       | (100     | )          |
| Net cash used in investing activities                                                     |       | (27,652  | )          | (51,196  | )          | (32,080  | )          |
| Financing activities:                                                                     |       |     |       |     |       |     |       |
| Repayments of long-term debt                                                              |       | —   |       | —   |       | (3,344   | )          |
| Repayments of acquired loan                                                               |       | —   |       | —   |       | (624     | )          |
| Payments on capital lease obligations                                                     |       | (1,642   | )          | (1,744   | )          | (1,147   | )          |
| Excess tax benefits from stock-based awards                                               |       | 444      |       | —   |       | —   |       |
| Issuance of common stock                                                                  |       | 3,503    |       | 11,806   |       | 13,363   |       |
| Net cash provided by financing activities                                                 |       | 2,305    |       | 10,062   |       | 8,248    |       |
| Effect of foreign  exchange rate changes on cash                                          |       | 1,029    |       | (867     | )          | 1,755    |       |
| Net increase in  cash and cash equivalents                                                |       | 12,210   |       | 2,125    |       | 33,615   |       |
| Cash and cash  equivalents, beginning of year                                             |       | 66,145   |       | 64,020   |       | 30,405   |       |
| Cash and cash  equivalents, end of period                                                 |       | $        | 78,355     |     | $     | 66,145   |       | $ | 64,020 |   |

 

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**.**

**SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Principles ofConsolidation**

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

**Reclassifications**

Certain prior periodbalances have been reclassified to conform to the current period presentationrelated to the classification of purchased capitalized software, which is nowincluded in intangible assets, net.

**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 translations adjustments areincluded in “Accumulated other comprehensive income (loss)” 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 offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. On an ongoing basis, the Company evaluates its estimateswhich are based on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances. Actual results coulddiffer from those estimates. The Company believes its critical accountingpolicies to be revenue recognition, acquisitions and related accruals,impairments, income taxes, capitalized software development costs and stockbased compensation.

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

**Revenue Recognition**

The Company provides a comprehensive range of SalesForce Effectiveness (“SFE”) software products, technology support services andvarious marketing, compliance and clinical services to the pharmaceuticalindustry. New customers that purchase software products from the Companygenerally enter into a license contract and a services contract with theCompany. The Company’s software licenses typically provide for a perpetualright to use the Company’s software and are contracted for within a licenseagreement that provides for license fees billable upon contract execution. Whenpurchasing new software, customers often also purchase implementation services,which are essential to the functionality of the Company’s software. Theseservices are contracted for in a services contract, which generally providesfor payment terms over the course of the implementation project. This contractalso covers the specific ongoing support services that may have been purchasedby the customer, which typically begin after the completion of the softwareimplementation. Certain customers who have not purchased software from theCompany will also enter into services contracts, and the Company will provide servicesthat may include technology solutions services and/or marketing, compliance orclinical 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 (“EITF”) 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 the deliveredelement, delivery or performance of the undelivered element is consideredprobable 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 

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

the configured software toend users. Revenues for these services are recognized as delivered, providedall other criteria for revenue recognition have been met. In addition to theinitial training and hardware services, the Company also performs variousongoing services such as integrated support center, data center, assetmanagement, production services and operations management. These ongoingservices are selected and negotiated individually by customers based upon theirbusiness needs and are generally recognized as delivered over the respectivecontractual term. Revenues related to the Company’s distribution and marketingservices are generally recognized as items are shipped or service obligationshave been fulfilled. The Company has offered limited price protection underservices agreements. Any right to a future refund from such price protection isentirely within the Company’s control. It is estimated that the likelihood of afuture payout due to price protection is remote.

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 has historically utilizes distributors to resell certain of itssoftware products internationally, on a limited basis. Revenues related tosales to distributors are recognized as the licenses are sold through toend-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. The Companyestablishes VSOE of fair value for PCS using the maintenance renewal rate thatis present in each of its services contracts. The Company’s maintenance isoffered at a fee that is based upon a percentage of license fees. The PCSelement of the Company’s arrangements is accounted for under SOP 97-2.

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.

License revenues were less than 10% of total revenuesfor all years presented within the consolidated statements of operations.

**Accounting forRestructuring Activities**

Upon approval of arestructuring plan by management with the appropriate level of authority, theCompany records restructuring liabilities in compliance with Statement ofFinancial Accounting Standards (“SFAS”) 112, “Employers’ Accounting forPostemployment Benefits,” and SFAS 146 “Accounting for 

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

CostsAssociated with Exit or Disposal Activities,” resulting in the recognition ofemployee severance and related termination benefits for recurring arrangementswhen they become probable and estimable and on the accrual basis for one-timebenefit arrangements. The Company records other costs associated with exitactivities as they are incurred. Employee severance and termination benefitcosts reflect estimates based on agreements with relevant statutoryrequirements or plans adopted by us. These costs are not associated with nor dothey benefit continuing activities. Changing business conditions may affect theassumptions related to the timing and extent of facility closure activities. TheCompany reviews the status of restructuring activities on a quarterly basisand, if appropriate, record changes based on updated estimates.

**Shipping andHandling Fees**

Shipping and handling feesbilled to customers are recorded as revenue and shipping and handling costspaid to vendors are recorded as operating costs in accordance with EITF 00-01,“Accounting for Shipping and Handling Fees and Costs.”  Shipping and handling fees recorded asrevenues and operating costs for the year ended December 31, 2006, 2005and 2004 were $19,984, $18,963 and $17,361, respectively.

**Stock BasedCompensation**

On January 1, 2006, the Company adoptedSFAS 123(R) “Share Based Payment” (“SFAS 123(R)”) using the modifiedprospective application method, as permitted under SFAS 123(R), which requiresmeasurement of compensation cost of all stock-based awards at fair value on thedate of grant and recognition of compensation over the respective serviceperiods for awards expected to vest. Under this method, compensation cost in2006 includes the portion vesting in the period for (1) all stock-based awardsgranted prior to, but not vested as of, January 1, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS No. 123, and (2) all stock-based awards granted subsequent to January 1,2006, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123(R). Accordingly, prior periods amounts have not beenrestated. Under this method, the Company is required to record compensationexpense for all awards granted after the date of adoption and for the unvestedportion of previously granted awards that remain outstanding at the date ofadoption. The Company recognizes the cost of all employee stock awards on astraight-line basis over their respective vesting periods, net of estimated forfeitures.

Prior to the adoption of SFAS 123(R), the Companyapplied Accounting Principles Board Opinion No. 25 (“APB 25”) to accountfor its stock-based awards. Under APB 25, the Company generally only recordedstock-based compensation expense for restricted stock units, which amounted to$440 and $46 for the years ended December 31, 2005 and 2004. Under theprovisions of APB 25, the Company was not required to recognize compensationexpense for the cost of stock options issued under its equity compensation plansor of shares issued under its Employee Stock Purchase Plan (“ESPP”). With theadoption of SFAS 123(R), the Company recorded stock-based compensationexpense for the cost of stock options, restricted stock units and shares issuedunder the ESPP (collectively, “Employee Stock-Based Awards”). Stock-basedcompensation expense for the year ended December 31, 2006, was $7,499. TheCompany has not changed its valuation model used for estimating the fair valueof options granted after January 1, 2006, from the Black-Scholesoption-pricing model previously used for pro forma presentation purposes.

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

The following tabledetails the pro forma effect on net (loss) income and (loss) income per sharehad stock based-compensation expense for the Employee Stock-Based Awards beenrecorded for the years ended December 31, 2005 and 2004, based on the fairvalue method under SFAS 123:

| ** **                                                                                                                              | ** ** | **For the Year Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **December 31,**                 | ** ** |
| ** **                                                                                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                  |       | $                                     | 21,447     |   | $ | 29,565 |   |
| Add: Total stock-based  expense included in reported net income, net of related tax effects                                             |       | 257                                   |       | 26 |   |
| Deduct: Total  stock-based compensation expense determined under the fair value based method  for all awards, net of related taxeffects |       | (21,805                               | )          | (21,967 | ) |
| Pro forma net (loss)  income                                                                                                            |       | $                                     | (101       | ) | $ | 7,624 |   |
| Basic (loss) income per share:                                                                                                          |       |                                  |       |   |   |
| As reported                                                                                                                             |       | $                                     | 0.50       |   | $ | 0.71 |   |
| Pro forma                                                                                                                               |       | $                                     | (0.00      | ) | $ | 0.18 |   |
| Diluted (loss) income per share:                                                                                                        |       |                                  |       |   |   |
| As reported                                                                                                                             |       | $                                     | 0.48       |   | $ | 0.69 |   |
| Pro forma                                                                                                                               |       | $                                     | (0.00      | ) | $ | 0.18 |   |

 

For the year ended December 31, 2006, the adoptionof SFAS 123(R) resulted in incremental stock-based compensationexpense causing the loss before income tax expense to increase by $4,367, netloss to increase by $2,904 and basic and diluted loss per share to increase by$.07 per share. Stock-based compensation expense for the year ended December 31,2006, of $3,132 relating to restricted stock units would have been recognizedin 2006 regardless of the adoption of SFAS 123(R). In addition, inconnection with the adoption of SFAS 123(R), net cash provided byoperating activities decreased and net cash provided by financing activitiesincreased for the year ended December 31, 2006 by $444 related to taxbenefits from stock-based payments arrangements.

Thefair value for these options were estimated at the date of grant for allperiods presented using the Black-Scholes option pricing model with thefollowing assumptions:

| ** **                                        | ** ** | **For the Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected dividend  yield                          |       | 0.0                                                      | %          | 0.0 | % | 0.0 | % |
| Weighted-average  expected stock price volatility |       | 50.0                                                     | %          | 50.0 | % | 67.4 | % |
| Weighted-average  risk-free interest rate         |       | 4.8                                                      | %          | 4.1 | % | 3.2 | % |
| Expected life of the  option (years)              |       | 5.00                                                     |       | 5.25 |   | 5.25 |   |

 

The weighted-averageexpected stock price volatility was estimated based on historical volatilityfor a period equal to the stock option’s expected life, estimated on the dateof grant, and calculated on a quarterly basis. The weighted-average risk-freeinterest rate is based on the U. S. Treasury yield curve in effect at the timeof grant for the expected life of the option. The expected life (estimatedperiod of time outstanding) of stock options granted was estimated using thehistorical exercise experience.

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

**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) other upfrontbillings of fees that are recognized over time.

**Cash and CashEquivalents**

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

**Supplemental CashFlow Information**

For the years ended December 31, 2006, 2005 and2004, the Company paid interest of approximately $434, $462 and $420, respectively.For the years ended December 31, 2006, 2005 and 2004, the Company paidincome taxes of approximately $4,630, $13,331, and $8,864, respectively.

As of December 31, 2006 and 2005, the Company had$2,030 and $373 of property and equipment additions which had not yet beenpaid, respectively.

In 2006, the Company entered into a lease arrangementfor a facility in Georgia with a tenant improvement allowance of $2,100. As aresult, we have recorded additional leasehold improvements of $2,100 which willbe amortized over the life of the lease arrangement and deferred rent of $2,100which will reduce rent expense over the life of the lease arrangement.

In 2005, pursuant to the terms of its replacementoption program, 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 exercised multipliedby the exercise price.

In 2005, the Company accepted 2,707 shares of itscommon stock from an executive, in lieu of cash, for the exercise ofapproximately 3,000 stock options. The shares delivered were valued atapproximately $40 on the dates of exercise, which value was equal to theexercise price of the options exercised and applicable tax withholdings.

In 2004, the Company entered into new capital leasearrangements for computer hardware and other equipment of approximately $2,400expiring in November 2007.

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

Thefollowing table lists assets (other than cash) that were acquired andliabilities that were assumed in connection with the acquisitions in 2006, 2005and 2004 as discussed in Note 2:

| ** **                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| *Assets Acquired*                                                                         |       |     |       |     |       |     |       |
| Accounts receivable                                                                       |       | $        | 19         |     | $          | 4,351    |       | $ | 2,867 |   |
| Other current assets                                                                      |       | 4        |       | 378      |       | 1,901    |       |
| Property and equipment                                                                    |       | 37       |       | 451      |       | 736      |       |
| Other assets                                                                              |       | —   |       | 1,287    |       | 458      |       |
| Intangibles                                                                               |       | 3,329    |       | 8,900    |       | 5,444    |       |
| Goodwill                                                                                  |       | 4,021    |       | 11,164   |       | 10,112   |       |
| Total assets acquired                                                                     |       | 7,410    |       | 26,531   |       | 21,518   |       |
| *Liabilities Assumed*                                                                     |       |     |       |     |       |     |       |
| Restructuring reserve—current                                                        |       | —   |       | —   |       | (322     | )          |
| Deferred revenue                                                                          |       | —   |       | (618     | )          | (709     | )          |
| Other current liabilities                                                                 |       | (1,679   | )          | (2,102   | )          | (7,833   | )          |
| Restructuring reserve—long-term                                                      |       | —   |       | —   |       | —   |       |
| Other liabilities                                                                         |       | —   |       | (1,998   | )          | —   |       |
| Total liabilities assumed                                                                 |       | (1,679   | )          | (4,718   | )          | (8,864   | )          |
| Net assets  acquired, net of cash                                                         |       | 5,731    |       | 21,813   |       | 12,654   |       |
| Unpaid purchase price and professional fees incurred  in connection with the acquisitions |       | —   |       | —   |       | (962     | )          |
| Value of stock options issued                                                             |       | —   |       | —   |       | (3,317   | )          |
| Cash paid, net of cash  acquired                                                          |       | $        | 5,731      |     | $          | 21,813   |       | $ | 8,375 |   |

 

**Receivables andAllowance for Doubtful Accounts**

Receivables consist ofamounts billed and currently due to the Company from normal business activitiesand unbilled costs primarily related to revenues on long-term contracts thathave been recognized for accounting purposes, but not yet billed to customers.The Company maintains an allowance for estimated losses resulting from theinability of its customers to make required payments. The Company estimatesuncollectible amounts based upon historical bad debts, current customerreceivable balances, age of customer receivable balances, the customer’sfinancial condition and current economic trends.

**Impairment ofLong-Lived Assets**

The Company reviews itslong-lived assets, including property and equipment and intangible assetssubject to amortization for impairment whenever events or changes incircumstances indicate that the carrying amount of the assets may not be fullyrecoverable. To determine the recoverability of its long-lived assets, theCompany evaluates the estimated future undiscounted cash flows that aredirectly associated with and that are expected to arise as a direct result ofthe use and eventual disposition of the long-lived asset. If the estimatedfuture undiscounted cash flows demonstrate that recoverability is not probable,an impairment loss would be recognized. An impairment loss would be calculatedbased on the excess carrying amount of the long-lived asset over the long-livedasset’s fair value. As of December 31, 2006 and 2005, there was noevidence of impairment.

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

**Property andEquipment**

Property and equipment,including software developed for internal use, are stated at cost lessaccumulated depreciation and amortization. Depreciation and amortization arecalculated on a straight-line basis. Maintenance, repairs and minorreplacements that do not extend the life or functionality of the related assetsare charged to expense as incurred; renewals and betterments are capitalized.

**CapitalizedSoftware Development Costs**

Inaccordance with SFAS 86, “Accounting for the Costs of Computer Software to beSold, Leased or Otherwise Marketed,” the Company capitalizes certain costsrelated to the development of new software products or the enhancement ofexisting software products for sale or license. These costs are capitalizedfrom the point in time that technological feasibility has been established, asevidenced by a working model or a detailed working program design, to the pointin time that the product is available for general release to customers.Capitalized software costs are amortized on a product-by-product basis.Capitalized software amortization is the greater of the ratio of currentrevenues for a product to the total of current and anticipated future grossrevenues for that product or on a straight-line basis over the remainingestimated economic life of the product, including the current reporting period(not to exceed four years). Amortization of capitalized software begins with thegeneral release of a product to customers. Research and development costsincurred prior to establishing technological feasibility and costs incurredsubsequent to general product release to customers are charged to expense asincurred. The Company periodically evaluates whether events or circumstanceshave occurred that indicate that the remaining useful lives of the capitalizedsoftware development costs should be revised or that the remaining balance ofsuch assets may not be recoverable. As of December 31, 2006, managementbelieves that no revisions to the remaining useful lives or write-down ofcapitalized development costs are required. The amount of capitalized softwaredevelopment related to the development of new software products or theenhancement of existing software products from sale of licenses as of December 31,2006 and 2005 was as follows:

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Capitalized  software development costs      |       | $                     | 36,050     |   | $ | 31,471 |   |
| Less: Accumulated  amortization              |       | (26,098               | )          | (21,130 | ) |
| Capitalized software  development costs, net |       | $                     | 9,952      |   | $ | 10,341 |   |

 

Amortization of capitalized software development costsfor the years ended December 31, 2006, 2005 and 2004 was $4,968, $3,693and $2,842, respectively, and is included in operating costs in theaccompanying consolidated statements of operations.

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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 certain business acquisitions, the Company purchased softwarethat was determined to have reached technological feasibility. The amount ofpurchased capitalized software remaining as of December 31, 2006 and 2005was as follows:

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Capitalized  software development costs      |       | $                     | 2,441      |   | $ | 2,441 |   |
| Less: Accumulated  amortization              |       | (2,441                | )          | (1,996 | ) |
| Capitalized software  development costs, net |       | $                     | —     |   | $ | 445 |   |

 

Amortization expense ofpurchased capitalized software for the years ended December 31, 2006, 2005and 2004 was $445, $611 and $610, respectively, and is included in amortizationof acquired intangible assets in the accompanying consolidated statements ofoperations.

**Impairment ofGoodwill and Intangible Assets**

The Company assesses the recoverability of thecarrying value of its goodwill and other intangible assets with indefiniteuseful lives annually or whenever events or changes in circumstances indicatethat the carrying amount of the asset may not be fully recoverable.Recoverability of goodwill is measured at the reporting unit level based on atwo-step approach. First, the carrying amount of the reporting unit is comparedto the fair value as estimated by the future net discounted cash flows expectedto be generated by the reporting unit. To the extent that the carrying value ofthe reporting unit exceeds the fair value of the reporting unit, a second stepis performed, wherein the reporting unit’s assets and liabilities are fairvalued. To the extent that the reporting unit’s carrying value of goodwillexceeds its implied fair value of goodwill, impairment exists and must berecognized. The implied fair value of goodwill is calculated as the fair valueof the reporting unit in excess of the fair value of all non-goodwill assetsand liabilities allocated to the reporting unit. The estimate of fair value maybe determined as the amount at which the asset could be bought or sold in acurrent transaction between willing parties. If this information is notavailable, fair value is determined based on the best information available inthe circumstances. This frequently involves the use of a valuation techniqueincluding the present value of expected future cash flows, discounted at a ratecommensurate with the risk involved, or other acceptable valuation techniques.

Recoverability of other intangible assets withindefinite useful lives is measured by a comparison of the carrying amount ofthe intangible assets to the fair value of the respective intangible assets.Any excess of the carrying value of the intangible assets over the fair valueof the intangible assets is recognized as an impairment loss. The estimate offair value is determined similar to that for goodwill outlined above.

The Company assesses the recoverability of intangibleassets with finite lives in the same manner as for long-lived assets. See “Impairmentof Long-Lived Assets”.

The Company conducts its annual impairment testing ofgoodwill and indefinite—lived assets as of October 1 each year. Based onthe impairment tests performed, there was no impairment of goodwill orindefinite—lived assets in 2006, 2005 or 2004; however, there can be noassurance that future goodwill or indefinite—lived assets impairment tests willnot 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.

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

**Guarantees**

The Company providescertain indemnification provisions within its software licensing agreements, toprotect its customers from any liabilities or damages resulting from a claim ofmisappropriation or infringement by third parties relating to its software.These provisions continue in perpetuity, along with the Company’s softwarelicensing agreements. The Company has never incurred a liability relating toone of these indemnification provisions in the past and management believesthat the likelihood of any future payout relating to these provisions isremote. Therefore, the Company has not recorded a liability during any periodfor these indemnification provisions.

**Deferred Rent**

The Company has leases forits facilities, which include escalation clauses and concessions as well astenant improvement allowances. In accordance with accounting principlesgenerally accepted in the United States of America, the Company recognizesrental expense, including tenant improvement allowances, on a straight-linebasis over the life of the leases, irrespective of the timing of payments to orfrom the lessor.

**Asset RetirementObligations**

The Company accrues forasset retirement obligations over the period in which the obligations areincurred. These costs consist primarily of retro-fit costs related to leaseholdimprovements required at lease termination and are accrued at the estimatedfair value. When the related liability is initially recorded, the Companycapitalizes the cost by increasing the carrying amount of the relatedlong-lived asset. Over time, the liability is accreted to its settlement valueand the capitalized cost is depreciated over the useful life of the relatedasset. Upon settlement of the liability, the Company recognizes a gain or lossfor any difference between the settlement amount and the liability recorded. Asof December 31, 2006 and 2005, the Company has approximately $607 and $514accrued for asset retirement obligations, respectively.

**Income Taxes**

The Company accounts for income taxes in accordancewith SFAS 109, “Accounting for Income Taxes.” (“SFAS 109”) UnderSFAS 109, deferred tax assets and liabilities reflect the differencesbetween the financial reporting and tax basis of assets and liabilities and aremeasured using the enacted tax rates that are expected to be in effect when thedifferences reverse. In addition, in accordance with SFAS 109, a valuationallowance is required to be recognized if it is not believed to be “more likelythan not” that a deferred tax asset will be realized.

At December 31, 2006and 2005, there were approximately $17,410 and $21,383, respectively, ofundistributed earnings of non-U.S. subsidiaries that have not been taxed in theUnited States and are considered to be permanently reinvested indefinitely. If suchearnings were remitted to the Company, the applicable United States federalincome and foreign withholding taxes may be wholly or partially offset byforeign tax credits.

**Concentration ofCredit Risk**

Financial instruments thatpotentially subject the Company to concentration of credit risk consistprincipally of cash and trade accounts receivable. The Company invests itsexcess cash with large banks 

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

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, 2006,approximately 8% and 11% of our receivable balance was due from our two largestcustomers, respectively. As of December 31, 2005, approximately 15% and10% of our receivables balance was due from our two largest customers, respectively.The Company monitors its customers’ financial condition and does not requirecollateral from its customers.

**Advertising Costs**

Advertising costs areexpensed as incurred. Advertising expense was $3,567, $2,643 and $2,547 for theyears ended December 31, 2006, 2005 and 2004, respectively.

**Net (Loss) IncomePer Share**

TheCompany calculates net (loss) 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,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic net (loss)  income per share computation:   |       |                  |       |   |   |   |   |
| Net (loss) income                                 |       | $                     | (26,745    | ) | $ | 21,447 |   | $ | 29,565 |   |
| Weighted-average common shares outstanding        |       | 43,692                |       | 42,861 |   | 41,503 |   |
| Basic net (loss)  income per share                |       | $                     | (0.61      | ) | $ | 0.50 |   | $ | 0.71 |   |
| Diluted net  (loss) income per share computation: |       |                  |       |   |   |   |   |
| Net (loss) income                                 |       | $                     | (26,745    | ) | $ | 21,447 |   | $ | 29,565 |   |
| Diluted common shares outstanding:                |       |                  |       |   |   |   |   |
| Weighted-average common shares outstanding        |       | 43,692                |       | 42,861 |   | 41,503 |   |
| Impact of dilutive stock options                  |       | —                |       | 1,362 |   | 1,572 |   |
| Diluted common shares outstanding                 |       | 43,692                |       | 44,223 |   | 43,075 |   |
| Diluted net (loss)  income per share              |       | $                     | (0.61      | ) | $ | 0.48 |   | $ | 0.69 |   |

 

For the year ended December 31,2006, 374,000 stock options that could potentially dilute net (loss) income pershare in the future are not included in the calculation of diluted net (loss)income per share as they would have been antidilutive. The difference betweenbasic and diluted shares for the years ended December 31, 2005 and 2004 isprimarily due to the assumed exercise of stock options included in the dilutedearnings per share computation.

**Recent AccountingPronouncements**

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose tomeasure many financial 

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

instruments and certainother items at fair value and amends SFAS 115 to, among other things, requirecertain disclosures for amounts for which the fair value option is applied.Additionally, this Statement provides that an entity may reclassifyheld-to-maturity and available-for-sale securities to the trading account whenthe fair value option is elected for such securities, without calling intoquestion the intent to hold other securities to maturity in the future. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007,provided the entity also elects to apply the provisions of SFAS 157. TheCompany has not completed its assessment of SFAS 159 and the impact, if any, onthe Company’s consolidated financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements When Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”), which provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. SAB 108 is effectivefor fiscal years ending after November 15, 2006. The adoption of SAB 108did not have a material impact on the Company’s consolidated financialstatements.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value under U.S. GAAP and expands fair valuemeasurement disclosures. SFAS 157 does not require new fair value measurementsand is effective for financial statements issued for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. TheCompany is currently evaluating the impact of adopting SFAS 157 on theconsolidated financial statements.

In June 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109” (“FIN 48”). ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The Interpretation is effectivefor fiscal years beginning after December 15, 2006. The Company’s analysisof the impact of this Interpretation is not yet complete.

**2.**                 ACQUISITIONS

***Opus***

On September 1, 2006, the Company completed theacquisition of substantially all the assets of Opus Health LLC (“Opus”). Basedin Long Island, New York, Opus provided direct-to-patient persistence solutions.Opus’ results of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition. Opus revenues are presentedwithin the marketing solutions segment.

The aggregate purchase price of Opus was $7,378,including $379 of legal and professional fees.  In accordance with the purchase agreement,$2,000 of the purchase price was held in escrow as of December 31, 2006. The$2,000 held in escrow together with any additional amounts to be added toescrow, less amounts claimed against escrow, if any, is payable upon certainmilestones relating to the representations, warranties and in connection with acertain patent application acquired as part of the 

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

acquisition. In addition,there is $3,000 of contingent consideration based on Opus obtaining certainfinancial measures over the next three years and will be paid if earned. The$3,000 of contingent consideration will be accounted for as compensationexpense if earned. There is an additional $1,000 of contingent considerationbased on the successful outcome of a certain patent application acquired aspart of the acquisition. The $1,000 of additional contingent considerationwould be accounted for as additional purchase price, if earned. As of December 31,2006, nothing had been earned or accrued for the contingent consideration. Thevaluation of certain intangible assets was finalized in the fourth quarter of2006. The assets and liabilities acquired in connection with the Opusacquisition and pro forma results of operations are not deemed material to theaccompanying consolidated financial statements.

The allocation of purchaseprice, including the net assets acquired of approximately $28, to intangibleassets and goodwill acquired in connection with the Opus acquisition is asfollows:

| ** **                                      | ** ** | **Weighted-Average**      | ** ** | ** **                   | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Estimated Useful** | ** ** | **Acquired Intangible** | ** ** |
| ** **                                      | ** ** | **Life (Years)**     | ** ** | **Asset Value**         | ** ** |
| Intangible Assets  Subject to Amortization:     |       |                      |       |                         |       |   |   |   |   |
| Acquired technology                             |       |                      | 5.3        |                         |       |   | $ | 1,930 |   |   |
| Customer relationship assets                    |       |                      | 7          |                         |       |   | 1,089 |   |   |
| Trademarks                                      |       |                      | 10         |                         |       |   | 310 |   |   |
| Total Intangible Assets Subject to Amortization |       |                      |       |                         |       |   | 3,329 |   |   |
| Intangible Asset  Not Subject to Amortization:  |       |                      |       |                         |       |   |   |   |   |
| Goodwill                                        |       |                      | N/A        |                         |       |   | 4,021 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 7,350 |   |   |

 

The goodwill andintangible assets recorded for financial statement purposes are deductible fortax purposes.

***Optas***

On September 12, 2005, the Company 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 accompanyingconsolidated financial statements since the date of acquisition. Optas revenuesare presented within the marketing solutions segment.

The aggregate purchase price for Optas wasapproximately $13,188, including $349 of legal and professional fees.  In accordance with the purchase agreement,approximately $1,200 of the purchase price was held in escrow as of December31, 2006. Approximately $1,200, representing the balance of escrow, lessamounts claimed against escrow, is scheduled to be released from escrow inaccordance with the purchase agreement in April 2007. The valuation of certainintangibles assets was finalized in the second quarter of 2006. The assetsacquired and liabilities assumed in connection with the Optas acquisition andpro forma results of operations are not deemed material to the consolidatedfinancial statements.

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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 $736, 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 assets                    |       |                      | 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        |                         |       |   | 8,302 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 12,452 |   |   |

 

The goodwill and intangibleassets recorded for financial statement purposes are not deductible for taxpurposes.

***Buzzeo***

On January 4, 2005, the Company completed theacquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provided compliance,auditing, consulting and reconciliation outsourcing services to thepharmaceutical and life sciences industry. This acquisition further expandedour sample and compliance management solution offerings.  Buzzeo’s results of operations have been includedin the accompanying consolidated financial statements since the date ofacquisition. Buzzeo revenues are characterized as compliance solutions withinthe emerging solutions segment.

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

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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 $3,606, 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 assets                    |       |                      | 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        |                         |       |   | 2,403 |   |   |
| Total Intangible  Assets                        |       |                      |       |                         |       |   | $ | 7,153 |   |   |

 

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

***Schwarzeck***

On July 20, 2004, theCompany completed the acquisition of Schwarzeck-Verlag GmbH(“Schwarzeck”). Schwarzeck was a provider of physician databases, directmarketing services and sample fulfillment services to pharmaceutical companiesin Germany. This acquisition accelerated the Company’s expansion in Europe andincreased its integrated marketing solutions and services to the Germanpharmaceutical industry. In connection with the acquisition, the Companyrestructured the combined operations by eliminating certain former Schwarzeckpositions. Schwarzeck’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.The Company has allocated the entire purchase price of approximately $800 topurchased database. The purchased database asset recorded for financialstatement purposes 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.

***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 fourthquarter of 2004. The 

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

assets acquired andliabilities assumed in connection with the MDM acquisition and pro formaresults of operations are not deemed material to the consolidated financialstatements.

Theallocation of purchase price, including the net assets acquired ofapproximately $370, to intangible assets acquired in connection with the MDMacquisition 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 pharmaceutical companieswith data, analytics, publishing and advisory services. The combining ofresources of Uto Brain with the existing resources of Dendrite createdcomprehensive information, software and services company dedicated to theJapanese pharmaceutical industry and further enhanced Dendrite’s ability toprovide solutions to enhance sales, marketing and clinical functions ofpharmaceutical companies in the Japanese market. Uto Brain’s results ofoperations have been included in the accompanying consolidated financialstatements since the date of 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 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.

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

The allocationof purchase price, including net liabilities acquired of approximately $1,100,to intangible assets acquired in connection with the Uto Brain acquisition isas follows:

| ** **                                      | ** ** | **Weighted Average  Estimated Useful  Life (Years)** | ** ** | **Acquired Intangible  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.

**3.**                 PURCHASEACCOUNTING RESTRUCTURING ACCRUAL

In December 2006, the Company amended thetermination date of the lease agreement of one of the remaining Synavantfacilities to December 31, 2006 and paid the landlord a single lump sumpayment of $4,500 in lieu of the remaining payment obligations under the leaseagreement. As a result, we applied a portion of the payment previously accruedfor to the purchase accounting and the restructuring and other charges accrualsin the amount of $2,651 and $310, respectively, and recorded an additional$1,539 restructuring charge related to the lease buyout.

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 facilitylease, ending in August 2007.

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 theoperations to the Company’s other facilities in New Jersey. The Companyaccrued, as part of the acquisition costs, the costs to terminate certainleases amounting to $3,252. The Company closed the facility during the firstquarter 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, 2006 and 2005 is summarized in the tables below:

| ** **              | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2005** | ** ** | **2006  Adjustments to  Goodwill** | ** ** | **2006  Payments** | ** ** | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2006** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Synavant                |       |                                                                                          |       |                                    |       |               |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Facility exit costs     |       |                                                                                          | $          | 4,289                                   |       |               |       | $                                                                                             | —     |   |   |   | $ | (3,938 | ) |   |   | $ | 351 |   |   |
| SAI                     |       |                                                                                          |       |                                    |       |               |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Lease termination costs |       |                                                                                          | 321        |                                    |       |               | (66        | )                                                                                             |       |   | (255 | ) |   |   | — |   |   |
| Total                   |       |                                                                                          | $          | 4,610                                   |       |               |       | $(66                                                                                          | )          |   |   | $ | (4,193 | ) |   |   | $ | 351 |   |   |
|                         |            |                                                                                               |            |                                         |            |                    |            |                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                        | ** ** | **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 |   |   |

 

 

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

**4.**                 PROPERTYAND EQUIPMENT

Propertyand equipment is as follows:

| ** **                                       | ** ** | **Estimated Useful Life**                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **(Years)**                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                                             |       | n/a                                                                           |       | $                     | 121        |   | $ | 2,338 |   |
| Building and  building improvements              |       | 40                                                                            |       | 841                   |       | 11,813 |   |
| Computer  hardware, software and other equipment |       | 2 - 10                                                              |       | 73,407                |       | 59,589 |   |
| Furniture and  fixtures                          |       | 3 - 5                                                               |       | 9,649                 |       | 8,584 |   |
| Leasehold  improvements                          |       | Shorter of estimated  useful life or lease term |       | 29,615                |       | 26,111 |   |
| Capital lease  furniture and equipment           |       | 2 - 10                                                              |       | 5,137                 |       | 5,176 |   |
|                                             |       |                                                                          |       | 118,770               |       | 113,611 |   |
| Less: Accumulated  depreciation and amortization |       |                                                                          |       | (75,287               | )          | (61,019 | ) |
|                                             |       |                                                                          |       | $                     | 43,483     |   | $ | 52,592 |   |

 

Depreciation expense, including amortization expenseof capital leases, for the years ended December 31, 2006, 2005 and 2004was $17,196, $16,037 and $13,791, respectively

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**5.**                 GOODWILLAND INTANGIBLE ASSETS

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

| ** **                                      | ** ** | **As of December 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                      | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**                                       | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Intangible Assets  Subject To Amortization:     |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchased capitalized software                  |       | $                                               | 2,441      |                                            |       | $ | (2,441 | ) |   | $ | — |   | $ | 2,441 |   |   | $ | (1,996 | ) |   | $ | 445 |   |
| Capitalized software development costs          |       | 36,050                                          |       |                                            | (26,098    | ) |   | 9,952 |   | 31,471 |   |   | (21,130 | ) |   | 10,341 |   |
| Customer relationship assets                    |       | 17,320                                          |       |                                            | (5,425     | ) |   | 11,895 |   | 16,397 |   |   | (3,696 | ) |   | 12,701 |   |
| Backlog                                         |       | —                                          |       |                                            | —     |   |   | — |   | 2,500 |   |   | (2,491 | ) |   | 9 |   |
| Non-compete covenants                           |       | —                                          |       |                                            | —     |   |   | — |   | 3,718 |   |   | (3,464 | ) |   | 254 |   |
| Purchased database                              |       | 5,185                                           |       |                                            | (3,186     | ) |   | 1,999 |   | 5,151 |   |   | (2,082 | ) |   | 3,069 |   |
| Acquired technology                             |       | 3,320                                           |       |                                            | (507       | ) |   | 2,813 |   | 1,390 |   |   | (84 | ) |   | 1,306 |   |
| Trademarks                                      |       | 808                                             |       |                                            | (182       | ) |   | 626 |   | 500 |   |   | (82 | ) |   | 418 |   |
| Other intangibles                               |       | 474                                             |       |                                            | (385       | ) |   | 89 |   | 474 |   |   | (325 | ) |   | 149 |   |
| Total                                           |       | 65,598                                          |       |                                            | (38,224    | ) |   | 27,374 |   | 64,042 |   |   | (35,350 | ) |   | 28,692 |   |
| Intangible Assets  Not Subject to Amortization: |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | 95,624                                          |       |                                            | —     |   |   | 95,624 |   | 90,440 |   |   | — |   |   | 90,440 |   |
| Trademarks                                      |       | 6,732                                           |       |                                            | —     |   |   | 6,732 |   | 6,732 |   |   | — |   |   | 6,732 |   |
| Total                                           |       | 102,356                                         |       |                                            | —     |   |   | 102,356 |   | 97,172 |   |   | — |   |   | 97,172 |   |
| Total Goodwill and  Intangible Assets           |       | $                                               | 167,954    |                                            |       | $ | (38,224 | ) |   | $ | 129,730 |   | $ | 161,214 |   |   | $ | (35,350 | ) |   | $ | 125,864 |   |

 

Thechanges in the carrying amount of intangible assets not subject to amortizationfor the years ended December 31, 2006 and 2005 are as follows:

| ** ** | ** ** | ** **                      | ** ** | **Acquisitions /** | ** ** | ** **      | ** ** | ** **                      | ** ** |
|------------|------------|---------------------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------|------------|
| ** ** | ** ** | ** **                      | ** ** | **Purchase**            | ** ** | **Currency**    | ** ** | ** **                      | ** ** |
| ** ** | ** ** | **Balance as of**     | ** ** | **Accounting**          | ** ** | **Translation** | ** ** | **Balance as of**     | ** ** |
| ** ** | ** ** | **December 31, 2005** | ** ** | **Adjustments**         | ** ** | **Adjustments** | ** ** | **December 31, 2006** | ** ** |
| Goodwill   |       |                            | $          | 90,440                  |       |            |       | $                               | 5,228      |   |   |   | $ | (44 | ) |   |   | $ | 95,624 |   |   |
| Trademarks |       |                            | 6,732      |                    |       |            | —     |                            |       |   | — |   |   |   | 6,732 |   |   |
| Total      |       |                            | $          | 97,172                  |       |            |       | $                               | 5,228      |   |   |   | $ | (44 | ) |   |   | $ | 102,356 |   |   |

 

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

 

| ** ** | ** ** | **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 |   |   |

 

Thechanges in the carrying amount of goodwill for the years ended December 31,2006 and 2005 for each business segment are as follows:

| ** **                               | ** ** | **Sales**     | ** ** | **Marketing** | ** ** | **Emerging**  | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|------------|------------|
| ** **                               | ** ** | **Solutions** | ** ** | **Solutions** | ** ** | **Solutions** | ** ** | **Total**  | ** ** |
| Balance as of  December 31, 2004         |       |          | $          | 51,900        |       |          |       | $          | 22,440     |   |   |   | $ | 6,623 |   |   | $ | 80,963 |   |
| Acquisition of Buzzeo                    |       |          | —     |          |       |          | —     |       |       |   | 2,548 |   |   | 2,548 |   |
| Acquisition of Optas                     |       |          | —     |          |       |          | 8,616      |       |       |   | — |   |   | 8,616 |   |
| Acquisition of Synavant—adjustments |       |          | (1,247     | )             |       |          | —     |       |       |   | — |   |   | (1,247 | ) |
| Exchange rate changes                    |       |          | —     |          |       |          | (440       | )          |       |   | — |   |   | (440 | ) |
| Balance as of  December 31, 2005         |       |          | 50,653     |          |       |          | 30,616     |       |       |   | 9,171 |   |   | 90,440 |   |
| Acquisition of Buzzeo—adjustments   |       |          | —     |          |       |          | —     |       |       |   | (145 | ) |   | (145 | ) |
| Acquisition of Optas—adjustments    |       |          | —     |          |       |          | (314       | )          |       |   | — |   |   | (314 | ) |
| Acquisition of Opus                      |       |          | —     |          |       |          | 4,021      |       |       |   | — |   |   | 4,021 |   |
| Acquisition of SAI—adjustment       |       |          | (109       | )             |       |          | —     |       |       |   | — |   |   | (109 | ) |
| Acquisition of Synavant—adjustments |       |          | 994        |          |       |          | 604        |       |       |   | 177 |   |   | 1,775 |   |
| Exchange rate changes                    |       |          | —     |          |       |          | (44        | )          |       |   | — |   |   | (44 | ) |
| Balance as of December  31, 2006         |       |          | $          | 51,538        |       |          |       | $          | 34,883     |   |   |   | $ | 9,203 |   |   | $ | 95,624 |   |

 

During the year ended December 31, 2006, theCompany increased goodwill by $4,021 as a result of the acquisition of Opus(see Note 2). The $1,207 of adjustments recorded during the year ended December 31,2006, relate to Synavant, Software Associates International (“SAI”), andBuzzeo, consist primarily of the resolution of uncertainties and the recordingof exposure related to pre-acquisition tax uncertainties.

During the year ended December 31, 2005, theCompany increased goodwill by $11,164 as a result of the acquisitions of Buzzeoand Optas (see Note 2). The $1,247 of adjustments recorded during the yearended December 31, 2005, related to Synavant, consist primarily of thereversals of certain pre-acquisition tax valuation allowances and resolution ofuncertainties.

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

Thefollowing table reconciles net intangible assets subject to amortization forthe period from December 31, 2005 to December 31, 2006:

| ** **                              | ** ** | **Net Intangibles**        | ** ** | **2006 Year-to-Date Activity** | ** ** | **Net Intangibles** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **as of**                  | ** ** | ** **                               | ** ** | ** **               | ** ** | **Translation** | ** ** | **as of** | ** ** |
| ** **                              | ** ** | **December 31, 2005** | ** ** | **Additions**                            | ** ** | **Amortization**         | ** ** | **and Other** | ** ** | **December 31, 2006** | ** ** |
| Purchased  capitalized software         |       |                            | $          | 445                                      |       |                     |       | $ | — |   |   |   | $ | (445 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Capitalized  software development costs |       |                            | 10,341     |                                     |       |                     | 4,579      |   |   |   | (4,968 | ) |   |   | — |   |   |   | 9,952 |   |   |
| Customer  relationship assets           |       |                            | 12,701     |                                     |       |                     | 1,089      |   |   |   | (1,729 | ) |   |   | (166 | ) |   |   | 11,895 |   |   |
| Backlog                                 |       |                            | 9          |                                     |       |                     | —     |   |   |   | (9 | ) |   |   | — |   |   |   | — |   |   |
| Non-compete  covenants                  |       |                            | 254        |                                     |       |                     | —     |   |   |   | (271 | ) |   |   | 17 |   |   |   | — |   |   |
| Purchased  database                     |       |                            | 3,069      |                                     |       |                     | —     |   |   |   | (1,104 | ) |   |   | 34 |   |   |   | 1,999 |   |   |
| Acquired  technology                    |       |                            | 1,306      |                                     |       |                     | 1,930      |   |   |   | (423 | ) |   |   | — |   |   |   | 2,813 |   |   |
| Trademarks                              |       |                            | 418        |                                     |       |                     | 310        |   |   |   | (100 | ) |   |   | (2 | ) |   |   | 626 |   |   |
| Other intangibles                       |       |                            | 149        |                                     |       |                     | —     |   |   |   | (60 | ) |   |   | — |   |   |   | 89 |   |   |
| Total                                   |       |                            | $          | 28,692                                   |       |                     |       | $ | 7,908 |   |   |   | $ | (9,109 | ) |   |   | $ | (117 | ) |   |   | $ | 27,374 |   |   |

 

Amortizationexpense related to intangible assets, including internally developedcapitalized software costs, for the years ended December 31, 2006, 2005and 2004 was $9,109, $8,124 and $7,798, respectively. Aggregate future annualamortization expense of intangible assets is estimated to be:

| Year Ending  December 31, |   |   |   |
|--------------------------------|--------|--------|--------|
| 2007                           |   | $      | 8,564  |   |
| 2008                           |   | 5,862  |   |
| 2009                           |   | 3,913  |   |
| 2010                           |   | 2,111  |   |
| 2011                           |   | 1,790  |   |
| Thereafter                     |   | 5,134  |   |
|                           |   | $      | 27,374 |   |

 

**6.**                 RESTRUCTURINGAND OTHER CHARGES

In the firstquarter of 2006, the Company announced an Operational Effectiveness (“OE”)program, which is expected to reduce costs and increase profitability by aminimum of $20,000 on an annual basis. As a result, the Company re-examined itscost structure and has presently identified areas of opportunity in facilitiesconsolidation, optimizing of delivery organizations and process automation andimprovement. Specifically, the Company’s plans include the followinginitiatives:

·       Consolidation of our United States hardware serviceoperations. A decision was made to move the New Jersey portion of ourhardware operations to a new combined hardware services facility in Georgia.

·       Consolidation of our United States integrated support centeroperations. A decision was made to move the Georgia portion of ourintegrated support center operations to our existing facility in Virginia.

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

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

For the year ended December 31, 2006, the Companyrecorded restructuring charges of $27,731 associated with the OE program. Therestructuring charges included approximately $19,300 of severance, $4,454 of anasset impairment charge (see Note 7 for further discussion of the impairmentcharge), $3,441 of a surplus facility and other charges and $536 of costsrelated to the refocusing of the Japanese data business.

In addition to the OE program, for the year ended December 31,2006, the Company recorded other severance charges of $2,013 associated withcertain of the Company’s largest customer sale force effectiveness services inthe United States which are expected to transition away in 2007.

During the three month period ended March 31,2005, the Company initiated and completed a plan to exit a facility in NewJersey for which it has an operating lease expiring in September 2011. Theaccrued facility charge relates to vacating a New Jersey facility and foradditional facilities vacated and accrued for in previous periods, for which ithad operating leases expiring through February 2012, due to changes inmarket conditions at that time. The Company accrued for the present value ofthese costs, net of estimated future sublease income. The Company also accruedfor severance charges related to the elimination of certain senior andmid-level management positions. These charges are included within accruedrestructuring and other charges on the consolidated balance sheets as of December 31,2006 and December 31, 2005, and in restructuring and other charges on theconsolidated statement of operations during the year ended December 31,2005.

Theactivity related to accrued restructuring and other charges for the year ended December 31,2006 is summarized in the table below:

| ** **           | ** ** | **Accrued**                            | ** ** | **2006**           | ** ** | ** **   | ** ** | ** **      | ** ** | **Accrued**                            | ** ** |
|----------------------|------------|----------------------------------------|------------|--------------------|------------|--------------|------------|-----------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **Restructuring and**             | ** ** | **Restructuring**  | ** ** | ** **   | ** ** | **Currency**    | ** ** | **Restructuring and**             | ** ** |
| ** **           | ** ** | **Other Charges as of** | ** ** | **and Other** | ** ** | **2006**     | ** ** | **Translation** | ** ** | **Other Charges as of** | ** ** |
| ** **           | ** ** | **December 31, 2005**        | ** ** | **Charges**        | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **December 31, 2006**        | ** ** |
| Facility exit  costs |       |                                   | $          | 5,332              |       |         |       | $               | 2,995      |                                   |       | $ | (3,281 | ) |   | $ | — |   |   |   | $ | 5,046 |   |   |
| Severance            |       |                                   | 301        |               |       |         | 21,313     |            |       | (9,289                                 | )          |   | 172 |   |   |   | 12,497 |   |   |
| Other                |       |                                   | —     |               |       |         | 982        |            |       | (982                                   | )          |   |   |   |   |   | — |   |   |
|                 |       |                                   | $          | 5,633              |       |         |       | $               | 25,290     |                                   |       | $ | (13,552 | ) |   | $ | 172 |   |   |   | $ | 17,543 |   |   |

 

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.**                 ASSETHELD FOR SALE

In connection with the OEprogram, the Company made the decision to consolidate its hardware supportfunction in Georgia and therefore decided to sell a New Jersey facility. Thisfacility is classified as asset held for sale in the accompanying consolidatedbalance sheet and is included within our Corporate segment. Accordingly, thecarrying value of the facility held for sale was adjusted to the new fair valueless costs to sell of approximately $8,545. The resulting $4,454 impairmentloss is included in the restructuring 

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

andother charges within the accompanying consolidated statement of operations forthe year ended December 31, 2006 and is included within our Corporatesegment.

**8.**                 REVOLVINGCREDIT

On December 14, 2006, the Company amended theline-of-credit agreement with JPMorgan Chase, dated as of July 25, 2005,(the “Agreement”) in the amount of $30,000, redefining the maturity date from June 30,2008 to June 30, 2007 and redefining earnings before interest and taxesfor purposes of the Agreement. The Agreement is available to finance workingcapital 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 31,2006, the Company was in compliance with all covenants and did not have anyamounts outstanding under the Agreement.

As of December 31,2006, the Company had outstanding letters-of-credit of approximately $5,337.

**9.**                 INCOMETAXES

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

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic                                 |       | $                     | (9,161     | ) | $ | 32,336 |   | $ | 29,982 |   |
| Foreign                                  |       | (9,253                | )          | 4,451 |   | 17,630 |   |
| (Loss) income  before income tax expense |       | $                     | (18,414    | ) | $ | 36,787 |   | $ | 47,612 |   |

 

The components of incometax expense were as follows:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current Provision:             |       |                  |       |   |   |   |   |
| Federal                        |       | $                     | (1,816     | ) | $ | 14,032 |   | $ | 8,035 |   |
| State                          |       | 631                   |       | 1,576 |   | 1,071 |   |
| Foreign                        |       | 11,674                |       | 4,578 |   | 6,242 |   |
|                           |       | 10,489                |       | 20,186 |   | 15,348 |   |
| Deferred  Provision (Benefit): |       |                  |       |   |   |   |   |
| Federal                        |       | (2,097                | )          | (811 | ) | 1,861 |   |
| State                          |       | 166                   |       | (1,239 | ) | (2,194 | ) |
| Foreign                        |       | (227                  | )          | (2,796 | ) | 3,032 |   |
|                           |       | (2,158                | )          | (4,846 | ) | 2,699 |   |
| Total income tax  expense      |       | $                     | 8,331      |   | $ | 15,340 |   | $ | 18,047 |   |

 

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

The reconciliation of theFederal statutory income tax rate to the Company’s effective income tax rate isas follows:

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal statutory  income tax rate              |       | 35.0                  | %          | 35.0 | % | 35.0 | % |
| Difference  between U.S. and non-U.S. rates     |       | (7.3                  | )%         | 2.5 | % | 2.6 | % |
| State income  taxes, net of federal tax benefit |       | (3.2                  | )%         | 2.8 | % | 1.7 | % |
| Nondeductible  compensation                     |       | (5.1                  | )%         | 0.0 | % | 0.0 | % |
| Nondeductible  expenses                         |       | (8.5                  | )%         | 0.4 | % | 0.4 | % |
| Benefit from  excess foreign tax credits        |       | 3.4                   | %          | 0.0 | % | (0.6 | )% |
| Valuation  allowances                           |       | (31.9                 | )%         | 0.0 | % | 0.0 | % |
| Increase in tax  reserves                       |       | (24.6                 | )%         | 0.0 | % | 0.0 | % |
| Other                                           |       | (3.0                  | )%         | 1.0 | % | (1.2 | )% |
|                                            |       | (45.2                 | )%         | 41.7 | % | 37.9 | % |

 

Valuation allowances recorded in 2006 of approximately$5,800 relate to international subsidiaries generating taxable losses for whichno benefit was recorded as realization is not deemed more likely than not. Inaddition, we recorded approximately $4,800 of income tax reserves for taxexposures identified at certain international subsidiaries, of which $600 relatedto prior periods. The effective tax rate was also adversely affected by certainnon-deductible expenses and foreign earnings taxed at different tax rates.

During 2006, the Company completed a restructuring ofits Asia Pacific operations whereby a regional headquarter office wasestablished in Singapore. As a result of committing to certain spending andemployment levels, income from operations in Singapore will be subject to areduced tax rate of 10%. In connection with this restructuring, the Companytransferred certain intangible assets from existing operations in the Asia Pacificregion and the United States to Singapore. The Company recorded a current yeartax expense of approximately $2,700 associated with this restructuring.

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

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

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Gross Deferred Tax  Asset:                     |       |                  |       |   |   |
| Federal net operating losses                   |       | $                     | 4,613      |   | $ | 5,418 |   |
| Foreign net operating losses                   |       | 12,680                |       | 9,822 |   |
| State credits and net operating losses         |       | 4,095                 |       | 3,919 |   |
| Federal capital loss carryover                 |       | 1,008                 |       | 1,994 |   |
| Accruals and reserves not currently deductible |       | 13,875                |       | 11,681 |   |
| Depreciation and amortization                  |       | 4,498                 |       | 1,376 |   |
| Asset held for sale                            |       | 3,419                 |       | 1,595 |   |
| Other                                          |       | 1,721                 |       | 1,237 |   |
|                                           |       | 45,909                |       | 37,042 |   |
| Less valuation  allowance:                     |       | (15,456               | )          | (10,827 | ) |
|                                           |       | $                     | 30,453     |   | $ | 26,215 |   |
| Gross Deferred  Tax Liability:                 |       |                  |       |   |   |
| Depreciation and amortization                  |       | $                     | —     |   | $ | — |   |
| Capitalized software development costs         |       | (7,541                | )          | (5,649 | ) |
|                                           |       | $                     | (7,541     | ) | $ | (5,649 | ) |

 

As of December 31, 2006 and 2005, the Company hasrecorded a valuation allowance against its net deferred tax assets ofapproximately $15,456 and $10,827, respectively. The change in the valuationallowance relates primarily to the realizability of state and foreign netoperating losses as realization is not deemed more likely than not likely.

At the point in time thatthe Company is able to recognize tax benefits related to deferred tax assets,for which valuation allowances have been provided as of December 31, 2006,the benefit would be allocated as follows:

| Income tax  benefit |   | $     | 9,172  |   |
|---------------------|--------|-------|--------|--------|
| Goodwill            |   | 6,284 |   |
|                |   | $     | 15,456 |   |

 

As of December 31,2006, the Company has available federal net operating loss carry forwards ofapproximately $13,181 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 carry forwards, 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 loss carryforwards of approximately $41,664 and foreign net operating loss carry forwardsof approximately $36,765 that expire in varying amounts from 2007 through 2024.In certain foreign jurisdictions, net operating losses may be carried forwardindefinitely.

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

**10.**          STOCKHOLDERS’EQUITY

**EQUITY COMPENSATIONPLANS**

The Company has variousequity compensation plans (the “Plans”) that provide for the granting ofoptions to purchase the Company’s common stock and other equity-based awards.Under the Plans, the total number of shares of common stock that may begranted is 15,750,000.

*Options*

Options granted under thePlans generally vest over a four-year period and are exercisable over a periodnot to exceed ten years as determined by the Compensation Committee of theBoard of Directors. During the years ended December 31, 2005 and 2004,certain options were granted that vested during the year of grant but weresubject to a restriction (of up to four years) on the sale of any sharesacquired upon option exercise in the period of restriction. Incentive stockoptions are granted with exercise prices equal to fair value of the Company’scommon stock using the closing price from the prior trading day. Nonqualifiedoptions are granted at exercise prices determined by the Compensation Committeeof the Board of Directors, but not below fair market value of common stock atthe date of grant.

Asummary of award activity under the Plans and changes are as follows:

| ** **                                                | ** ** | ** ** | ** ** | ** **                                   | ** ** | **  Weighted-Average  ** | ** ** | ** **               | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | **  Weighted-Average  ** | ** ** | **Remaining**                                | ** ** | **Aggregate**            | ** ** |
| ** **                                                | ** ** | **Shares** | ** ** | **Exercise Price**                      | ** ** | **Contractual Term**                    | ** ** | **Intrinsic Value** | ** ** |
| Outstanding  December 31, 2005                       |       | 10,067,978 |       |                                         | 15.04      |                                         |       |                     |       |   |   |   |   |   |   |
| Granted                                                   |       | 310,300    |       |                                         | 10.28      |                                         |       |                     |       |   |   |   |   |   |   |
| Exercised                                                 |       | (278,750   | )          |                                         | 8.32       |                                         |       |                     |       |   |   |   |   |   |   |
| Canceled                                                  |       | (1,191,591 | )          |                                         | 15.23      |                                         |       |                     |       |   |   |   |   |   |   |
| Outstanding  December 31, 2006                       |       | 8,907,937  |       |                                         | $          | 15.04                                        |       |                     |       | 5.3 |   |   |   | $ | 4,947 |   |   |
| Vested and  expected to vest at December 31, 2006(1) |       | 8,842,783  |       |                                         | $          | 15.08                                        |       |                     |       | 5.2 |   |   |   | $ | 4,832 |   |   |
| Exercisable December 31,  2006                       |       | 8,069,494  |       |                                         | $          | 15.67                                        |       |                     |       | 5.1 |   |   |   | $ | 3,255 |   |   |

----

(1)          Theexpected to vest options are the results of applying the pre-vesting forfeiturerate assumption to total outstanding options.

At December 31, 2006,2005 and 2004, there were 8,069,494, 8,818,196 and 6,347,979 optionsexercisable with a weighted average exercise price of $15.67, $15.63 and$15.98, respectively. As of December 31, 2006, there were 1,953,556 sharesavailable for future grants under the Plans.

The weighted average fairvalue of options granted, determined using the Black-Scholes option valuationmethod, was $5.07, $7.87 and $9.32 for the years ended December, 2006, 2005 and2004, respectively. The total intrinsic value of options exercised during theyears ended December 31, 2006, 2005 and 2004, was $1,119, $6,134 and$9,971, respectively. As of December 31, 2006, there was $1,766 of totalunrecognized compensation costs related to stock options. These costs areexpected to be recognized over a weighted average period of 1.5 years.

In 2006, the Companyadopted FASB Staff Position FAS 123(R)-3 (“FSP 123 (R)-3”). FSP 123(R)-3 allows a “short cut” method of calculating its pool of excess taxbenefits (“APIC Pool”) available to absorb 

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

taxdeficiencies recognized subsequent to the adoption of FAS 123-(R). TheCompany calculated its APIC Pool utilizing the short cut method under FSP 123(R)-3. As of the adoption date, the Company did not have any excess taxbenefits to calculate the initial pool.

The actual tax benefitrealized for the tax deduction from options exercised of the share-basedpayment arrangement for the year ended December 31 2006 totaled $444.

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

| ** **                                  | ** ** | ** ** | ** ** | ** **                                   | ** ** | **  Weighted-Average  ** | ** ** | ** **             | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | ** **                                   | ** ** | **Remaining**                                | ** ** | ** **             | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | **  Weighted-Average  ** | ** ** | **Contractual Life**                    | ** ** | **Number of**     | ** ** |
| **Exercise Price Per Share** | ** ** | **Shares** | ** ** | **Exercise Price**                      | ** ** | **(Years)**                                  | ** ** | **Vested Shares** | ** ** |
| $0.00 - $3.32                               |       | 5,950      |       |                                         | $          | 2.65                                         |       |                   |       | 0.1 |   |   |   | 5,950 |   |   |
| $3.33 - $6.64                               |       | 222,792    |       |                                         | 6.27       |                                         |       |                   | 0.7        |   |   |   | 222,792 |   |   |
| $6.65 - $9.95                               |       | 1,664,562  |       |                                         | 8.37       |                                         |       |                   | 4.4        |   |   |   | 978,542 |   |   |
| $9.96 - $13.27                              |       | 708,358    |       |                                         | 12.11      |                                         |       |                   | 5.4        |   |   |   | 581,519 |   |   |
| $13.28 - $16.59                             |       | 2,965,016  |       |                                         | 14.64      |                                         |       |                   | 6.4        |   |   |   | 2,939,432 |   |   |
| $16.60 - $19.91                             |       | 2,641,489  |       |                                         | 17.86      |                                         |       |                   | 5.5        |   |   |   | 2,641,489 |   |   |
| $19.92 - $23.23                             |       | 190,000    |       |                                         | 22.78      |                                         |       |                   | 1.9        |   |   |   | 190,000 |   |   |
| $23.24 - $26.55                             |       | 129,070    |       |                                         | 23.63      |                                         |       |                   | 3.1        |   |   |   | 129,070 |   |   |
| $26.56 - $29.87                             |       | 97,200     |       |                                         | 27.42      |                                         |       |                   | 3.1        |   |   |   | 97,200 |   |   |
| $29.88 - $33.19                             |       | 283,500    |       |                                         | 33.15      |                                         |       |                   | 2.7        |   |   |   | 283,500 |   |   |
|                                        |       | 8,907,937  |       |                                         | 15.04      |                                         |       |                   | 5.3        |   |   |   | 8,069,494 |   |   |

 

*Restricted StockUnits*

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

In 2006, 2005 and 2004, the Company granted 541,500,269,000 and 7,619 units representing shares of the Company’s common stock,respectively, under the Plans. As of December 31, 2006, there was $9,466of total unrecognized compensation costs related to unvested restricted stockunits. These costs are expected to be recognized over a weighted average periodof 2.6 years. For 2006, 2005 and 2004, the total value at the date of grant of suchunits was $6,800, $4,736 and $115, respectively.

Changesin the Company restricted stock units for the year ended December 31,2006, were as follows:

| ** **                                           | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Grant Date**  | ** ** |
| ** **                                           | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
| Unvested  restricted stock at December 31, 2005 |       | 280,599    |       |                 | $          | 17.22 |   |   |
| Granted                                              |       | 541,500    |       |                 | 12.56      |   |   |
| Vested                                               |       | (107,611   | )          |                 | 16.82      |   |   |
| Canceled                                             |       | (27,824    | )          |                 | 12.75      |   |   |
| Unvested restricted  stock at December 31, 2006 |       | 686,664    |       |                 | $          | 13.79 |   |   |

 

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

Under the provisions ofSFAS 123(R), the recognition of deferred compensation, a contra-equity accountrepresenting the amount of unrecognized restricted stock unit expense that isreduced as expense is recognized at the date the restricted stock unit isgranted, is no longer required. Therefore, in the first quarter of 2006, theamount that had been in deferred compensation was reversed to zero throughcommon stock in the Company’s consolidated balance sheet.

**EMPLOYEE STOCK PURCHASE PLAN**

In 1997, the Companyestablished an employee stock purchase plan (“ESPP”) that provides full-timeemployees the 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 obtained shareholderapproval to increase the number of authorized shares available for purchaseunder this plan from 450,000 to 900,000, of which 122,317, 86,960 and 79,367were purchased in 2006, 2005 and 2004, respectively. There were 18,292 and140,609 available for future issuance under the plan as of December 31,2006 and 2005, respectively.

In connection with theMerger Agreement dated as of March 1, 2007 with Cegedim S.A. (“Cegedim”),the Company committed to pay, at the closing of the merger transaction with Cegedim,to each participant in the ESPP who had elected to participate in and topurchase shares of the Company’s common stock under the ESPP in the offeringperiod relating to the Company’s 2006 fourth quarter, (i) an amount equalto the amount actually deferred by each such participant in the 4Q offeringperiod which has not been converted into shares pursuant to the ESPP, withinterest at a rate reasonably determined by the Company, plus (ii) anamount equal to: (x) the per share merger consideration, less (y) thediscounted purchase price applicable under the ESPP for the 4Q offering period,times (z) the number of shares which the participant would have acquiredunder the ESPP in the 4Q offering period using the cash actually deferred bythe participant for the 4Q offering period which has not been converted intoshares pursuant to the ESPP. A similar arrangement was established forparticipants in the 2007 first quarter ESPP offering period.

**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.

**SHAREHOLDER RIGHTS PLAN**

On February 16, 2001,the Company’s Board of Directors adopted a shareholder rights plan (the “RightsPlan”). The Rights Plan is designed to deter coercive or unfair takeovertactics and to prevent a person or group from acquiring control of the Companywithout offering a fair price to all shareholders. The adoption of the RightsPlan was not in response to 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 oneright for each share of common stock of the Company (“Rights”). At present, theRights are represented by the Company’s common stock certificates, are nottraded separately from the common stock and are not 

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

exercisable.The Rights will become exercisable only if a person acquires, or announces atender offer that would result in ownership of 15% or more of the Company’scommon stock, at which time each Right would enable the holder to buy oneone-hundredth of a share of the Company’s Series A preferred stock at anexercise price of $120, subject to adjustment. Following the acquisition of 15%or more of the Company’s common stock, the holders of Rights (other than theacquiring person or group) will be entitled to purchase shares of the Company’scommon stock at one-half of the market price, and in the event of a subsequentmerger or other acquisition of the Company, to buy shares of common stock ofthe acquiring entity at one-half of the market price of 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.

In connection with theMerger Agreement with Cegedim, on March 1, 2007, Dendrite and Registrarand Transfer Company, as Rights Agent, entered into Amendment No. 1 (the “RightsAmendment”) to Dendrite’s Rights Agreement, dated February 20, 2001 (the “RightsAgreement”). The effect of the Rights Amendment is to permit the execution ofthe Merger Agreement and the performance and consummation of the transactionscontemplated by the Merger Agreement, including specifically the mergertransaction with Cegedim, without triggering the separation or exercise of theRights (as defined in the Rights Agreement) or any adverse event under theRights Agreement (see Note 15).

**11.**          SAVINGSAND DEFERRED COMPENSATION PLANS

The Company maintainsEmployee Savings Plans (the “Savings Plans”) that cover substantially all ofits full-time U.S., U.K., Italy, Japan, Korea and Netherlands employees. Alleligible employees may elect to contribute a portion of their wages to theSavings Plans, subject to certain limitations. The Company contributes to theSavings Plans at a certain rate of the participant’s contribution based ontheir location. The Company’s contribution to the Savings Plans ranges fromapproximately 1% of a participant’s annual salary to 10% of the participant’sannual salary. The Company’s contributions to the Plans were $3,076, $3,042 and$3,049 in the years ended December 31, 2006, 2005 and 2004, respectively.

The Company also maintainsa noncontributory defined contribution retirement plan that covers substantiallyall of its full-time employees in Japan and Australia. All contributions tothese pension plans are made by the Company in accordance with prescribedstatutory requirements. The Company’s contributions to the plan were $594, $757and $657 for the years ended December 31, 2006, 2005 and 2004,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 $4,834 and $4,000 as of December 31, 2006 and 2005,respectively, and is included in other assets in the accompanying consolidatedbalance sheets. The corresponding deferred compensation liability ofapproximately $3,982 and $3,900 as of December 31, 2006 and 2005,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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**DENDRITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data)**

**12.**          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 $17,173, $23,767 and $16,035 for the years ended December 31,2006, 2005 and 2004, 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** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|
| 2007                                                  |       |                   | $          | 1,352                    |       |   |   | $ | 17,128 |   |   |
| 2008                                                  |       |                   | 72         |                     |       |   | 13,229 |   |   |
| 2009                                                  |       |                   | —     |                     |       |   | 11,514 |   |   |
| 2010                                                  |       |                   | —     |                     |       |   | 10,018 |   |   |
| 2011                                                  |       |                   | —     |                     |       |   | 7,417 |   |   |
| Thereafter                                            |       |                   | —     |                     |       |   | 22,888 |   |   |
| Total                                                 |       |                   | 1,424      |                     |       |   | $ | 82,194 |   |   |
| Less: Amount  representing interest                   |       |                   | 35         |                     |       |   |   |   |   |
| Present value of  net minimum lease payments          |       |                   | 1,389      |                     |       |   |   |   |   |
| Less: Current  portion of capital lease obligations   |       |                   | 1,318      |                     |       |   |   |   |   |
| Capital lease  obligations, excluding current portion |       |                   | $          | 71                       |       |   |   |   |   |   |

In connection with certainleasing arrangements, the Company entered into a sale-leaseback of furnitureand equipment of approximately $2,200 expiring in November 2007. Inaddition, the Company also entered into new capital lease arrangements forcomputer hardware and other 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 $2,000 each for 2007 and 2008, respectively.

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, 2006, $700 hasbeen paid with $300 of commitment remaining. The agreement has a terminationdate of December 11, 2010, subject to extension by the limited partners. Duringthe fourth quarter of 2006, we determined that our investment in the venturecapital fund was impaired, therefore we recorded an impairment charge of $171to other expense, net to write the venture capital fund down to its fair marketvalue.

**13.**          RELATED-PARTYTRANSACTIONS

For the years ended December 31, 2006, 2005 and2004, the Company incurred approximately $97, $158 and $289, respectively, ofcosts for rental and use of aircraft for Company business payable to certain 

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

third-party chartercompanies. While none of these third-party charter companies areaffiliated with the Company or any of its officers or directors, in someinstances, the aircraft provided by these third-party companies wasleased from an entity whose owners are the Company’s Chairman and ChiefExecutive Officer and his spouse. As of December 31, 2006 and 2005, therewere no rental charges included in other accrued expenses.

For the years ended December 31,2006, 2005 and 2004, the Company also incurred approximately $0, $0 and $1,respectively, of costs for air travel for Company business payable to theentity owned by the Chairman and Chief Executive Officer and his spouse. As of December 31,2006 and 2005, there was no air travel costs included in other accruedexpenses.

**14.**          SEGMENTINFORMAITON

*Information aboutBusiness Segments:*

In the second quarter of 2006, the Company changed itsoperating segments to reflect the reorganized business. The Company hasexpanded its segments into three operating segments: sales solutions, marketingsolutions, emerging solutions as well as a corporate segment. The reportablesegments presented below represent the Company’s operating segments for whichseparate financial information is available and which is now utilized on aregular basis by its chief operating decision maker to assess performance and toallocate resources. In identifying its reportable segments, the Company alsoconsidered the nature of services provided by its operating segments.

The Company evaluates the performance of the segmentsbased on operating earnings after the corporate allocation of certainadministrative expenses. Information about interest income and expense andincome taxes is not provided on a segment level. In addition, equity-basedcompensation is not allocated to the segments. See Note 10 above for furtherdiscussion of the Company’s equity-based compensation. The accounting policiesof the segments are the same as the Company’s. Information with respect to theCompany’s segments are as follows:

Sales solutions includes products and sales supportservices which are used by, or provided to, the sales forces of our customers.

Marketing solutions primarily includes interactivemarketing, data & analytics, consulting, and shipping fees. Shippingfees, which are pass-through costs that bear little to no margin, are requiredto be included in revenues and costs based upon EITF 00-10, “Accountingfor Shipping and Handling Fees and Costs.” These billable shipping transactionsare primarily related to our interactive marketing activities.

Emerging solutions includes compliance solutions,clinical solutions, and contract sales force services.

Corporate includes costs and assets which are notrepresentative of the results of the Company’s individual operating segments. TheCompany allocates a significant portion of its gross corporate costs to therespective operating segments, to reflect the approximate value which has beenincurred relating to services provided by the corporate entity. In addition,certain gross costs are considered to be overhead not attributable to anysegment and as such, remain unallocated in Corporate. Included among theunallocated overhead remaining within Corporate are costs for equity basedcompensation, audit and tax fees, excess facilities, certain administrativestaff, and other ancillary costs.

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

In 2004, the Company did not have the necessarysystems in place to track the global information needed to consolidate revenue,operating (loss) income, depreciation and amortization expense and capitalexpenditures between the new operating segments. As such, the 2004 amounts havenot been presented below for 2004, as to do so would be impracticable. Our 2005segments results have been restated to conform to current year presentation.

Thefollowing tables include revenue and operating (loss) income for each reportablesegment for the years ended December 31, 2006 and 2005.

| ** **          | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Revenue:            |       |                                       |       |   |   |
| Sales solutions     |       | $                                          | 274,257    |   | $ | 300,624 |   |
| Marketing solutions |       | 123,034                                    |       | 112,049 |   |
| Emerging solutions  |       | 26,667                                     |       | 24,567 |   |
| Total revenue       |       | $                                          | 423,958    |   | $ | 437,240 |   |

 

| ** **                     | ** ** | **For  the Years Ended  December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Operating (loss) income:       |       |                                        |       |   |   |
| Sales solutions                |       | $                                           | 40,521     |   | $ | 65,578 |   |
| Marketing solutions            |       | (13,162                                     | )          | (2,484 | ) |
| Emerging solutions             |       | (1,070                                      | )          | 522 |   |
| Corporate                      |       | (46,698                                     | )          | (27,434 | ) |
| Total operating (loss)  income |       | $                                           | (20,409    | ) | $ | 36,182 |   |

The following tablesinclude depreciation and amortization expense, capital expenditures andrestructuring and other charges for each business segment for the years ended December 31,2006 and 2005.

| ** **                                   | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| Depreciation and  amortization expense:      |       |                                                      |       |   |   |
| Sales solutions                              |       | $                                                         | 16,063     |   | $ | 12,641 |   |
| Marketing solutions                          |       | 4,121                                                     |       | 3,019 |   |
| Emerging solutions                           |       | 1,375                                                     |       | 1,002 |   |
| Corporate                                    |       | 4,746                                                     |       | 7,499 |   |
| Total depreciation and  amortization expense |       | $                                                         | 26,305     |   | $ | 24,161 |   |

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

 

| ** **                  | ** ** | **For the Years Ended  December 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| Capital  expenditures:      |       |                                                      |       |   |   |
| Sales solutions             |       | $                                                         | 10,394     |   | $ | 12,069 |   |
| Marketing solutions         |       | 4,108                                                     |       | 1,978 |   |
| Emerging solutions          |       | 106                                                       |       | 342 |   |
| Corporate                   |       | 2,734                                                     |       | 10,130 |   |
| Total capital  expenditures |       | $                                                         | 17,342     |   | $ | 24,519 |   |

 

| ** **                                | ** ** | **For the Years Ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| Restructuring and  other charges:         |       |                                                      |       |   |   |
| Sales solutions                           |       | $                                                         | 13,712     |   | $ | — |   |
| Marketing solutions                       |       | 6,221                                                     |       | — |   |
| Emerging solutions                        |       | 113                                                       |       | — |   |
| Corporate                                 |       | 9,698                                                     |       | 9,372 |   |
| Total restructuring and  other charges(1) |       | $                                                         | 29,744     |   | $ | 9,372 |   |

 

(1)          See Note 6 for furtherdiscussion of restructuring and other charges.

Thefollowing table includes total assets at December 31, 2006 and 2005 foreach business segment.

| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets:             |       |                  |       |   |   |
| Sales solutions     |       | $                     | 128,581    |   | $ | 149,920 |   |
| Marketing solutions |       | 96,905                |       | 87,642 |   |
| Emerging solutions  |       | 15,060                |       | 16,515 |   |
| Corporate(2)        |       | 134,125               |       | 108,930 |   |
| Total assets(3)     |       | $                     | 374,671    |   | $ | 363,007 |   |

----

(2)          Corporate assets consistprimarily of cash, property and equipment, prepaid taxes, deferred tax assetsand asset held for sale.

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

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

*Information aboutGeographic Areas:*

Revenueis classified by the major geographic areas in which we operate. All transfersbetween geographic areas have been eliminated from consolidated revenues. Thefollowing table presents revenues by geographic area:

| ** **    | ** ** | **December 31** | ** ** |
|---------------|------------|----------------------|------------|
| ** **    | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                    | 255,417    |   | $ | 276,282 |   | $ | 247,437 |   |
| Europe        |       | 112,602              |       | 107,307 |   | 98,368 |   |
| All other     |       | 55,939               |       | 53,651 |   | 53,392 |   |
|          |       | $                    | 423,958    |   | $ | 437,240 |   | $ | 399,197 |   |

 

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,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| United States |       | $                     | 164,875    |   | $ | 167,459 |   |
| Europe        |       | 8,332                 |       | 9,267 |   |
| All other     |       | 9,482                 |       | 10,586 |   |
|          |       | $                     | 182,689    |   | $ | 187,312 |   |

*Information about Major Customers:*

For the year ended December 31,2006, the Company derived approximately 18% and 12% of its total revenues fromits two largest customers. For the year ended December 31, 2005, theCompany derived approximately 24% and 10% of its total revenues from its twolargest customers. For the year ended December 31, 2004, the Companyderived approximately 28% of total revenues from its largest client. The Company’slargest customer has indicated that it plans to transfer certain domesticservices performed by the Company to one or more third party vendors in thefuture.

**15.**          SUBSEQUENTEVENTS

On March 1, 2007, Dendrite entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Cegedim SA andDogwood Enterprises, Inc., an indirect subsidiary of Cegedim (“MergerCo”).Pursuant to the Merger Agreement, MergerCo will be merged with and intoDendrite (the “Merger”), with Dendrite continuing as the surviving corporation.Under the Merger Agreement, at the effective time of the Merger (i) eachoutstanding share of common stock of Dendrite will be converted into the rightto receive $16.00 per share in cash; (ii) each vested and unvested optionto purchase Dendrite common stock that is outstanding and unexercised shallbecome fully vested and exercisable and, if not exercised prior to theeffective time of the merger, shall be cancelled in exchange for the right toreceive a cash payment per option equal to the excess of (a) $16.00 over (b) theexercise price of such option, less any applicable and required withholdingtaxes; and (iii) all unvested restricted stock unit awards will becancelled and the holder will be entitled to receive a cash payment equal to$16.00 in cash, without interest 

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

and less any applicablewithholding taxes, for each share of common stock underlying the restrictedstock unit award. Each of Dendrite and Cegedim has made customaryrepresentations, warranties and covenants in the Merger Agreement. Thecompletion of the Merger is subject to various closing conditions, includingobtaining the approval of Dendrite’s shareholders, antitrust approvals andother customary closing conditions. The Merger Agreement contains certaintermination rights for both Dendrite and Cegedim. If the Merger Agreement isterminated under certain circumstances specified in the Merger Agreement,Dendrite will be required to pay to Cegedim a termination fee of $22.2 million.The Merger Agreement also requires Dendrite to reimburse up to $5 million ofCegedim’s reasonable expenses if the Merger Agreement is terminated undercertain specified circumstances.

On or about March 13, 2007, plaintiff AlbertOldham commenced a purported class action against Dendrite, its directors andCegedim alleging that Cegedim’s pending acquisition of Dendrite is unfair toDendrite’s shareholders, and purporting to assert claims for breach offiduciary duty and aiding and abetting breach of fiduciary duty. In thelawsuit, captioned Albert Oldham v. Dendrite International, Inc., et al.,plaintiff asks the court to (i) declare that the action is properlymaintainable as a class action, and certify the named plaintiff as classrepresentative and its counsel as class counsel; (ii) declare and decreethat the merger agreement between Dendrite and entities affiliated with Cegedimwas entered into in breach of the fiduciary duties of the members of the Boardand is therefore unlawful and unenforceable; (iv) rescind and invalidatethe merger agreement; (v) enjoin Dendrite and the Board from consummatingthe merger unless and until procedures are implemented to obtain the highestpossible price for the shareholders; (vi) direct the Board to exercise itsfiduciary duties to obtain a transaction which is in the best interests of theshareholders and in which the highest possible price is obtained; (viii) imposea constructive trust on any benefits improperly received by the Board as aresult of wrongful conduct; and (viii) award plaintiff the costs anddisbursements of this action, including reasonable attorneys’ and experts’fees. Based on the facts known to date, Dendrite believes that the claimsasserted by the plaintiff are without merit and intends to defend itselfvigorously.

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**DENDRITEINTERNATIONAL, INC.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

| ** **                         | ** ** | **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, 2006 |       |                                                       |       |                                                                 |       |                                |       |                           |       |                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts    |       |                                                       | $          | 1,000                                                                |       |                                |       | $                              | 1,112      |                                                     |       |                                            | $          | — |   |   |   | $ | (368 | ) |   |   | $ | — |   |   |   | $ | 1,744 |   |   |
| Deferred tax valuation allowance   |       |                                                       | $          | 10,827                                                               |       |                                |       | $                              | 6,890      |                                                     |       |                                            | $          | 115 |   |   |   | $ | (1,784 | ) |   |   | $ | (592 | ) |   |   | $15,456 |   |   |
| 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 |   |   |

 

102

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**EXHIBIT INDEX**
|        |   | Plan  of Acquisition, Reorganization, Arrangement, Liquidation or Succession:                                                                                                                                                                                                                                                                                 |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 2.1    |   | Agreement and  Plan of Merger, dated March 1, 2007, by and among the Company, Cegedim  SA and Dogwood Enterprises, Inc. (incorporated by reference to  Exhibit 2.1 to the Company’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission (the “Commission”) on  March 2, 2007)              |   |
| 2.2    |   | 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 Commission on May 12, 2003)                                                                            |   |
| 2.3    |   | 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)                       |   |

103

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| 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) |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.5    |   | Amendment  No. 1, dated as of March 1, 2007, to Rights Agreement, dated as of  February 20, 2001, by and between the Company and Registrar and Transfer  Company (incorporated by reference to Exhibit 4.1 to the Company’s Current  Report on Form 8-K, filed with the Commission on March 2,  2007)                                                                                                                                                                                                                                                                                                        |   |
|   |   | 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, File No. 033-92434)*                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 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   |   | Resolution  amending 1997 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| 10.5   |   | Restated  Employment Agreement dated May 16, 2006 between the Company and John E.  Bailye (incorporated by reference to Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q, filed with the Commission on  August 9, 2006)*                                                                                                                                                                                                                                                                                                                                                                                   |   |
| 10.6   |   | Amendment to  Restated Employment Agreement dated March 1, 2007 between the Company  and John E. Bailye*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
| 10.7   |   | 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, File No. 033-92434)*                                                                                                                                                                                                                                                                                                                                                  |   |
| 10.8   |   | 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, File No. 033-92434)*                                                                                                                                                                                                                                                                                                                                                                    |   |
| 10.9   |   | 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, File No. 001-16379)*                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.10  |   | 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, File No. 001-16379)*                                                                                                                                                                                                                                                                                                                                                |   |
| 10.11  |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Christine Pellizzari (incorporated by reference to Exhibit 10.3 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                                                                                                                                                                                                                                                                                                                                                      |   |

104

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| 10.12 |   | Amendment  to Employment Agreement dated October 23, 2006 between the Company and  Christine Pellizzari*                                                                                                                                                                                                                      |   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.13 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and  Christine Pellizzari*                                                                                                                                                                                                                         |   |
| 10.14 |   | 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)                                                                                               |   |
| 10.15 |   | 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, File No. 001-16379)               |   |
| 10.16 |   | 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)                                                      |   |
| 10.17 |   | 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)                                                                    |   |
| 10.18 |   | 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)*                                                                                              |   |
| 10.19 |   | New Hire  Authorization—Updated Appendix (incorporated by reference to  Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q,  filed with the Commission on May 10, 2006)*                                                                                                                         |   |
| 10.20 |   | New Hire  Authorization—Updated Appendix (incorporated by reference to  Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q,  filed with the Commission on August 9, 2006)*                                                                                                                       |   |
| 10.21 |   | New Hire  Authorization—Updated Appendix (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q,  filed with the Commission on November 2, 2006)*                                                                                                                     |   |
| 10.22 |   | New Hire  Authorization—Updated Appendix*                                                                                                                                                                                                                                                                                     |   |
| 10.23 |   | Credit Agreement,  dated as of July 25, 2005, among the Company, the Lenders party thereto,  and JPMorgan Chase Bank, N.A. (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)                                          |   |
| 10.24 |   | December 2006  Amendment to Credit Agreement, dated December 14, 2006, among the  Company, the Lenders referred to therein, and JPMorgan Chase Bank, N.A.  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the Commission on December 20,  2006) |   |
| 10.25 |   | 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)                                                       |   |
| 10.26 |   | 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)*                                                    |   |

105

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| 10.27 |   | New  Hire Authorization—Form of Notice of Restricted Stock Agreement and  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)*                                                        |   |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.28 |   | 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)* (5)                                                                                                   |   |
| 10.29 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Mark H. Cieplik (incorporated by reference to Exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)* (5)                                                                                          |   |
| 10.30 |   | Transition  Agreement and General Release dated June 6, 2006 between the Company and  Mark H. Cieplik (incorporated by reference to Exhibit 10.3 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on August 9, 2006)* (5)                                                                                      |   |
| 10.31 |   | Employment  Agreement dated as of June 9, 1983, 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) *                                                                                                        |   |
| 10.32 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Jean-Paul Modde (incorporated by reference to Exhibit 10.7 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                                                                              |   |
| 10.33 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and  Jean-Paul Modde*                                                                                                                                                                                                                                                           |   |
| 10.34 |   | Amendment to  Employment Agreement dated as February 21, 2007 between the Company and  Jean-Paul Modde*                                                                                                                                                                                                                                                       |   |
| 10.35 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and  Jean-Paul Modde*                                                                                                                                                                                                                                                              |   |
| 10.36 |   | 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)*                                                                                              |   |
| 10.37 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Garry D. Johnson (incorporated by reference to Exhibit 10.6 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                                                                             |   |
| 10.38 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and  Garry D. Johnson                                                                                                                                                                                                                                                           |   |
| 10.39 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and Garry  D. Johnson*                                                                                                                                                                                                                                                             |   |
| 10.40 |   | 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)*                                                                                            |   |
| 10.41 |   | 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) |   |

106

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| 10.42 |   | 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)*                               |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.43 |   | 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)* |   |
| 10.44 |   | 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 10, 2006)*                                                                                       |   |
| 10.45 |   | Performance  criteria for the Company’s executive bonus plan for 2007 (incorporated by  reference to the Company’s Current Report on Form 8-K, filed with  the Commission on January 31, 2007)*                                                                                     |   |
| 10.46 |   | 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)*                                               |   |
| 10.47 |   | 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)*                                                                |   |
| 10.48 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Natasha Giordano (incorporated by reference to Exhibit 10.5 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                  |   |
| 10.49 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and  Natasha Giordano*                                                                                                                                                                                               |   |
| 10.50 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and Natasha  Giordano*                                                                                                                                                                                                  |   |
| 10.51 |   | 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)*(1)(4)                                                                      |   |
| 10.52 |   | 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)*(1)(4)                                         |   |
| 10.53 |   | 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)*                                                                     |   |
| 10.54 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Joseph A. Ripp (incorporated by reference to Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                    |   |
| 10.55 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and Joseph  A. Ripp*                                                                                                                                                                                                    |   |
| 10.56 |   | Employment  Agreement dated November 28, 2005 between the Company and Jeffrey J.  Bairstow (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)*                                           |   |

107

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| 10.57 |   | Amendment  to Employment Agreement dated February 13, 2006 between the Company and  Jeffrey Bairstow (incorporated by reference to Exhibit 10.2 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                                          |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.58 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and  Jeffrey Bairstow*                                                                                                                                                                                                                       |   |
| 10.59 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and Jeffrey  Bairstow*                                                                                                                                                                                                                          |   |
| 10.60 |   | 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)* |   |
| 10.61 |   | 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)*                                                                                                                                  |   |
| 10.62 |   | Employment  Agreement of Mark Theilken dated April 2, 2004 (incorporated by  reference to Exhibit 10.35 to the Company’s Annual Report on  Form 10-K. filed with the Commission on March 16, 2006)*                                                                                                    |   |
| 10.63 |   | 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)*                                                                                                                                                           |   |
| 10.64 |   | Amendment to  Employment Agreement dated February 13, 2006 between the Company and  Mark Theilken (incorporated by reference to Exhibit 10. 8 to the  Company’s Quarterly Report on Form 10-Q, filed with the Commission  on May 10, 2006)*                                                            |   |
| 10.65 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and Mark  Theilken*                                                                                                                                                                                                                          |   |
| 10.66 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and Mark  Theilken*                                                                                                                                                                                                                             |   |
| 10.67 |   | Employment  Agreement dated September 19, 2006 between the Company and James Young*                                                                                                                                                                                                                                        |   |
| 10.68 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and James  Young*                                                                                                                                                                                                                               |   |
| 10.69 |   | Employment Agreement  dated June 28, 2006 between the Company and Carl L. Cohen (incorporated  by reference to Exhibit 10.4 to the Company’s Quarterly Report on  Form 10-Q, filed with the Commission on August 9, 2006)*                                                                             |   |
| 10.70 |   | Amendment to  Employment Agreement dated October 23, 2006 between the Company and Carl  L. Cohen*                                                                                                                                                                                                                          |   |
| 10.71 |   | Amendment to  Employment Agreement dated March 1, 2007 between the Company and  Carl L. Cohen*                                                                                                                                                                                                                        |   |
| 10.72 |   | Employment  Agreement dated June 15, 1995 between the Company (Walsh Italia, Srl.  predecessor in interest) and Mario Mauri*                                                                                                                                                                                               |   |
| 10.73 |   | Amendment to  Employment Agreement dated March 2, 1998 between the Company (Walsh  Italia, Srl) and Mario Mauri*                                                                                                                                                                                                           |   |
| 10.74 |   | Amendment to  Employment Agreement dated February 28, 2007 between the Company and  Mario Mauri*                                                                                                                                                                                                                           |   |

108

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| 10.75  |   | Standstill  and Support Agreement, dated as of October 20, 2006, by and between the  Company and MMI Investments, L.P. (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the Commission on October 23, 2006)                                   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.76  |   | Letter dated  March 1, 2007 between Cegedim, S.A. and John Bailye regarding John Bailye’s  employment*                                                                                                                                                                                                                |   |
|   |   | Letter re Change in Certifying Accountant:                                                                                                                                                                                                                                                                                 |   |
| 16.    |   | Letter of BDO  Seidman regarding change in certifying accountant for the Dendrite 401(k) Plan  dated March 9, 2006 (incorporated by reference to Exhibit 16 to the  Company’s Current Report on Form 8-K/A, filed with the Commission  on March 31, 2006)                                         |   |
|   |   | Subsidiaries:                                                                                                                                                                                                                                                                                                              |   |
| 21.    |   | Subsidiaries of  the Company                                                                                                                                                                                                                                                                                               |   |
|   |   | Consents of Independent Registered Public Accounting  Firms:                                                                                                                                                                                                                                                               |   |
| 23.1   |   | Consent of  Deloitte & Touche 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

(5)          Ceased as executiveofficer effective July 31, 2006 and ceased employment with the Companyeffective October 31, 2006

109

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