Dendrite International 10Q 2005 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended September 30, 2005

Commission File Number 001-16379

Dendrite International, Inc.

(Exact name of registrant as specified in its charter)

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

1405 U.S. Highway 206

Bedminster, NJ 07921

(Address, including zip code, of

principal executive offices)

(908) 443-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
ý yes o no

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): ýyes o no

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): oyes ý no

As of October 31, 2005, 43,417,840 shares of Dendrite International, Inc. no par value common stock were outstanding.

DENDRITE INTERNATIONAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Operations (unaudited) Three and nine months ended September 30, 2005 and 2004	3

	Consolidated Balance Sheets (unaudited) September 30, 2005 and December 31, 2004	4

	Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 2005 and 2004	5

	Notes to Unaudited Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

ITEM 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION	31

ITEM 6.	Exhibits	31

Signatures		32

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2005			2004			2005			2004
Revenues	$	114,360		$	99,428		$	328,873		$	294,399

Operating Costs & Expenses:
Operating costs	61,252			51,578			173,732			151,807
Selling, general and administrative	33,395			32,832			103,258			98,923
Research and development	1,343			1,673			4,615			7,417
Facility and other charges	—			—			9,372			—
Amortization of acquired intangible assets	960			1,214			3,340			3,467
Other operating (income)	—			(368		)	—			(707		)
Total operating costs & expenses	96,950			86,929			294,317			260,907

Operating income	17,410			12,499			34,556			33,492

Interest (income) expense, net	(150		)	14			(315		)	11
Other expense (income), net	35			(190		)	32			(251		)

Income before income tax expense	17,525			12,675			34,839			33,732
Income tax expense	6,747			4,880			13,413			12,987

Net income	$	10,778		$	7,795		$	21,426		$	20,745

Net income per share:
Basic	$	0.25		$	0.19		$	0.50		$	0.50
Diluted	$	0.24		$	0.18		$	0.49		$	0.48

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

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

	September 30,			December 31,
	2005			2004
Assets

Current Assets:
Cash and cash equivalents	$	64,618		$	64,020
Accounts receivable, net of allowance for doubtful accounts of $1,021 and $2,034, respectively	76,184			71,653
Prepaid expenses and other current assets	7,079			6,935
Deferred income taxes	6,757			5,029
Total current assets	154,638			147,637

Property and equipment, net of accumulated depreciation of $58,400 and $56,499, respectively	55,507			45,283
Other assets	9,025			7,922
Goodwill	91,409			80,963
Intangible assets, net	25,685			19,876
Purchased capitalized software, net	598			1,056
Capitalized software development costs, net	10,339			9,170
Deferred income taxes	9,640			9,873
	$	356,841		$	321,780
Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable	$	10,495		$	8,171
Income taxes payable	8,265			12,013
Capital lease obligations	1,467			1,689
Accrued compensation and benefits	16,047			14,662
Accrued professional and consulting fees	6,320			7,413
Accrued facility and other charges	2,103			—
Other accrued expenses	15,135			19,284
Purchase accounting restructuring accrual	1,925			3,000
Deferred revenues	13,870			13,347
Total current liabilities	75,627			79,579

Capital lease obligations	2,068			3,036
Purchase accounting restructuring accrual	3,224			4,143
Accrued facility and other charges	4,497			—
Deferred rent	5,936			2,070
Other non-current liabilities	5,293			5,363

Stockholders' Equity:
Preferred stock, no par value, 15,000,000 shares authorized, none issued	—			—
Common stock, no par value, 150,000,000 shares authorized, 46,117,895 and 44,913,584 shares issued; 43,355,678 and 42,374,836 shares outstanding at September 30, 2005 and December 31, 2004, respectively	142,563			125,237
Retained earnings	148,927			127,501
Deferred compensation	(368		)	(123		)
Accumulated other comprehensive income	(639		)	1,239
Less treasury stock, at cost	(30,287		)	(26,265		)
Total stockholders' equity	260,196			227,589
	$	356,841		$	321,780

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

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	Nine Months Ended September 30,
	2005			2004
Operating activities:
Net income	$	21,426		$	20,745
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,026			15,958
Write-off of property and equipment	1,030			—
Amortization of deferred compensation, net of forfeitures	103			149
Deferred income taxes	(2,277		)	599
Other adjustments for non-cash items	—			901
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivable	(1,825		)	7,424
Decrease in prepaid expenses and other current assets	56			926
(Increase) decrease in other assets	(1,277		)	786
Increase (decrease) in accounts payable and accrued expenses	1,599			(3,671		)
Increase in accrued facility and other charges	6,618			—
Decrease in purchase accounting restructuring accrual	(2,180		)	(5,606		)
(Decrease) increase in income taxes payable	(1,621		)	3,308
Increase (decrease) in deferred revenue	221			(5,505		)
(Decrease) increase in other non-current liabilities	(70		)	860
Net cash provided by operating activities	39,829			36,874

Investing activities:
Proceeds from sale-leaseback of furniture and equipment	—			2,162
Acquisitions, net of cash acquired	(21,439		)	(7,312		)
Purchases of property and equipment	(22,633		)	(15,083		)
Additions to capitalized software development costs	(3,845		)	(4,087		)
Net cash used in investing activities	(47,917		)	(24,320		)

Financing activities:
Repayments of long-term debt	—			(1,773		)
Repayments of acquired loan	—			(624		)
Payments on capital lease obligations	(1,241		)	(829		)
Issuance of common stock	10,938			6,249
Net cash provided by financing activities	9,697			3,023
Effect of foreign exchange rate changes on cash	(1,011		)	152
Net increase in cash and cash equivalents	598			15,729
Cash and cash equivalents, beginning of year	64,020			30,405
Cash and cash equivalents, end of period	$	64,618		$	46,134

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

1. Basis of Presentation

The consolidated financial statements of Dendrite International, Inc. and its subsidiaries (“Dendrite” or the “Company”) included in this Form 10-Q are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position as of September 30, 2005, operating results for the three and nine months ended September 30, 2005 and 2004 and cash flows for the nine months ended September 30, 2005 and 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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

Reclassifications. Certain prior period balances have been reclassified to conform to current period presentation. The Company has also made immaterial adjustments to the prior year classification of current and non-current purchase accounting restructuring accruals and from accrued compensation and benefits to other non-current liabilities.

2. Supplemental Cash Flow Information

As of September 30, 2005, the Company acquired approximately $300 of property and equipment which was included in other accrued expenses on the accompanying consolidated balance sheet as of September 30, 2005 and is therefore excluded from the consolidated statement of cash flows for the nine months ended September 30, 2005.

Pursuant to the terms of its replacement option program, the Company accepted 223,469 shares of its common stock from an executive, in lieu of cash for the exercise of approximately 223,469 stock options. The shares delivered were valued at approximately $4,022 on the date of exercise, which value was equal to the number of options exercised multiplied by the exercise price.

3. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as a replacement to SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). This statement supersedes Accounting Principles Board (“APB”) 25, “Accounting for Stock Issued to Employees,” which allowed companies to use the intrinsic method of valuing share-based payment transactions and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the fair-value method as defined in SFAS 123. SFAS 123(R) provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the approach of the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS 123 for the pro forma disclosure. The Company plans to adopt SFAS 123(R) using the modified prospective method. In addition, SFAS 123(R) also requires that tax benefits received in excess of compensation cost be reclassified from operating cash flows to financing cash flows in the consolidated statement of cash flows. The adoption of FAS 123(R)’s fair value method is expected to have a significant impact on the Company’s consolidated results of operations, though it will have no impact on the Company’s overall assets, liabilities and stockholder’s equity. However, had the Company adopted SFAS 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and net income per share in Note 4 to our consolidated financial statements.

In April 2005, the Securities and Exchange Commission issued Release No. 33-8568, Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” which allows companies to continue to follow SFAS 123 throughout 2005 and implement SFAS 123(R) beginning January 1, 2006, which the Company expects to follow.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

4. Stock Based Compensation

The Company has adopted the disclosure requirements of SFAS 123 as amended by SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company applies APB 25 and related interpretations in accounting for stock options granted under the Company’s stock option plans (the “Plans”). Accordingly, compensation cost has been computed for the Plans based on the intrinsic value of the stock options at the date of grant, which represents the difference between the exercise price and the fair value of the Company’s stock. The exercise price of all stock options granted equaled the fair value of the Company’s stock at the date of option grant and accordingly, no compensation cost related to stock options has been recorded in the accompanying consolidated statements of operations. Had compensation cost for the Plans and the employee stock purchase plan been determined consistent with SFAS 123, the Company’s net income and net income per share would have been adjusted to the following pro forma amounts:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2005			2004			2005			2004
Net income as reported	$	10,778		$	7,795		$	21,426		$	20,745

Add: Deferred compensation amortization, net of forfeitures recognized in accordance with APB 25, net of related tax effects	42			21			63			92

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(4,165		)	(7,836		)	(11,857		)	(15,484		)

Pro forma net income	$	6,655		$	(20	)	$	9,632		$	5,353

Basic income per share:
As reported	$	0.25		$	0.19		$	0.50		$	0.50
Pro forma	$	0.15		$	0.00		$	0.23		$	0.13
Diluted income per share:
As reported	$	0.24		$	0.18		$	0.49		$	0.48
Pro forma	$	0.15		$	0.00		$	0.22		$	0.12

The fair value for these options were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2005		2004		2005		2004
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Weighted-average expected stock price volatility	50.0	%	70.0	%	50.0	%	70.0	%
Weighted-average risk-free interest rate	4.1	%	3.7	%	3.9	%	3.2	%
Expected life of the option (years)	5.25		5.25		5.25		5.25

The stock-based employee compensation expense determined under the fair value based methods for all awards, net of related tax effects, disclosed above is determined based upon the number and fair value of options granted and an estimate of forfeitures. The expense is recognized over the vesting period of the options. Under SFAS 123, compensation expense is not recognized for options that are forfeited due to the employee’s failure to fulfill service requirements. Therefore, while the fair value per option is not recalculated, the number of options vesting would change, thus requiring recalculation of the aggregate compensation expense.

5. Net Income Per Share

The following table presents the computation of basic and diluted net income per share for the three and nine months ended September 30, 2005 and 2004:

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Basic net income per share computation:
Net income	$	10,778	$	7,795	$	21,426	$	20,745
Weighted-average common shares outstanding	42,944		41,620		42,670		41,335
Basic net income per share	$	0.25	$	0.19	$	0.50	$	0.50

Diluted net income per share computation:
Net income	$	10,778	$	7,795	$	21,426	$	20,745
Diluted common shares outstanding:
Weighted-average common shares outstanding	42,944		41,620		42,670		41,335
Impact of dilutive stock options	1,387		1,319		1,233		1,607
Diluted common shares outstanding	44,331		42,939		43,903		42,942
Diluted net income per share	$	0.24	$	0.18	$	0.49	$	0.48

6. Comprehensive Income

The components of comprehensive income for the three and nine months ended September 30, 2005 and 2004 consisted of the following:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2005			2004		2005			2004
Net income	$	10,778		$	7,795	$	21,426		$	20,745
Other comprehensive (loss) income:
Foreign currency translation adjustments	(916		)	236		(1,878		)	434
Comprehensive income	$	9,862		$	8,031	$	19,548		$	21,179

7. Acquisitions

Optas

On September 12, 2005, the Company completed the acquisition of Optas, Inc. (“Optas”). Based in Boston, Massachusetts, Optas provides privacy-safe relationship marketing solutions for patients and physicians. Optas’ results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Optas was approximately $12,814, including $349 of legal and professional fees. Approximately $313 of the purchase price was included in other accrued expenses in the consolidated balance sheet as of September 30, 2005 and $1,800 of the purchase price was held in escrow as of September 30, 2005. In accordance with the purchase agreement, the $1,800 held in escrow, less amounts claimed against escrow, if any, is payable as follows: approximately $600 within five business days after September 12, 2006; and approximately $1,200 within five business days after March 12, 2007. The Company is in the process of finalizing the valuation of certain intangible assets, including the review of a third-party valuation. Therefore, the allocation of purchase price is preliminary and subject to adjustment. The assets acquired and liabilities assumed in connection with the Optas acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

	Weighted-Average
	Estimated Useful	Acquired Intangible
	Life (Years)	Asset Value
Intangible Assets Subject to Amortization:
Customer relationship asset	10	$	2,590
Acquired technology	5	1,390
Backlog	0.33	100
Trademarks	2	70
Total Intangible Assets Subject to Amortization		4,150

Intangible Assets Not Subject to Amortization:
Goodwill	N/A	8,242
Total Intangible Assets		$	12,392

The goodwill and intangible assets recorded for financial statement purposes are not deductible for tax purposes.

Buzzeo

On January 4, 2005, the Company completed the strategic acquisition of BuzzeoPDMA, Inc. (“Buzzeo”). Based in Richmond, Virginia, Buzzeo provides compliance, auditing, consulting and reconciliation outsourcing services to the pharmaceutical and life sciences industry. This acquisition further expands the Company’s sample and compliance management solution offerings. In connection with the acquisition, the Company restructured the combined operations by eliminating certain former Buzzeo positions. The Company accrued $200 at January 4, 2005 for liabilities associated with the cost of completing the restructuring plan (see Note 8). Buzzeo’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Buzzeo was approximately $10,988, including $33 of legal and professional fees. Approximately $590 of the purchase price was included in other accrued expenses in the consolidated balance sheet as of September 30, 2005 and $1,025 of the purchase price was held in escrow as of September 30, 2005. In accordance with the purchase agreement, the $1,025 held in escrow, less amounts claimed against escrow, if any, is payable on January 4, 2006. The Company is in the process of finalizing the valuation of certain intangible assets, including the review of a third-party valuation. Therefore, the allocation of purchase price is preliminary and subject to adjustment. The assets acquired and liabilities assumed in connection with the Buzzeo acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

	Weighted-Average
	Estimated Useful	Acquired Intangible
	Life (Years)	Asset Value
Intangible Assets Subject to Amortization:
Customer relationship asset	10	$	4,390
Trademark	7	290
Other	0.25	70
Total Intangible Assets Subject to Amortization		4,750

Intangible Assets Not Subject to Amortization:
Goodwill	N/A	2,777
Total Intangible Assets		$	7,527

The goodwill and intangible assets recorded for financial statement purposes are deductible for tax purposes.

8. Purchase Accounting Restructuring Accrual

In connection with the June 2003 acquisition of Synavant Inc. (“Synavant”), the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. The

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

Company anticipates that the remaining accrued restructuring balance related to the facility exit costs will be paid over the life of the facility leases, ending in February 2012. The liability accrued for expenses to be incurred in exiting certain Synavant facilities and includes assumptions related to sublease income, which offsets future lease obligations. The underlying subleases are not in place for all facilities and the future placement of subleases, including the timing and terms and conditions of subleases, could be different than the assumptions utilized.

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

In connection with the July 2004 and January 2005 acquisitions of Schwarzeck-Verlag GmbH (“Schwarzeck”) and Buzzeo, the Company restructured the combined operations by eliminating certain former positions. The Company accrued approximately $300 and $200 to complete the Schwarzeck and Buzzeo restructuring plans, respectively.

The activity related to the purchase accounting restructuring accrual for the nine months ended September 30, 2005 is summarized in the table below:

											Purchase Accounting
	Purchase Accounting							Currency			Restructuring Accrual
	Restructuring Accrual				2005			Translation			as of September 30,
	as of December 31, 2004		2005 Accruals		Payments			Adjustments			2005
Synavant
Termination payments to employees	$	23	$	—	$	(23	)	$	—		$	—
Facility exit costs	5,926		—		(1,423		)	—			4,503
Total Synavant	5,949		—		(1,446		)	—			4,503
SAI
Lease termination costs	947		—		(497		)	—			450
Schwarzeck
Termination payments to employees	247		—		(235		)	(12		)	—
Buzzeo
Termination payments to employees	—		200		(4		)	—			196
Total	$	7,143	$	200	$	(2,182	)	$	(12	)	$	5,149

9. Goodwill and Intangible Assets

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

	As of September 30, 2005							As of December 31, 2004
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible Assets Subject To Amortization:
Purchased capitalized software	$	2,441	$	(1,843	)	$	598	$	2,441	$	(1,385	)	$	1,056
Capitalized software development costs	30,452		(20,113		)	10,339		26,607		(17,437		)	9,170
Customer relationship assets	16,471		(3,304		)	13,167		9,595		(2,222		)	7,373
Backlog	2,500		(2,394		)	106		2,400		(2,313		)	87
Non-compete covenants	3,729		(3,392		)	337		3,768		(2,678		)	1,090
Purchased database	5,168		(1,811		)	3,357		5,221		(979		)	4,242
Acquired technology	1,390		(15		)	1,375		—		—			—
Trademarks	505		(59		)	446		151		(15		)	136
Other intangibles	482		(317		)	165		413		(197		)	216
Total	63,138		(33,248		)	29,890		50,596		(27,226		)	23,370

Intangible Assets Not Subject to Amortization:
Goodwill	91,409		—			91,409		80,963		—			80,963
Trademarks	6,732		—			6,732		6,732		—			6,732
Total	98,141		—			98,141		87,695		—			87,695

Total Goodwill and Intangible Assets	$	161,279	$	(33,248	)	$	128,031	$	138,291	$	(27,226	)	$	111,065

The changes in the carrying amount of intangible assets not subject to amortization for the nine months ended September 30, 2005 is as follows:

			Acquisitions /
			Purchase		Currency
	Balance as of		Accounting		Translation			Balance as of
	December 31, 2004		Adjustments		Adjustments			September 30, 2005
Goodwill	$	80,963	$	10,694	$	(248	)	$	91,409
Trademarks	6,732		—		—			6,732
Total	$	87,695	$	10,694	$	(248	)	$	98,141

The Company conducts its annual impairment testing of goodwill as of October 1 each year. During the nine months ended September 30, 2005, there were no changes in events or circumstances that would indicate impairment.

The following table reconciles net intangible assets subject to amortization for the period from December 31, 2004 to September 30, 2005:

	Net Intangibles		2005 Year-to-Date Activity								Net Intangibles
	as of							Translation			as of
	December 31, 2004		Additions		Amortization			and Other			September 30, 2005
Purchased capitalized software	$	1,056	$	—	$	(458	)	$	—		$	598
Capitalized software development costs	9,170		3,845		(2,676		)	—			10,339
Customer relationship assets	7,373		6,980		(1,082		)	(104		)	13,167
Backlog	87		100		(81		)	—			106
Non-compete covenants	1,090		—		(714		)	(39		)	337
Purchased database	4,242		—		(832		)	(53		)	3,357
Acquired technology	—		1,390		(15		)	—			1,375
Trademarks	136		360		(44		)	(6		)	446
Other intangibles	216		70		(120		)	(1		)	165
Total	$	23,370	$	12,745	$	(6,022	)	$	(203	)	$	29,890

Amortization expense related to intangible assets, including internally developed capitalized software costs, for the three month periods ended September 30, 2005 and 2004 was $1,877 and $1,937, respectively. Amortization expense related to intangible assets, including internally developed capitalized software costs, for the nine month periods ended September 30, 2005 and 2004 was $6,022 and $5,739, respectively. Aggregate annual amortization expense of intangible assets (exclusive of future additions) is estimated to be:

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ending December 31,
2005	$	8,161
2006	8,303
2007	6,085
2008	3,440
2009	2,100
2010	1,810
Thereafter	6,013
	35,912
Less: 2005 year-to-date amortization expense	(6,022		)
Net intangible assets subject to amortization as of September 30, 2005	$	29,890

10. Accrued Facility and Other Charges

During the period ended March 31, 2005, the Company initiated and completed a plan to exit a facility in New Jersey for which it has an operating lease expiring in September 2011. The accrued facility charge relates to vacating this New Jersey facility and for additional facilities vacated and accrued for in previous periods, for which the Company has operating leases expiring through February 2012, due to changes in current market conditions. The Company accrued for the present value of these costs, net of estimated future sublease income. The Company also accrued for severance charges related to the elimination of certain senior and mid-level management positions. These charges are included within Accrued Facility and Other Charges on the consolidated balance sheet as of September 30, 2005, and within Facility and Other Charges on the consolidated statement of operations during the nine months ended September 30, 2005.

The activity related to Accrued Facility and Other Charges for the nine months ended September 30, 2005 is summarized in the table below:

	Accrued Facility and		2005 Facility					Currency			Accrued Facility and
	Other Charges as of		and Other		2005			Translation			Other Charges as of
	December 31, 2004		Charges		Payments			Adjustments			September 30, 2005
Facility exit costs	$	—	$	6,619	$	(759	)	$	—		$	5,860
Severance	—		1,723		(931		)	(52		)	740
	$	—	$	8,342	$	(1,690	)	$	(52	)	$	6,600

In connection with the plan initiated and completed during the three months ended March 31, 2005, the Company also wrote-off $1,030 of leasehold improvements included within Facility and Other Charges in the consolidated statement of operations for the nine months ended September 30, 2005.

11. Line-of-Credit

The June 16, 2003 line-of-credit agreement with JPMorgan Chase, amended September 24, 2004, expired on July 1, 2005. On July 25, 2005, the Company entered into a replacement line-of-credit agreement (the “Agreement”), in the amount of $30,000 with JPMorgan Chase Bank that expires on June 30, 2008. The Agreement is available to finance working capital needs and possible future acquisitions. The Agreement contains customary affirmative and negative covenants and also contains certain financial covenants, including those related to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) a minimum interest coverage ratio at the end of any fiscal quarter and (c) a minimum fixed charge coverage ratio at the end of any fiscal quarter. The Agreement also restricts the Company’s ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of September 30, 2005, the Company’s consolidated net worth was $260,196, the Company was in compliance with all covenants and did not have any amounts outstanding under the line-of-credit.

As of September 30, 2005, the Company had outstanding letters-of-credit of approximately $5,721.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

12. Income Taxes

The Company’s effective income tax expense rate was 38.5% for the three and nine months ended September 30, 2005 and 2004.

13. Common Stock

The following table rolls forward the balance of common stock for the nine months ended September 30, 2005.


		Issuance of	Tax Benefit
Balance as of		Common	of Stock Option		Balance as of
December 31, 2004		Stock (1)	Exercises	Other	September 30, 2005
$	125,237	14,960	2,018	348	$	142,563

(1) Includes issuance of common stock through the employee stock purchase plan as well as stock option exercises.

14. Enterprise-Wide Data

Information about Major Customers:

For the three month period ended September 30, 2005, the Company derived approximately 27% and 10% of its revenues from its two largest customers. For the three month period ended September 30, 2004, the Company derived approximately 27% of its revenues from its largest customer. For the nine month periods ended September 30, 2005 and 2004, the Company derived approximately 26% and 27% of its revenues from its largest customer, respectively. As of September 30, 2005, approximately 13% and 11% of the Company’s accounts receivable balance was due from its two largest customers, respectively. As of December 31, 2004, approximately 18% of the Company’s accounts receivable balance was due from its largest customer. Other than what has been presented above, no individual customer represented 10% or more of our total consolidated revenues or accounts receivable for or as of the periods presented.

Information about Products and Services:

Due to the growth in the Company’s strategic product and service offerings, largely built through recent acquisitions, the Company has expanded its revenue categories into sales solutions, marketing solutions and shipping. These categories are reflective of how service offerings are marketed to and viewed by customers. They are not reflective of the way the business is managed. Company operating costs are not broken out for these categories on a global basis, as they are not currently viewed as necessary to the management of the business globally. Based upon all of these factors, while these categories are useful in understanding the Company’s operating results, the Company has only one reportable segment for disclosure purposes under SFAS 131, “Disclosure About Segments of an Enterprise and Related Information.” The following is a summary of our revenue categories:

Sales solutions revenue includes product and sales support services which are used by, or provided to, the sales forces of our customers.

Marketing solutions revenue includes our product and service offerings that are not directly geared toward the client sales force and primarily consists of offerings acquired in our business combinations over the past few years. The primary components of marketing solutions revenue include interactive marketing, data, consulting and clinical.

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

The following table presents revenues by category for the three and nine month periods ended September 30, 2005 and 2004.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Services & Technology:
Sales solutions	$	86,314	$	71,629	$	239,527	$	214,673
Marketing solutions	24,052		23,834		75,757		67,847
Shipping	3,994		3,965		13,589		11,879
	$	114,360	$	99,428	$	328,873	$	294,399

Information about Geographic Areas:

The Company is organized by geographic location and has one reportable segment. All transfers between geographic areas have been eliminated from consolidated revenues. The following table presents revenues by geographic area for the three and nine months ended September 30, 2005 and 2004.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
United States	$	76,169	$	60,992	$	209,296	$	185,197
Europe	24,171		25,168		79,510		69,991
All other	14,020		13,268		40,067		39,211
	$	114,360	$	99,428	$	328,873	$	294,399

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

The following table presents long-lived assets by geographic area:

	As of		As of
	September 30,		December
	2005		31, 2004
United States	$	170,742	$	144,233
Europe	10,204		9,614
All other	11,350		10,423
	$	192,296	$	164,270

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

($ IN THOUSANDS)

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations and future estimates, future financial position or results and future plans and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and the pharmaceutical and consumer packaged goods industries. All such forward-looking statements involve significant risks and uncertainties, including those risks identified in this Form 10-Q under “Factors That May Affect Future Results,” many of which are beyond our control. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate. Actual results may differ materially from those indicated by the forward-looking statements included in this Form 10-Q, as more fully described under “Factors That May Affect Future Results.” In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results or changes in assumptions, expectations or projections. In addition, our financial and performance outlook concerning future revenues, margins, earnings, earnings per share and other operating or performance results does not include the impact of any future acquisitions, future acquisition-related expenses or accruals, or any future restructuring or other charges that may occur from time-to-time due to management decisions and changing business circumstances and conditions.

EXECUTIVE OVERVIEW

We provide a broad array of solutions worldwide that enable pharmaceutical and other life science companies to strategically optimize their sales and marketing channels and clinical resources. Our plan is to continue to diversify and expand our solutions portfolio, customer base and geographic reach by leveraging our extensive knowledge of the pharmaceutical and life sciences industries and capitalizing upon our deep relationships in these industries. Our strategy continues to rely on both internal growth and acquisitions to meet to our growth objectives.

We have expanded both our portfolio of solutions and customer base and believe that this combination presents significant opportunity for future growth. In January 2005 and September 2005, we broadened and enhanced our service portfolio with our acquisitions of BuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”). The Buzzeo acquisition expands our sample and compliance management solution offerings. The Optas acquisition enhances our portfolio of marketing solutions services by expanding our privacy-safe relationship marketing solutions for patients and physicians. We believe our recent acquisitions complement our existing business operations by enhancing our solutions portfolio, increasing our access to new customers and allowing deeper penetration into our current markets. We have also committed to investing in key initiatives to help drive future growth. Our future growth is dependent on our ability to further penetrate the markets in which we operate and increase the adoption rate of our expanded portfolio of solutions.

We evaluate our performance based upon a number of operating metrics. Chief among these metrics are revenues, operating margins, diluted net income per share, operating cash flow and days sales outstanding. Our goal in 2005 is to execute our strategy to yield growth in revenues, operating margins and diluted net income per share. As part of our strategy to improve operating margins, we began shifting technical positions offshore in early 2004. We currently partner with a third party to operate our offshore development centers. As of September 30, 2005 we have 350 positions located in India. We expect to continue moving additional technical and non-technical functions into low cost countries such as India as we further seek to expand our operating margins. We hope to maintain our level of days sales outstanding and generate strong positive operating cash flow as we continue to reduce the remaining liabilities associated with our acquisitions.

As a result of international growth through our recent acquisitions, certain lines of our business are now subject to a higher level of seasonal fluctuations than we have experienced in the past. Specifically, our European business and interactive marketing business in the United States have historically experienced a seasonal slowdown during the summer months.

Due to the growth in our strategic product and service offerings, largely built through our recent acquisitions, we expanded our revenue categories into sales solutions, marketing solutions and shipping. These categories reflect how our service offerings are marketed to and viewed by our customers. They are not reflective of the way we manage our global business. Our operating costs are not broken out for these categories on a global basis, as they are not viewed as necessary in the management of our global business. Based upon all of these factors, while these categories are useful in understanding our operating results, we have only one reporting segment for disclosure purposes under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure About Segments of an Enterprise and Related Information.” The following is a summary of our revenue categories:

Sales solutions revenue includes product and sales support services which are used by, or provided to, the sales force of our customers.

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

($ IN THOUSANDS)

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

There have been no material changes to our critical accounting policies, judgments and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

MERGERS AND ACQUISITIONS

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

Optas

On September 12, 2005, we completed the acquisition of Optas. Based in Boston, Massachusetts, Optas provides privacy-safe relationship marketing solutions for patients and physicians. Optas’ results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Optas was approximately $12,814 including $349 of legal and professional fees. Approximately $313 of the purchase price was included in other accrued expenses in the consolidated balance sheet as of September 30, 2005 and $1,800 of the purchase price was held in escrow as of September 30, 2005. In accordance with the purchase agreement, the $1,800 held in escrow, less amounts claimed against escrow, if any, is payable as follows: approximately $600 within five business days after September 12, 2006; and approximately $1,200 within five business days after March 12, 2007. We are in the process of finalizing the valuation of certain intangible assets, including the review of a third-party valuation. Therefore, the allocation of purchase price is preliminary and subject to adjustment. The assets acquired and liabilities assumed in connection with the Optas acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

The preliminary allocation of purchase price, including the net assets acquired of approximately $422, to intangible assets and goodwill acquired in connection with the Optas acquisition are as follows: customer relationship asset of $2,590, amortizable over 10 years; acquired technology of $1,390, amortizable over 5 years; backlog of $100, amortizable over 4 months; trademark of $70, amortizable over 2 years; and goodwill of $8,242.

Buzzeo

On January 4, 2005, we completed the strategic acquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provides compliance, auditing, consulting and reconciliation outsourcing services to the pharmaceutical and life sciences industry. This acquisition further expands our sample and compliance management solution offerings. In connection with the acquisition, we restructured the combined operations by eliminating certain former Buzzeo positions. We accrued $200 at January 4, 2005 for liabilities associated with the cost of completing the restructuring plan. Buzzeo’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Buzzeo was approximately $10,988, including $33 of legal and professional fees. Approximately $590 of the purchase price was included in other accrued expenses in the consolidated balance sheet as of September 30, 2005 and $1,025 of the purchase price was held in escrow as of September 30, 2005. In accordance with the purchase agreement, the $1,025 held in escrow, less amounts claimed against escrow, if any, is payable on January 4, 2006. We are in the process of finalizing the valuation of certain intangible assets, including the review of a third-party valuation. Therefore, the allocation of purchase price is preliminary and subject to adjustment. The assets acquired and liabilities assumed in connection with the Buzzeo acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

The preliminary allocation of purchase price, including the net assets acquired of approximately $3,461, to intangible assets and goodwill acquired in connection with the Buzzeo acquisition are as follows: customer relationship asset of $4,390, amortizable over 10 years; trademark of $290, amortizable over 7 years; other intangibles of $70, fully amortized during the three months ended March 31, 2005; and goodwill of $2,777.

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

($ IN THOUSANDS)

Schwarzeck

On July 20, 2004, we completed the strategic acquisition of the capital stock of Schwarzeck-Verlag GmbH (“Schwarzeck”). Schwarzeck was a provider of physician databases, direct marketing services and sample fulfillment services to pharmaceutical companies in Germany. This acquisition accelerated our expansion in Europe and increased our interactive marketing solutions and services to the German pharmaceutical industry. In connection with the acquisition, we restructured the combined operations by eliminating certain former Schwarzeck positions. We accrued approximately $300 at July 20, 2004 for liabilities associated with the cost of completing the restructuring plan. Schwarzeck’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. The valuation of certain intangible assets was finalized during the third quarter of 2005. The assets acquired and liabilities assumed in connection with the Schwarzeck acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

MDM

On April 6, 2004, we completed the strategic acquisition of the capital stock of the Medical Data Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and Ukraine. MDM’s results of operations have been included in the accompanying consolidated 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 professional fees. The valuation of certain intangible assets was finalized during the fourth quarter of 2004. The assets acquired and liabilities assumed in connection with the MDM acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

Uto Brain

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

The aggregate purchase price for Uto Brain was approximately $4,900 (498,270 Yen), including approximately $100 of legal and professional fees. As of September 30, 2005, the purchase price was paid. In addition, we assumed approximately $3,800 in bank debt and an acquired loan, all of which was repaid during the year ended December 31, 2004. The assets acquired and liabilities assumed in connection with the Uto Brain acquisition and pro forma results of operations are not deemed material to the consolidated financial statements.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

REVENUES

	THREEMONTHS ENDED						%		2005 %		2004 %
	SEPTEMBER 30,				$ Increase		Increase /		of Total		of Total
	2005		2004		/ (Decrease)		(Decrease)		Revenues		Revenues
Services & Technology:
Sales solutions	$	86,314	$	71,629	$	14,685	21	%	75	%	72	%
Marketing solutions	24,052		23,834		218		1	%	21	%	24	%
Shipping	3,994		3,965		29		1	%	3	%	4	%
Total Revenues	$	114,360	$	99,428	$	14,932	15	%	100	%	100	%

Total revenues of $114,360 increased by 15% for the three months ended September 30, 2005 compared with the three months ended September 30, 2004. Our international revenues were $38,859, or approximately 34% of total revenues

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

($ IN THOUSANDS)

in the quarter, and decreased by 4% from 2004 due to decease in license revenue. License fees are, by nature, non-recurring items and fluctuate from period to period. Total revenues in the United States increased by 28% from the three months ended September 30, 2004, and were $75,501, or approximately 66% of total revenues. The increase in the United States was primarily due to help desk, asset management and implementation services associated with new system roll-outs by our customers, an increase in our interactive marketing business and the addition of revenues from our acquisitions.

Our current business is subject to a higher level of seasonal fluctuation than we have experienced in the past. Specifically, our European business and our interactive marketing business in the United States have historically experienced a seasonal slowdown during the summer months.

Sales Solutions

Sales solutions accounted for approximately 75% of total revenues during the three months ended September 30, 2005, and increased by 21% compared with the three months ended September 30, 2004. Sales solutions services in the United States increased by 35%, due to increases in help desk, asset management, and implementation services, which were primarily driven by a non-recurring project as well as field inventory and reconciliation services from our first quarter 2005 acquisition of Buzzeo. Additionally, there was a significant decrease in international license revenue. During the third quarter 2004, there was a sale of third-party licenses to an international customer, which did not reoccur in 2005. International sales solutions services increased by 2% versus the three months ended September 30, 2004.

Marketing Solutions

Marketing solutions accounted for approximately 21% of total revenues during the three months ended September 30, 2005, and were relatively flat as compared with the three months ended September 30, 2004. In the United States, marketing solution revenues were relatively flat as compared with the three months ended September 30, 2004, but included growth in our interactive marketing services and consulting services from our acquisition of Buzzeo. These increases were offset by decreases in our clinical and data services. Our international marketing solutions revenues were relatively flat as compared with the three months ended September 30, 2004, but included growth in our interactive marketing services which was offset by a decrease in our contract sales and data services.

Shipping

Shipping revenues accounted for approximately 3% of total revenues during the three months ended September 30, 2005, and were relatively flat as compared with the three months ended September 30, 2004. Shipping revenues contribute little to no margin and relate to our interactive marketing business.

OPERATING COSTS & EXPENSES

	THREEMONTHS ENDED								%		2005 %		2004 %
	SEPTEMBER 30,					/$ Increase			Increase /		of Total		of Total
	2005		2004			/ (Decrease)			(Decrease)		Revenues		Revenues
Operating Costs & Expenses:
Operating costs (including shipping)	$	61,252	$	51,578		$	9,674		19	%	54	%	52	%
Selling, general and administrative	33,395		32,832			563			2	%	29	%	33	%
Research and development	1,343		1,673			(330		)	-20	%	1	%	2	%
Amortization of acquired intangible assets	960		1,214			(254		)	-21	%	1	%	1	%
Other operating (income)	—		(368		)	368			-100	%	0	%	0	%
Total operating costs & expenses	$	96,950	$	86,929		$	10,021		12	%	85	%	87	%

OPERATING COSTS (including shipping). Operating costs increased 19% for the three months ended September 30, 2005 compared with the three months ended September 30, 2004. This increase was due to higher costs from our current year acquisitions, as well as our overall revenue growth and increased costs associated with our interactive marketing business in the United States. As a percentage of revenues, operating costs during the three months ended September 30, 2005 were 54% versus 52% during the three months ended September 30, 2004.

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

($ IN THOUSANDS)

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses were relatively flat for the three months ended September 30, 2005 compared with the three month ended September 30, 2004. SG&A cost increases due to higher costs associated with our current year acquisitions, and were offset by actions taken by management to contain costs during the first quarter of 2005. As a percentage of revenues, SG&A decreased to 29% for the three months ended September 30, 2005, down from 33% for the three months ended September 30, 2004. We have and expect to continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures in other elements of SG&A.

RESEARCH AND DEVELOPMENT (R&D). R&D expenses decreased by 20% for the three months ended September 30, 2005 compared with the three months ended September 30, 2004. As a percentage of revenues, R&D expenses decreased to 1% for the three months ended September 30, 2005, from 2% for the three months ended September 30, 2004, due to reduced R&D spending. Gross R&D spending (R&D expenses plus additions to capitalized software development costs) decreased 25% from $3,686 for the three months ended September 30, 2004 to $2,749 for the three months ended September 30, 2005. Gross R&D decreased due to the deployment of resources to revenue-generating projects and the savings related to our offshore initiative.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 21% from the comparable three months ended September 30, 2004. The decrease primarily reflects certain intangible assets related to the SAI and Synavant acquisitions which were fully amortized as of June 30, 2005, partially offset by additional amortization of intangibles related to the Schwarzeck, Buzzeo and Optas acquisitions.

OTHER OPERATING (INCOME). We received insurance proceeds related to the recovery of costs of certain previous losses in the three month period ended September 30, 2004.

PROVISION FOR INCOME TAXES. Our effective income tax expense rate remained flat at 38.5% for the three months ended September 30, 2005 and 2004. We expect our annualized effective income tax expense rate for the year ending December 31, 2005 to be approximately 38.5%.

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

REVENUES

	NINEMONTHS ENDED				$ Increase		%		2005 %		2004 %
	SEPTEMBER 30,				/		Increase /		of Total		of Total
	2005		2004		(Decrease)		(Decrease)		Revenues		Revenues
Services & Technology:
Sales solutions	$	239,527	$	214,673	$	24,854	12	%	73	%	73	%
Marketing solutions	75,757		67,847		7,910		12	%	23	%	23	%
Shipping	13,589		11,879		1,710		14	%	4	%	4	%
Total revenues	$	328,873	$	294,399	$	34,474	12	%	100	%	100	%

Total revenues of $328,873 increased by 12% for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004. Our international revenues were $122,082, or approximately 37% of total revenues for the period, and increased by 7% over 2004, due to our recent acquisitions and organic growth. Total revenues in the United States increased by 14% from the nine months ended September 30, 2004, and were $206,791, or approximately 63% of total revenues. The increase in the United States resulted from a non-recurring project, $4,000 of revenue associated with the early termination of a contract with Odyssey, which was a mid-tier domestic client that has ceased operating in the United States, and the addition of revenues from our current year acquisitions.

Sales Solutions

Sales solutions accounted for approximately 73% of total revenues during the nine months ended September 30,

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

($ IN THOUSANDS)

2005, and increased by approximately 12% compared with the nine months ended September 30, 2004. Sales solution services in the United States increased by 15%, which included $4,000 associated with the early termination of a contract with Odyssey, as well as an increase in help desk, asset management, and implementation services which were primarily driven by a non-recurring project and the addition of sales support services from our Buzzeo acquisition. Our international sales solutions services were flat, with sales solutions services increasing by approximately 5% which was mostly offset by a decrease in license fees of our international business versus the nine months ended September 30, 2004.

Marketing Solutions

Marketing solutions accounted for approximately 23% of total revenues during the nine months ended September 30, 2005, and increased by approximately 12% compared with the nine months ended September 30, 2004. The increase was mostly due to growth in our international marketing solutions business, which increased by 19% over the prior year, including from 32% growth in our international interactive marketing services. The growth in international interactive marketing included the additional revenues from our 2004 acquisitions as well as organic growth. In the United States, marketing solutions increased by approximately 4% compared with the nine months ended September 30, 2004, due to increases in interactive marketing and the inclusion of marketing services from our Buzzeo acquisition, which was partially offset by a decrease in our domestic clinical, data and consulting revenues.

Shipping

Shipping revenues accounted for approximately 4% of total revenues during the nine months ended September 30, 2005, and increased by approximately 14% compared with the nine months ended September 30, 2004. Shipping revenues contribute little to no margin, and increased primarily as a result of higher pass-through shipping costs related to the growth in our interactive marketing business.

OPERATING COSTS & EXPENSES

	NINEMONTHS ENDED					$			%		2005 %		2004 %
	SEPTEMBER 30,					Increase /			Increase /		of Total		of Total
	2005		2004			(Decrease)			(Decrease)		Revenues		Revenues
Operating costs (including shipping)	$	173,732	$	151,807		$	21,925		14	%	53	%	52	%
Selling, general and administrative	103,258		98,923			4,335			4	%	31	%	34	%
Research and development	4,615		7,417			(2,802		)	-38	%	1	%	3	%
Facility and other charges	9,372		—			9,372			N/A		3	%	0	%
Amortization of acquired intangible assets	3,340		3,467			(127		)	-4	%	1	%	1	%
Other operating (income)	—		(707		)	707			-100	%	—		—
Total operating costs & expenses	$	294,317	$	260,907		33,410			13	%	89	%	89	%

OPERATING COSTS (including shipping). Operating costs increased 14% for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004. This increase was due to higher costs from our current year acquisitions and a full nine months of costs related to our 2004 acquisitions of MDM and Schwarzeck, higher pass-through postage costs and our overall increase in revenues. These increases were partially offset by the savings related to our offshore initiative. As a percentage of revenues, including the impact of the early termination of the contract with Odyssey, operating costs during the nine months ended September 30, 2005 were 53% versus 52% during the nine months ended September 30, 2004. We anticipate realizing additional savings in future periods as we continue to build our offshore presence.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased 4% for the nine months ended September 30, 2005 compared with the nine month ended September 30, 2004. SG&A costs increased due to higher costs from our current year acquisitions and a full nine months of costs related to our 2004 acquisitions of MDM and Schwarzeck , as well as an increased expenses as a result of our efforts to comply with Sarbanes-Oxley section 404 review, testing and attestation requirements. As a percentage of revenues, including the impact of the early termination of the contract with Odyssey, SG&A decreased to 31% for the nine months ended September 30, 2005, down from 34% for the nine months ended September 30, 2005. We have and expect to continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures in other elements of SG&A.

RESEARCH AND DEVELOPMENT (R&D). R&D expenses decreased 38% for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004. As a percentage of revenues, R&D expenses decreased to 1% for

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

($ IN THOUSANDS)

the nine months ended September 30, 2005 from 3% for the nine months ended September 30, 2004. The decrease was due to decreased R&D spending and a substantially higher capitalization rate during the nine months ended September 30, 2005. We capitalized more costs in the nine months ended September 30, 2005 due to the development of our release of the next generation CRM solutions. Gross R&D spending (R&D expenses plus additions to capitalized software development costs) decreased 26% from $11,504 for the nine months ended September 30, 2004, to $8,460 for the nine months ended September 30, 2005. Gross R&D decreased due to the deployment of resources to revenue-generating projects and the savings related to our offshore initiative.

FACILITY AND OTHER CHARGES. During the nine months ended September 30, 2005, we recorded $7,649 of facility-related charges and a severance charge of $1,723. The facility charges consist of $6,619 related to vacating a New Jersey facility and for additional facilities vacated in previous periods due to changes in current market conditions, as well as $1,030 related to the write-off of leasehold improvements associated with the exit of our New Jersey facility. The $1,723 severance charge relates to the elimination of certain senior and mid-level management positions during the three months ended March 31, 2005.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 4% over the comparable nine months ended September 30, 2004. The increase reflects a full current period’s amortization of intangible assets acquired in connection with our acquisitions of MDM, Schwarzeck and Buzzeo, offset by certain intangible assets related to the SAI, Synavant and Uto Brain acquisitions being fully amortized during or prior to the nine months ended September 30, 2005.

OTHER OPERATING (INCOME). We received proceeds of $707 related to insurance claims during the nine months ended September 30, 2004.

PROVISION FOR INCOME TAXES. Our effective income tax expense rate remained flat at 38.5% for the nine months ended September 30, 2005 and 2004. We expect our annualized effective income tax expense rate for the year ending December 31, 2005 to be approximately 38.5%.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2005, working capital was $79,011 compared to $68,058 as of December 31, 2004. Cash and cash equivalents were $64,618 as of September 30, 2005, compared to $64,020 as of December 31, 2004. These increases were primarily attributable to the cash generated by operating activities partially offset by payments made in connection with our 2005 and 2004 acquisitions as well as the previously communicated increase in capital expenditures during the nine months ended September 30, 2005.

We finance our business primarily through cash generated by operations. Net cash provided by operating activities was $39,829 and $36,874 for the nine month periods ended September 30, 2005 and 2004, respectively. During the nine months ended September 30, 2005, we generated operating cash from our net income adjusted for changes in assets and liabilities, net of effects from acquisitions. Our accrued facility and other charges resulted in lower net income for the nine months ended September 30, 2005, however, these charges only had an approximate $1,700 negative impact on our operating cash flows for the nine months ended September 30, 2005. Future payments of these accruals will continue to have a negative impact on future operating cash flows. Impacting our operating cash flow were payments of income taxes and purchase accounting restructuring charges. During the three months ended September 30, 2005, our accounts receivable days sales outstanding decreased to 60, from 62 days for the three months ended December 31, 2004 due to improved cash collections.

During the nine months ended September 30, 2004, we generated operating cash from net income adjusted for changes in assets and liabilities, net of effects from acquisitions. This increase in operating cash flow was partially offset by $5,606 of payments related to accrued purchase accounting restructuring charges incurred in connection the Synavant and SAI acquisitions as well as increased payments of accounts payable and accrued expenses. Our accounts receivable days sales outstanding decreased to 63 days for the three months ended September 30, 2004, from 68 days for the three months ended December 31, 2003.

Cash used in investing activities was $47,917 for the nine months ended September 30, 2005, and includes payments for the Optas, Buzzeo and Uto Brain acquisitions, as well as additions to capitalized software development costs and purchases of property and equipment. Additions of property and equipment primarily related to our new hardware facility in New Jersey, new corporate headquarters in New Jersey and new international facilities, as well as investing in our helpdesk automation process and interactive marketing machinery. Cash used in investing activities was $24,320 for the nine months ended September 30, 2004, and was primarily attributable to purchases of property and equipment related to the relocation of

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

($ IN THOUSANDS)

our corporate headquarters, as well as payments made related to the MDM and Uto Brain acquisitions.

As anticipated, purchases of property and equipment increased for the nine months ended September 30, 2005 versus the comparable prior year period. During 2005, we currently expect capital spending in the range of approximately $24,000 to $26,000 primarily to support our infrastructure expansion, as well as for the consolidation of our New Jersey based, U.S. hardware facility. We review our capital expenditure program periodically and adjust it as required to meet current needs.

Cash provided by financing activities was $9,697 for the nine months ended September 30, 2005, and includes proceeds from the issuance of common stock partially offset by payments related to capital lease obligations. Cash provided by financing activities was $3,023 for the nine months ended September 30, 2004, and was primarily attributable to the issuance of common stock partially offset by the repayments of long-term debt and loans acquired in connection with the Uto Brain acquisition.

We regularly evaluate opportunities to acquire products or businesses complementary to our operations. Such acquisition opportunities, if they arise, may involve the use of cash, equity or debt instruments. We believe that available funds, anticipated cash flows from operations and the availability of our revolving line of credit will satisfy our current projected working capital and capital expenditure requirements, exclusive of cash required for possible future acquisitions of businesses, products and technologies, during the next twelve to eighteen months. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. Our ability to generate future cash flows depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the pharmaceutical and life sciences industry and to general economic, political, financial, competitive and regulatory factors beyond our control.

Contractual Obligations and Commitments

The June 16, 2003 line-of-credit agreement with JPMorgan Chase, amended September 24, 2004, expired on July 1, 2005. On July 25, 2005, we entered into a replacement line-of-credit agreement (the “Agreement”), in the amount of $30,000 with JPMorgan Chase Bank that expires on June 30, 2008. The Agreement is available to finance working capital needs and possible future acquisitions. The Agreement contains customary affirmative and negative covenants and also contains certain financial covenants, including those related to (a) a maximum leverage ratio at the end of any fiscal quarter, (b) a minimum interest coverage ratio at the end of any fiscal quarter and (c) a minimum fixed charge coverage ratio at the end of any fiscal quarter. The Agreement also restricts our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. As of September 30, 2005, our consolidated net worth was $260,196, we were in compliance with all covenants and did not have any amounts outstanding under the line-of-credit.

Our principal commitments at September 30, 2005 consisted primarily of obligations under operating and capital leases as well as future minimum guarantees to certain vendors. Future minimum payments on these obligations are as follows:

			Payments Due by Period
			October 1, 2005
			through
			December 31,
Contractual Obligations	Total		2005		2006		2007		2008		2009		Thereafter
Capital leases	$	3,741	$	402	$	1,738	$	1,547	$	54	$	—	$	—
Corporate headquarters	193		193		—		—		—		—		—
Minimum guarantees	2,832		2,195		355		282		—		—		—
Buzzeo purchase price	1,615		—		1,615		—		—		—		—
Operating leases (1)	100,967		5,764		17,965		15,485		12,333		11,352		38,068
Total	$	109,348	$	8,554	$	21,673	$	17,314	$	12,387	$	11,352	$	38,068

(1) Operating lease amounts disclosed above include $17,343 of future operating lease costs, excluding estimated future sublease income, accrued for in accrued facility charges and in the purchase accounting restructuring accruals related to the Synavant and SAI acquisitions.

As of September 30, 2005, letters of credit for approximately $5,721 were outstanding related to deposits on certain facilities.

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

($ IN THOUSANDS)

We have an agreement with a 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 September 30, 2005, $500 has been paid, with $500 of the commitment remaining. The agreement has a termination date of December 11, 2010, subject to extension with the consent of a majority in interest of the limited partners. This asset is recorded within other assets in the accompanying consolidated balance sheets.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES

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

OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY

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

• the significant and continuing consolidation of the pharmaceutical industry which may reduce the number of our existing and potential customers;

• regulatory changes that permit the over-the-counter sale of formerly prescription-only drugs;

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

• increasing Food and Drug Administration activism; and

• competitive pressure on the pharmaceutical industry resulting from the continuing shift to delivery of healthcare and pharmaceuticals through managed care organizations.

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

OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS

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

WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS

Our business may be materially and adversely affected as a result of the significant risks associated with our acquisitions, including our recent acquisitions of Uto Brain, the MDM group of companies, Schwarzeck, Buzzeo and Optas. As part of our business strategy, we have acquired, and in the future may acquire, businesses that offer complementary products, services or technologies. These acquisitions are accompanied by substantial risks, including:

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

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

($ IN THOUSANDS)

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

• our inability to successfully integrate the acquired business;

• the failure of an acquired business to further our strategies;

• our inability to achieve expected cost and business synergies;

• the significant strain on our operating systems;

• the diversion of our management’s attention from other business concerns;

• the impairment or loss of relationships with customers of the acquired business;

• the negative impact of the combination of different corporate cultures;

• the loss of key employees of the acquired company;

• undetected problems within the acquired organization; and

• the integration and maintenance of uniform, company-wide standards, procedures and policies.

Any of these factors could have a material adverse effect on our revenues and earnings. We expect that the consideration paid for future acquisitions, if any, could be in the form of cash, equity, debt or a combination of these. To the extent that we issue shares of stock or other rights to purchase stock in connection with any future acquisition, existing shareholders will experience dilution and potentially decreased earnings per share.

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

We may in the future acquire additional complementary companies, products or technologies. If we do so, we may face the same risks, uncertainties and disruptions discussed above. In addition, our profitability may suffer because of acquisition-related costs or amortization costs of acquired intangible assets.

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

Business and economic pressures on our major customers may result in budget constraints that directly impact their ability to purchase our new products and services offerings. We cannot assure you that any decrease in demand caused by these pressures will not have a material adverse effect on our business, operating results or financial condition.

OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES

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

In addition, an implementation process of three to six or more months before the software is rolled out to a customer’s sales force is customary. However, if a customer were to delay or extend its implementation process, our quarterly revenues may decline below expected levels and could adversely affect our results of operations.

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

($ IN THOUSANDS)

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE

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

• the discretionary nature of our customers’ purchase and budget cycles;

• potential delays in recognizing revenue from license and other transactions;

• seasonal variations in operating results, including the increased seasonality associated with our international growth; and

• variations in the fiscal or quarterly cycles of our customers.

In addition, we establish our expenditure levels for product development, sales and marketing and some of our other operating expenses based in large part on our expected future revenues and anticipated competitive conditions. In particular, we frequently add staff in advance of new business to permit adequate time for training. If the new business is subsequently delayed, canceled or not awarded, we will have incurred expenses without the associated revenues. We also may increase sales and marketing expenses if competitive pressures become greater than originally anticipated. Since only a small portion of our expenses varies directly with our actual revenues, our operating results and profitability are likely to be adversely and disproportionately affected if our revenues fall below our targeted goals or expectations.

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

WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR RESPOND TO TECHNOLOGICAL CHANGE

The market for CRM and SFA products changes rapidly because of frequent improvements in computer hardware and software technology. Our future success will depend, in part, on our ability to:

• use available technologies and data sources to develop new products and services and to enhance our current products and services;

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

• address the changing and increasingly sophisticated needs of our customers.

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

Competition for software products has been characterized by shortening product cycles. We may be materially and adversely affected by this trend if the product cycles for our products prove to be shorter than we anticipate. If that happens, our business, operating results or financial condition could be adversely affected.

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

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

($ IN THOUSANDS)

SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES

Our software products are technologically complex and may contain previously undetected errors or failures or errors when products are first introduced or when updated versions are released. We cannot assure you that, despite our testing, our new products will be free from significant errors. Software errors could cause delays in the commercial release of products until the errors have been corrected. Software errors 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 commit significant resources to their correction. Errors that result in termination of agreements, monetary damages, losses or delays could have a material adverse effect on our business, operating results or financial condition.

INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES SOLUTIONS

There are a number of other companies that sell CRM and SFA products and related services that specifically target the pharmaceutical industry, including competitors that are actively selling CRM and SFA software products in more than one country and competitors that also offer CRM and SFA support services. Some of our competitors and potential competitors are part of large corporate groups and have significantly greater financial, sales, marketing, technology and other resources than we have.

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

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

• the number and success of new market entrants supplying competing CRM and SFA products or support services;

• alliances among existing competitors;

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

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

• development and/or operation of in-house CRM or SFA software products or services by our customers and potential customers.

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

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

The success of parts of our business will depend, in part, on our ability to continue developing Internet-related products, modifying and improving our existing products and responding to technological advances and changing commercial uses of the Internet. We cannot assure you that our Internet-related products and services will adequately respond to such technological advances and changing uses. Nor can we assure you that the demand for our Internet-related products and services will increase.

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

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

($ IN THOUSANDS)

OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTIC OPERATIONS DO NOT

We have recently significantly expanded and may in the future further expand our international operations and enter additional international markets. This expansion would require significant management attention and financial resources that could adversely affect operating margins and earnings. We may not be able to maintain or increase international market demand for our products and services. If we do not, our international sales will be limited and our business, financial condition or results of operations could be materially and adversely affected.

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

• adverse changes in the political stability and economic environments in these countries and regions;

• adverse changes in tax, tariff and trade and other regulations;

• the absence or significant lack of legal protection for intellectual property rights in certain of these countries; and

• difficulties in managing an organization spread on a global basis.

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

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

CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATION TECHNOLOGY INFRASTRUCTURE

The efficient operation of our business, and ultimately our operating performance, depends on the uninterrupted use of our critical business and information technology systems. Many of these systems require the use of specialized hardware and other equipment that is not readily available in the marketplace. Although we maintain these systems at more than one location, a natural disaster, a fire or other catastrophic event at any of these locations could result in the destruction of these systems. In such an event, the replacement of these systems and restoration of archived data and normal operation of our business could take several days to several weeks, or more. During the intervening period when our critical business and information technology systems are fully or partially inoperable, our ability to conduct normal business operations could be significantly and adversely impacted and as a result our business, operating results and financial condition could be adversely affected.

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

($ IN THOUSANDS)

OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM AND ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL

Our future success depends, to a significant extent, upon the contributions of our executive officers and key sales, technical and customer service personnel.

Our future success also depends on our continuing ability to attract and retain highly qualified technical and managerial personnel. Due to competition for such personnel, we have at times experienced difficulties in recruiting and retaining qualified personnel and we may experience such difficulties in the future. Our ability to expand and increase revenue growth in the future will depend, in part, on our success in recruiting and training such qualified personnel. We may not always be able to expand our personnel in these areas as necessary to support our operations. Any recruiting or retention difficulties could adversely affect our business, operating results or financial condition.

IF OUR SECURITY MEASURES ARE BREACHED AND AN UNAUTHORIZED PARTY OBTAINS ACCESS TO A CUSTOMER’S DATA, CERTAIN OF OUR SOLUTIONS MAY BE PERCEIVED AS BEING INSECURE AND CUSTOMERS MAY CURTAIL OR STOP USING OUR SERVICE.

Certain of our solutions involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and potential liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose existing customers and our ability to obtain new customers.

OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BE ABLE TO PROTECT COMPLETELY

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

Further, while we believe that our products and trademarks do not infringe upon the proprietary rights of any third parties, third parties may assert infringement claims against us in the future that may result in costly litigation, diversion of management’s attention, the imposition of monetary damages or injunctive relief against us. In addition, any such claims may require us to enter into royalty arrangements. Any of these results could materially and adversely affect our business, operating results or financial condition.

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

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

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

($ IN THOUSANDS)

THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGIC RELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED

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

OUR DATA SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPS WHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESE SOLUTIONS

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

FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THE DEMAND FOR SOME OF OUR SOLUTIONS

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

GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL

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

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

We expect to sublease all or a portion of certain facilities, including facilities acquired as part of the Synavant acquisition. An inability to successfully dispose of or sublet, as applicable, any of these facilities or to obtain favorable pricing or sublease terms could negatively impact our earnings.

UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BE REQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS AND COULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS

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

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

($ IN THOUSANDS)

WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THE WORLD ECONOMY

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

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

We continue to be involved in the process of evaluating our internal control over financial reporting in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. This is a continuing process and we cannot be certain as to the timing of completion of our future reviews, evaluation, testing and remediation actions or the impact of the same on our operations or the results of the required testing and required attestation report by us and also by our registered independent public accounting firm. If at any time we are unable to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or NASDAQ. Any such actions could have a material adverse affect our financial results and the price of our common stock.

PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAY DISCOURAGE AN ACQUISITION OF DENDRITE

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

OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS

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

• the announcement or the introduction of new products and services by us or our competitors;

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

• market conditions in the technology, healthcare and other growth sectors;

• general consolidation in the healthcare information industry which may result in the market perceiving us or other comparable companies as potential acquisition targets;

• the gain or loss of significant orders;

• changes in the domestic and international economic, political and business conditions; and

• future acquisitions.

Further, the stock market has experienced on occasion extreme price and volume fluctuations. The market prices of the equity securities of many technology companies have been especially volatile and often have been unrelated to the operating performance of such companies. These broad market fluctuations may have a material adverse effect on the market price of our common stock.

ITEM 4. Controls and Procedures

The Company’s Chief Executive Officer and Interim Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 as amended, as of the end of the period covered by this Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

The Company’s Chief Executive Officer and Interim Chief Financial Officer have also concluded that there have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As of September 1, 2005, we transitioned our financial reporting consolidation system to a new platform. Implementation of the new system necessarily involves changes to our procedures for control over financial reporting. The new system was subjected to testing prior to and after September 1, 2005. We have not experienced any significant difficulties to date in connection with the implementation or operation of the new system.

PART II. OTHER INFORMATION

ITEM 5. Other Information

The following is disclosed pursuant to the requirements of Form 8-K under Item 1.01 and Item 1.02 of Form 8-K and is in satisfaction of such requirements.

On November 4, 2005, the Company and Paul Zaffaroni entered into a Retirement Agreement and General Release, dated as of November 4, 2005 (the “Agreement”). The Agreement supersedes Mr. Zaffaroni’s previously filed Employment Agreement, dated as of May 16, 2001 (the “Employment Agreement”). Pursuant to the Agreement, unless his employment is terminated for Cause (as defined in the Employment Agreement), Mr. Zaffaroni will continue to serve as an employee of the Company through March 31, 2006 and will continue to receive his base salary and benefits. Commencing April 1, 2006, unless terminated for Cause, Mr. Zaffaroni will continue to render services as the Company may reasonably request through March 31, 2007 and in return will be paid his base salary through such date.

Mr. Zaffaroni will be eligible to continue to participate in the Executive Incentive Plan until the end of calendar year 2005 at which time he will no longer be entitled to participate in the Executive Incentive Plan or any other bonus plan. In addition, through the earlier of (i) March 31, 2007 and (ii) the date Mr. Zaffaroni may secure other full-time employment (the “Retirement Date”), Mr. Zaffaroni will be eligible for (i) continued stock option vesting for stock options which were previously granted to him, (ii) participation in the deferred compensation plan, and (iii) participation in the Company’s 401(k) plan and stock purchase plan. Dendrite will also reimburse Mr. Zaffaroni for future, documented relocation costs up to $200,000 and for certain costs already incurred in the refinancing of his current residence.

Mr. Zaffaroni’s health coverage under the Company’s group health plan will terminate on the Retirement Date, at which time Mr. Zaffaroni will be provided an opportunity to continue health coverage for himself and qualifying dependents under the Company’s group health plan in accordance with the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).

Mr. Zaffaroni will continue to be eligible for life insurance coverage under Dendrite’s policy through the Retirement Date. As soon as practicable following the Retirement Date, the ownership of the insurance policy securing Mr. Zaffaroni’s account balance under Dendrite’s nonqualified deferred compensation plan shall be transferred from Dendrite to Mr. Zaffaroni.

A copy of the Agreement is attached as Exhibit 10.8.

ITEM 6. Exhibits

10.1 Amendment dated July 1, 2005 to Credit Agreement, dated as of June 16, 2003, and as amended September 24, 2004 among Dendrite International, Inc., the Lenders party hereto, and JPMorgan Chase Bank, incorporated by reference to the Company’s Current Report on Form 8-K filed on July 7, 2005.

10.2 Credit Agreement, dated July 25, 2005, among Dendrite International, Inc., the Lenders party thereto, and JP Morgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to the Company’s Current Report on Form 8-K filed on July 29, 2005.

10.3 The Dendrite International, Inc. New Hire Authorization, as amended, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 21, 2005.

10.4 New Hire Authorization - Form of Notice of Stock Option Award; Nonqualified Stock Option Agreement, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 21, 2005.

10.5 New Hire Authorization - Forms of Restricted Stock [Units] Agreement, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 21, 2005.

10.6 Letter Amendment between Dendrite International, Inc. and George T. Robson, dated September 27, 2005, incorporated by reference to the Company’s Current Report on Form 8-K filed on October 3, 2005.

10.7 Employment Agreement between the Company and Joseph A. Ripp dated October 5, 2005.

10.8 Retirement Agreement and General Release between the Company and Paul L. Zaffaroni dated November 4, 2005.

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 George T. Robson, Interim Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certifications of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, and George T. Robson, Interim Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 7, 2005

	By:	/s/ John E. Bailye
		John E. Bailye,
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Brent J. Cosgrove
		Brent J. Cosgrove,
		Vice President and Corporate Controller (Principal Accounting Officer)

EXHIBIT INDEX

10.3 The Dendrite International, Inc. New Hire Authorization, as amended, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 21, 2005.

10.5 New Hire Authorization - Forms of Restricted Stock [Units] Agreement, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 21, 2005.

10.7 Employment Agreement between the Company and Joseph A. Ripp dated October 5, 2005.

10.8 Retirement Agreement and General Release between the Company and Paul L. Zaffaroni dated November 4, 2005.

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 George T. Robson, Interim Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Dendrite International (DRTE) Inactive 10-Q2005 Q3 Quarterly report

Content analysis

FACTORS THAT MAY AFFECT FUTURE RESULTS