Dendrite International (DRTE) 10-Q 2006 Q2 Quarterly report

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 June 30, 2006

Commission File Number   001-16379

Dendrite International, Inc.

(Exact name of registrant as specified in its charter)

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

1405 U.S. Highway 206

Bedminster, NJ  07921

(Address, including zip code, 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.
x yes o no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

As of August 1, 2006, 43,722,566 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 JUNE 30, 2006

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

2

PART I.    FINANCIAL INFORMATION

ITEM 1.    Financial Statements

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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

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

3

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

	June 30, 2006			December 31, 2005
Assets
Current Assets:
Cash and cash equivalents	$	80,395		$	66,145
Accounts receivable, net of allowance for doubtful accounts of $1,000	68,744			80,167
Prepaid expenses and other current assets	10,021			8,544
Deferred income taxes	9,088			8,848
Total current assets	168,248			163,704
Property and equipment, net of accumulated depreciation of $68,707 and $61,019, respectively	52,825			52,592
Other assets	9,378			8,856
Goodwill	90,257			90,440
Intangible assets, net	22,942			25,083
Capitalized software development costs, net	10,591			10,341
Deferred income taxes	13,008			11,991
	$	367,249		$	363,007
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	8,262		$	7,677
Income taxes payable	10,785			9,518
Capital lease obligations	1,390			1,383
Accrued compensation and benefits	19,219			17,950
Accrued professional and consulting fees	5,904			5,690
Accrued restructuring and other charges	1,436			1,490
Other accrued expenses	15,947			17,468
Purchase accounting restructuring accrual	1,130			1,601
Deferred revenues	15,855			18,680
Total current liabilities	79,928			81,457
Capital lease obligations	816			1,648
Purchase accounting restructuring accrual	2,428			3,009
Accrued restructuring and other charges	3,800			4,143
Deferred rent	5,526			5,740
Other non-current liabilities	5,590			5,595
Stockholders’ Equity:
Preferred stock, no par value, 15,000,000 shares authorized, none issued	—			—
Common stock, no par value, 150,000,000 shares authorized, 46,528,807 and 46,353,252 shares issued; 43,667,504 and 43,491,949 shares outstanding at June 30, 2006 and December 31, 2005, respectively	151,539			149,947
Retained earnings	148,943			148,948
Deferred compensation	—			(4,419		)
Accumulated other comprehensive income (loss)	416			(1,324		)
Less treasury stock, at cost	(31,737		)	(31,737		)
Total stockholders’ equity	269,161			261,415
	$	367,249		$	363,007

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

4

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

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

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

5

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

2. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes accounting for and disclosure of uncertainty in tax positions. This interpretation defines the criteria that must be met for the benefits of a tax position to be recognized in the financial statements as well as the measurement of tax benefits recognized. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.

3. Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”) as a replacement to SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). This statement supersedes Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) 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.

On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective application method, as permitted under SFAS 123(R), which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation over the respective service periods for awards expected to vest. Under this method, compensation cost in 2006 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company will recognize the cost of all employee stock awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures. Accordingly, prior periods amounts have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

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

6

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following table details the pro forma effect on net income and income per share had stock based-compensation expense for the Employee Stock-Based Awards been recorded for the three and six months ended June 30, 2005, based on the fair value method under SFAS 123:

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

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

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

	For the Three Months Ended  June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Weighted-average expected stock price volatility	50.0	%	50.0	%	50.0	%	50.0	%
Weighted-average risk-free interest rate	5.0	%	3.9	%	5.0	%	3.9	%
Expected life of the option (years)	5.00		5.25		5.00		5.25

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

7

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

EQUITY COMPENSATION PLANS

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

Options

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

A summary of award activity under the Plans as of June 30, 2006 and changes during the six month period is as follows:

	Shares		Weighted-Average  Exercise Price		Weighted-Average Remaining  Contractual Term	Aggregate Intrinsic Value
Outstanding December 31, 2005	10,067,978		$	15.04
Granted	7,000		14.56
Exercised	(89,141	)	8.44
Canceled	(122,295	)	13.52
Outstanding March 31, 2006	9,863,542		15.11		6.1	12,580
Granted	155,000		10.04
Exercised	(31,012	)	11.48
Canceled	(316,075	)	17.66
Outstanding June 30, 2006	9,671,455		14.97		6.1	2,254
Exercisable June 30, 2006	8,443,850		15.55		6.1	1,815

At June 30, 2006 and December 31, 2005, there were 8,443,850 and 8,818,196 options exercisable with a weighted average exercise price of $15.55 and $15.63, respectively. As of June 30, 2006, there were 1,348,635 shares available for future grants under the Plans.

The weighted average fair value of options granted, determined using the Black-Scholes option valuation method, was $5.08 and $7.35 for the six months ended June 30, 2006 and 2005, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, was $580 and $1,451, respectively. As of June 30, 2006, there was $2,817 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 0.8 years.

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

8

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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

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

Restricted Stock Units

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

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

	Shares		Weighted-Average Grant Date Fair Value
Unvested restricted stock at December 31, 2005	280,599		$	17.22
Granted	44,000		14.56
Vested	(468	)	14.90
Canceled	(620	)	14.90
Unvested restricted stock at March 31, 2006	323,511		16.86
Granted	482,500		12.43
Vested	(20,802	)	14.22
Unvested restricted stock at June 30, 2006	785,209		14.21

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

EMPLOYEE STOCK PURCHASE PLAN

In 1997, the Company established an employee stock purchase plan that provides full-time employees the opportunity to purchase shares, at 85% of the fair value on dates determined by the Board of Directors, up to a maximum of 10% of their eligible compensation or $21,250, whichever is less. The number of authorized shares available for purchase under this plan is 900,000, of which 50,361 and 39,987 shares were purchased in the six months ended June 30, 2006 and 2005, respectively. There were 90,248 and 140,609 shares available for future issuance under the plan as of June 30, 2006 and December 31, 2005, respectively.

9

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

4. Net (Loss) Income Per Share

The following table presents the computation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2006 and 2005 (share data in thousands):

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

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

5. Comprehensive Income

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

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

6. Purchase Accounting Restructuring Accrual

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

10

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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

	Purchase Accounting Restructuring Accrual as of December 31, 2005		2006 Adjustments to Goodwill			2006 Payments			Purchase Accounting Restructuring Accrual as of  June 30, 2006
Synavant
Facility exit costs	$	4,289	$	—		$	(731	)	$	3,558
SAI
Lease termination costs	321		(66		)	(255		)	—
Total	$	4,610	$	(66	)	$	(986	)	$	3,558

7. Goodwill and Intangible Assets

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

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

The changes in the carrying amount of intangible assets not subject to amortization for the six months ended June 30, 2006 is as follows:

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

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

11

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following table reconciles net intangible assets subject to amortization for the period from December 31, 2005 to June 30, 2006:

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

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

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

12

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

8. Restructuring and Other Charges

In the first quarter of 2006, the Company announced an Operational Effectiveness (“OE”) program, which is expected to reduce costs and increase profitability by a minimum of $20,000. As a result, the Company is in the process of re-examining its cost structure and has presently identified areas of opportunity in international operations, facilities consolidation, optimizing of delivery organizations and process automation and improvement.

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

During the three month period ended March 31, 2005, the Company intiated and completed a plan to exit a facility in New Jersey for which it has an operating lease expiring in September 2011. The accrued facility charge relates to vacating a New Jersey facility and for additional facilities vacated and accrued for in previous periods, for which it had operating leases expiring through February 2012, due to changes in current market conditions. The Company accrued for the present valued 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 sheets as of June 30, 2006 and December 31, 2005, and in facility and other charges on the consolidated statement of operations during the six months ended June 30, 2006.

The activity related to accrued facility and other charges for the six months ended June 30, 2006 is summarized in the table below:

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

In connection with the plan initiated and completed during the six months ended June 30, 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 six months ended June 30, 2005.

9. Revolving Credit

The Company has a line-of-credit agreement with JPMorgan Chase (the “Agreement”) in the amount of $30,000 that expires on June 30, 2008. The Agreement is available to finance working capital needs and possible 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 June 30, 2006, the Company was in compliance with all covenants and did not have any amounts outstanding under the Agreement.

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

13

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. Income Taxes

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

11. Enterprise-Wide Data

Information about Business Segments:

In the second quarter of 2006, the Company changed its operating segments to reflect the reorganized business.  The Company has expanded its segments into four operating segments: sales solutions, marketing solutions, emerging solutions and a corporate segment.  The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is now utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources.  In identifying its reportable segments, the Company also considered the nature of services provided by its operating segments.

The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of certain administrative expenses.  Information about interest income and expense and income taxes is not provided on a segment level.  In addition, equity-based compensation is not allocated to the segments.  See Note 3 above for further discussion of the Company’s equity-based compensation.  The accounting policies of the segments are the same as the Company’s.  Information with respect to the Company’s segments follows:

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

Marketing solutions primarily includes interactive marketing, data & analytics, consulting, and shipping fees. Shipping fees which are pass-through costs that bear little to no margin, are required to be included in revenues and costs based upon Emerging 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.

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

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

Corporate includes costs and assets which are not representative of the results of the Company’s individual operating segments.  The Company allocates a significant portion of its gross corporate costs to the respective operating segments, to reflect the approximate value which has been incurred relating to services provided by the corporate entity.  In addition certain gross costs are considered to be overhead not attributable to any segment and as such, remain unallocated in Corporate.  Included among the unallocated overhead remaining within Corporate are costs for equity based compensation, audit and tax fees, excess facilities, administrative staff, and other ancillary costs.

14

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following tables include revenue and operating income (loss) for each reportable segment for the three and six months ended June 30, 2006 and 2005.

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

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

15

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following tables include depreciation and amortization expense, capital expenditures and restructuring charges for each business segment for the three and six months ended June 30, 2006 and 2005.

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

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

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

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

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

(1)See Note 8 for further discussion of restructuring charges.

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

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

16

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Information about Geographic Areas:

Revenue is classified by the major geographic areas in which we operate.  All transfers between geographic areas have been eliminated from consolidated revenues. The following table presents revenues by geographic area:

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

The table above allocates license revenues on a 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 June 30, 2006		As of December 31, 2005
United States	$	166,633	$	167,459
Europe	9,367		9,267
All other	9,992		10,586
	$	185,992	$	187,312

Information about Major Customers:

For the three month period ended June 30, 2006, the Company derived approximately 18% and 13% of it revenues from its two largest customers.  For the three month period ended June 30, 2005, the Company derived approximately 24% and 11 % of its revenue from its two largest customers.  For the six month period ended June 30, 2006, the Company derived approximately 18% and 12% of its revenues from its two largest customers. For the six month periods ended June 30, 2005, the Company derived approximately 25% of its revenues from its largest customer. As of June 30, 2006, approximately 11% of the Company’s accounts receivable balance was due from its second largest customer. As of December 31, 2005, approximately 15% and 10% of the Company’s accounts receivable balance was due from its two largest customers. 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.

17

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

($ In Thousands, Except Per Share Data)

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, life sciences 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 do not plan 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, clinical resources and compliance initiatives. 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 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 and September 2005, we broadened and enhanced our service portfolio with our acquisitions of BuzzeoPDMA, Inc. (“Buzzeo”) and Optas, Inc. (“Optas”), respectively. The Buzzeo acquisition expanded our sample and compliance management solution offerings. The Optas acquisition enhanced our portfolio of marketing solutions services by expanding our privacy-safe relationship marketing solutions for patients and physicians. We believe our 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. Key metrics are revenues, operating income, diluted net income per share, operating cash flow and days sales outstanding. Our goal is to execute our strategy to yield growth in revenues, operating income and diluted net income per share.

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

In recent years, we have presented a breakout of our revenues into the three categories of sales solutions, marketing solutions and shipping. These categories were reflective of how our service offerings were marketed to and viewed by our customers, and we believe they provided useful information to understand the changes in our revenues across periods. They

18

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

($ In Thousands, Except Per Share Data)

are not reflective of the way we have managed our business, and therefore associated operating costs and assets by revenue category have not been available on a global basis. Based upon this, we operated under one reportable segment for disclosure purposes under Statement of Financial Accounting Standards 131, “Disclosure About Segments of an Enterprise and Related Information” (“SFAS 131”) through March 31, 2006. During 2006, we initiated and completed a process to reorganize our business and to capture transactional data in a format that will enable the reporting of various financial information broken into three new discrete operating segments.  We have reclassified our current and historical revenues operating income, assets and other select data into these new groupings which management is now utilizing to manage the business. Our four operating segments are sales solutions, marketing solutions, emerging solutions as well as a corporate segment. Below is a description of these operating segments:

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

Marketing solutions business primarily includes interactive marketing, data and analytics, campaign management, and shipping fees. Our shipping fees which 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.

Emerging solutions business includes compliance solutions, clinical solutions, and contract sales force services. While these businesses are not individually significant to our total revenues today, we believe they represent significant growth opportunities in the future.

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

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, 2005, except for the Company’s accounting for stock-based compensation in connection with the adoption of SFAS 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”).

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

We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of stock options, the weighted-average expected stock price volatility and weight-average risk-free interest rate. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on our Consolidated Financial Statements. See Note 3 of the Notes to the Unaudited Consolidated Financial Statements for additional information regarding our adoption of SFAS 123(R).

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.

19

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

($ In Thousands, Except Per Share Data)

Optas

On September 12, 2005, we completed the acquisition of Optas. Based in Woburn, Massachusetts, Optas provided 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. Optas revenues are presented within our marketing solutions segment.

The aggregate purchase price for Optas was approximately $13,188, including $349 of legal and professional fees. In accordance with the purchase agreement, $1,800 of the purchase price was held in escrow as of June 30, 2006. 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 valuation of certain intangibles assets was finalized in the second quarter of 2006. 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.

Buzzeo

On January 4, 2005, we completed the strategic acquisition of Buzzeo. Based in Richmond, Virginia, Buzzeo provided 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.  Buzzeo’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. Buzzeo revenues are characterized as compliance solutions within our emerging solutions segment.

The aggregate purchase price for Buzzeo was approximately $10,759, including $33 of legal and professional fees. Approximately $487 of the remaining purchase price was paid in April 2006. In accordance with the purchase agreement, $1,025 was released from escrow in the first quarter of 2006. The valuation of certain intangibles assets was finalized in the fourth quarter of 2005. 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 AND 2005

REVENUES

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

Total revenues decreased by 8% for the three months ended June 30, 2006 compared with the three months ended June 30, 2005. Total revenues in the United States decreased by 15% from the three months ended June 30, 2005, and were $61,702, or approximately 58% of total revenues. This decrease in the United States was primarily due to reduced spending by our largest customer, and a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market recorded during the three months ended June 30, 2005 partially offset by revenue from the September 2005 acquisition of Optas and organic growth in our Marketing Solutions business.  Our international revenues were $44,679, or approximately 42% of total revenues in the quarter, which increased by 6% from 2005, which was primarily due to increased license fee revenues in our Asia market, partially offset by unfavorable foreign currency impact in Asia and the roll-off of a larger European customer during the second quarter of 2005.

20

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

($ In Thousands, Except Per Share Data)

OPERATING COSTS & EXPENSES

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

As part of our effort to realign the Company in order to drive efficiency and support our growth objectives, we announced plans to identify initiatives during 2006 that will generate approximately $20 million of annualized cost savings. During the three months ended June 30, 2006, we have already identified a portion of our cost savings target, and certain actions have already been taken, which resulted in restructuring and other charges of approximately $2.6 million during the period.  We expect to incur significant additional charges related to OE during the third and fourth quarters of 2006.  We do not expect to fully realize the savings from these efforts in 2006.

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

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased 24% for the three months ended June 30, 2006 compared with the three month ended June 30, 2005. The SG&A cost increased due to higher costs related to stock based compensation expense of $2,145, strategic consulting costs related to our effort to realign the Company and increased other compensation expense. As a percentage of revenues, SG&A increased to 40% for the three months ended June 30, 2006, up from 30% compared with the three months ended June 30, 2005.

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

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

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 8% over the three months ended June 30, 2005. The decrease primarily reflects certain intangibles assets related to the Software Associates International (“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.

PROVISION FOR INCOME TAXES. Our effective income tax expense rate increased to 433.6% for the three months ended June 30, 2006, from 38.5% for the three months ended June 30, 2005. The significant increase in our effective tax rate is primarily driven by the inability to benefit from losses in certain foreign jurisdictions, the impact of SFAS 123(R), and increased permanent non-deductible items over lower pre tax book earnings as compared to 2005.  We believe that our full year effective tax rate will continue to be volatile as the rate will continue to be impacted by our cost reduction initiatives.

21

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

($ In Thousands, Except Per Share Data)

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

REVENUES

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

Total revenues decreased by 2% for the six months ended June 30, 2006 compared with the six months ended June 30, 2005. Our international revenues were $83,518, or approximately 40% of total revenues for the six months ended June 30, 2006, were relatively flat from 2005. Total revenues in the United States decreased by 4% from the six months ended June 30, 2005, and were $125,992, or approximately 60%, of total revenues. This decrease in the United States was primarily due to reduced spending by our largest customer, and a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market recorded during the six months ended June 30, 2005 which was partially offset by revenue from the 2005 acquisition of Optas and organic growth in our Marketing Solutions business.

OPERATING COSTS & EXPENSES

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

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

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

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

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

22

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

($ In Thousands, Except Per Share Data)

of $6,619 related to vacating a New Jersey facility and for additional 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.  We expect to incur approximately $25 to $30 million of additional charges related to OE during the third and fourth quarters of 2006.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. Amortization of acquired intangible assets decreased 14% over the six months ended June 30, 2005. The decrease primarily reflects certain intangibles assets related to the Software Associates International (“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.

PROVISION FOR INCOME TAXES. Our effective income tax expense rate increased to 100.3% for the six months ended June 30, 2006, from 38.5% for the six months ended June 30, 2005. The significant increase in our effective tax rate is primarily driven by the inability to benefit from losses in certain foreign jurisdictions, the impact of SFAS 123(R), and increased permanent non-deductible items over lower pre tax book earnings as compared to 2005.  We believe that our full year effective tax rate will continue to be volatile as the rate will continue to be impacted by our cost reduction initiatives.

SEGMENT REVENUE AND OPERATING INCOME (LOSS)

THREE MONTHS ENDED JUNE 30, 2006 AND 2005

Sales Solutions

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

Sales solutions revenues accounted for approximately 65% of total Company revenues during the three months ended June 30, 2006, which decreased 14% compared with the three months ended June 30, 2005. Revenues in the United States decreased by 19%, due to reduced spending by our largest customer, a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market recorded during the three months ended June 30, 2005 and a large client rollout project which we were completing during the three months ended June 30, 2005.  We expect the trend of decreased spending from our largest customer to continue. As a result, we currently expect less revenue from this customer in 2006 and beyond. Our current contract with this customer for U.S. sales force effectiveness and related services has been renewed through 2006, subject to right of the customer to reduce or modify certain services. The customer is re-evaluating a significant portion of such U.S. services for 2007 in a request for proposal process in which we are participating. Our international sales increased by approximately $1,000 or 4%, primarily due to increased license fee revenues in our Asian market partially offset by an unfavorable foreign currency impact in Asia and the roll-off of a larger European customer during the second quarter of 2005.

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

23

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

($ In Thousands, Except Per Share Data)

Marketing Solutions

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

Marketing solutions revenues accounted for approximately 29% of total Company revenues during the three months ended June 30, 2006, which increased by approximately 8% compared with the three months ended June 30, 2005. This increase was primarily due to growth in our United States marketing solutions business, which increased by 18% over the prior year, primarily from added revenue from our 2005 acquisition of Optas. Our international marketing solution revenues increased by approximately 2% compared with the three months ended June 30, 2005, due to increases in consulting and data, partially offset by a decrease in interactive marketing revenues.

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

Operating (loss) income decreased by 432% compared with the three months ended June 30, 2005.  This decrease was primarily due to severance costs recorded in the three months ended June 30, 2006 and higher incremental costs to deliver various marketing solutions offerings in the three months ended June 30, 2006 as compared with the three months ended June 30, 2005.

Emerging Solutions

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

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

Operating (loss) income decreased by 145% compared with the three months ended June 30, 2005.  This decrease was primarily due to a reduction of ongoing clinical solution services with our largest customer versus the three months ended June 30, 2005.

Corporate

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

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

24

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

($ In Thousands, Except Per Share Data)

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

Sales Solutions

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

Sales Solutions revenues accounted for approximately 65% of total Company revenues during the six months ended June 30, 2006, and decreased 8% compared with the six months ended June 30, 2005. Revenues in the United States decreased by 9%, due to reduced spending by our largest customer, a $4,000 one-time contract cancellation settlement from a mid-market pharmaceutical company that exited the United States market recorded during the six months ended June 30, 2005 and a large client rollout project which we were completing during the six months ended June 30, 2005.  We expect the trend of decreased spending from our largest customer to continue. As a result, we currently expect less revenue from this customer in 2006 and beyond. Our current contract with this customer for U.S. sales force effectiveness and related services has been renewed through 2006, subject to right of the customer to reduce or modify certain services. The customer is re-evaluating a significant portion of such U.S. services for 2007 in a request for proposal process in which we are participating.  International sales decreased by approximately $1,500 or 3%, primarily due to the roll-off of a larger European customer during the second quarter of 2005 and reduced European license fees, which was partially offset by growth in license revenues in Asia and increased ongoing service fees resulting from regional deals Latin America.

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

Marketing Solutions

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

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

Also included in marketing solutions revenue is low gross margin revenue consisting primarily of shipping fees which accounted for approximately $12,318 or 6% of total revenues for the six months ended June 30, 2006, which increased by approximately 13% compared with approximately $10,876 for the six months ended June 30, 2005. Shipping revenues contribute little to no margin and result from pass-through shipping costs associated with our global integrated marketing business.

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

25

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

($ In Thousands, Except Per Share Data)

Emerging Solutions

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

Emerging solution revenues accounted for approximately 6% of total Company revenues during the six months ended June 30, 2006, which decreased by $357 or 3% compared with the six months ended June 30, 2005. This decrease was due to a reduction of ongoing clinical solution services with our largest customer, partially offset by organic growth in revenues from our compliance solution services, which grew by 39% and our European contract sales force business, which increased by 40% versus the six months ended June 30, 2005.

Operating income decreased by $1,531 from income to a loss of $552 as compared with the six months ended June 30, 2005.  This decrease was primarily due to a reduction of ongoing clinical solution services with our largest customer versus the six months ended June 30, 2005.

Corporate

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash used in investing activities was $9,694 for the six months ended June 30, 2006, which was primarily attributable to purchases of property and equipment as well as additions to capitalized software development costs. Cash used in investing activities was $30,364 for the six months ended June 30, 2005, which included payments for the 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 in 2005 primarily related to our new hardware facility in New Jersey, as well as investing in our helpdesk automation process and interactive marketing machinery.

As anticipated, purchases of property and equipment decreased for the six months ended June 30, 2006 versus the comparable prior year period. During 2006, excluding expenditures related to the OE initiative we expect capital spending in the range of approximately $15,000 to $18,000 primarily to support the Company’s infrastructure and productivity initiatives. This expected range of capital spending does not include any capital requirements that could be required in support of streamlining our cost structure, which could require

26

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

($ In Thousands, Except Per Share Data)

additional capital spending in support of business automation, facility consolidation, or other improvement initiatives. We review our capital expenditure program periodically and adjust it as required to meet current needs.

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

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

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

We have a line-of-credit agreement with JPMorgan Chase (the “Agreement”) in the amount of $30,000 that expires on June 30, 2008. The Agreement is available to finance working capital needs and possible 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 June 30, 2006, we were in compliance with all covenants and did not have any amounts outstanding under the Agreement.

Our principal commitments at June 30, 2006 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
Contractual Obligations	Total		July 1, 2006 Through December 31, 2006		2007		2008		2009		2010		Thereafter
Capital leases	$	2,290	$	653	$	1,565	$	72	$	—	$	—	$	—
Minimum guarantees	4,912		912		2,000		2,000		—		—		—
Operating leases (1)	90,176		10,427		16,618		12,969		11,902		10,892		27,368
Total	$	97,378	$	11,992	$	20,183	$	15,041	$	11,902	$	10,892	27,368$

(1)Operating lease amounts include $15,205 of future operating lease payments, 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 June 30, 2006, letters-of-credit for approximately $5,337 were outstanding related to deposits on certain facilities.

We have an agreement with a venture capital fund promoting technology businesses in New Jersey with a commitment to contribute $1,000 to the fund, callable at the discretion of the general partner in $100 increments. As of June 30, 2006, $600 has been paid, with $400 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 sheet.

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.

27

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

($ In Thousands, Except Per Share Data)

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.

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

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

WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS

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, including any future acquisitions, are and will be accompanied by substantial risks, including:

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

•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;

•regulatory or compliance issues existing in the acquired organization;

•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.

28

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

($ In Thousands, Except Per Share Data)

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 new businesses into our operations or achieve any expected cost synergies.

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.

THE LENGTHY SALES AND IMPLEMENTATION CYCLES FOR SFE SOLUTIONS MAKE IT DIFFICULT TO PREDICT OUR QUARTERLY REVENUES

The selection of a sales force effectiveness (SFE) solution generally entails an extended decision-making process by our 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.

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.

AN UNFAVORABLE GOVERNMENT REVIEW OF OUR INCOME AND PAYROLL TAX RETURNS AND CHANGES IN OUR EFFECTIVE TAX RATES COULD ADVERSELY AFFECT OUR OPERATING RESULTS

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

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

($ In Thousands, Except Per Share Data)

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

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

FUTURE RESTRUCTURING MAY ADVERSELY IMPACT OUR OPERATIONS

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

Furthermore, delays or increased costs in implementing any restructuring plans or cost savings initiatives or opportunities could delay or adversely affect the anticipated financial benefits of any such restructuring.

Additionally, any restructuring or cost savings initiatives may be disruptive to our employees who are transitioning to different roles or responsibilities in restructured areas of our business. Such disruptions may cumulatively adversely impact future operating results.

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

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

The market for SFE 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.

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 SFE products and related services that specifically target the pharmaceutical industry, including competitors that are actively selling CRM and SFE software products in more than one country and competitors that also offer CRM and SFE support services. Some of our competitors and potential competitors

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

($ In Thousands, Except Per Share Data)

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 SFE 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 SFE 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 SFE 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.

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

($ In Thousands, Except Per Share Data)

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.

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.

OUR SUCCESS DEPENDS ON RETAINING OUR KEY SENIOR MANAGEMENT TEAM, ENSURING EFFECTIVE TRANSITION FOR KEY POSITIONS AND ATTRACTING AND RETAINING QUALIFIED PERSONNEL

Our future success depends, to a significant extent, upon the contributions of our executive officers and key sales, technical and customer service personnel. While we believe that we have implemented effective succession plans, we can make no assurance that the loss of key personnel and transitions to new key personnel would not adversely impact our

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

($ In Thousands, Except Per Share Data)

business or result in less effective management or technical teams.

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.

THIRD PARTIES MAY CLAIM THAT OUR SOLUTIONS INFRINGE ON THEIR PROPRIETARY RIGHTS

As a company offering technology solutions, there can be no assurance that third parties also offering technology solutions will not assert infringement claims against us in the future. While we believe that our solutions do not infringe upon proprietary rights of other parties, there can be no assurance that the Company would not be found to infringe on the proprietary rights of others. Any such finding could have a material adverse impact on our 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.

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 AND ANALYTICS 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

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

($ In Thousands, Except Per Share Data)

believe there are other sources for such data, the termination of any of these relationships could diminish the breadth or depth of our data and analytics solutions. 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 of our facilities. 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.

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

World events such as terrorist attacks, the current 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.

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

($ In Thousands, Except Per Share Data)

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 customers, orders or other business with significant customers;

•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

Management, with the participation of our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on their evaluation as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2006 solely because of the material weakness in internal control over financial reporting described below.  Management considers internal control over financial reporting to be an integral component of disclosure procedures.

As reported in our Annual Report on Form 10-K for the year ended December 31, 2005, our management conducted an evaluation of the effectiveness of our system of internal control over financial reporting and concluded that our system of internal control over financial reporting was effective as of December 31, 2005. During the second quarter of 2006, management identified a material weakness in internal control at Optas, Inc., a component of our Marketing solutions segment.  Specifically, the controls to ensure that revenue is recognized in the appropriate accounting period did not operate effectively at Optas, Inc.  This material weakness resulted in an overstatement of revenue that was corrected by management in the consolidated financial statements and not material to the overall presentation of Dendrite’s consolidated financial statements.  However due to the potential for additional misstatement this deficiency was concluded to represent a material weakness. Optas, Inc., which represents approximately 2% of consolidated revenues for the six months ended June 30, 2006, was acquired during the third quarter of 2005 and, as permitted by applicable SEC rules, was excluded from the scope of our internal control assessment at December 31, 2005. 

As of the date of this filing, we are taking the steps necessary to fully remediate this material weakness in our internal control over financial reporting.  These internal controls will be subjected to testing by Dendrite’s internal and external auditors in connection with management’s annual assessment of the effectiveness of internal control over financial reporting as of December 31, 2006.  There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

There are no material changes in the risk factors from those included in our 2005 annual report on Form 10-K.

However, in addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “FACTORS THAT MAY AFFECT FUTURE RESULTS” in this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/ or operating results.

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ITEM 4.  Submission of Matters to a Vote of Security Holders.

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

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

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

2.  Ratification of Independent Registered Public Accounting Firm. The ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the Company’s 2006 fiscal year was proposed. There were 38,029,720 votes cast for the proposal, 26,271 votes cast against the proposal and 3,692 abstentions.

Based on these voting results, each of the directors nominated was elected and the proposal was approved.

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ITEM 6.Exhibits

10.1	Restated Employment Agreement dated May 16, 2006 between the Company and John E. Bailye
10.2	Employment Agreement dated May 26, 2006 between the Company and Ronald W. Pearce
10.3	Transition Agreement and General Release dated June 6, 2006 between the Company and Mark H. Cieplik
10.4	Employment Agreement dated June 28, 2006 between the Company and Carl L. Cohen
10.5	New Hire Authorization - Updated Appendix
31.1	Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, and Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

Pursuant to the requirements of the 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: August 9, 2006

By:	/s/ John E. Bailye
	John E. Bailye,
	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
By:	/s/ Jeffrey J. Bairstow
	Jeffrey J. Bairstow,
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

10.1	Restated Employment Agreement dated May 16, 2006 between the Company and John E. Bailye
10.2	Employment Agreement dated May 26, 2006 between the Company and Ronald W. Pearce
10.3	Transition Agreement and General Release dated June 6, 2006 between the Company and Mark H. Cieplik
10.4	Employment Agreement dated June 28, 2006 between the Company and Carl L. Cohen
10.5	New Hire Authorization - Updated Appendix
31.1	Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, and Jeffrey J. Bairstow, Executive Vice President and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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