DENDRITE INTERNATIONAL INC - 10-Q Quarterly Report

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	THREE MONTHS ENDED										NINE MONTHS ENDED
	SEPTEMBER 30,										SEPTEMBER 30,
	2004					2003					2004				2003
Revenues	$	99,428				$	92,862				$		294,399		$		222,100

Operating Costs & Expenses:
Operating costs	51,578					46,688					151,807				110,839
Selling, general and administrative	32,832					33,780					98,923				74,535
Research and development	1,673					2,863					7,417				8,775
Amortization of acquired intangible assets	1,214					1,251					3,467				2,168
Other operating (income)	(368				)	-					(707			)	-
Total costs & operating expenses	86,929					84,582					260,907				196,317

Operating income	12,499					8,280					33,492				25,783

Interest expense (income), net	14					(58				)	11				(612				)
Other (income) expense, net	(190				)	55					(251			)	21

Income before income tax expense	12,675					8,283					33,732				26,374
Income tax expense	4,880					3,314					12,987				11,158

Net income	$		7,795			$	4,969				$	20,745			$			15,216

Net income per share:
Basic	$		0.19			$		0.12			$	0.50			$		0.38
Diluted	$			0.18		$			0.12		$	0.48			$	0.37

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

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

	September 30,				December 31,
	2004				2003
Assets
Current Assets:
Cash and cash equivalents	$		46,134		$	30,405
Accounts receivable, net	69,589				71,383
Prepaid expenses and other current assets	7,843				7,949
Deferred taxes	4,976				8,844
Income tax receivable	3,045				—
Facility held for sale	—				6,900
Total current assets	131,587				125,481

Property and equipment, net of accumulated amortization of $53,096 and $43,946	42,613				28,140
Other assets	5,851				2,538
Long-term receivable	—				3,157
Goodwill	85,752				70,403
Intangible assets, net	20,067				18,574
Purchased capitalized software, net	1,208				1,666
Capitalized software development costs, net	8,015				6,126
Deferred taxes	6,462				6,372
	$	301,555			$		262,457
Liabilities and Stockholders’ Equity
Current Liabilities:
Current installments of long-term debt	$	422			$		—
Accounts payable	9,666				4,990
Income taxes payable	9,502				6,194
Capital lease obligations	1,345				1,033
Accrued compensation and benefits	14,998				16,104
Accrued professional and consulting fees	6,330				7,842
Other accrued expenses	22,808				21,038
Purchase accounting restructuring accrual	3,600				3,203
Deferred revenues	11,512				16,379
Total current liabilities	80,183				76,783

Capital lease obligations	2,651				187
Purchase accounting restructuring accrual	4,452				8,627
Deferred rent	1,295				369
Long-term debt, excluding current installments	1,041				—
Other non-current liabilities	3,546				356

Stockholders’ Equity:
Preferred stock, no par value, 15,000,000 shares authorized, none issued	—				—
Common stock, no par value, 150,000,000 shares authorized, 43,881,862 and 43,013,428 shares issued; 41,659,162 and 40,790,728 shares outstanding at September 30, 2004 and December 31, 2003, respectively	111,556				100,448
Retained earnings	118,681				97,936
Deferred compensation	(91			)	(56			)
Accumulated other comprehensive loss	(883			)	(1,317			)
Less treasury stock, at cost	(20,876			)	(20,876			)
Total stockholders’ equity	208,387				176,135
	$	301,555			$		262,457

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

DENDRITE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	For the Nine Months Ended September 30,
	2004			2003
Operating activities:
Net income	$	20,745		$	15,216
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,958			14,924
Amortization of deferred compensation, net of forfeitures	149			(40		)
Other adjustments for non-cash items	901			608
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable	7,424			15,443
Decrease in prepaid expenses and other current assets	926			1,399
Decrease in other assets	786			136
Decrease in accounts payable and accrued expenses	(3,671		)	(21,034		)
Decrease in purchase accounting restructuring accrual	(5,606		)	(6,969		)
Increase in income taxes payable	3,907			2,163
Decrease in accrued restructuring charge	—			(260		)
Decrease in deferred revenue	(5,505		)	(8,968		)
Increase in other non-current liabilities	860			288
Net cash provided by operating activities	36,874			12,906

Investing activities:
Sales of short-term investments	—			1,294
Proceeds from sale-leaseback of furniture and equipment	2,162			—
Acquisitions, net of cash acquired	(7,312		)	(53,161		)
Purchases of property and equipment	(15,083		)	(5,038		)
Additions to capitalized software development costs	(4,087		)	(2,362		)
Other, net	—			(50		)
Net cash used in investing activities	(24,320		)	(59,317		)

Financing activities:
Borrowings from line of credit	—			8,000
Repayments of line of credit	—			(8,000		)
Repayments of long-term debt	(1,773		)	—
Repayments of acquired loan	(624		)	—
Payments on capital lease obligations	(829		)	(469		)
Issuance of common stock	6,249			4,458
Net cash provided by financing activities	3,023			3,989

Effect of foreign exchange rate changes on cash	152			287

Net increase (decrease) in cash and cash equivalents	15,729			(42,135		)
Cash and cash equivalents, beginning of period	30,405			68,308

Cash and cash equivalents, end of period	$	46,134		$	26,173

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

1. Basis of Presentation

The consolidated financial statements of Dendrite International, Inc. and its subsidiaries (“Dendrite” or the “Company”) included in this Form 10-Q are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position as of September 30, 2004, operating results for the three and nine month periods ended September 30, 2004 and 2003 and cash flows for the nine month periods ended September 30, 2004 and 2003. 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, 2003.

Over time our business has changed and license revenues have become less material to our total revenues and associated gross margins. These revenues have consistently been less than 10% since 2001, and we have therefore condensed our revenue presentation on the face of the accompanying statement of operations.

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

Reclassifications. Certain prior period balances have been reclassified to conform to current period presentation.

2. Stock Based Compensation

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

	For the Three Months							For the Nine Months
	Ended September 30,							Ended September 30,
	2004				2003			2004				2003
Net income as reported	$	7,795			$	4,969		$	20,745			$	15,216

Add/(Deduct): Deferred compensation amortization, net of forfeitures recognized in accordance with APB 25, net of related tax effects	21				8			92				(24		)

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(7,836			)	(2,091		)	(15,484			)	(7,349		)

Pro forma net income (loss)	$		(20	)	$	2,886		$		5,353		$	7,843

Earnings per share:
Basic - as reported	$		0.19		$	0.12		$		0.50		$	0.38
Basic - pro forma	$		0.00		$	0.07		$		0.13		$	0.19

Diluted - as reported	$		0.18		$	0.12		$		0.48		$	0.37
Diluted - pro forma	$		0.00		$	0.07		$		0.12		$	0.19

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected stock price volatility	70.0	%	70.0	%	70.0	%	70.0	%
Weighted-average risk-free interest rate	1.3	%	3.7	%	1.1	%	3.7	%
Expected life of the option (years)	5.25		5.25		5.25		5.25

The stock-based employee compensation expense determined under the fair value based methods for all awards, net of related tax effects, disclosed herein is determined based upon the number and fair value of options granted and an estimate of forfeitures. The expense is recognized over the vesting period of the options. Under SFAS 123, compensation expense is not recognized for options that are forfeited due to the employee’s failure to fulfill service requirements. Therefore, while the fair value per option is not recalculated, the number of options vesting would change, thus requiring recalculation of the aggregate compensation expense. The Company accounts for forfeitures by estimating the total number of awards that will vest and adjusting that estimate if evidence becomes available that a different number of awards is expected to vest.

The Black-Scholes valuation model was developed for use in estimating the fair market value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes valuation model requires the input of the highly subjective assumptions disclosed above. Since the Company’s employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

3. Net Income Per Share

The following table presents the computation of basic and diluted net income per share for the three and nine month periods ended September 30, 2004 and 2003:

	For the Three Months Ended							For the Nine Months Ended
	September 30,							September 30,
	2004			2003				2004		2003
Basic net income per share computation:
Net income	$	7,795		$	4,969			$	20,745	$	15,216
Weighted-average common shares outstanding	41,620			40,442				41,335		40,225
Basic net income per share	$		0.19	$		0.12		$	0.50	$	0.38

Diluted net income per share computation:
Net income	$	7,795		$			4,969	$	20,745	$	15,216
Diluted common shares outstanding:
Weighted-average common shares outstanding	41,620			40,442				41,335		40,225
Impact of dilutive stock options	1,319			1,417				1,607		865
Diluted common shares outstanding	42,939			41,859				42,942		41,090
Diluted net income per share	$	0.18		$			0.12	$	0.48	$	0.37

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

4. Comprehensive Income

The components of comprehensive income for the three and nine month periods ended September 30, 2004 and 2003, consisted of the following:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004		2003			2004			2003
Net income	$	7,795	$		4,969	$	20,745		$	15,216
Other comprehensive income:
Foreign currency translation adjustments	236		315			434			402
Comprehensive income	$	8,031	$	5,284		$		21,179	$		15,618

5. Acquisitions

Schwarzeck

On July 20, 2004, the Company completed the strategic acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”). Schwarzeck was a leading provider of physician databases, direct marketing services and sample fulfillment services to pharmaceutical companies in Germany. This acquisition accelerated the Company’s expansion in Europe and increases its interactive marketing solutions and services to the German pharmaceutical industry. In connection with the acquisition, the Company restructured the combined operations by eliminating certain former Schwarzeck positions. Schwarzeck’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. The Company has preliminarily allocated the entire purchase price to goodwill. The assets acquired and liabilities assumed in connection with the Schwarzeck acquisition, the aggregate purchase price and pro forma results of operations are not deemed material to the consolidated financial statements as a whole.

MDM

On April 6, 2004, the Company completed the strategic acquisition of the capital stock of the Medical Data Management group of companies (“MDM”). Primarily based in Warsaw, Poland, MDM was a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for MDM was approximately $9,250 and consisted of approximately $5,700 in cash payments, approximately $3,300 in restricted stock and approximately $250 of legal and professional fees. The Company is in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment. The preliminary allocation of purchase price, including the net liabilities acquired of approximately $250, to intangible assets acquired in connection with the MDM acquisition is as follows:

	Weighted-Average Estimated Useful Life (Years)	Acquired Intangible Asset Value
Intangible Assets Subject to Amortization:
Purchased database	3	$	1,700
Customer relationship assets	7	690
Other	4	240
Intangible Assets Not Subject to Amortization:
Goodwill	N/A	6,888
		$	9,518

The assets acquired and liabilities assumed in connection with the MDM acquisition and pro forma results of operations are not deemed material to the consolidated financial statements as a whole.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

Uto Brain

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

The aggregate purchase price for Uto Brain was approximately $4,800 (498,270 Yen), including approximately $100 of legal and professional fees. As of September 30, 2004, the Company paid approximately $2,300 of the purchase price with approximately $2,400 still outstanding and included within Other Accrued Expenses on the September 30, 2004 consolidated balance sheet. In accordance with the purchase agreement, the outstanding balance is payable as follows: approximately $1,100 by October 31, 2004; approximately $400 on January 5, 2005; and $900 on March 31, 2005. In addition, the Company assumed approximately $3,800 in bank debt and an acquired loan. The Company is in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation remains preliminary and subject to adjustment. The preliminary allocation of purchase price, including net liabilties acquired of approximately $1,100, to intangible assets acquired in connection with the Uto Brain acquisition is as follows:

	Weighted-Average Estimated Useful Life (Years)	Acquired Intangible Asset Value
Intangible Assets Subject to Amortization:
Customer relationship assets	10	$	1,870

Intangible Assets Not Subject to Amortization:
Goodwill	N/A	3,905
Trademarks	N/A	150
		$	5,925

The assets acquired and liabilities assumed in connection with the Uto Brain acquisition and pro forma results of operations are not deemed material to the consolidated financial statements as a whole.

Synavant

On June 16, 2003, the Company completed its acquisition of Synavant Inc. (“Synavant”). Synavant provided a broad range of knowledge-based services to pharmaceutical and other life science companies around the world. Its comprehensive global solutions included pharmaceutical customer relationship management (“CRM”) applications, interactive marketing, server and database management, dedicated local help-line support, training, telemarketing, sample management and product recall services. Synavant was headquartered in Atlanta, Georgia, and had offices in 21 countries. The combining of resources of Synavant with the existing resources of Dendrite creates a more comprehensive information, software and services company dedicated to the global life sciences industry, and further enhances Dendrite’s ability to provide solutions to the sales, marketing and clinical functions of pharmaceutical and other life science companies. Synavant’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price was approximately $55,100, including consideration paid for the common stock and approximately $3,400 of legal and professional fees incurred in connection with the transaction.

The pro forma results of operations of the Company as if the Synavant acquisition had occurred as of January 1, 2003 are as follows:

	Pro Forma Results for the Nine Months Ended September 30, 2003
Revenues	$	287,183
Net income (A)	$	404
Basic income per share	$	0.01
Diluted income per share	$	0.01

(A) Net income includes approximately $1,300 of historical restructuring charges from Synavant as well as early termination fees related to Synavant’s lines of credit of approximately $1,850.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

6. Purchase Accounting Restructuring Accrual

In connection with the June 2003 acquisition of Synavant, the Company restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. During the first quarter of 2004, the Company’s management increased its restructuring accrual by approximately $1,800 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to Goodwill in the accompanying consolidated balance sheet. During the third quarter of 2004, the Company’s management decreased the restructuring accrual by approximately $200 due to an adjustment to the total anticipated costs to terminate certain former Synavant employees and recorded the corresponding adjustment to goodwill in the consolidated balance sheet. The Company anticipates that the balance related to the termination of employees will be paid during the current year and the remaining accrued restructuring balance related to the facility exit costs will be paid over the life of the facility leases, ending in February 2012.

The liability accrues for expenses to be incurred in exiting certain Synavant facilities, including 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.

In connection with the July 2004 acquisition of Schwarzeck, the Company restructured the combined operations by eliminating certain former Schwarzeck positions. The Company accrued approximately $250 on July 20, 2004 to complete the restructuring plan.

The activity related to purchase accounting restructuring accruals for the nine month period ended September 30, 2004 is summarized in the table below:

	Purchase								Purchase
	Accounting								Accounting
	Restructuring								Restructuring
	Accrual as of		2004 Year-to-Date			2004 Year-to-Date			Accrual as of
	December 31, 2003		Adjustments			Payments			September 30,
Synavant
Termination payments to employees	$	2,378	$	(207	)	$	(2,132	)	$	39
Facility exit costs	7,187		1,791			(2,464		)	6,514
Total Synavant	9,565		1,584			(4,596		)	6,553
SAI
Lease termination costs	2,265		—			(1,010		)	1,255
Schwarzeck
Termination payments to employees	—		244			—			244
Total	$	11,830	$	1,828		$	(5,606	)	$	8,052

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

7. Goodwill and Intangible Assets

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

	Net Intangibles		2004 Year-to-Date Activity									Net Intangibles
	as of								Translation			as of
	December 31, 2003		Additions			Amortization			and Other			September 30, 2004
Purchased capitalized software	$	1,666	$		—	$	(458	)	$	—		$	1,208
Capitalized software development costs	6,126		4,087			(2,198		)	—			8,015
Customer relationship assets	6,089		2,560			(979		)	(48		)	7,622
Backlog	602		—			(386		)	—			216
Non-compete covenants	2,560		—			(1,133		)	(12		)	1,415
Purchased database	2,460		1,700			(478		)	—			3,682
Other intangibles	131		240			(107		)	(11		)	253
Total	$	19,634	$	8,587		$	(5,739	)	$	(71	)	$	22,411

The changes in the carrying amount of intangible assets not subject to amortization for the period ended September 30, 2004 are as follows:

									Currency
	Balance as of								Translation			Balance as of
	December 31, 2003			Additions		Deletions			Adjustments			September 30, 2004
Goodwill	$	70,403		$	16,321	$	(852	)	$	(120	)	$	85,752
Trademarks	6,732			150		—			(3		)	6,879
Total	$		77,135	$	16,471	$	(852	)	$	(123	)	$	92,631

The Company conducts its annual impairment testing of goodwill as of October 1 of each year. For the quarter ended September 30, 2004, there were no changes in events or circumstances that would indicate impairment.

Aggregate annual amortization expense of intangible assets (exclusive of future additions) is estimated to be:

Year Ending December 31,
2004	$	7,719
2005	6,164
2006	4,821
2007	2,791
2008	1,030
Thereafter	5,625
	28,150
Less: Year-to-date amortization expense	(5,739		)
Net intangible assets subject to amortization as of September 30, 2004	$	22,411

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

8. Line-of-Credit

The Company entered into a line-of-credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the Agreement requires the Company to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003, and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of September 30, 2004, the Company’s consolidated net worth was $208,387. The Agreement contains certain restrictions on the Company’s ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. On September 24, 2004, the Company entered into an amendment to the Agreement that relaxed certain covenants relating to acquisitions, dispositions of Company assets, indebtedness of foreign subsidiaries of the Company, real estate and capital expenditures in connection with the Company’s move to its new corporate headquarters facility. As of September 30, 2004, the Company was in compliance with all covenants and did not have any amounts outstanding under the line-of-credit.

As of September 30, 2004, the Company had outstanding letters-of-credit of approximately $5,721.

9. Long-Term Debt

In connection with the Uto Brain acquisition, the Company assumed bank debt of approximately $3,200, with a weighted-average interest rate of 2.10%, and acquired a loan of approximately $600 with an interest rate of 1.80%. As of September 30, 2004, approximately $1,500 of the bank debt related to this transaction was outstanding. The acquired loan balance was paid in full during the quarter ended March 31, 2004.

As of September 30, 2004, future payments related to the acquired bank debt are as follows:

Year Ending December 31,
2004	$	80
2005	390
2006	283
2007	255
2008	91
Thereafter	364
	$	1,463

10. Income Taxes

The Company’s effective income tax expense rate decreased to 38.5% for the nine months ended September 30, 2004, from 42.3% for the nine months ended September 30, 2003. The primary driver for the change in the effective tax rate was the consolidation of certain international legal entities. Prior to operational restructuring and legal entity integration, these international legal entities generated losses that could not be benefited. As a result of the integration, the amount of losses generated that can not be benefited has been significantly reduced. In connection with the Synavant integration in June 2003, the Company determined which foreign entities would be dissolved and performed a reforecast of projected taxable income by jurisdiction and recognized a full valuation allowance on a net operating loss carryforward for one of its foreign subsidiaries of approximately $608. The effective tax rate for the quarter ended September 30, 2004 was 38.5% compared to 40.0% for the quarter ended September 30, 2003.

During the three months ended June 30, 2004, the Company completed the tax accounting analysis related to the Synavant acquisition. As a result, the Company increased current deferred tax assets by approximately $4,500, increased income taxes payable approximately $5,800, with the balance increasing goodwill approximately $1,300.

During the three months ended September 30, 2004, the Company completed the tax accounting analysis related to the MDM acquisition. As a result, the Company decreased current deferred tax assets by approximately $1,100 and recorded the corresponding increase to goodwill.

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

11. Capital Leases

In connection with certain leasing arrangements, the Company entered into a sale-leaseback of furniture and equipment of approximately $2,200 expiring in November 2007. In addition, the Company also entered into new capital lease arrangements for computer hardware and other equipment of approximately $1,400 expiring through November 2007. The future minimum rental payments of all capital leases are as follows:

2004	$	273
2005	1,543
2006	1,293
2007	1,185
Total	4,294
Less: Amount representing interest	298
Present value of net minimum lease payments	3,996
Less: Current portion of capital lease obligations	1,345
Capital lease obligations, excluding current portion	$	2,651

12. Facility Held For Sale

During the three months ended September 30, 2004, the Company decided to move the New Jersey hardware services to the Piscataway, New Jersey facility. Accordingly, the $6,900 carrying value, which approximates the fair market value of the facility, was reclassified to property and equipment in the consolidated balance sheet as of September 30, 2004.

13. Deferred Compensation Plan

The Company has supplemental deferred compensation arrangements for the benefit of certain officers, directors and certain key executives. These arrangements are primarily funded by life insurance contracts, which have been purchased by the Company. The arrangements permit the participants to diversify their investments. The value of the assets held, managed and invested, pursuant to the agreements was approximately $3,000 as of September 30, 2004 and is included in Other Assets in the accompanying consolidated balance sheet. The corresponding deferred compensation liability of $3,500 as of September 30, 2004 is recorded at the fair market value of the assets held in a rabbi trust and adjusted to reflect the fair value of the amount owed to certain officers, directors and certain key executives and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheet.

14. Common Stock

The following table rolls forward the balance of common stock from December 31, 2003 to September 30, 2004:

	Balance as of December 31, 2003		Issuance of Common Stock (1)	MDM Acquisition	Tax Benefit of Stock Option Exercises	Other	Balance as of September 30, 2004
Common Stock	$	100,448	6,249	3,317	1,358	184	$	111,556

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

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

15. Enterprise-Wide Data

Information about Major Customers:

For the three month periods ended September 30, 2004 and 2003, the Company derived approximately 28% and 31% of its revenues from its largest customer, respectively. For the nine month periods ended September 30, 2004 and 2003, the Company derived approximately 27% and 39% of its revenues from its largest customer, respectively.

Information about Products and Services:

Due to the growth in the Company’s strategic product and service offerings, largely built through recent acquisitions, the Company has expanded its revenue categories into sales support, marketing support and shipping. These categories are reflective of how service offerings are marketed to and viewed by customers. They are not reflective of the way the business is managed. Company operating costs are not broken out for these categories on a global basis, as they are not viewed as necessary to the management of the business globally. Based upon all of these factors, while these categories are useful in understanding the Company’s operating results, the Company’s only operating segments for disclosure purposes under Statement of Financial Accounting Standards (“SFAS”) 131, “Disclosure About Segments of an Enterprise and Related Information,” are geographic areas, as presented in footnote 15 to our consolidated financial statements. The following is a summary of our revenue categories:

Sales Support revenue includes product and sales support services of the traditional Dendrite business. All of these products and services are used by, or provided to, the sales force of our customers.

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

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

The following table presents revenues by category for the three and nine month periods ended September 30, 2004 and 2003.

	THREE MONTHS ENDED SEPTEMBER 30,				NINE MONTHS ENDED SEPTEMBER 30,
	2004		2003		2004		2003
Services & Technology:

Sales support	$	71,629	$	71,593	$	214,673	$	187,723
Marketing support	23,834		18,122		67,847		30,280

Shipping	3,965		3,147		11,879		4,097
Total revenues	$	99,428	$	92,862	$	294,399	$	222,100

DENDRITE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

($ IN THOUSANDS, EXCEPT PER SHARE DATA)

Information about Geographic Areas:

The Company is organized by geographic location and has one reportable segment. All transfers between geographic areas have been eliminated from consolidated revenues.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues:
United States	$	60,992	$	65,198	$	185,197	$	167,999
Europe	25,168		18,658		69,991		32,273
All other	13,268		9,006		39,211		21,828
	$	99,428	$	92,862	$	294,399	$	222,100

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 September 30, 2004		As of December 31, 2003
Long-lived assets:
United States	$	143,098	$	118,555
Europe	6,576		4,436
All other	7,981		1,918
	$	157,655	$	124,909

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

($ IN THOUSANDS)

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

Our acquisition of Synavant Inc. (“Synavant”) in 2003 diversified and expanded our solutions portfolio, particularly as it relates to the pharmaceutical marketing channel, by adding interactive marketing services in the U.S. and abroad, as well as new data and services solutions in Europe. In January 2004, we further broadened and enhanced our product and service portfolio in the Japanese pharmaceutical industry and extended our leadership position in Japan with our acquisition of Uto Brain Co. Ltd. (“Uto Brain”). In April 2004, we acquired the Medical Data Management group of companies (“MDM”), increasing our ability to provide leading solutions that drive promotional and sales effectiveness in Central and Eastern Europe. We believe these acquisitions complement our existing business operations by enhancing our solutions portfolio and increasing our access to new customers and markets.

We have expanded both our portfolio of solutions and customer base and believe that this combination presents significant opportunity for future growth. We have also committed to investing in key initiatives to help drive future growth. We believe increased investments in marketing and sales resources and programs will help us more effectively sell and market the diversity of solutions we now offer. Our future growth is dependent on our ability to further penetrate the markets in which we operate and increase the adoption rate of our expanded portfolio of solutions.

We evaluate our performance based upon a number of operating metrics. Chief among these metrics are revenues, operating margins, diluted net income per share, operating cash flow and days sales outstanding. In the third quarter of 2004, we saw the continued execution of our strategy yield growth in revenues, operating margins and diluted net income per share versus the same period of 2003. We also continued to exhibit strong cash generation attributes, improving days sales outstanding from year end and generating strong positive operating cash flow even as we continued to pay some of the remaining liabilities associated with our acquisitions. In addition, seasonality has become a factor in certain lines of our business due to our international growth from our 2003 and 2004 acquisitions.

Due to the growth in our strategic product and service offerings, largely built through our recent acquisitions, we have expanded our revenue categories into Sales Support, Marketing Support and Shipping. These categories are reflective of how our service offerings are marketed to and viewed by our customers. They are not reflective of the way we manage our business. Our operating costs are not broken out for these categories on a global basis, as they are not viewed as necessary in the management of our global business. Based upon all of these factors, while these categories are useful in understanding our operating results, our only operating segments for disclosure purposes under the Statement of Financial Accounting Standards (“SFAS”) 131, “Disclosure About Segments of an Enterprise and Related Information,” are geographic areas, as presented in footnote 15 to our consolidated financial statements. The following is a summary of our revenue categories:

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

($ IN THOUSANDS)

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

For MD&A purposes, license revenues have been allocated to the geographic location of the customer.

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, 2003.

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.

Schwarzeck

On July 20, 2004, we completed our strategic acquisition of Schwarzeck-Verlag GmbH (“Schwarzeck”). Schwarzeck was a leading provider of physician databases, direct marketing services and sample fulfillment services to pharmaceutical companies in Germany. This acquisition accelerated our expansion in Europe and extends our interactive marketing solutions and services to the German pharmaceutical industry. In connection with the acquisition, we restructured our combined operations by eliminating certain former Schwarzeck positions. We have preliminarily allocated the entire purchase price to goodwill. Schwarzeck’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition. The assets acquired and liabilities assumed in connection with the Schwarzeck acquisition, the aggregate purchase price and pro forma results of operations are not deemed material to the consolidated financial statements as a whole.

MDM

On April 6, 2004, we completed our strategic acquisition of MDM. Primarily based in Warsaw, Poland, MDM was a leading provider of physician databases, market research and sales force support services to pharmaceutical companies in Poland, Hungary, Russia and the Ukraine. MDM’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for MDM was approximately $9,250 and consisted of approximately $5,700 in cash payments, approximately $3,300 in restricted stock and approximately $250 in legal and professional fees. We are in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation, including the net liabilities acquired, remains preliminary and subject to adjustment.

Uto Brain

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

The aggregate purchase price for Uto Brain was approximately $4,800 (498,270 Yen), including approximately $100 of legal and professional fees. As of September 30, 2004, we paid approximately $2,300 of the purchase price with approximately $2,400 still outstanding and included within Other Accrued Expenses on the September 30, 2004 consolidated balance sheet. In accordance with the purchase agreement, the outstanding balance is payable as follows: approximately $1,100 by October 31, 2004; approximately $400 on January 5, 2005; and $900 on March 31, 2005. In addition, we assumed approximately $3,800 in bank debt and an acquired loan. We are in the process of finalizing a third-party valuation of certain intangible assets and therefore the purchase price allocation, including the net liabilities acquired, remains preliminary and subject to adjustment.

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

($ IN THOUSANDS)

Synavant

On June 16, 2003, we completed our acquisition of Synavant. Synavant provided a broad range of knowledge-based services to pharmaceutical and other life science companies around the world. Its comprehensive global solutions included pharmaceutical customer relationship management (“CRM”) applications, interactive marketing, server and database management, dedicated local help-line support, training, telemarketing, sample management and product recall services. Synavant was headquartered in Atlanta, Georgia, and had offices in 21 countries. We believe that combining Synavant’s resources with our existing resources creates a more comprehensive information, software and services company dedicated to the global life sciences industry, and further enhances our ability to provide market leading solutions to the sales, marketing and clinical functions of pharmaceutical and other life science companies. Synavant’s results of operations have been included in the accompanying consolidated financial statements since the date of acquisition.

The aggregate purchase price for Synavant was approximately $55,100, including consideration paid for the common stock and approximately $3,400 of legal and professional fees incurred in connection with the transaction.

In connection with the June 2003 acquisition of Synavant, we restructured the combined operations by exiting certain former Synavant facilities and eliminating certain former Synavant positions. During the first quarter of 2004, our management increased its restructuring accrual estimate by approximately $1,800 due to an adjustment of the total costs to exit certain former Synavant facilities and recorded the corresponding adjustment to goodwill in the accompanying consolidated balance sheet. During the third quarter of 2004, the Company’s management decreased the restructuring accrual by approximately $200 due to an adjustment to the total anticipated costs to terminate certain former Synavant employees and recorded the corresponding adjustment to goodwill in the consolidated balance sheet. Management believes the accrued liability as of September 30, 2004 will be adequate to cover the costs incurred related to the restructuring.

The liability accrued for expenses incurred in exiting certain Synavant facilities and includes assumptions related to sublease income which offsets future lease obligations. The underlying subleases are not in place for all facilities and the future placement of subleases, including the timing and terms and conditions of subleases, could be different than the assumptions and may impact future results of operations.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

REVENUES

	THREE MONTHS ENDED SEPTEMBER 30,				$ Increase /		% Increase /		2004% of Total		2003% of Total
	2004		2003		(Decrease)		(Decrease)		Revenue		Revenue
Services & Technology:
Sales support	$	71,629	$	71,593	$	36	0	%	72	%	77	%
Marketing support	23,834		18,122		5,712		32	%	24	%	20	%
Shipping	3,965		3,147		818		26	%	4	%	3	%
Total Revenues	$	99,428	$	92,862	$	6,566	7	%	100	%	100	%

Total revenues increased by 7% for the three months ended September 30, 2004 compared with the same period in 2003. Our international revenues were $40,278, or approximately 40% of total revenues in the quarter, and increased by 44% over 2003, due to a combination of factors including our recent acquisitions, foreign currency impact and organic growth. Total revenues in the United States decreased by 9% from the three months ended September 30, 2003, and were $59,150, or approximately 60% of total revenues. This decrease in the United States was primarily due to two large client system rollouts in the prior year, which did not repeat during the three months ended September 30, 2004, and delayed decision making by clients that are engaged in complex merger, restructuring or cost containment initiatives. As a result of our recent acquisitions, our business is now subject to a higher level of seasonal fluctuation than we have experienced in the past. Specifically, our European business and interactive marketing business in the United States experienced a seasonal slowdown during the summer months.

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

($ IN THOUSANDS)

Sales Support

Sales support revenues were $71,629 and accounted for approximately 72% of total revenues during the three months ended September 30, 2004, and were relatively flat compared with the same period in 2003. Sales support services in the United States decreased by 10%, primarily in the areas of training and software implementation revenues. These decreases were primarily due to two large client system rollouts in the prior year, which did not repeat during the three months ended September 30, 2004, and delayed decision making relating to several of our clients that are engaged in complex merger, restructuring or cost containment initiatives. The decrease in the United States sales support service revenues was offset by an increase in sales support license revenue of $1,908, or 71%, to $4,604 and an increase in international sales support service revenues of 18% versus the three months ended September 30, 2003. The increase in sales support license revenue was primarily related to sales of new user licenses and upgrades from our existing customers in our international business, while the increase in international sales support service revenues related primarily to increased software implementation services.

Marketing Support

Marketing Support revenues were $23,834 and accounted for approximately 24% of total revenues during the three months ended September 30, 2004, and increased by approximately 32% compared with the same period in 2003. This increase was due to our international marketing support business, which increased by 74% over the prior year, including 84% growth in our international interactive marketing services, 54% growth in our international consulting services, 31% growth in international data revenues and the addition of contract sales services from our recent acquisition of MDM. This international growth was primarily driven by our recent acquisitions. These increases were partially offset by flat growth in our U.S. marketing support revenues for the three month period ended September 30, 2004, and a greater than anticipated seasonal slowdown.

Shipping

Shipping revenues accounted for approximately 4% of total revenues during the three months ended September 30, 2004, and increased by approximately 26% compared with the same period in 2003. Shipping revenues contribute little to no margin, and increased primarily as a result of higher pass-through shipping costs related to the growth in our international interactive marketing business.

OPERATING COSTS & EXPENSES

	THREE MONTHS ENDED SEPTEMBER 30,						$ Increase /				% Increase /		2004% of Total		2003% of Total
	2004			2003			(Decrease)				(Decrease)		Revenue		Revenue
Operating Costs & Expenses:
Operating costs (including shipping)	$	51,578		$		46,688	$	4,890			10	%	52	%	50	%
Selling, general and administrative	32,832			33,780			(948			)	-3	%	33	%	36	%
Research and development	1,673			2,863			(1,190			)	-42	%	2	%	3	%
Amortization of acquired intangible assets	1,214			1,251			(37			)	-3	%	1	%	1	%
Other operating (income)	(368		)	-			(368			)	NM		0	%	0	%
Total costs & operating expenses	$	86,929		$	84,582		$		2,347		3	%	88	%	91	%

OPERATING COSTS (including shipping)

Operating costs increased 10% for the three months ended September 30, 2004 compared with the same period in 2003. This increase was due to higher costs from our current year acquisitions, higher postage costs as well as costs associated with low gross margin revenues. We did obtain minimal savings related to our offshore initiative in excess of our significant set-up costs.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A)

SG&A expenses decreased 3% for the three months ended September 30, 2004 compared with the same period in 2003. This decrease reflects lower bonus expense and employee benefit related costs, and lower severance costs related to the Synavant acquisition partially offset by higher costs related to the three acquisitions completed this year. As a percentage of revenues, SG&A decreased to 33% for the three months ended September 30, 2004, down from 36% compared with the same period in 2003. We have and will continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures. In addition, we were able to minimize the cost of several facility moves around the world and repurpose other facilities, which offset the incremental costs we incurred as we transitioned to our new headquarters in New Jersey and a new facility in the United Kingdom. We anticipate a slight increase in SG&A during the fourth quarter of 2004 as a result of our efforts to satisfy all SEC 404 review, testing and attestation requirements effective for 2004.

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

($ IN THOUSANDS)

RESEARCH AND DEVELOPMENT (R&D)

R&D expenses decreased 42% for the three months ended September 30, 2004 compared with the same period in 2003. As a percentage of revenues, R&D expenses decreased to 2% for the three months ended September 30, 2004 from 3% compared with the same period in 2003, due to the costs that have moved off-shore and a substantially higher software capitalization rate. The Company capitalized more costs in the three months ended September 30, 2004 than in previous quarters due to the development for the release of its next generation CRM solution, expected to be released in 2005. We expect our capitalization rates for the remainder of 2004 to be higher than our prior year’s capitalization rates.

OTHER OPERATING (INCOME)

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

PROVISION FOR INCOME TAXES

Our income tax expense rate decreased to 38.5% for the three months ended September 30, 2004 from 40% compared with the same period in 2003. The primary driver for the change in the effective tax rate was the consolidation of certain international legal entities. Prior to operational restructuring and legal entity integration, these international legal entities generated losses that could not be benefited. As a result of the integration, the amount of losses generated that can not be benefited has been significantly reduced.

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

REVENUES

	NINE MONTHS ENDED SEPTEMBER 30,				$ Increase /		% Increase /		2004% of Total		2003% of Total
	2004		2003		(Decrease)		(Decrease)		Revenue		Revenue
Services & Technology:
Sales support	$	214,673	$	187,723	$	26,950	14	%	73	%	85	%
Marketing support	67,847		30,280		37,567		124	%	23	%	14	%
Shipping	11,879		4,097		7,782		190	%	4	%	2	%
Total Revenues	$	294,399	$	222,100	$	72,299	33	%	100	%	100	%

Total revenues increased by 33% for the nine months ended September 30, 2004 compared with the same period in 2003. Our international revenues were $113,615, or approximately 40% of total revenues in the nine months ended September 30, 2004 versus $57,365 or 26% of total revenue in the 2003 period, and increased by 98% versus the nine months ended September 30, 2003. Total revenues in the United States were $180,784 or approximately 60% of total revenues and increased by 10% from the nine months ended September 30, 2003. The increase in revenues is primarily due to a full nine month period of revenues in 2004 compared with the revenues from the June 16, 2003 acquisition of Synavant as well as revenues from the current year acquisitions of Uto Brain, MDM and Schwarzeck.

Sales Support

Sales Support revenues were $214,673 and accounted for approximately 73% of total revenues during the nine months ended September 30, 2004, and increased by 14% and compared with the same period in 2003. Sales support license revenue increased by $2,370, or 30%, to 10,381 over the prior year, due to a higher level of international licensing activity. Sales support services in the United States increased by approximately 1%, and included an increase in our ongoing support services with off-setting decreases in one-time services related to client software roll-outs. International sales support service revenues increased by 57% versus the nine months ended September 30, 2003, primarily due to our recent acquisitions.

Marketing Support

Marketing Support revenues were $67,847 and accounted for approximately 23% of total revenues during the nine months ended September 30, 2004, and increased by approximately 124% compared with the same period in 2003. The total growth in our worldwide marketing support revenues was primarily driven by our 2004 and 2003 acquisitions. Our international marketing support business increased by more than 225% over the prior year, including almost 300% growth in our international interactive marketing services, 69% growth in our international consulting services, 200% growth in international data revenues and the addition of contract sales services from our acquisition of MDM. In the United States, marketing support revenues increased by 62% compared with the nine months ended September 30, 2003. This increase in the United States was comprised of greater than 100% growth in our interactive marketing services, 25% growth in our clinical services, 69% growth in our consulting services and 30% growth in domestic data revenues.

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

($ IN THOUSANDS)

Shipping

Shipping revenues accounted for approximately 4% of total revenues during the nine months ended September 30, 2004, and increased approximately 190% compared with the same period in 2003. Shipping revenues contribute little to no margin, and result from pass-through shipping costs associated with our international interactive marketing business. The interactive marketing business was originated in connection with our June 2003 acquisition of Synavant, and has been further expanded through our other recent acquisitions.

OPERATING COSTS AND EXPENSES.

	NINE MONTHS ENDED SEPTEMBER 30,							$ Increase /			% Increase /		2004% of Total		2003% of Total
	2004				2003			(Decrease)			(Decrease)		Revenue		Revenue
Operating costs (including shipping)	$	151,807			$	110,839		$	40,968		37	%	52	%	50	%
Selling, general and administrative	98,923				74,535			24,388			33	%	34	%	34	%
Research and development	7,417				8,775			(1,358		)	-15	%	3	%	4	%
Amortization of acquired intangible assets	3,467				2,168			1,299			60	%	1	%	1	%
Other operating (income)	(707			)	-			(707		)	NM		0	%	0	%
Total costs & operating expenses	$		260,907		$		196,317	64,590			33	%	89	%	88	%

OPERATING COST (including Shipping)

Operating costs increased 37% for the nine months ended September 30, 2004 compared with the same period in 2003. The primary driver of the increase was our acquisition of Synavant. In addition, we had additional costs associated with the recent acquisitions of Uto Brain, MDM and Schwarzeck, the ongoing implementation of our offshore initiative and increased pass-through postage costs for the nine months ended September 30, 2004, compared with the same period in 2003.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A)

SG&A expenses increased 33% for the nine months ended September 30, 2004, compared with the same period in 2003. This increase reflects the additional costs related to our recent acquisitions, primarily Synavant. As a percentage of revenues, SG&A was flat at 34% for the nine months ended September 30, 2004, compared with the same period in 2003. We have and will continue to invest in sales and marketing initiatives in order to drive our top-line growth while continuing to focus on cost containment measures.

RESEARCH AND DEVELOPMENT (R&D)

R&D expenses decreased 15% for the nine months ended September 30, 2004 compared with the same period in 2003. As a percentage of revenues, R&D expenses decreased to 3% for the nine months ended September 30, 2004, from 4% compared with the same period in 2003. This decrease was due to the expansion of revenue in marketing support areas, which is not dependent on R&D spending, as well as a higher software capitalization rate. In addition, we capitalized more costs in the nine months ended September 30, 2004 than in comparable prior periods due to the development for the release of our next generation CRM solution, expected to be released in 2005.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets increased 60% compared with the same period in 2003. The increase reflects a full year of amortization of assets acquired in connection with our June 2003 Synavant acquisition and the current years amortization of assets acquired in connection with our Uto Brain and MDM acquisitions.

OTHER OPERATING (INCOME)

We received insurance proceeds related to the recovery of costs of certain previous losses in the nine month period ended September 30, 2004.

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

($ IN THOUSANDS)

PROVISION FOR INCOME TAXES

Our effective income tax expense rate decreased to 38.5% for the nine months ended September 30, 2004 from 42.3% compared with the same period in 2003. The primary driver for the change in the effective tax rate was the consolidation of certain international legal entities. Prior to operational restructuring and legal entity integration, these international legal entities generated losses that could not be benefited. As a result of the integration, the amount of losses generated that can not be benefited has been significantly reduced. In connection with the Synavant integration in June 2003, we determined which foreign entities would be dissolved and performed a reforecast of projected taxable income by jurisdiction and recognized a full valuation allowance on a net operating loss carryforward for one of its foreign subsidiaries of approximately $608.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2004, working capital was $51,204 compared to $48,698 as of December 31, 2003. Cash and cash equivalents were $46,134 as of September 30, 2004, compared to $30,405 as of December 31, 2003. These increases were primarily attributable to the cash generated by operating activities partially offset by payments made in connection with our recent 2004 and 2003 acquisitions as well as higher capital expenditures related to our new corporate headquarters.

We finance our business primarily through cash generated by operations. Net cash provided by operating activities was $36,874 and $12,906 for the nine month periods ended September 30, 2004 and 2003, respectively. This increase was primarily related to actions taken in the prior period to significantly reduce the liabilities assumed in connection with the acquisition of Synavant. Payments of these assumed liabilities were $22,866 in the nine months ended September 30, 2003. We also generated operating cash from our considerable growth in net income adjusted for changes in assets and liabilities, net of effects from acquisitions for the nine months ended September 30, 2004 compared with the same prior period. These increases in operating cash flow were partially offset by lower accounts receivable collections for the nine months ended September 30, 2004 compared with the same prior period. Our accounts receivable days sales outstanding increased slightly to 63 days for the quarter ended September 30, 2004 from 62 days as of September 30, 2003.

Cash used in investing activities was $24,320 for the nine months ended September 30, 2004, and includes payments for the MDM, Uto Brain and Schwarzeck acquisitions as well as increased purchases of property and equipment due to the ongoing relocation of our corporate headquarters offset by proceeds from the sale leaseback of furniture and equipment in the three months ended September 30, 2004. Cash used in investing activities was $59,317 for the nine months ended September 30, 2003, and was primarily attributable to the payments made related to the Synavant acquisition.

As anticipated, purchases of property and equipment increased for the nine months ended September 30, 2004 versus the comparable prior year period. The increase is primarily due to the capital requirements of the new corporate headquarters and the need to adjust going-forward capital requirements for a larger combined Company reflecting the acquisition of Synavant. We expect capital spending in the range of approximately $3,000 to $5,000 to support the infrastructure expansion as well as capital expenditures for our new corporate headquarters relocation for the remainder of 2004. We review our capital expenditure program periodically and adjust it as required to meet current needs. An agreement to sell the facility in Piscataway, New Jersey, was terminated during the quarter ended June 30, 2004. During the three months ended September 30, 2004, we decided to move our New Jersey hardware services to this facility. Accordingly, the $6,900 carrying value, which approximates the fair market value of the facility, has been reclassified to property and equipment in the consolidated balance sheet as of September 30, 2004.

Cash provided by financing activities was $3,023 for the nine months ended September 30, 2004, compared to $3,989 for the nine months ended September 30, 2003. The decrease of $966 was primarily attributable to the repayments of long-term debt and loans acquired in connection with the Uto Brain acquisition partially offset by an increase in proceeds from stock option exercises.

We regularly evaluate opportunities to acquire products or businesses complementary to our operations. Such acquisition opportunities, if they arise and are successfully completed, may involve the use of cash, 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 industry and to general economic, political, financial, competitive and regulatory factors beyond our control.

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

($ IN THOUSANDS)

Contractual Obligations and Commitments

We entered into a credit agreement (the “Agreement”) as of June 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank that expires on July 1, 2005. The Agreement is available to finance working capital needs and possible future acquisitions. Among other covenants, the agreement requires us to maintain a minimum consolidated net worth, measured quarterly, which is equal to $130,000, plus 50% of net income earned after April 1, 2003 and 75% of the net proceeds of any offering of new equity interests issued subsequent to June 30, 2003. As of September 30, 2004, our consolidated net worth was $208,387. The Agreement contains certain restrictions on our ability to create or assume liens, dispose of assets, consolidate or merge, extend credit, incur other indebtedness or pay cash dividends. On September 24, 2004, we entered into an amendment to the Agreement that relaxed certain covenants relating to acquisitions, dispositions of our assets, indebtedness of our foreign subsidiaries, real estate and capital expenditures in connection with our move to the new corporate headquarters facility. As of September 30, 2004, there were no borrowings outstanding under the Agreement and we were in compliance with all covenants.

In connection with the Uto Brain acquisition, we assumed bank debt of approximately $3,200, with a weighted-average interest rate of 2.10% and acquired a loan of approximately $600, with an interest rate of 1.80%. As of September 30, 2004, approximately $1,500 of the bank debt related to this transaction was outstanding.

Our principal commitments at September 30, 2004 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		2004		2005		2006		2007		2008		Thereafter
Capital leases	$	4,294	$	273	$	1,543	$	1,293	$	1,185	$	-	$	-
Corporate headquarters	1,834		1,834		-		-		-		-		-
Minimum guarantees	1,079		582		497		-		-		-		-
Uto Brain purchase price	2,423		1,077		1,346		-		-		-		-
Long-term debt	1,598		111		417		303		269		104		394
Operating leases(1)	98,387		4,174		15,846		12,981		11,838		9,621		43,927
Total	$	109,615	$	8,051	$	19,649	$	14,577	$	13,292	$	9,725	$	44,321

(1) Operating lease amounts disclosed above include $14,183 of future operating lease costs, excluding estimated future sublease income, accrued for in the purchase accounting restructuring accruals related to the Synavant and SAI acquisitions.

As of September 30, 2004, letters-of-credit for approximately $5,721 were outstanding.

We have an agreement with a venture capital fund with a commitment to contribute $1,000 to the fund, callable at the discretion of the general partner in $100 increments. As of September 30, 2004, $600 of the commitment remains. 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 September 30, 2004 and December 31, 2003 consolidated balance sheets.

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

($ IN THOUSANDS)

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICAL INDUSTRY

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

WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS

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

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

• 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; and

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

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

($ IN THOUSANDS)

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

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

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

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

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

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

The selection of a CRM or SFA solution generally entails an extended decision-making process by our customers because of the strategic implications, substantial costs and significant commitment of resources associated with a customer’s license or implementation of the solution. Given the importance of the decision, senior levels of management of our customers are often involved in the process and, in some instances, their board of directors may also be involved. As a result, the decision-making process typically takes nine to eighteen months, and in certain cases longer. Accordingly, we cannot fully control or predict the timing of our execution of contracts with customers. Prior sales and implementation cycles can not 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.

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

($ IN THOUSANDS)

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

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

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

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

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

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

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

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

SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES

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

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

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

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

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

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

• alliances among existing competitors;

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

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

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

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

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

($ IN THOUSANDS)

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 expanded and may in the future 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, a material part of our revenues. These sales are subject to risks inherent in international business activities, including:

• any adverse change in the political stability or economic environments in these countries or regions;

• any adverse change in tax, tariff and trade or other regulations;

• the absence or significant lack of legal protection for intellectual property rights;

• exposure to exchange rate risk for service revenues and expenses which are denominated in currencies other than U.S. dollars; and

• difficulties in managing an organization spread over various jurisdictions.

Any of the above risks could have a significant impact on our ability to deliver products on a competitive and timely basis, which could materially and adversely affect our 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 business, the risks associated with foreign currency translation will also grow.

AN INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS

To manage our growth effectively we must continue to strengthen our operational, financial and management information systems; ensure that we have the appropriate infrastructure in place; and expand, train and manage our work force. However, we may not be able to do so effectively or on a timely basis. Failure to do so could have a material adverse effect upon our business, operating results or financial condition.

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

($ IN THOUSANDS)

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 AND ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL

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

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

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

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

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

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

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

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.

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

($ IN THOUSANDS)

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

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

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

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

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

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

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

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

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

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

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

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

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

We are in the process of evaluating our internal controls systems 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. We are performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. While we currently believe we will be able to satisfactorily implement the requirements relating to internal controls of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our 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 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.

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

($ IN THOUSANDS)

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

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

OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS

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

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

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

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

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

• the gain or loss of significant orders;

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

• future acquisitions.

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

ITEM 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 Route 206 South
Bedminster, NJ 07921
(Address, including zip code, of principal executive offices)

(908) 443-2000
(Registrant’s telephone number, including area code)

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Operations (unaudited) Three and nine month periods ended September 30, 2004 and 2003

	Consolidated Balance Sheets (unaudited) September 30, 2004 and December 31, 2003

	Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 2004 and 2003

	Notes to Unaudited Consolidated Financial Statements

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

ITEM 4.	Controls and Procedures

PART II.	OTHER INFORMATION

ITEM 6.	Exhibits

Signatures

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

	By:	/s/ Kathleen E. Donovan
		Kathleen E. Donovan,
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

Number		Description

10.31		New Hire Option Grant Authorization — Updated Appendix.

10.41		Form of Indemnification Agreement

31.1		Certification of John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).

31.2		Certification of Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).

32		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board and Chief Executive Officer of the Company and Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company.