10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 29, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-12392

NDCHealth Corporation

(Exact name of registrant as specified in charter)

DELAWARE	58-0977458
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
NDC Plaza, Atlanta, Georgia	30329-2010
Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code 404-728-2000

None

(Former name, former address and former fiscal year, if

changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, Par Value $.125 – 35,203,340 shares

outstanding as of September 29, 2003

CONSOLIDATED STATEMENTS OF OPERATIONS

NDCHealth Corporation and Subsidiaries

(In thousands, except per share data)

	Three Months Ended
	August 29, 2003			August 30, 2002
Revenues	$	108,891		$	100,082
Operating expenses:
Cost of service		55,152			51,801
Sales, general and administrative		23,186			20,153
Depreciation and amortization		9,314			7,609
Restructuring, impairment and other charges		1,499			—
		89,151			79,563
Operating income		19,740			20,519
Other income (expense):
Interest and other income		135			278
Interest and other expense		(7,713	)		(3,240	)
Minority interest in losses		152			378
		(7,426	)		(2,584	)
Income before income taxes and equity in losses of affiliated companies		12,314			17,935
Provision for income taxes		4,617			6,458
Income before equity in losses of affiliated companies		7,697			11,477
Equity in losses of affiliated companies		(343	)		(312	)
Net income	$	7,354		$	11,165
Basic earnings per share:	$	0.21		$	0.32
Diluted earnings per share:	$	0.21		$	0.32

See Notes to Condensed Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

NDCHealth Corporation and Subsidiaries

(In thousands)

	Three Months Ended
	August 29, 2003			August 30, 2002
Cash flows from operating activities:
Net income	$	7,354		$	11,165
Adjustments to reconcile net income to cash provided by operating activities:
Equity in losses of affiliated companies		343			312
Non-cash restructuring, impairment and other charges		101			—
Depreciation and amortization		9,314			7,609
Deferred income taxes		4,221			286
Provision for bad debts		1,011			722
Other, net		884			1,191
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:
Accounts receivable, net		(474	)		(5,196	)
Prepaid expenses and other assets		2,315			(1,728	)
Accounts payable and accrued liabilities		2,700			(11,317	)
Accrued interest on long-term debt		(5,530	)		2,625
Deferred revenue		(3,079	)		739
Income taxes		459			(395	)
Net cash provided by operating activities		19,619			6,013
Cash flows from investing activities:
Capital expenditures		(13,950	)		(12,902	)
Investing activities and other non-current assets		(4,865	)		(5,073	)
Net cash used in investing activities		(18,815	)		(17,975	)
Cash flows from financing activities:
Net principal payments under capital lease arrangements and other long-term debt		(602	)		(439	)
Net cash from refinancing activities		(154	)		—
Net proceeds from stock activities		653			567
Dividends paid		(1,408	)		(1,388	)
Net cash used in financing activities		(1,511	)		(1,260	)
Cash flows from discontinued operations:
Cash provided by tax benefits of discontinued operations		—			5,343
Cash used in discontinued operations		(728	)		(290	)
Net cash (used in) provided by discontinued operations		(728	)		5,053
Decrease in cash and cash equivalents		(1,435	)		(8,169	)
Cash and cash equivalents, beginning of period		16,103			13,447
Cash and cash equivalents, end of period	$	14,668		$	5,278

See Notes to Condensed Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

NDCHealth Corporation and Subsidiaries

(In thousands, except share data)

	August 29, 2003			May 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	14,668		$	16,103
Accounts receivable		79,081			78,988
Allowance for doubtful accounts		(7,100	)		(6,785	)
Accounts receivable, net		71,981			72,203
Income tax receivable		745			1,199
Deferred income taxes		17,528			21,663
Prepaid expenses and other current assets		30,791			34,304
Total current assets		135,713			145,472
Property and equipment, net		123,922			116,678
Intangible assets, net		473,422			479,234
Deferred income taxes		5,312			5,018
Debt issuance cost		12,282			12,756
Investments		16,877			15,662
Other		12,338			12,432
Total Assets	$	779,866		$	787,252
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	6,447		$	6,558
Current portion of obligations under capital leases		772			1,028
Accounts payable and accrued liabilities		60,683			61,211
Accrued interest		7,751			13,281
Deferred revenue		34,507			38,137
Total current liabilities		110,160			120,215
Long-term debt		321,212			321,262
Obligations under capital leases		372			558
Deferred revenue		9,906			9,461
Other long-term liabilities		30,119			30,225
Total liabilities		471,769			481,721
Commitments and contingencies
Minority interest in equity of subsidiaries		8,867			9,019
Stockholders’ equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued		—			—
Common stock, par value $.125 per share; 200,000,000 shares authorized; 35,192,896 and 34,888,753 shares issued, respectively.		4,399			4,361
Capital in excess of par value		221,834			216,156
Retained earnings		85,173			79,228
Deferred compensation and other		(8,639	)		(4,301	)
Other comprehensive income		(3,537	)		1,068
Total stockholders’ equity		299,230			296,512
Total Liabilities and Stockholders’ Equity	$	779,866		$	787,252

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 1—Summary Of Significant Accounting Policies

NDCHealth Corporation, which may be referred to in this Report as the “Company”, “NDCHealth”, “we”, “our”, or “us”, provides network based information processing services and systems to healthcare providers and payers; and information management products and solutions primarily to pharmaceutical manufacturers. We classify our business into two reportable segments: Information Management and Network Services and Systems.

We have prepared the financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In addition, certain reclassifications have been made to the fiscal 2003 consolidated financial statements to conform to the fiscal 2004 presentation.

You should read these financial statements in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K/A for the fiscal year ended May 30, 2003.

In the opinion of management, these financial statements reflect all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Because of the seasonality inherent in our business, our interim results are not necessarily indicative of our anticipated results for the full fiscal year.

In accordance with Securities and Exchange Commission guidance, those accounting policies that management believes are the most critical and require complex management judgment are discussed below. Further discussion of the application of these critical accounting policies can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K/A for the year ended May 30, 2003.

Revenue—In accordance with criteria set forth in Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” American Institute of Certified Public Accountants Statement of Position No. 97-2, “Software Revenue Recognition” and other authoritative literature, we recognize revenue when persuasive evidence of an agreement exists, delivery and performance has occurred, there is a fixed and determinable sales price, and collectibility is reasonably assured.

Within the Information Management segment, we have two primary sources of revenue: database information reporting and consulting services. Database information reporting typically involves the delivery of data providing pharmaceutical information. Revenue for our database information reporting products and services delivered over a period of time with multiple deliverables is recognized ratably over the term of the contract, typically using a straight-line model. Typically, the terms of these database information reporting contracts average one to three years. When we are able to support the fair value of the elements of the arrangement, and the undelivered elements are not essential to the delivered elements, revenue for these separable deliverable products and services is recognized based on the delivery of those elements. Revenue for single deliverable products and services is recognized when obligations to the customer have been fulfilled, which is typically upon delivery. Consulting services are typically structured as fixed price service contracts. Revenue for these services is recognized over the contract term as performance milestones specified in the contract are achieved. If it is determined that we will

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incur a loss on a contract, the loss is recognized at the time of determination. Typically, these service contracts average 3 to 12 months.

Within the Network Services and Systems segment, the primary source of revenue is transaction fees charged for network services. This revenue is recognized at the time services are rendered. In instances where we host web browser-based applications for our customers, fees charged per transaction include the use of the application software, network, and other value added services. Additionally, we receive revenue from the sale of software licenses and subscription fees from related maintenance and support agreements. Revenue related to software utilized by the customer to process transactions through our network is recognized ratably over the estimated life of the network services relationship beginning on the date of customer acceptance of the software. In instances where revenue is deferred over the term of a contract and we incur discrete incremental costs in providing the initial deliverable, we defer these costs and recognize them ratably over the contract term. Revenue related to customer installed software with stand alone functionality (meaning that connection to our network is not required for the software to be functional) is recognized when the product is shipped. Revenue related to software with stand alone functionality that is installed by us or one of our affiliates is recognized upon the date that the software is in operation at the customer site where vendor specific objective evidence (VSOE) has been established for the undelivered elements of the customer contract, which typically is maintenance and customer support. In these cases, the maintenance and customer support revenue is recognized over the term of the contract. Where VSOE cannot be established for undelivered elements within the contract, the revenue is recognized upon acceptance over the remaining term of the contract.

In many cases, our physician systems are sold indirectly through value added resellers, or VARs. Because the VARs provide many of the services that we would otherwise provide (such as contract support, advertising, etc.), we provide them allowances to cover their cost of providing these services. We record revenue in accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products,” which requires that certain allowances be treated as reductions in revenue and allows other allowances, for which we receive separable, identifiable and quantifiable benefits, to be recorded as revenue and operating expense.

Capitalized software—Capitalized software consists of development costs for software held for sale to our customers as well as software used internally to provide services to our customers. In accordance with Statement of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” capitalization of costs begins when technological feasibility has been established, and ends when the product is available for general release to customers. Completed projects capitalized under SFAS No. 86 are amortized after reaching the point of general availability using the greater of the amount computed using the straight-line method or the ratio that current revenues bear to the total of current and anticipated revenues, based on the estimated useful life of the software, normally five years. The net realizable value of software capitalized under SFAS No. 86 is monitored to ensure that the investment will be recovered through the future sales of products.

In accordance with Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” capitalization of costs begins when the application development phase has been initiated, and ends when the product is available for general use. Completed projects capitalized under SOP 98-1 are amortized using the straight-line method, normally five years. The net realizable value of software capitalized under SOP 98-1 is monitored to ensure that the investment will be recovered through its future use.

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Investments—In a rapidly changing technology industry, we consider and selectively enter into a variety of alliances, joint ventures and investments. We maintain investments in both publicly traded and privately held entities. Investments in publicly traded entities are classified as available-for-sale securities and are reported at fair value. Unrealized gains and losses are reported, net of taxes, as a component of stockholders’ equity. In accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold. Realized gains and losses on investments are included in Other income (expense) when realized.

Investments in privately held entities are accounted for under either the cost, equity, or consolidation method, whichever is appropriate for the particular investment. The appropriate method is determined by our ability to exercise significant influence over the investee, through either voting stock or other means. These investments are regularly reviewed for impairment issues and propriety of current accounting treatment. In accordance with the provisions of Accounting Principles Board Opinion No. 18, “Equity Method of Accounting for Investments in Common Stock,” transition from the cost to equity method, due to changes in our ability to influence the investee or the level of investment, would require retroactive restatement of previously issued financial statements as if we had always accounted for the investment under the equity method. If our level of investment increases to a level such that we directly or indirectly control the entity, the entity’s results would be consolidated into our consolidated financial statements.

The entire purchase price for the second step of the TechRx acquisition, which closed during the fourth quarter of fiscal 2003, was allocated to intangible assets as the tangible assets and liabilities of TechRx had been consolidated into our financial statements under the first step of the acquisition. The purchase price under the first step was allocated to assets acquired and liabilities assumed based on their fair value on May 28, 2002. At that time, and at May 27, 2003, we determined that the fair value of the assets and liabilities were reasonably approximated by their carrying values. The purchase price allocation of the fiscal 2003 acquisition is preliminary and subject to change.

Intangible assets—Intangible assets represent goodwill, customer base, and proprietary technology acquired in connection with acquisitions. Customer base acquired is amortized over the estimated useful life ranging from 5 to 15 years. Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets.

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 141 eliminates pooling of interests accounting and requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS 142 deals with, among other things, the elimination of amortization of goodwill. We adopted these new standards in the first quarter of fiscal 2002. SFAS 142 requires that goodwill no longer be amortized but be reviewed for impairment at least annually. In accordance with SFAS 142, we conduct our annual impairment tests during the second quarter of each fiscal year. Additionally, we test at other times if events or circumstances occur that would more likely than not impact the fair value of a reporting unit. The goodwill impairment test has two steps. First, we compare the fair value of the reporting unit with its book value. If the fair value of the reporting unit exceeds its carrying value, the second step is not necessary. If the carrying value exceeds its fair value, the second step calculates the possible impairment by comparing the implied fair value of goodwill with the carrying amount. If the implied value of goodwill is less than the carrying amount, a write-down would be required.

We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of other intangibles may warrant revision or may not be recoverable. When factors indicate that

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intangibles with finite lives should be evaluated for possible impairment, we compare the estimated fair value to the carrying value in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If such evaluation indicates a potential impairment, cash flows discounted using a risk adjusted rate are used to measure fair value in determining the amount of these assets that should be written off. In management’s opinion, goodwill and identifiable intangible assets were appropriately valued at August 29, 2003 and May 30, 2003.

Other Accounting Policies

Allowance for doubtful accounts—Allowance for doubtful accounts reflects management’s estimate of probable losses based principally on historical experience and specific review and analysis. All accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off against the allowance.

Data costs—We purchase data from a variety of sources primarily for use in our information products and services. These costs are typically held in deferred cost at the time of purchase and expensed during one, or over several months as products utilizing the data are delivered to customers. Occasionally product offerings are expanded by modifying current products for a new market. In these cases, additional or new types of data costs may be incurred in developing the database for these new products over several months during which the product cannot be sold and the additional data costs are deferred. These data costs are then amortized, beginning when sales of the new products commence, over the expected life of the customer relationships established around these new products, in all cases not to exceed three years.

Use of estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make other estimates and assumptions in addition to those discussed above. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

Stock options—We have chosen the disclosure option under SFAS No. 123, “Accounting for Stock Based Compensation” and SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123,” and continue to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our stock option plans. Accordingly, no compensation cost has been recognized for options granted under the plans. The weighted average fair value of options granted during the first quarter of fiscal 2004 and 2003 was approximately $9.10 and $11.45, respectively. Had compensation cost for these plans been recognized based on the fair value of the options at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the effect on our net income and earnings per share would have been as follows:

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(In thousands, except per share data)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Net income:
As reported	$	7,354		$	11,165
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		450			203
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(2,445	)		(1,931	)
Pro forma	$	5,359		$	9,437
Basic earnings per share:
As reported	$	0.21		$	0.32
Pro forma	$	0.15		$	0.27
Diluted earnings per share:
As reported	$	0.21		$	0.32
Pro forma	$	0.15		$	0.27

Note 2—Earnings Per Share

Basic earnings per share is computed by dividing reported net earnings available to common stockholders by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported net earnings available to common stockholders by weighted average shares outstanding during the period and the impact of securities that, if exercised, and convertible debt that, if converted, would have a dilutive effect on earnings per share. Our only outstanding convertible debt was retired during the third quarter of fiscal 2003 and therefore can no longer be converted. All options with an exercise price less than the average market share price for the period have a dilutive effect on earnings per share.

The following table sets forth the computation of basic and diluted earnings (in thousands, except per share data):

	Three Months Ended
	August 29, 2003					August 30, 2002
	Income		Shares	Per Share		Income		Shares	Per Share
Basic EPS:
Income	$	7,354	34,746	$	0.21	$	11,165	34,474	$	0.32
Effect of Dilutive Securities:
Stock Options and Restricted Stock		—	368				—	582
		—	35,114				11,165	35,056
Convertible debt		—	—				1,243	4,140
Diluted EPS:
Income plus assumed conversions	$	7,354	35,114	$	0.21	$	12,408	39,196	$	0.32

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Outstanding options to purchase 2,521,000 and 956,000 shares of the Company’s common stock were not included in the computation of diluted earnings per share in the three months ended August 29, 2003 and August 30, 2002, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock. For the three months ended August 29, 2003 and August 30, 2002 dividends declared per common share were $0.04.

Note 3—Intangible Assets

The table below presents goodwill and intangible assets by asset class.

(In thousands)	As of August 29, 2003							As of May 30, 2003
	Gross Carrying Amount		Accumulated Amortization			Total		Gross Carrying Amount		Accumulated Amortization			Total
Amortized intangible assets
Customer base	$	67,744	$	(16,649	)	$	51,095	$	67,744	$	(15,163	)	$	52,581
Proprietary technology		32,029		(12,447	)		19,582		32,029		(11,702	)		20,327
Other		900		(205	)		695		900		(167	)		733
Total		100,673		(29,301	)		71,372		100,673		(27,032	)		73,641
Unamortized intangible assets
Goodwill		402,050		—			402,050		405,593		—			405,593
Total Intangible Assets	$	502,723	$	(29,301	)	$	473,422	$	506,266	$	(27,032	)	$	479,234

The aggregate amortization expense for the quarter ended August 29, 2003 and estimated amortization expense for the next five fiscal years is as follows:

Aggregate Amortization Expense	(In thousands)
For the quarter ended August 29, 2003	$	2,269
Estimated Amortization Expense
For year Ending May 28, 2004	$	8,593
For year Ending May 27, 2005		10,283
For year Ending June 02, 2006		9,968
For year Ending June 01, 2007		9,365
For year Ending May 30, 2008		9,225

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The changes in the carrying amount of goodwill and other indefinite life unamortized intangibles for the three months ended August 29, 2003 are as follows:

Goodwill and other indefinite life unamortized intangibles (In thousands)	Information Management			Network Services and Systems			Total
Balance as of May 30, 2003	$	74,489		$	331,104		$	405,593
Translation adjustment		(3,025	)		(518	)		(3,543	)
Balance as of August 29, 2003	$	71,464		$	330,586		$	402,050

Note 4—Segment Information

Segment information for the three months ended August 29, 2003 and August 30, 2002 is presented below. We operate our business as two reportable segments: Network Services and Systems, which we offer to healthcare providers and payers; and Information Management, which we offer primarily to pharmaceutical manufacturers. Network Services and Systems provides electronic connectivity to the NDCHealth intelligent network and system solutions throughout the healthcare industry. Information Management provides management information, research, and consulting services to pharmaceutical manufacturers, pharmacy chains and hospitals. Other includes fiscal 2004 restructuring, impairment and other charges. There has been no significant change in the composition of the reportable segments from the presentation of fiscal 2003 segment information included in our Annual Report on Form 10-K/A for the year ended May 30, 2003.

Quarter Ended August 29, 2003 (In thousands)	Information Management		Network Services and Systems		Other			Total
Revenues	$	39,488	$	69,403	$	—		$	108,891
Income before income taxes and equity in losses of affiliated companies		3,438		10,375		(1,499	)		12,314
Depreciation and amortization		3,453		5,861		—			9,314
Segment assets		145,695		634,171		—			779,866
Quarter Ended August 30, 2002 (In thousands)	Information Management		Network Services and Systems		Other			Total
Revenues	$	36,082	$	64,000	$	—		$	100,082
Income before income taxes and equity in losses of affiliated companies		4,757		13,178		—			17,935
Depreciation and amortization		2,793		4,816		—			7,609
Segment assets		151,146		508,576		—			659,722

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The following presents information about our operations from different geographic regions for the three months ended August 29, 2003 and August 30, 2002:

(In thousands)	2003		2002
Revenues:
United States	$	101,159	$	95,531
All other		7,732		4,551
Total revenues	$	108,891	$	100,082
Long-lived assets:
United States	$	120,288	$	105,669
All other		3,634		3,144
Total long-lived assets	$	123,922	$	108,813

Note 5—Commitments And Contingencies

We currently provide pharmaceutical information services solutions to our European customers, pharmaceutical companies, through our German business. In this regard we deliver the prescription data we receive from our data suppliers in a variety of products to our customers to assist them in operating their businesses. We deliver this prescription data to our customers in an electronic format. The specific electronic format within which such prescription data is actually delivered to such pharmaceutical companies in Germany is the subject matter of the current litigation both before the European Commission and the German courts with IMS Health.

In the proceedings before the European Commission instituted by us on December 19, 2000, we are alleging that to the extent this format is copyrighted by IMS Health, the format constitutes an industry standard and an essential facility to competition and must be made available to competitors of IMS Health. We obtained a ruling as to our request for Interim Relief from the European Commission whereby they ordered IMS Health to license its structure for organizing pharmaceutical sales data to us. However, subsequent to this decision, the Court of First Instance and later the European Court Of Justice stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding. The European Commission has recently withdrawn its ruling as to our request for Interim Relief finding that since the German Court of Appeals had found that IMS Health had no right to enforce any existent copyright in the structure that we could sufficiently compete in the marketplace.

In proceedings before the German courts instituted by IMS Health on December 21, 2000, IMS Health has alleged copyright infringement against each of Pharma Intranet Information AG, or PI, the company from whom we purchased certain assets of our German business, and us, and we each have contested the validity of IMS Health’s alleged copyright. In these proceedings, IMS Health obtained an injunction from the Frankfurt Regional Court to prevent each of PI and us from distributing data in the contested format. On August 13, 2002, the Frankfurt Court of Appeals ruled in our favor by dismissing the preliminary injunction against our use of the industry standard data structure. This decision is final and is not subject to further appeal by IMS Health. On September 17, 2002 the Frankfurt Court of Appeals issued a judgment in the main proceedings against PI. While validating a copyright in the structure, the Court held that IMS Health has no standing to sue to enforce the copyright. The Court also determined that IMS Health does not own the copyright. The Court further denied IMS Health’s claims under the EU Database Directive for protection of the data structure involved. Finally, the Court found that PI breached the German Act Against Unfair Trade Practices (UGW) by reason of identically copying the data structure. We have not sold or used the data structure initially used by PI. We do not own PI and PI is no longer actively conducting business. The case against us remains pending before the Frankfurt Regional Court at this time.

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Several independent pharmacies filed a lawsuit on December 23, 2002 in the Twentieth Judicial Circuit Court, St. Clair County, Illinois, against IMS Health, Inc., or IMS, and sixty-two other defendants, including us (collectively the computer systems vendors). We were served with the lawsuit in May 2003. The pharmacies, Douglas & Ogden Medical Center Pharmacy, Inc. d/b/a Douglas Main Pharmacy, Timmerman & Associates, Inc. d/b/a Comprehensive Care Pharmacy, and John Hartman d/b/a Bittles Drug Store allege that IMS violated the Illinois Trade Secrets Act and breached alleged contracts it had with the computer systems vendors by reselling what the plaintiffs claim to be proprietary drug information to a competing prescription drug provider. The plaintiffs have also alleged that the computer systems vendors, including us, violated the Illinois Trade Secrets Act and breached alleged contracts with the plaintiffs by providing what they claim to be proprietary pharmacy data to IMS. In connection with the class action that the plaintiffs are seeking, the plaintiffs are claiming damages in excess of $100 million, alleging that other independent pharmacies have similar relationships with IMS and the computer systems vendors.

We have denied all liability in the lawsuit, have objected to certification of the class and intend to defend the case vigorously. Our contracts with IMS provide for indemnification, and we have asserted a claim for indemnification against IMS. Based on our preliminary internal investigations, management does not currently anticipate that this case will have a material adverse impact on our financial position, liquidity or results of operations.

Additionally, we are party to a number of other claims and lawsuits incidental to our business. We believe that the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on our financial position, liquidity or results of operations.

Note 6—Supplemental Cash Flow Information

Supplemental cash flow disclosures are as follows:

	Three months ended
(in thousands)	August 29, 2003		August 30, 2002
Net income taxes paid	$	83	$	135
Interest paid		13,191		851

Note 7—Comprehensive Income

The components of comprehensive income are as follows:

	Three months ended
(in thousands)	August 29, 2003			August 30, 2002
Net income	$	7,354		$	11,165
Foreign currency translation adjustment		(3,893	)		1,986
Unrealized holding loss, net of tax		—			(282	)
Pension liability adjustment, net of tax		(712	)		—
Total comprehensive income	$	2,749		$	12,869

Note 8—Restructuring, Impairment and Other Charges

In the fourth quarter of fiscal 2003, in conjunction with the completion of the TechRx acquisition, we began a review of the entirety of NDCHealth to identify opportunities for increased operational

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efficiencies. This ongoing review includes an assessment of our organizational structure as well as our physical operating locations. We have taken several actions in the first quarter of fiscal 2004 as a result of this review.

In the Network Services and Systems segment, we have begun to streamline the management organizations of our pharmacy services and systems businesses and the application development organization in our hospital business. In the first step of the streamlining, we have eliminated 16 positions. In connection with this streamlining, we recorded approximately $1.0 million in severance related costs in the first quarter. Approximately $0.1 million of this severance cost was a non-cash charge related to modified stock options. We expect to implement further streamlining changes in the second quarter.

During the first quarter, we made a decision to combine the sales organizations and streamline the development organizations within the Information Management segment. As a result of this reorganization, we have eliminated 28 positions and reduced the size of two locations. Accordingly, we recorded approximately $0.4 million in severance related costs and $0.1 million of expense related to lease terminations in the first quarter. The reorganization of these sales organizations is substantially complete however; we expect to implement further streamlining changes in the second quarter.

Note 9—Consolidating Financial Data Of Subsidiary Guarantors

In fiscal year 2003, we issued $200 million aggregate principal amount of 10 1/2% senior subordinated notes due 2012. Our wholly-owned, material subsidiaries, which include NDC Health Information Services (Arizona) Inc., NDCHealth Intellectual Property Corp, HISIP Corp., NDCIP, Inc., NDCHealth Licensing, Inc., and NDC of Canada, Inc., have fully and unconditionally guaranteed the notes on a joint and several basis.

Presented below is our consolidating financial data, including the combined financial data for our subsidiary guarantors and our subsidiary non-guarantors.

Statement of Operations for the Three Months Ended August 29, 2003 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors		Subsidiary Non- Guarantors			Consolidated
Revenues	$	59,043		$	39,268	$	10,580		$	108,891
Cost of service		21,814			25,221		8,117			55,152
Other operating expenses		20,167			11,079		2,753			33,999
Operating income (loss)		17,062			2,968		(290	)		19,740
Other income (expense)		(7,297	)		1,030		(1,159	)		(7,426	)
Income (loss) before income taxes and equity in losses of affiliated companies		9,765			3,998		(1,449	)		12,314
Provision for income taxes		3,662			1,499		(544	)		4,617
Income (loss) before equity in losses of affiliated companies		6,103			2,499		(905	)		7,697
Equity in losses of affiliated companies		—			—		(343	)		(343	)
Net income (loss)	$	6,103		$	2,499	$	(1,248	)	$	7,354

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Statement of Operations for the Three Months Ended August 30, 2002 (in thousands)	NDCHealth Corporation			Subsidiary Guarantor			Subsidiary Non-Guarantor			Elimination			Consolidated
Revenues	$	43,184		$	52,751		$	7,599		$	(3,452	)	$	100,082
Cost of service		14,927			31,428			5,883			(437	)		51,801
Other operating expenses		8,210			18,600			3,100			(2,148	)		27,762
Operating income		20,047			2,723			(1,384	)		(867	)		20,519
Other income (expense)		(2,956	)		(345	)		415			302			(2,584	)
Income before income taxes and equity in losses of affiliated companies		17,091			2,378			(969	)		(565	)		17,935
Provision for income taxes		6,153			842			(334	)		(203	)		6,458
Income before equity in losses of affiliated companies		10,938			1,536			(635	)		(362	)		11,477
Equity in losses of affiliated companies		(312	)		—			—			—			(312	)
Net income	$	10,626		$	1,536		$	(635	)	$	(362	)	$	11,165
Statement of Cash Flows for the Three months Ended August 29, 2003 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	6,103		$	2,499		$	(1,248	)	$	—		$	7,354
Adjustments to reconcile net income (loss) to cash provided by operating activities:		22,404			2,716			(8,938	)		(308	)		15,874
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		(13,176	)		(2,226	)		12,536			(743	)		(3,609	)
Net cash provided by (used in) operating activities		15,331			2,989			2,350			(1,051	)		19,619
Cash flows from investing activities:		(14,660	)		(2,727	)		(1,428	)		—			(18,815	)
Cash flows from financing activities:		(1,173	)		(1,230	)		(159	)		1,051			(1,511	)
Cash flows from discontinued operations:		—			—			(728	)		—			(728	)
Increase (decrease) in cash and cash equivalents		(502	)		(968	)		35			—			(1,435	)
Cash and cash equivalents, beginning of period		12,698			1,491			1,914			—			16,103
Cash and cash equivalents, end of period	$	12,196		$	523		$	1,949		$	—		$	14,668

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Statement of Cash Flows for the Three Months Ended August 30, 2002 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	10,626		$	1,536		$	(635	)	$	(362	)	$	11,165
Adjustments to reconcile net income (loss) to cash provided by operating activities:		12,970			5,193			(7,942	)		(101	)		10,120
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		(14,579	)		(6,745	)		5,589			463			(15,272	)
Net cash provided by operating activities		9,017			(16	)		(2,988	)		—			6,013
Cash flows from investing activities:		(9,934	)		(6,020	)		(2,021	)		—			(17,975	)
Cash flows from financing activities:		(823	)		(223	)		(214	)		—			(1,260	)
Cash flows from discontinued operations:		—			—			5,053			—			5,053
Increase (decrease) in cash and cash equivalents		(1,740	)		(6,259	)		(170	)		—			(8,169	)
Cash and cash equivalents, beginning of period		4,400			7,387			1,660			—			13,447
Cash and cash equivalents, end of period	$	2,660		$	1,128		$	1,490		$	—		$	5,278

Balance Sheet as of August 29, 2003 (in thousands)	NDCHealth Corporation		Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	12,196	$	523		$	1,949	$	—		$	14,668
Accounts receivable		50,419		18,075			3,487		—			71,981
Income taxes		17,644		—			629		—			18,273
Prepaid expenses and other current assets		25,141		12,100			4,990		(11,440	)		30,791
Total current assets		105,400		30,698			11,055		(11,440	)		135,713
Property and equipment, net		85,824		34,186			3,912		—			123,922
Intangible assets, net		389,825		38,541			50,435		(5,379	)		473,422
Investments		277,261		264			7,535		(268,183	)		16,877
Intercompany receivables		235,449		1,296			—		(236,745	)		—
Other		35,342		(53	)		11,429		(16,786	)		29,932
Total Assets	$	1,129,101	$	104,932		$	84,366	$	(538,533	)	$	779,866
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	6,548	$	670		$	6,846	$	(6,845	)	$	7,219
Accounts payable and accrued liabilities		35,293		9,869			9,355		6,166			60,683
Accrued interest		7,751		—			—		—			7,751
Deferred income		15,685		16,487			2,335		—			34,507
Total current liabilities		65,277		27,026			18,536		(679	)		110,160
Long-term liabilities		560,679		35,017			28,497		(262,584	)		361,609
Total liabilities		625,956		62,043			47,033		(263,263	)		471,769
Minority interest in equity of subsidiaries		—		—			8,867		—			8,867
Stockholders’ equity		503,145		42,889			28,466		(275,270	)		299,230
Total Liabilities and Stockholders’ Equity	$	1,129,101	$	104,932		$	84,366	$	(538,533	)	$	779,866

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Balance Sheet as of May 30, 2003 (in thousands)	NDCHealth Corporation		Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	12,698	$	1,491		$	1,914	$	—		$	16,103
Accounts receivable		48,570		20,052			3,581		—			72,203
Income taxes		21,137		1,721			4		—			22,862
Prepaid expenses and other current assets		24,937		12,827			5,050		(8,510	)		34,304
Total current assets		107,342		36,091			10,549		(8,510	)		145,472
Property and equipment, net		79,332		33,842			3,504		—			116,678
Intangible assets, net		391,590		39,012			54,011		(5,379	)		479,234
Investments		269,823		264			5,484		(259,909	)		15,662
Intercompany receivables		253,419		1,068			—		(254,487	)		—
Other		42,390		(2,329	)		9,033		(18,888	)		30,206
Total Assets	$	1,143,896	$	107,948		$	82,581	$	(547,173	)	$	787,252
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	6,809	$	663		$	5,889	$	(5,775	)	$	7,586
Accounts payable and accrued liabilities		37,294		8,781			9,507		5,629			61,211
Accrued interest		13,281		—			—		—			13,281
Deferred revenue		17,708		18,347			2,082		—			38,137
Total current liabilities		75,092		27,791			17,478		(146	)		120,215
Long-term liabilities		569,720		40,186			33,340		(281,740	)		361,506
Total liabilities		644,812		67,977			50,818		(281,886	)		481,721
Minority interest in equity of subsidiaries		—		—			9,019		—			9,019
Stockholders’ equity		499,084		39,971			22,744		(265,287	)		296,512
Total Liabilities and Stockholders’ Equity	$	1,143,896	$	107,948		$	82,581	$	(547,173	)	$	787,252

Note 10—Recently Issued Accounting Pronouncements

We have adopted the provisions of Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The adoption of this statement has resulted in an acceleration of the trend of deferring revenue as we provide more end to end solutions.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. We have not entered into any relationships since January 31, 2003, which would meet the reporting requirements of FIN 46. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We are currently evaluating several business relationships or interests existing prior to February 1, 2003 that could possibly be considered variable interest entities and whether we would have to consolidate or deconsolidate any such entities.

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those set forth herein under the caption “Forward-Looking Information.”

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with the condensed consolidated financial statements and related notes appearing elsewhere in this report.

General

We are a leading provider of integrated health information solutions to the pharmacy, hospital, physician, pharmaceutical and payer businesses. Our principal mission is to offer solutions to our customers that deliver quantifiable value in terms of cash flow acceleration through reducing accounts receivable days, the optimization of the prescription fulfillment process, higher inventory turnover and valuable market insights—in short, to improve our customers’ profitability and cash flow. We will work to achieve long-term growth by leveraging the key strengths of our core assets and by generating an increasing stream of recurring revenues.

Business Strategy

Healthcare represents the largest segment of the United States economy and its percentage is expected to continue to grow as the country’s population ages. We believe NDCHealth plays an increasingly important role in providing automation, transaction processing and information solutions to improve the efficiency and effectiveness of healthcare. We estimate that we process approximately 45% of the electronic healthcare claims in the U.S. through our Network Services and Systems segment.

Our Information Management segment provides data solutions that can help pharmaceutical manufacturers better align and appropriately compensate their sales forces, analyze their markets, more effectively develop and position their product offerings, and ultimately better understand and enhance the efficacy of drug treatment. We estimate our Information Management segment has attained approximately a 30% market share in the United States based on the number of pharmaceutical sales representatives compensated utilizing our products. In addition, we are increasingly utilizing this segment’s information assets to provide solutions to other sectors of the healthcare market.

In our 2003 Annual Report, we outlined an eight quarter plan that provides a detailed summary of key business strategies and goals for fiscal years 2004 and 2005.

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The goals of this eight quarter plan are:

• To generate more than $100 million in free cash flow, defined as Net cash provided by operating activities less capital expenditures and dividends paid over the eight quarter period, which we expect to utilize to significantly reduce our levels of senior debt and interest expense, and lower our debt to capital ratio toward a target of 35%;

• To achieve sustainable low double digit to mid-teens revenue growth rates in both business segments as we exit fiscal 2005; and

• To expand operating margins by at least 100 basis points from the fourth quarter of fiscal 2003 to the fourth quarter of fiscal 2005; however, there will be a margin decline in fiscal 2004.

The three key elements to our strategy to achieve this plan are: to increase revenue per claim by providing advanced edit processing and other value adding solutions; to grow claims volume as healthcare grows and through gains in market share; and, in our Information Management segment, to take full advantage of our extensive claims processing resources and to position the business for the anticipated rebound in the pharmaceutical manufacturing industry. Therefore, our current execution priorities are: to grow revenue through the sales of integrated and value-adding information solutions; to control operational and administrative costs to realize margin improvement; and generate significant cash to reduce debt.

First Quarter Operating Summary

In our first quarter ended August 29, 2003, we made solid progress toward attaining the key goals outlined in our eight quarter plan:

• Revenue grew 8.8% to $108.9 million from $100.1 million in the same quarter last year. This revenue growth resulted from our achieving the metrics in our strategy. Revenue per claim grew in pharmacy. Claims volume increased as we grew market share. In our hospital unit, we had record new sales at a higher revenue per claim rate. In our Information Management segment our German operation had solid growth and we were successful in selling new analytic solutions domestically;

• As expected, revenue growth in our first quarter was impacted by several factors, including:

o normal seasonality in both our segments;

o our emphasis on solution selling in our Network Services and Systems segment resulted in some delay of revenue recognition until later quarters; however, we expect our recurring revenue to increase as a percentage of total revenue;

o in the physician business, our Lytec product upgrade, which was released the in first quarter last year, is scheduled for the second quarter of this year in order to increase units sold; and

o lower growth in our research and consulting business due to continued pressure on discretionary spending by pharmaceutical manufacturers;

• We believe the impact of these factors will be reduced in future quarters and our strategy will result in accelerated revenue growth;

• As previously disclosed, the first quarter included an incremental step-up in several expense items and, as a result, first quarter fiscal 2004 results reflect a year-over-year increase in our expense base impacting operating income, other income (expense), and net income;

• Operating income was $19.7 million, versus $20.5 million in the first quarter of fiscal 2003. These results were impacted by:

o a restructuring charge of $1.5 million as a result of the completion of the TechRx acquisition and other efforts to control costs;

o Sales, general and administrative expense was higher than a year ago due in part to increased sales expenses on higher revenue, increased marketing expenses from new products which are expected to be profitable later in this fiscal year, and increased corporate costs of $0.5 million; and

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o Depreciation and amortization expense increased $1.7 million to $9.3 million from the first quarter a year ago due to increased amortization related to the second step of the TechRx acquisition completed in May 2003 and the rollout of new products;

• Income before income taxes and equity in losses of affiliated companies declined to $12.3 million from $17.9 million, due to the decline in Operating income and the increase in Other income and (expense) of $4.8 million, of which $4.5 million was increased interest expense related to our refinancing completed in November 2002;

• Our assumed tax rate increased to 37.5% in the first quarter of fiscal 2004 from 36% in the first quarter of fiscal 2003 as a result of the consolidation of TechRx for tax purposes, and other factors;

• The above factors, which were anticipated in our guidance, impacted Net income, which declined to $7.4 million or $0.21 per diluted share, from $11.2 million or $0.32 per diluted share in the first quarter of fiscal 2003;

• Net cash provided by operating activities was $19.6 million, more than triple the $6.0 million in the same three-month period a year ago;

• Free cash flow, as defined above, improved significantly to $4.3 million from a deficit of $(8.3) million in the same period of fiscal 2003; and

• As of August 29, 2003, we were in compliance with all of our debt covenants, and we expect to remain in compliance with all debt covenants throughout fiscal 2004.

Network Services and Systems

First quarter revenue in our Network Services and Systems segment increased to $69.4 million from $64.0 million in the first quarter of fiscal 2003. This growth was due in part to a more than 30% increase in total network transaction volume driven primarily by pharmacy, which includes claims and value-added edits, as compared to the previous year’s first quarter. Revenue from our pharmacy business unit grew at a low double digit percentage rate, while both our physician and hospital business units showed single-digit revenue growth.

Network segment Operating income was $15.3 million as compared to $15.2 million last year, reflecting increased revenue, partially offset by the previously mentioned additional amortization resulting from the second step of the TechRx acquisition, expenses related to the roll-out of our new ePREMIS, e-prescribing and T-Rex One product roll outs, and increased corporate costs.

One of our strategies is to increase the percentage of recurring revenue in the Network segment by selling solutions and by shifting more of our systems pricing models to be transaction based. We recognize that this creates pressure on revenue growth in the short term as we transition to the new model, but it builds a reliable recurring revenue stream. In our first quarter, we experienced both a sequential and year-over -year increase in the percentage of recurring revenue.

We are pleased with the progress of our pharmacy solutions in our first quarter. Our pharmacy claims volume increased at a faster rate than the overall market grew due to gains in market share and a continuing market shift to adjudicated claims from cash transactions. In addition, we continued to sell value adding solutions that assist our customers in increasing their cash flow and profitability. More importantly, our pharmacy revenue per claim continued to increase as we expected.

TechRx has given our pharmacy business great strategic advantages, and early market acceptance of the T-Rex integrated solution platform by current and prospective pharmacy customers continues to be positive. TechRx revenue increasingly includes services related to our providing complete end to end pharmacy solutions. In the first quarter of fiscal 2004, we estimate that core TechRx systems revenue

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grew at a low-teens percentage rate compared to the first quarter of fiscal 2003. On a contribution basis, TechRx was profitable in the first quarter.

In our hospital unit, ePREMIS product sales were strong during the first quarter as we began to sell to and convert our existing base of over 1,500 hospital customers and add new customers. We sold over 250 units, as compared to 100 all of last fiscal year. We are still in the early stages of the product introduction and installation process of our ePREMIS revenue cycle management solution. Our revenue per claim on new units sold during our first quarter was higher than our current revenue per claim within our legacy hospital customer base and is higher than in our pharmacy unit.

Our physician unit experienced slower growth in the first quarter compared to last year. In the past, we have released our periodic product upgrade for our Lytec product in the first quarter. This year, the Lytec product upgrade has been scheduled, and is on track, for release in the second quarter in order to avoid selling into the generally seasonally low summer months. The release of our Medisoft upgrade continues to be scheduled for our fiscal third quarter.

Information Management

First quarter revenue in our Information Management segment grew to $39.5 million from $36.1 million in the first quarter of fiscal 2003. Our first quarter revenue growth in this segment was the result of growth in Germany and our ability to sell information products to domestic pharmaceutical manufacturer customers. This strength was partially offset by lower research and consulting revenue as our pharmaceutical customers continued to limit their discretionary spending.

Information Management segment Operating income increased to $5.9 million from $5.3 million, reflecting increased revenue, partially offset by the expenses related to new product introductions, such as our medical repository, and European expansion, and higher corporate costs.

During the quarter, we continued to actively pursue Information Management strategies that leverage data from our physician, pharmacy and hospital markets to capture claim and related transaction information, and combine it with data we purchase to create information solutions with unique business insights for pharmaceutical manufacturers. During the quarter, these recently introduced Insight and Impact solutions generated significant interest among our customers and increased sales opportunities for NDCHealth.

Outlook

Based on our progress during the first quarter of our eight quarter plan, we continue to believe the execution of our strategy will increase our revenue, net income and net cash from operating activities as we move through the next several quarters.

In our Network segment, we expect to continue to grow revenue per claim and increase our claims volume. Industry wide, there is inherent growth in prescription volume and a continuing market shift to adjudicated claims from cash transactions. Both of these trends should increase our claims volume as we also continue to grow market share.

We expect to recognize a portion of the pharmacy revenue that was delayed from the fourth quarter of last fiscal year and the first quarter of this fiscal year, and we believe we have a solid pipeline for pharmacy sales, each of which should help to enhance our sequential growth.

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With our new pharmacy solutions improving our customers’ cash flow and profitability, we expect our pharmacy revenue per claim will continue to increase as we sell and install these solutions to existing customers and add new customers. Our total pharmacy transaction volume is also expected to continue to rise, indicating further penetration of our value-adding solutions into our claims base and continued market share gains. The combination of these factors, plus the recognition of revenue that was deferred, lead us to expect accelerated revenue growth in the pharmacy business through the remainder of fiscal 2004.

In our pharmacy systems business, TechRx results in our first quarter, combined with its sales and installation pipeline, lead us to continue to expect core TechRx systems revenue to be in the range of $40 to $42 million in fiscal 2004. Installations of T-Rex One, our integrated solution platform for independent and regional pharmacies, are increasing and should result in rising recurring revenue. Sales of T-Rex One have been progressing well and we believe we have a strong pipeline for the remainder of fiscal 2004. We originally planned to install 700 units this fiscal year and we believe we are on track to meet that goal.

We also feel confident about the market acceptance of our new T-Rex Enterprise platform for national chain drug stores.We have active negotiations underway with a number of large institutions. We are on schedule with the development and product delivery timeline we established, and continue to expect our customers to begin implementation of the T-Rex Enterprise system in early fiscal 2005. In addition, we are pursuing several significant opportunities for our T-Rex products.

In our Hospital unit, we expect to continue to make market share gains and increase revenue per claim as ePREMIS continues to accelerate its penetration in the market. Approximately 50% of our ePREMIS sales so far this year have been to new name customers, indicating increasing market share. Sales of ePREMIS conversions into our existing customer base have been strong. Our installation pipeline for the second quarter is full and is beginning to fill out for the third quarter. As we install these ePREMIS sales, we would expect to see transaction growth, which could also be positively impacted by regulations adopted under the Health Insurance Portability and Accountability Act of 1996.

The large majority of our new ePREMIS sales are at per transaction rates that are 20 to 25% higher per claim than the pricing under our current PREMIS contracts, which should increase revenue per claim as ePREMIS installations grow.

As we continue to grow hospital sales and install these new sales, we expect hospital to achieve low double digit or mid-teens growth. Revenue per hospital claim is significantly higher than revenue per claim in the pharmacy unit. As the growth in our hospital unit accelerates, we expect it will have a positive impact on Network revenue.

In our Physician business unit, we experienced somewhat lower revenue than in the first quarter a year ago. We are anticipating an improved revenue growth rate as we introduce product upgrades of Lytec in the second fiscal quarter and Medisoft in the third fiscal quarter, as well as an increase in our physician claims processing revenue over the remainder of the eight quarter plan.

In our Information Management segment, our fiscal first quarter has traditionally been a slow quarter in terms of revenue growth. We are pleased with our performance in Germany, the market acceptance of our new domestic solutions, and the current status of our high quality sales pipeline for the next few quarters. In research and consulting, we have new management in place and have reorganized the sales force. These actions are beginning to show results as the pipeline is stronger than in prior quarters and we would expect performance to improve over the first quarter. Further, we continue to be

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focused on generating revenue growth, controlling costs and eliminating losses currently being incurred in our new medical repository product and joint venture in the United Kingdom. Except for the normal seasonal growth pattern, we are maintaining a cautious outlook for this segment for the remainder of our fiscal 2004.

As stated in our eight-quarter plan, we expect revenue in our Information Management segment to reach sustainable low double digit to mid-teen percentage growth by the end of the fourth quarter of fiscal 2005. We believe that as new drugs are approved by the FDA and introduced into the market, our customers’ discretionary spending levels should increase, stimulating growth in this segment. We will also continue to generate additional revenue streams as we bring to market new solutions that leverage the claims processing resources of our network and move beyond the traditional sales and compensation product lines.

We believe we are on track to achieve the goals outlined in our eight quarter plan. Based on our first quarter performance, we have no changes to our previously issued financial guidance for fiscal 2004, as follows:

• We estimate revenue will be approximately $475 to $490 million;

• We expect diluted earnings per share to be in the range of $1.08 to $1.25, including restructuring charges;

• As previously disclosed, we expect to incur restructuring charges totaling $0.05 to $0.07 per share in the first half of this fiscal year, which includes the $0.03 restructuring charge in the first fiscal quarter;

• We expect to continue to be a strong generator of cash, with fiscal 2004 net cash provided by operating activities in the range of $105 to $115 million; and

• We expect free cash flow, as defined above, to be in the range of $55 to $65 million.

For the second quarter of fiscal 2004, we would expect to see increased revenue growth due to the release of our updated Lytec product in our physician business during the quarter, increased installations of our hospital unit’s ePREMIS product from the committed pipeline, further deployment of T-Rex One, recognition of a portion of the revenue in our pharmacy business that was previously deferred, the expected sequential growth in our business due to script growth, increased third party claims as a percentage of total scripts, increasing revenue per claim and gains in market share in our Network segment and the expected pick-up in Information Management from the seasonally low first quarter.

Although there are risks in our business plan as outlined in our Annual Report on Form 10 K/A, there are also a number of favorable macroeconomic trends in healthcare, which may benefit NDCHealth. First and foremost, there continues to be a significant need to improve physician, pharmacy and hospital automation. We believe we are very well positioned with our existing systems to provide solutions to address many of the challenges currently being faced by healthcare providers.

Given the financial constraints and challenges facing many healthcare institutions and businesses, we believe there is a substantial need for our new, value-adding solutions. For example, our new ePREMIS solution helps enable hospitals to comply with HIPAA by providing electronic transaction processing capabilities for additional HIPAA transactions, while enhancing the hospital’s workflow efficiency and cash collections and increasing our revenue per claim.

Separately, major pharmacy chains have recently reported a rebound in same-store retail pharmacy sales. We believe continuation of this trend will benefit NDCHealth’s claims and total transaction volume. We believe that healthcare transactions will continue to grow due to a greater use of medical care and treatment by an aging population. In addition, new programs such as the discount card recently approved by both the

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Senate and the House of Representatives may provide Medicare beneficiaries with temporary assistance in purchasing prescription drugs in 2004 and 2005. We would expect any such program which increases non-cash prescription and generates new prescription growth may benefit NDCHealth through increased network transaction volumes.

Due to the growth in prescriptions in the managed care market, there may be additional opportunity to accelerate sales of new pharmacy systems in this market. It is likely that the pricing in this market will be based on the more traditional software revenue model. We are pursuing a number of significant pharmacy system opportunities in this market and, should we be successful, we could gain additional revenue over the balance of our eight quarter plan from long-term licensing, maintenance and support contracts.

While we expect these macro trends in healthcare to continue to present exciting, new opportunities to grow our business, some or all of these opportunities may not materialize.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions. Critical accounting policies are those policies that can have a significant impact on our financial position and results of operations and require complex judgments and the most significant use of these subjective estimates and assumptions. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Specific risks inherent in our application of these critical policies are described below. For all of these policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. These policies also often require difficult judgments on complex matters that may be subject to multiple sources of authoritative guidance. Additional information concerning our accounting policies can be found in Note 1 to our condensed consolidated financial statements.

Revenue

Although we have several sources of revenue, in all cases, we recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery and performance has occurred, and collectibility is probable. The most variable of these factors between our various businesses is determining when delivery and performance has occurred.

In our Information Management segment, we have two primary sources of revenue: database information reporting and consulting services. Database information reporting typically involves the delivery of products providing pharmaceutical information. These include products with a single delivery and products where multiple deliveries are made over a period of time. Revenue for products involving a single delivery is recognized when obligations to the customer have been fulfilled, which is typically upon delivery. Products with multiple deliveries over a period of time, usually 1 to 3 years, are generally unique in nature and therefore require more complex judgment to determine appropriate revenue recognition. In most cases, information of a similar type is delivered at equal intervals over a fixed period of time in which case revenue is recognized over the term of the contract using a straight-line model.

Our consulting services are typically provided for a fixed fee over a specific period of time. Because the terms of these contracts generally include multiple performance milestones, revenue for these services is recognized over the contract term as performance milestones specified in the contract

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are achieved. If we determine that we will incur a loss on a contract, we recognize the loss at the time the determination is made. These contracts typically average 6 to 12 months.

In our Network Services and Systems segment, the primary source of revenue is transaction fees charged for network services. We provide these services to our pharmacy, hospital, physician, and payer customers. These fees are generally based on the volume of services we provide to each individual customer. In most instances, this fee is charged per transaction and type of transaction while in some instances, these services are provided to large customers for a fixed monthly fee, regardless of each month’s actual transaction volume for a portion of the contract term. We have begun the rollout of hosted web browser based applications for our hospital and pharmacy customers. The per transaction charge for these services includes charges for the use of the application software, network, and other value added services. Revenue for these services is recognized each month as the services are rendered.

In our systems businesses, we also receive revenue from software licenses and related maintenance and support agreements. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” These SOP’s provide guidance on applying accounting principles generally accepted in the United States for software revenue recognition transactions. Based on these authoritative statements, we recognize revenue as follows:

Revenues from the sale of software licenses and implementation services are recognized upon the date that the software is in operation at the customer site where vendor specific objective evidence, or VSOE, has been established for the undelivered elements of the customer contract, which typically is maintenance. In these cases, the maintenance revenue is recognized over the term of the maintenance contract. Where VSOE cannot be established for undelivered elements within the contract, the revenue related to license fees and implementation services are deferred and recognized upon acceptance over the remaining term of the contract, typically two or three years.

The software we license to our customers is generally one of two types. The most common software type performs functions such as scheduling and billing and is used by our customers to manage their businesses and connect to our network. Because this type of software has stand alone functionality (meaning that connection to our network is not required for the software to be functional), we recognize revenue for sales of these type products that are customer installed when the product is shipped. For products of this type that are installed by us or one of our affiliates, we recognize revenue when the software is installed. The other type of software is used by our customers to process transactions through our network. Because this software provides value to our customers only to the extent that they are utilizing our network services, revenue is recognized over the estimated life of the network services contract rather than when the software is installed. In instances where revenue is deferred over the term of a contract and we incur discrete incremental costs in providing the initial deliverable, we defer these costs and recognize them ratably over the contract term.

We provide software maintenance and customer support to our customers on both an as needed and long-term basis. Services provided outside a maintenance contract are on an as requested basis and revenue is recognized as the services are provided. Revenue for services provided on a long-term basis is recognized ratably over the terms of the contract.

Many of our physician systems are sold indirectly through value added resellers, or VARs. Because the VARs provide many of the services that we would otherwise provide (such as contract support, advertising, etc.), we provide them allowances to cover their cost of providing these services. We record revenue in accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for

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Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products,” which requires that certain allowances be treated as reductions in revenue and allows other allowances, for which we receive separable, identifiable and quantifiable benefits, to be recorded as revenue and operating expense.

Capitalized software

Internally developed software held as property on our balance sheet consists of two types: software that we develop for sale to our customers and software that we develop that is for internal use in providing services to our customers. The costs associated with developing this software are capitalized differently depending on whether the software is for sale or for internal use. In each instance, in accordance with SFAS 86 or SOP 98-1, costs are capitalized only when the project has reached the point of technological feasibility or the application development stage. Costs incurred prior to this point are charged to earnings as research and development expense.

For software sold to our customers, in accordance with SFAS 86 we capitalize both direct and indirect development costs such as programmers’ salaries and benefits, outside contractor costs, computer time, and allocated facility costs. Completed projects capitalized under SFAS 86 are amortized after reaching the point of general availability using the greater of the amount computed using the straight-line method or the ratio that current revenues bear to the total of current and anticipated revenues, based on the estimated useful life of the project, normally five years. The life used for amortization is based on the projected period of time that we will either sell the product or use the product to provide services, typically five years.

For software used internally, in accordance with SOP 98-1 direct development costs such as programmers’ salaries and benefits, and fees paid to others for development are capitalized. Completed projects capitalized under SOP 98-1 are amortized using the straight-line method. The life used for amortization is based on the projected period of time that we will use the software to provide services, typically five years.

The actual useful life of the product or software may be longer or shorter than the estimated useful life. If the actual life is longer, we would continue to realize value from the asset while no longer recognizing a corresponding expense. If the actual life is shorter or we determine that the investment will not be recovered through the future sales of products or services, the remaining carrying amount may need to be amortized over a shorter period or a non-cash charge to earnings could be required. The net realizable value of capitalized software is monitored on a periodic basis to ensure that the investment will be recovered through the future sale of products or in the case of internal software, through use.

Investments

We consider and selectively enter into a variety of alliances, joint ventures and investments. As such, we maintain investments in both privately held and publicly traded entities.

Our investments in privately held entities are accounted for under either the cost, equity, or consolidation method, whichever is appropriate for the particular investment. The appropriate method is determined by our ability to exercise significant influence over the investee, through either quantity of voting stock or other means. We regularly review our investments for impairment issues and propriety of current accounting treatment. The primary method we use to determine whether or not an impairment issue exists is to compare the valuation of our investment with the underlying value of the entity in which we have an investment. We determine the underlying value of the entity based on a number of factors, including: the execution of business strategy and the steps that it has and is taking in the execution of that

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strategy, and the entity’s subsequent financing activity. If we determine that an impairment issue exists, we would realize the loss in Other income (expense) in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” If we determine that our accounting treatment should change from the cost to equity method, in accordance with the provisions of Accounting Principles Board Opinion No. 18, “Equity Method of Accounting for Investments in Common Stock” we would retroactively restate our previously issued financial statements as if we had always accounted for the investment under the equity method. If our level of investment increased to a level such that we directly or indirectly controlled the entity, we would consolidate the entity’s results into our consolidated financial statements.

Our investments in publicly traded entities are classified as available-for-sale securities and are reported at fair value and unrealized gains and losses are reported, net of taxes, as a component of stockholders’ equity. For example, if the market price of our investment has declined but we believe that the decline is only temporary because the underlying value of the business is higher than the market indicates, we will report the value of our investment at the price indicated by the market and report any change in the investment’s value as an unrealized holding loss. When a decline is determined to be other than temporary, we realize the gain or loss in Other income (expense).

Intangible assets

Intangible assets are created when the purchase price of an acquired business exceeds the value of its tangible assets. For any significant business we acquire, we obtain a valuation from an independent specialist which assists in the identification of any specific intangibles and provides assistance in our determination of an estimated value and life for each. Goodwill exists where our purchase price exceeds the value of tangible assets plus these specifically identified intangible assets.

Specifically identified intangible assets primarily represent proprietary technology and customer relationships. Identified intangibles are assigned a value, generally that which was estimated in the valuation, and amortized over the estimated life. Because of the complexity of assumptions and judgment used in estimating the value and life of these assets, there is significant risk that their actual value and life may vary from the original estimate. We periodically evaluate whether events and circumstances have occurred that indicate the carrying amount of intangibles may warrant revision or may not be recoverable. When factors indicate that an intangible should be evaluated for possible impairment, we estimate the present value of future cash flows associated with the asset over its remaining life. We may determine that an intangible asset has diminished or has no remaining value prior to it being fully amortized. In this instance, we would be required to record a charge to earnings to account for impairment of the asset.

SFAS 142, “Goodwill and Other Intangible Assets,” requires that goodwill no longer be amortized but be reviewed for impairment on a regular basis. The goodwill impairment test has two steps. The first step is to compare the fair value of each reporting unit with its book value. Our reporting units are defined as our Pharmacy, Hospital, and Physician businesses in our Network Services and Systems segment plus our total Information Management segment. For each of our reporting units, we found that the estimated fair value exceeded the net book value of the unit and therefore the second step was not necessary. Due to the size of the TechRx acquisition, we updated our test for the Pharmacy reporting unit as of May 30, 2003 and found that no adjustments were required.

If the estimated current value of future cash flows of any reporting unit had been lower than its book value, the second step would have been to calculate the possible impairment by comparing the implied fair value of goodwill with the carrying amount. Any impairment would require a non-cash charge to earnings in the period in which the impairment was identified. We will conduct these same

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tests going forward at least annually to ensure that goodwill carried on our balance sheet is properly valued.

Recently Issued Accounting Pronouncements

We have adopted the provisions of Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The adoption of this statement has resulted in an acceleration of the trend of deferring revenue as we provide more end to end solutions.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We are currently evaluating several business relationships or interests existing prior to February 1, 2003 that could possibly be considered variable interest entities and whether we would have to consolidate or deconsolidate any such entities. We have not entered into any relationships since January 31, 2003, which would meet the reporting requirement of FIN 46.

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Financial Review

We operate our business as two fundamental segments: Network Services and Systems, and Information Management. Network Services and Systems provides electronic connectivity to our NDCHealth Intelligent Network and system solutions throughout the healthcare industry. Information Management provides management information, research, and consulting services to pharmaceutical manufacturers and pharmacy chains. Other Operating income includes restructuring, impairment and other charges in fiscal 2004. More information concerning segments can be found in Note 4 of the Notes to our Condensed Consolidated Financial Statements.

(In millions, except per share data)	First Quarter Ended,
	August 29, 2003			August 30, 2002		Change
Revenue:
Information Management	$	39.5		$	36.1	$	3.4		9.4	%
Network Services and Systems		69.4			64.0		5.4		8.4	%
Total revenue	$	108.9		$	100.1	$	8.8		8.8	%
Operating income:
Information Management	$	5.9		$	5.3	$	0.6		11.3	%
Network Services and Systems		15.3			15.2		0.1		0.7	%
Other		(1.5	)		—		(1.5	)	n/m
Total operating income	$	19.7		$	20.5	$	(0.8	)	(3.9	)%
Net income	$	7.4		$	11.2	$	(3.8	)	(33.9	)%
Diluted earnings per share	$	0.21		$	0.32	$	(0.11	)	(34.4	)%

Revenue

Total revenue increased $8.8 million, or 8.8%, to $108.9 million in the first quarter of fiscal 2004 from $100.1 million in the first quarter of fiscal 2003. On a segment basis, Information Management revenue grew $3.4 million, or 9.4%, to $39.5 million in the first quarter of fiscal 2004 from $36.1 million in the first quarter of fiscal 2003. Network Services and Systems revenue grew $5.4 million, or 8.4%, to $69.4 million in the first quarter of fiscal 2004 from $64.0 million in the first quarter of fiscal 2003. The increases in revenue, but relatively lower year-over-year growth, are due to the reasons discussed in “First Quarter Operating Summary.”

Operating Expenses

Our most significant expenses are compensation, data costs, depreciation and amortization, and communications expense. Together these expenses represented 63% of our operating expenses in the first quarter of fiscal 2004 compared to 65% in the first quarter of the prior year. Cost of service includes certain compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. Sales, general and administrative expense includes certain compensation, sales, marketing, administration, and corporate overhead expenses.

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Compensation Expense

As a service organization, compensation is our largest expense and we continue to monitor it closely. In general, we are not always able to pass our inflationary cost increases on to our customers. As our costs go up, we must find new ways to operate our business in order to reduce costs and improve productivity. This includes addressing under-performing projects, products and people.

As a percent of revenue, compensation expense, which includes incentive pay, commissions, and related fringe benefits, and is net of capitalized labor, has been decreasing. This decrease is due to increased productivity as a result of our training initiatives and cost control efforts as well as the scalability of our business model. We will continue to look for ways to improve efficiencies, including centralization, in our businesses.

(In millions)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Compensation expense, net of capitalized labor	$	27.5		$	28.5
Revenue	$	108.9		$	100.1
Percent of revenue		25.3	%		28.5	%

Cost of Service

Cost of service, or COS, includes certain compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. COS increased $3.4 million, or 6.6%, to $55.2 million in the first quarter of fiscal 2004 from $51.8 million in the first quarter of fiscal 2003 due primarily to increased revenue. As a percent of revenue, during the first quarters of fiscal 2004 and 2003, COS expense was 50.6% and 51.8%, respectively. We expect that COS, as a percentage of revenue, will be relatively consistent in the remainder of fiscal 2004.

Data Costs

We buy data from various sources to supplement our own data collection efforts. Data costs increased $3.1 million, or 26.3%, to $14.9 million in the first quarter of fiscal 2004 from $11.8 million in the first quarter of fiscal 2003 due to the purchase of additional data types for our new German informatics products, an increase in volume of other data purchased, and an increase in the costs of such data. As a percent of revenue, data costs increased from fiscal 2003 to fiscal 2004. We are actively pursuing programs to continue to contain data costs, including exploring new areas of opportunity where data is less costly.

(In millions)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Data costs	$	14.9		$	11.8
Revenue	$	108.9		$	100.1
Percent of revenue		13.7	%		11.8	%

Communications Costs

Communications costs were flat as a percent of revenue at 3.9% in the first quarters of fiscal 2004 and fiscal 2003. We continue to look at new technologies that will allow us to provide superior service to our customers at reduced cost. However, because competition in the telecommunications industry has resulted in historically low communications costs, we do not expect significant future

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reductions in communications costs.

(In millions)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Communication costs	$	4.2		$	3.9
Revenue	$	108.9		$	100.1
Percent of revenue		3.9	%		3.9	%

Software Costs

Software costs are related to the development of new products and maintenance and enhancement of existing products. We capitalize the cost of developing software held for sale to our customers as well as software used internally to provide services to our customers. Depreciation expenses associated with capitalized software are discussed below under Depreciation and Amortization.

Our current focus is developing new products such as T-Rex Enterprise, Next Generation Projection, ePrescribing, Weekly SNR, Canada PPE, Dynamic Claims Analyzer, Future Rx, Payment Optimizer, Fraud & Abuse, additional RX Safety Advisor modules, and products for the United Kingdom and German markets. Total costs associated with software development for TechRx were $4.5 million in the first quarter of fiscal 2004 versus $3.6 million in the first quarter of fiscal 2003. Approximately $3.4 million of these development costs were capitalized resulting in net development expense associated with TechRx of approximately $1.1 million. TechRx software maintenance expense was $0.4 million in the first quarter of fiscal 2004. In the first quarter of fiscal 2004, development costs capitalized as a percentage of total development costs declined to 71% from 82% in the first quarter of fiscal 2003. We would expect this trend to continue as we roll out new products currently in development.

(In millions)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Total costs associated with software development	$	10.8		$	8.7
Less: capitalization of internally developed software		(7.7	)		(7.1	)
Net software development expense		3.1			1.6
Software maintenance expense		2.1			2.5
Total net software expense	$	5.2		$	4.1
Revenue	$	108.9		$	100.1
Capitalization as a % of revenue		7.1	%		7.1	%
Total net software expense as a % of revenue		4.8	%		4.1	%

Sales, General and Administrative Expense

Sales, general and administrative, or SG&A, expense consists primarily of salaries, wages and expenses relating to sales, marketing, administrative and management employees, employee training costs, and occupancy of leased space directly related to these functions. SG&A expense increased $3.0 million, or 14.9%, to $23.2 million in the first quarter of fiscal 2004 from $20.2 million in the first

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quarter of fiscal 2003. As a percent of revenue, during the first quarters of fiscal 2004 and 2003, SG&A expense was 21.3% and 20.1%, respectively. The increase was due to increased sales expenses on higher revenue, increased marketing expenses from new product introductions and a step up in corporate costs. We expect that SG&A expense, as a percentage of revenue, will be flat or increase in the remainder of fiscal 2004 due to continued investment in our sales and marketing programs to support the roll out of new products, increased corporate governance expenses, and increases in expenses related to equity compensation programs.

Depreciation and Amortization

Depreciation and amortization expense increased in the first quarter of fiscal 2004 from the first quarter of fiscal 2003 due to increased amortization related to the second step of the TechRx acquisition completed in May 2003 and the roll out of new products. Depreciation and amortization expense will increase in the remainder of fiscal 2004 as newly developed products are placed in service and intangible assets acquired in the TechRx acquisition are amortized.

(In millions)	First Quarter Ended,
	August 29, 2003			August 30, 2002
Depreciation and amortization	$	9.3		$	7.6
Revenue	$	108.9		$	100.1
Percent of revenue		8.5	%		7.6	%

Operating Income

Operating income decreased $0.8 million, or (3.9%), to $19.7 million in the first quarter of fiscal 2004 from $20.5 million in the first quarter of fiscal 2003. Operating income decreased due to Restructuring, impairment and other charges of $1.5 million, increased depreciation and amortization and higher corporate costs.

In the fourth quarter of fiscal 2003, in conjunction with the completion of the TechRx acquisition, we began a review of the entirety of NDCHealth to identify opportunities for increased operational efficiencies. This ongoing review includes an assessment of our organizational structure as well as our physical operating locations. We have taken several actions in the first quarter of fiscal 2004 as a result of this review.

In the Network Services and Systems segment, we have begun to streamline the management organizations of our pharmacy services and systems businesses and the application development organization in our hospital business. In the first step of the streamlining, we have eliminated 16 positions. In connection with this streamlining, we recorded approximately $1.0 million in severance related costs in the first quarter. Approximately $0.1 million of this severance cost was a non-cash charge related to modified stock options. We expect to implement further streamlining changes in the second quarter.

During the first quarter, we made a decision to combine the sales organizations and streamline the development organizations within the Information Management segment. As a result of this reorganization, we have eliminated 28 positions and reduced the size of two locations. Accordingly, we recorded approximately $0.4 million in severance related costs and $0.1 million of expense related to lease terminations in the first quarter. The reorganization of these sales organizations is substantially complete however; we expect to implement further streamlining changes in the second quarter.

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Provision for Income Taxes

Our estimated effective tax rate in the first quarter of fiscal 2004 was 37.5% compared to 36% in the first quarter of fiscal 2003. We have increased our estimated effective tax rate for fiscal 2004 as a result of the consolidation of TechRx for tax purposes, and other factors.

Interest and Other Expense

Interest and other expense consists of interest expense, amortization of debt issuance costs and other miscellaneous non-operating expense. As a percent of revenue, during the first quarters of fiscal 2004 and 2003, interest and other expense was 7.1% and 3.2%, respectively. As discussed in Liquidity and Capital Resources below, we completed a refinancing at the end of the second quarter of fiscal 2003. We expect interest expense to be higher in the second quarter of fiscal 2004 versus the second quarter of fiscal 2003 due to the additional debt and higher weighted average interest rates in place in the current fiscal year.

Liquidity and Capital Resources

Payments from our customers are our greatest source of liquidity. Additional sources of liquidity include our credit facility, financing under capital lease arrangements, vendor financing, and issuances of common stock and other instruments. The cash provided by these sources has a variety of uses. Most importantly, we must pay our employees and vendors for the services and materials they supply. Additional uses include, among other things, expenditures for new capital equipment, development of additional products, investments in alliances, acquisitions, payment of taxes, payment of dividends, extension of credit to our customers, and to generally fund our operations.

Our operating cash requirements are generally satisfied with our customer receipts because we receive a higher level of cash from our customers than we expend for payments of salaries and other recurring operating costs. Excess cash that we generate after satisfying all of our continuing operating requirements is shown on our statement of cash flows as Net cash provided by operating activities. This measure takes into account items such as non-cash expenses included in our operating income, cash used to extend credit to our customers, and cash provided by our vendors extending credit to us.

Net cash provided by operating activities was $19.6 million for the first three months of fiscal 2004, an increase of $13.6 million from $6.0 million in the first three months of fiscal 2003. Net income adjusted for non-cash items including Equity in losses of affiliated companies, Restructuring, impairment and other charges, and Depreciation and amortization was $17.1 million in the first three months of fiscal 2004 compared to $19.1 million in the first three months of fiscal 2003. As a result of our acquisition of TechRx, in the first three months of fiscal 2004 we began to recognize the benefit of Net operating loss carry-forwards, or NOLs, previously generated by TechRx of approximately $50 to $60 million. We expect to be able to utilize approximately half of this benefit in fiscal 2004 thereby reducing our cash tax payments by approximately $9 to $11 million in fiscal 2004, positively impacting Net cash provided by operating activities. Utilization of these, and other NOLs related to our continuing operations, allowed us to reduce our cash tax payments by $4.2 million in the first three months of fiscal 2004 compared to $0.3 million in the first three months of fiscal 2003.

The most significant difference in Net cash provided by operating activities in the first three months of fiscal 2004 compared to the first three months of fiscal 2003 was Accounts payable and accrued liabilities. Accounts payable and accrued liabilities provided $2.7 million of cash in the first three months of fiscal 2004 and used $11.3 million of cash in the first three months of fiscal 2003. This difference was the result of management’s increased focus on minimizing working capital requirements.

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Additionally, Accrued interest on long term debt is an emerging item that significantly impacted operating cash flows in the first three months of fiscal 2004 versus the first three months of fiscal 2003. In November 2002 we completed a refinancing discussed in detail below, which significantly increased our interest expense from the prior year. Because interest payments on the $200 million of senior subordinated notes issued in the refinancing are made on June 1 and December 1 of each year, we had a significant amount of accrued interest on our balance sheet at May 30, 2003. Cash payment of this interest was made in the first quarter of fiscal 2004. Other significant differences between the first three months of fiscal 2004 and the first three months of fiscal 2003 are Accounts receivable, Prepaid expenses and other assets, and Deferred revenue. Collectively, these changes in working capital used $1.2 million of cash in the first three months of fiscal 2004 versus $6.2 million of cash in the first three months of fiscal 2003. Changes in working capital are the result of the timing of receipts from our customers and our payments to vendors, and the timing difference between billing customers for services as required by their contracts and our recognition of related revenue. In our Network Systems and Services segment, our strategy is to market a complete set of solutions rather than individual products that we emphasized in the past. As a result, more of our network contracts are subject to EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” The impact is an increase in Deferred revenue as the customer may remit payment in advance even though revenue is recognized in future periods.

The nature of an information services business is such that it requires a substantial continuing investment in technology equipment and product development in order to expand the business. We are generally able to internally fund these investments from excess cash generated from operations. Additionally, historically we have also expanded our business through acquisitions and strategic investments in other businesses. The cash we use to expand our business is shown as Net cash used in investing activities. Capital expenditures, which reflect our investment in equipment and product development such as software costs discussed above, were $14.0 million in the first three months of fiscal 2004, including $7.7 million in capitalized software costs and $0.7 million in capitalized interest; and $12.9 million in the first three months of fiscal 2003, including $7.1 million in capitalized software costs and $0.2 million in capitalized interest. Capital expenditures were funded from cash from operations in both years. As we continue the roll-out of new products and solutions during fiscal 2004, we will be reducing the capital expenditure run rate. In addition, capital expenditures in the first three months of fiscal 2004 included some costs that we would not expect to repeat. As a result, the level of capital expenditures in the first three months of fiscal 2004 is not indicative of the expected full-year capital expenditure level, which is still expected to be in the $40 to $45 million range, including approximately $28.0 million in capitalized software costs.

We used $4.9 million of cash in the first three months of fiscal 2004 for other investing activities, primarily the payment of transaction costs related to the completion of our acquisition of TechRx at the end of fiscal 2003. During the first three months of fiscal 2003, we used cash totaling $5.1 million for the payment of merger related costs associated with our acquisition of a controlling interest in TechRx at the end of fiscal 2002.

In November 2002, we completed a refinancing that included a new $225 million senior secured credit facility and the issuance of $200 million of 10  ¹/2% Senior Subordinated Notes due 2012 in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933. On September 2, 2003 we completed an exchange offer whereby we exchanged $199.9 million of the unregistered notes for substantially identical registered senior subordinated notes. After the closing of the exchange offer, $0.1 million of the unregistered notes remain outstanding.

The $225 million senior secured credit facility consists of a $100 million five-year revolving credit facility and a $125 million six-year term loan. The $100 million revolving credit facility is

34

available for working capital and general corporate purposes and has a variable interest rate based on market rates.

Borrowings under the credit facility are guaranteed by our material domestic subsidiaries. Our obligations under the credit facility are secured by a pledge of the capital stock of our domestic subsidiaries and 66% of the voting stock of our first-tier material foreign subsidiaries. Our obligations are also secured by a perfected lien and security interest in substantially all of our, and such domestic subsidiaries’, tangible and intangible assets. Under certain circumstances, future material subsidiaries will be required to guarantee the credit facility and to secure their guarantees with substantially all of their tangible and intangible property. Similarly, under certain circumstances, we will pledge 66% of the voting stock of our future first-tier foreign subsidiaries to the lenders under the credit facility.

As of August 29, 2003, there were no borrowings outstanding under the revolving credit facility. As of August 29, 2003, $125 million was outstanding under the term loan, which bore interest at a weighted average annual interest rate equal to 6% at such date. The revolving credit facility terminates on November 30, 2007, and the term loan matures on November 30, 2008. Commencing on August 31, 2003, quarterly payments of $1,562,500 are due on the term loan on August 31, November 30, February 28 and May 31 of each year until November 30, 2007, and thereafter quarterly payments of $24,218,750 are due on such dates until maturity on November 30, 2008. Voluntary prepayments of principal amounts outstanding under the term loan are permitted at any time if accompanied by a premium of 2% of the amount of any voluntary prepayment made before November 26, 2003 and 1% of the amount of any voluntary prepayment made before November 26, 2004.

Borrowings under the credit facility bear interest, at our option, at a rate based on either (1) the applicable margin plus the base rate, which is the higher of the per annum rate, which the administrative agent publicly announces from time to time to be its prime lending rate, and the federal funds rate, as published by the Federal Reserve Bank of New York, plus 0.5%, or (2) the applicable margin plus a reserve-adjusted “LIBOR” rate, which shall be not less than 2.00% in the case of term loan borrowings. The applicable margin with respect to term loan borrowings is a percentage per annum equal to 3.00% for base rate borrowings and 4.00% for LIBOR borrowings. The applicable margin with respect to borrowings under the revolving credit facility is a percentage per annum equal to 2.00% for base rate borrowings and 3.00% for LIBOR borrowings. The applicable margin is subject to adjustments based on our financial performance. Under the credit agreement, the interest rate on the term loan will not be less than 6% and there is no cap on the interest rate applicable to the term loan or the revolving credit facility.

With respect to base rate borrowings, interest is payable quarterly on the last business day of each fiscal quarter and interest is calculated based on a 365- or 366-day year, as the case may be, and actual days elapsed. With respect to LIBOR borrowings, we may elect interest periods of 1, 2, 3 or 6 months and interest is payable in arrears at the earlier of the end of an applicable interest period and quarterly. Interest on LIBOR borrowings is calculated based on a 360-day year and actual days elapsed. We also pay customary commitment fees on the daily average unused portion of the credit facility.

The credit facility contains certain financial and non-financial covenants customary for financings of this nature, such as limiting our level of capital expenditures and requiring us to maintain a certain leverage ratio of debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA is defined in the credit agreement as income before equity in losses of affiliated companies, plus income taxes, interest expense, depreciation and amortization, and certain other non-cash charges, less minority interest in income and losses. As of August 29, 2003, we were in compliance with all restrictive covenants and expect to remain in compliance in the foreseeable future.

35

The $200 million senior subordinated notes are our senior unsecured subordinated obligations, will mature on December 1, 2012, and are classified as fixed rate borrowings. The notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior subordinated basis by the subsidiary guarantors that guarantee our credit facility. The notes bear interest at a rate of 10  ¹/2% per year and interest is payable on June 1 and December 1 of each year. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. As of August 29, 2003, the fair market value of the notes was approximately $212.0 million.

We intend to reduce our level of senior debt during fiscal 2004 and 2005, and believe that free cash flow, defined as Net cash provided by operating activities less Capital expenditures and Dividends paid, is a meaningful, measure of our ability to generate cash for this use. Free cash flow is not a GAAP measurement and may not be comparable to free cash flow reported by other companies. Free cash flow improved to $4.3 million in the first three months of fiscal 2004 from a deficit of $8.3 million in the first three months of fiscal 2003.

Stock activities provide us an additional source of liquidity. Stock activities are primarily related to the exercises of employee stock options and issuances under the employee stock purchase plan. In the first three months of fiscal 2004, issuance of shares of our common stock generated $0.7 million versus $0.6 million in the first three months of fiscal 2003. Although the issuance of additional shares provides us with liquidity, it results in a dilution of each individual stockholder’s equity. Another use of cash is the payment of dividends, which totaled $1.4 million in the first three months of both fiscal 2004 and 2003.

Discontinued operations used $0.7 million in the first three months of fiscal 2004, primarily in the settling of liabilities, versus $0.3 million in the first three months of fiscal 2003. Net operating loss carry-forwards related to our discontinued operations allowed us to reduce our cash tax payments by $5.3 million in the first three months of fiscal 2003.

We believe that our current level of cash on hand, future cash flows from operations, and our credit facility are sufficient to meet our operating needs in fiscal 2004.

Forward-Looking Information

This report contains forward-looking statements. The statements related to the Company’s expected business outlook and the Company’s guidance for fiscal year 2004 are forward-looking statements. In general, forward-looking statements may include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the forward-looking statements. Among other things, the Company’s business outlook and the projected results for the remainder of fiscal year 2004 are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management’s control. Some of management’s assumptions that underlie the Company’s forward-looking statements include, among others, assumptions regarding demand for the Company’s products, the cost and timing of product upgrades and new product introductions, gains in market share, industry conditions affecting the Company’s customers, expected pricing levels, expected growth of revenue and net income, the timing and cost of planned capital expenditures, expected outcomes of pending litigation and expected synergies relating to acquisitions, joint ventures and alliances.

Additional factors that could cause results to materially differ from current expectations include, but are not limited to, the following:

• intense competition could damage our sales and profitability;

• our substantial indebtedness could adversely affect our financial health;

• we may lose customers or revenue due to consolidation in the healthcare industry;

• our profitability could suffer if we are unable to continue our expansion in new and existing markets;

36

• defaults in payment or a material reduction in purchases of our products by large customers could have a significant negative impact on our financial condition, results of operations and liquidity;

• we may spend significant resources developing and promoting new products or solutions that may not meet the demands of our customers;

• interruptions may occur in some of our information services;

• proprietary technology protections may not be adequate and proprietary rights may infringe on rights of third parties;

• recent and future combinations and strategic relationships may not be profitable;

• complex state and federal regulations could depress the demand for information products or impact the availability to us of certain data, and we could incur redesign costs or be subject to penalties;

• changes in the United States healthcare environment could have a material negative impact on our revenues;

• unanticipated changes in our accounting policies may be required because of mandates by standards setting organizations and could have a material impact on our financial statements;

• we may need additional capital to continue our growth and expansion; and

• our data suppliers may restrict or modify access to their data.

For further discussion of the factors noted above and other relevant factors, please see the information set forth under the caption “Additional Factors That May Affect Future Performance” in Item 7 of our Annual Report on Form 10-K/A for the fiscal year ended May 30, 2003, which are incorporated herein by this reference.

Forward-looking statements speak only as of the date they are made, and the Company disclaims any obligation to update these statements in light of new information, future events or otherwise. Forward-looking statements are only predictions and are not guarantees of performance.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk from that disclosed in our Annual Report on Form 10-K/A for the year ended May 30, 2003.

ITEM 4—CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of August 29, 2003. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, as of August 29, 2003, our disclosure controls and procedures provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There have been no significant changes in our internal control over financial reporting during the quarter ended August 29, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37

Part II

ITEM 1—LEGAL PROCEEDINGS

We currently provide pharmaceutical information services solutions to our European customers, pharmaceutical companies, through our German business. In this regard we deliver the prescription data we receive from our data suppliers in a variety of products to our customers to assist them in operating their businesses. We deliver this prescription data to our customers in an electronic format. The specific electronic format within which such prescription data is actually delivered to such pharmaceutical companies in Germany is the subject matter of the current litigation both before the European Commission and the German courts with IMS Health.

In the proceedings before the European Commission instituted by us on December 19, 2000, we are alleging that to the extent this format is copyrighted by IMS Health, the format constitutes an industry standard and an essential facility to competition and must be made available to competitors of IMS Health. We obtained a ruling as to our request for Interim Relief from the European Commission whereby they ordered IMS Health to license its structure for organizing pharmaceutical sales data to us. However, subsequent to this decision, the Court of First Instance and later the European Court Of Justice stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding. The European Commission has recently withdrawn its ruling as to our request for Interim Relief finding that since the German Court of Appeals had found that IMS Health had no right to enforce any existent copyright in the structure that we could sufficiently compete in the marketplace.

In proceedings before the German courts instituted by IMS Health on December 21, 2000, IMS Health has alleged copyright infringement against each of Pharma Intranet Information AG, or PI, the company from whom we purchased certain assets of our German business, and us, and we each have contested the validity of IMS Health’s alleged copyright. In these proceedings, IMS Health obtained an injunction from the Frankfurt Regional Court to prevent each of PI and us from distributing data in the contested format. On August 13, 2002, the Frankfurt Court of Appeals ruled in our favor by dismissing the preliminary injunction against our use of the industry standard data structure. This decision is final and is not subject to further appeal by IMS Health. On September 17, 2002 the Frankfurt Court of Appeals issued a judgment in the main proceedings against PI. While validating a copyright in the structure, the Court held that IMS Health has no standing to sue to enforce the copyright. The Court also determined that IMS Health does not own the copyright. The Court further denied IMS Health’s claims under the EU Database Directive for protection of the data structure involved. Finally, the Court found that PI breached the German Act Against Unfair Trade Practices (UGW) by reason of identically copying the data structure. We have not sold or used the data structure initially used by PI. We do not own PI and PI is no longer actively conducting business. The case against us remains pending before the Frankfurt Regional Court at this time.

Several independent pharmacies filed a lawsuit on December 23, 2002 in the Twentieth Judicial Circuit Court, St. Clair County, Illinois, against IMS Health, Inc., or IMS, and sixty-two other defendants, including us (collectively the computer systems vendors). We were served with the lawsuit in May 2003. The pharmacies, Douglas & Ogden Medical Center Pharmacy, Inc. d/b/a Douglas Main Pharmacy, Timmerman & Associates, Inc. d/b/a Comprehensive Care Pharmacy, and John Hartman d/b/a Bittles Drug Store allege that IMS violated the Illinois Trade Secrets Act and breached alleged contracts it had with the computer systems vendors by reselling what the plaintiffs claim to be proprietary drug information to a competing prescription drug provider. The plaintiffs have also alleged that the computer systems vendors, including us, violated the Illinois Trade Secrets Act and breached alleged contracts with the plaintiffs by providing what they claim to be proprietary pharmacy data to IMS. In connection with the class action that the plaintiffs are seeking, the plaintiffs are claiming damages in excess of $100

38

million, alleging that other independent pharmacies have similar relationships with IMS and the computer systems vendors.

We have denied all liability in the lawsuit, have objected to certification of the class and intend to defend the case vigorously. Our contracts with IMS provide for indemnification, and we have asserted a claim for indemnification against IMS. Based on our preliminary internal investigations, management does not currently anticipate that this case will have a material adverse impact on our financial position, liquidity or results of operations.

Additionally, we are party to a number of other claims and lawsuits incidental to our business. We believe that the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on our financial position, liquidity or results of operations.

ITEM 2—CHANGES IN SECURITIES AND USE OF PROCEEDS

On September 2, 2003 we completed an exchange offer whereby we exchanged $199.9 million of 10- ¹/2% senior subordinated notes due 2012, which have been registered under the Securities Act of 1933, for a like principal amount of our 10- ¹/2% senior subordinated notes due 2012, which were issued on November 26, 2002 in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933. After the closing of the exchange offer, $0.1 million of our unregistered 10- ¹/2% senior subordinated notes due 2012 issued pursuant to Rule 144A remain outstanding.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon our senior securities during the quarter ended August 29, 2003

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5—OTHER INFORMATION

None

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ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

3(ii) Amended and Restated By-laws of the Corporation adopted on August 26, 2003.

10 (i) Letter Amendment and Waiver No. 1 to Credit Agreement dated as of May 27, 2003 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto.

10 (ii) Letter Amendment No. 2 to Credit Agreement dated as of August 29, 2003 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto.

31.1 Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff

31.2 Rule 13a-14(a)/15d-14(a) Certification of Randolph L.M. Hutto

32 Section 1350 Certification

(b) Reports on Form 8-K were filed during the quarter ending August 29, 2003. The items reported, any financial statements filed, and the dates of any such reports are listed below.

(i) NDCHealth Corporation’s Current Report on Form 8-K filed on July 29, 2003, reporting as an exhibit under Item 7 the Company’s press release dated July 29, 2003 and the Company’s release of financial information; and under Item 9 Management’s discussion of its’ business position and strategy.

(ii) NDCHealth Corporation’s Current Report on Form 8-K filed on July 31, 2003, reporting under Item 2 the Company’s acquisition of the remaining interest in TechRx and under Item 7 pro forma combined financial information.

(iii) NDCHealth Corporation’s Current Report on Form 8-K filed on August 29, 2003, reporting under Item 5 and as an exhibit under Item 7 Amendments to the Corporation’s By-laws adopted on August 26, 2003.

40

Signatures

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

NDCHealth Corporation

(Registrant)

By: /s/ David H. Shenk

David H. Shenk

Vice President & Corporate Controller

(Authorized Signing Officer and Chief

Accounting Officer)

Date: October 1, 2003

41

NDCHEALTH CORPORATION

FORM 10-Q

INDEX TO EXHIBITS

Exhibit Numbers	Description
3 (ii)	Amended and Restated By-laws of the Corporation adopted on August 26, 2003.
10 (i)	Letter Amendment and Waiver No. 1 to Credit Agreement dated as of May 27, 2003 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto.
10(ii)	Letter Amendment No. 2 to Credit Agreement dated as of August 29, 2003 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff
31.2	Rule 13a-14(a)/15d-14(a) Certification of Randolph L.M. Hutto
32	Section 1350 Certification

42

EX-3.II

Exhibit 3(ii)

BY-LAWS

OF

NDCHEALTH CORPORATION

(As Amended Through August 26, 2003)

BY-LAWS

of

NDCHEALTH CORPORATION

TABLE OF CONTENTS

		Page
ARTICLE I.	OFFICES
SECTION 1.	Registered Office	1
SECTION 2.	Other Offices	1
ARTICLE II.	MEETINGS OF STOCKHOLDERS
SECTION 1.	Place of Meetings	1
SECTION 2.	Date of Meetings	1
SECTION 3.	Notice of Meetings	1
SECTION 4.	List of Stockholders	1
SECTION 5.	Special Meetings	2
SECTION 6.	Notice of Special Meetings	2
SECTION 7.	Limitations on Special Meetings	2
SECTION 8.	Quorum and Adjournment	2
SECTION 9.	Voting Rights	2
SECTION 10.	Proxies and Voting Rights	2
ARTICLE III.	DIRECTORS
SECTION 1.	Number, Election, and Term of Office	3
SECTION 2.	Vacancies	3
SECTION 3.	Powers of Directors	3
SECTION 4.	Place of Meetings	3
SECTION 5.	Time of Meetings	3
SECTION 6.	Regular Meetings	4
SECTION 7.	Special Meetings	4
SECTION 8.	Quorum	4
SECTION 9.	Participation By Conference Telephone	4
SECTION 10.	Action by Consent	4
SECTION 11.	Executive and Other Committees	4
SECTION 12.	Minutes of Meetings	5
SECTION 13.	Compensation	5
ARTICLE IV.	NOTICES
SECTION 1.	Procedure	5
SECTION 2.	Waiver and Consent	5

ARTICLE V.	OFFICERS
SECTION 1.	General	6
SECTION 2.	Election of Officers	6
SECTION 3.	Additional Officers	6
SECTION 4.	Tenure	6
SECTION 5.	Chairman of the Board	6
SECTION 6.	President	6
SECTION 7.	Vice Presidents—Powers and Duties	7
SECTION 8.	Secretary—Powers and Duties	7
SECTION 9.	Assistant Secretary	7
SECTION 10.	Treasurer—Powers and Duties	7
SECTION 11.	Treasurer—Disbursements and Accounting	7
SECTION 12.	Assistant Treasurer	8
SECTION 13.	Bonds	8
ARTICLE VI.	CERTIFICATES OF STOCK
SECTION 1.	Rights to Certificate	8
SECTION 2.	Classes of Stock—Rights	8
SECTION 3.	Officers’ Signatures	8
SECTION 4.	Lost Certificates	9
SECTION 5.	Transfers of Stock	9
SECTION 6.	Fixing of Record Date	9
SECTION 7.	Registered Stockholders	10
ARTICLE VII.	GENERAL PROVISIONS
SECTION 1.	Dividends	10
SECTION 2.	Reserves	10
SECTION 3.	Annual Statements	10
SECTION 4.	Checks	10
SECTION 5.	Fiscal Year	11
SECTION 6.	Seal	11
SECTION 7.	Indemnification	11
SECTION 8.	Miscellaneous	11
ARTICLE VIII.	AMENDMENTS	11

BY-LAWS

of

NDCHEALTH CORPORATION

(As Amended Through August 26, 2003)*

ARTICLE I

OFFICES

SECTION 1. Registered Office. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware.

SECTION 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

SECTION 1. Place of Meetings. All meetings of the stockholders for the election of Directors shall be held in the City of Atlanta, State of Georgia, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

SECTION 2. Date of Meetings. Annual meetings of stockholders shall be held on the fourth Thursday of October if not a legal holiday, and if a legal holiday, then on the next secular day following, or on such other date as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which stockholders shall elect a Board of Directors and transact such other business as may be properly brought before the meeting. Elections of Directors need not be by written ballot.

SECTION 3. Notice of Meetings. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten days nor more than sixty days before the date of the meeting.

SECTION 4. List of Stockholders. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary

* These By-Laws were adopted by the Board of Directors on November 30, 1977 and have been amended from time to time thereafter. Restated to reflect all amendments on and through August 26, 2003.

1

business hours, for a period of at least ten days prior to the meeting, either at the place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

SECTION 5. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board or the President or Secretary at the request in writing of a majority of the members of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.

SECTION 6. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten or more than fifty days before the date of the meeting to each stockholder entitled to vote at such meeting.

SECTION 7. Limitations on Special Meetings. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

SECTION 8. Quorum and Adjournment. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

SECTION 9. Voting Rights. When a quorum is present at the meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question.

SECTION 10. Proxies and Voting Rights. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the

2

capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period.

ARTICLE III

DIRECTORS

SECTION 1. Number, Election and Term of Office. The number of Directors which shall constitute the whole Board shall be not less than three nor more than nine. Within the limits above specified, the number of Directors shall be determined as specified in the certificate of incorporation. The Directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each Director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.

SECTION 2. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and any Director so chosen shall hold office until the next election of the class for which such Director shall have been chosen and until his successor shall be elected and qualify, unless sooner displaced. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the Directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten per cent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the Directors chosen by the Directors then in office.

SECTION 3. Powers of Directors. The business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these By-Laws directed or required to be exercised or done by the stockholders.

SECTION 4. Place of Meetings. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.

SECTION 5. Time of Meetings. The first meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders at the same place as such annual meeting or, in the alternative, at such time and place as shall be fixed by the vote of the stockholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at the time and place determined under the preceding sentence, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special

3

meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the Directors.

SECTION 6. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board.

SECTION 7. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board on three days’ notice to each Director, either personally or by mail or by telegram; special meeting shall be called by the Chairman of the Board or Secretary in like manner and on like notice on the written request of a majority of the Directors.

SECTION 8. Quorum. At all meeting of the Board a majority of the Directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

SECTION 9. Participation by Conference Telephone. Members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment through which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting.

SECTION 10. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

SECTION 11. Executive and Other Committees. The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, appoint three or more of its members to constitute an Executive Committee which to the extent provided by the Board of Directors shall have and exercise all of the authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. All action taken by the Executive Committee shall be reported to the Board of Directors at its first meeting thereafter. The Board of Directors may also from time to time by resolution passed by a majority of the whole Board appoint other committees from among its members and/or officers of the corporation, and such committee or committees shall have such powers and duties to be exercised under the control and direction of the Board of Directors as the latter may from time to time prescribe. Unless otherwise provided by the Board of

4

Directors, a majority of the members of any committee appointed by the Board of Directors pursuant to this Section shall constitute a quorum at any meeting thereof and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Action may be taken by any such committee without a meeting by a writing as provided in Section 10 of this Article III. Any such committee shall, subject to any rules prescribed by the Board of Directors, prescribe its own rules for calling, giving notice of and holding meetings and its method of procedure at such meetings and shall keep a written record of all action taken by it.

SECTION 12. Minutes of Meetings. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

SECTION 13. Compensation. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

ARTICLE IV

NOTICES

SECTION 1. Procedure. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these By-Laws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United State mail. Notice to Directors may also be given by telegram.

SECTION 2. Waiver and Consent. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Notice of all stockholders’ meetings, whether annual or special, shall be given in writing and may be given by the Chairman of the Board or the President or the Secretary (or in case of their refusal, by the person or persons entitled to call meetings under the provisions of these By-Laws). The notice shall state the general nature of the business to be transacted at the meeting and the place, day and hour thereof. If such notice is mailed or telegraphed, it shall be deemed to have been given when deposited in the United States mail or with a telegraph office for transmission, as the case may be. If any meeting is adjourned to another time or place, no notice as to such adjourned meeting or of the business to be transacted thereat need be given other than by announcement at the meeting at which such adjournment is given, except as otherwise expressly provided in Section 8 of Article II.

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ARTICLE V

OFFICERS

SECTION 1. General. The officers of the corporation shall be chosen by the Board of Directors and shall include a President, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors may also choose a Chairman of the Board, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as the Board of Directors may deem appropriate. Any number of offices may be held by the same person, unless the certificate of incorporation or these By-Laws otherwise provide.

SECTION 2. Election of Officers. The Board of Directors at its first meeting after each meeting of stockholders (and thereafter as appropriate) shall elect a President, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers as the Board of Directors may deem appropriate. Officers elected by the Board of Directors shall be denominated as corporate officers, and their compensation shall be fixed by the Board of Directors.

SECTION 3. Additional Officers. In addition to the corporate officers elected as provided in Section 2 above, non-corporate officers of the corporation, including, for example, divisional officers, may be appointed from time to time and in such manner as may be prescribed by the Board of Directors, especially including delegation by the Board of Directors to the President of the corporation the power to appoint such non-corporate officers. Such non-corporate officers shall hold their offices for such terms, shall exercise such powers and perform such duties, not inconsistent with these By-Laws, and shall receive such compensation as shall be determined from time to time by the Board of Directors or by the person designated by the Board of Directors to appoint such officers.

SECTION 4. Tenure. The corporate officers of the corporation shall hold office until their successors are chosen and qualify. Any corporate officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any corporate office of the corporation shall be filled by the Board of Directors.

SECTION 5. Chairman of the Board. In the event the Board of Directors elects a Chairman of the Board, the Chairman of the Board shall call meetings of the stockholders, the Board of Directors and the Executive Committee to order and shall preside at such meetings. The Chairman of the Board shall appoint all committees not otherwise appointed by or pursuant to the instructions of the Board of Directors, and he shall have such other powers and duties as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee.

SECTION 6. President. The President shall be the Chief Executive Officer of the corporation and shall have general supervision and control over the business and affairs of the corporation and its officers and employees, subject to the authority granted to the Board of Directors by law and by these By-Laws. The President shall see that all orders

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and resolutions of the Board of Directors are carried into effect. In the event the Board of Directors does not elect a Chairman of the Board, or in the absence of the Chairman of the Board or his inability to act, the President shall preside at meetings of the stockholders and the Board of Directors and shall have all other powers and responsibilities of the Chairman of the Board under these By-Laws. The President shall also have such other duties and powers as may be assigned to or vested in him from time to time by the Board of Directors or by the Executive Committee.

SECTION 7. Vice Presidents—Powers and Duties. The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Vice Presidents who are elected corporate officers under the provisions of Section 2 above shall be governed by the provisions of this Section 7. Non-corporate officers appointed under the provisions of Section 3 above who hold the title “Vice President” shall have the duties and powers as determined under the provisions of Section 3 and shall not perform the duties or exercise the powers of the President in the event of his absence or disability.

SECTION 8. Secretary—Powers and Duties. The Secretary (or an Assistant Secretary in his absence) shall record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or officer designated by the Board of Directors, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature.

SECTION 9. Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

SECTION 10. Treasurer—Powers and Duties. The Treasurer shall be responsible for the custody of the corporate funds and securities, for keeping full and accurate accounts of receipts and disbursements in books belonging to the corporation, and for the deposit of all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors.

SECTION 11. Treasurer—Disbursements and Accounting. The Treasurer shall be responsible for disbursing the funds of the corporation as may be ordered by the Board of

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Directors and for taking proper vouchers for such disbursements, and he shall render to the officer designated by the Board of Directors and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions performed or ordered by him as Treasurer and of the financial condition of the corporation.

SECTION 12. Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

SECTION 13. Bonds. If required by the Board, any officers or assistant officers shall give the corporation a bond in such sum and with surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of their office and for the restoration to the corporation, in case of their death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the corporation.

ARTICLE VI

CERTIFICATES OF STOCK

SECTION 1. Right to Certificate. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman of the Board, the President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation.

SECTION 2. Classes of Stock—Rights. If the corporation shall be authorized to issue more than one class of stock, or more than one series of any class, the designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class of stock; provided, however, that except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

SECTION 3. Officers’ Signatures. Where a certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any such Chairman of the Board, President,

8

Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimile. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the corporation, such certificate or certificates may nevertheless be adopted by the corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation.

SECTION 4. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed.

SECTION 5. Transfers of Stock. Transfers of shares of stock shall be made upon the transfer books of the corporation, kept at the office of the transfer agent designated to transfer the shares, only upon direction of the person named in the certificate or by an attorney lawfully constituted in writing. The corporation is under a duty to register the transfer of its shares only if:

(a) the old share certificate is surrendered and is endorsed by the appropriate person or persons; and

(b) reasonable assurance is given that the endorsements are genuine and effective; and

(c) the corporation has no duty to inquire into adverse claims or has discharged any such duty; and

(d) any applicable law relating to the collection of taxes has been complied with; and

(e) the transfer is in fact rightful or is to a bona fide purchaser.

SECTION 6. Fixing of Record Date. The Board of Directors may close the stock transfer books of the corporation for a period not less than ten nor more than sixty days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period not exceeding sixty days in connection with obtaining the consent of stockholders for any purpose. In lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not less than ten nor more than sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go

9

into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meetings, and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid.

SECTION 7. Registered Stockholders. The corporation shall be entitled to recognized the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII

GENERAL PROVISIONS

SECTION 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.

SECTION 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Directors shall think conducive to the interest of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created.

SECTION 3. Annual Statements. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.

SECTION 4. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

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SECTION 5. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

SECTION 6. Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

SECTION 7. Indemnification. Each director, officer, employee or agent of the corporation, and each person who at the request of the corporation has served as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the corporation against those expenses which are allowed by the laws of the State of Delaware and which are reasonably incurred in connection with any action, suit or proceeding, pending or threatened, in which such person may be involved by reason of his being or having been a director, officer, employee, or agent of this corporation or of such other enterprises. Such indemnification shall be made only in accordance with the laws of the State of Delaware and subject to the conditions prescribed therein. The corporation may purchase and maintain insurance on behalf of any such directors, officers, employees, or agents against any liabilities asserted against such persons whether or not the corporation would have the power to indemnify such directors, officers, employees, or agents against such liability under the laws of the State of Delaware.

SECTION 8. Miscellaneous. Unless otherwise ordered by the Board of Directors, the Chairman of the Board or the President or any Vice President or the Secretary or the Treasurer in person or by proxy or proxies appointed by any of them shall have full power and authority on behalf of the corporation to vote, act and consent with respect to any shares of stock issued by other corporations which the corporation may own or as to which the corporation has the right to vote, act or consent.

ARTICLE VIII

AMENDMENTS

These By-Laws may be altered or repealed at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. No By-Law adopted by vote of the stockholders shall be subject to amendment by the Board of Directors if such By-Law so provides. No change of the time or place of the meeting for the election of Directors shall be made within sixty days next before the day on which such meeting is to be held, and in case of any change of such time or place, notice thereof shall be given to each stockholder in person or by letter mailed to his last known post office address at least twenty days before the meeting is held.

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EX-10.I

Exhibit 10(i)

LETTER AMENDMENT AND WAIVER NO. 1

Dated as of May 27, 2003

To the banks, financial institutions

      and other institutional lenders

      (collectively, the “Lenders”) parties

      to the Credit Agreement referred to

      below and to Merrill Lynch Capital,

      a Division of Merrill Lynch Business

      Financial Services Inc., as Administrative Agent

      (in such capacity, the “Administrative Agent”) for the Lenders

Ladies and Gentlemen:

We refer to that certain Credit Agreement, dated as of November 26, 2002 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Credit Agreement”; the terms defined therein being used herein as therein defined), among NDCHealth Corporation, a Delaware corporation (the “Borrower”), the Lenders and agents from time to time party thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Swing Line Lender, Credit Suisse First Boston, as Syndication Agent, Bank of America, N.A., as Documentation Agent and LaSalle Bank National Association, as L/C Issuer. Capitalized terms not otherwise defined in this Letter Amendment and Waiver have the same meanings as specified in the Credit Agreement.

The Credit Agreement is, effective as of the date of this Letter Amendment and Waiver, hereby amended as follows:

(a) Section 7.13 is hereby amended by deleting the figure “$12,000,000” in the last line thereof and replacing it with the figure “$20,000,000”.

(b) Section 1.01 is hereby amended by restating the definition of “Annualized” in its entirety to read as follows:

“Annualized” means:

(a) with respect to the first four full fiscal quarters following the Closing Date and any period thereafter, for purposes of calculating Consolidated Interest Charges, the amount of such Consolidated Interest Charges for the four full fiscal quarters ending on or prior to such date of determination, and

(b) with respect to the first three full fiscal quarters following the Closing Date, for purposes of calculating Consolidated Interest Charges, (A) for

the first full fiscal quarter after the Closing Date, Consolidated Interest Charges for such fiscal quarter multiplied by four, (B) for the second full fiscal quarter after the Closing Date, the sum of Consolidated Interest Charges for such fiscal quarter and for the prior fiscal quarter multiplied by two, and (C) for the third full fiscal quarter after the Closing Date, the sum of Consolidated Interest Charges for such fiscal quarter and for the prior two fiscal quarters multiplied by four and divided by three.

The Lenders hereby agree that all fees, charges and related expenses of the Borrower and its Subsidiaries in connection with (i) the repayment of the Borrower’s $143 million Convertible Notes due November 1, 2003, (ii) the issuance of the Senior Subordinated Notes and (iii) the Credit Agreement, be excluded from the calculation of Consolidated Interest Expense as reported in the Compliance Certificate for the period ended February 28, 2003, only. The Borrower hereby agrees that an amended Compliance Certificate for the period ended February 28, 2003 will be delivered to the Agent, the Arrangers and the Lenders with the Compliance Certificate for the period ended May 31, 2003.

This Letter Amendment and Waiver shall become effective as of the date first above written when, and only when, (i) the Administrative Agent shall have received counterparts of this Letter Amendment and Waiver executed by the undersigned and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Administrative Agent that such Lender has executed this Letter Amendment and Waiver, and the consent attached hereto executed by each Guarantor, (ii) payment in full of all expenses of the Administrative Agent related to this Letter Amendment and Waiver (including legal fees of counsel to the Agent, to the extent invoiced) shall have been made by the Borrower, and (iii) the TechRx Acquisition shall have been consummated. This Letter Amendment and Waiver is subject to the provisions of Section 10.01 of the Credit Agreement.

On and after the effectiveness of this Letter Amendment and Waiver, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Letter Amendment and Waiver.

The Credit Agreement, the Notes and each of the other Loan Documents, as specifically amended by this Letter Amendment and Waiver, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Obligations of the Loan Parties under the Loan Documents, in each case as amended by this Letter Amendment and Waiver. The execution, delivery and effectiveness of this Letter Amendment and Waiver shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or any Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

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If you agree to the terms and provisions hereof, please evidence such agreement by executing and returning a counterpart of this Letter Amendment and Waiver to Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, Attention: Petal Modeste, Telecopier No. (212) 848-7179.

This Letter Amendment and Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Letter Amendment and Waiver by telecopier shall be effective as delivery of a manually executed counterpart of this Letter Amendment and Waiver.

This Letter Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York.

Very truly yours,
NDCHEALTH CORPORATION
By
	Name:
	Title:

Agreed as of the date first above written:

MERRILL LYNCH CAPITAL, a division of

Merrill Lynch Business Financial Services Inc.,

as Administrative Agent, Swing Line Lender and

as Lender

By
	Name:
	Title:

3

                                                                     , as a Lender

[Insert Name of Financial Institution]

By
	Title:

4

CONSENT

Dated as of May     , 2003

Each of the undersigned, as Guarantor under the Guaranty dated November 26, 2002 (the “Guaranty”), in each case, in favor of the Secured Parties referred to in the Credit Agreement referred to in the foregoing Letter Amendment and Waiver (the “Credit Agreement”) hereby consents to such Letter Amendment and Waiver and hereby confirms and agrees that (a) notwithstanding the effectiveness of such Letter Amendment and Waiver, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Letter Amendment and Waiver, each reference in the Guaranty to the “Credit Agreement”, “thereunder”, “thereof” or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Letter Amendment and Waiver and (b) the Collateral Documents to which each of the undersigned is a party and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Secured Obligations. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

THE COMPUTER PLACE, INC.
By
	Title:

NDC HEALTH INFORMATION SERVICES (ARIZONA) INC.
By
	Title:

NDCHEALTH INTELLECTUAL PROPERTY CORP.
By
	Title:

HISIP CORP.
By
	Title:

NDCIP, INC.
By
	Title:

NDCHEALTH LICENSING, INC.
By
	Title:

NDC OF CANADA, INC.
By
	Title:

TECHRX INCORPORATED
By
	Title:

NDC ACQUISITION CORP.
By
	Title:

EX-10.II

Exhibit 10(ii)

LETTER AMENDMENT NO. 2

Dated as of August 29, 2003

To the banks, financial institutions

      and other institutional lenders

      (collectively, the “Lenders”) parties

      to the Credit Agreement referred to

      below and to Merrill Lynch Capital,

      a Division of Merrill Lynch Business

      Financial Services Inc., as Administrative Agent

      (in such capacity, the “Administrative Agent”) for the Lenders

Ladies and Gentlemen:

We refer to that certain Credit Agreement, dated as of November 26, 2002, among NDCHealth Corporation, a Delaware corporation (the “Borrower”), the Lenders and agents from time to time party thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Swing Line Lender, Credit Suisse First Boston, as Syndication Agent, Bank of America, N.A., as Documentation Agent and LaSalle Bank National Association, as L/C Issuer, as amended by Letter Amendment and Waiver No. 1, dated as of May 27, 2003 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Credit Agreement”; the terms defined therein being used herein as therein defined). Capitalized terms not otherwise defined in this Letter Amendment have the same meanings as specified in the Credit Agreement.

The Credit Agreement is, effective as of the date of this Letter Amendment, hereby amended as follows:

Section 7.11(c) (Minimum Consolidated Fixed Charge Coverage Ratio) is hereby amended by deleting the ratio “1.40:1.00” for each of the four quarters ending August 31, 2003, November 30, 2003, February 28, 2004 and May 31, 2004 and replacing it with the ratio “1.25:1.00” for each such quarter.

This Letter Amendment shall become effective as of the date first above written when, and only when, (i) the Administrative Agent shall have received counterparts of this Letter Amendment executed by the undersigned and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Administrative Agent that such Lender has executed this Letter Amendment, and the consent attached hereto executed by each Guarantor, and (ii) payment in full of all expenses of the Administrative Agent related to this Letter Amendment (including all outstanding legal fees of counsel to the Agent incurred in connection with the Credit Agreement since the last date of payment of such fees) shall have been made by the Borrower. This Letter Amendment is subject to the provisions of Section 10.01 of the Credit Agreement.

On and after the effectiveness of this Letter Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Letter Amendment.

The Credit Agreement, the Notes and each of the other Loan Documents, as specifically amended by this Letter Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Obligations of the Loan Parties under the Loan Documents, in each case as amended by this Letter Amendment. The execution, delivery and effectiveness of this Letter Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or any Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

If you agree to the terms and provisions hereof, please evidence such agreement by executing and returning a counterpart of this Letter Amendment to Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, Attention: Sunita Daswani, Telecopier No. (212) 848-7179.

This Letter Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Letter Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Letter Amendment.

This Letter Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

Very truly yours,
NDCHEALTH CORPORATION
By
	Name:
	Title:

2

Agreed as of the date first above written:

MERRILL LYNCH CAPITAL, a division of

Merrill Lynch Business Financial Services Inc.,

as Administrative Agent, Swing Line Lender and

as Lender

By
	Name:
	Title:

3

                                                                     , as a Lender

[Insert Name of Financial Institution]

By
	Title:

4

CONSENT

Dated as of August 28, 2003

Each of the undersigned, as Guarantor under the Guaranty dated November 26, 2002 (the “Guaranty”), in each case, in favor of the Secured Parties referred to in the Credit Agreement referred to in the foregoing Letter Amendment (the “Credit Agreement”) hereby consents to such Letter Amendment and hereby confirms and agrees that (a) notwithstanding the effectiveness of such Letter Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Letter Amendment, each reference in the Guaranty to the “Credit Agreement”, “thereunder”, “thereof” or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Letter Amendment and (b) the Collateral Documents to which each of the undersigned is a party and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Secured Obligations. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

THE COMPUTER PLACE, INC.
By
	Title:

NDC HEALTH INFORMATION SERVICES (ARIZONA) INC.
By
	Title:

NDCHEALTH INTELLECTUAL PROPERTY CORP.
By
	Title:

HISIP CORP.
By
	Title:

NDCIP, INC.
By
	Title:

NDCHEALTH LICENSING, INC.
By
	Title:

NDC OF CANADA, INC.
By
	Title:

TECHRX INCORPORATED
By
	Title:

NDC ACQUISITION CORP.
By
	Title:

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Walter M. Hoff, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NDCHealth Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 1, 2003

/s/ Walter M. Hoff

Walter M. Hoff

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Randolph L.M. Hutto, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NDCHealth Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 1, 2003

/s/ Randolph L.M. Hutto

    Randolph L.M. Hutto

  Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NDCHealth Corporation (the “Company”) on Form 10-Q as filed with the Securities and Exchange Commission on the date hereof, (the “Report”), we the undersigned certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Walter M. Hoff

Walter M. Hoff, Chairman and

Chief Executive Officer

(Principal Executive Officer)

October 1, 2003

By: /s/ Randolph L.M. Hutto

Randolph L.M. Hutto

Chief Financial Officer

(Principal Financial Officer)

October 1, 2003